The informal sector comprises a sizable percentage of the workforce, especially in developing countries. Even if we exclude agriculture, which mostly belongs to the informal sector, the non-agricultural activities unravel a significant proliferation of the informal sector. Further, within the formal sector, informalization processes are in place, resulting in an overwhelming proportion of labour being engaged in informal capacity. In other words, informal employment is a much larger set, encompassing both informal sector employment and the informal employment within the formal sector.

Though parts of the informal sector have been growing in response to demand, a wide range of low productivity activities exist within the informal sector, indicating its significant overlaps with poverty and slum dwelling. There has been a close link between rural-urban migration and urban informal sector employment, suggesting a transfer of rural poverty to the urban space. Additionally, several of the workers have been residing in the urban areas for more than a decade, and they have been engaged in the informal sector in a persistent manner. The possibility of graduating to the formal sector after acquiring experience in the informal sector is rather bleak.

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Hence, excess supplies of labour in many of the activities exist significantly and many of the workers continue to work within the informal sector for their entire working life span with meagre earnings. Though some of the jobs within the informal sector help reduce poverty, the recent pandemic has affected the poverty reduction processes miserably. Hence, the importance of public provisioning of work opportunities in the urban context must be felt in policy circles. Certain segments within the informal sector bear strong links with the formal sector through the processes of ancillarisation, business subcontracting and a great deal of complimentary activities.

However, many of the informal enterprises do not have access to adequate capital, technology, raw materials and marketing. Possibilities of exploitation, particularly with the operation of the intermediaries and contractors, exist on a large scale, reducing the pace of upward mobility of the workers and the enterprises. Even when the linkages exist between the enterprises from both the sectors, informal sector enterprises do not gain in terms of productivity, quality of employment and earnings. What support can be offered to make them economically viable and help them enhance productivity is an important consideration.

Besides, the dynamic ones may expand in size and graduate to the formal sector and the best support for the informal sector businesses is to help them shift to the formal sector. This will help them access benefits kept reserved for the formal sector enterprises, and at the same time raise the tax revenue of the government. Graduation to the formal economy, however, may not be straightforward. Some may opt to operate within the informal sector in order to control costs. For some others, the barriers may be envisaged in terms of the process of registration to become formal business entities and the additional financial costs associated therein.

So, unless the benefits are significantly larger than the costs, the enterprises would remain unwilling to shift to the formal sector. An endemic problem associated with many of the informal sector enterprises is that they are usually engaged in the production of lowquality products and services, thus getting stuck in a vicious circle. Product innovation and process innovation are instrumental to productivity growth. Besides, many of the enterprises and the independent workers are usually large in supplies, reducing the possibility of any upward wage mobility.

In what way skilling and reskilling can be done to facilitate occupational flexibility is a pertinent question. The dynamics of the informal sector must be understood thoroughly to recommend inclusive and broadbased productivity enhancement interventions. In order to raise productivity, we need to identify first the major constraints that the informal sector enterprises and workers face. This in turn would help us strategize the initiatives, which will be highly impact oriented. In fact, integrating the informal sector with the mainstream economy must be the primary objective; else, the informal sector may continue to operate in isolation.

Of course, even after establishing links with the formal sector, there can still be certain gross disadvantages due to the dominance of the formal sector in controlling the transactions and shaping the contracts. So, one question that crops up is, will formalising the informal sector help access certain benefits and make them at par with the formal sector. On the other hand, extending certain advantages in terms of credit and technology acquisition, the informality can be a better and cost-effective strategy as the enterprises would continue to retain their informal status and utilise the flexibility aspect of informality to improve their functioning and profitability.

It is important to understand the sharp distinctions between informal manufacturing and informal services. The dynamics and the causes of growth are very different for these two broad activities, and the reasons for low productivity can be varied. Inadequate access to capital, material etc., low level of technology and catering to the local market and low income/ poor households, manufacturing low quality products with minimum cost, the lack of research and development for process or product innovation, producing stereotypes and lack of joint ventures and joint collaboration in acquiring capital are some of the factors which are relevant for the informal manufacturing sector. On the other hand, the informal services sector is confronted with a wide range of issues, starting from skill gaps to the excessiveness of human labour.

The lack of training and skill acquisition from formally recognised institutions reduce the occupational flexibility of the informal sector workers and their chance to experience upward mobility. Recognising the informal sources of skill acquisition and making provisions for appropriate returns are indeed important from the practical point of view. State efforts in terms of establishing cooperatives and providing marketing assistance can help the informal sector units cater to the upper income households and organisations both within the country and outside. Policy changes that could affect vulnerable groups can be balanced by stronger safety nets, greater labour and product market flexibility, and better access to resources for the informal sector firms.

In addition, policies to spur economic development in general can help reduce informality. Specific measures include streamlining of tax codes and enhanced enforcement of revenue collection; easing firm and labour regulations to create a level playing field for both formal and informal participants; as well as greater access to finance and public services to help increase productivity in the informal sector are some of the key interventions. For making the informal sector units competitive it is pertinent to improve their access to finance, encourage entrepreneurship development initiatives and reduce the entry cost for the formal sector so that more informal sector units become formal.

Similarly, simplification and provisions for tax benefits will remove the mental blocks for registering as formal sector enterprises. Improving the bargaining power of the informal sector enterprises, removing information asymmetry and improving their direct accessibility to the market are instrumental to success as the role of the intermediaries will be suppressed significantly. The role of the ICT sector in this context holds tremendous potentiality.

(This article contains excerpts taken from the study commissioned by the Asian Productivity Organisation on the informal sector for which the writer was the Chief Expert, South Asian University, New Delhi.)