Demographic Dividend on Borrowed Time

The 2024 Sample Registration System (SRS) Statistical Report, released by the Office of the Registrar General & Census Commissioner of India, confirms with little ambiguity what we have been anticipating for some years: India is no longer a young, fast-multiplying nation racing toward a demographic windfall. It is a country in the middle of a structural demographic pivot, one that carries serious implications for growth, fiscal policy, and market valuations. The data covers the calendar year 2024 and was published in May 2026.

I had highlighted this trend previously in April 2022 (Gorillas in the Room – 2) and September 2025 (End of demographic dividend approaching fast). The 2024 SRS report is not a reversal of those trends. It is their continuation and, in several respects, their acceleration.

The much-discussed demographic dividend was always a time-limited window. The 2024 SRS data suggests that the window is not merely closing — in the urban and more prosperous half of India, it has already closed.

The headline: TFR below replacement for the fifth consecutive year

India's Total Fertility Rate stood at 1.9 in 2024, unchanged from 2023, and below the replacement threshold of 2.1 for the fifth consecutive year. The stubborn persistence at this level — neither recovering toward replacement nor diving sharply lower — should not be mistaken for stability. It signals that sub-replacement fertility has now become the structural baseline of the Indian demographic story, not a passing episode.

1.9 National TFR

1.5 Urban TFR

2.1 Rural TFR

2.9 Bihar (highest)

1.2 Delhi (lowest)

 

The rural–urban gap deserves attention. A rural woman in India still has, on average, one more child over her lifetime than her urban counterpart. Rural TFR is exactly at replacement (2.1) while urban TFR has dropped to 1.5 — a level comparable to several ageing European societies. This matters because India’s economic, fiscal, and political weight is increasingly urban, and the urban population is the one that produces the skilled workforce, pays the bulk of direct taxes, and drives consumption of discretionary goods. An urban TFR of 1.5, sustained over years, implies that the productive urban cohort is not replacing itself.

It is also important to note the demographic inequality implicit in these numbers. Bihar, with a TFR of 2.9, is still growing fast. It is also the state with the highest poverty rate, the lowest per-capita income, and among the weakest human development indicators. The richer and more economically dynamic states — Delhi (1.2), Kerala (1.3), Tamil Nadu, Maharashtra, Karnataka — are all deeply sub-replacement. This means that India’s future population growth, such as it is, will be concentrated in its most economically backward regions. The 2022 post noted this pattern in NFHS-5 data. The 2024 SRS confirms it is not correcting.

Birth rate and death rate: diverging slowly, not dramatically

The Crude Birth Rate (CBR) declined to 18.3 in 2024 from 18.4 in 2023, continuing a steady multi-year slide (it was 20.0 in 2018). Urban birth rate has dropped sharply to 14.7 while the rural rate, at 20.2, remains considerably higher. Among larger states, Bihar (26.8) and Uttar Pradesh remain at the top end; Kerala (11.1) sits near the bottom.

The Crude Death Rate (CDR) held at 6.4 in 2024 — the same as in 2023. Chhattisgarh continues to have the highest CDR (8.4) and Delhi the lowest (4.5). The post-COVID stickiness in the death rate deserves a note: the overall mortality rate remains above pre-pandemic levels, even as birth rates have fallen further. The gap between births and deaths — the natural growth rate — is therefore narrowing faster than either indicator alone might suggest.

Infant mortality: improving, but the state-wise disparity remains stark

The Infant Mortality Rate (IMR) fell to 24 in 2024, down from 25 in 2023 and 30 in 2019. This represents genuine progress, and the trend is broad-based. Rural IMR is now 27 and urban IMR has dropped to 17. The Under-Five Mortality Rate (U5MR) stands at 28.

However, the state-level disparity is alarming. Chhattisgarh has an IMR of 36 — meaning one in every 28 infants born in that state does not survive to see their first birthday. Kerala, at the other end, has brought its IMR down to 8, a figure comparable to many developed countries. For context: China’s IMR is around 5, Germany’s is 3, and Bangladesh has brought its own figure down to roughly 24 — broadly matching India’s national average today despite having a fraction of India’s healthcare resources.

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Sex ratio at birth: a marginal improvement that conceals large state-wise gaps

The Sex Ratio at Birth (SRB) improved marginally to 918 females per 1,000 males for the 2022–24 observation window, up by one point from the prior period. Chhattisgarh leads at 978 and Uttarakhand records the lowest at 872. The rural SRB (914) remains below the urban figure (928).

The persistence of adverse sex ratios at birth in several of India’s wealthier states — Haryana, Uttarakhand, parts of Gujarat and Punjab — continues to be a structural concern. Wealthier households in India have historically used selective practices more than poorer ones, and the data does not yet show a decisive break from that pattern. The aggregate national improvement, while welcome, masks these pockets.

 

Healthcare access: strong at birth, nearly absent at death

Perhaps the single most striking finding of the 2024 SRS report is the yawning gap between healthcare access at two critical moments: birth and death. A remarkable 95.4% of births in India now receive medical attention at the time of delivery — testament to the success of institutional delivery schemes like the Janani Suraksha Yojana over two decades. But only 40.2% of deaths involved medical care before death. In rural India, that figure drops further: nearly half of all rural deaths (48.9%) occur without any medical attention at all.

What this means: India has built a formidable system for protecting lives at their start. It has not built a comparable system for managing lives near their end. As the population ages — which the fertility and mortality trends together guarantee — the absence of geriatric care infrastructure, chronic disease management, and end-of-life medical support will become an increasingly serious fiscal and humanitarian problem.

