Topic 1: Conceptualizing Social Dev

- Modernisation theory
- Dependency theory
- Amartya Sen development concept
- Social development concepts

Topic 2: Inter-regional and Rural–Urban Inequality

- Regional imbalance and its types

- Indicators of Regional imbalance
- Causes of Regional imbalance
- Consequences of Regional imbalance
- Suggestions for Regional imbalance
- Regional Imbalance theories
- Balanced Regional development

Topic 3: Informal Economy- Concept And Measurement

- Informal Economy Definition By Activities, Location And Employment.

- Measurement of Informal Economy: Direct & Indirect

TOPIC 4: Situation of informal employment in organized and unorganized sector

TOPIC 1: Conceptualizing Social development

 Social development has a long history and seems to have gained momentum, especially
after the end of the Second World War.

 This period signalled the onset of some far-reaching global trends such as: the creation of
the United Nations Organisation; reconstruction of Europe and the birth of the European
Welfare State; the inception of the Cold War, and the commencement of the
decolonisation of the colonies of imperial Europe in Asia and Africa.

 This was also the period when the concept of development was beginning to be seriously
interrogated by various scholars and bodies such as the United Nations.

 One of the key issues for countries of the South or developing nations was the drive by
the developed North through agencies such as the World Bank or the International Bank
for Reconstruction and Development to “modernise” countries of the south through
planned interventions.

 The issue at hand here was that development was perceived from an
Ethnocentric/Eurocentric prism.

 In both the West and the new communist bloc, development was seen as hinging on
economic growth and industrialisation. The latter group of countries was driven by five
year plans which seemed to bring material well-being to the then Soviet Union and its
satellite states.

 With the foregoing agenda unfolding, the newly independent nations of the South were
now being made to follow similar evolutionary paths of the West if they had to “catch
up”.

 There were frantic moves to “develop” “Third World” countries through the process of
modernisation.

 The erection of modern infrastructure such as huge dams, roads construction; the
discarding of “retrogressive” traditional belief systems and modern education were
pursued in the developing world in order to “catch-up” with the West or even the
communist countries.

Modernisation theory

 The driving force behind this modernising project was the modernisation theory which
was strictly adhered to in the 1950s and early 1960s.

 Modernisation theory is bipolar in outlook, as it posits two contexts, the traditional

society and a modern one.
 Modernisation theory presupposes that “backward” or “traditional societies” have to
follow the same trajectories as Western nations in order to become developed.

 It picks up from the biological sciences of 18th Century Europe that likened human
society to biological organisms. Hence, the functionalist school of thought dominates in
modernisation theory.

 Traditional traits were said to hamper development in these “backward” nations. Among
the features of modern societies worthy of imitation were an extensive division of labour,
a well-functioning and active state apparatus, a democratic form of government and
equality before the law (Martinusen, 1997).

 Modernisation theorists saw development as an evolutionary process going through

various stages and transforming all societies from traditional to modern.

 The number of stages varied from one writer to another: Hoselitz referred to two,
traditional and modern; Lerner added an intermediary third, transitional stage. Parsons
extended the number of stages to five, and so did Rostow with his well-publicised stages
of traditional, pre-take-off, take-off, the road to maturity and the society of mass
consumption (George, 1988:5).

Modernisation theory challenged

 Dependency theory: critiqued modernisation theory. This is one of the best-known neo-
Marxist development theories of the 1960s.

 Andre Gunder Frank (in the 1960s onwards), Paul Baran (in the late 1950s) and the
structuralist writings of a group of Latin American economists working with the United
Nations Economic Commission for Latin America (ECLA) in Santiago in the early 1960s
are associated with this school of thought.

 They saw developing countries as being stuck in their stage of underdevelopment as a

result of their structural exploitation by the industrialised countries. They provided the
rich countries with both raw materials and export markets at very favourable trade terms.

 Hence, the spread of capitalism from the North had a destructive influence on those of the
South. Also, capitalism in the wealthier or core countries actively underdeveloped poorer
or periphery countries.

