Paving the Way: Challenges on the Road to Formalization in the Unorganized Workforce

India's economic landscape prominently features the unorganized sector, encompassing a diverse range of informal enterprises that significantly contribute to employment and GDP. Approximately 93% of the nation's labor force is comprised of workers in the unorganized sector.

Source: Economic Survey 2021-2022 Insights from the graph –

Though there has been workforce population growth of 9.6% from 2018-2019 to 2019-2020.

However there has been a fall in the percent share of organized sector in this workforce by 1.6%.

Organized sector growth decelerated in the span of 2017-2020 compared to accelerated  growth rate of 15% in unorganized sector in the same time period even though there has been an increase in the total population of organized workforce which led to decrease in percentage share of organized sector..

Acknowledging the need to formalize, it has become increasingly vital for addressing these issues and fostering comprehensive economic growth.

Understanding the Unorganized Sector

The workforce in unorganized sectors in India spans agriculture, construction, small-scale manufacturing, street vending, gig economy, freelancers, domestic workers, unaccounted child labor and various other services. 

Marked by the absence of formal contracts and adherence to labor laws, this sector presents a lot of challenges.

Causes to its existence

While playing a crucial role in sustaining millions of livelihoods, the informal nature of these activities exists because –

Lack of laws or governance in certain sectors such as legacy/traditional occupations, domestic workers, etc

Lack of ease of doing in business, though India has improved a lot in last decade however still far away from desired goal

Abundance of labor in hugely populated country like India.

Even though financial inclusion has improved, there is a long way to go.

Lack of awareness about rights in masses

Lower level of educational & skills limiting workers' upward mobility

The lack of sufficient universal social security benefits, including health insurance, pension schemes, and maternity benefits, leaving them vulnerable during economic downturns and health crises.

Insufficient enforcement of Regulation: Without effective enforcement & regulation, the unorganized sector is prone to exploitation and unethical practices.

Initiatives already in place:

The integration of the unorganized workforce into the formal economy is crucial for achieving inclusive growth and ensuring equitable labor practices.

Social Security Schemes such as E-Shram, Pradhan Mantri Shram Yogi Maan-dhan and Aam Aadmi Beema Yojana, PM Street Vendor's Atma Nirbhar Nidhi and Ayushman Bharat-Pradhan Mantri Jan Arogya Yojana have helped in promoting a safety net during emergencies and ensured access to essential services like healthcare, education, and retirement benefits. 

As of July 2023, more than 28.96 crore workers have been registered under the eShram portal out of which around 52.70 lakh workers have been registered on eShram in Haryana.

Aatma Nirbhar Bharat package was introduced to provide stimulus to business and to mitigate the adverse effects of the pandemic.

Every unorganized worker shall be registered by the District Administration. The State Governments are mandated to register the Unorganized Workers and to provide benefits of welfare schemes.

The Central Government has also constituted the National Social Security Board at Central level to recommend to the Central Government suitable schemes for different sections of unorganized workers and to oversee the execution of programs and provide recommendations to the Central Government regarding issues stemming from the enforcement of the Act.

eShram portal was introduced on 26th August 2021 for the unorganized sector in order to build a comprehensive National Database of Unorganized Workers (NDUW) in the country.

Pradhan Mantri Shram Yogi Maan-dhan has been introduced to provide old age protection and social security of unorganized workers.

Aam Aadmi Beema Yojana has been implemented but there is still a need for creating more awareness as majority of workers from the unorganized sector are yet to receive social security coverage. Bills have been introduced by the government to ensure better coverage for all the unorganized sector. 

Ayushman Bharat Yojana, launched in 2018, provides a Rs. 5 lakh annual coverage per family for hospitalization expenses, benefiting over 10 crore vulnerable families, with cashless transactions and nationwide portability.

Way Forward:

Formalizing the unorganized sector requires a collaborative and comprehensive approach from the government, private sector, and civil society. Beyond economic policy considerations, addressing the challenges faced by unorganized sector workers is crucial for building a more inclusive and well-developed economy. By recognizing the significance of the unorganized sector and implementing effective formalization measures, India can unlock the full potential of its workforce, fostering equitable economic development.

Initiatives that can be taken into consideration

Implementing comprehensive labor reforms that are held accountable by both and strike a balance between worker and employer’s interests is essential. 

Enhancing financial inclusion i.e. promoting hourly/daily wages and implementation of policies in the private sector so as to have equal pay for can empower individuals in the unorganized sector to invest in their businesses and enhance their economic well-being. Further strengthening already existing Skill Development Programs to enhance the unorganized sectors workers' capabilities and empower them to engage in more productive and economic activities.

Innovative ways for execution of legal frameworks for various sectors of the unorganized workforce that includes child labor, unrecognized sources of income, etc. Focusing on mass employment sectors such as such as manufacturing, electronics, handicrafts, handlooms, pottery, domestic workers, etc. can help in covering a large section of the unorganized workforce.

Societal awareness can work wonders by implementing digital strategies. Inspiration from developed countries and by using aadhar cards or work cards where used so that fixed hourly/daily wages can be implemented. Creating digital user-friendly platforms for easy access to workers, right awareness and law enforcements were done.

Authored by- Chandra Shekhar Singh, Director, Posterity Consulting