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The report also records a rise in accidental and self-inflicted deaths. Deaths from motor vehicle accidents now account for 3.2% of all deaths, and deaths by suicide have risen to 2.8%. These are not large numbers in absolute share terms, but the directional trend — rising in both categories — is worth tracking against the backdrop of rapid urbanization, economic stress, and the erosion of traditional social support structures.

What it all adds up to

Taken together, the 2024 SRS data paints a picture that is known to all but believed by only a few. It has therefore still not fully entered the mainstream investment and policy conversation.

The birth rate is declining and will continue to decline. The death rate is sticky, with elderly cohorts growing faster than they are being replaced by younger ones. The TFR has been below replacement for five straight years, and the urban TFR is already at levels that Western Europe achieved only after decades of demographic decline. The window for harvesting a demographic dividend — defined broadly as the period when the working-age population is large relative to dependents — is not merely narrowing. In the urban and more productive half of India, it has already closed.

The implications for the economy and markets, as flagged in the 2022 post, remain unchanged and are if anything sharpening. Wage pressure will increase as the working-age cohort peaks. Consumption patterns will shift toward healthcare, pharmaceuticals, assisted living, and financial products oriented toward retirement and wealth preservation — away from housing, personal mobility, and youth-oriented discretionary goods. The fiscal burden of an ageing population will grow: pension liabilities will expand, healthcare spending will need to rise sharply, and the taxable base will shrink unless female labour force participation improves meaningfully.

The 16 states and union territories already below the replacement rate — including the economically dominant ones — are not going to reverse course in any policy-relevant timeframe. India is not heading toward a demographic crisis in the near term. But it is heading, quietly and with growing momentum, toward a demographic maturity for which neither the government’s fiscal framework nor the market’s long-term valuation assumptions appear adequately prepared.

 

Why are markets in a state of disbelief?

Last week I raised a question that I believe lies at the heart of India’s current economic anxiety: why, despite the government and the RBI signaling growing concern — which, by historical precedent, should calm markets — are investors, particularly foreign investors, refusing to be reassured? (see here)

In my view, the disbelief is neither irrational nor transient. It is rooted in a confluence of structural, socio-political, and corporate factors that have been building for several years, and which the present crisis has simply made impossible to ignore. I would group them under four broad heads.

Macro weakness: Old problem, but with unfamiliar depth this time

India’s external and domestic macroeconomic position has deteriorated in ways that go beyond the cyclical discomfort of a typical crisis.

1.    Balance of Payments under structural strain: The current account deficit has widened, driven by persistently high energy import costs in a period of elevated West Asia tensions. More concerning is the composition of financing: net FDI has turned negative, and FII outflows have been large and sustained over three years. India is, for now, plugging the gap through forex reserves and debt flows — a less stable combination than equity-led capital.

2.    The rupee and the RBI’s impossible dilemma: The INR has weakened materially and has been among the worst-performing major currencies over the past year. The causes are multiple: BoP pressure, a widening yield differential with the US, and a rising tide of outward remittances and overseas portfolio investments by domestic HNIs through the RBI’s Liberalized Remittance Scheme. The RBI’s response has been constrained: hiking rates aggressively to attract foreign flows and defend the rupee would suppress growth in an already sluggish economy. Keeping rates low risks currency depreciation and imported inflation. This is not reluctance — it is a genuine policy trap, and investors know it.

3.    Inflation without growth: Rising inflation, driven by a weaker rupee and adverse weather, is compressing real purchasing power. The combination of rising prices and stagnant to declining real wages is particularly damaging to private consumption — the engine that India needed to fire in the absence of strong export or investment demand. The consumption story, which was central to the India bull case, looks increasingly fragile.

4.    Fiscal space is narrowing: The government’s fiscal position is under pressure from multiple directions: elevated subsidy commitments, defence spending following the May 2025 tensions, and weaker tax revenues in a slowing economy. This is reducing the government’s capacity to compensate through public capital expenditure — which had been the primary growth driver for the past four years.

5.    Valuation offered no cushion: Indian equities entered this downturn at stretched valuations. The Nifty 50 was trading at 20–22x forward earnings even as earnings growth was decelerating. When negative macro news lands on an expensive market, the correction can be disproportionate — and that is exactly what has happened. There was no margin of safety built into prices.

Socio-Political challenges: The harder conversation

These are the factors that investors discuss in private but rarely commit to paper. I will try to be precise rather than polemical.

1.    The pivot toward consumption control: The Prime Minister’s recent appeal for austerity — asking citizens to cut fuel use, forgo overseas travel, and defer gold purchases — sent a signal that many investors read as a reversion to pre-1991 thinking. (I discussed this at length in my earlier post, ‘Austerity vs. Reform’.) Whether that reading is entirely fair or not, the market impact is real: investors who were already watching the reform pipeline closely have grown more anxious about whether the government will reach for supply-side reform or demand-suppression controls.

2.    Subsidies, welfare spending, and labour market effects: The government’s increasing reliance on direct benefit transfers, free ration schemes, and cash transfers to consolidate its political base may not be inherently wrong — but its side effects on the private sector labour market are real. Labour availability and motivation in certain sectors have been affected by welfare floors that reduce the incentive to accept low-wage formal employment. This is a structural drag on manufacturing-led growth.

3.    Education quality and the demographic dividend at risk: India’s single most important long-term economic asset is its young population. But that asset is only valuable if the population is educated and skilled. The data on learning outcomes — whether ASER surveys or international comparisons — tells a deeply uncomfortable story. If the demographic dividend passes without a commensurate investment in human capital, it becomes a demographic burden. Sophisticated long-term investors are beginning to price this in.

