Have India's Unincorporated Enterprises Survived Economic Crises?

The growth of manufacturing is critical to realising India’s goals of becoming manufacturing nation, as opposed to merely relying on services to generate the jobs and incomes for a growing work force.

While manufacturing growth was rapid in the period of the first three five-year plans till 1966, the sector, along with the rest of the economy, became a victim of exogenous shocks (wars, oil shocks and drought). The manufacturing sector has gone through a difficult period over the last 10 years.

India’s economy is highly segmented, a fact not very clear if you read the mainstream pink press or the national electronic media. The vast majority of India’s manufacturing enterprises (and hence its workers) toil in the unorganised (or informal) sector, while most of the press is hogged by the organised sector companies. Yet, the unincorporated sector is crucial for India as it comprises a significant portion of the economy, contributing around 45% to the GDP and employing nearly 93% of the workforce (according to the Ministry of Labour and Employment). This sector serves as a backbone for rural and urban livelihoods, providing essential goods and services. Despite its substantial role in economic and social stability, all the support it has got is the creation of a Udyam registration portal, which does nothing to actually support the unincorporated sector in India.

Slow structural change, and then its recent reversal

One of the goals of planned development in India was rapid import-substituting industrialisation, but that process slowed down after 1965. Since the early 1980s economic reforms, a structural change that any developing country must undergo if it is to reduce poverty and dependence upon low-productivity traditional agriculture had been relatively slow.

The share of agriculture in GDP was consistently falling; from 54% in 1950-1 to 33% by 1990-91, or just over 20 percentage points in four decades. It then fell to 25% by 2000-01, and 17% in 2010-11, from which point it has fallen little. Total employment was much more dependent upon agriculture at Independence – it was as much as 74% of total employment in 1972-73 (when agriculture’s share in GDP was just over 44%). In two decades (1993-94) it had barely fallen to 60% of employment. It had then fallen to 42% in 2018-19, but since the shocks of poor economic policy management since COVID, we saw 80 million workers added to agriculture by 2023-24 – taking the share of agriculture to 46.1% of employment. This was one aspect of the reversal of structural change.

Meanwhile, manufacturing growth was reasonable up until the mid-1960s, during the first three plan periods of import-substituting industrialisation. So it stood at 16% of gross value added or GVA in 1965. However, it picked up well after the decade-long shocks from the mid-1960s to the mid-1970s (oil price quadrupling), to rise to 18% by 1979. It remained between 16 and 18% of GVA till 2014. However, thereafter, it fell gradually to a trough of 13% of GVA by 2021; and only recently has it recovered somewhat by 2023-24 to 15.9%. This was the second aspect of the reversal of structural change that the policy-induced shocks of demonetisation, unplanned Goods & Services Tax (GST) introduction, and then poor COVID health and economic policy management.

As though  the collapse of manufacturing output, despite exhortations to ‘Make in India’, is mirrored in the absolute fall in employment in manufacturing. The share of total employment in manufacturing had moved between 11.4% in 1983 and 11.7% in 2004-5. It was only after 2004-2005 that manufacturing employment, organised, as well as unorganised, grew to 12.8% in 2011-12. In millions, it had grown from 33.8 million in 1983 to reach 60 million by 2011-12. It was particularly driven by labour intensive manufacturing sectors like food processing, garments, textiles, wood furniture and leather footwear, but also more engineering and capital goods production.

Also read: Consumption Data Shows the Indian Middle-Class Is Shrinking

From 2012 onwards, manufacturing employment fell in absolute terms for the first time in India’s post-Independence history to 55.4 million in 2017-18. This was the year of the highest ever unemployment rate in a 45-year history of labour force surveys. This situation was also reflected in the tripling of youth unemployment to 18% by 2017-18.

Only since 2021 had manufacturing employment climbed back up to its level a decade earlier of 60 million and only recently exceeded it. However, as a share of total employment, its level has still stagnated at 11.4% in 2023-24, below the 2012 level. In other words, despite all the hype around Performance Linked Incentive Scheme for 14 manufacturing sectors, and the special hype around Apple phones and Samsung electronics products being assembled in India – after these companies are reducing their exposure to China – the government is selling a new narrative of India Rising, especially with this new manufacturing assembly occurring in India.

