Most people in India earn a livelihood by working for an income. They work for one employer or many, or as self employed or own account workers or as contract workers, home-based workers etc. in every sector in the economy. The informal sector is economic activity that is neither taxed nor monitored by a government; and is not included in that government's Gross National Product (GNP); as opposed to a formal economy. Although the informal economy is often associated with developing countries-where up to 60% of the labor force (with as much 40% of GDP) works, all economic systems contain an informal economy in some proportion.
Share in national income
The Non-Corporate or unincorporated sector constitutes largest portion of the economy in terms of value addition, savings, investments etc. The share of corporate sector is around 12-14 percent in our national income while that of unincorporated [non-corporate] or Bhagidari sector is more than 30 percent. In the case of United States, the share of corporate business is nearly 70 percent.
Even in manufacturing activity the share of non-corporate sector is nearly 40 percent if we consider the unregistered manufacturing group (fully non-corporate sector) plus the partnership proprietorship groups in the registered manufacturing group.
The non-corporate forms of organisations are major players in such activities as manufacturing, construction, transport, trade, hotels and restaurants, and business and personal services.
The informal sector plays a significant role in the economy in terms of employment opportunities and poverty alleviation. This sector generates income-earning opportunities for a large number of people. In India, a large section of the total workforce is still in the informal sector, which contributes a sizeable portion of the country's net domestic product.
The unorganised sector has a crucial role in our economy in terms of employment and its contribution to the National Domestic Product, savings and capital formation.
Generally, all enterprises which are either registered or come under the purview of any one of the acts like the Indian Factories Act 1948, Mines and Minerals (Regulation and Development) Act, 1957, the Company Law, the Central/State Sales Tax Acts, the Shops and Establishment Acts of the State governments, are defined as part of the organized sector. Also included are all government companies, departmental enterprises and public sector corporations.
"Similarly, forestry, irrigation works, plantations, recognised educational institutions, and hospitals which are registered as non-profit making bodies are also classified as organised sector...all unincorporated enterprises and household industries which are not regulated by any acts of the above mentioned type and which do not maintain any annual reports presenting the profit and the loss and balance sheets are classified as unorganized" (National Accounts Statistics- NAS 1980: pp 69).
A partnership firm may, thus, be grouped under the 'organised sector' if it was covered under any of the statutes mentioned and if it maintained annual accounts. Otherwise it would be classified under the 'unorganised sector'. Thus, non-corporate enterprises can figure under either of the two (organised and unorganised) sectors in the national income classification.
The unincorporated or non-corporate sector has the largest share of national income, manufacturing activities, services, savings, investment, taxes, credit market, employment, forex earnings, etc. Yet it is little understood, dismissed as 'un-organised', 'informal' or 'residual' sector. It is important that the nature and role of this sector are explored to see how it impacts the economy, says R. Vaidyanathan.
From the point of view of mode of production or economic activity, the distinguishing features of the informal sector are as follows:
- Low level of organisation; small in scale usually employing fewer than ten workers and often from the immediate family;
- Heterogeneity in activities;
- Easier entry and exit than in the formal sector;
- Usually minimal capital investment; little or no division between labour and capital;
- Mostly labour intensive work, requiring low-level skills; there is usually no formal training as workers learn on the job;
- Labour relations based on casual employment and or social relationships as opposed to formal contracts; employer and employee relationship is often unwritten and informal with little or no rights;
- Due to their isolation and invisibility, workers in the informal sector are often largely unaware of their rights, cannot organise them and have little negotiating power with their employers and intermediaries (ILO 2000).
Informal or unorganized sector workers dominate the Indian labor market and represent some 90% of the total Indian workforce. India's unorganized sector is one of the largest, if not the largest, in the post-industrial world. Informal employment that characterizes the unorganized sector comprises both self-employment in informal enterprises (small or unregistered) and wage-based employment undertaken without a transparent employment contract in both informal and formal sector enterprises.
Unorganized Sector Workforce in India
India's workforce comprises nearly 92 per cent in the unorganised segment, with the entire farm sector falling under the informal category, while only one-fifth of the non-farm workers are found in the organized segment. Estimates suggest that in the non-farm sectors, as we move up the income ladder, the share of the informal sector gradually declines. However, as far as the agricultural sector is concerned, irrespective of economic class, the share of the unorganised workforce remains flat.
Sources of Finance
It is believed that the unorganized manufacturing sector of industries is starved of capital and since they fail to get access to the organized sources of finance, they borrow from the unorganized credit market often at high interest rates. It is felt that there is urgent need for the state to intervene in order to raise their capital. In response to this demand the state has become quiet active over the past few decades in promoting institutional finances for this unorganized sector. Public and private commercial banks and central and state level term lending institutions, cooperative societies etc. are directed/ encouraged by the state to provide loans to the unorganized manufacturers at low interest rates. Over the years, the share of these institutional sources in total outstanding loans of the unorganized manufacturing sector has increased steadily.
The informal financial sources generally include funds available from the family or moneylenders who operate outside the legal and policy framework of banks. Apart from this, the chit fund is another form of credit source operated by groups of people for mutual benefit; but this approach has its own limitations. Credit in the informal system is usually available on tap. The loans are granted mostly without collateral and lengthy documentation formalities as the lender depends mainly on the personal knowledge of, and contact with, the borrower. However, over the years, a few NGOs have engaged themselves in activities related to community mobilisation for savings and credit-related operations targeted at some groups in the rural sector.
Informal finances in other countries
Predominance of non-institutional finance is not unique to India; it is more widespread. It is not only in the developing countries but also in more advanced economies like Brazil, Russia, China, self raised fund, primarily borrowed from non-institutional sources like moneylenders, friends and relatives, business partners, traders, distributors, profits from business, etc, constitutes a large part of their total financing in new investments.
The non-corporate forms of organisations are major players in such activities as manufacturing, construction, transport, trade, hotels and restaurants, and business and personal services. Terming them as "un-organised" is inappropriate as they are well-organised from the economic and organisational point of view. They are not the residual segment of the economy. They are very much part of the "formal" system of laws/rules/regulations. Hence, we will use the term of Uninc (unincorporated) or sometimes non-corporate sector.
1) R. Vaidyanathan "Understanding the unorganised sector" 2004.
2) Anjula Gurtoo and Colin C. Williams "Entrepreneurship and the informal sector".
3) S SAKTHIVEL, PINAKI JODDAR "Unorganised Sector Workforce in India".
About the Authors
Dr. P. Vikkraman is the Asst. Prof. MBA in Anna University, Coimbatore. Tamilnadu and Mr. S. Basakran is the Faculty, MBA in HKBK College of Engg. Bangalore.