Among a host of factors, India’s growth story depends also on the health of the vast number of unincorporated non-agricultural enterprises — which are not legally registered as companies — that belong to the informal sector. These small businesses, which are beyond the purview of institutional protection, contribute as much as 28 to 30% of the nation’s output of goods and services or GDP and 40% of employment. These enterprises are not just stand-alone entities but also support the incorporated or formal sector by acting as suppliers and services providers, thereby forming an integral part of the domestic value chain. According to the National Statistical Office’s latest fact sheet, the number of unincorporated enterprises rose to 65 million in 2022-23 from the pandemic lows of 59.7 million in 2021-22 while adding 11.7 million workers to 109.6 million. Prima facie, it would indeed appear that this sector is showing resilience after the Covid pandemic shock and exhibiting significant capacity to generate employment.

However, the informal sector has been buffeted by other shocks besides the nationwide lockdown to battle the Covid pandemic. The sector was hit by demonetisation which took high-value notes out of circulation in November 2016 and the implementation of the goods and services tax in July 2017. As cash accounts for bulk of transactions in India, demonetisation struck a body blow to unincorporated enterprises impacting daily wage earners in urban areas as also in the villages. There was no money to pay wages to around 46% of the unorganised workers who were either casual or contractual. Around 65% of daily wage earners went without work in urban areas as informal enterprises downed shutters and they returned to their villages. Pronab Sen, then country director for the India programme of the International Growth Centre, argued that the severe cash crunch perhaps permanently damaged the informal sector.

The upshot is that the informal sector has not fully recovered from these shocks. While the employment generated by unincorporated non-agricultural enterprises in 2022-23 is impressive, it still remains below the levels before demonetisation. As against 109.6 million in 2022-23, there were 111.3 million workers employed in this sector according to the survey conducted of these enterprises between July 2015 and June 2016. Sen told FE that had this sector not faced these disruptions, the number of enterprises — which normally rises by 2 million annually — would have been around 75 million. In effect, 10 million enterprises were lost. As a typical unincorporated enterprise employs between 2.5 and 3 persons, close to 25 to 30 million jobs were lost in the process. Employment in unincorporated manufacturing enterprises suffered the most, declining to 30.6 million in 2022-23 from 36 million in 2015-16.

As the health of unincorporated enterprises is therefore far from resilient, what is it that policy can do to improve matters? The government can certainly help by ensuring that they have access to more formal credit for their working capital requirements as also guarantee term loans so that they can grow organically and become more formalised over time. If the bulk of their credit requirements are not met by the banks as they do not have the requisite documentation, they have no alternative but to access the informal credit markets and pay usurious interest rates. The overarching need is to restore vibrancy to this sector so that it continues to contribute to the country’s process of rapid economic expansion.