1) According to surveys conducted in India, the informal economy makes up the vast majority of employment outside of agriculture, accounting for around 75% of employment in rural areas and 69% in urban areas. 2) The surveys define the informal sector as small proprietary and partnership enterprises outside of agriculture, which excludes many domestic jobs. The actual proportion of informal employment is likely even larger. 3) Even in the organized sector, which is defined by having more than 10 or 20 employees depending on the use of power, around 25% of public sector jobs and over 50% of private sector jobs still lack basic formal protections and benefits.

1. India’s informal economy
Discussions on the need for labour reform in India, recharged by recent decisions
of the Rajasthan state government and the central cabinet, focus on the need to deal
with the inflexibilities resulting from the application of the Factories Act. Too
much of Indian manufacturing, it is argued, falls in the category of units
subject to that Act, which employ 10 workers or more if functioning with the
aid of power or 20 workers or more when functioning without the aid of
power. This is seen as a reason to shift the definitional boundary, as is being
done in Rajasthan to 20 workers with power and 40 without, so that more of
Indian manufacturing is exempted from meeting the regulatory provisions
of the Act, including those on the terms and conditions of employment.
However, evidence on the issue coming from reports based on the periodic
employment and unemployment surveys (EUS) conducted by the National
Sample Survey Organisation suggests that only a small share of employment
is in the organised sector so defined. The most recent is the just released report on
the “Informal Sector and Conditions of Employment in India” based on the
employment and unemployment survey conducted in the 68th round of the NSS
during July 2011 to June 2012.
The NSS adopts a definition of the “informal sector” which, in the case of
manufacturing, is very different from the residual sector excluded from the
statutory definition of the organised manufacturing sector. The report
identifies the informal sector as consisting of proprietary and partnership
enterprises (excluding those run by non-corporate entities such as
cooperatives, trusts and non-profit institutions), in the non-agricultural

2. sector and in agriculture-related activities excluding crop production
(AGEGC).
Besides the diversification of economic activity away from agriculture, modern economic
growth would be accompanied by an increase in the size of non-agricultural enterprises
and a growing role for impersonal forms of organisation (such as the joint-stock
company).
Using this definition of the informal sector, the EUS for 2011-12 estimated employment
in the informal component to be about 75 per cent of total usual status
employment (principal and subsidiary) in the rural areas and 69 per cent in
urban areas. The non-agriculture and AGEGC sectors themselves accounted for 41 per
cent and 95 per cent of total employment. The figures for informal employment
are likely to be even larger because enterprises identified as “employer’s
households”, which account for employment like the provision of domestic services,
are excluded from the definition of the informal sector.
This implies that an overwhelming share of non-agricultural employment is in
the “informal sector”.
The fact that sectors like trade and construction are important contributors to
the unorganised sector and to informal employment is of significance, given the
argument that it is regulation that is responsible the proliferation of
unorganised units and informal employment. The really stringent form of size-based
regulation applies to the manufacturing sector, in which units that meet the
criteria set by the Factories Act, 1948 need to register themselves and be
subject to factory legislation. This legal distinction does not apply to non-agricultural
sectors outside manufacturing.
Between 2004-05 and 2011-12, total employment in the country rose from
457.9 million to 472.4 million. Over the same period employment in the
organised, non-agricultural sector, defined to include all units with 10 or
more workers if using power and 20 or more workers if not using power,
rose from 28.8 million to 47.7 million, whereas employment in the
unorganised sector rose from 185.4 million to 209.6 million. That is
organised sector employment stood at 6.3 per cent and 10.1 per cent
respectively of total employment in 2004-05 and 2011-12. In absolute terms
there were more who joined the unorganised sector’s workforce than the
number who entered the organised sector between the two years. Even in
2011-12, as much as 86 per cent of workers in the private sector and 50 per cent in the
public sector were in units that could be designated as unorganised based on
employment size.
In fact, a useful exercise is to rely on the unit level data from NSS surveys and
consider the proportion of employment where any one of three features—
written contract, provision of social security (pension etc) and eligibility for
paid leave—is present as indicative of employment being ‘formal’. Let us also

3. separate out the organized and unorganized sectors in terms of the employment-size
based definition referred to above. The results are striking. It emerges that 25.6 per
cent of employment in the “unorganized” public sector and 23 per cent of
employment in the organized public sector is “informal”, whereas 94.5 per
cent of unorganized and 54.3 per cent of organized employment in the
private sector is informal in nature. Thus, when approached from the employment
side non-formal employment still constitutes an overwhelmingly large proportion of
employment outside of crop production in India. This questions the grounds on
which the need for labour reform is often defended.