4.    Governance quality and institutional confidence: Several global investors have expressed, with increasing directness, concern about the quality and independence of Indian institutions — the judiciary, the regulatory apparatus, and law enforcement. These concerns are not new, but they have intensified. When investors cannot trust that contracts will be enforced, that regulations will be applied consistently, or that disputes will be resolved impartially, the risk premium they demand rises — sometimes dramatically.

Corporate growth visibility: The profit-investment paradox

Perhaps the most paradoxical aspect of the current situation is that Indian corporate balance sheets are in excellent shape — and yet confidence in future earnings is low. The reasons for this are structural.

1.    Profits without purpose: As Chief Economic Adviser Dr. V.A. Nageswaran has noted, corporate India tripled its net profits between FY21 and FY25, while cutting its debt-to-equity ratio from 139% to 94%. Cash reserves swelled from ₹9 lakh crore to ₹16 lakh crore. Private investment as a percentage of GDP fell to a 20-year low. The money is there. The willingness to deploy it in productive assets — factories, R&D, new technologies — is not. Instead, promoters are accumulating profits, setting up family offices, and increasing overseas investments. This is rent-seeking at scale, and it destroys future earnings potential even as it flatters current balance sheets.

2.    The three large sectors offer moderate visibility at best: Financials, IT services, and FMCG collectively dominate index earnings. All three face meaningful headwinds. Financials are managing through margin compression and pockets of asset quality stress in the retail and MSME book. IT services is navigating weak global discretionary technology spending and the early disruptions from AI-driven efficiency gains on the demand side. FMCG is struggling with volume growth in a real-wage-compressed consumer environment. None of this is catastrophic, but none of it inspires conviction either.

3.    Financial system stress is a risk, not just a concern: Rising financing costs and persistent inflation increase the probability of stress in the financial system — particularly in unsecured retail lending, microfinance, and small business credit. The RBI has been flagging this, and the market is beginning to price a higher probability of credit cost escalation than consensus earnings estimates currently reflect.

The changing global order: India’s ambiguity has a price

This is the factor that is perhaps most underappreciated in domestic commentary, but which global investors flag consistently.

1.    Strategic ambiguity in a polarizing world: The ongoing West Asia conflict, the continued Russia-Ukraine war, and the accelerating US-China decoupling are forcing every country to make choices about where it stands in the emerging global order. India has, with considerable skill, maintained strategic autonomy — balancing relationships with the US, Russia, and the Gulf. That balancing act is becoming harder. The costs of ambiguity are rising: trade partners want clarity on supply chain alignment, technology partners want assurance on data security and geopolitical reliability, and capital allocators want predictability on which side of the emerging economic blocs India will ultimately sit. India has not provided those answers, and the uncertainty is keeping investment at bay.

2.    The technology dependency trap: As Dr. Raghuram Rajan has written, India’s approach to the AI era risks repeating — and deepening — the mistake of the IT services era. India provides the land, power, and construction for data centres owned by US hyperscalers. The LLMs running on those servers are designed in California. The chips are fabricated in Taiwan. India contributes inputs; the intellectual rent flows out. This is not self-reliance. It is a sophisticated form of technological dependency, with stronger lock-in than the earlier IT services model. Investors who understand technology cycles are asking whether India has the innovation infrastructure to build the next layer — and the honest answer, today, is no.

The Real Reason for Disbelief

Taken individually, each of these factors would be manageable. Taken together, they describe a situation where the authorities’ panic — however genuine — may simply not be adequate to address the scale of what needs fixing.

Past crises — 1990, 2008, 2020 — had sharp triggers and identifiable remedies. The RBI cut rates; the government spent; the rupee fell and exports recovered; the crisis passed. The market knew what medicine was available and trusted that the doctor would administer it.

The present situation is different. The headwinds are structural, not cyclical. Rate cuts cannot fix a corporate investment drought driven by rent-seeking incentives. Fiscal stimulus cannot substitute for the human capital investment that was deferred over a decade. Forex intervention cannot sustainably defend a currency whose weakness reflects deep competitiveness questions. And no single policy action can resolve India’s strategic positioning in a fracturing global order.

Markets are not in disbelief because they doubt the government’s sincerity. They are in disbelief because they are looking at the medicine cabinet and wondering whether any of the available remedies actually treats the disease.

That is a harder problem than any previous Indian crisis has posed. And until investors see credible evidence of structural remedies — not just cyclical stabilization — the disbelief is likely to persist.

Also read

Markets in a State of Disbelief

Indian Economy – At an Inflection Point

Austerity vs. Reform: Which Way Are We Headed

Rein Your Horses

 

Markets in a state of disbelief

“Markets stop panicking when the authorities begin to panic.”

The logic behind this old adage is intuitive: in a sudden crisis, financial markets typically price in the worst-case scenario well before governments, central banks, and regulators even acknowledge the problem. Once the authorities do act — through stimulus, rate cuts, liquidity injections, or other interventions — the corrective measures tend to limit the actual damage, providing an immediate floor and often a sharp rebound to stock prices that had already discounted catastrophe.

Empirical evidence

1990 — Balance of Payments Crisis: Fuelled by fiscal deficits, dwindling foreign reserves, and the Gulf War oil shock, India was pushed to the brink of sovereign default. The government’s eventual response — including pledging gold reserves and accepting an IMF bailout — marked the beginning of India’s landmark economic liberalisation. Markets recovered.

1998 — Asian Financial Crisis Contagion: Contagion from the 1997 Asian Financial Crisis rattled the rupee and slowed growth. Tight monetary policy and fiscal prudence steadied the ship.

