The Role of the Informal Sector in India’s Employment and Economy

Walk through any Indian city or town and the economy you see in motion is largely an informal one. The vegetable seller, the auto driver, the construction worker, the tailor, the household help, the small workshop with three employees – none of them appear neatly in payrolls or formal employment registers, yet together they keep the country running. This is the informal sector, and far from being a marginal corner of the economy, it is the part where most people actually earn their living. Understanding how much it contributes to employment and income is essential to understanding how the economy really works.

What the informal sector actually means 🔗

The terms informal sector and unorganised sector are used interchangeably in the country. The National Commission for Enterprises in the Unorganised Sector (NCEUS) defined it as all unincorporated private enterprises owned by individuals or households, engaged in the sale and production of goods and services on a proprietary or partnership basis, with fewer than ten total workers. The defining feature is the absence of protection: workers here usually lack written contracts, social security, paid leave, and the safeguards that labour laws provide to formal employees.

This definition matters because it separates two related ideas. The informal sector refers to the type of enterprise, while informal employment refers to workers without social security – including those employed within otherwise formal enterprises. When people talk about the informal economy contributing to employment and income, they are usually talking about this vast, loosely regulated space that sits outside the organised system.

How much employment does the informal sector provide? 🔗

The scale is enormous. Estimates based on the labour force survey indicate that the informal sector constituted roughly 69 percent of the total workforce when measured through enterprise-based surveys, and the share rises even higher when informal employment as a whole is counted. Computations from the NSSO 68th round (2011-12) put the share of the informal workforce at close to 92 percent of the total. A government report similarly notes that more than 90 percent of the workforce and about 50 percent of the national product are accounted for by the informal economy.

The non-agricultural employment picture 🔗

The contribution becomes especially striking once agriculture is set aside. In non-agricultural activities – manufacturing, trade, construction, transport, and services – the informal sector still accounts for more than half of all employment. This is significant because non-agricultural work is exactly where India’s economy has been expanding as people move out of farming. The expectation was that this shift would pull workers into stable formal jobs. Instead, much of the movement has been from agricultural informality into non-agricultural informality, with the formal sector growing far too slowly to absorb the new entrants.

Self-employment as the backbone 🔗

Within this workforce, self-employment dominates. Self-employed workers form the largest component of non-agricultural workers, with their share remaining stable at around 44 percent across the 1980s and 1990s. Casual labour forms the next largest block. What stands out is the steady decline of regular organised-sector jobs – the share of workers in stable, protected positions fell over the same period, a trend often described as the informalisation of the formal sector, where even formal enterprises increasingly hire workers on informal terms without social security.

The informal sector’s contribution to income and GDP 🔗

Employment is only half the story. The other half is how much income and value this sector generates. Here the numbers are equally large, even if they often surprise people: roughly half of everything the economy produces originates outside the formal, organised system.

From the 1990s to 2008 🔗

During the 1990s, studies estimated that the informal sector contributed close to 45 percent of GDP. Over the following years this share grew rather than shrank. According to estimates worked out by the NCEUS Sub-Committee using a modified apportioning method, about 50 percent of GDP was contributed by the unorganised/informal sector in 2004-05. This is a remarkable figure: even as the economy liberalised and formal industry expanded through the 2000s, the informal sector held and even increased its share of national output, reaching about 50 percent by 2008.

This persistence reveals something important. Economic growth did not automatically formalise the economy. The informal sector grew alongside the formal one, supplying goods and services, absorbing labour, and generating value in ways that conventional growth narratives often overlook.

How these numbers are estimated 🔗

Measuring an economy that operates largely off the books is genuinely difficult, which is why estimates vary. The NCEUS Sub-Committee reviewed methods including the labour input method from an OECD handbook and a method of apportioning, eventually developing an alternative that uses both labour inputs and productivity differentials between the organised and unorganised sectors. Different methods produce different results – one earlier calculation placed the informal share of net domestic product at 47.7 percent for 2001-02, while a conventional estimate ran much higher.