 Others such as Walter Rodney (1972) were able to systematically show how Europe had
actually underdeveloped Africa tracing this through the mercantile era and primitive
accumulation, the transatlantic slave trade, colonialism, imperialism and neo-colonialism.

What then is development?

 There are many definitions and interpretations of the term development.

 For purposes of this lecture, the definition of Amartya Sen (1999) will be adopted.

 He describes development in terms of human capabilities and sees it as a bundle of

freedoms. He distinguishes five types of freedoms: (i) political freedoms, (ii) economic
facilities, (iii) social opportunities, (iv) transparency guarantees, and (v) protective
security. It is also important that public policy fosters human capabilities and substantive
freedoms in general, as well as working through the promotion of these distinct, but
interrelated instrumental freedoms. Development is then achieved through the removal
of poverty, tyranny, lack of economic opportunities, social deprivation, and neglect of
public services and the machinery of repression (Sen, 1999).

Key concepts associated with Social Development

 Capabilities: For all citizens so that people would have the required economic, social,
and political freedoms to lead the type of life they have reason to value. These should
also result in people having a decent life. Capabilities such as being adequately nourished
(nutrition), educated (basic education) and able to avoid common and preventable
illnesses (primary healthcare) (Alexander, 2008) are central to social development theory
and practice.

 Assets: are accumulated resources that are invested for social and economic
development. The investment can be in human, social, or tangible assets, most often in
education, homeownership, and small business development (Centre for Social
Development, 2014).

 Empowerment: a social-action process that promotes participation of people,

organisations, and communities towards the goals of increased individual and community
control, political efficacy, improved quality of community life, and social justice
(Wallestein, 1992).

 Strengths: focusing on strengths, abilities, and potential rather than problems, deficits
and pathologies. An essential assumption of the strength’s perspective is that every
person has an inherent power that may be characterised as life force, transformational
capacity, life energy, spirituality, regenerative potential, and healing power - which is a
potent form of knowledge that can guide personal and social transformation (Weick,
1992)

 Social capital: Defined as the norms, shared understandings, trust and other factors that
make collective action feasible and productive. Social capital enables members of a
neighbourhood or social network to help one another, especially in terms of economic
opportunity and social mobility (Green & Haines, 2012).
SOCIAL DEVELOPMENT

The different approaches defining social development reflect the diverse normative beliefs of
scholars and practitioners. They also reveal the rich diversity of ideas that find expression in
social development theory and practice today. However, these definitions prioritise different
types of intervention and, accordingly, no single, agreed-upon definition has yet emerged.

Due to its broad nature, it can be defined as: a process of planned social change designed to
promote the well-being of the population within the context of a dynamic multifaceted
development process (Midgley, 2014).

Accordingly, social development:

i. Firstly, it invokes the notion of process – its dynamic nature and its focus on
transformative change should be stressed.

ii. Second, the process of social change in social development is progressive in nature.

iii. Third, social development process forms a part of a larger multifaceted process
comprised of economic, social, political, cultural environmental, gender and other
dimensions which are integrated and harmonised.

iv. Fourth, the process of social development is interventionist in that it requires human
agency in the form of projects, programmes, policies and plans that achieve social
development goals. Social development interventions are also implemented on different
levels, including the household, community, regional and national levels.

v. Fifth, the social development process is productivity in those interventions that practice
interventions function as investments that contribute positively to economic development.
Because they are based on social investments, they generate rates of return on the
individuals, households and communities that benefit from these investments as well as
to the wider society.

vi. Social development is universalistic in scope, being concerned with the population rather
than impoverished, vulnerable and needy groups of people. It also seeks to promote
people’s participation in development.

vii. Lastly, social development is committed to the goal of promoting people’s social well-
being. The notion of social well-being requires that social needs be met, problems are
managed, and opportunities maximised for families, communities and societies.
TOPIC 2: Inter-regional and Rural–Urban Inequality

Regional Imbalances

Regional imbalances or disparities means wide differences in per capita income, literacy rates,
health and education services, levels of industrialization, etc. between different regions. Regions
may be either States or regions within a State.