2008 — Global Financial Crisis: The collapse of Lehman Brothers triggered a sharp stock market crash and industrial slowdown. A coordinated response of fiscal stimulus, rate cuts, and liquidity injection arrested the fall.

2013 — Rupee and Current Account Crisis: A widening current account deficit combined with US Federal Reserve tapering signals drove the rupee to ₹68/USD with inflation surging. The RBI’s decisive rate hikes and forex market interventions restored confidence.

2020 — COVID-19 Pandemic Shock: Nationwide lockdowns contracted GDP by an estimated 7.3%. But aggressive fiscal support (PMGKY), RBI liquidity measures, and deep repo rate cuts helped markets stage one of their sharpest recoveries on record.

In each case, the pattern held: authorities panicked (or at least acted decisively), and markets calmed.

The latest episode

The Indian economy is navigating a confluence of serious headwinds. The India-Pakistan military stand-off in May 2025 rattled investor sentiment. Sweeping changes to US tariff and immigration policy, which began taking effect through 2025, disrupted trade flows and created uncertainty for Indian exporters and the IT-services sector. An escalating conflict in West Asia — with implications for oil prices, remittances, and regional stability — has added another layer of risk as of early 2026.

Financial markets have responded accordingly, and painfully. Bond yields have risen sharply. The rupee has weakened significantly, ranking among the worst-performing major currencies over the past year. Equity markets have corrected meaningfully — the Nifty 50, which stood near 23,465 in mid-2024, has gone essentially nowhere in two years, even as several peer markets have advanced. Indian equities have strikingly underperformed comparable emerging markets.

So far, this fits the familiar script. Market pricing in the worst.

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The adage is being tested

The Prime Minister has, in recent public statements, signaled growing concern about the economic situation — a rare and telling departure from the usual official optimism. The RBI Governor has similarly struck a more cautious tone. In other words, the authorities appear to be beginning to panic.

By the logic of the old saying, this should be the inflection point. Markets should be bottoming out. Relief should be setting in.

And yet — the panic in markets is not subsiding.

Why are markets in a state of disbelief?

Is it that investors doubt the adequacy of the policy response? Is the nature of this crisis — multi-front, geopolitical, and partly beyond India’s control — fundamentally different from past ones? Or is something else at work?

…more on this next week

 

Small is not necessarily beautiful

Continuing from yesterday…(see here)

The recently released report of Annual Survey of Unincorporated Small Enterprises (ASUSE 2025) is a detailed report on the current state of the unorganized sector in the country. The headline numbers — 7.92 crore enterprises, 12.81 crore workers, Rs. 19.93 lakh crore in GVA, 11% GVA growth — make an attractive story of expansion and progress.

That story is not false. But it is incomplete. The data, read carefully and with some elementary arithmetic, reveals a picture that the official narrative tends to gloss over: this is a sector where the majority of participants earn incomes that would be considered inadequate by almost any standard, where women's participation often reflects compulsion rather than empowerment, where capital is thin and productivity is low, and where digitization and formalization are advancing from a very modest base. The ASUSE numbers deserve to be read not just with appreciation — but with questions.

 The income problem: Rs. 9,700/month for a self-employed worker

The single most important number in the ASUSE 2025 report is the one that receives the least attention: GVA per worker for Own Account Establishments (OAEs) — the 6.86 crore single-person or family-run units that constitute 87% of all unincorporated establishments. This figure stands at Rs. 1,16,583 per year — or approximately Rs. 9,715 per month.

GVA, it must be remembered, is not take-home income. It is gross value added — output minus intermediate inputs — and it must still cover the owner's own labour, any unpaid family labour, depreciation on assets, and loan repayments before anything resembling a profit or wage reaches the household. The actual monthly income of the typical OAE operator is likely considerably lower than Rs. 9,715. A conservative estimate, after accounting for these deductions, might put it somewhere between Rs. 7,000 and Rs. 10,000 per month.

Compare this to India's per capita net national income for 2024-25: approximately Rs. 1,84,000 per year, or Rs. 15,333 per month. The OAE worker in the unincorporated sector earns, in GVA terms, roughly 60% of the national per capita average — and in take-home terms, possibly 40-50%. This is not prosperity. This is subsistence.

The arithmetic becomes starker at the household level. India's average household size is approximately 4 persons. If an OAE's GVA of Rs. 9,715 per month is the household's primary income — which it frequently is in rural areas — the implied per capita income for that household is around Rs. 2,400 per month, or roughly Rs. 28,800 per year. That is well below the national average, and disturbingly close to poverty-line territory in many state definitions. We are talking about a large fraction of the 6.86 crore OAEs — likely representing over 50 crore people in associated households — living at or near this level.

Even if one takes the aggregate GVA per worker figure of Rs. 1,56,539 per year (Rs. 13,045 per month) — which blends in the more productive Hired Worker Establishments — the picture is not reassuring. This overall figure is still below the national per capita income, and GVA is still not the same as household income.

The ASUSE report duly presents these numbers. It does not dwell on what they imply.

A productivity crisis hidden in plain sight

OAE GVA per establishment — a proxy for establishment-level productivity — is Rs. 1,40,005 per year, or roughly Rs. 11,667 per month. That is the gross value added of an entire enterprise — typically run by an owner who works full time, often with unpaid family assistance.

For context, a single semi-skilled factory worker in the organized sector typically earns more than this in wages alone — before the employer counts any value added the worker contributes to output.

HWEs, by contrast, generate Rs. 10,00,868 GVA per establishment — seven times more than an OAE. The gap tells the story of what scale, hired labour, fixed capital, and formalization can do. But the sector is 87% OAEs. The productivity uplift available at the HWE level remains out of reach for the overwhelming majority.

