Project on

Some Observation on INFORMAL SECTOR OF

INDIA

Project Submitted by

B.Sc. (Economics Hons.) Part-III Examination 2015

Registration No: 076423

Roll No: 23A0

West Bengal State University

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 To Whom It May Concern

This is to certify that Smt. Sriparna Chowdhury Registration No : 076423of 2012-

2015 Roll No. 23A0 B.Sc Part III (Economics Hons.) Examination of WBSU has
worked on the project titled ‘Some Observation on Informal Sector in India’ under
the joint supervision of the departmental teachers, namely Dr. M.Roy, Dr.
P.Bhattacharya and Prof B.Dhar and has prepared this project report for evaluation
as per the requirement of partial fulfillment of obtaining the B.Sc (Hons in
Economics) degree of WBSU 2016. In this context, I am to reveal that, the study is
based on secondary data provided by the Planning commission, Govt. of India, The
National Commission for Enterprises in the Informal sector (NCEUS), , NSSO, 61 &
68 Round and other Quasi-Governmental Reports.

She/He has undertaken the study with all seriousness and we wish her/him all
success in future.

Dr. Mainak Roy

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 Content

1. Introduction
2. Status of Informal Sector in India
3. Factors Responsible for massive growth of Informal Sector
a. Land Distribution in Rural India
b. Decline in Employment in Agricultural sector
c. Increasing Labour force
d. Employment in Agricultural sector is declining
e. Lack of Employment Opportunities in Non-Agricultural
Sector
4. Conclusion
5. References

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INFORMAL SECTOR OF INDIA

Introduction:

Unorganised or informal sector constitutes a pivotal part of the Indian economy. More than 90
per cent of workforce and about 50 per cent of the national product are accounted for by the
informal economy. A high proportion of socially and economically underprivileged sections of
society are concentrated in the informal economic activities. The high level of growth of the
Indian economy during the past two decades is accompanied by increasing informalisation. There
are indications of growing interlinkages between informal and formal economic activities. There
has been new dynamism of the informal economy in terms of output, employment and earnings.
Faster and inclusive growth needs special attention to informal economy. Sustaining high levels of
growth are also intertwined with improving domestic demand of those engaged in informal
economy, and addressing the needs of the sector in terms of credit, skills, technology, marketing
and infrastructure.
The ILO's definition of the informal sector in the early seventies was descriptive. It specified a set
of characteristics to distinguish informal enterprises such as: small scale of operation, family
ownership, reliance on indigenous resources, labour intensive and adaptive technology, skills
acquired outside the formal system and operation in unregulated and competitive markets. The
problem with applying such multiple criteria is that all of them could be found in units pursuing
different objectives. It is also difficult to apply. In practice, most of the early ILO studies ended up
using a single index of the employment size.

 At the international level, after several years of negotiations, an agreement has been reached on
the definition of the informal sector in the Fifteenth International Conference of Labour
Statisticians (ICLS), 1993 and the new System of National Accounts (SNA), 1993. Due to the
complexity and looseness of the concept, the labour statisticians decided to distinguish one single
statistical definition for the purpose of data collection from the several definitions that may vary
according to the needs of the users and could be differentiated at the tabulation stage.

 The SNA (1993) characterizes the informal sector as consisting of units engaged in the production
of goods or services with the primary objective of generating employment and incomes to the
persons concerned. They form part of the household sector as unincorporated enterprises owned
by households. They are distinguished from corporations and quasi-corporations on the basis of
their legal status and the type of accounts they hold. These household enterprises do not have a
legal status independently of the households or household members owning them.

 The fifteenth ICLS, 1993, adopted an operational definition of the informal sector that is
irrespective of the kind of workplace, the extent of fixed assets, the duration of the activity of the
enterprises and its operation as a main or secondary activity. Within the household sector, the
informal sector comprises: (i) Informal own-account enterprises that are single member or
partnership household units that do not hire workers on a continuous basis. (ii) Enterprises of

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informal employers are household units owned and operated by employers, singly or in
partnership, which employ one or more employees on a more or less continuous basis.