In India there are enormous imbalances on various accounts and British colonial rule accentuated
these regional disparities which we are not able to remove, and hence Balanced regional
development has always been an essential component of the Indian development strategy.

Two major institutions, which were expected to work towards reducing the regional imbalances
after independence, were the Finance Commission and the NITI Aayog (Planning Commission).
The Finance Commission has only limited role to play. India’s successive Five-Year Plans have
stressed the need to develop backward regions of the country.

Types of Disparities/Imbalances:

1. Global Disparity: Disparities that exist between the nations. Each country is at a different
level of development, which causes disparity between countries. Some counties have been
endowed with resources in abundance, while there are countries that are extremely poor in
resources.

2. Inter - State Disparity: Disparities between the states in India. Inter –state disparities refers
to a situation where a per capita income, standard of living, consumption situation, industrial and
agriculture development are not uniform in different parts of a given region. Backwardness of
state could be the result of either the regional diversity or disparity.

3. Intra-State Disparity: Intrastate disparity refers to disparity within the state. Intra-regional
disparities in development can be identified through macro indicators of development like
allocation of resources, quality of governance, agrarian structure, income, consumption patterns
and estimates of poverty.

4. Rural-Urban disparity: Rural-urban disparity has been prevalent in India for ages. Rural
areas are considered backward areas in terms of availability of basic infrastructure. It is because
of the absence of such facilities that rural areas lag behind urban areas in terms of the basic
indicators of development - poverty, illiteracy, unemployment etc.

Indicators of Regional Imbalances in India:

1. State Per - Capita Income: In most of the years States like Goa, Sikkim, Delhi, Chadigarh
have achieved higher per capita income compared to Bihar, UP, Jharkhand and Manipur.
2. Inter - State Disparities in Agricultural and Industrial Development: Punjab, Haryana and
part of U. P. has recorded high rate of productivity due to its high proportion of irrigated area and
higher level of fertilizer use. On the other hand, states like Assam. Bihar, Orissa and Uttar
Pradesh have been lagging behind in respect of the pace of industrialization.

3. Intra - State imbalance: There is a growing tendency among most of the advanced states
concentrate its development activities towards relatively more developed urban, and
metropolitan of the states while allocating its industrial and infrastructural projects by neglecting
the backward areas.

4. Spatial Distribution of Industries: Although the country has achieved industrial

development at a fair rate since independence, but the spatial distribution of such industrial
development between different states remained almost uneven. The top 5 states which own 53%
of India's total factories are Tamil Nadu, Maharashtra, Gujrat, U.P. and A.P.

5. Population below poverty line: Percentage of population living below the poverty line in dif-
ferent states is an important indicator of regional Imbalance or disparities. Chhattisgarh has the
highest percentage of population below poverty line and Goa has the lowest.

6. Degree of Urbanization: In respect of urbanization the percentage of urban population to

total population is an important indicator. The all India percentage share of urban population
stands at 34.93 in 2020.

7. Per Capita Consumption of Electricity: India’s per capita electricity consumption has risen
steadily in recent years, but it is much below the world average and has wide variations with Bihar
being abysmally low, and Dadra & Nagar Haveli being higher than developed countries because of
having higher degree of industrialization and mechanization of agriculture. 

8. Foreign Direct Investment: FDI is yet another important indicator of regional disparities.
Most of the states think that if they attract FDI it is useful for economic growth. Discounts in
bank rates, discount in taxes etc. are the benefits of FDI investment. The projects like IT Park,
Industrial Park, Agricultural processing such projects are reserved for FDI.

