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.
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
- Identify Reason 1: high entry barriers and compliance costs for small firms.
- Explain why this pushes firms into informality: registration, tax filing, and labour law compliance are costly and complex.
- Provide an urban example: street vendors in Delhi often avoid formal registration to escape licensing fees.
- Suggest Policy 1: introduce a simplified, one‑stop registration portal and lower tax rates for micro‑enterprises.
- Identify Reason 2: widespread use of contract and gig labour lacking statutory protection.
- Explain how this creates a large informal workforce: workers are hired on short‑term contracts without benefits.
- Provide an urban example: ride‑hailing drivers in Bengaluru operate as independent contractors.
- Suggest Policy 2: create a portable benefits framework that links social security to the individual rather than the employer.
- 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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