ISAS Working Papers

The informal sector accounts for over 92 per cent of the labour force, over 40 per cent of output, and 99 per cent of businesses in India. The range and size of informality in India is arguably larger than for any other economy, compared to other economies at a similar stage of development. The informal economy primarily comprises of millions of self-employed, and small and tiny, relatively inefficient enterprises that detract from India's growth potential. Informal enterprises have deep and intricate links with formal sector enterprises and are affected by developments in the domestic and global economies. The spread of informality is symptomatic of much that ails the Indian economy. Yet, it is also a powerful safety valve, offering employment and income generation avenues for tens of millions who are unable to secure jobs in the formal sector. This paper reviews the reasons leading to the growth of the informal sector. It finds that a nuanced approach, cognisant of the wide differences across the informal sector, should identify segments that should be allowed to exist as informal entities and those that should, with improving conditions for doing business, be induced to enter the formal economy.