9. Human Development Index: It is a composite statistic of life expectancy, education, and

income per capita indicators. It is also an important indicator of regional disparities. HDI helps to
analyze the regional imbalance among the globe so also inter-states and intra states of a country.
The HDI is the highest for Kerala (0.625) followed by Punjab (0.569) and the lowest for Orissa
(0.442), Bihar (0.447) and Chhattisgarh (0.449).
Causes of Regional Imbalances in India:

1. Historical factors: Historically regional imbalance started in India from British regime.
British industrialist mostly preferred to concentrate their activities in two states like west Bengal
and Maharashtra and more particularly to their metropolitan cities like Kolkata, Mumbai and
Chennai. They concentrated all their industries in and around these cities neglecting the rest of
the country to remain back ward.

2. Geographical factors : The difficult terrain surrounded by hills, rivers and dense forests,
leads to increase in the cost of administration, cost of developmenental projects, besides making
mobilization of resources particularly difficult. Most of the Himalayan states of India, i.e.,
Himachal Pradesh. Northern Kashmir, the hill districts of Uttar Pradesh and Bihar, Arunachal
Pradesh and other North-Eastern states, remained mostly backward due to its inaccessibility and
other inherent difficulties. Adverse climate and proneness to flood are also responsible factors
for poor rate of economic development of different regions of the country as reflected by low
agricultural productivity and lack of industrialization. Thus these natural factors have resulted
uneven growth of different regions of India.

3. Failure of planning: Although balanced growth has been accepted as one of the major
objectives of economic planning in India, since the second plan on wards, but it did not make
much headway in achieving this object. On the other hand, the backward states like Bihar,
Assam, Orissa, UP, Rajasthan have been receiving the smallest allocation of per capita plan
outlay in almost all the plans. Due to such divergent trend, imbalance between the different states
in India has been continuously widening in spite of framing achievement of regional balance as
one of the important objectives of economic planning in the country.

4. Financial: Financial sector reforms have led to a booming stock market that has helped large
firms finance their expansion easily, however small and medium enterprises which are important
engine of growth and productivity have not been able to access finance in rural areas.

5. Infrastructure: India’s tier 1 cities i.e. Mumbai, Bangalore, Delhi, Chennai and Hyderabad
are at breaking point regions bootlicks in basic infrastructure such as power, water, roads and
airport exist. The concentrated mushrooming of out sourcing companies in these cities lead
further higher growth, while as other areas do not poses the same situation prevailing in these
metropolitan cities.

6. Predominance of Agriculture: The occupational structure of India from the beginning is

agriculture. In 1921, it was 76.0% and around 72% in 2001 census. This indicated degeneration
economic conditions, deindustrialization and realization of the economy. According to census
2011, yet 58.02% population is engaged with agriculture and remains poor as compared to
industrialized civilization.

7. Lack of Motivation on the Part of Backward States: Growing regional imbalance in India
has also been resulted from lack of motivation on the part of the backward states for industrial
development. While the developed states like Maharashtra. Punjab, Haryana, Gujarat, Tamil
Nadu etc. are trying to attain further industrial development, but the backward states have been
showing their interest on political intrigues and manipulations instead of industrial development.

Consequences of Regional Imbalances in India:

1. Inter - States and Intra State Agitations: Uneven regional development or regional
imbalances lead to several agitations with in a State or between the States. The erstwhile
combined State of Andhra Pradesh can be sited as the best example of the consequences of intra
- state regional imbalance in terms of development, which has lead to several agitations for
separate Telangana State.

2. Migration: Migration takes from backward areas to the developed areas in search livelihood.
For example, migration from rural to urban. Because urban areas will provide better quality of
life and more job opportunities when compared to rural. .

3. Social Unrest: Differences in prosperity and development leads to friction between different
sections of the society causing social unrest. For example, Naxalism. Naxalites in India function
in areas which have been neglected for long time for want of development and economic
prosperity. 

4. Pollution: Centralization of industrial development at one place leads to air and sound
pollution.

5. Housing, Water Problem: Establishment of several industries at one place leads to shortage
of houses as a result rental charges will increase abnormally. For example, Mumbai, New Delhi,
Chennai and Hyderabad and over population leads to water crisis.

