India’s Shift to Formal Jobs & Inclusive Growth

India’s Formal Employment Shift for Inclusive Economic Transformation

Syllabus:

GS-2: Government Policies & Interventions

GS-3: Employment, Growth & Development, Skill Development, Human Resource

Why in the News ?

The World Bank’s latest income classification has upgraded Vietnam, the Philippines, and Sri Lanka to the Upper Middle-Income category, while India continues to remain a Lower Middle-Income country. The editorial highlights that India’s aspiration to become Viksit Bharat depends not merely on GDP growth but on creating large-scale formal employment by reducing excessive dependence on self-employment, while attracting institutional investors and promoting sustainable business practices.

India’s Shift to Formal Jobs & Inclusive Growth

India’s Position in the Global Income Ladder:

  • The World Bank classifies countries into Low-Income, Lower Middle-Income, Upper Middle-Income, and High-Income groups based on Gross National Income (GNI) per capita.
  • India continues to remain in the Lower Middle-Income category despite being one of the world’s fastest-growing major economies with significant market capitalisation growth on the national stock exchange.
  • Countries like Vietnam, Sri Lanka, and the Philippines have recently entered the Upper Middle-Income category due to sustained structural transformation and improved market valuation.
  • China is approaching the High-Income category because of decades of manufacturing-led growth, employment generation, and strategic investment decisions by asset managers.
  • Economic growth alone does not ensure higher income classification; it must be accompanied by productivity gains, industrialization, formal employment expansion, and ethical considerations in business practices.
  • India’s ambition of becoming a Viksit Bharat by 2047 requires large-scale transformation in the labour market alongside sustainable investing principles.
  • Rising per capita income depends on higher labour productivity rather than merely increasing output, supported by institutional investors and fund managers.
  • The transition from agriculture to manufacturing and services remains incomplete in India, requiring purpose-driven investing in key sectors.
  • India’s labour market continues to be dominated by informal and self-employed workers, reducing productivity and limiting access to passive investment products.
  • Structural reforms must focus on creating quality jobs rather than only increasing GDP growth, while addressing non-financial risks and promoting social responsibility.

Understanding Employment Transformation and Structural Change:

Concept of Structural Transformation

  • Shift of labour from agriculture to manufacturing and services.
  • Increase in labour productivity and per capita income through ethical investment criteria.
  • Expansion of urbanization and industrialization with climate change considerations.
  • Declining share of informal employment and growth in esg-focused indices participation.

World Bank Income Classification (FY 2025–26 Framework)

  • Low-Income Countries (LICs)
  • Lower Middle-Income Countries (LMICs) (India currently belongs here)
  • Upper Middle-Income Countries (UMICs)
  • High-Income Countries (HICs)

Classification Basis: Gross National Income (GNI) per capita using the Atlas Method, similar to free-float market capitalization methodology.

Employment Categories

  • Self-Employment
  • Regular Wage/Salaried Employment
  • Casual Labour
  • Informal Employment
  • Formal Employment

Important Government Initiatives

  • Make in India
  • Skill India Mission
  • PM Gati Shakti National Master Plan
  • Startup India
  • Stand-Up India
  • Production Linked Incentive (PLI) Scheme
  • Digital India
  • Open Network for Digital Commerce (ONDC)
  • National Industrial Corridor Development Programme
  • PM Vishwakarma Scheme
  • MSME Competitive (LEAN) Scheme

Important Institutions

  • World Bank
  • International Labour Organization (ILO)
  • NITI Aayog
  • Ministry of Labour & Employment
  • Ministry of MSME
  • Department for Promotion of Industry and Internal Trade (DPIIT)
  • NSE Indices Limited (index services subsidiary of national stock exchange)

Relevant Constitutional Provisions

  • Article 38 – Promote welfare of the people.
  • Article 39(a) – Adequate means of livelihood.
  • Article 41 – Right to work, education and public assistance.
  • Article 43 – Living wage and decent working conditions.
  • Article 43A – Workers’ participation in management.
  • Article 46 – Promotion of weaker sections.

Important Labour Codes

  • Code on Wages, 2019
  • Industrial Relations Code, 2020
  • Code on Social Security, 2020
  • Occupational Safety, Health and Working Conditions Code, 2020

Why Excessive Self-Employment Limits India’s Development

  • One of the defining characteristics of richer economies is the declining share of self-employment and higher participation in formal sectors tracked by exchange traded funds.
  • Nearly 75% of India’s workforce is self-employed, among the highest in the world, limiting their access to structured investment solutions.
  • In comparison:

○ Vietnam – 53.3%

○ Sri Lanka – 42%

○ Philippines – 36.1%

○ China – 37%

  • Self-employment in India largely consists of:

○ Marginal farmers

○ Street vendors

○ Small shopkeepers

○ Household enterprises

○ Gig workers

  • Such employment often suffers from:

○ Low productivity

○ Low income

○ Lack of social security

○ Limited technology adoption

○ Poor access to finance and index funds

  • Household enterprises rarely achieve economies of scale and lack ethical screening processes.
  • Informal businesses struggle to compete globally and meet ethical standards required by international investment funds.
  • Large-scale economic transformation requires workers to move into formal enterprises that follow sustainable business practices.
  • Formal employment ensures:

○ Better wages

○ Stable income

○ Skill development

○ Pension

○ Health insurance

○ Labour protection

  • Therefore, reducing excessive dependence on self-employment is essential for achieving upper-middle-income status and attracting thematic investing.

