35 years of liberalisation: India’s workforce remains largely informal | Specials News

While there is no directly comparable data for the 1990s under the current Periodic Labour Force Survey (PLFS) methodology, a 2002 Unicef working paper, based on the National Sample Survey’s 50th round, estimated that 80.3 per cent of non-agricultural employment was informal in 1993-94, with as many as 100.5 million of the 124.6 million non-agricultural workers estimated to be in informal employment.  

Experts say rigid labour laws were part of the problem, but India’s persistently informal labour market is rooted in a broader set of structural factors, including its industrialisation strategy, the dominance of micro and small enterprises, weak manufacturing growth and skill gaps. 

Unlike East Asia, where industrialisation absorbed millions of workers leaving agriculture, India’s transition followed a different trajectory. Abhay Tilak, director and secretary at the Indian School of Political Economy, said policy choices predating liberalisation shaped the labour market for decades.  

“In the Second Five-Year Plan, India focused on basic and heavy industries with emphasis mostly on capital-intensive sectors. Then came the MRTP (Monopolistic and Restrictive Trade Practices) Act and decentralisation of industries, which led to the widespread development of small-scale industries where jobs were mostly low-skill, low-paying and low-security. As an outcome, people moved out of agriculture, migrated to cities and ended up settling for whatever informal jobs they found,” said Tilak. 

Liberalisation accelerated growth in information technology, automobiles, finance and engineering, but manufacturing never expanded at the scale needed to absorb the growing workforce. Tilak said India’s reforms remained concentrated in urban, capital-intensive sectors, limiting their impact on employment. 

The trajectory also concerned organised labour, which argued that greater global competition and changes in the public sector would weaken employment protections. Several central trade unions strongly opposed the liberalisation process. In April 1994, trade unions joined farmer, women, student and youth organisations in a mass mobilisation in Delhi against the General Agreement on Tariffs and Trade agreement. Contemporary reports put the turnout at over 100,000, with protesters demanding that the Centre reject the accord. 

Amarjeet Kaur, national secretary of the All India Trade Union Congress, said the protests reflected concerns that liberalisation would weaken worker protections and accelerate contractual and informal employment. “The whole model of liberalisation informalised the economy. We had argued then that informal workers were in a vulnerable spot and that the direction of policy should instead be towards formalisation, with better wages, social security and occupational safety.” 

Former labour secretary Arti Ahuja said liberalisation eased industry restrictions but left employment compliance largely unchanged.  

“What happened with liberalisation was that several procedural requirements freed up and more industries came in. But the laws stayed the same, so compliances and reporting requirements were unchanged. Industries and factories were incentivised to hire informal workers or hire on contractual basis,” she said.  

Before the four labour Codes consolidated 29 central laws in 2019, employers faced multiple registrations, returns and compliance requirements, with some obligations becoming more onerous after crossing employment thresholds. 

Tushar Kumar, a Supreme Court advocate, said the earlier legal framework altered firms’ incentives. “Enterprises had an incentive to remain below statutory thresholds, fragment operations, engage workers through contractors or retain workers outside documented employer-employee relationships. Labour regulation therefore became a tax on organisational scale and employment visibility rather than a uniform framework encouraging firms to grow formally,” Kumar noted.  

Outsourced and gig work 

The shift towards contractualisation was not limited to smaller firms, with large companies also increasingly outsourcing recruitment.  

Kaur said privatisation and outsourcing had accelerated the trend. “When you privatise the public sector, you outsource work to contract workers. Most recruitments are through contractors now,” she said. 

Ahuja said the nature of informality had changed over the decades since liberalisation. “The nature of informality has changed. Now we have gig workers and sectors like logistics and transport have mostly contractual employment hired through outsourcing agencies. Several large companies also outsourced a lot of hiring now.”  

The trend is also visible in public-sector employment, where restrictions on direct recruitment encouraged outsourcing of functions such as housekeeping and security, Ahuja said.  

Contract workers accounted for just 16.5 per cent of total workers in factories in 1997-98, according to Annual Survey of Industries (ASI) data. Their share more than doubled to 42 per cent by 2023-24, the latest year for which ASI data is available.  

The nature of employment had therefore changed substantially even as informality remained entrenched. Rather than relying solely on compliance, policy has increasingly focused on bringing workers within social security systems and creating incentives for formal employment through measures such as the Employment Linked Incentive (ELI) Scheme, wider Employees’ Provident Fund Organisation (EPFO) coverage and e-Shram. 

Puneet Gupta, partner, people advisory services at EY India, said the emphasis has shifted towards expanding social security coverage. 

“The formalisation journey is increasingly centred around expanding social security coverage, improving workforce visibility and creating an environment that encourages formal employment relationships. The Employment Linked Incentive Scheme reflects an approach where workforce formalisation is being supported not only through regulatory compliance but also through incentives that encourage both employers and workers to participate in the formal social security ecosystem. Formalisation should ultimately be viewed not merely as documentation or registration, but as expansion of meaningful social security protection and workforce welfare coverage across diverse forms of employment,” Gupta said. 

Rashmi Pradeep, partner at Cyril Amarchand Mangaldas, said the labour Codes represent an important overhaul but cannot by themselves transform the labour market. “The four new Labour Codes represent the most significant labour law reform in decades. By consolidating 29 central labour laws into four broad Codes covering wages, industrial relations, workplace safety and social security, the Codes aim to simplify an outdated framework and make it better suited to a modern, services-driven economy. While the Codes present a significant policy shift, workforce formalisation will likely require reforms beyond the letter of the law,” said Pradeep. 

For workers, formalisation was also about real wages and basic protections. Kaur said the erosion of collective wage-setting mechanisms had left informal workers particularly exposed to inflation. 

The employment challenge has also extended beyond the nature of jobs to the economy’s ability to create suitable work for a growing pool of young people. Nearly one in six people aged 15-29 who were in the labour force were unemployed in April-June 2026, according to the latest PLFS. The rate was higher among young women at 19.6 per cent, rising to 25.2 per cent in urban areas.  

“For many, jobs do not meet their aspirations or they do not find jobs at all. The higher education environment needs to align with the industry, which they have not yet done,” Ahuja said. 

Tilak said reforms would deliver limited gains without addressing the disconnect between industry and workforce skills. He pointed to Germany, Italy, Switzerland and Australia, where governments, industry associations and training institutions jointly identified skill requirements and designed vocational training systems.  

The experience of the past 35 years suggests that formalisation will depend not only on bringing more workers into social security systems, but also on encouraging firms to scale, expanding manufacturing-led job creation, and ensuring workers have access to rising wages, predictable protections and skills that match changing industry demand.