6. Frustration among Rural Youth: In the absence of employment opportunities in rural and
backward areas leads to frustration especially among educated youth.

7. Under – Developed Infrastructure: Rural and backward areas do not have 24 hours power,
proper houses, safe drinking water, sanitation, hospitals, doctors, telephone and internet
facilities.

Suggestions to improve Regional Imbalances in India:

1. Identification of the Backward Areas and Allocation of funds: First, government must
identify all the backward areas within the country and special attention should be paid by
preparing and implementing special plans and models suited to these for the overall
development. Due care also to be taken by allotting sufficient funds.
2. Need for Investments in Backward Areas: Government and the private sector must realize
that regional disparities can be removed only, if greater attention is paid towards backward areas,
which need more investments. It is also important to formulate special policies and programmes
for the development of backward areas like - north- eastern regions.

3. Good Governance: Good governance refers to equitable distribution of the gains of

development to all the regions without any prejudice so that over all development takes place in
a country. Thus, the better the governance, the less would be the disparities in country.

4. Political Will: Political will is vital for the balanced regional development i.e. to remove
regional imbalances in a country.

5. Promoting New Financial Institution in Backward Region: In order to accelerate the pace
of industrialization in backward areas, the Government of India should promote new financial
institutions. Government must see that these Institutions functional well for all round
development of the backward areas.

6. Strict restrictions on usage of productive agricultural lands for non-agricultural purposes

to be implemented. If required, permissions for non-agricultural usage should be granted only
after the farmers have been guaranteed a better life.

7. Usage of natural resources for the development of tribal areas to be implemented. There
should be guaranteed share for the tribals in the income generated from the use of natural
resources.

8. Additional funds for Infrastructure: Additional funds need to be provided to build core
infrastructure at the inter-district level in less developed States and backward regions. The
quantum of assistance should be made proportionate to the number of people living in such
areas.

9. Government must speedup developmental works in backward areas: Government must

swing into action to free up blocked investment and projects. It must work with the relevant
ministries and courts. If norms have been violated and fines need to be imposed, or if additional
environment standards need to be imposed the government must get that done as soon as
possible. If developmental works are not implemented with speed, especially in backward areas,
they remain backward, and regional disparities will increase further.
Theories – Regional Imbalances

There are sharp differences in the theoretical opinions on the issue of development
disparity/imbalance and has been debated extensively by the scholars in terms of theory as
well as empirical investigators.

1. The Neo-Classical Theory of Convergence: The neo-classical school is a believer in market

forces and flexible prices. Its perspective on regional developmental disparities is drawn
from Solow’s growth model. One implication on Solow’s growth model is that the countries
with different levels of per capita income over time tend to converge to one level of per
capita income. The conclusion assumes that output per labor is subject to diminishing returns
to capital per labor. By this assumption in developed countries with higher capital per labor,
per capita income tends to grow at a slow rate than in developing countries which have lower
capital per labor. Although the convergence hypothesis was originally about international
disparities in per capita income, the hypothesis is often tested for disparities of inter-regional
development levels especially within large countries like India, China etc. Lack of unanimity
of empirical support for the convergence hypothesis lead to emergence of several other
theories.
2. Gunnar Myrdal Theory: He argues that due to industrialization and gain in productivity,
rich regions benefit more. He does not deny that growth spreads to poor regions through
access to larger markets and trade opportunities. However, he insists that gains are offset by
stronger backwash effects generated by deteriorating terms of trade resulting from high
productivity gains in industrialization in rich regions. Therefore, the theory predicts
divergence in regional incomes. Myrdal’s and krugman analysis also resonant with
Hirschman’s theory of unbalanced growth.
3. Theory of Unbalanced Growth: Unbalanced growth is a natural path of economic
development. Situations that countries are in at any one point in time reflect their
previous investment decisions and development. Unbalanced investment can complement or
correct existing imbalances. Once such an investment is made, a new imbalance is likely to
appear, requiring further compensating investments. Therefore, growth need not take place in
a balanced way. Supporters of the unbalanced growth doctrine include Albert O.
Hirschman, Hans Singer, Paul Streeten and Marcus Fleming.
4. Resource Curse Theory: According to this theory, some of the faster growing economies
over recent decades are regions with little natural resource endowments, whereas some
countries with enormous natural resource endowments suffer from poor economic
performance. This phenomenon of the negative correlation between resource abundance and
economic growth is called the resource curse. It was formally presented by Auty in 1993. For
example: Japan relatively having less natural resources compare to India developed faster.

