We have heard repeatedly that India's informal sector is unproductive. That is true, but also incomplete. The latest Annual Survey of Unincorporated Sector Enterprises (ASUSE) data reveals many aspects of smaller businesses in India.
How Scale Drives Productivity
According to the report, in 2025, there were nearly 8 crore non-agricultural small businesses in India employing more than 12 crore workers. Own-account enterprises (OAEs) - businesses without hired workers, mostly consisting of sole proprietors - account for 86.6% of all establishments. Hired-worker enterprises (HWEs) - businesses that hire workers - form just 13.4%.
But the output gap between them is huge. An average HWE generates roughly Rs 10 lakh in gross value added (GVA) annually, compared to just Rs 1.4 lakh for an OAE. At first glance, that looks like a straightforward scale story. Bigger firms produce more.
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But the more revealing number is GVA per worker, which is largely used as a productivity measure. HWE's GVA per worker is about Rs 2.3 lakh, compared with Rs 1.16 lakh for OAEs. The difference is roughly 2x, not 7x. Further, the average OAE employs barely one person, while the average HWE employs around five.
This becomes clearer once we look sector by sector. The manufacturing unit of a sole proprietor generates only Rs 72,000 of GVA per worker a year. That is almost half of a one-worker trading or service unit. The logic appears to be straightforward. A tailor can stitch only so many pieces a day. On the other hand, in the case of trading and services, this is not a limitation.
Employing The First Worker
But manufacturing also reveals the most interesting pattern in the entire dataset: the first hire matters enormously. When a manufacturing OAE hires its first worker, productivity per worker jumps more than 40%. That is a huge increase.
But that is not the case with a trading unit. After hiring the first worker, the productivity actually falls by 24%. This sounds counterintuitive, but think about a kirana store near you. The first worker is usually within his or her family. Obviously, that worker may help in operations, but not in growing the business.
In the case of services, there isn't much difference. Productivity growth is mostly flat.
Productivity Rises After The Third Worker
Trading and services sectors, however, gain only when businesses become large enough for some division of work to emerge. That starts at three workers (one owner plus two workers).
Across all establishments, GVA per worker stays almost unchanged between one-worker and two-worker firms, before jumping sharply at three workers. The takeaway is simple: two-person firms still behave much like OAEs, while businesses with three or more workers become slightly more professional.
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The 10-Worker Wall
After the third worker, the productivity gains rise significantly. But there's some limit to it, too. It starts to fall sharply when firms move from the 9th to the 10th worker.
The report doesn't mention the exact reason. But I think the compliance burden after crossing 10 workers might be taking a toll on productivity. Businesses need to comply with Provident Fund registration, ESI requirements, labour records, inspections, accounting burdens, etc., after crossing 10 workers.
In the case of manufacturing firms, the productivity takes a hit after 10 workers, but recovers and peaks around 13 workers.
In trade, GVA per worker peaks at the 9th worker and then drops more than 32% at 10 workers. We can only see it crossing that peak beyond 20 workers. But those larger firms likely represent a completely different category of businesses, such as supermarkets or large wholesalers, rather than small firms gradually scaling up over time.
Services perform the worst. Productivity peaks as early as the 8th worker, drops sharply at 10 workers, recovers slightly, and falls again at 12 workers, even as firms continue investing in fixed assets. That suggests many service businesses are expanding and spending more, but without generating enough additional output.
Overall, productivity across the informal sector peaks at around 9 workers and does not return to that level even beyond the 20-worker mark.
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Final Take
The informal sector is often discussed as though it were one homogeneous category. The ASUSE data shows it is not. Manufacturing, trade, and services respond very differently to scale, hiring, and compliance costs. That also means policymakers need to move beyond generic "MSME support" language.
The compliance angle also needs deeper investigation, especially for businesses this small. If these thresholds are indeed creating bottlenecks in the productivity journey, then policymakers may need to rethink rules that end up trapping firms in low-productivity zones.
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