Informality remains a defining characteristic of the Indian economy, with 89 per cent of the workforce engaged in informal employment. Over the past decade the government has introduced several formalisation initiatives. Key measures include the implementation of the Goods and Services Tax (GST), expansion of digital payments, and financial inclusion initiatives aimed at bringing enterprises into the tax net.
For workers, efforts such as the E-Shram portal, Pradhan Mantri Rojgar Protsahan Yojana (PMRPY), and amnesty schemes for EPFO and ESIC enrolment have sought to extend social security coverage. The labour codes introduced in 2020 also include provisions for informal workers, including gig and platform workers. However, the outcomes of these initiatives are not very clear yet.
The GST, while intended to create a unified market and improve tax compliance in the medium run, has arguably disproportionately affected small and informal enterprises, raised compliance costs and disrupted value chains in the short run. Similarly, demonetisation, despite increasing digital transactions and formal financial inclusion, led to severe short-term liquidity constraints, particularly for cash-dependent small enterprises and workers. The economic shocks from Covid-19 compounded these challenges.
These trends highlight the complexities of formalisation, where regulatory shifts, rather than integrating informal workers and enterprises into more secure economic structures, may instead marginalise them further. In this context, it is crucial to examine how India’s informal sector has evolved over the past decade.
Manufacturing sector analysed
We analyse the informal manufacturing sector in India using data from the 67th (2010-11) and 73rd (2015-16) rounds of the NSS Survey on Unincorporated Non-Agricultural Enterprises (Excluding Construction), the Annual Survey of Unincorporated Sector Enterprises (ASUSE) 2021-22, and three corresponding rounds of the Annual Survey of Industries (ASI). Our analysis focuses on three key dimensions — output, value added, and employment — to examine structural changes and trends in the informal manufacturing sector over time.
We find that between 2010-11 and 2015-16, both the informal sector’s share in manufacturing output and GVA increased, with a more pronounced growth in output. However, between 2015-16 and 2021-22, the trends diverged slightly. Output share declined sharply after 2015-16, nearly returning to its 2010-11 level, while the GVA share experienced a more gradual decline throughout this period.
Despite the contrasting rates of decline, both indicators reflect an overall contraction in the informal sector’s role in manufacturing. Employment followed a more consistent downward trend, with the informal sector’s share falling from 78 per cent in 2010–11 to 68 per cent in 2021–22, while the share of formal sector employment increased from 22 per cent to 32 per cent. At first glance, the 10 per cent rise in formal sector employment appears to signal increased formalisation, but it’s important to note that almost half of the increase (around 5 per cent) is due to the hiring of contract workers, who remain informally employed by formal enterprises through contractors.
Household enterprises
Informal sector enterprises are categorised into Own Account Manufacturing Enterprises (OAME), run by individuals or households without hired workers, and Establishments, which employ at least one hired worker on regular basis. Establishments accounted for the majority of output and GVA in the informal sector, contributing 79 per cent of output and 64 per cent of GVA in 2010–11. By 2021-22, these shares fell to 65 per cent and 59 per cent, respectively. Employment in establishments also declined, from 40 per cent in 2010–11 to 32 per cent in 2021–22, reflecting a shift within the informal sector, where OAMEs, that are typically low productivity units, asset poor and home-based may have become more dominant as share of establishments contracted.
Our findings, therefore, present a nuanced picture of informality in India. While the informal sector’s share in output, value added, and employment has declined, the rise in contract workers within the formal sector signals a troubling shift toward informal employment within formal enterprises. Additionally, the growing share of OAMEs suggests deeper employment challenges, as many individuals may be engaging in economic activity out of survival necessity rather than opportunity. It must also be noted that the share of more productive part of informal sector, i.e., Establishments has decreased which may mean that they either finally graduated into the formal sector or simply cease to exist.
Policy efforts to reduce informality must now focus more directly on OAMEs to facilitate their transition into more stable and profitable units. This requires targeted interventions such as skill development in quality control, packaging, branding, and marketing to enhance product competitiveness. Expanding access to credit, business training, and market linkages can further improve their productivity and long-term sustainability.
Give the very nature of OAMEs, fostering labour-intensive growth in manufacturing may provide secure jobs for individuals involved in OAMEs and reduce reliance on informal work. At the same time, formalisation efforts must extend beyond enterprises to ensure workers also gain protections. Integrating firms into tax and regulatory frameworks does not automatically improve workers’ conditions, as evident by increasing informalisation of jobs in the formal sector. Without complementary labour protections, formalisation may benefit businesses while leaving workers vulnerable.
Dwivedi and Mishra are Assistant Professor (Economics) respectively at the Faculty of Management Studies and Hindu College, University of Delhi
