The Paradox of Growth: Why India’s Informal Economy Is Running to Stand Still 

Despite a “healthy” expansion in the number of informal enterprises and total employment, India’s unincorporated sector is showing clear signs of stagnation: Gross Value Added per worker rose just 4.5% and earnings per hired worker increased only 3.9%—a sharp deceleration from the previous year—while overall GDP grew at nearly 9%. This gap reveals a K-shaped recovery where the formal economy surges but the informal base, which employs over 12.8 crore workers, struggles with falling productivity, fragmented growth, and wage stagnation. The data underscores that simply adding more micro-enterprises does not equate to prosperity; without targeted policies to improve access to credit, simplify compliance, and boost productivity, the informal sector will continue to run just to stand still, widening the divide between macroeconomic growth and the lived reality of most Indians.

The Paradox of Growth: Why India’s Informal Economy Is Running to Stand Still 

For decades, the narrative surrounding India’s economy has been a tale of two worlds. On one side, there is the gleaming, fast-paced formal sector—the IT parks, the listed corporations, and the booming stock market. On the other, there is the sprawling, resilient, yet often invisible informal sector. It is where the majority of Indians work, where cash is king, and where the line between survival and enterprise is often blurred. 

The Ministry of Statistics and Programme Implementation (MoSPI) recently released the results of the Annual Survey of Unincorporated Sector Enterprises (ASUSE) for 2025. On paper, the headline numbers offer a reason to celebrate. The sector added 74.5 lakh new jobs; the number of establishments grew to nearly 8 crore. The Ministry described the expansion as “healthy” and the labor market performance as “robust.” 

But data, like a river, reveals its truth only when you look beneath the surface. A closer examination of the ASUSE 2025 findings reveals a disquieting reality: India’s informal economy is growing, but it is growing slower, poorer, and more fragile than the overall economy. It is a classic case of running to stand still. 

The Illusion of Expansion 

Let’s start with the headline numbers because they are instructive. Between the ASUSE 2023-24 period and 2025, the number of unincorporated non-agricultural enterprises—the mom-and-pop stores, the roadside mechanics, the home-based garment stitchers—grew by almost 8%, from 7.34 crore to 7.92 crore. Employment followed suit, rising to 12.8 crore workers. 

At first glance, this suggests a vibrant entrepreneurial spirit. But in the context of India’s demographic dividend, these numbers also hint at a less romantic truth: distress-push entrepreneurship. When the formal job market fails to generate enough opportunities for a burgeoning young population, the informal sector acts as a sponge. It absorbs the excess labor, not necessarily because of a surge in consumer demand, but because people need to eat. 

An 8% increase in the number of shops does not indicate a thriving market if the value created by each shop is stagnating. And that is precisely where the data begins to paint a more sobering picture. 

The Lagging Metrics of Productivity 

The true health of an economy is not measured by how many people are doing something, but by how much value they are creating per unit of effort. Here, the ASUSE 2025 data rings alarm bells. 

While the overall Indian GDP was growing at nearly 9% in nominal terms—a pace that would be the envy of the developed world—the Gross Value Added (GVA) per worker in the informal sector rose by a meager 4.5%. GVA per establishment grew even slower, at just 2.85%. 

To put that in human terms: if you were a tailor running a small shop in 2024, the amount of economic value you generated for your work increased by less than 5% by 2025. Meanwhile, the cost of living—fuel, rent, food—continued to climb at a rate that often outpaces these gains. 

This is the paradox. The macroeconomic ship is sailing at full speed, but the boats carrying the majority of the crew are taking on water. When productivity lags, it doesn’t just affect the business owner; it has a cascading effect on the workers. 

The Squeeze on the Average Worker 

Perhaps the most human element of this report is the data on earnings. Between the 2023 and 2024 survey periods, earnings per hired worker had seen a promising uptick of 13%. It was a sign that post-pandemic recovery was finally trickling down. But in 2025, that momentum stalled spectacularly. The increase fell to just 3.9%. 

For a worker in the informal sector, a 3.9% wage increase is functionally a pay cut in real terms when adjusted for inflation. These are workers who often lack the safety nets of the formal sector—no provident fund, no health insurance, no guaranteed severance. Their vulnerability is tied directly to the stagnancy of the businesses they work for. 