REVIEW OF STUDIES RELATED TO INDIA:

India has experienced wide regional imbalance in achievement of development goals. Whether
such imbalances have widened over the years have been studied by the Williamson (1964), Dhar
and Sastry (1969), Rao (1973), Gupta (1973), Raj (1990), Dholakia (1994), Ahluwalia (2000),
Jha (2000), Kurian (2000), Majumdar (2004), Nayyar (2008), Kalra & Sodsriwiboon (2010) etc.

Williamson (1964) investigated the pattern of regional inequalities in the 1950’s and concluded
that the decade was marked by increasing inequalities. This was however contested by Dhar and
Sastry (1969) who using power consumption as a proxy for industrial development found a
tendency towards narrowing down of inter-state disparity in industrial output. In another study
by Rao (1973), the states were grouped into categories on the basis of factor analysis of a number
of indicators. He found that broadly the same set of states remained within the different
categories over the period thereby negating convergence or divergence. Gupta (1973) found that
public investment had a significant contribution in reducing regional income disparity during
1950-66. In a detail analysis Nair (1983) in which on the basis of compiled SDP data for 1950-
51, 1955-56, 1960-61 to 1975-76 from different official and unofficial sources, and showed that
inter-state disparities in per capita net state domestic product (NSDP) had declined over the
period 1950-51 to 1964-65, but increased between 1964-65 and 1976-77. Raj (1990) finds that
the disparities in the level of income across rural and urban sectors tend to persist because of
slow growth of per capita income in the rural sector. The study covered the period between
1950-51 and 1986-87. In an analysis of 20 Indian states during the period 1960-1990, Dholakia
(1994) finds a significant tendency for convergence of the growth rates of State Domestic
Products (SDPs).

Balanced Regional Development

Balanced regional development is an important condition for the harmonious and smooth
development of a country. It does not imply equal development of all regions of a country but
utilization of development potential of all areas as per its capacity so that the benefit of overall
economic growth is shared by the inhabitants of all the different regions of a country.

Thus, Balanced regional development is the economic development of all regions

simultaneously, raising their per capita income and living standards by exploiting their
natural and human resources fully. The policy of balanced regional development is considered
as both on economic, social, and political grounds. The Second Five Year Plan documents of
India observed in this connection.
TOPIC 3: INFORMAL ECONOMY- CONCEPT AND MEASUREMENT

Introduction:

The term “informal economy” refers to all economic activities by workers and economic units
that are – in law or in practice – not covered or insufficiently covered by formal arrangements.
Their activities are not included in the law, which means that they are operating outside the
formal reach of the law; or they are not covered in practice, which means that – although they are
operating within the formal reach of the law, the law is not applied or not enforced; or the law
discourages compliance because it is inappropriate, burdensome, or imposes excessive costs. The
informal economy can be also called as the black economy, cash economy, hidden economy,
illegal economy, informal sector, underground economy, or unobservable economy.

General characteristics of the informal economy:

- Low entry requirements in terms of capital and professional qualifications.

