IT is now evident from the latest NSSO report on unincorporated enterprise that the informal sector in India suffered a big jolt in employment and value added in the past six years. The RBI has recently come out with KLEMS database latest estimates of a rise of employment from 47.5 crore in 2017-18 to 64.33 crores in 2023-24 claiming a rise of employment in the tune of 16.83 crore in the past five years. This is also backed by the fact that 6.2 crores of net subscribers joined the EPFO payroll indicating a rise in formal employment in the past five years. These figures attracted a lot of controversy as they do not conform with other trends of the economy derived from official sources.

The claim is there has been significant growth in employment in the past five or six years while official sources suggest a contraction in employment in the informal segment of the economy. The growth of employment has been claimed to be the fastest in the past five years but there was a decline in the average growth rate of GDP during the same reference period. During this period, the economy faced several shocks, internal and external, that had devastating effects on the informal sector. The impact of demonetisation, hasty implementation of GST and subsequently the pandemic and disruptions due to war and inflation that followed have wreaked havoc on the informal sector of the economy. Huge loss of employment indicated massive dispossession that occurred in the economy involving large section of the population.

INFORMAL SECTOR

The ASUSE (Annual Survey of Unincorporated Enterprises) 2021-22 reports that there were 5.97 crore establishments in India distributed in three broad categories namely manufacturing, trade and other services. Out of these total number of enterprises, 3.31 crores belong to rural areas and 2.65 crores are in urban areas. In 2022-23, the number of establishments increased to 6.5 crores. However, this survey of 2021-22 is done after six years following the last comprehensive survey in 2015-16. In 2015-16 the total number of establishments in India was 6.33 crores which came down to 5.97 crores in 2021-22. Also, employment in unincorporated enterprises fell sharply in the past six years. The annual survey of 2021-22 and 2022-23 does indicate a rise in both the number of enterprises and employment. But comparing with 2015-16 figures we see a massive decline in employment in the past six years. In fact, 36.89 lakh enterprises were closed in the past six years and 1.34 crore people lost their jobs. However there has been some recovery during the period 2021-22 to 2022-23 and apparently 53.45 lakh new enterprises came up in one year with an addition of employment of about 1.17 crores. This is something surprising that how come such a big leap happened in one year which is about to offset all the negative effects of enterprise closures and unemployment that occurred in the past six years. It is also important that the bigger fall in the number of enterprises in the past six years happened in enterprises which used to hire workers, and the fall is relatively less in enterprises who do not employ any hired worker.

The number of enterprises who do not employ any hired worker fell by 3.86 per cent during the period 2015-16 to 2021-22, but those who are relatively bigger enterprises and hire workers, their number fell by 16.27 per cent. This indicates that business enterprises who used to employ people had been more affected and became unviable more than those who are in self-employed activities. This report also suggests that on average labour productivity measured by gross value added per worker is on average eight times in an enterprise that hires workers compared to that of own account enterprises.

If we compare the sectoral composition of enterprises, the share of manufacturing activities in unincorporated enterprises have fallen while that of trade and other services have increased. The employment share in 2021-22 for manufacturing was 28.5 per cent, for trade 37.7 per cent and for other services it stood at 33.8 per cent. The decline in employment also has been highest in the manufacturing sector. During the period 2015-16 to 2021-22 manufacturing employment in the unincorporated segment declined by 22.5 per cent while in trade it fell by 4.8 per cent and in other services by 9.32 per cent. These facts suggest that in the informal sector the large part of employment is concentrated on services. Also 42 per cent of the unincorporated enterprises in India operate from their own household and 44 per cent of the enterprises do have fixed premises outside household but those include permanent, temporary or spaces without defined structures. In the unincorporated enterprises the top three activities in terms of labour productivity are ‘warehousing and storage’, ‘wholesale and retail trade of motor vehicles and motorcycles’ and ‘wholesale on a fee or contract basis’.

FRAGMENTATION OF

EMPLOYMENT

The estimations of employment as projected by the RBI as well as the sharp recovery of employment in the last one year as shown in official documents are hardly supported by other core economic trends. Firstly, the average growth rate of GDP during the period 2015-16 to 2022-23 was around 5.49 per cent while the average growth rate in the preceding five years was about 8.22 per cent. Higher employment growth with respect to a lower increase in growth rate can happen only if elasticity of employment increases, that is absorption of labour per unit change in output increases. This is unlikely to happen rather employment elasticity has declined across sectors due to rising capital intensity in production.

There has been some increase in employment in the formal sector, but it is accompanied by a drastic rise in contract workers in the formal segment. It is also important to note that the growth of consumption demand in India continues to be less than the growth of GDP which means that demand for goods and services have not recovered in the post pandemic period the way it should. As a result of this, the growth of private investment has not picked up in the past three years. Hence the growth of employment as has been claimed does not follow from the trends as stated. Also, the recovery in the unincorporated segment points to deeper issue of fragmentation of enterprises. The impact of shocks has adversely impacted enterprises who hired labour and self-employed own account enterprises could survive better during the turmoil of the past six years.

Apart from demonetisation, pandemic, NBFC crisis and implementation of GST, inflation has hit smaller enterprises and made them non-viable. The larger firms could withstand high inflation in input prices because of their big pockets and because of their higher control over the product market could easily transfer the rise in input prices to the consumers by raising prices of final products. This was not possible for the small businesses who became unviable in large numbers. In such a scenario a rise in own account enterprises might be a manifestation of survival strategy indicating disguised unemployment. In developing countries open unemployment is less because people have no other alternative but to work to make ends meet. The quality of employment becomes a better indicator of state of work than just comparing numbers of employment and hence, fragmentation of employment indicates higher vulnerability and lower returns for the working population.  t for mistakes...