What traps OAEs at this level? The data offers some clues:

·         Thin capital base: Fixed assets owned per OAE establishment average only Rs. 2,18,431; and a large part of this is likely to be basic tools, a push-cart, a sewing machine, or a modest stock of goods. There is little capital to leverage productivity improvements.

·         Minimal credit access: Outstanding loan per OAE establishment is a negligible Rs. 19,520 — barely enough to cover a month's working capital. Even this small figure is likely inflated by a minority of better-capitalized OAEs. For most, formal or semi-formal credit is not a material resource.

·         Low digitalization among OAEs: Only 34.2% of OAEs use internet for entrepreneurial purposes — versus 72.7% of HWEs. The gap in digital adoption tracks closely with the gap in productivity.

·         Structural isolation: Many OAEs operate within household premises (42% do), are unregistered (about 63% of manufacturing OAEs), and maintain no formal accounts. They are, by design, outside the institutional systems that could help them grow.

The ASUSE 2025 report records 2.85% growth in GVA per establishment and 4.5% growth in GVA per worker, materially lagging the overall GVA growth for the country. At current inflation, this represents roughly zero real productivity gain. The sector is expanding in headcount and in nominal terms. It is not becoming more productive per person.

Female participation: empowerment or compulsion?

The ASUSE 2025 data on women is presented as good news. And in some respects, it is: 27% of proprietors are female, women comprise 29% of the workforce, and female-led HWEs tend to hire other women. These are meaningful facts.

But the headline that demands scrutiny is this: in the manufacturing sector, more than 60% of proprietary OAEs are female-headed.

Manufacturing OAEs, as established above, generate the lowest GVA among all establishment types and categories. They are home-based, capital-light, and almost entirely informal. The top employment categories within manufacturing — wearing apparel, tobacco products, and textiles — are precisely the activities that women in low-income households have historically been pushed into: piece-rate work, home-based stitching, bidi rolling, and handicraft production. These are not typically chosen as entrepreneurial ventures. They are survival strategies.

The data lends itself to a hypothesis that should be tested but cannot be resolved from the ASUSE data alone: a significant share of female OAE proprietorship may reflect economic compulsion — a second household income to supplement an inadequate primary income — rather than entrepreneurial aspiration. This is not a criticism of the women involved. It is a criticism of the conditions that drive the outcome.

The ASUSE survey does not collect data on the occupation or income of the spouse or other household members. This is a significant gap. If such data were available, it would be possible to test whether female OAE participation is correlated with male household member unemployment, low agricultural income, or casual daily-wage work. That correlation — which most fieldworkers would expect to be strong — would fundamentally reframe what the headline female participation numbers mean.

The finding that 72% of female-led HWEs employ at least one other female hired worker is more genuinely positive — HWEs represent greater scale, deliberate employment, and somewhat higher productivity. But female-led HWEs are a small fraction of the total. The dominant story is OAEs.

An additional concern: female workers in this sector are concentrated in precisely the activities with the lowest pay. Wearing apparel manufacturing (48.4% of manufacturing female workers), retail trade (95% of trade female workers), and personal services — these are not high-paying segments. The feminization of the sector, at the OAE level, is occurring disproportionately in its least remunerative corners.

Formalization: progress too slow to matter

The ASUSE 2025 report notes that 37.5% of establishments are now registered under some act or authority, up marginally from 37.2% in the previous survey. Internet use has risen sharply, from 27% to 39%. Bank accounts are held by 82.5% of establishments. These are presented as signs of growing formalization and digitization.

Let us consider what 37.5% registration actually means. More than 62% of unincorporated establishments — over 4.9 crore enterprises — remain entirely outside any regulatory framework. In manufacturing, the registration rate is only 16.4%, meaning more than 5 out of every 6 manufacturing units operate with no formal recognition whatsoever. This matters not just for tax compliance, but because unregistered establishments have no legal standing to enforce contracts, access formal credit, or participate in government procurement.

The 0.3 percentage point increase in registration between surveys — covering roughly a year — implies that at the current pace, it will take many decades to bring the sector into even a minimal formality. The Udyam registration scheme and similar initiatives have made it easier to register. But ease of registration has not translated into a meaningful acceleration in the rate of formalization.

The internet numbers are more genuinely encouraging — a 12% jump in one year is substantial. But a closer look is warranted. 'Use of internet for entrepreneurial purposes' in a largely cash-based, low-margin sector may often mean a basic WhatsApp group for customer communication or using a UPI QR code — both genuinely useful, but a far cry from e-commerce integration, digital bookkeeping, or participation in online marketplaces. The survey does not break down what internet use comprises.

Geographical concentration: The same states, the same story

Uttar Pradesh, West Bengal, and Maharashtra together account for 35% of all unincorporated establishments and about 35% of the sector's employment. These same three states have topped the distribution in every ASUSE. What is missing from the data is any serious analysis of whether the unincorporated sector in these states is a springboard to something better, or a holding pattern for labour that cannot find formal employment.

Uttar Pradesh has the most establishments and the most workers — but Delhi, Haryana, and Tamil Nadu have the highest GVA per establishment and per worker. This divergence between labour concentration and productivity concentration is a structural problem. The states with the most informal workers are not the most productive states; they are states where the formal economy has not generated enough employment to absorb the workforce.

In that sense, the unincorporated sector's size is not merely a reflection of entrepreneurial energy. It is also a measure of formal economy failure. The sector expands, in part, because there is nowhere else for labour to go.

