Until the mid-sixties, the emergence of cities as hubs of industrialisation led policy makers and economists to presume that the formal sector would absorb a majority of transitional occupations - petty traders, small producers, and a range of other casual jobs. But the persistence of these traditional occupations beyond the gambit of state regulation finally attained recognition based on research conducted by the International Labour Organisation (ILO) in Kenya in 1972. Following this, the ILO officially endorsed the term 'The Informal Sector' for a range of small scale and unregistered non-agricultural economic activities in both urban and rural areas. The ILO realised that the problem lay in the excess supply of labour caused by the capital-intensive nature of industrialisation, which was unable to absorb the teeming mass of urban migrants and/or the traditional rural artisans displaced by industrial products.

In India, a sizable 83 percent of non-agricultural employment is in informal activities, comprising of self-employment (i.e. small and/or unregistered enterprises), wage employment in informal jobs (i.e. without formal employment contracts, worker benefits, or social protection), and informal employment outside informal enterprises (including industrial home-workers sub-contracted by formal firms and domestic workers engaged by households). The absence of any social security in these jobs has resulted in the creation of a class of 'working poor' who are engaged in low-quality jobs to scrap together whatever income they can to survive, even if such employment is insufficient to bring them above the poverty line.

By the late eighties, descriptions of the informal sector had taken a completely new twist with Hernando De Soto's book 'The Other Path' (1989). De Soto proclaimed that the multitudes of unorganised self-employed workers in the informal economy, such as the local cobbler, rag picker, fishmonger, vegetable vendor, florist, pawnbroker, etc., are brave 'entrepreneurs' who routinely oppose stifling state regulation. De Soto considered government regulation of the informal economy as an interference upon their enterprise. This view is echoed by Madhu Kishwar who has estimated that no less than two-thirds of Delhi's population of 12 million depends on hawking and cycle rickshaws. She argues that these entrepreneurs must be supported by state regulation, rather than be repeatedly harassed by the police force. After all, she maintains, they are no less than entrepreneurs who have made the best of available resources through their limited capital and skill.

The most distressing part of the informal economy is the lack of social security in most developing countries. According to the Tenth Five Year Plan (2002-2007), of the 400 million workers in the country, only 50-60 million, i.e. 12-15%, are covered by some form of social security.
Portes and Castells, in their definitive book, 'The Informal Economy' defined informalisation as 'a process of income-generation characterised by one central feature: it is unregulated by the institutions of society, in a legal and social environment in which similar activities are regulated.' According to this view, the key difference between a roadside sandwich and coffee vendor and a Barista coffee house is that the former sell unbranded products without paying taxes. The informal economy functions as a shadow economy, producing legitimate products but without the sanction or protection of law. More importantly, their research revealed that though it is unregulated by the state, the informal sector often functions with implicit permission from state institutions, although usually in illegal ways. In Delhi, for example, it is estimated that four-fifths of the cycle rickshaw drivers and hawkers are unlicensed, but they pay the petty bureaucracy a whopping 480 crore per year in bribes.

The most distressing part of the informal economy is the lack of social security in most developing countries. According to the Tenth Five Year Plan (2002-2007), of the 400 million workers in the country, only 50-60 million, i.e. 12-15%, are covered by some form of social security. For the majority, their job is the only security that they possess.

In January 2004, for example, the Supreme Court passed a directive to set up a three- person panel to supervise the transformation of 236 roads in Mumbai into designated hawking zones. Of the 1.03 lakh hawkers in the city, only 32,000 will be accommodated with licenses on these 236 streets. The future of the large remainder lies in limbo! Worse still, a newspaper report in mid-May indicates that two months before the deadline, not a single licence had been issued nor the office or software system set up to undertake this mammoth task. Further, due to certain ambiguities in the court order, hawkers unions went on a strike in February. There are few available alternatives to the informal sector in a city bursting at its seams with daily immigration of 350 families and with high entry barriers for the limited number of formal sector jobs.

Solutions to crises wrought by the informal economy should reflect a mixed approach, respecting ingenuity and entrepreneurship, but also recognizing that a large portion (if not all) of the shadow economy is downgraded labour, victimised by the larger system. There should be an endeavour to promote informal enterprises by increasing their assets and productivity through a mix of micro-finance and business development. A parallel goal is the development of policy interventions, to protect informal workers through state regulation by providing insurance coverage for illness, maternity, property, disability, old age, and death.

The main policy goal in support of these solutions should be to make the process of policy-making participatory and inclusive. A few years ago, in the Mumbai suburb of Dadar, an overenthusiastic state machinery decided to relocate hawkers from railway platforms to a multi-storied building to ease congestion for railway commuters. The government considered the intervention to be a win-win solution for commuters and the hawkers, but in reality the latter were unable to sustain their business and many lost their livelihoods due to their relocation away from zones of high pedestrian traffic as consumers were unwilling to climb a multi-storied building to buy vegetables or newspapers. It is important for the voices of the informal sector workers to be heard in an economy where the majority of the total workforce, contributing to massive 63 percent of the GDP, is employed in the informal sector. Gender-sensitive strategies are particularly important, as more than 90% of women in India are employed in the informal sector.

The Karnataka Unorganised Workers Bill has resulted in the constitution of a Social Security Authority to provide for registration of workers and regulation of employment conditions.
The Tenth Plan (2002-2007) has devolved the main thrust of responsibility for formulating polices for the informal sector to the state governments. This provides an opportunity to address local needs of the subaltern classes. In a labour-surplus economy dominated by 390 million poor citizens, there is no alternative to upgrading the informal sector diligently. States not only can undertake this charge, but also must.

The Karnataka Unorganised Workers (Regulation of Employment and Conditions of Work) Bill 2001 is a step towards finding the right balance. This legislation has resulted in the constitution of a Social Security Authority to provide for registration of workers and regulation of employment conditions; including wages, hours of work, medical and maternity benefits, overtime payment, leave, gratuity, provident fund, bonus, pension, insurance, and housing for different segments of unorganised workers. A second important feature is that it gives the state government the right to constitute boards for scheduled employment with representation from the government and the unorganised workers to administer welfare schemes.

The success and sustainability of such schemes will largely determine the economic destiny of most Indians, who have little - if any - role to play in the celebreated sectors of the formal economy.