India employs a vast share of its workforce in enterprises that most economists would hesitate to call ‘firms.’ The Annual Survey of Unincorporated Sector Enterprises (ASUSE) of 2025 counts 79.2 million unincorporated non-agricultural establishments in India. Yet this vast segment generates only 6.5% of national gross value added (GVA). A sector that large, contributing so little, is a story of structural entrapment more than entrepreneurship.
Most of these establishments are own-account units, family-run, often home-based, concentrated in retail, apparel and personal services. In many populous developing economies, such units function as a labour sink when formal jobs are insufficient. Why they remain stuck at low scale and low productivity is the question.
A simple comparison shows the scale gap. The Annual Survey of Industries (ASI), 2023-24, reports that the average registered factory employs 73 workers; ASUSE shows the average unincorporated establishment employs only 1.6. This is near-solo work.
The income implications are stark. Per-worker GVA in this segment is around ₹1.6 lakh a year, and average annual emoluments for hired workers are roughly in the same range, implying monthly earnings near ₹13,000. For many regions, that is barely above subsistence. While the sector may be large, it is not generating broad-based gains in earnings or capability.
The sector has also remained buoyant: in 2025, establishments increased by 8%, employment by 6.2% and GVA by 10.9%. Yet these gains conceal a troubling reality. Output per establishment increased by only 2.9%, per worker by just 4.5% and emoluments paid to hired workers by a mere 3.9%. This means that the sector is simply adding more units, not upgrading the typical unit.
This persistence is not mysterious. When the modern sector does not create enough stable, productive wage jobs, self-employment becomes the default option rather than an entrepreneurial choice. For many households, these enterprises are income-smoothing arrangements that prioritize survival and stability over expansion. In such a setting, staying informal and small reflects rational risk management rather than a lack of ambition.
But why is scaling unusually hard? Because moving from one or two workers to ten is not a smooth incremental step. It raises supervision and coordination needs, requires more reliable input supply and exposes owners to fixed wage obligations even when demand fluctuates. Once you employ non-family labour, a weak sales month can become a cash-flow crisis.
Growth also increases visibility. Larger operations are easier for regulators, inspectors and competitors to notice. When contract enforcement is weak, logistics unreliable and buyer payments uncertain, the risk of scaling can rise faster than expected returns.
This explains India’s ‘missing middle’: many enterprises rationally remain tiny because the next step is seen as disproportionately risky.
Who owns these enterprises matters as much as how they operate. Female-owned establishments account for 27% of the total, while Scheduled Caste, Tribe and Other Backward Class proprietors together own roughly two-thirds. For many among these groups, informal enterprises are a fallback source of income.
In some activities, caste-linked occupational segmentation channels households into low-return niches regardless of effort or skill. These are social constraints and policy that ignores this distinction will continue to misfire.
Moreover, most such enterprises remain disconnected from supply chains and market networks that enable upgradation. Digital adoption is rising, no doubt. About 39% of them use the internet, but connectivity alone does not create profitable investment opportunities.
Also, registration remains low where productivity gains matter most. In manufacturing, only about 16.4% of these establishments are registered. If demand is uncertain and margins are thin, finance often funds working capital to survive rather than investment to upgrade.
What does China’s experience tell us? Its township and village enterprises of the late 1990s offer a useful contrast. Small firms scaled when they were embedded in an ecosystem: local support, shared infrastructure, dense supplier networks and integration into markets that rewarded quality and scale, especially if aimed at export markets.
India’s unincorporated enterprises operate far more in isolation. India has not built an equivalent ecosystem of shared production infrastructure and value-chain linkages that allow small units to grow without bearing the full fixed costs of formalization and market access. This is a policy gap.
Closing that gap requires moving beyond fragmented interventions. The country’s priority should be integration: invest in manufacturing clusters and shared production infrastructure, build durable supplier-buyer linkages and reduce the social barriers—gendered, caste-linked and geographic—that hold back their entry to higher-return segments.
At the same time, policy must aim to accelerate productive wage employment at scale, so that survival enterprises are not forced to absorb labour by default.
We need not romanticize micro-entrepreneurship. Our goal should be to create real routes from subsistence to scale, so that enterprise growth reflects opportunity and capability, not the absence of better work.
The authors are, respectively, professor and PhD scholar, Madras School of Economics.