Formalisation of the economy

Also called: Formalisation · Topic: Employment, Unemployment and Informalisation · NCERT: Beyond NCERT

Meaning

Formalisation of the economy is the shift of enterprises and workers into the registered, taxed and regulated economy. For firms, this means registering with the government and paying tax. For workers, it means a written contract plus social security such as PF, pension and health cover.

It matters because about 89% of India's workers were informal in 2019-20. India has more than 50 crore workers, and almost 90% of them are in the unorganised sector (2025) [1]. Formalisation is the main route from "a job" to decent work: a job with security, rights and protection.

Explanation

What gets formalised: the enterprise and the job

Formalisation works at two levels. The ILO measures informality in two separate ways:

• The enterprise (the firm). A small, unincorporated (not a company), unregistered firm, mainly owned by a household, is part of the informal sector (ILO 15th ICLS, 1993). The firm becomes formal when it registers for tax, registers as an MSME and follows labour laws.
• The job (the worker). A job with no written contract, paid leave or social security is informal employment, even if the employer is a formal firm (ILO 17th ICLS, 2003).
• The 17th ICLS defined informal employment as work that is "not registered, regulated or protected by existing legal or regulatory frameworks" [3].

• The job becomes formal when the worker gets a contract and is enrolled in PF, ESIC or a pension scheme.

• Why both levels matter. A firm can be formal while many of its jobs stay informal.

• Example: a temporary computer operator in a government office.
• The employer (the government) is formal.

• The job has no contract and no PF, so the job is informal.

• Formula (from the job view): share of informal employment (%) = (informal jobs in both the formal and informal sectors ÷ total employment) × 100. Formalisation means this share falls.

What pulls firms and workers into the formal net

• GST registration. GST is the Goods and Services Tax.
• A firm must register under GST to claim input tax credit (a set-off for the tax it already paid on its inputs).
• Big buyers prefer registered suppliers, because they want that credit too.

• So small firms get pulled into the tax net.

• Digital payments. Every digital sale leaves a record. The firm's turnover becomes visible to the tax system.

• Udyam registration. This is a free, online registration for MSMEs (micro, small and medium enterprises). It gives the firm access to government schemes and bank credit.
• EPFO and ESIC enrolment of workers:
• EPFO (Employees' Provident Fund Organisation) runs PF and pension.

• ESIC (Employees' State Insurance Corporation) gives medical care and cash benefits during sickness.

• e-Shram registration. e-Shram is a national database of unorganised workers. It brings them into the view of the state, so that schemes can reach them.

What makes formalisation rise or fall

• It rises when:
• the benefits are clear (credit, legal rights, social security);
• registration is simple, free and digital;

• the government shares the cost, for example through subsidised pension schemes.

• It falls, or stays hidden, when compliance costs are high.

• Compliance costs are the money and time spent on registration, GST returns, PF and ESIC contributions, and inspections.
• When these costs are too high, a small firm may stay small on purpose to remain below legal size thresholds.
• It may hide workers from the records, or it may close.

• This is the same problem Class 10 describes: organised firms operating as unorganised units to evade taxes and labour laws.

• Worked example: is it formalisation or new jobs? Say 100 lakh new members join EPFO in a year.

• 40 lakh of them already had these jobs. Their employers only registered them this year. This is formalisation.
• So new job creation is at most 60 lakh.
• Lesson: a rise in formal payroll numbers can come from better job quality, not only from more job quantity.

In India

• The legal push: 4 Labour Codes. 29 labour laws were combined into 4 Labour Codes [1].
• The Code on Social Security, 2020 merges 9 laws [1]. It:
  • opens ESIC to workers of all sectors, including the unorganised sector, and to gig and platform workers [1];
  • removes the minimum service rule for gratuity (a lump sum paid when a worker leaves after long service) for fixed-term employees, who now get the same social security as permanent staff [1];
  • creates a social security fund for the unorganised sector [1];
  • makes employers with more than 20 workers report vacancies online [1].

• The OSH Code, 2020 (Occupational Safety, Health and Working Conditions Code) merges 13 laws, including the Contract Labour (Regulation and Abolition) Act, 1970 [1].

