India’s Informal Economy: Growth Without Transformation

Context

The latest Annual Survey of Unincorporated Sector Enterprises (ASUSE) 2025 highlights a paradox—India’s informal sector is expanding in size but lacking qualitative transformation, raising concerns about sustainability and productivity.

Magnitude and Economic Role

Enterprise Base – Around 7.92 crore units, rising from 7.34 crore (2023–24).
Workforce Dependence – Supports 12.81 crore workers, making it a key employment backbone.

Functional Significance

Acts as a shock absorber for surplus labour, especially rural migrants.
Sustains grassroots demand via local production and services.

Concern – Reflects limited capacity of the formal sector to generate jobs.

Enterprise Expansion vs Structural Stagnation

Increase in Units – Nearly 8% rise, indicating steady entry of small businesses.

Sectoral Distribution (unchanged pattern)

Manufacturing – 27%
Trade – 31%
Services – 42%

Inference – Growth remains numerical rather than structural.

Nature of Employment Generation

Employment Growth – Expanded by 6.18%.

Workforce Composition

Owner-led enterprises – 62%
Wage-employed workers – 24%

Implication – Growth driven by self-employment, not formal job creation.

Output Growth and Sectoral Shift

GVA Growth – Increased by 10.9% (2023–25).

Sector-wise Contribution

Services – 42%
Trade – 37%
Manufacturing – 21%

Trend – Increasing reliance on consumption-driven sectors.

Core Structural Constraints

Weak Industrial Base

Low capital investment
Limited technology adoption
Dominance of micro-units

Outcome – Lack of manufacturing-led transformation.

Productivity Dynamics

Per Worker GVA – Rose from ₹1.49 lakh to ₹1.56 lakh (~4.5%).

Interpretation

Incremental gains
Continued reliance on traditional methods
Limited technological progress

Income Trends and Inequality Concerns

Average Wage Growth – Increased by 3.88%.

Issue

Slower than output growth
Indicates unequal benefit distribution

Causes

Weak labour bargaining power
Absence of formal safeguards

Gender Dimensions in Informality

Women-led Enterprises – Increased slightly from 26% to 27%.

Challenges

Limited credit access
Weak market linkages
Concentration in low-value work

Outcome – Restricted economic mobility for women.

Exposure to External Vulnerabilities

Fuel Price Sensitivity

High dependence on imported crude oil
Rising fuel costs increase input and transport expenses

Remittance Dependency

Decline reduces consumption demand

Impact – Sector remains highly shock-sensitive.

Institutional Structure of Informality

Ownership Pattern – Nearly 95% proprietary/partnership units.

Advantages

Ease of entry
Operational flexibility

Limitations

Limited credit access
Poor scalability
Lack of social security

Policy Priorities for Reform

Quality-Oriented Growth

Promote technology adoption and skilling
Improve access to formal finance

Labour Welfare

Extend social security
Enhance wage conditions

Women Empowerment

Targeted credit support
Better market access

Resilience Building

Diversify energy sources
Strengthen supply chains
Improve infrastructure

Way Forward

The ASUSE 2025 findings show that India’s informal sector is expanding without adequate transformation.

It continues to provide livelihoods but largely in low-productivity, survival-oriented forms.

Key Challenge – Shift toward productivity, formalisation, and equitable growth to avoid long-term stagnation.

Source : The Indian Express