Status of Informal Sector in India

Table-1

Parameter 1999 - 2000 2001 - 2006 - 2011 - % change per

2002 2007 2012 annum
Labour force (Million) 363.33 378.21 413.50 453.52 1.80
Employed (Million) 336.75 343.36 392.35 451.53 2.70
Unemployed (Million) 26.58 34.85 21.15 21.99 - 1.77
Unemployed rate (%) 7.32 9.21 5.11 6.11 13.98
Employment in Organised 27.960 26.993 28.999
Sector(Million)
Employment in Informal 308.79 365.355 422.531 3.78% per
sector(Million) (91.697) (93.11) (93.5776) annum
12930760 23867200
16745240 28419300
Note: 1) Data for respective years in million 2) Special group estimates on CDS basis
Source: Planning commission, Govt. of India, Tenth five year plan 2002-07

So far employment is concerned is concerned, informal sector continues to maintain its dominance.
In 1999-2000, the share of this sector in total employment was as high as 91.697, the share
increased further, in spite of introduction of so called New Economic Policy back in 1991. In fact,
the share increased to 93.11 in 2006-07 and further to 93.5776 in 2011-12. In absolute terms, this
rise appears to be more poignant.

Chart I (Table: 1)

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 Informal Sector : % of Total Employment
94

93.5

93

92.5

%
92

91.5

91

90.5
1999-2000 2006-07 2011-12

Table: 2

Share of Informal sector in GROSS VALUE ADDED (GVA) (Current Prices)

Sectors 2004-05 2008-09

Rs. in Rs. in
Million Million
Organised 12930760 23867200
Informal 16745240 28419300
Total 29676000 52286500
% of Informal 56.4 54.4
sector

Source: National Commission for Enterprises in the Unorganised Sector

Using the available information on labour input and value added per worker from the above
mentioned survey results, following diagram has been constructed.

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 Chart II (Table: 2)

% of informal sector in GVA

60.0

58.0

56.0

54.0

52.0

50.0
2004-05 2008-09

% of informal sector in GVA

Table - 2 reveals that the share unorganised in gross value added (GVA) as measured in current
market price is as high as 54.4%. However the share of employment of this sector in total
employment is over 90 %. The share of GVA has declined marginally to 54.4 %. in 2008-09 though
employment of this sector continue to increase to 93.58 %.

Table: 3

2006 - 2011 -
2007 2012
Yield
Organis
ed 479041.2 823035.2
Sector 329 771
Yield
Informa
l 45832.79 67259.68
Sector 276 035

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Sources: National Commission for Enterprises in the Unorganised Sector

Factors Responsible for massive growth of Informal Sector

(A) Land Distribution in Rural India

Tables: 3.a to 3.e shows different types of Distribution of Land in is observed in rural sector.
According to National Commission on Agriculture classification there are following types land
holding

1. Individual Land Holding

2. Joint Land Holding

3. Institutional Land Holding

We have taken the data released by National Commission on Agriculture for the years 1995-
96, 2000-01, 2005-06 & 2010-11 for this particular study. An d are presented in tables 3.a to
3.e. We have estimated average holding for different types of land holding by deflating to
area by total number of holding for different categories of farmers. We have taken five
categories farmers- (a) Marginal Farmers (less than 1 Hectare), (b) Small Farmers (1 to 2
Hectares), (c) Semi Medium Farmers (2 to 4 Hectares), (d) Medium Farmers (4 to 10
Hectares) and (e) Large Farmers (more than 10 Hectares). Table: 3.a shows the trend of
Average Individual Land holding of different types of farmers over the period study (1995-
96 to 2010-11).

Table: 3.a Trend in Average Individual holding for different categories of farmers.

Sl.No. Size of holding (in ha.)

AV.Ind.Holding
1995-96 2000-01 2005-06 2010-11
1.000
0 MARGINAL 0.3928 0.3927 0.3798 0.3851
2.000
0 SMALL 1.4195 1.4163 1.3795 1.4240
3.000
0 SEMIMEDIUM 2.7284 2.7164 2.6673 2.7032
4.000
0 MEDIUM 5.8182 5.7844 5.6986 5.7256
5.000
0 LARGE 15.9774 15.6151 15.4433 15.7287
6.000
0 ALL CLASSES 1.3510 1.2739 1.1726 1.1034

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 AM 5.2673 5.1850 5.1137 5.1933
GM 2.6921 2.6730 2.6181 2.6614
AII 0.4889 0.4845 0.4880 0.4875
Source: National Commission on Agriculture.

