India's self-employed

The quality of jobs needs to improve

The widespread adoption of digitisation, implementation of goods and services tax, advancements in technology in general, and a better performance of the corporate sector in recent times suggest that the Indian economy is getting formalised. However, this formalisation in terms of production is not resulting in an increase in formal employment. The structure of the labour market in India is skewed towards self-employment, which keeps earnings depressed. Self-employment often becomes a fallback option for workers who are unable to find work but cannot afford to exit the workforce. According to the recently released Annual Periodic Labour Force Survey (PLFS), India has been witnessing a consistent increase in self-employment, with well over half the country’s workforce being self-employed. In 2022-23, for instance, 57.3 per cent of workers in so-called usual status were self-employed, which was higher than in the previous years.

The upward trajectory of self-employment in India can be attributed to several factors, including uneven recovery from pandemic-induced disruption. Further, the adversities of the labour market are strongly skewed against women. Azim Premji University’s State of Working India Report 2023 explains that the recent rise in rates of female labour force participation is due to a distress-led increase in self-employment. This employment trend obviously does not signify a surge in genuine entrepreneurship but reflects the scarcity of satisfactory jobs. According to the PLFS report, the proportions of self-employed workers are significantly higher among women, and in rural areas. Returns on self-employment are also lower than earnings from regular-wage work, and have declined in recent years. In terms of income in self-employment, men, on average, tend to earn much more than women.

There is also evidence of large inter-state variations in the share of self-employment among workers. Uttar Pradesh, Himachal Pradesh, Rajasthan, Chhattisgarh, and a few northeastern states have the highest share of self-employed workers in the country. In contrast, the shares of the self-employed are relatively low in some of India’s more prosperous states, such as Tamil Nadu, Kerala, and Andhra Pradesh. Most self-employed workers operate on a very small scale without hiring workers or as unpaid helpers in their family businesses. Across states, the highest to lowest earnings ratio for self-employment is much higher than that for regular-wage work. This is expected since local infrastructure and institutions exhibit large spatial variation, and matter far more for earnings from self-employment than for salaried work. Agriculture continues to employ an overwhelming share of the self-employed, followed by trade, in both rural and urban areas.

While the improvement in the headline labour force participation rate and decline in the unemployment rate do give a better macro picture, the level of the self-employed suggests that the economy is not creating quality jobs at scale. Given the formalisation of the economy, it is worth debating why it is not leading to more formal jobs. It is possible that firms in the formal sector rely more on informal contracts with workers. It is also likely that some of the self-employed may be offering service to firms in an informal way and count themselves as self-employed. Most gig workers, for example, would fall into this category. Thus, India’s basic problem of job creation remains. At a broader level, the problem regarding the quality of employment can partly be explained by India’s performance in low-skill manufacturing over the years and its reluctance to compete in global markets.