Whalesbook
Informal Sector Faces Sharp Slowdown
Official data shows a significant slowdown in India's informal sector in 2025. Hired worker pay rose by just 3.9% for the calendar year, less than half the 13% surge seen in the 2023-24 period. This annual nominal pay of Rs 1.47 lakh is far below the 9.2% staff cost growth reported by formal sector companies in the October-December 2025 quarter. Job creation plummeted by 32%, with only 74.5 lakh new positions added in 2025, down from 1.1 crore in the previous year. New business creation also slowed, adding 58.5 lakh units to reach 7.92 crore, a drop from the 83.5 lakh additions in the prior period. This slowdown in jobs and new businesses signals the sector is lagging behind the wider economy.
Growth Figures Mask Reality for Informal Workers
This slowdown comes as India's economy is projected to grow strongly. Forecasts for fiscal year 2025-26 typically range from 7.3% to 7.8%, with continued strong performance predicted into 2027. This contrast suggests that overall growth numbers don't fully reflect the economic reality for many people. The informal sector's per-worker Gross Value Added (GVA) growth slowed to 4.5% in 2025, down from 5.6% the year before. Although retail inflation was low at 2.2% in 2025 (down from 4.9%), the wage gains in the informal sector are not enough to match formal sector pay or significantly improve living standards. Despite the wage stagnation, the sector saw increased formalization, with 41% of establishments reporting registration (up from 37%), and internet usage jumped to 39.4% from 26.7%.
Deep-Rooted Issues Fuel Inequality
The ongoing slowdown in India's informal sector points to deeper structural issues that risk widening economic disparities. This sector employs about 85% of India's workforce and contributes significantly to GDP. It is vulnerable due to a lack of formal contracts, social security, and stable working conditions. Past economic shocks, like demonetization, the GST rollout, and the COVID-19 pandemic, disproportionately hit the informal economy, making its performance diverge sharply from the formal sector. This divergence points to a 'K-shaped recovery,' where formal sectors and wealthier groups thrive while most people face stagnant incomes and job insecurity. There are also concerns about the accuracy of official GDP estimates, with some analyses suggesting real GDP might be overstated by up to 22%, as past methods relied too heavily on formal sector data. The declining share of private consumption in GDP also shows that overall economic growth isn't leading to widespread household spending power.
Outlook Depends on Addressing Structural Weaknesses
While India's economy is expected to remain a global growth leader, its expansion's sustainability depends on addressing the structural weaknesses in its large informal sector. Risks include rising inflation pressures in early 2026 and geopolitical uncertainties that could affect oil prices and currency stability. The growing gap between formal and informal wages could reduce domestic demand and slow inclusive growth. Continued government focus on structural reforms, social safety nets, and formalization for informal workers will be key to closing this gap and ensuring more balanced economic growth.