India’s ambition to generate quality jobs and fully harness its demographic dividend will remain out of reach unless the Union Budget 2026 introduces targeted measures to accelerate employment formalisation, according to budget recommendations submitted by the Indian Staffing Federation (ISF).
In its pre-budget note to the Ministry of Finance, ISF argues that nearly 85 per cent of India’s workforce, or more than 500 million people, remains trapped in informal employment despite contributing over half of national output. This structural informality, the federation says, depresses productivity, erodes worker welfare and undermines the country’s ability to create sustainable, scalable employment across labour-intensive sectors.
The report warns that without placing formalisation at the core of fiscal policy, India risks missing its target of creating 90 million non-farm jobs by 2030. It also cautions that informality weakens the economy’s resilience to global shocks and constrains India’s long-term ambition of becoming a developed economy by 2047.
ISF highlights outdated and fragmented labour regulations as a key driver of informal hiring. With more than 40 central labour laws and over 100 state-level rules, the current framework incentivises evasion rather than compliance, encouraging firms to rely on contract and informal work arrangements to control costs and reduce administrative complexity.
According to the report, informal employment generates a vicious cycle of vulnerability and underperformance. Around 80 per cent of informal workers lack access to any form of social security, including provident fund coverage, health insurance or pensions. Women workers are disproportionately affected, earning 20–30 per cent less than men in informal roles and facing higher safety and harassment risks due to the absence of formal grievance mechanisms.
From an employer’s perspective, ISF says excessive compliance requirements increase hiring delays by 30–60 days and raise statutory employment costs by 12–15 per cent of salary. Small and medium enterprises, which employ about 45 per cent of the workforce, face particularly high compliance risks, including penalties of up to Rs 5 lakh for violations, discouraging expansion and formal hiring.
The federation estimates that informality caps labour productivity at around half that of the formal sector and leads to annual tax revenue losses of more than Rs 16,200 crore, limiting the government’s ability to invest in infrastructure and social services.
To address these challenges, ISF has proposed three budget reforms it says could materially shift incentives towards formal employment.
First, it has called for reducing GST on staffing and manpower supply services to 5 per cent from 18 per cent, classifying employment services as “merit services”. ISF argues that the current tax rate makes formal agency-based hiring significantly more expensive than informal alternatives, particularly in manufacturing, logistics and other labour-intensive sectors. Lowering GST, it says, would reduce the delivered cost of formal hiring, expand EPFO and ESIC coverage, and support women’s workforce participation.
Second, the federation has recommended enhancing Section 80JJAA of the Income Tax Act, which provides deductions for net job creation. ISF proposes a women-specific slab under the provision, along with inflation indexation of wage thresholds that have remained unchanged since 2016. Without adjustment, rising wages have eroded the incentive’s effectiveness, particularly for higher-skilled and female workers, the report says.
The federation links this proposal to rising female labour force participation, which has increased from 23.3 per cent in 2017–18 to 41.7 per cent in 2023–24, arguing that employer-side incentives are now needed to convert participation gains into formal, on-roll employment.
Third, ISF has urged the government to clarify and expand the use of corporate social responsibility funds for building worker hostels and support facilities in industrial clusters. It argues that safe and affordable housing is a critical determinant of retention for migrant and women workers, especially in manufacturing hubs located far from urban centres.
Allowing CSR funding for hostels through public-benefit channels, rather than employer-owned facilities, would align with existing company law provisions while improving safety, attendance and productivity, the report says.
Taken together, the federation says the proposed measures would lower the cost of formal hiring, improve gender inclusion and strengthen worker retention, while expanding the tax base and improving fiscal efficiency. Without such reforms, ISF warns, India’s labour market risks remaining a drag on growth rather than an engine of inclusive development.