India’s Informal Workforce – Trapped Between Survival and Stagnation

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