Key Details
The analysis suggests that India’s informal economy is increasingly being shaped by human capital, digital adoption and formal business ecosystems rather than enterprise growth alone.
Theme | What the Data Shows |
|---|---|
Education and Employment Quality | Graduates are 43.8 percentage points less likely to be in informal employment than illiterate workers |
Skills and Labour Formalisation | Vocational training reduces the probability of informal employment by 4.8 percentage points |
Digital Productivity Gains | ICT adoption is associated with a 76% increase in labour productivity among unincorporated enterprises |
Digitalisation and Registration | ICT adoption increases the likelihood of enterprise registration by 83% |
Formalisation and Finance | Registered enterprises are more likely to access institutional credit, with Udyam-linked firms receiving the largest loans |
Women’s Economic Participation | Education improves women’s transition into regular wage employment, but finance gaps persist for women-owned enterprises |
Growing Informal Enterprise Sector | Unincorporated enterprises increased by 22% between 2022–23 and 2025, reaching 7.92 crore units |
Policy Direction | Integrating skilling, digital adoption, enterprise registration and financial inclusion policies |
Summary
India’s Informal Economy Is Becoming More Productive, Digital and Connected to Formal Institutions
A new working paper by the Economic Advisory Council to the Prime Minister, Formalization of Labour Market in India: Evidence from PLFS and ASUSE 2025 Unit-Level Data, based on unit-level data from the 2025 Periodic Labour Force Survey (PLFS) and the Annual Survey of Unincorporated Sector Enterprises (ASUSE), examines how India’s informal economy is evolving. The findings suggest that productivity, employment quality and access to finance are increasingly shaped by education, skills, digital adoption and enterprise formalisation, highlighting a shift from quantity-driven growth towards capability-driven economic transformation.
Education and Skills Remain the Strongest Drivers of Employment Quality
The study identifies education as the most significant determinant of labour market formalisation. Graduates are 43.8 percentage points less likely to be employed informally than illiterate workers, while vocational training lowers the likelihood of informal employment by 4.8 percentage points.
The findings reinforce the role of human capital not only in improving employability, but also in enabling workers to transition into more secure and productive forms of employment.
Digital Adoption Is Transforming Enterprise Performance
Digital technologies are emerging as an important driver of productivity across India’s unincorporated sector. The study finds that higher levels of ICT adoption are associated with a 76% increase in labour productivity, reflecting gains in efficiency, market access and business operations.
Internet adoption among enterprises increased from 21% in 2022–23 to 39% in 2025, suggesting that digital technologies are becoming increasingly embedded in small business activity.
Formalisation Is Becoming a Gateway to Finance
The paper finds a strong relationship between enterprise registration, digital adoption and access to institutional finance. Digitally enabled enterprises are significantly more likely to register, while registered enterprises are more likely to obtain formal credit than unregistered businesses.
Government-linked registration systems such as Udyam and Udyam Assist are associated with stronger formalisation outcomes and substantially larger loan sizes. Average formal loans rise from roughly ₹3 lakh for unregistered enterprises to nearly ₹10 lakh for Udyam-linked firms, highlighting the growing benefits of integration with formal business ecosystems.
Women Continue to Face Structural Barriers
The analysis finds that higher education significantly improves women’s likelihood of securing regular wage employment and reduces dependence on casual work. Female-owned enterprises are also increasing as a share of unincorporated businesses.
However, women-owned enterprises remain less likely to access institutional credit than male-owned enterprises, indicating that financial inclusion gaps continue despite improvements in education and enterprise registration.
Informality Is Changing, Not Disappearing
The paper argues that India’s informal economy should no longer be viewed solely through the lens of employment vulnerability. Unincorporated enterprises grew by 22% between 2022–23 and 2025, while their contribution to Gross Value Added increased from 9.9% to 11.2%.
The emerging challenge is therefore not only reducing informality, but improving the productivity, capabilities and institutional integration of workers and enterprises operating within it.
What is an Unincorporated Enterprise?
An unincorporated enterprise is a business that is not registered as a company under corporate law. These enterprises typically include small proprietorships, household businesses and micro-enterprises operating in manufacturing, trade and services. They form a major part of India’s informal economy and account for a significant share of employment and economic activity.
Policy Relevance
Reframes informality as a productivity and capability challenge, not merely a labour market issue.
Strengthens the case for integrating education, skilling and labour-market policies to improve employment quality.
Highlights digital adoption as a driver of enterprise productivity, registration and market participation.
Demonstrates the growing importance of Udyam and Udyam Assist platforms in connecting enterprises to formal finance and government support systems.
Suggests that formalisation policies are most effective when combined with digital and financial inclusion measures.
Highlights persistent gender gaps in enterprise finance, despite improvements in education and labour-market outcomes for women.
Positions human capital, digital capabilities and enterprise formalisation as key drivers of India’s long-term structural transformation.
Follow the Full Working Paper Here: EAC-PM Working Paper: Formalization of Labour Market in India (PLFS & ASUSE 2025)