India's Informal Economy Is Growing. That's Not Necessarily Good News.

India's informal economy is getting bigger, but that does not necessarily mean India's jobs problem is getting smaller.

The latest government data shows that India had 7.92 crore unincorporated establishments in 2025, up from 7.34 crore in 2023-24. Employment in these businesses also rose by 6.18%, adding more than 74 lakh jobs. On paper, that looks like a strong sign of economic activity. But look closer and the picture becomes more complicated.

Around 86% of these establishments are own-account enterprises. In other words, they are businesses run by their owners without regularly hired workers. Average daily earnings were also only ₹391 in manufacturing, ₹401 in trade and ₹420 in other services, according to an analysis of the data. These figures remain below the ₹477 daily benchmark for unskilled non-agricultural work used in that analysis.

This matters because India's challenge is not simply to get people working. It is to create work that becomes more productive and provides people with a path towards higher incomes.

A ceiling built into the structure

A small shop, food stall or repair business can be an important source of income. It can also be the only realistic option available to someone who cannot find formal employment. But when millions of people operate businesses with little capital and no employees, there is a limit to how much those businesses can grow.

The latest data does show one encouraging sign. Gross value added in the unincorporated sector increased by 10.87%, while employment increased by 6.18%. Output is therefore growing faster than employment, which suggests some improvement in productivity.

The problem is that the structure of the sector remains heavily concentrated in tiny businesses. When most establishments are operated by their owners alone, there are fewer opportunities for businesses to scale and become employers themselves. That makes it harder for workers to see large increases in productivity and wages.

Why the headline number can mislead

This is one reason why India's employment numbers can sometimes look better than the experience of workers on the ground.

Moving from unemployment into a ₹400-a-day informal job is an important improvement. But if that worker remains in the same kind of job for years, their economic mobility is limited. The bigger gain comes when they can move into a more productive business or a formal job where their income can grow.

India has made progress with formalisation. Digital payments, GST registration and access to banking have made it easier for small businesses to participate in the formal economy. But formalisation is about more than registration.

A small business becomes economically stronger when it can access affordable credit, invest in equipment, hire workers and reach larger markets. Those changes can raise productivity and eventually allow wages to increase.

The scale of the problem

The scale of India's informal workforce makes this especially important. World Bank data from its 2022 survey of informal enterprises found that 88.8% of surveyed workers did not have a temporary or permanent employment contract. The survey covered nine Indian cities, including Mumbai.

India also cannot simply try to eliminate informal work. These businesses absorb millions of workers and provide services that would otherwise be difficult to access. For many people, informal work is an essential source of income.

The real policy challenge is helping productive informal businesses grow.

If a street vendor has the opportunity to become a small retailer, hire two employees and access formal credit, the economy gains more than another registered business. It gains a more productive enterprise and potentially several better-paid jobs.

The question that matters

That is why the rise to 7.92 crore informal establishments deserves some caution. India's informal economy is clearly active and expanding, but the quality of that expansion matters.

The next stage of India's growth will depend on whether these millions of tiny businesses can become more productive and create opportunities for other workers.

Will India's informal economy become a pathway into a more productive formal economy, or will it continue absorbing workers without giving them a clear path to higher incomes?