You Can’t Regulate an Economy by Destroying It: The Case for India’s 90% Workforce

India’s informal economy has long served as the country’s largest employment generator and economic shock absorber. According to the International Labour Organisation (ILO), nearly 90 percent of India’s workforce is employed in the informal economy, while the informal sector contributes around 45–50 percent of the country’s Gross Domestic Product (GDP) through agriculture, manufacturing, trade, transport, construction, and services. At the same time, India’s Micro, Small and Medium Enterprises (MSME) sector comprises more than 6.3 crore enterprises, contributing nearly 30 percent of GDP, roughly 45 percent of manufacturing output, and approximately 45 percent of exports. This makes it one of the principal engines of employment and economic growth.

Over the past decade, governments at both the central and state levels have rightly intensified efforts to improve urban planning, fire safety, environmental compliance, and municipal governance. These objectives are essential for sustainable development and public safety. However, the aggressive manner of enforcement has generated an important policy debate: How can India ensure regulatory compliance without undermining the livelihoods of millions who depend on the informal economy?

India’s informal sector constitutes a substantial portion of economic activity and employs a vast number of people, particularly among low- and middle-income households. Small manufacturing units, workshops, roadside vendors, hawkers, family-run enterprises, and micro-businesses form the backbone of local economies in both urban and rural areas.

The Cost of Compliance Without Rehabilitation

In recent years, enforcement drives against unauthorised establishments, the demolition of small business units, and the removal of street vendors in various cities have raised serious concerns about their social and economic consequences. While compliance with municipal, environmental, and safety regulations is undoubtedly important, abrupt closures or demolitions leave thousands of families without a stable source of income.

These concerns are not merely theoretical. Across various states, demolition drives affecting informal workshops, the eviction of street vendors, the closure of small industrial units for environmental or municipal violations, and the removal of roadside businesses have repeatedly highlighted the tension between regulatory enforcement and livelihood protection. While authorities pursue legitimate public goals—like fire safety, pollution control, urban planning, and removing illegal encroachments—the lack of adequate rehabilitation, relocation, or transition support leaves thousands of workers and small entrepreneurs facing prolonged economic uncertainty.

The consequences of large-scale disruption in the informal sector extend far beyond individual households. Reduced household incomes directly lower consumer spending, which triggers a domino effect through local markets, retailers, and service providers. Crucially, this decline in purchasing power hurts the formal sector as well; large-scale industries depend heavily on mass consumption from these very populations for fast-moving consumer goods (FMCG), textiles, and basic electronics. A dip in informal earnings ultimately weakens overall economic growth, reduces indirect tax revenues, and increases social vulnerabilities.

Furthermore, prolonged unemployment and economic insecurity adversely affect access to education, healthcare, and social mobility. Families struggling to meet basic needs may be forced to withdraw children from schools, seek unsafe informal labour opportunities, or become dependent on public assistance. Such conditions inevitably contribute to higher levels of social distress and systemic inequality.

India’s economic strength has traditionally rested on the coexistence of large corporations and millions of small entrepreneurs. Sustainable development requires policies that balance regulatory compliance with social protection. Instead of simply removing non-compliant businesses, governments must prioritise rehabilitation measures, relocation plans, regularisation mechanisms, affordable compliance assistance, and dedicated vending zones for hawkers and small traders.

Economic reforms are most effective when they combine enforcement with inclusion. Ensuring adherence to safety and environmental standards is necessary, but safeguarding livelihoods is equally important. A policy framework that provides affected workers and entrepreneurs with viable alternatives helps maintain economic stability while promoting orderly development.

Policymakers, businesses, and communities must work together to ensure that economic growth remains inclusive and that efforts to improve urban governance do not push vulnerable populations into deeper poverty. Development should not merely be measured by infrastructure and compliance statistics, but by the extent to which it preserves dignity, opportunity, and livelihoods for ordinary citizens.

Constitutional Principles and the Need for Inclusive Regulation

The Indian constitutional framework explicitly recognises the importance of balancing public interest with individual livelihood. While the State possesses the authority to regulate trade, land use, environmental protection, and public safety, such regulation must respect constitutional guarantees.

