Introduction

The informal sector, encompassing small and medium enterprises (SMEs) and household proprietary and partnership establishments, plays a pivotal role in India’s economy. This sector is responsible for nearly half of the country’s economic output and over three-fourths of employment. However, it faces significant challenges, as evidenced by recent data from the Annual Survey of Unincorporated Enterprises (ASUSE). According to this data, released by the National Sample Survey Office (NSSO), many units have shut down over the past seven years, resulting in the loss of approximately 16.45 lakh jobs.

Key Exogenous Shocks

• The data reflects the profound impact of three major exogenous shocks on the economy: Demonetization in November 2016, the rollout of the Goods and Services Tax (GST) in July 2017, and the COVID-19 Pandemic beginning in March 2020.
• These events have particularly affected informal manufacturing establishments.
• Most new jobs in the sector have been created in own-account enterprises rather than hired-worker units, indicating a decline in employment quality.

Unincorporated Enterprises

• Unincorporated enterprises are a crucial component of the informal sector, including micro, small, and medium enterprises (MSMEs), household units, and own-account enterprises.
• The surveys covered unincorporated non-agricultural establishments in three sectors: Manufacturing, Trade, and Other Services.
• These include manufacturing units not covered under the Factories Act, 1948, and the organized manufacturing sector’s Annual Survey of Industries (ASI), as well as informal establishments engaged in activities such as cotton ginning and bidi manufacturing.

Importance of Survey Results

• The latest survey results are significant as they provide updated data after a gap since 2015-16.
• The informal sector is vital for job creation, especially for semi-skilled and unskilled labor.
• Understanding the impact of sudden cash withdrawals (demonetization), regulatory compliance (GST), and the national lockdown due to COVID-19 is essential for policymakers and economists.
• These surveys help illustrate how these events have affected the informal sector, providing insights into employment trends amid a formal sector slowdown.

Headline Trends

• The informal sector experienced a decline in employment, although the number of enterprises increased from 2015-16 to 2022-23.
• Own-account enterprises grew by nearly 4% over the seven-year period, while hired-worker enterprises contracted by 3.2%.
• This shift suggests a deterioration in employment quality, as more units moved towards self-owned setups rather than hiring workers.
• The transition to more Capital-intensive Manufacturing has reduced employment in labor-intensive manufacturing within the unorganized sector.
• This trend aligns with data from the Periodic Labour Force Survey (PLFS), which shows an increase in agricultural workers and a decrease in manufacturing jobs.

Sector-Specific Trends

• The Manufacturing Sector has been the hardest hit, with a 9.3% contraction in units between 2015-16 and 2022-23, and a 15% drop in workers to 3.06 crore.
• The Trade Sector saw a 2% decline in units but a slight 0.8% increase in workers.
• Conversely, the Services Sector experienced significant growth, with a 19.1% increase in units and a 9.5% rise in workers.
• Despite these mixed trends, the overall growth rate of enterprises and workers has slowed in the seven years from 2015-16 compared to the previous five years.

Economic Output

• At current prices, the Gross Value Added (GVA) per enterprise increased from Rs 1.82 lakh in 2015-16 to Rs 2.38 lakh in 2022-23, while GVA per worker rose from Rs 1.04 lakh to Rs 1.42 lakh.
• However, in real terms, growth was slower. The real GVA of unincorporated sector enterprises grew by 6.9% in 2022-23 but remained below pre-pandemic levels.
• Over the long term, the compounded annual growth rate (CAGR) of the real GVA of the unincorporated sector contracted by 0.2% between 2015-16 and 2022-23, compared to a 7.4% growth rate from 2010-11 to 2015-16.

Informal Employment Across States

• Sixteen of the 34 states and Union Territories recorded a decline in informal sector workers in 2022-23 compared to 2015-16.
• The share of informal sector workers increased in most states following the pandemic, indicating economic distress and a shift away from the formal sector.
• Notably, the top 10 states, accounting for nearly three-quarters of informal sector workers, have shown varying trends in employment and enterprise growth.

Conclusion

The informal sector in India is undergoing significant transformations, influenced by economic shocks and regulatory changes. While the sector remains crucial for employment and economic output, the quality of employment and the pace of growth have been adversely affected. Understanding these trends is essential for formulating policies that support the resilience and growth of the informal sector in the face of ongoing challenges.