The Rise of Informalisation of Labour in India: Causes and Consequences

Walk into any Indian city and you’ll see the informal economy at work everywhere: the delivery rider weaving through traffic, the construction labourer mixing cement without a hard hat, the domestic worker cycling between three households a day. None of them have an appointment letter, a provident fund account, or paid sick leave. This is informalisation of labour in action, and it has quietly become one of the defining features of India’s job market.

What does informalisation of labour actually mean? 🔗

Informalisation refers to the shift of work away from secure, protected employment relationships and toward arrangements that offer little to no legal cover. This includes casual daily-wage work, contract labour hired through intermediaries, and self-employment in tiny, unregistered enterprises. The International Labour Organization defines the informal economy as all economic activity that is, in law or in practice, not adequately covered by formal rules, whether that’s a written contract, minimum wage protection, or social security.

It’s worth separating two related ideas here. The informal sector refers to unregistered or unincorporated small enterprises. Informal employment is broader still, because even workers inside registered, formal companies can hold informal jobs if they lack a contract, provident fund coverage, or paid leave. A large share of India’s contractual and gig workforce falls into this second category, employed by big, formal firms but without any of the protections a permanent employee would get.

How big is the problem in India? 🔗

The scale is substantial. Data drawn from the Periodic Labour Force Survey shows that in 2017-18, roughly 83 per cent of workers in the non-agricultural sector were informally employed, and the pattern held for both men and women. Within the overall workforce, a little under a quarter were regular salaried employees, over half were self-employed, and the remaining share worked as casual labourers, with self-employment far more common in rural areas because of the dominance of agriculture-linked activity.

More recent research reinforces that this isn’t a temporary blip. A study using pooled PLFS data through 2023-24 found that the predicted probability of informal work has been rising steadily, with the increase sharpest among women and rural workers. Crucially, the researchers point out that job creation in recent years has not been matched by a corresponding rise in formal employment, meaning the economy is growing, but the quality of jobs it generates is not improving at the same pace.

Formal versus informal employment: a quick comparison 🔗

Why is Indian labour becoming more informal? 🔗

No single factor explains this shift. It’s the outcome of business strategy, policy design, and structural change in the economy all pulling in the same direction.

Pressure to cut labour costs 🔗

Firms operating in competitive markets look for every possible way to reduce fixed costs, and hiring permanent staff is one of the biggest fixed costs there is. Employing workers through contractors or on fixed-term arrangements lets a company avoid the expense of provident fund contributions, gratuity, and retrenchment compensation, while retaining the flexibility to scale its workforce up or down with demand.

Rigid labour laws pushing employers toward informal hiring 🔗

Ironically, laws designed to protect workers have often had the opposite effect. Strict rules around layoffs and retrenchment in the organised sector made many employers reluctant to hire permanent staff in the first place, since exiting a formal employment relationship is administratively difficult. The government’s response has been to consolidate dozens of existing labour laws into four unified labour codes, one of which is the Code on Social Security, 2020, aimed at simplifying compliance while widening coverage.

Technology and automation 🔗

Digitisation and automation are reshaping which jobs exist and how they are structured. Routine, predictable tasks are increasingly handled by machines or software, pushing displaced workers into lower-skilled, informal roles. At the same time, technology platforms have created an entirely new category of work, the gig and platform economy, where riders and drivers are technically self-employed and fall outside traditional employer-employee protections.

Demand-supply mismatch in the labour market 🔗

India adds a huge number of people to its working-age population every year, but the pace of formal job creation hasn’t kept up. Research on fragmentation in the Indian labour market points to a highly segmented workforce along gender, location, and skill lines, with a persistently low female labour force participation rate. When the supply of job seekers outstrips the supply of formal positions, informal and self-employment absorb the surplus.

What informalisation costs workers 🔗

The consequences go well beyond a missing appointment letter.

Income insecurity and poverty 🔗

Informal workers typically earn less than their formally employed counterparts doing comparable work, and their earnings fluctuate with demand, weather, and health. The ILO’s framework on decent work notes that informal workers are largely excluded from national accounts and official policy protections, which keeps them invisible even as they form the backbone of economic activity.

No safety net during shocks 🔗

Without employer-linked insurance or provident fund savings, informal workers have almost nothing to fall back on during illness, injury, or an economic downturn. This vulnerability was exposed sharply during the pandemic, when millions of casual and migrant workers lost their livelihoods overnight with no cushion to absorb the shock.

Gendered impact 🔗

Women bear a disproportionate share of this burden. The same PLFS-based research found the predicted probability of informal work rising faster for women than for men across successive survey rounds, and women are also concentrated in the most vulnerable categories, such as home-based and domestic work, where oversight is minimal.

Weakened bargaining power 🔗

Informal workers rarely have access to unions or collective bargaining structures. Without that leverage, they have little say over wages, working hours, or safety standards, and disputes with employers are hard to resolve through formal legal channels.

What is being done to address it? 🔗

Policymakers have recognised that informality can’t simply be legislated away; it needs to be brought gradually within a protective framework instead. The centrepiece of this effort is the Code on Social Security, 2020, which merges nine older social security laws into a single code and, for the first time, formally defines and extends benefits to gig and platform workers alongside unorganised sector workers. Under this code, workers can register on a national portal to receive a unique ID linked to Aadhaar, which is meant to make benefits portable even when someone changes jobs or cities.

The code also establishes a right to minimum wages across both organised and unorganised sectors, based on skill level and location, along with information and facilitation centres to help informal workers actually access the schemes meant for them. Separate welfare funds are being set up specifically to support gig and platform workers, funded through contributions from the central government, state governments, and aggregator platforms.

Beyond legislation, a few other strategies are widely discussed among labour economists:

• Simplifying compliance for small firms, so registering workers formally becomes less of an administrative burden than staying informal.
• Skilling programmes that help workers move from low-productivity informal roles into higher-skilled, better-paid formal jobs.
• Extending financial inclusion through direct benefit transfers and portable social security accounts that don’t depend on a single employer.
• Strengthening labour inspection and grievance redressal in sectors like construction and domestic work, where informal arrangements are the norm.

Why this matters beyond economics textbooks 🔗

Informalisation isn’t just an abstract statistic tracked in employment surveys. It shapes whether a construction worker can afford a hospital bill, whether a gig delivery rider gets any compensation after an accident, and whether a domestic worker has any recourse if wages go unpaid for months. As India’s economy continues to grow, the real test isn’t just how many jobs are being created, but what kind of jobs they are.

What do you think? Do you think platforms like ride-hailing and delivery apps should be required to treat their workers as formal employees rather than independent contractors? And can better enforcement of laws like the Code on Social Security genuinely close the gap between India’s formal and informal workforce, or does that require a deeper shift in how businesses are structured?

References

1. https://www.ilo.org/media/118846/download
2. https://cprindia.org/wp-content/uploads/2021/12/Informality_Explainer_Dec2020.pdf
3. https://link.springer.com/article/10.1007/s43621-026-02673-4
4. https://prsindia.org/billtrack/the-code-on-social-security-2020
5. https://www.nilerd.ac.in/writereaddata/UploadFile/Pritam%20Datta%20and%20Chetana%20Chaudhuri.pdf
6. https://www.ilo.org/media/458111/download
7. https://www.pib.gov.in/PressReleasePage.aspx?PRID=2192795&reg=48&lang=2
8. https://www.issa.int/node/258924