Higher wages and social security keys to unlocking informal sector

If at all evidence is needed to show that investing in workers by giving them higher emoluments and wages — as against investing in assets — leads to higher productivity in the informal sector, particularly in manufacturing, here is one such example from an in-house study of the Ministry of Statistics and Programme Implementation (MoSPI).

Published in its journal Sarvekshana recently, this MoSPI study analyses unit-level data from the Annual Survey of Unincorporated Sector Enterprises (ASUSE) 2023-24 to conclude that investments in labour capital show “a very strong and highly significant positive relationship with productivity across all sectors”. The sectors here refer to informal manufacturing, trade and other services (unincorporated enterprises).

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The correlation is stronger in the case of informal manufacturing, compared to trade and other services.

Labour investment boosts productivity

Comparing self-run establishments with those run with hired labour, the MoSPI study finds that the effect of capital investment is “notably higher” for the former but “weak” for the latter. In fact, it says, the “primary driver” of productivity in the establishments run with hired labour is the “investment in human capital – through emoluments and wages”.

It also compares the effect on formal and informal manufacturing and finds that the latter “may be generating relatively more value” from their limited assets and its “substantially more” investment in employee remuneration (50 per cent of GVA) underscores the “centrality of labour input”.

The study is important for two reasons. One, the Centre’s focus on the formal sector for creating more jobs is not working. Despite several policy decisions and cash handouts to the formal sector, its job share is progressively declining.

Centre’s formalisation push under scrutiny

The Centre took two key policy decisions, demonetisation and GST, to push cash-driven small and informal enterprises to the formal sector. It has also been giving cash handouts through the PM-Rozgar Protsahan Yojana (PM-RPY) of 2018-2022, Aatmanirbhar Bharat Rozgar Yojana (ABRY) of 2020-2024 and Employment Linked Incentive (ELI), launched on July 1, 2025.

The Centre spent Rs 9,253 crore and Rs 10,189 crore, respectively, on the first two schemes; its budget outlay for the third is a massive Rs 99,446 crore. The first two were officially described as formalisation drives — by subsidising the EPF liabilities of companies to encourage them to enrol more workers with the EPFO. The third is officially called a job creation scheme, but it too subsidises the EPF liabilities of companies — and provides cash handouts to the newly hired workers in addition.

But the PLFS reports show the share of informal workers — without legal protection, regular wages/salaries and social security — has grown from 88.5 per cent of the total workforce in 2017-18 to 88.9 per cent in 2023-24.

The Federal had explained earlier (Why Centre must prioritise informal jobs alongside formal ones) that the Centre is forced to focus on the formal sector for the formalisation drive because it is very tough to reach out to the informal sector. The very nature of the informal sector (unincorporated enterprises) leaves no formal channels to support. But that need not be so.

Operationalise wage and social codes

The MoSPI’s in-house study should prompt the Centre to raise emoluments and wages in the informal sector — to boost productivity, and hence income and consumption demand — through a legislative route.

Here is a three-step legislative move it needs to make:

(a) Amend the Code on Wages, 2019 to include hitherto excluded informal workers from the definition of workers, such as establishments with five or less workers for “agriculture and domestic purpose”, domestic workers, gig workers, platform workers and home-based workers and unpaid helpers in household enterprises etc. and bringing them under the ambit of statutory minimum wages and adding equal-pay-for-equal-work principle to bring gender parity

(b) Thereafter, operationalise the Code on Wages, 2019 simply by notifying it and

(c) Operationalise the Code on Social Security, 2020, also by simply notifying it, to enforce universal social security cover for all informal workers through special funds and schemes — as the unimplemented law provides.

This would also save the NITI Aayog from listing the failed formalisation drive at the top of its policy prescriptions — “accelerating formalisation” and expanding social security cover to “self-employed, gig and MSME workers” as its first-pillar roadmap. Its three other pillars of the roadmaps are the routine ones — “enabling women and rural youth to access high-growth services”, “investing in technology-led skilling” and “balanced” regional growth.