- A small scale of operations.
- Skills often acquired outside of formal education.
- Labour-intensive methods of production and adapted technology.
- Engaged in small and micro enterprises and activities
- Casual, part time, irregular or seasonal employment
- Frequently changing workplaces and employers
- Unclear employer-employee relationship
- Generally, not covered under the labour laws
- Poor working conditions
- Unorganized therefore no collective bargaining
- Minimum wage or piece rate work
- Little or no access to formal sector credit and skills training facilities
- No social protection

INFORMAL ECONOMY DEFINATION BY ACTIVITIES- The informal sector is broadly

characterized as consisting of units engaged in the production of goods or services with the
primary objective of generating employment and incomes to the persons concerned. These units
typically operate at a low level of Organisation, with little or no division between labour and
capital as factors of production and on a small scale. The international concept also distinguishes
between the two subcategories of informal economy enterprises:

1. Family enterprises comprised of independent and own- account workers, family workers,
apprentices, and workers, and with no permanent employees.
2. Micro-enterprises comprised of units with less than 5 to 10 employees (or jobs), and
which are not registered as enterprises
INFORMAL ECONOMY DEFINATION BY EMPLOYMENT CATEGORIES - The
Informal employment is all remunerative work, both self-employment and wage employment
that is not recognised, regulated, or protected by existing legal or regulatory frameworks as well
as non-remunerative work undertaken in an income- producing enterprise. The informal
economy can be described through the following employment categories:

1. Self-employed, i.e., own-account workers, heads of family businesses and unpaid family
workers.
2. Wage workers, i.e., employees of informal enterprises, casual workers without a fixed
employer, home workers, paid domestic workers, temporary and part-time workers and
unregistered workers.
3. Employers, i.e., owners and owner operators of informal enterprises

INFORMAL ECONOMY DEFINATION BASED ON THE LOCATION OF INFORMAL

ECONOMY ACTORS THE CATEGORIES ARE:

1. Home-based workers:

a) Dependent home-based workers which

- Work at home outside the establishment that buys their product;

- Agree by prior arrangements to supply goods or services to a particular enterprise;
- Get remunerated through what is paid for their products;
- Do not employ workers on a regular basis.

b) Independent home-based workers are those who work in their home and deliver their products
or services to prospective buyers. Their characteristics are those of the self-employed and are
classified as part of the “account workers”.

2. Street traders and street vendors.

3. Itinerant, seasonal, or temporary job workers on building sites or road works.

4. Those in between the streets and home, e.g., waste collectors.

METHODS TO ESTIMATE THE SIZE OF INFORMAL ECONOMY

Direct Methods

1. Surveys
Surveys have been widely used as a means of collecting data on all aspects of the urban
informal economy from its size and determinants to its characteristics and implications for
urban areas.

In developing countries, surveys have been the primary source of data on a growing number
of issues connected with the urban informal economic activity providing insights into labor
exploitation, sexual harassment, and poor working conditions; enhancing comparability of
data, micro-finance, micro-insurance, microentrepreneurs; migration, formal small
businesses, traditional livelihoods, social co-operatives, the conduct of multinational
companies, and urban infrastructure.

Disadvantages:

- Surveys success hinges greatly on the respondent’s willingness to cooperate. It is

difficult to assess the rise of the undeclared work from a direct questionnaire. Most
people interviewed hesitate to confess fraudulent behavior and quite often responses
are rarely reliable so that it is difficult, from these types of answers, to calculate a real
estimate – in monetary terms – of the extent of undeclared work.
- Another disadvantage is that surveys are costly, time consuming and difficult.
Finally, by their very nature, surveys offer snapshot glimpses of informal economic
activity making it difficult to extrapolate trends on its size and development.

2. Tax Auditing
The Tax Auditing method determines the size of the informal economy by measuring the
residual between income declared for tax purposes and that measured by institutional checks.

Disadvantages:
- Firstly, using tax compliance data is equivalent to using a (possibly biased)
sample of the population. This factor is likely to bias compliance–based estimates of
the informal economy.
- Secondly, estimates based on tax audits reflect that portion of informal economy
income which the authorities succeeded in discovering and this is likely to be only a
fraction of the hidden income.