A thorough scrutiny of Table: 3.a. reveals that average individual holding of the Marginal Farmers
have recorded a steady decline from 0.3928 hectare in 1995-96 to 0.3798 hectare in 2005-06, a
marginal recovery has been observed in 2010-11 when it increased to 0.3851 hectare. However
this is still less than what it was in 1995-96. This pattern of trend is observed for all other categories
of farmers. Taking all types of farmers together, it is observed that average individual holding has
shown a slow but steady decline from 1.3510 hectare in 1995-96 to 1.1034 hectare in 2010-11.

Across the ‘agricultural census years’ we have calculated Arithmetic Mean and Geometric Mean of
average individual land holding across categories of farmers and subsequently the ATKINSONS’s
measure of inequality (AII) by using the following formula

AI = {1 – (GM/AM)}.

Table: 3.b

Av.Joint Holding
2000- 2005- 2010-
95-96 01 06 11
1.000
0 MARGINAL 0.4129 0.4154 0.4024 0.3983
2.000
0 SMALL 1.4190 1.4156 1.4090 1.4121
3.000
0 SEMIMEDIUM 2.7497 2.7703 2.7745 2.7675
4.000
0 MEDIUM 5.9242 5.9303 5.9204 5.8870
5.000 18.218 18.118 18.295
0 LARGE 18.5642 3 5 1
6.000
0 ALL CLASSES 1.7623 1.6046 1.4857 1.3934
AM 5.8140 5.7500 5.7250 5.7520
GM 2.8163 2.8126 2.7890 2.7853
AITKINSON’s Inequality Index
(AII) 0.5156 0.5108 0.5128 0.5158

Source: Estimated from the Figures released by the National Commission on Agriculture.

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It is observed from Table: 3: b that the average joint holding considering all classes of farmers taken
together have maintained a declining trend during our period of study. This declining trend is quite
clear for medium and large holding also. Atkinson’s Inequality Index (AII) has also registered a rise
from 0.515593794 in 1995-96 to 0.515766192 in 2010-11 but with minor fluctuation.

Table: 3.c

Av. Holding (Individual

+Joint)
1995-96 2000-01 2005-06 2010-11
1 MARGINAL 0.3952 0.3956 0.3828 0.3869
2 SMALL 1.4195 1.4162 1.3832 1.4223
SEMIMEDIU
3 M 2.7314 2.7239 2.6824 2.7133
4 MEDIUM 5.8360 5.8089 5.7365 5.7564
5 LARGE 16.5973 16.2510 16.1431 16.4335
6 ALL CLASSES 1.4037 1.3173 1.2145 1.1444
AM 5.3959 5.3191 5.2656 5.3425
GM 2.7183 2.7021 2.6534 2.6915
AI 0.4962 0.4920 0.4961 0.4962

Source: Estimated from the Figures released by the National Commission on Agriculture.

If individual and joint holding are merged, taking all classes of farmers together, the average
holding declined steadily without any fluctuation. Almost identical pattern of average holding is
observed irrespective of type of farmers. It is further observed that Atkinson’s Inequality Index (AII)
remained more or less stable in this period.

T able: 3.d

Institutional Holdings
95-96 2000-01 2005-06 2010-11

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 1 MARGINAL 0.3233 0.3021 0.3072 0.3256
2 SMALL 1.4234 1.4061 1.4091 1.4165
SEMIMEDIU
3 M 2.7887 2.7920 2.7848 2.7703
4 MEDIUM 6.1984 6.2698 6.2414 6.1874
5 LARGE 64.3168 60.7765 62.1496 63.1392
6 ALL CLASSES 6.6357 6.6348 6.6214 6.4632
AM 15.0101 14.3093 14.5784 14.7678
GM 3.4818 3.3965 3.4196 3.4645
AI 0.7680 0.7626 0.7654 0.7654
Source: Estimated from the Figures released by the National Commission on Agriculture.
In case of Institutional Holding, average holding of all most all categories of farming declined with
minor fluctuation, more interestingly, the Atkinson’s Inequality Index (AII) has also finally declined.