Moreover, if we juxtapose the problem of unauthorized construction by small households and shopkeepers and commercial activities run from residential premises with this survey outcome, the drive to demolish such houses/shops by UP State and other governments might seem extremely unjust.

The data we do not have

ASUSE 2025, to its credit, is a serious survey. But several gaps in what it measures limit its analytical value for policymaking:

No household income linkage: The survey does not connect enterprise income to household income. It is therefore impossible to assess the actual living standard of an OAE proprietor's family, or to determine whether the enterprise is the primary or supplementary income source.

No longitudinal tracking: Enterprises are not tracked over time. We do not know what fraction of OAEs from the previous survey have closed, grown into HWEs, or migrated to the formal sector. The sector looks stable across surveys, but behind that stability may be enormous churn — a revolving door of enterprises entering and exiting subsistence.

No income distribution within categories: The GVA per worker figures are averages. The distribution within each category is likely highly skewed — a small number of more successful establishments pulling up the mean, with a large majority well below it. Medians would be far more informative than means.

No occupational history of proprietors: We do not know whether proprietors were previously employed in the formal sector (and lost that employment), were always self-employed, or are recent entrants to the labour market. This matters enormously for understanding what the sector represents.

No welfare outcome data: Dietary adequacy, housing conditions, access to healthcare, children's schooling — none of these are linked to enterprise data. A sector that employs 12.81 crore workers should be evaluated not just on GVA growth but on whether it is actually improving lives.

What does it all add up to?

The unincorporated sector is not a problem to be solved. It is a reality to be understood. For hundreds of millions of Indians, it is the only economy they have access to. The ASUSE data shows that this economy is growing — in number of enterprises, in employment, and in nominal GVA.

But growing from a very low base, at roughly the rate of nominal GDP, is not the same as transformation. The sector's productivity per worker — at Rs. 1,56,539 per year overall, and Rs. 1,16,583 for the dominant OAE segment — has not broken out of the low-income trap. The gains in GVA per worker, at 4.5% in nominal terms, are likely negative in real terms given inflation.

What India needs from this sector is not just more of the same — more OAEs at Rs. 9,700 a month — but pathways out: credit access that enables capitalisation, registration processes that are genuinely low-cost, skilling that is aligned with market demand, and a formal employment ecosystem large enough to absorb workers who want it. Without those, the unincorporated sector will continue to do what it has always done: absorb everyone the formal economy does not want, and pay them accordingly.

The 12.81 crore workers counted in ASUSE 2025, and the 50-odd crore people in their households, deserve a more honest accounting than the headline numbers provide. The data is there. The questions are obvious. The honest conversation is overdue.

Also read

State of unorganized sector in India

State of unorganized sector in India

The unincorporated sector — comprising millions of small and micro manufacturers, traders, and service providers — is the backbone of India's economy. While informal in structure, it is deeply formal in impact: generating livelihoods, fostering entrepreneurship, and contributing significantly to the country's GDP.

The National Statistics Office (NSO) recently released the Annual Survey of Unincorporated Sector Enterprises (ASUSE) 2025, covering the period from January to December 2025. This is the most comprehensive annual stocktaking of the sector, and the numbers tell a story of steady expansion, rising productivity, growing female participation, and accelerating digital adoption.

Key Points

·         The unincorporated sector now comprises over 7.92 crore establishments — an 8% jump in a year.

·         Employment crossed 12.81 crore workers, with more than 74.5 lakh new jobs added.

·         Overall GVA of the sector grew by nearly 11% to Rs. 19.93 lakh crore.

·         Internet usage for business purposes surged from 27% to 39% in a single year.

·         Women now head 27% of all unincorporated establishments, and account for nearly 29% of the workforce.

Scale and Spread

Enterprises: The total number of unincorporated non-agricultural establishments grew from 7.34 crore in ASUSE 2023-24 to 7.92 crore in ASUSE 2025, a growth of approximately 8%. This expansion was broad-based: rural establishments grew by 6.71% (to 4.24 crore) and urban establishments grew at a faster 9.45% (to 3.68 crore).

Of these, 6.86 crore are Own Account Establishments (OAEs) — units run by working owners, typically without hired labour — while 1.06 crore are Hired Worker Establishments (HWEs), each employing at least one paid worker.

Sectoral composition has remained largely stable. Other Services leads with 42.37% of all establishments, followed by Trade at 30.56% and Manufacturing at 27.07%.

Who Runs These Enterprises?

Ownership structure: Around 95% of all unincorporated establishments are proprietary — run by a single owner. This dominance of sole proprietorship holds across rural and urban areas and across all three broad sectors. Uttar Pradesh records the highest share of proprietary establishments among major states, at 99.2%.

Social profile: Other Backward Classes (OBC) own the largest share of proprietary and partnership establishments at 51%, followed by Others (30.7%), Scheduled Castes (13.3%), and Scheduled Tribes (4.7%).

Market orientation: Almost all (99.5%) informal establishments operate as market-oriented units — selling goods or services at economically meaningful prices — reinforcing the sector's integration into the mainstream economy.

Geographic concentration: Uttar Pradesh (13.8%), West Bengal (13.1%), and Maharashtra (8.29%) together account for about 35% of all unincorporated establishments. Together with Tamil Nadu, Bihar, Gujarat, Madhya Pradesh, and Rajasthan — each with a share of 5% or more — a handful of states dominate the sector's landscape.

Employment Generation

The unincorporated non-agricultural sector employed approximately 12.81 crore workers during January-December 2025, up from 12.06 crore in ASUSE 2023-24 — a growth of 6.2%, adding over 74.5 lakh jobs. Employment rose in both rural areas (from 5.61 crore to 6.00 crore, up 6.9%) and urban areas (from 6.45 crore to 6.80 crore, up 5.6%).

