Why in News?
The recent findings of the Annual Survey of Unincorporated Sector Enterprises (ASUSE) 2025 shed light on this paradox, revealing a sector that is expanding in size but not necessarily evolving in quality.
What is the scale and significance of the informal sector?
- Establishments – It comprises 7.92 crore establishments, up from 7.34 crore in 2023–24.
- Employment – It employs 12.81 crore workers, making it one of the largest employment providers.
- This scale highlights its dual role:
- Absorbing surplus labour, especially from agriculture.
- Sustaining local consumption through small-scale production and services.
- However, its dominance also reflects the limited capacity of the formal sector to generate adequate employment.
- Growth in Establishments – The nearly 8% increase in establishments indicates steady entry and survival of small enterprises.
- However, the sectoral composition remains largely unchanged:
- Manufacturing: 27%
- Trade: 31%
- Services: 42%
- This stability suggests that while the number of enterprises is growing, the structure of the sector is not undergoing significant transformation.
- Employment Trends – Employment has grown by 6.18%, reaffirming the sector’s role as a labour absorber.
- Yet, the nature of employment is revealing:
- 62% are owner-operators
- Only 24% are hired workers
- This indicates that employment growth is primarily driven by self-employment and family labour, rather than the creation of stable, wage-paying jobs.
- Rising Gross Value Added (GVA) – The sector recorded a 10.9% increase in GVA between 2023–24 and 2025.
- The distribution of GVA highlights a shift:
- Services – 42%
- Trade – 37%
- Manufacturing – 21%
- This reflects the growing importance of service-oriented and trade-based activities, driven by local demand rather than industrial expansion.
What are the issues?
- Limited Industrial Transformation – Manufacturing, though significant, shows moderate growth due to:
- Low capital investment
- Limited technological adoption
- Small-scale operations
- The shift toward services and trade suggests a consumption-driven informal economy, rather than one anchored in productivity-enhancing industrialisation.
- Modest Productivity Gains – Per worker GVA increased from ₹1.49 lakh to ₹1.56 lakh, a growth of about 4.5%, lower than the previous year’s growth rate.
- This indicates:
- Incremental improvements rather than structural shifts
- Continued reliance on traditional methods
- Limited technological progress
- Wage Growth and Inequality – Average annual wages rose by 3.88%, from ₹1,41,071 to ₹1,46,550.
- However, this increase is modest compared to GVA growth.
- This divergence suggests:
- Unequal distribution of gains
- Weak bargaining power of workers
- Absence of formal labour protections
- Thus, while output increases, workers do not proportionately benefit, reinforcing economic vulnerability.
What are the Gender Dimensions in the Informal Economy?
- Rise in Women-Owned Enterprises – The share of women-owned proprietary enterprises has increased marginally from 26% to 27%.
- While this indicates progress, it remains limited.
- Structural Barriers – Women entrepreneurs face multiple constraints:
- Limited access to credit due to lack of collateral.
- Weak market linkages.
- Concentration in low-value, home-based activities.
- As a result, women’s participation often remains confined to subsistence-level enterprises, limiting their economic advancement.
- Vulnerability to External Shocks – The informal sector is highly susceptible to global and domestic disruptions.
- Impact of Rising Fuel Prices – India’s dependence on crude oil imports—especially from West Asia—makes the sector vulnerable to geopolitical tensions. Rising fuel prices increase:
- Transportation costs
- Input costs
- Since trade and services account for 80% of GVA, such cost increases directly affect profitability.
- Decline in Remittances – Remittances from West Asia support household consumption in many regions Any disruption:
- Reduces local demand.
- Weakens small enterprises dependent on consumption.
- Thus, external shocks are transmitted directly into the informal economy, amplifying its fragility.
- Structural Features of Informality – Nearly 95% of enterprises operate as proprietary or partnership units.
- This structure has both advantages and limitations:
- Advantages
- Low entry barriers
- Flexibility and adaptability
- Minimal regulatory burden
- Limitations
- Restricted access to formal finance
- Limited scalability
- Absence of social security for workers
- This duality explains why the sector persists but struggles to transform.
What are the policy measures to be taken?
- From expansion to transformation – Policy must move beyond counting enterprises to improving their quality.
- Key priorities include:
- Enhancing productivity through technology adoption.
- Promoting skill development.
- Facilitating access to formal credit.
- Strengthening labour conditions – Extend social security to informal workers.
- Improve wage conditions and job security.
- Encourage formalisation without increasing compliance burdens.
- Supporting women entrepreneurs – Improve access to credit through targeted schemes.
- Strengthen market linkages.
- Promote women’s participation in higher-value sectors.
- Building resilience – Reduce dependence on external shocks through diversified energy sources.
- Strengthen local supply chains.
- Enhance infrastructure to reduce logistics costs.
What lies ahead?
- The ASUSE 2025 findings present a nuanced picture of India’s informal economy.
- While the sector is expanding in scale, it remains constrained by low productivity, limited wage growth, and persistent informality.
- It continues to provide livelihoods, but largely in the form of survival-oriented employment rather than pathways to economic mobility.
- The central challenge, therefore, is not merely growth but transformation.
- Unless policies focus on strengthening enterprises, improving labour conditions, and addressing structural inequalities, India’s informal workforce will remain caught between survival and stagnation.
Reference
The Indian Express| India’s Informal Workforce
