Lesson eLearning

Discuss two structural reasons why informalisation of employment remains high in urban India despite rapid GDP growth, and suggest one specific policy measure for each reason that could encourage a shift towards formal employment. Illustrate each reason with a real‑world example.

hard 5 marks Class 12 · Economics · Employment Growth Informalisation and Other Issues
Answer
Two structural reasons are (i) high entry barriers and compliance costs for small enterprises, leading many urban firms to stay informal; policy: simplify tax registration and provide single‑window clearance. Example: street vendors in Delhi. (ii) prevalence of contract and gig work without social security; policy: extend statutory benefits to contract workers through portable benefits schemes. Example: app‑based ride‑hailing drivers in Bengaluru.

Step-by-step solution

  1. Identify Reason 1: high entry barriers and compliance costs for small firms.
  2. Explain why this pushes firms into informality: registration, tax filing, and labour law compliance are costly and complex.
  3. Provide an urban example: street vendors in Delhi often avoid formal registration to escape licensing fees.
  4. Suggest Policy 1: introduce a simplified, one‑stop registration portal and lower tax rates for micro‑enterprises.
  5. Identify Reason 2: widespread use of contract and gig labour lacking statutory protection.
  6. Explain how this creates a large informal workforce: workers are hired on short‑term contracts without benefits.
  7. Provide an urban example: ride‑hailing drivers in Bengaluru operate as independent contractors.
  8. Suggest Policy 2: create a portable benefits framework that links social security to the individual rather than the employer.
  9. Summarize: both regulatory simplification and extending benefits can reduce informalisation even while the economy grows.
Common mistake: Listing only demand‑side factors and ignoring regulatory constraints.

Concept tested: Causes and policy of informalisation

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