Table: 3.e

Average of Total Holdings

95-96 2000-01 2005-06 2010-11
1 MARGINAL 0.3951 0.3954 0.3827 0.3868
2 SMALL 1.4195 1.4162 1.3833 1.4223
SEMIMEDIU
3 M 2.7315 2.7240 2.6826 2.7134
4 MEDIUM 5.8370 5.8106 5.7383 5.7579
5 LARGE 17.2028 17.1246 17.0793 17.3802
6 ALL CLASSES 1.4134 1.3294 1.2252 1.1535
AM 5.5172 5.4942 5.4532 5.5321
GM 2.7378 2.7305 2.6835 2.7219
AI 0.5038 0.5030 0.5079 0.5080

Source: Estimated from the Figures released by the National Commission on Agriculture.

From the table above, one can have some idea of the objective reality in the rural economy of
India. It is observed that only 1.21 percent of total number of land holding belongs to the size-
group of 10 Hectare or more (termed as Large), 61.5 percentage belong to the marginal farmers
those who owns land of size below 1 hectare. More precisely nearly, farmers having plot of less
than 2 hectares own 80 percent of holding. Further investigation would reveal that substantial
part of these rural households belong to schedule caste, schedule tribe and other economically
backward classes including minorities. This reveals that the distribution of land (which is largely
the source of income generation in rural sector) in rural sector is highly skewed in its distribution
in favour of the owners of larger land-holdings, who can be safely termed as Large farmers. This is

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indirectly responsible for skewed and highly inadequate income for roughly 80 % of rural
population. In addition, if we consider the average family size of rural households which is about
5.5 along with the fact that cultivable land is more or less constant, it creates a tremendous
adverse effect on rural economy for the poor 80 percent of rural households. This might have
accentuated the growth of informal sector further, particularly when low average yield rate in
agricultural sector is coupled with sheer absence of alternative employment opportunity in rural
sector.

Table: 4 The Correlation between Atkinson’s Inequality Index (AII) & Rural Unemployment and
Correlation Employment in Informal Sector (EINF) and AII

CORRELATION COEFFICIENT (RU,AI) 0.49288

CORRELATION COEFFICIENT (EINF,AI) 0.8728
Results are obtained from the figures released by National Commission on Agriculture and
NSSO (61 and 68 Round)

It is observed from the above table: 4 that there is a strong positive correlation between the
inequality in the distribution of land holding and unemployment as well as with the growth of
informal sector. Almost displaced populations from the agriculture sector have been absorbed in
the informal sector in absence of alternative employment opportunity in organised sector. The
correlation coefficient is more prominent in informal sector may be because displaced persons
escaped their current daily status may be because of the 100 days job under MGNREGA.

Agricultural sector did not experience much improvement because of slow growth of capital
injection and technological up gradation. This resulted in a declining yield in the sector. This had a
direct bearing upon the agricultural employment. The table below reveals that -

Employment in Agricultural sector is declining:

Table: 5 Declining Trend in Agricultural Labour Use

State Agricultural labour Reduction

(Million) (Million)
2004-05 2011-12
Uttar
Pradesh 43.3 34.83 8.47
Karnataka 17.6 12.91 4.69
West
Bengal 15.5 11.79 3.71

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 Bihar 15.5 11.79 3.71
Rajasthan 17.4 13.83 3.56
Others 143.83 137.31 6.52
Total 258.93 228.36 30.57
Source: NSSO, 61 & 68 Round

In the year 2004-05 the number of agricultural labour in India was 258.93 million which declined
by 30.57 million in the span of just seven years. This declining trend is almost uniform in all most
all major states. Lack of non-agricultural jobs in the rural sector has led them to take shelter in
the informal sector.

Increasing Labour force:

Actual size of labour force depends on two different factors – (1) Increase in Population and (2)
concentration of population in the working age. The age wise composition of change in
population has been depicted in the following table: 6. This would help us why there occurred a
tremendous growth in labour employment in the informal sector. This table would also hint at
why employment in this sector is expected to grow in future.

