The informal sector, also known as the unorganised sector, comprises economic activities that are not regulated by the government and often escape formal taxation and labor laws. In India, this sector plays a pivotal role in sustaining livelihoods and contributing to economic output, yet it presents significant challenges for inclusive and sustainable development.

Contribution to the Indian Economy

1. Employment Generation: Over 90% of India’s workforce is employed in the informal sector, including agriculture, construction, street vending, and domestic work.
2. GDP Contribution: The informal sector contributes nearly 45–50% to India’s Gross Domestic Product, despite being largely undocumented.
3. Entrepreneurial Base: It supports micro-entrepreneurship and self-employment, especially among marginalized communities and women.

Challenges Posed to Economic Policy

1. Lack of Regulation: Informal enterprises operate outside the ambit of labor laws, leading to poor working conditions and exploitation.
2. Tax Evasion: The sector remains largely untaxed, reducing the government’s revenue base.
3. Data Deficiency: Inadequate data on informal activities hampers effective policy formulation and economic planning.
4. Low Productivity: Informal units often lack access to credit, technology, and markets, resulting in low productivity and income stagnation.
5. Social Insecurity: Workers lack access to social security benefits such as health insurance, pensions, and maternity leave.

Measures to Improve Conditions and Promote Formalisation

1. Legal and Institutional Reforms:
   1. Implementation of the four labor codes to extend protections to informal workers.
   2. Strengthening the E-Shram portal to create a comprehensive database of unorganised workers.
2. Financial Inclusion and Social Security:
   1. Expanding coverage of schemes like PM Shram Yogi Maandhan and Ayushman Bharat.
   2. Promoting Jan Dhan-Aadhaar-Mobile (JAM) trinity for direct benefit transfers.
3. Skill Development and Digital Empowerment:
   1. Upskilling workers through schemes like PM Kaushal Vikas Yojana.
   2. Leveraging digital platforms to connect informal workers with formal job markets.
4. Support for MSMEs:
   1. Simplifying compliance norms and improving access to credit through schemes like MUDRA and Emergency Credit Line Guarantee Scheme (ECLGS).
5. Awareness and Outreach:
   1. Conducting awareness campaigns to educate workers and employers about the benefits of formalisation.

The informal sector is both a backbone and a bottleneck for the Indian economy. While it provides essential employment and sustains millions, its informality limits economic resilience and social equity. A balanced approach that protects livelihoods while promoting gradual formalisation is essential for inclusive and sustainable growth.