Wikipedia defines the formal sector as activities that are taxed and monitored by the government and the activities involved are included in the Gross Domestic Product(GDP). In contrast to the formal economy is the informal sector which is neither taxed nor included in the GDP and Gross national product (GNP) of a country.
Looking into the composition of the Indian economy, as mentioned above, the formal or organized sector and the informal or unorganized sector constitutes the Indian economy. Formal sectors represent all jobs with specific working hours and regular wages and the worker’s job is assured. The workers are employed by the government, state or private sector enterprises. It is a licensed organization and is liable to pay taxes. It includes large-scale operations such as banks and other corporations. Conversely, informal or unorganized sectors are the ones where the employees or the workers do not have regular working hours and wages and are exempted from taxes. It is mainly concerned with the primary production of goods and services with the primary aim of generating employment and income on a small scale. A street vendor selling his farm products on the street to generate and earn his daily bread is an example of an informal economy. Ragpickers, moneylenders, brokers are considered as a part of an informal economy. It is also described as the grey economy.
A major section of the Indian population is into the informal sectors. In accordance with the 2000-2010 new employment recorded data, out of the 6.4 million new employment opportunities recorded, approximately 76 percent were in the informal sector. Furthermore, 81 percent were informally employed of the 24 percent newly employed in the formal sector.
Informal sectors are deemed low with low production value. In India agriculture, dairy, horticulture and related occupation employ 52 percent of the workers. It has less remunerative, unlike the formal sectors. The latter provides incentives such as bonuses, paid leave and fixed working hours not to forget maternity leave which is devoid in informal sectors, there are no such incentives.
Moreover, it lacks security both legally and economically. Therefore, there is a greater vulnerability of the workers who are outside the reach of the labor legislation due to a worker’s absence of social protection and worker’s right. The vulnerability increases with women in particular. Since the organizations, informal sectors are legalized and are monitored by governments the workers by default have economic security and social protection.
25 percent of the informal sectors constitute urban employment in India. These comprise of domestic workers, home-based workers, street vendors, and waste pickers. 25 percent of the informal sectors constitute urban employment in India. These comprise of domestic workers, home-based workers, street vendors, and waste pickers.
The majority of the Indian population is concentrated in informal sectors. The main reason could be because most of the Indian section of society are economically backward people. They cannot afford to pay taxes. They can hardly earn the basic bread of the day. Therefore, they prefer to work which is easily accessible to them such as farming, selling well on a street where they don’t have to levy taxes. The activities informal sectors are licensed and are obliged by the government to levy taxes. These organizations are usually big private firms and organizations.
In a nutshell, the formal sector and the informal sector constitute the Indian economic sector. The major difference being the exemption of taxes in the informal sector, it dominates the major population of India. Formal sectors are legalized and the workers have social protection, economic security and have certain incentives while those of informal sectors do not possess such privileges.