Table: 6: Increase in Population by Age Group during 2007 – 2012 & 2012 –2017 (Projected)

Age Group Increase distribution of increase

2007-2012 2012 – 2017 2007-12 2012-17
In ooo In Percentage
0-14 -9308 -5916 -11.70 -7.86
15-29 26353 9601 33.08 12.76
30-44 20913 26844 26.25 35.66
45-59 25731 24006 32.30 31.89
15-59 72997 60451 91.63 80.31
60+ 15969 20735 20.05 27.55
All Ages 79658 75270 100.00 100.00
Source: Report of the Sub Committee of a NCEUS Task Force. National Commission for
Enterprises

The situation is aggravated further (as revealed from Table: 6) by the increase in concentration of
population in the working age group (15-59 yrs). It is observed that 91.63 %. of total population
belongs to the age group of 15-59 yrs. The dependent population ie population in the age group
of 0-14 years and in the age group of 60 years and above age are considered as dependent
population

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 (B) Lack of Employment Opportunities in Non-Agricultural Sector

Table: 7: Growth of employment by sectors (Percentage)

S/No Sectors Annual growth rate Annual growth rate

1983 -1994 1994 - 2004

1 Agriculture 1.51 -0.34

2 Mining and Quarrying 4.16 -2.85
3 Manufacturing 2.14 2.05
4 Electricity, GAS and WS 4.50 -0.88
5 Construction 5.32 7.09
6 Trade 3.57 5.04
7 Transport/Storage/Communication 3.24 6.04
8 Financial services 7.18 6.20
9 Community and social services 2.90 0.55
10 Average employment 2.04 0.98

Source: Report of the Sub Committee of a NCEUS Task Force. National Commission for
Enterprises

From Table: 7, it is observed that the average (all sectors) employment grew at an annual rate of
2.04 percent during the period of 1983 – 1994; the same rate has fallen sharply to 0.98 percent
per annum for the period 1994 – 2004. This implies that employment opportunity is not maintain
proper pace with the population growth rate (which was estimated to be as high as around 2.16
percent during the period of 1901 -2001. Moreover, we have already noticed that the labour
force must have grown at a rate greater than the rate at which population grew mainly due to the
increase in concentration in the age group of 15 – 59 years. Between these two periods mining
and quarrying, manufacturing, Electricity Gas & W.S. and community and social services sectors
registered a sharp decline in the growth rate of employment. In fact

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Mining and quarrying, manufacturing, and Electricity Gas & W.S. sector register a negative a
growth rate in employment in the decade 1994 – 2004. The natural outcome of this is the
overcrowding in the informal sector.

Table: 8 Industry Group wise percentage of employment in Informal, Others Unorganised and
Organised sector.

Sl.N Industry Group Informal Others Unorganised Organised Total

o

1 Agriculture, forestry and fishing 25.5 25.5 0.9 26.4

2 Mining and quarrying 0.2 0.2 1.8 2.0

3 Manufacturing 1.6 3.4 5.0 8.4 13.4

4 Electricity, gas and water supply 0.1 0.1 1.0 1.1

5 Construction 3.9 3.9 2.5 6.4

6 Trade, Hotels, restaurants 9.3 2.5 11.9 3.8 15.6

7 Transport and communication 3.3 0.6 3.9 2.8 6.7

8 Real estate, financial services and 2.6 2.9 5.4 7.6 13.0
ownership
of dwellings,

9 Community, social and personal 1.3 1.3 2.6 12.8 15.4

Services

10 Total 47.7 10.7 58.5 41.5 100.0

Source: Report of the Sub Committee of a NCEUS Task Force. National Commission for
Enterprises

It is observed from the Table: 8 that in addition to agriculture, the unorganised sector including
Informal sector maintains a relative dominance in terms of employment in the Construction,

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 Trade, Hotels, restaurants, Transport and communication and Community, social and personal
Services. In the sectors like Real estate, financial services and ownership
of dwellings and Manufacturing the share of the unorganised sector is gradually coming close to
the organised sector.

Table 9: Organised Sector Employment

Sector Employment in Million Growth Rate % per Annum

1983 1988 1994 1999-00 1983-94 1994-00
Organised Sector 24.0 25.71 27.18 28.11 1.13 0.56
Employment 1
Public Sector 16.4 18.32 19.30 19.41 1.46 0.10
6
Private Sector 7.55 7.39 7.88 8.70 0.39 1.64
Source: Economic Surveys for different years. Government of India.