Indirect/Indicator/Proxy Methods

1. Labor Market Analysis

 If data is both accessible and available, labor market analysis can give strong clues as to
the size and composition of the informal economy workforce in urban areas. These data
are ideal for studying the informal economy at the county level and give important
insights into the size and characteristics of the informal economy.
Disadvantages:
- The data used is only disaggregated to the county level and not to the municipal
level making urban informal sector analysis more difficult.
- There is a risk of double counting as workers may be working in both the formal
and informal economies.

2. Currency Demand Analysis

One of the most popular and evolving methods of measuring the informal economy is the
currency demand analysis. The foundation of this method assumes that informal economic
transactions are made in cash. Other monetary indicators include the number of large
denomination notes in circulation, the cash-deposit ratio, or level of money transactions

Disadvantages:
- First, while most transactions in the informal economy are in cash, it is not 100%.
Researchers have found that about 80% of transactions are made in cash.
- Second, the method assumes that the base year of comparison of the ratios of cash
demand did not have an informal economy. The method does not provide evidence
supporting this assumption.
- Third, the continued growth of international currency has made tracking currency
an inexact science.
- This method is a macro approach and micro markets are too small an area in
which to determine currency demand.

3. The Residual Methodology

This is a very simple but controversial method for estimating informal employment from
existing published statistical data. The estimation steps are as follows:

• Step 1: Using a labour force survey or estimate from other source, determine the total non-
agricultural workforce.

• Step 2: Using an establishment survey, economic census, determine the number of formal
employees.

• Step 3: Subtract formal employees from total non-agricultural workforce to obtain total
informal employment.

Disadvantages:

- The estimates are not precise and are somewhat akin to a back-of-the envelope
methodology for proxying informal employment.
 - A serious problem with the residual method is that it assumes that there is no
formal employment in informal sector enterprises and no statistically recorded
informal employment in formal sector enterprises.
- Depending upon the country and statistical system both assumptions can be
wrong. But, still, given the choice of no data and an approximate estimate, the
residual method can be useful when it comes to generating attention around an issue.
4. Vulnerable employment.
Vulnerable employment is an indicator that attempts to identify vulnerability by linking quality
of work to status of employment. There are two main categories of status of employment:

(i) wage and salaried workers and

(ii) self-employed: self-employed workers with employees, own-account workers, members
of producers cooperatives, and contributing family workers.

Vulnerable workers are measured as a summation of own-account and contributing family

workers, since these two groups of workers are less likely to have formal work arrangements.

Disadvantages:

- The correspondence between vulnerable employment and informal employment is

inexact; vulnerable employment can, at best, be described as a subset of informal
employment since it does not include employees holding informal jobs (who may be
much more vulnerable than own account or contributing family workers), employers
of informal enterprises or members of informal producers’ cooperatives.

5. Working poor
Working poor links remuneration to quality of work. The measure gives a reflection of decent
work, because if a person’s work does not provide an income high enough to lift them from
poverty, then these jobs, at the very least do not fulfill the income component of decent work
and it is likely that other components are not being fulfilled either.

TOPIC 4: Situation of informal employment in organized and unorganized sector

A widespread informality characterizes the Indian economy and the labour market. We may
disaggregate total employment according to two dimensions:

The type of production unit: It is defined in terms of legal organization and enterprise-related
characteristics such as their number of workers.

The type of job: It is defined in terms of status in employment as defined by the NSSO,
employers, own-account workers, unpaid family members, and regular/salaried and casual
workers. Together they provide the dualistic framework of informality.
Informal employment combines all informal jobs found in the Informal Sector or Households,
plus informal jobs carried out in the formal sector.

Reasons why informal employment is discouraged:

- Leads to seasonal unemployment

- Works have unregulated and lower wages
- Job insecurity
- Tax invasion and illegal activities
- Poor working condition

To capture the dimensions of informality at the enterprise level and worker level, we make use
of the following classifications adhering to the dualistic framework of informality:

1. Informal employment in organised sector (IOS)

2. Informal employment in unorganised sector (IUS)