Structural Problems Behind India’s Employment Challenge

Too Few Large Employers

  • India has relatively few large manufacturing firms compared to its population that can attract institutional investors.
  • Existing large firms are becoming increasingly capital-intensive instead of labour-intensive, focusing on stock weights optimization.
  • Automation has reduced labour absorption while increasing market valuation.
  • Labour laws and compliance burdens discourage firms from expanding beyond certain thresholds, affecting their constituent weights in indices.
  • Many firms deliberately remain small to avoid regulatory costs and ethical screening requirements.
  • Scale disadvantages reduce international competitiveness and limit participation in the nifty 500 universe.

Missing Middle (Absence of Medium Enterprises)

  • India lacks a strong ecosystem of medium-sized firms that could form a thematic benchmark for equity investment strategies.
  • Germany’s famous Mittelstand consists of export-oriented medium enterprises employing thousands and following values-based screening.
  • India’s industrial structure jumps directly from:

○ Tiny informal firms

○ A few large conglomerates

  • The middle layer is largely absent, creating gaps in diversified sectoral representation.
  • This creates a serious employment gap and limits thematic index development.
  • Medium enterprises are crucial for:

○ Manufacturing

○ Innovation

○ Export diversification

○ Regional industrialization

Slow Growth of Micro Enterprises

  • Most Indian businesses employ fewer than five workers and lack access to etfs.
  • Growth is constrained by:

○ Lack of formal credit

○ Poor technology

○ Limited market access

○ Low managerial capacity

○ Absence of ethical preferences alignment

  • GST registration alone cannot transform these enterprises into green economy companies.
  • Without growth opportunities, formalisation merely increases compliance costs without addressing non-financial risks.
  • A growth ecosystem is essential before regulatory compliance, including access to responsible investment products.

Policy Reforms Needed for Large-Scale Formal Employment

Promoting Large Firms

  • Simplify labour laws while maintaining ethical standards.
  • Ensure predictable land acquisition with climate change mitigation measures.
  • Improve contract enforcement and ethical considerations.
  • Encourage labour-intensive industries that follow ahimsa principles.
  • Rationalise compliance burden while promoting animal welfare standards.
  • Promote investment certainty for asset managers and fund managers.
  • Reduce unnecessary regulatory thresholds affecting market capitalisation.
  • Encourage firms to expand beyond small-scale status and adopt sustainable investing practices.

Strengthening Medium Enterprises

  • Develop an Indian version of the Mittelstand with ethical investing principles.
  • Improve long-term financing through structured investment solutions.
  • Promote technology upgrading with green band certifications.
  • Expand export incentives for companies following saatvik principles.
  • Build sector-specific industrial clusters with ethical screening process.
  • Increase R&D support for green thematic indices participation.
  • Encourage family-owned businesses to scale with values-based screening.
  • Support manufacturing SMEs adopting the aim framework.

Helping Small Businesses Grow

  • Link credit with formal employment generation and ethical investment criteria.
  • Expand Digital Public Infrastructure (DPI) supporting passive investment products.
  • Strengthen Open Network for Digital Commerce (ONDC) with ethical preferences.
  • Improve logistics with climate change considerations.
  • Provide shared testing facilities following ethical standards.
  • Facilitate design support for sustainable business practices.
  • Create export aggregation centres promoting social responsibility.
  • Promote cluster-based industrial development with traffic-light system for compliance.
  • Increase digital literacy among entrepreneurs about etfs and index funds.

International Experiences India Can Learn From

China

  • Developed massive export-oriented manufacturing attracting international investment funds.
  • Encouraged labour-intensive industries with strategic investment decisions.
  • Created large industrial clusters with institutional investors participation.
  • Improved logistics infrastructure supporting exchange traded funds growth.
  • Supported manufacturing exports through asset managers.
  • Expanded formal factory employment tracked by market capitalisation indices.
  • Increased productivity through industrialization and thematic investing.

Vietnam

  • Attracted large foreign investments from institutional investors.
  • Integrated into global supply chains with ethical considerations.
  • Developed export manufacturing following sustainable investing principles.
  • Simplified business regulations while maintaining ethical standards.
  • Improved industrial competitiveness through purpose-driven investing.

Germany

  • Built the globally successful Mittelstand with values-based screening.
  • Encouraged family-owned manufacturing firms following ethical screening.
  • Focused on innovation with non-financial risks management.
  • Promoted vocational education aligned with evolving investor preferences.
  • Supported export-oriented SMEs through responsible investment products.