Chart: 3 Growth rate (in % per annum) in organised sector employment during 1983-94 & 1994-04.

1.8
1.64
1.6
1.46
1.4
It is clearly visible
1.2 1.13
from the Table: 9 and
1 Chart: 3 that the
1983-94 growth rate of
0.8
1994-04
0.56 employment in the
0.6 0.3900000000000 organised sector as a
01
0.4 whole has decreased
0.2 0.1 drastically from the
0 period of 1983-94 to
Organised Sec- Public Sector Private Sector the period of 1994-
torEmployment
04. This is fuelled
mainly by the slowing down of employment in the public sector. Private organised sector
however registered acceleration in labour absorption.

Page 16 of 18
Agriculture, Mining and Quarrying & Electricity, Gas and WS have registered a negative growth in
annual employment generation. Average employment annual growth rate has registered a
declining trend from 2.04% during 1983-1994 to 0.98% during 1994-04. Thus it appears that
during the post liberalization period the rate of job creation in formal sector has decreased, or to
put it in safer terms, has not increased at all. This is perhaps an indication that the addition to
the labour force during the same period is finding virtually no alternative of being unemployed
than to join the informal sector.

Conclusion 

In Indian economy, the relative importance informal and unorganised sector in terms of output as
well as in terms of employment is increasing over time; the pace of this transformation is
sufficiently significant also. We have further observed that the yield rate (average productivity) of
the informal sector is relatively much lower than that of the formal or organised sector. This in its
turn establishes a much unwarranted conclusion that the Indian Economy is gradually moving
towards a subsistence economy as a whole in spite of some glittering images appearing from
greater integration world capital.

A host of factors are responsible for this backward transformation of the economy which includes
continuous increase in the skewness in the distribution of land holding, and several policies
adopted by and encouraged by the Government of India that includes increasing privatisation and
indiscriminatingly adoption in appropriate technology. Choice of technology and centralised
planning might have some impact on this and which needs to be probed further.

We have observed that informal sector is relatively less productive mainly because these are run
mainly by individual initiatives from the driven out section of population and therefore are
suffering from paucity of investible fund. Capital is negligibly present in this sector leading
therefore to extremely low productivity. In addition, the work force is getting the minimal wage
and is deprived of minimum social security measures. Thus it would not be much incorrect to
conclude that the employment in this informal sector tantamount to disguised unemployment in
some special form.

It may be inferred further that the pace of the growth of employment in informal sector has
actually been accelerated by the forces of liberalization. With the job opportunities in the formal
sector is literally inelastic and traditional agricultural sector also registering a negative average

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Annual Growth rate of employment, it appears that, the option available to the added labour
force during the same period after Liberalization is only the informal sector. This observation
finds support in many scholastic studies those portray the liberalization process has caused a
somewhat jobless growth.

References:

1. The National Commission for Enterprises in the Informal sector (NCEUS), constituted by the
Government of India, has also compiled estimates of value added for the informal sector
and informal employment for the years 1999-2000 and 2004-2005.
2. National Sample Survey Organisation, 61 Round and 68 Round
3. National Commission on Agriculture for the years 1995-96, 2000-01, 2005-06 & 2010-11
4. Planning commission, Govt. of India, Tenth five year plan 2002-07
5. Working Paper No-2, Contribution of the unorganised sector to GDP Report of the Sub
Committee of a NCEUS Task Force. National Commission for Enterprises in the
Unorganised Sector.2008
6. LABOUR IN INDIAN AGRICULTURE: A GROWING CHALLENGE: Federation of Indian
Chambers of Commerce & Industry (FICCI). 2013.
7. Declining Labour Use in Agriculture: A Case of Rice Cultivation in Andhra Pradesh
Narasimha Reddy Duvvuru and Venkatanarayana Motkuri S. R. Sankaran Chair (Rural
Labour), National Institute of Rural Development (NIRD), Hyderabad August 2013 Online
at http://mpra.ub.uni-muenchen.de/49204/ MPRA Paper No. 49204, posted 21. August
2013 11:53 UTC

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