Practice Question 8

Q) There are strong arguments within the government as well as policy debates which look at a strong and large informal sector as a drag on growth. Is over-regulation of informal sector good for India? Examine.

Superb Hints:

Between 2004-05 and 2011-12, net addition to jobs in the economy was 14 million, the bulk of which was in the informal sector. But the informal sector, which contributes to almost half of national income and employs more than 90% of all workers, remains neglected in most policy initiatives because Informal sector is looked upon as drag on growth since:

  • it encourages low productivity and does not contribute to tax resources

  • it has low rate of innovation and poor productivity.


Most government policies attempt to regulate the informal sector and bring it into the mainstream, with the overall objective of reducing its share in the economy. The attempt to over regulate informal sector is not good for Indian economy because:

  1. Any attempt to regulate it to bring it into the tax net, without adequate support, may kill the sector which has so far managed to absorb labour which is unskilled and uneducated.

  2. Even though the informal sector is unregulated, it is not competing with the formal sector and is therefore unlikely to affect it.

  3. The cost of adhering to regulation and taxes will not only add to the cost of production but will also render the informal sector unviable.


Need of hour is:

1. Upgrade the skills of those who are already in the informal sector with government support through easier access to credit, technology and availability of markets.

2. Social security architecture to be provided by the government for informal sector workers.

Conclusion: What the informal sector needs is less of regulation and more of support as against the government policy of more regulation and no support. The formal and informal sectors are complementary to each other and any attempt to use one against the other will harm both. Informal sector is the new normal. Despite its problems, it will continue to remain important for the economy both for national income and employment generation.

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