Exploring the Urban Informal Sector’s Role in India

India’s cities are powered by a largely invisible workforce. The street vendor selling cutting chai at dawn, the construction worker hauling bricks in the midday heat, the domestic worker managing an urban household – all of them belong to what economists call the urban informal sector. This sector is not a marginal footnote in India’s economy. It is the economy for a majority of working Indians. Yet for all its scale and significance, it remains one of the most poorly protected, under-documented, and structurally neglected parts of the country’s labour landscape.

What the informal sector actually means 🔗

The informal sector refers to economic activity that takes place outside formal regulatory frameworks – no registration, no written contracts, no employer-provided social security. In India, the terms “informal sector” and “unorganised sector” are often used interchangeably. According to India’s National Statistical Office, the informal or unorganised sector consists of enterprises that are own-account enterprises or those employing fewer than ten workers without formal terms of employment.

What makes the urban informal sector particularly important is how it bridges the gap between rapid urbanisation and the formal economy’s inability to absorb new workers fast enough. As millions migrate from villages to cities every year, the informal sector is what receives them. It demands no formal qualifications, no prior employment history, and very little capital to enter. This accessibility is both its greatest strength and the root of its deepest vulnerabilities.

The scale of informal employment in India 🔗

Despite decades of rapid economic growth, 90% of workers in India remain informally employed, together contributing roughly half of the country’s GDP. India is now the fourth-largest economy in the world, with growth estimated at 6.5% in 2024, yet it still carries one of the highest rates of informal labour globally – a paradox that researchers and policymakers have struggled to resolve.

In urban India specifically, informal workers span self-employment, casual wage work, and household-based enterprises. Official Periodic Labour Force Survey (PLFS) data shows that 75% of informal workers are self-employed or casual wage workers, earning significantly less than regular salaried employees. As of 2023-24, about 61% of women workers in the non-agriculture sector are employed in informal enterprises, making gender a critical dimension of informality.

India has over 6.33 crore MSMEs, employing nearly 11 crore people and contributing close to 30% of India’s GDP, with microenterprises – the smallest and most informal of these – accounting for 99.4% of all MSMEs and 97% of MSME employment.

Who makes up the urban informal workforce? 🔗

The urban informal sector is not a single occupation – it is a broad canvas of livelihoods. Understanding its composition helps explain why it is so difficult to regulate and why one-size-fits-all policies consistently fall short.

Street vendors and hawkers 🔗

Street vending alone supports over 10 million people across India, with cities like Delhi hosting more than 3 lakh vendors. These workers sell everything from produce and cooked food to garments and electronics. Entry barriers are low, but so are protections. Income fluctuates by season, weather, and local authority crackdowns, leaving vendors in a state of chronic economic uncertainty.

Construction workers 🔗

The construction sector employs over 50 million workers, 85% of whom are informal, mostly seasonal migrants from states like Bihar, Uttar Pradesh, Odisha, and Jharkhand. These workers – masons, carpenters, unskilled labourers – are hired on daily wages with no job security, no safety equipment, and no guarantee of work tomorrow. Urban construction workers often work 12-14 hours a day for meagre pay, and the ILO estimates 48,000 annual workplace deaths in India – among the highest globally.

Domestic workers 🔗

Domestic workers – housemaids, cooks, childcare providers – form one of the largest but least visible segments of urban informal labour. The vast majority are women. They typically work without written contracts, fixed hours, or any form of employment documentation. This invisibility makes them particularly vulnerable to wage theft, abuse, and arbitrary dismissal with no legal recourse.

Home-based and self-employed workers 🔗

Self-employed informal workers include street vendors, small shop owners, auto-rickshaw drivers, and home-based workers like tailors or food processors. They are their own bosses but carry all the risks of entrepreneurship without access to formal credit, insurance, or business support. Home-based workers – often women engaged in stitching, assembling goods, or processing food – are frequently paid piece-rate, making it nearly impossible to calculate their effective hourly wage.

Why the informal sector keeps growing 🔗

A common assumption is that informality is a transitional phase – that as economies develop, workers naturally move into the formal sector. India’s experience challenges this assumption. The informal sector typically absorbs surplus labour, and rural-urban migration significantly reinforces this trend, as new arrivals are channelled into informal jobs as the first point of urban integration.

Three structural forces drive this growth. First, the formal economy simply does not generate enough jobs. India’s workforce has grown significantly since 2000, but demographic pressures have produced “jobless growth” – economic expansion that fails to create sufficient employment for the expanding population. Second, the informal sector fills genuine market gaps by providing goods and services that formal businesses find too small-scale or unprofitable to pursue. Third, barriers to formal employment – educational requirements, skills mismatches, and geographic exclusion – push large populations toward informal livelihoods as the only viable option.

In many parts of the developing world, including India, informality has reduced at a very sluggish pace, manifesting itself most visibly in urban squalor, poverty, and unemployment – even as the national economy registers strong headline growth figures.

Legal protections: what exists and what doesn’t reach workers 🔗

On paper, India has an extensive framework of labour legislation. The Minimum Wages Act, 1948, the Factories Act, 1948, and the Payment of Wages Act, 1936 all articulate rights that sound comprehensive. In practice, the majority of informal workers fall entirely outside their reach. India’s labour market is characterised as ‘informal’, with over 93% of workers located outside the organised sector. Crucially, this is not simply a matter of weak enforcement – the legal architecture itself is designed in ways that exclude informal workers.