Manufacturing Sector

We all know that the organised sector creates a very small proportion of all non-farm jobs in India. So what insights does the latest  Annual Survey of Unincorporated Sector Enterprises (ASUSE) for 2021-22 and 2022-23  (data was released end June 2024) reveal? We compared ASUSE 2021-22 and ASUSE 2022-23 with previous NSS surveys on the unincorporated sector from 2010-11 (67th NSS round) and 2015-16 (73rd NSS round) to show significant trends and changes in the landscape of unincorporated enterprises.

Table 1: Total number of enterprises and number of workers in major sectors, 2010-11 to 2022-23 (in million)

Source: NSS 67th, 73rd round, ASUSE 2021-22 and ASUSE 2022-23

We assess how manufacturing has performed, first between a normal period, i.e. 2010- to 2015, with the period since 2016 marked by exogenous policy-induced shocks to the economy – demonetisation (November 2016) and the introduction of a poorly designed and badly implemented GST (July 2017) – which impacted very adversely the cash dependent unorganised sector transactions. These policy shocks were followed by a slowdown in overall GDP growth rate consistently for the next three years to early 2020, when COVID hit the world. India’s national, extremely strict lockdown, and limited fiscal stimulus post-COVID, sent the economy into contraction mode. India’s economy contracted by 5.8% in FY21, when the global economy only contracted by 3.1%. 

The effects were visible for the manufacturing sector, especially the unorganised segments. Thus, in the normal period of economic growth, the number of manufacturing establishments increased from 16.9 million in 2010-11 to 19.3 million in 2015-16. But over the next six years, they not only did not increase, they decreased to 17.3 million in 2021-22 before recovering slightly to 17.8 million in 2022-23. But this figure is still less than the pre covid period, which clearly indicates the shrinking manufacturing sector. 

Employment in the unorganised manufacturing sector, which had been rising during the normal growth period between 2010 and 2015, fell sharply by 7.6 million workers  to 27.9 million in 2021-22. The employment sector recovered to 30.6 million workers in 2022-23 with comparison with 2021-22. However, it is still less than the 35.5 million workers in 2015-16.

Trade and other services sector

The number of firms in the trade sector – which includes both retail and wholesale operations – has stayed largely constant. From 20.8 million in 2010-11 to 23.0 million in 2015-16, the number increased, then fell slightly to 22.5 million in 2021–22, and finally stabilised at 22.6 million in 2022-23, which is still little less than 23 million in 2015-16. This suggests that, despite fluctuating economic situations, the sector plays a fundamental role in the economy by delivering necessary services. 

The trade industry had a rising trajectory in terms of employment. From 34.1 million in 2010-11 to 38.7 million in 2015-16, and then to 36.9 million in 2021-22 and 39 million in 2022-23, the number of workers grew. 

The other services sector, which includes transportation, education, health services, and personal services, has shown significant expansion. The number of establishments increased from 20.0 million in 2010-11 to 21.1 million in 2015-16, followed by a slight dip to 19.9 million in 2021-22, and then a sharp rise to 24.7 million in 2022-23. This recent increase indicates a robust demand for diverse services, driven by urbanisation and rising consumer needs.

A similar tendency may be seen in employment trends within the other services industry. After declining from 39.5 million in 2010-11 to 33.1 million in 2021-22, the number of workers had a notable uptick to 40 million in 2022-23. 

However, the most important message from this data clearly remains that the non-farm unorganised sector, the creator of the largest number of jobs in India, not only stagnated in respect of productive activities, but it actually shrank in size. Perhaps that is also what accounts for the services livelihoods becoming more significant as enabling the most vulnerable to survive in a time of structural crisis, as well as a reversal of positive structural change.

Santosh Mehrotra taught economics at Jawaharlal Nehru University; Tuhinsubhra Giri teaches economics at Christ University, Bangalore.