India’s informal sector, often regarded as the backbone of employment and grassroots economic activity, is undergoing a significant transition. According to the Ministry of Statistics and Programme Implementation’s (MoSPI) Annual Survey of Unincorporated Sector Enterprises (ASUSE) 2025, informal enterprises are reducing their debt burden substantially. However, this positive trend has been accompanied by declining investments, slower wage growth, and weaker job creation, raising concerns regarding the long-term health of the unorganised economy.
Background
India’s informal or unorganised sector mainly consists of unincorporated non-agricultural enterprises such as:
- Small manufacturers
- Local traders
- Service providers
- Household enterprises
- Micro businesses operating without formal corporate registration
These enterprises are crucial to India’s economy due to their role in employment generation, local production, and consumption. The ASUSE 2025 report estimates that the informal non-agricultural sector contributes nearly ₹20 lakh crore to the economy, accounting for approximately 6.4% of India’s Gross Value Added (GVA). Micro enterprises constitute nearly 99.94% of all surveyed establishments.
Key Findings of ASUSE 2025
1. Decline in Outstanding Loans
The survey reported a sharp decline in indebtedness among informal enterprises.
- Outstanding loans per establishment declined by nearly 20% to around ₹42,776.
- Annual interest liabilities reduced by approximately 16%.
This indicates that many businesses are prioritising debt repayment and financial caution rather than borrowing for expansion.
2. Decline in Fixed Asset Investments
The survey also revealed a worrying decline in capital formation.
- Net addition to fixed assets per establishment declined by nearly 14%.
Lower investments in machinery, infrastructure, technology, and business expansion can adversely affect productivity and long-term economic growth.
3. Slower Employment Generation
Employment growth in the informal sector has weakened considerably.
- Job creation declined to 74.5 lakh jobs in 2025 compared to 1.1 crore jobs in the previous year.
- Wage growth slowed sharply to 3.9%, compared to nearly 13% earlier.
This suggests weakening economic momentum in labour-intensive informal activities.
Reasons Behind the Slowdown
Economic Uncertainty
Informal enterprises are highly vulnerable to fluctuations in demand, inflation, and market uncertainty. Businesses are increasingly focusing on survival rather than expansion.
Weak Consumer Demand
Lower household purchasing power and uneven recovery after the pandemic have affected local consumption patterns, especially for small businesses.
Rising Operational Costs
Higher input costs, transportation expenses, and energy prices have increased financial stress on micro enterprises.
Limited Access to Affordable Credit
Although formal credit to MSMEs has increased, many small informal enterprises continue to face difficulties accessing institutional finance due to lack of collateral, documentation, and formal registration.
Lack of Social Security
Absence of adequate insurance, pension support, and welfare mechanisms increases vulnerability and discourages risk-taking by entrepreneurs.
State-wise Variations
The ASUSE 2025 survey highlighted major regional disparities.
States Reporting Higher Investments
- Punjab recorded more than double the investment levels along with higher outstanding loans.
- Goa and Chhattisgarh also witnessed improving investment activity.
States Reporting Decline in Investments
Several major states experienced significant declines:
- Telangana – Investment down by 63%
- Gujarat – Down by 48%
- Maharashtra – Down by 35%
- Uttar Pradesh – Down by 30%
These variations indicate uneven business confidence and recovery across states.
Concern Regarding Credit-Investment Disconnect
An important issue highlighted by the report is the disconnect between rising formal bank credit and falling investments among informal enterprises.
According to RBI data, loans to micro and small industries increased by nearly 33% year-on-year by March 2026. However, this has not translated into stronger investment activity among the smallest informal businesses.
Possible reasons include:
- Credit concentration among relatively larger MSMEs
- Continued exclusion of tiny enterprises from formal finance
- Economic uncertainty discouraging expansion despite credit availability
Significance of the Informal Sector
Employment Generation
The informal sector employs a majority of India’s workforce, especially migrant workers, low-skilled labour, and self-employed individuals.
Economic Contribution
It contributes significantly to India’s GVA and supports local supply chains and consumption demand.
Social Stability
The sector acts as a safety net during economic distress by absorbing surplus labour.
Way Forward
Improve Access to Affordable Credit
Expand financial inclusion through simplified lending norms, collateral-free loans, and digital financial services for micro enterprises.
Strengthen Social Security
Provide insurance, pension coverage, and welfare schemes for informal workers to reduce economic vulnerability.
Encourage Investment
Targeted incentives, tax support, and infrastructure assistance can improve business confidence and capital formation.
Formalisation with Support
Formalisation efforts should be gradual and accompanied by easier compliance, skill development, and digital literacy support.
Boost Local Demand
Policies promoting rural income growth, employment generation, and consumption can revive informal sector activity.
Conclusion
The ASUSE 2025 findings reflect a mixed picture of India’s informal sector. While lower indebtedness suggests financial caution and improved balance sheets, declining investments, weaker job creation, and slower wage growth indicate deeper structural concerns. Given the informal sector’s central role in employment and economic resilience, policy measures must focus on balancing financial stability with growth, investment, and worker welfare to ensure sustainable and inclusive development.