Two other studies carried in the MoSPI’s Sarvekshana are also worth taking note of.

Caste system seeps into ICT skilling in UP

Another study on inequality in ICT (information and communication technology) skilling finds caste system proving to be a major hurdle for Uttar Pradesh — apart from factors such as generally poor educational attainment and infrastructure.

Unlike the previous one, this is a study by two academicians who used the NSSO’s Multiple Indicator Survey (MIS) of 2020–21 to map the inequality in ICT skilling in Uttar Pradesh across social groups –vis-à-vis India.

It says that in Uttar Pradesh “more than 75 per cent youths” do not have any ICT skills (against the national average of 58 pc); only 10.9 per cent individuals have any form of ITC skills (against the national average of 18.4 pc); only 1 per cent individuals have high-level ICT skills — beyond copying files, sending emails with attachments or creating simple presentations (against the national average of 3.25 pc). It states that while inequality in general education may have declined, inequality in technical education and vocational training has increased among the social groups between 2004-05 and 2011-12.

Lack of access, not inequality

Having highlighted the “age-old caste system that has exacerbated various forms of inequalities in the society as well as in the labour market”, it goes on to demonstrate how it has led to “disadvantageous situation” in the state in the spread of ICT skills among the social groups lower in this order:

• No ICT skills for 94.7, 93.3 and 89.8 per cent of STs, SCs and OBCs, against 80 per cent for others (general or upper castes). In each case, the numbers are far higher than the national averages.
• No ICT skills for 93 per cent of women, against the national average of 86 per cent.

Similarly, the ICT skill penetration is “considerably lower” in rural areas at 7.9 per cent (national average of 13 pc), compared to 22 per cent in urban areas (national average of 31 pc).

The same pattern is reflected in its labour market: ‘No ICT skill’ is lowest in salaried workers (58.8 per cent, against the national average of 44.9 per cent) and highest in casual workers (93.7 per cent, against the national average of 89.9 per cent).

The study sums up Uttar Pradesh’s ICT skilling situation thus: “…since very few individuals have acquired ICT skills, the scope for inequality within this domain remains minimal. As such, the issue at present is not so much about unequal access, but rather the overall lack of access."

Southern states top in financial inclusion and debt

Yet another study on financial inclusion and indebtedness by academicians shows that southern states not only lead in financial inclusion (access to and usage of financial institutions) but also in indebtedness (institutional loans, including from mobile money service providers or apps).

This study is also based on the NSSO’s Multiple Indicator Survey (MIS) of 2020-21 — not a fiscal year.

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In financial inclusion, southern states average 92.1 per cent, followed by eastern (87.9 per cent) and northern states (87.8 per cent). The highest level of financial inclusion is recorded by Karnataka (95.9 per cent), Andhra Pradesh (92.3 per cent), Tamil Nadu (92 per cent) and Kerala (91.0 per cent) — against the national average of 87 per cent.

Similarly, southern states average 31.8 per cent in indebtedness, followed by eastern (10.9 per cent) and northern states (10 per cent). States with the highest level of indebtedness are Andhra Pradesh (43.7 per cent), Telangana (37.2 per cent), Kerala (29.9 per cent), Tamil Nadu (29.4 per cent) and Karnataka (23.2 per cent) — against the national average of 14.7 per cent.

Study timing limits accuracy

Surprisingly, the study doesn’t explain why the level of indebtedness is higher in southern states, which are better off in both income (per capita) and assets (physical and financial) than the rest. Is it because they can afford more debts or their credit-worthiness is higher than the rest? What drives their debts — education, health or business needs or something else?

The MoSPI would have done better if it had explored these aspects across the region to provide insight into their economic health and dynamics.

It would have also done better if the study had been conducted during a normal year. The survey year of 2020-21 was the one hit by the Covid-19 pandemic.