How the government is masking the true scale of job losses in India’s informal sector

On July 9, credit markets rating agency India Ratings released a report saying that 63 lakh informal sector enterprises shut down in the country resulting in a loss of 1.6 crore jobs between the financial years 2015-’16 and 2022-’23. The report blamed the downturn on the shocks to India’s economy due to demonetisation, the introduction of the Goods and Services Tax and the Covid-19 pandemic.

The report was based on findings from the annual survey of Unincorporated Sector Enterprises done by the National Sample Survey Office. A fact sheet of the survey was released by the Union Ministry of Statistics and Programme Implementation in June, and the detailed findings earlier this month. Curiously, the survey report highlights a rise in the number of informal sector enterprises and workers.

Sunil Kumar Sinha, the principal economist of India Ratings told Scroll this was because the survey report compared the findings for 2021-’22 to data from 2022-’23. Sinha said this comparison does not paint an accurate picture as it compares a period when economic distress due to Covid-19 pandemic was at its worst to a time when the economy started to recover from its impact.

The India Ratings report, on the other hand, compares the 2022-’23 findings to that of 2015-’16 when the last round of the government survey had been conducted. It calculates the decline in jobs in the seven-year period and then estimates the actual scale of job losses by using previous trends.

“The note ban, GST [Goods and Services Tax] and Covid-19 massively hurt the informal sector,” Sinha said. “It only makes sense to compare a period prior to all these macroeconomic shocks.”

The flawed way in which the government has presented the survey findings masks the scale of job losses in the informal sector, which Sinha described as a “safety net” for India’s workforce. Economists told Scroll that the poor health of the informal sector is likely to have pushed millions of Indians towards self-employment, jobs in the gig sector, or forced them to go back to agriculture. This results in a deterioration of job quality in terms of wages, they said.

Why do findings of India Ratings and the government differ?

A fact sheet on the latest government survey shows that the number of enterprises in the informal sector rose from 5.97 crore in 2021-’22 to 6.50 crore in 2022-’23 at a compounded annual growth rate of 5.88%. Meanwhile, the number of workers in these enterprises increased from 9.78 crore to 10.96 crore during the period at a rate of 7.84%.

But, as Sinha pointed out, the numbers are much more humbling when the 2022-’23 numbers are compared to those of 2015-’16. In this seven-year period, the number of enterprises went up by 2.68% from 6.33 crore to 6.50 crore, and the number of workers dropped by 1.5% from 11.13 crore to 10.96 crore.

But the actual picture is far worse, if previous trends were taken into account.

There was an addition of 57 lakh informal sector enterprises between 2010-’11 and 2015-’16, Sinha pointed out. This translates to an addition of nearly 11 lakh enterprises annually, he said. If the same trend had continued, the total number of enterprises would have reached 7.14 crore by 2022-’23, Sinha explained. “Similarly, the number of workers employed in these enterprises would have been more than 12.5 crore.”

The India Ratings report uses these estimates to say that there has been a loss of 63 lakh informal sector establishments and 1.6 crore jobs during the 2015-’16 to 2022-’23 period.

What is the result of these job losses?

Another worrying trend that has emerged in recent years relates to the kind of employment that workers who lost their informal sector jobs transitioned to, economists told Scroll. The most recent Periodic Labour Force Survey report released by the government last year throws light on this trend.

The Periodic Labour Force Survey showed that between 2017-’18 and 2022-’23, there has been a decline in the share of Indians employed in salaried jobs, and a corresponding rise in self-employment. Economists have pointed out that the rise of the share of the workforce engaged in self-employment, contrary to criteria set by the International Labour Organisation, includes “unpaid helpers in household enterprises”.

“The loss of jobs has forced workers to fall back to self-employment in the form of agriculture and household enterprises,” said Rosa Abraham, assistant professor at Bengaluru’s Azim Premji University, and one of the co-authors of the State of Working India 2023 report. “In both these cases, many people might not be getting paid because it could be the case of a family cultivating a field or setting up a small shop for its own subsistence.”

Abraham said this also explains why the rise in self-employment was seen to be sharper among women in the Periodic Labour Force Survey. She elaborated: “If a man owns a stall or shop, his wife might set up another stall next to it, or simply attend to the stall when the husband is not available to ensure that the outlet remains open for longer hours. All this gets counted as self-employment.”

The rise in the number of self-employed partly explains why the number of workers employed in informal sector enterprises declined between 2015-’16 and 2022-’23, even as the number of enterprises rose, Abraham said.

The other reason why jobs in the informal sector decreased was that the share of establishments which hire workers came down from 15.8% in 2015-’16 to 15% in 2022-’23. This shows that many of the new establishments that have come up in the last seven years are not generating jobs, Abraham said.

The transition towards self-employment is concerning in terms of earnings as well. Historical data from Periodical Labour Force Surveys show that the wages in self-employment are much lower than in salaried jobs. In fact, even within the self-employment sector, wages declined between 2017-’18 and 2021-’22, before they went up in 2022-’23.

Sinha of India Ratings pointed at another worrying trend in the latest survey which shows a decline in the share of informal enterprises engaged in manufacturing. The India Ratings report noted that the number of workers in manufacturing was 3.06 crore in 2022-’23, which is lower than 3.6 crore in 2015-’16. Meanwhile, the number of workers employed in the trade and other services sector in 2022-’23 was higher.

“This could be due to the emergence of e-commerce which has led to significant expansion of retail and wholesale trade and gig workers in the post 2015-’16 period,” Sinha observed.

Abraham also said that in recent years, gig work has become an easy option to fall back on for those who have lost jobs. “Especially for those living in cities, it is like an equivalent of going back to agriculture in rural areas, because it is easy to land a job as a delivery person, there is not much skill or training needed for such jobs,” she said.

The shrinking of employment in the manufacturing sector was a matter of great concern, economists told Scroll. This is because the manufacturing sector has the potential to create jobs in other sectors too, said Surbhi Kesar, senior lecturer at the department of economics in London’s School of Oriental and African Studies.

“Manufacturing has more forward and backward linkages,” Kesar explained. “For example, a manufacturing establishment would need certain inputs which are possibly manufactured in another establishment. And when a finished product is ready, it aids the service sector because the product needs to be delivered.”

Thus, if the manufacturing sector shrinks, it could have a significant domino effect, Kesar said.

She also pointed to another reason for the decline in workers employed in the informal manufacturing sector: the nature of subcontracting in India under which large manufacturing firms sub-contract work to household enterprises.

“For example, a firm that manufactures shawls could give a subcontract to a household enterprise to do a certain pattern of embroidery,” Kesar said.

In a study of such subcontracts, Kesar found the household enterprises exercise little control over the production process and therefore, are unable to expand their business and hire workers. Sub-contracting in the Indian manufacturing sector is largely made up of household enterprises where women work, Kesar told Scroll.

“They are given raw materials and the design by a bigger firm and they just have to give it back as per the specification,” she said. “So there is no transfer of technology or entrepreneurial skills happening.”

As a result of this, the smaller firms do not get the opportunity to upskill and find a market beyond just their contracts with larger firms. This restricts productivity of smaller firms, their ability to create more jobs and the chance to transition into a formal enterprise, noted Kesar.

“Moreover, what we find in the Indian informal manufacturing sector, if you are sub-contracted to a larger enterprise, you have much lower income than it should be,” Kesar said, adding that this could be a reason that people are moving away from such manufacturing sector jobs.