Why in the News?

• Recent data from the Ministry of Statistics and Programme Implementation’s (MoSPI) report shows that India’s informal sector is reducing debt levels significantly, but at the same time witnessing a decline in investments and job creation.

What’s in Today’s Article?

• Informal Sector (Introduction, Components, etc.)
• Key Findings of ASUSE Report

Introduction

• India’s informal sector, which forms the backbone of employment and small-scale economic activity, is witnessing a major financial shift.
• According to the Ministry of Statistics and Programme Implementation’s (MoSPI) Annual Survey of Unincorporated Sector Enterprises (ASUSE) 2025, informal businesses are becoming less indebted as outstanding loans and interest liabilities have declined sharply.
• However, the reduction in debt has also coincided with weaker investment activity, slower wage growth, and reduced job creation.
• The findings have raised concerns among policymakers regarding the long-term health of India’s unorganised sector, which employs a majority of the country’s workforce and contributes significantly to Gross Value Added (GVA).

About India’s Informal Sector

• 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 play a vital role in the Indian economy by generating employment and supporting local consumption.
• According to ASUSE 2025, the informal non-agricultural sector contributes nearly Rs 20 lakh crore to the economy, accounting for around 6.4% of India’s total GVA.
• Most enterprises in this category fall under the Micro, Small and Medium Enterprises (MSME) framework, with micro enterprises forming nearly 99.94% of the establishments surveyed.

Key Findings of ASUSE 2025

• The ASUSE 2025 survey revealed several important trends regarding the financial condition of India’s informal businesses.
• Decline in Outstanding Loans
  • Outstanding loans per informal establishment declined by nearly 20% to approximately Rs 42,776 compared to the previous survey period.
  • Additionally, annual interest payable by businesses reduced by around 16%, indicating that loan repayments are exceeding fresh borrowings.
  • This trend suggests increasing financial caution among informal entrepreneurs, many of whom appear to be focusing on reducing liabilities instead of expanding operations.
• Reduction in Fixed Asset Investments
  • Alongside lower indebtedness, the survey reported a 14% decline in net addition to fixed assets per establishment.
  • This means informal enterprises are investing less in machinery, infrastructure, technology, or business expansion.
  • The decline in investment is considered worrying because fixed asset creation is closely linked to productivity improvement and future economic growth.
• Slower Job Creation and Wage Growth
  • The survey also showed signs of weakening employment generation:
    • Employment creation declined to 74.5 lakh jobs in 2025 compared to 1.1 crore jobs in the previous year.
    • Wage growth in the informal sector slowed sharply to 3.9%, significantly lower than the 13% increase reported earlier.
  • These indicators suggest that economic momentum in the informal sector may be slowing.

• Growing Concerns Over Investment Slowdown
  • The reduction in investments within the informal economy aligns with broader concerns regarding private sector capital expenditure in India.
  • Chief Economic Advisor V. Anantha Nageswaran recently observed that despite strong profit growth among large Indian companies after the Covid-19 pandemic, capital formation and investment activity remain below expectations.
  • For informal businesses, the hesitation to invest may arise due to:

• Economic uncertainty
• Weak consumer demand
• Rising operational costs
• Limited access to affordable finance
• Lack of social security and institutional support

• When businesses prioritize survival and debt repayment over expansion, economic growth potential becomes constrained.

State-wise Variations in Informal Sector Performance

• The ASUSE 2025 survey highlighted large differences among states in terms of investments and indebtedness.
• States Reporting Higher Investments

• Punjab witnessed more than double the investments by establishments, alongside a sharp rise in outstanding loans.
• Goa and Chhattisgarh also reported increasing investments despite declining indebtedness.

• States Reporting Investment Decline
  • Several economically significant states saw substantial reductions in investment levels:

• Telangana: Investment down by 63%
• Gujarat: Investment down by 48%
• Maharashtra: Investment down by 35%
• Uttar Pradesh: Investment down by 30%

• These variations reflect uneven economic recovery and differing business confidence levels across states.

Relationship Between Formal Credit and Informal Enterprises

• An important aspect highlighted in the report is the disconnect between rising formal bank credit and declining informal sector investment.
• According to Reserve Bank of India (RBI) data, loans to micro and small industries increased by nearly 33% year-on-year as of March 2026.
• However, this increase does not appear to be translating into stronger investments among the smallest informal enterprises.
• This indicates that:

• Formal credit may be concentrated among relatively larger MSMEs
• Small informal units may still face barriers in accessing institutional finance
• Broader economic uncertainty may discourage investment even when credit is available