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India moving towards a formal economy

"The emergence of a formal employment allocation indicates that more people are getting regular jobs and are employed in the formal sector."

The transition from the informal sector to the formal sector takes place at two levels- formalization of the firm and formalization of the labour force. Although in the former, businesses changed significantly from informal to the formal sector of the economy, the latter could be the result of both. India is currently focusing on formalization of work force and making progress in increasing the percentage of formal employees.

India's informal economy has dropped to 15-20 percent of GDP by 2020-21 from 52 percent in 2017-18 as per a report published by the State Bank of India (SBI) in October. Formalization can be understood as a progress towards formal finance such as banks or digital payment systems, an increase in the number of employees in registered businesses, or an increase in GDP generated from businesses that are part of tax revenues. Employment and digital integration can be considered as important factors in assessing the level of formalisation in the economy. The report finds that Rs 13 lakh crore has entered the formal economy through various channels over the past few years, including the latest version of the E-Shram portal.

According to Soumya Kanti Ghosh, the group chief economic adviser at SBI, many steps since the demonetization in November 2016 accelerated the digitalization of the economy, and the pandemic has also induced emergence of online world leading to higher formalization of the Indian economy. Demonetization was the first major issue affecting the informal sector, which involved 93 percent of the workforce. The second largest contributor to the informal economy was the GST and the last and hardest hit was the global pandemic. Since FY18, the agricultural sector has been officially established at 20-25 percent due to KCC debt growth. Over the years, the use of Kisan credit cards has also grown dramatically as the per card outstanding has gone up.

The E-Shram portal has proved to be an important step in establishing formal employment. E-Shram, the first national database for informal workers, has 5.7 crore workers registered in the first two months after its launch in August, 2021; 62 percent of employees between the ages of 18-40 and 92 percent of registered employees are earning less than Rs 10,000 per month. Informal employment often suggests workers who do not have written contracts, or paid leave and other benefits that include some form of social security and employment security provided by the employer, or the government. The mere registration of informal workers on the E-Shram portfolio does not guarantee formalisation.

The economic concept suggests that as the country progresses, its economy will move into the formal sector. Currency swap may be set as the first step, but the changes that are really needed are structural in nature. Labor laws are distorted and confusing at many levels, making it difficult for firms to grow and to encourage them to stay young to avoid the high costs of compliance. The high cost of living in urban areas makes it harder for labor-intensive firms to compete in cities leading to a mismatch and a major barrier to growth and formalization. One-time measures such as currency swap may serve a purpose, but the obstacles face by central government in its efforts to simplify labor laws reflect the magnitude of the challenge. Therefore, there is still a long way to go for the Indian Economy to be formal.


Nandini, Sneha


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