How the law produces exclusion 🔗

Three mechanisms perpetuate informality within India’s legal framework: narrow definitions of who counts as a ‘worker’ or ’employee’; workforce-size thresholds that determine which employers must comply with labour protections; and discretionary welfare schemes that replace enforceable rights. A construction firm hiring workers through unlicensed intermediaries, or a household employing a domestic worker with no written contract, can effectively operate outside India’s core labour protections.

According to the National Sample Survey Office, nearly 81% of India’s workforce is engaged in informal employment, lacking access to formal contracts, social security benefits, and legal protections. Workers in this situation are often vulnerable to exploitation, with employers using their precarious status to circumvent the law entirely.

The new labour codes: promise and reality 🔗

In 2019-2020, the Indian government consolidated 29 existing central labour laws into four codes: the Code on Wages, 2019; the Code on Social Security, 2020; the Industrial Relations Code, 2020; and the Occupational Safety, Health and Working Conditions Code, 2020. The intent was to simplify the regulatory framework and extend coverage to informal workers.

The four codes were introduced with the promise of universalising minimum wages and ensuring the timely payment of wages. However, the key question remains whether these reforms can overcome entrenched structural and enforcement challenges to effectively protect informal workers. Labour experts and rights organisations have raised serious concerns.

Critics argue the new laws exempt tens of thousands of smaller firms and further expand India’s informal workforce of more than 400 million workers, leaving many without the protection of formal contracts and benefits such as paid holidays and healthcare. The Code on Wages, 2019 retains exclusionary definitions of ’employee’ and ‘worker’, leaving the majority of the workforce outside its applicability. Gig and platform workers – a group NITI Aayog forecasts will reach 23.5 million by 2029-30 – are classified as independent contractors rather than employees, exempting their employers from social security obligations.

The Code on Social Security, 2020’s transformative potential is undermined by serious hurdles: lack of awareness among workers, bureaucratic complexities in registration, and the voluntary nature of employer contributions, which collectively dilute its capacity to guarantee genuine social security coverage.

Specific protections and their gaps 🔗

Several targeted laws exist for specific categories of informal workers. The Unorganised Workers’ Social Security Act, 2008 and the Street Vendors (Protection of Livelihood and Regulation of Street Vending) Act, 2014 aim to provide benefits such as health insurance, pension schemes, and housing facilities – but enforcement remains inconsistent.

Domestic workers remain excluded from the Minimum Wages Act, leaving them vulnerable to exploitation. India has not yet ratified the ILO’s Domestic Workers Convention (C189), which would establish an international floor of protections for this workforce. The registration process, while simplified through the e-Shram portal, still poses challenges for workers with limited digital literacy, and as many as 27.69 crore informal workers have registered on e-Shram, though registration alone does not guarantee access to welfare.

The reality for most casual, contract, daily wage, and migrant workers is that labour law enforcement is practically non-existent. The dominant policy stance – that workers need benefits rather than rights – leaves millions dependent on discretionary government schemes rather than enforceable entitlements.

The broader consequences of informality 🔗

The costs of operating at the margins of legality are borne almost entirely by the workers themselves. The National Health Accounts Report (2023) states that 93% of informal workers lack health insurance, making medical treatment unaffordable. When illness strikes or an accident occurs on a construction site, there is typically no compensation, no paid leave, and no employer accountability.

The informal sector’s inability to leverage economies of scale or access formal credit also limits productivity. Although the informal sector employs more than 75% of the population, the value-addition per employee is very low, meaning a major proportion of India’s human capital is systematically underutilised. This is not simply a welfare concern – it represents a structural drag on the economy’s long-term potential.

Women, Dalits, Adivasis, and migrant communities face compounding disadvantages within the informal sector, as discrimination based on caste, gender, and origin operates freely in spaces where formal oversight is absent. Women make up a disproportionately high share of informal sector workers, concentrated in the lowest-paid, most precarious occupations, often with the longest working hours and the least bargaining power.

What meaningful reform would require 🔗

Addressing the urban informal sector’s challenges is not simply a matter of passing more legislation. The new labour codes are unlikely to make a difference until central and state governments actively engage in dialogue with unorganised workers and their unions to understand their demands. Strong political will and adequate funding are prerequisites for any law to translate into real-world protection.

Models from within India offer some direction. Kerala has established welfare boards for construction workers, auto-rickshaw drivers, and domestic workers, where registered workers contribute a small fee and the government provides pensions, insurance, and healthcare – demonstrating that integrating informal workers into welfare systems is feasible with the right institutional design. Digital tools like UPI and the PM SVANidhi scheme have also begun creating transaction records for street vendors, enabling them to access credit and banking services that were previously inaccessible.

The core challenge is shifting from a framework of discretionary benefits to one of enforceable rights – where a construction worker injured on the job, or a domestic worker dismissed without notice, has a genuine legal avenue to seek redress, not just the hope of a government scheme that may or may not reach them.

What do you think? Given that India’s labour laws have historically excluded informal workers through their very design – not just through weak enforcement – can legislative reforms alone close the protection gap? And what would it actually take to give the millions of urban informal workers in India not just welfare benefits, but enforceable rights?

References

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