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Logical Reasoning · 6 questions · about 1 min to read

The Informal Economy in India

Read the passage, answer the questions, then open each answer to check it. The explanation says why the right option is right.

The passage

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The informal economy in India encompasses all economic activity that is not regulated, taxed, or monitored by the government. By most estimates, it accounts for over 80 percent of employment and approximately 50 percent of GDP. The informal sector includes street vendors, construction workers, domestic workers, small workshops, home-based producers, and a large proportion of agricultural workers. Workers in the informal economy typically lack written contracts, social security coverage, access to formal credit, or legal protections against arbitrary termination.

The relationship between the formal and informal economies is not one of separation. Formal enterprises routinely sub-contract work to informal units, enabling them to reduce costs and evade labour regulations. The garment industry offers a striking example: a branded garment may pass through several layers of sub-contracting before reaching a home-based worker who sews buttons for a few rupees per piece, entirely outside the regulatory framework that nominally applies to the brand's supply chain.

Efforts to formalise the informal economy — through digital payment systems, registration schemes, and social security programmes like the PM-KISAN scheme for farmers — have made incremental progress, but the structural incentives that keep workers informal — lower taxes, lower compliance costs — remain powerful for employers.

  1. Q1. According to the passage, what proportion of India's employment is estimated to be in the informal economy?

    1. Approximately 50 percent
    2. Over 65 percent
    3. Over 80 percent
    4. Approximately 90 percent
    Show answer

    Answer: C. Over 80 percent

    The passage states: 'it accounts for over 80 percent of employment and approximately 50 percent of GDP.'

  2. Q2. The garment industry example in the passage is used to illustrate:

    1. The exploitation of female workers in the textile sector
    2. How formal enterprises use sub-contracting to access informal labour and evade labour regulations
    3. The importance of branded goods in India's export economy
    4. The role of home-based work in rural female employment
    Show answer

    Answer: B. How formal enterprises use sub-contracting to access informal labour and evade labour regulations

    The passage uses the garment example to illustrate: 'Formal enterprises routinely sub-contract work to informal units, enabling them to reduce costs and evade labour regulations.'

  3. Q3. The passage states that structural incentives that keep workers informal include:

    1. Lack of awareness among workers about their legal rights
    2. Lower taxes and lower compliance costs for employers
    3. The preference of workers for flexible and unstructured employment
    4. The absence of formal sector jobs in rural areas
    Show answer

    Answer: B. Lower taxes and lower compliance costs for employers

    The passage states: 'the structural incentives that keep workers informal — lower taxes, lower compliance costs — remain powerful for employers.'

  4. Q4. Which of the following would most directly address the structural incentive for employers to keep workers informal?

    1. Increasing awareness campaigns for informal workers about registration benefits
    2. Reducing the tax and compliance cost differential between formal and informal employment
    3. Expanding the PM-KISAN scheme to urban informal workers
    4. Requiring all informal workers to obtain a government registration certificate
    Show answer

    Answer: B. Reducing the tax and compliance cost differential between formal and informal employment

    The structural incentive is lower taxes and compliance costs for employers. The most direct solution is to reduce that differential — making formal employment less costly relative to informal employment.

  5. Q5. The passage describes the relationship between the formal and informal economies as:

    1. Entirely separate spheres with no interaction
    2. Competitive, with informal enterprises undercutting formal enterprises
    3. Interdependent, with formal enterprises routinely using informal sub-contractors
    4. Hierarchical, with the formal sector growing at the expense of the informal
    Show answer

    Answer: C. Interdependent, with formal enterprises routinely using informal sub-contractors

    The passage states: 'The relationship between the formal and informal economies is not one of separation. Formal enterprises routinely sub-contract work to informal units.'

  6. Q6. Which of the following is NOT listed in the passage as a characteristic of workers in the informal economy?

    1. Lack of written contracts
    2. Absence of social security coverage
    3. No access to formal credit
    4. No right to organise into trade unions
    Show answer

    Answer: D. No right to organise into trade unions

    The passage lists: no written contracts, no social security, no formal credit access, and no legal protection against arbitrary termination. The right to organise into trade unions is not mentioned.

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