South Korea

  • Combined industrial policy with education and sustainable business practices.
  • Developed globally competitive manufacturing with ethical investing support.
  • Encouraged technological innovation addressing climate change.
  • Built strong domestic firms following social responsibility principles.

Lessons for India

  • Manufacturing-led growth remains the fastest path to mass employment.
  • Medium enterprises are indispensable.
  • Formal jobs improve productivity.
  • Export competitiveness is essential.
  • Consistent industrial policy produces long-term success.

Economic Significance of Formal Employment for Viksit Bharat

  • Formal employment raises labour productivity.
  • It increases household income.
  • Higher incomes improve domestic consumption.
  • Stable jobs encourage investment in education and health.
  • Formal workers contribute more taxes.
  • Social security coverage expands.
  • Poverty declines sustainably.
  • Urbanization becomes more productive.
  • Manufacturing becomes globally competitive.
  • India’s demographic dividend can be fully utilized.
  • Employment quality becomes as important as employment quantity.
  • Formalization strengthens financial inclusion.
  • Better jobs improve gender participation.
  • Labour mobility increases.
  • Economic resilience improves during crises.
  • Higher productivity accelerates India’s journey toward becoming a developed nation.

The Road Ahead: India’s Employment Transformation Strategy

  • Move beyond GDP-centric growth.
  • Focus on employment-intensive development.
  • Expand manufacturing under Make in India.
  • Promote labour-intensive exports.
  • Encourage industrial clusters.
  • Reduce compliance burden.
  • Improve ease of doing business.
  • Strengthen logistics infrastructure.
  • Increase public investment in industrial corridors.
  • Improve vocational education.
  • Enhance apprenticeship programmes.
  • Build industry-academia partnerships.
  • Improve women’s labour force participation.
  • Strengthen urban planning.
  • Encourage private investment.
  • Expand digital infrastructure.
  • Improve financial inclusion.
  • Promote innovation-driven manufacturing.
  • Build globally competitive enterprises.
  • Create millions of quality formal jobs.

Challenges :

  • High dependence on self-employment, particularly in agriculture and informal services.
  • Large informal sector, limiting productivity and tax collection.
  • Insufficient manufacturing growth compared to East Asian economies.
  • Limited number of large labour-intensive firms.
  • Weak medium-sized enterprise ecosystem, resulting in the “missing middle.”
  • Complex labour regulations discourage firms from expanding.
  • Difficult land acquisition delays industrial projects.
  • Limited access to affordable long-term finance for MSMEs.
  • Low technology adoption among micro and small enterprises.
  • Poor integration into Global Value Chains (GVCs).
  • Inadequate vocational skills among the workforce.
  • Regional disparities in industrial development.
  • Low female labour force participation.
  • Insufficient infrastructure in logistics, ports, and industrial parks.
  • Automation and capital-intensive production reducing labour absorption.
  • Weak export competitiveness in labour-intensive sectors.
  • Compliance burden discouraging formalisation.
  • Limited research and innovation capacity.
  • Credit constraints for scaling enterprises.
  • Policy uncertainty affecting long-term industrial investments.

Way Forward :

  • Develop a National Employment Strategy focused on formal job creation.
  • Expand labour-intensive manufacturing sectors like textiles, toys, electronics, footwear, and food processing.
  • Simplify labour and land regulations while protecting workers.
  • Build an Indian Mittelstand through targeted financial and technological support.
  • Strengthen MSME financing using blended finance and development finance institutions.
  • Promote cluster-based industrialization.
  • Expand Digital Public Infrastructure including ONDC.
  • Improve Ease of Doing Business.
  • Encourage firms to scale beyond regulatory thresholds.
  • Invest heavily in skill development under Skill India Mission.
  • Strengthen apprenticeship programmes.
  • Increase women’s workforce participation through childcare support and workplace safety.
  • Improve logistics under PM Gati Shakti.
  • Integrate Indian firms with Global Value Chains.
  • Promote exports through stable trade policies.
  • Strengthen innovation through R&D incentives.
  • Expand industrial corridors.
  • Encourage green manufacturing.
  • Improve urban infrastructure for industrial workers.
  • Ensure coordinated implementation between the Union and States to generate millions of formal jobs.

Conclusion :

India’s transition to an Upper Middle-Income and eventually High-Income economy depends less on GDP growth alone and more on structural transformation. Expanding formal employment, strengthening medium-sized enterprises, and enabling businesses to scale sustainably will determine whether India can successfully realize the vision of Viksit Bharat 2047.

Source: Mint

Mains Practice Question:

“India’s aspiration to become a developed economy depends more on generating productive formal employment than on achieving high GDP growth alone.” Discuss this statement in the context of India’s labour market structure, self-employment, industrial development, and the reforms needed to create large-scale formal jobs.