Informal Sector in India

What is Informal Sector?

Informal Sector includes all activities which are not officially recognized or registered as normal income sources. They are not monitored by any form of government and thus no taxes are paid on them unlike the formal sector. The term is sometimes used to refer to that part of economy which includes illegal activities, like earning income without paying tax on it, the black market, the shadow economy, underground economy etc. However, the informal sector also encompasses many other legal activities, such as job that are performed in exchange for something other than money.

Increasing unemployment and underemployment in the urban areas and shift of labor from subsistence farming to market-oriented economy account for majority of the people to go into self-employment in the informal sector. Such people generally do not have the any type of formal education and trainings. They mostly utilise their own traditional skill and knowledge acquired outside the formal system. The informal sector jobs are labour-intensive and do not require formal educational qualifications. There is an ease of entry where people have higher chances of getting an employment without having to tackle with the time consuming and complex systems of regulations and authorisations.

According to the International Labour Organization (ILO) the informal sector has been understood to mean a very small scale units producing and distributing goods and services and consisting largely on independent self employed producers in urban and rural areas of developing countries, some of which also employ family member and or few hired workers or apprentices which operate with very little capital or none at all, which utilize a low level of technology and skills, which generally provides very low and irregular income and highly unstable employment to those who work in it.

It also include activities that are carried out without formal approval from authorities and escape the administrative machinery responsible for enforcing legislation and similar instruments.

Informal Sector in India
Informal Sector in India

Informal sector plays an important role in terms of it capacity –

  • to absorb labour
  • provide a sizable amount of goods and services at inexpensive cost
  • sustains a large proportion of urban population


The informal sector represents very “heterogeneous” group in terms of employment characteristics. Its activities are different from traditional sector activities which are carried out without any significant change in the mode of production, they are new ones and arise from the process of urbanization and structural differential.

Informal Sector as per National Seminar on urban informal sector held at IIPA, New Delhi

According to deliberations of the National Seminar on urban informal sector held at IIPA, New Delhi, the informal sector included all those enterprises in the urban economy using less than 10 workers, not covered by the Factories Act and Shops and Establishment Act, and where income do not attract the provisions of the Income Tax Act.

The informal enterprises due to its tiny size and unauthorized operations do not come under the purview of the incentives or social security system offered by government and state institutions. Being characterized by labor intensive activities like manufacturing, processing, trade and commerce and services, it cuts across various well defined crafts or industry conglomerates like cottage and household industry, khadi and village industries, handlooms, handicrafts, agriculture etc setup all over the country in both rural and urban areas.


Read about: What is Urban Growth, Types of Data Processing, Data Mining