Unincorporated enterprises sector bleeds businesses, jobs | Policy Circle

Recent data from the National Statistical Office paint a worrying picture of the unincorporated enterprises. Between July 2015 and September 2023, the sector lost nearly 1.8 million establishments and shed 5.4 million jobs, pointing to a significant contraction in a segment critical to the Indian economy.

The NSO’s analysis reveals a 9.3% drop in the number of unincorporated enterprises, from 19.7 million in 2015-16 to 17.82 million in 2022-23. This decline is even more pronounced in employment figures: the sector saw a nearly 15% fall in the number of workers, from 36.04 million to 30.6 million. These numbers illustrate not just a loss of businesses but a substantial human impact, with millions of livelihoods affected.

Understanding unincorporated enterprises

Unincorporated businesses typically include small businesses, sole proprietorships, partnerships, and other informal sector entities. These businesses are integral to the Indian economy, contributing significantly to employment and GDP while supporting the formal sector as suppliers and service providers. Their role in the domestic value chain cannot be overstated. These enterprises often operate with minimal regulatory oversight, which, while providing flexibility, also leaves them vulnerable to economic shocks and policy changes.

The unincorporated sector has faced multiple economic shocks over the past decade, beginning with the demonetisation in 2016, followed by the implementation of the Goods and Services Tax (GST) in 2017, and the unprecedented disruptions caused by the COVID-19 pandemic.

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Demonetisation, intended to curb black money and promote digital transactions, unexpectedly crippled small businesses that largely operated on cash. The abrupt removal of high-denomination currency notes led to a severe liquidity crunch, leaving many small enterprises struggling to pay their workers and suppliers. The implementation of GST, while aiming to simplify the tax regime, imposed compliance costs that were burdensome for small businesses unaccustomed to such rigorous documentation and tax procedures. The sudden lockdowns during the COVID-19 pandemic further exacerbated these challenges, halting operations and disrupting supply chains.

The second wave of the COVID-19 pandemic, particularly between April and June 2021, dealt a severe blow to the sector. Data from the Annual Survey of Unincorporated Sector Enterprises (ASUSE) shows that this period reported the lowest number of establishments and workers, with gradual improvement observed only from July 2021 onwards. The subsequent recovery has been slow and uneven, with the manufacturing sector showing only a modest 2.22% annual growth in the number of establishments from 2021-22 to 2022-23.

The pandemic’s impact was not merely a temporary disruption but a catalyst that exposed the underlying fragilities of the unincorporated sector. Many small businesses, already weakened by previous economic shocks, could not withstand the prolonged periods of inactivity and financial stress. The reduction in demand, supply chain disruptions, and health-related absences further compounded their challenges.

The human cost

MSMEs in the unorganised sector are among the largest non-farm employment providers. The successive economic shocks have led to a sharp slowdown in this sector, contributing to a significant decline in non-farm employment. The increase in own-account enterprises post-pandemic indicates a survival strategy rather than a sign of robust economic health.

The loss of 5.4 million jobs is not just a statistic but a narrative of personal and community hardship. These jobs often represent entire families’ livelihoods, particularly in rural and semi-urban areas where alternative employment opportunities are scarce. The reduction in household incomes has a ripple effect, impacting education, health, and overall quality of life for millions.

A glimmer of resilience

Despite these challenges, the unincorporated enterprises have shown some resilience. The total number of establishments across all non-agricultural sectors increased by 5.88% annually from 2021-22 to 2022-23. Employment figures also rose by 7.84% during the same period, indicating some recovery, albeit insufficient to offset the previous losses. This resilience is partly attributed to the sector’s inherent flexibility and the entrepreneurial spirit that drives many to start their own ventures despite adverse conditions.

The Gross Value Added (GVA) per worker, a measure of labour productivity, rose to Rs 141,769 in 2022-23 from Rs 138,207 in 2021-22. Similarly, the average annual earnings for informal workers increased slightly, reflecting improved wage conditions. However, these gains are modest compared to the vast scale of job losses and business closures.

Improved productivity metrics suggest that the businesses that have survived are perhaps more efficient and better adapted to the new economic realities. Yet, the marginal increase in wages indicates that the overall economic environment remains challenging, with many workers still earning barely enough to meet their basic needs.

Policy implications

The closure of unincorporated enterprises points to the need for targeted interventions. It is crucial to address the vulnerabilities of this sector, which has been the backbone of India’s informal economy. Measures should include providing direct financial aid and easier access to credit for small businesses. Financial support is essential to help businesses rebuild and invest in growth, while credit facilities can provide the necessary liquidity to manage operational costs and expand activities.

Regulatory relief is another critical area. Simplifying regulatory compliances can reduce the burden on small enterprises, enabling them to focus more on their core activities rather than navigating complex administrative requirements. This could involve streamlining tax procedures, offering tax incentives, and reducing the paperwork required for compliance.

Skill development programs are vital for enhancing the employability of the workforce. Investing in training and development can equip workers with new skills, making them more adaptable to changing industry needs and improving their prospects in the job market. This can also help businesses become more innovative and competitive.

Creating better market access opportunities for unincorporated enterprises is also crucial. Integrating these businesses more effectively into the formal economy can provide them with broader customer bases and more stable revenue streams. This can be facilitated through digital platforms, government procurement policies, and support for marketing and export activities.

The closure of 1.8 million unincorporated enterprises and the loss of 5.4 million jobs between 2015 and 2023 highlight a critical issue that needs urgent attention. While the sector has shown some resilience post-pandemic, the scale of the crisis demands comprehensive policy measures to support these enterprises and the millions who depend on them. It is essential to recognise and bolster the unincorporated sector’s role in the Indian economy to ensure sustainable and inclusive growth.

The plight of these enterprises serves as a stark reminder of the vulnerabilities inherent in the informal sector. As policymakers and stakeholders consider the path forward, it is crucial to create an environment where these businesses can thrive, contributing to a more robust and resilient economy that benefits all segments of society.