India’s informal sector shows signs of life after Covid-19, DeMo hiccups

The Covid-19 pandemic has adversely affected India’s informal sector. However, discussions on this adverse impact have suffered from the lack of necessary evidence due to the lack of comprehensive data at the national level. Recently, the National Sample Survey Bureau of the Ministry of Statistics and Programme Implementation released a fact sheet on the Annual Survey of Unregistered Enterprises (ASUE) for 2021-22 and 2022-23.

The ASUE Fact Sheet 2021-22 and 2022-23 provides aggregate level statistics on non-farm enterprises in the informal sector. This is the first official post-pandemic survey data on enterprises in the informal sector. Previously, data was available for 2015-16 (73rd round of NSSO).

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The role of the informal sector has been extremely important to the Indian economy. Though often overshadowed by the formal sector, the informal sector absorbs a significant portion of India’s workforce. As per the latest data on informal sector enterprises (2022-23), there are an estimated 65 million informal establishments providing employment to 109.6 million workers, as per the ASUE fact sheet. The informal sector in India is known for its flexible and diverse production activities.

Moreover, this sector has been a significant support to the Indian formal sector. On the other hand, informality exposes workers to greater risks of vulnerability and insecurity. The vulnerability of informal work has become particularly evident during the Covid-19 pandemic. According to ILO (2020), over 2 billion workers employed in the informal sector worldwide have been severely affected by the pandemic as their livelihoods depended on daily wages.

Factories and workers: the burden falls on urban areas

The impact of Covid-19 on India’s informal sector is evident in the latest fact sheet. A comparison of the previous NSSO data of 2015-16 (73rd round) with the 2021-22 estimates shows a significant decline in the estimated number of establishments from 63.4 million to 59.7 million. However, there was a revival in the subsequent year 2022-23 and the estimated number came back to 65.0 million.

The worst hit areas were urban areas in India, where the estimated number of establishments fell from 30.9 million in 2015-16 to 26.5 million in 2021-22, in the immediate aftermath of the pandemic. This decline can be linked to the massive movement of migrants from urban to rural areas due to the slowdown in economic activity in urban regions.

While the data shows some revival in the urban economy, with the number of establishments reaching 29.4 million in 2022-23, it is yet to return to its pre-pandemic level. On the other hand, rural India has witnessed a continuous increase in the estimated number of establishments from 2015-16 to 2021-22 and 2022-23. This could be due to reverse migration of skilled workers from urban to rural areas, who started their businesses in rural areas and decided not to return to urban areas, as per the PLFS 2020-21 migration data.

The number of workers employed in the Indian informal sector has seen a more noticeable decline compared to the number of establishments. From 2015-16 to 2021-22, the number of workers has fallen by 13.4 million. Though there has been a revival in 2022-23, the numbers are still lower than the pre-pandemic (2015-16) levels. Urban areas have been the main driver of this decline, losing as much as 11.2 million workers between 2015-16 and 2021-22. On the other hand, the number of workers in rural areas has been less affected than in urban areas during the pre- and post-Covid periods. However, in 2022-23, the estimated number of workers in rural areas has increased by over 2.5 million compared to 2015-16.

Two key implications

These trends have two important implications. First, urban areas have shown a high vulnerability to unexpected external shocks such as Covid-19. The significant decline in the number of establishments and workers in urban areas underscores this vulnerability, reflecting the harsh effects of economic disruption on informality. Second, in addition to Covid-19, the Indian informal sector has been faced with two major policy interventions, namely demonetization and the Goods and Services Tax (GST), as many argue. These policies have likely put a direct strain on the informal sector, hampering its growth prospects. The collective impact of these major external disruptions has resulted in a near-stagnation in the informal sector numbers over the last 6-7 years.

Productivity gains: preliminary evidence

A notable finding of the ASUE 2022-23 is the significant increase in informal sector productivity, represented by Gross Value Added (GVA) per employee, observed from 2015-16 to 2022-23. The data shows that GVA per employee is at an all-time high for urban areas in all the three time frames. Specifically, GVA per employee increased by 41.8 per cent for all-India. The upward trend was also observed in both rural and urban areas, although rural areas recorded a much higher growth (51 per cent) compared to urban areas (33.4 per cent).

The primary reason for this phenomenon is the significant increase in GVA and slow employment growth. Moreover, these trends underscore the adaptability and resilience of India’s informal sector. Despite facing major challenges over the past decade, such as demonetization, GST implementation, and the Covid-19 pandemic, the informal sector has managed to produce more with fewer workers.

These trends suggest that informal settings are finding ways to increase productivity, possibly by improving their management practices, adopting grassroots innovations, and increasing market integration. It should be noted, however, that when calculating GVA at constant prices, productivity growth may not be as high. Moreover, it may be premature to infer drastic productivity growth based solely on GVA and headcount. A deeper analysis with more variables will be necessary once the full report and unit-level data are released by the NSSO.

Tareef Husain is an assistant professor at the Department of Economics, Galgotias University, Greater Noida.

Puneet Kumar Shrivastav is Deputy Director of the National Institute of Labour Economics Research and Development, Delhi.

Samar Kumar Mishra is an Assistant Professor at the Department of Economics, Galgotias University, Greater Noida.