Other Services leads employment generation at 39.5% of the total workforce, followed by Trade (33.2%) and Manufacturing (27.3%). Within these broad categories:

·         In manufacturing, wearing apparel (31.8%), food products (13%), and textiles (12.9%) are the top three employers, together accounting for nearly 58% of manufacturing jobs.

·         In trade, other retail trade overwhelmingly dominates with 82.9% of all trade-sector employment.

·         In services, social and personal activities (24.1%), food and accommodation (17.4%), and land transport (16.2%) are the top three job-generating activities.

Emoluments: Average annual emoluments per hired worker stood at Rs. 1,46,550 in 2025, up about 4% over the previous survey. Urban hired workers earned more (Rs. 1,56,143) than their rural counterparts (Rs. 1,24,516). Among broad sectors, 'other services' offered the highest pay. Uttarakhand topped the chart among major states with average emoluments of Rs. 2,14,237 per hired worker, followed by Kerala (Rs. 1,98,204) and Telangana (Rs. 1,90,390).

Female Participation

Women's engagement in the unincorporated sector is on an upward trajectory, both as entrepreneurs and workers.

As entrepreneurs: About 27% of all unincorporated establishments are headed by female proprietors. This is particularly striking in manufacturing, where more than 60% of proprietary establishments are female-headed — a share that rose 2% from the previous survey. Telangana leads with 38.55% of its establishments headed by women (and a remarkable 80.45% in manufacturing). Gujarat and West Bengal also report high female entrepreneurship.

As workers: Female workers make up 28.71% of the total workforce in the unincorporated non-agricultural sector during ASUSE 2025, slightly up from 28.12% in the prior survey. Women constitute 34.24% of the OAE workforce and 18.72% of the HWE workforce. In manufacturing alone, women account for 48.3% of workers.

Multiplier effect: Female-led hired-worker establishments show a strong tendency to employ other women — nearly 72% of such establishments engaged at least one female hired worker. This signals a virtuous cycle where women in leadership create opportunities for other women.

Digitization and Formalization

Registration: 37.5% of unincorporated establishments are now registered under some act or authority, a marginal improvement from 37.2% in ASUSE 2023-24. Among sectors, services lead (47.8%), followed by trade (41.8%) and manufacturing (16.4%).

Bank accounts: Financial inclusion in the sector has strengthened significantly. The percentage of establishments maintaining accounts with financial institutions rose from 76.1% in ASUSE 2023-24 to 82.5% in ASUSE 2025. About 94% of HWEs maintain a bank or post office account.

Internet use: This is where the leap stands out. Internet usage for entrepreneurial purposes jumped from 27% to 39% overall in a single survey cycle — a gain of 12 percentage points. In rural areas, the rise was from 18% to 31% (13 points); in urban areas, from 37% to 49% (12 points). Among hired-worker establishments, 72.7% now use the internet for business. Delhi, Haryana, and Assam recorded the highest digital adoption rates among major states.

Productivity — GVA and Fixed Assets

Overall GVA: The total Gross Value Added (GVA) of the unincorporated non-agricultural sector grew by about 11% to Rs. 19.93 lakh crore in 2025 (from Rs. 17.97 lakh crore in ASUSE 2023-24). Rural GVA grew 11.86% and urban GVA grew 10.32%.

GVA per establishment: The average annual GVA per establishment has risen to Rs. 2,52,699 (up from Rs. 2,45,687), reflecting a 2.85% improvement in establishment-level productivity. HWEs are far more productive — averaging Rs. 10 lakh per establishment versus Rs. 1.40 lakh for OAEs. Delhi, Haryana, and Tamil Nadu lead states in GVA per establishment. Among the top GVA contributors at the national level are Uttar Pradesh (11.74%), Maharashtra (11.22%), and Tamil Nadu (8.20%).

GVA per worker: The sector-wide average is Rs. 1.6 lakh per worker. OAEs average Rs. 1.2 lakh per worker; HWEs average Rs. 2.3 lakh per worker.

Capital investment: Fixed assets per establishment rose to Rs. 3.4 lakh (from Rs. 3.2 lakh in ASUSE 2023-24), indicating better capitalization of the sector. Outstanding loan per establishment stood at Rs. 42,776 at the all-India level, with about 80% of borrowing channeled through institutional sources.

Rural vs Urban

Rural establishments at 4.24 crore represent 53.5% of the total. Rural employment — at 6.00 crore — has grown meaningfully, reflecting an expansion of non-farm livelihoods. Most rural establishments (44.7%) operate within household premises, while urban establishments are more likely to have fixed premises outside the home.

The urban sector is where scalable, hired-worker activity concentrates: 75 lakh of the 1.06 crore HWEs are located in urban areas. Urban establishments also show higher formalization and digital adoption.

…more on this tomorrow

Rein your horses

In the past three months, a quiet but consequential story has been playing out in the Indian equity markets. While the benchmark Nifty 50 has ground along with minimal enthusiasm, the broader market has put on a spectacular show. The Nifty Midcap 100 has outperformed the Nifty 50 by ~10% in this period, and the Nifty Smallcap 100 has done even better, outperforming Nifty 50 by ~15%. This material outperformance of the broader markets implies that “greed” has been a dominating sentiment in the past three months, decisively beating fear.

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This dominance of greed, against a backdrop of elevated geopolitical tensions — an ongoing conflict in West Asia and persistent uncertainty around US trade policy — is noteworthy. The question worth asking, carefully and honestly, is whether the market is reading the future correctly or simply repricing hope.

