Informal economy leaping ahead

In the last 12 years, the Indian economy has ascended global GDP rankings and during the five years ending FY26 it grew at the fastest pace among major economies. Whenever GDP is dissected for debate and discussion, the analysis often does not transcend the incorporated sector, missing an analysis of a crucial sector that contributes significantly to the nation’s growth. The unincorporated sector, also known as informal economy, is an invisible, inalienable, and indispensable part of the Indian economic landscape. This vast segment includes millions of neighbourhood traders, workshops, repair shops, health clinics, transport operators, and others.

The ministry of statistics and programme implementation’s National Statistics Office (NSO) initiated the Annual Survey of Unincorporated Sector Enterprises (ASUSE) in FY22 to better understand this vast segment of unincorporated non-agricultural establishments, excluding construction. Recognising the need for higher-frequency data, the NSO introduced a Quarterly Bulletin on Unincorporated Sector Enterprises in 2025. The January-March 2026 bulletin reported strong momentum and buoyancy in the sector. The number of establishments is estimated at 9.16 crore, recording a year-on-year growth of 16.69%, with the rural sector driving growth at 20.46%.

Further, employment, driven by other services, crossed 15 crore workers for the first time registering double-digit year-on-year growth. Around 81% of establishments in the unincorporated non-agricultural sector have used internet for entrepreneurial purposes and a similar percentage of establishments have adopted digital transactions. Gross value added (GVA) and other metrics, as captured in ASUSE reports, have shown growth and promise. The impressive figures of the unincorporated sector — a crucial driver of local entrepreneurship and a source of large-scale employment — warrant a deeper examination of the forces driving its expansion.

The first and foremost explanation lies in India’s exceptional macroeconomic management and stability. The incorporated sector benefits from the sustained high growth and investments due to unprecedented structural and sectoral reforms, ease of doing business, stable inflation, and external sector management. The unincorporated sector is also bolstered as it is deeply integrated with the incorporated sector through domestic value chains by supplying goods and services.

In manufacturing, a mobile manufacturing company would rely on unincorporated establishments for handling, transportation, distribution, and retailing. Likewise, apparel, metal and machinery, food processing, pharmaceuticals, furniture, and other companies are tied to unincorporated establishments. Manufacturing companies rely on wholesalers for transforming bulk shipments into smaller lots for sales to retailers who, in turn, create product awareness and extend consumer credit for final sales to the consumer. Similarly, an IT services firm relies on housekeeping, maintenance, transport operators, food vendors, and courier services.

The second dimension is directing buoyant fiscal resources — a result of sustained high growth —towards empowerment through welfare spending. Large-scale programmes in housing, sanitation, healthcare, financial inclusion, drinking water, cooking fuel, electricity, education, nutrition, skilling, and social protection have ensured steadfast human development through the social sector, thus reducing household vulnerabilities.

Consequently, the basic needs of more than 25 crore people are secured, positioning them to pursue economic aspirations, entrepreneurship, and income-generating opportunities. Labour market trends validate the fact that empowerment through welfare is unlocking enterprise. According to Periodic Labour Force Survey releases, India’s labour force participation rate has steadily improved since 2017-18, rising from 49.8% to 59.3% in 2025 with a corresponding rise in self-employment.

Another noteworthy structural development that has aided the unincorporated sector’s growth is light-touch formalisation with the Udyam Registration and Udyam Assist Platform (UAP) initiatives of the ministry of micro, small, and medium enterprises. These initiatives — free of cost, online, and requiring minimum documentation — aided maintaining a centralised database of MSMEs, whether they are registered under the Companies Act, Partnership Act, Co-operative Societies Act, Shops and Establishments Act, GST or holding licences that are state-specific or from FSSAI, RTOs, etc.

Establishments, including unincorporated ones, can access MSME schemes for their growth and those registered under UAP are eligible for priority-sector lending. Additionally, own account establishments and employees of hired worker establishments can secure social security benefits through the e-Shram portal of the ministry of labour and employment, relieving employers from the burden of social security provision to their employees. Through these measures, unincorporated sector has acquired administrative visibility and formal identity without the burden of strict formal compliance.

Several policy measures and schemes have boosted the sector’s growth. The GST Composition Scheme simplified tax compliance for small taxpayers and schemes such as the Pradhan Mantri Mudra Yojana, Lakhpati Didi initiative, the Prime Minister’s Employment Generation Programme, Pradhan Mantri Formalisation of Micro Food Processing Enterprises, PM Vishwakarma, National SC/ST Hub, and the Government e-Marketplace portal have expanded access to credit, skills, technology, and market opportunities.

Mass adoption of UPI is a game changer, transforming the transaction landscape and benefitting millions of establishments to leverage their real-time cash flows for seamless formal credit access.

The unincorporated sector also benefits from the powerful circular flow of money across the wider economy which has multiplier effects. Income earned in both the incorporated and unincorporated sectors, surge in construction activity, and a shift towards allied activities in rural areas along with higher personal income tax relief translates into household consumption which supports retailers, service providers, and micro-enterprises.

Various measures for the unincorporated sector are creating a new layer in the formal economy — visible to state, linked to social security and formal credit systems yet retaining entrepreneurial flexibility. This stratified formal economy is generating income-earning opportunities at the grassroots, strengthening growth, and fostering inclusion. However, much remains to be done to increase registrations, formal credit access, technology adoption, productivity, and expansion.

Disclaimer: The views expressed are the author’s own and do not reflect the official policy or position of Financial Express.