The way enterprises are classified also shifts the picture. The economy treats unincorporated enterprises that maintain proper accounts as quasi-corporates, counting them as part of the formal sector. As an IMF analysis points out, the share of the informal sector in total gross value added stays above 50 percent across years, but falls below that line once the quasi-corporate segment is set aside. These definitional choices are not mere technicalities – they determine whether a worker or enterprise is officially counted as informal at all.

Gender and the informal economy 🔗

One of the most defining features of the informal sector is its gender composition. Data from both the NSSO and the NCEUS show that women are concentrated in informal work to a greater degree than men. The ILO-based estimates found that female informal-sector workers made up about 72 percent of the female workforce, compared with roughly 68 percent for men. In other words, a woman who works is even more likely than a man to be working informally.

Why women cluster in informal work 🔗

This pattern reflects deep social and economic realities. For many women – especially those with limited formal education or those balancing paid work with unpaid household and care responsibilities – informal activities such as home-based manufacturing, street vending, domestic work, beedi rolling, and small-scale food processing offer the only accessible options. These jobs are flexible and require little formal credentialing, which makes them reachable but also keeps them low-paid and insecure.

Recent research on manufacturing shows that the entry of women into industrial work has happened almost entirely in the informal segment rather than the formal one, with a typical female-owned informal unit being about half the size of a male-owned one and generating roughly a third of the value added per worker. So even where female participation rises, it tends to rise in the most precarious and least productive parts of the economy.

The vulnerability behind the numbers 🔗

Higher representation does not mean better conditions. Most women in the informal sector work without written contracts, which leaves them with weak legal claims to wages or compensation for workplace injuries. Studies drawing on the Periodic Labour Force Survey find that less than 10 percent of informal women workers have access to any form of social security. A Springer study on the sector similarly calls for gender-responsive labour policies and stronger regulation to improve working conditions. The high female share of informal employment is therefore both a sign of opportunity and a marker of disadvantage – it shows the sector opens doors that the formal economy keeps shut, while exposing workers to wage gaps, exploitation, and absent safety nets.

Why this matters for cities and planning 🔗

The informal sector is not just an economic statistic – it shapes how cities look, function, and grow. Street vendors occupy footpaths, informal settlements house construction and service workers, and unregistered workshops cluster in residential neighbourhoods. When planners treat these activities as nuisances to be cleared rather than as the livelihood base of most urban residents, they end up displacing the very workforce that keeps the city functioning. Recognising that more than half of urban output and the bulk of urban jobs are informal forces a different approach: one that integrates vending zones, affordable housing, transport access, and social protection into the core of urban policy rather than the margins.

The data also exposes a structural challenge. An economy where roughly 90 percent of workers and half of all output sit outside formal protection cannot generate inclusive growth through formal-sector expansion alone. Schemes aimed at registering and supporting informal workers exist, but enrolment and implementation gaps remain wide. The real task is not to wish the informal sector away but to improve the security, productivity, and dignity of the work that already sustains the majority.

What do you think? If the informal sector employs the vast majority of workers and produces nearly half of national output, should economic policy focus on formalising it, or on improving conditions within it? And how should urban planners redesign cities around the reality that most of their residents earn a living informally?

References

1. https://sanhati.com/wp-content/uploads/2013/10/NCEUS-WP-contribution-to-GDP.pdf
2. https://casi.sas.upenn.edu/sites/default/files/iit/UNNI%20India%20Case%20Study%20for%20ILO%20stats%20book.pdf
3. https://arxiv.org/pdf/2005.06795
4. https://labour.gov.in/sites/default/files/report_vol_4_final.pdf
5. https://ruralindiaonline.org/en/library/resource/contribution-of-the-unorganised-sector-to-gdp/
6. https://www.imf.org/-/media/files/conferences/2019/7th-statistics-forum/session-ii-murthy.pdf
7. https://www.ideasforindia.in/topics/productivity-innovation/feminisation-of-india-s-industrial-workforce.html
8. https://ijlsss.com/analyzing-how-women-workers-in-informal-sector-are-vulnerable-to-exploitation-and-their-legal-protection/
9. https://link.springer.com/article/10.1007/s43621-025-01398-0