What has been driving the broader market outperformance?

The outperformance of mid and smallcap indices is not entirely irrational. There are identifiable, structural reasons behind it — even if the magnitude of the move warrants some scrutiny.

To begin with, Foreign Portfolio Investor (FPI) selling has been persistent and, critically, concentrated in large cap stocks. FPIs sold over Rs2trn worth of Indian equities in the past three months, and a disproportionate share of that selling was absorbed by Nifty 50 constituents. When the biggest sellers in the room target the biggest names, the smaller names benefit from neglect — and sometimes, from active rotation by domestic investors seeking alternatives.

The second factor is sectoral de-rating at the index heavyweight level. IT services and private sector banking together account for close to 40% of the Nifty 50’s weight. Both have faced meaningful valuation compression. IT has struggled with demand visibility in a slowing global environment, while private banking has grappled with margin compression and asset quality concerns in select pockets. When the two most influential sectors in a benchmark underperform, the benchmark itself cannot outperform, regardless of what else is happening elsewhere.

Third, and perhaps most interesting from a structural standpoint, is the massive valuation re-rating of stocks connected to what markets have come to call “sunrise themes” — Data Centers, energy transition (renewables, green hydrogen, EV infrastructure), and defense indigenization. These sectors are populated almost entirely by mid and smallcap companies. A defense electronics company that was trading at 25x earnings two years ago may now trade at 60-80x on the back of record order books and a government policy tailwind that shows no signs of reversing. The same logic applies to several renewable energy plays and select data center infrastructure names. Domestic institutions and retail investors have piled into these themes, and the resulting re-rating has been dramatic.

Finally, there is an earnings growth divergence that has provided at least partial fundamental justification for the rally. Aggregate earnings growth for Nifty Midcap 100 constituents has tracked in the 18-22% range over recent quarters, while Nifty 50 earnings growth has been closer to 10-12%. When earnings diverge, price divergence follows. The question is whether the divergence in price has now exceeded the divergence in earnings — and that is where the story gets uncomfortable.

The valuation question that cannot be deferred

Let us look at where valuations actually stand. The Nifty Midcap 100 is currently trading at approximately 35-38x trailing twelve-month earnings, a significant premium to its own historical average of around 26-28x. The Nifty Smallcap 100 presents an even starker picture, with the price-to-earnings multiple in the 40-45x range for several constituents, well above any sensible reading of long-run sustainable earnings multiples for companies of this scale and quality.

In the “sunrise theme” stocks, the valuation conversation becomes even more challenging. Several defense stocks now trade at price-to-earnings multiples north of 80-100x on the back of order book-driven earnings projections that extend three to five years into the future. Data center plays have been accorded valuations that imply an almost frictionless execution of extremely ambitious capacity expansion plans. The market is not merely pricing in optimism — it is pricing in perfection.

This is not to say that the underlying businesses are unworthy of investor attention. India’s defense order pipeline is real. The energy transition is real. The data center buildout is real. But markets have a long and well-documented history of taking genuine structural stories and extrapolating them to valuations that assume everything goes right and nothing goes wrong. The honest investor’s job is to separate the story from the price.

The sharp correction this week: A warning shot, not a blip

The sharp correction witnessed this week — the Nifty Midcap 100 fell approximately 3.5-4% in a matter of two sessions, with several momentum favorites dropping 7-10% from recent highs — deserves to be read not as a buying opportunity in isolation, but as a revelation of the fragility that had been building beneath the surface.

When markets correct sharply on relatively modest triggers — in this case, a combination of slightly disappointing earnings from one sector, a modest uptick in geopolitical risk premium, and a political gesture by the prime minister — it typically signals that positioning has become crowded and valuations have left little room for disappointment. The high-beta, high-momentum trade in mid and smallcaps had attracted significant participation from retail investors through SIP flows into sectoral and thematic funds, many of which had concentrated exposure to exactly the names that corrected the hardest.

The data on retail participation is instructive here. Monthly SIP contributions have crossed ₹25,000 crore, with a meaningful and growing share directed into midcap, smallcap, and thematic funds rather than diversified large cap or flexi-cap vehicles. This is not inherently bad — systematic investing in the broader market has a sound long-term logic. But when that flow becomes heavily concentrated in momentum themes and elevated valuations, the market structure becomes vulnerable. A correction feeds on itself as stop-losses are triggered and sentiment sours quickly.

The rally since February 2026, which took the Nifty Midcap 100 up approximately 18% from its lows, was built on a narrowing base of momentum names. Breadth — the proportion of stocks participating in the rally — had been declining even as the headline index climbed. This is a classic warning sign that a rally is running on borrowed time rather than broad fundamental support.

Is it time to rebalance?

The correction this week is a useful reminder that markets do not move in straight lines, and that the fragility of a rally built on multiple expansion rather than earnings delivery is always greater than it appears while the momentum is intact. Geopolitical uncertainty has not been resolved. Earnings growth in momentum sectors still needs to be delivered, not just projected. And the global environment — with US monetary policy, dollar strength, and West Asia risk all unresolved — provides ample triggers for further volatility.

For investors who have ridden the midcap and smallcap rally well, this is a moment for honest portfolio review rather than celebration. The question is not whether India’s broader market will outperform over the next decade — it very likely will, on the back of genuine structural growth drivers. The question is whether one’s current portfolio is positioned to capture that outperformance at an acceptable price, or whether the enthusiasm of the past three months has led to concentration risks that deserve attention.

The rebalancing question is one that every serious investor should be asking at this point, and answering honestly rather than in the hope that momentum themes will rescue a concentrated portfolio from a correction.