• e-Shram (launched 2021) [1]:

• Each worker gets a Universal Account Number (UAN) on a self-declaration basis [2].
• Registrations passed 30.95 crore by 22 July 2025 [2].
• Women made up 53.77% of enrollees (June 2025) [1].

• The e-Shram "One-Stop-Solution", launched on 21 October 2024, links workers to many social security schemes [2].

• Voluntary schemes for informal workers:

• PM-SYM gives a pension of ₹3,000 a month after age 60. It had 51.35 lakh members (May 2025) [1].

• Atal Pension Yojana had 7.25 crore subscribers (December 2024) [1].

• Outcomes so far:

• Social protection coverage rose from 19% (2015) to 64.3% (2025), which is 94.3 crore people. This figure is recorded on the ILO's ILOSTAT database [1].
• Caveat: "coverage" counts anyone covered by at least one cash-based, legally backed scheme. That is not the same as a formal job with a contract [1].
• EPFO net additions: 1.29 crore in 2024-25 [1]. These figures are used as a proxy (an indirect measure) for formal jobs, but that use is debated.

Don't confuse with

• Informal sector vs informal employment: the informal sector is defined by the enterprise (15th ICLS, 1993). Informal employment is defined by the job (17th ICLS, 2003). Formalising a firm does not automatically formalise all of its jobs.
• Decline in casualisation: the casual share of workers fell from 31.8% (1993-94) to 19.9% (2023-24), but informality stayed near 90%. A move from casual to "regular" or self-employed work is a change in the status of work. It is not formalisation unless the job gets a contract and social security.
• Job creation: a rise in EPFO payroll numbers may only mean that old jobs were registered. Formalisation improves job quality. It does not prove that job quantity rose.
• Social protection coverage: the 64.3% (2025) figure counts people covered by at least one scheme [1]. Being covered by one benefit is not the same as having a formal job with a written contract.

Prelims Hooks

• Formal employment = a written contract + social security (PF, pension, health cover). A formal employer does not by itself make a job formal.
• A temporary computer operator in a government office with no contract or PF is in informal employment, even though the employer is formal.
• e-Shram (launched 2021) gives unorganised workers a UAN on self-declaration [1][2]. It passed 30.95 crore registrations by 22 July 2025 [2].
• The Code on Social Security, 2020 merges 9 laws and extends ESIC to gig and platform workers. Overall, 29 laws were merged into 4 codes [1].
• Social protection coverage: 19% (2015) → 64.3% (2025), as recorded by the ILO (ILOSTAT) [1].
• EPFO net additions (1.29 crore in 2024-25) are a debated proxy. They mix new jobs with the formalisation of old jobs [1].

Mains Points

• Carrots vs sticks (GS-III):
• GST, digital payments, Udyam, EPFO/ESIC and e-Shram pull firms and workers into the formal net. Social protection coverage reached 64.3% (2025) [1].
• But compliance costs can push MSMEs to stay small on purpose or to hide workers.

• A balanced answer should suggest simple thresholds, state-paid contributions for poor workers, and portability through the UAN, so that benefits move with the worker from job to job.

• Growth has not formalised jobs (GS-III):

• Planners expected the informal share to shrink as the economy grew. Yet about 89% of workers were still informal in 2019-20, and almost 90% in 2025 [1].
• Payroll data cannot cleanly separate job creation from job registration, so claims of formal job growth need care.

• Link this to jobless growth, weak manufacturing and India's dual labour market.

• Formalisation as social justice (GS-II/GS-I link):

• Most workers from SC, ST and backward communities are in the unorganised sector.
• The Ahmedabad mill closures, which began in the early 1980s, show the cost of the reverse process:
  • 80,000 permanent and 50,000 non-permanent workers lost their jobs;
  • the result was poverty, child labour, riots and suicides.
• So formalisation through the 4 Labour Codes is also about decent work (SDG 8). Decent work has four pillars: employment creation, rights at work, social protection and social dialogue [3].

Related concepts

• Casualisation of workforce
• Informalisation
• Informalisation of the organised sector
• Contract labour
• Social discrimination in the labour market
• Informal employment
• Formal employment
• Decent work

Read more

• Casualisation, informalisation and formalisation