Article 19(1)(g) of the Constitution of India guarantees citizens the fundamental right to practice any profession or carry on any occupation, trade, or business, subject to reasonable restrictions in the interest of the general public. Likewise, Article 21, which guarantees the right to life and personal liberty, has been interpreted by the Supreme Court of India in several landmark judgments to include the right to livelihood as an integral component of the right to life. These constitutional principles dictate that while governments are fully empowered to enforce legitimate regulations, such enforcement should always be accompanied by fair procedures, reasonable opportunities for compliance, and measures that minimise avoidable hardship.

The same philosophy is reflected in the Street Vendors (Protection of Livelihood and Regulation of Street Vending) Act, 2014. This legislation seeks to regulate street vending while simultaneously protecting the livelihood rights of millions of vendors through designated vending zones and participatory governance.

Concrete Suggestions for Policymakers

To achieve orderly development without depriving millions of citizens of their means of livelihood, policymakers should consider the following constructive measures:

1. Prioritise Guidance Over Punitive Action: Before demolishing or shutting down any micro-enterprise, workshop, or vending activity, governments should ensure adequate notice, mandatory consultation, and an opportunity for compliance. Small businesses often lack the financial and technical capacity to immediately meet complex requirements relating to fire safety, pollution control, or building norms. Instead of relying solely on punitive action, authorities should provide technical guidance, affordable compliance mechanisms, and realistic timelines.
2. Mandate “Relocation Before Eviction”: Wherever displacement becomes unavoidable, governments should establish alternative industrial clusters, vending zones, and commercial spaces before undertaking eviction or demolition drives. The objective should always be relocation and rehabilitation rather than the outright elimination of economic activity.
3. Leverage Existing Welfare Schemes: Existing developmental programmes should be mobilised more effectively. Frameworks under the National Urban Livelihoods Mission (NULM), the Ministry of MSME, and various credit-linked support initiatives can be expanded to help small entrepreneurs financially modernise their establishments to meet modern safety and environmental regulations.
4. Enforce the Street Vendors Act Extensively: The spirit of the Street Vendors Act, 2014, must be implemented more uniformly across states. Street vendors and hawkers are not urban liabilities; they are essential components of city economies, providing affordable goods and services while generating decentralised employment. Their legally recognised rights should be protected through town vending committees and participatory decision-making processes.
5. Conduct Socio-Economic Impact Assessments: Governments should mandate independent socio-economic impact assessments before undertaking large-scale demolition, closure, or eviction exercises. These assessments will help estimate the precise number of affected workers, families, and dependents, enabling authorities to formulate tailored, data-driven rehabilitation plans.
6. Establish a Comprehensive “Livelihood Protection Framework”: Under this framework, no economic activity employing a substantial number of people should be discontinued without first identifying alternative opportunities for those affected. Skill development programmes, targeted reskilling initiatives, concessional credit, and employment transition assistance should be systematically integrated into this safety net.
7. Focus on Gradual Formalisation: The long-term policy goal should be gradual formalisation rather than the abrupt disruption of the informal economy. Simplified licensing procedures, reduced compliance costs, accessible digital support systems, tax incentives, and easier access to formal banking, insurance, and social security will organically encourage small enterprises to become compliant while continuing to sustain employment.

Development Must Protect Both Order and Opportunity

India’s aspiration to become a developed economy cannot rest solely on modern infrastructure, stricter regulations, or cleaner urban landscapes. It must ensure that development remains inclusive, humane, and economically sustainable. A nation of India’s scale cannot afford to choose between regulatory compliance and livelihoods; it must achieve both simultaneously.

The true measure of development lies not in the number of buildings regularised, roads widened, or encroachments removed, but in whether economic progress expands opportunities rather than displacing those who have long sustained the country’s economy. Policies that combine effective regulation with rehabilitation, gradual formalisation, skill development, and social protection will strengthen governance while preserving social stability and public trust.

Ultimately, India’s greatest strength lies in the resilience, entrepreneurship, and hard work of millions of ordinary citizens. Protecting their livelihoods while promoting lawful and orderly development is not a contradiction—it is the very foundation of inclusive growth and the hallmark of a mature democracy.