Moreover, the absolute number of new jobs created—74.5 lakh—masks a troubling deceleration. While 74.5 lakh is a large number, it represents a sharp drop from the job creation figures of the previous year. The informal sector, it seems, is beginning to reach a saturation point. It is becoming harder for these tiny enterprises to scale, to hire, and to pay more. 

Why the “Lag” Matters 

Why should the average urban consumer, sitting in a high-rise and ordering from a quick-commerce app, care about the GVA of an unincorporated enterprise? Because the informal economy is not a peripheral issue; it is the bedrock of India’s domestic consumption. 

When 12.8 crore workers (and the families dependent on them) see their productivity stagnate and their wages grow slower than the national GDP, the ripple effect is felt across the entire economy. It explains the K-shaped recovery that economists have often spoken about—where the top tier thrives while the base struggles to keep up. 

This lag also points to a structural flaw in India’s growth model. A 9% GDP growth driven largely by formal corporate profits and government capital expenditure is fragile if it is not accompanied by a corresponding rise in the productivity of the micro-enterprises that dominate the landscape. 

The Structural Roots of Stagnation 

To understand why the informal sector is lagging, one must look at the constraints that these enterprises face. Unlike their formal counterparts, unincorporated enterprises operate in a perpetual state of credit poverty. They do not have access to institutional lending at reasonable rates. They rely on local moneylenders or chit funds, often paying interest rates that eat into their already thin margins. 

Furthermore, these enterprises are often the first to bear the brunt of regulatory uncertainty. While the government has made strides with initiatives like the Goods and Services Tax (GST) and the digitization of payments, the transition has been rocky for the informal player. The cost of compliance, even under simplified regimes, remains a burden that many small enterprises struggle to shoulder. 

There is also the issue of fragmentation. The 8% growth in the number of establishments suggests that instead of existing enterprises expanding and hiring more people, we are seeing a proliferation of smaller, single-person enterprises. This fragmentation leads to diseconomies of scale. When you have 8 crore establishments fighting for the same pool of consumers, margins get compressed, and innovation takes a backseat to sheer survival. 

Bridging the Formal-Informal Divide 

The data from ASUSE 2025 is not a reason for despair, but it is a definitive call to action. It underscores that the goal of policy should not merely be to “formalize” the economy in the sense of bringing people under the tax net, but to formalize the productivity of these enterprises. 

For too long, the informal sector has been viewed by policymakers as a problem to be solved or a black market to be regulated. But the reality is that these 7.92 crore establishments are the training grounds for Indian entrepreneurship. They are the primary source of employment for millions who lack college degrees. 

To bridge the lag, the focus must shift from punitive formalization to enabling formalization. This means: 

• Access to credit: Moving beyond MUDRA loans to offering working capital that is tailored to the actual cash-flow cycles of micro-enterprises. 

• Technology as an enabler: Not just forcing digital payments, but providing digital tools that help small businesses manage inventory, access markets beyond their immediate geography, and understand regulatory requirements in their local language. 

• Simplifying the tax interface: Creating a regime where moving from the informal to the formal sector is seen as an aspiration (because it unlocks benefits) rather than a burden (because it invites scrutiny). 

Conclusion: A New Social Contract 

The informal sector in India has always been defined by its resilience. It survived demonetization, weathered the COVID-19 pandemic, and continues to absorb millions of migrants returning to cities. But resilience is not a substitute for growth. 

The ASUSE 2025 data reveals that the sector is tired. The 4.5% growth in labor productivity and the 3.9% rise in earnings are not just numbers; they represent the fraying safety net of the Indian middle class and the aspiring poor. 

If India is to achieve its ambition of becoming a developed nation (Viksit Bharat), it cannot do so by leaving 12.8 crore informal workers behind. The “lag” in the informal economy is not just a statistical anomaly; it is a reflection of a deeper disconnect between macroeconomic growth and microeconomic reality. 

The path forward requires a new social contract—one that recognizes that the small shopkeeper, the roadside manufacturer, and the home-based artisan are not just statistics of the informal sector. They are the architects of India’s economic future. Until their productivity catches up with the nation’s GDP, India’s economic engine will always be firing on only half its cylinders. 

The data is sobering,, but it is also a roadmap. It tells us exactly where the bottlenecks are. Now, it is up to policymakers, financial institutions, and industry leaders to decide whether they will simply observe the lag or take the necessary steps to close the gap.