India’s prosperity depends on reducing its 50% self-employment

India has 63 million enterprises but doesn’t need that many — the US economy is eight times our size but only has 22 million enterprises.

More importantly, 12 million of our enterprises don’t have an address, 12 million work from home, only 7 million were registered for indirect taxes pre-GST, and only 1.2 million pay into the mandatory employer social security program.

This massive informality is not only dangerous for its sense of humour about the rule of law but is painful because of the huge drag on productivity that murders the wage premium and formal wage employment. And we must be careful about positioning the gig economy in the world, but this is also the only reconciliation of our 4.9% unemployment with 40% of our labour force being working poor (they make enough money to live but not enough money to pull out of poverty). India does not have a jobs problem but a wage problem, and the only way to make self-employment viable is to increase the productivity of our enterprises.

Improving the productivity of our enterprises needs policy to push five things: formalisation, urbanisation, industrialisation, financialisation, and human capital.

Formalisation because formal enterprises have access to credit, human capital, technology, etc that give them the productivity to pay the wage premium (the 50% increase in the number of registered enterprises post-GST is an important early outcome).

Urbanisation because there is a massive divergence between real and nominal wages in our big cities that is blunting migration (we only have 52 cities with more than a million people compared with China’s 375).

Industrialisation because the only way to help farmers is to have less of them, and that needs massive non-farm job creation (50% of our labour force in agriculture only produces 14% of our GDP). Financialisation because financial savings and digital payments create access, credit, and track records (the 0.1 million transactions per month on UPI have gone to 126 million this month and will touch a billion in one year). Human capital because enterprises can’t manufacture their own employees, and our school, skill, and college system is not producing employable output. Enterprises cannot substitute for the state, and the biggest gift to entrepreneurs is a state that does less so it can do more in the areas that make India a fertile habitat for job creation.

Formal, private job creation — as evidenced by Provident Fund and ESI payers — has grown by more than 20 million over the last few years.

These may not be jobs, but there are new formal jobs. And recent reforms — demonetisation, GST, RERA, the Bankruptcy Act, shell company evisceration, ease of doing business, Aadhaar, UPI, etc.—are starting to reinforce each to create an entrepreneurial ecosystem that creates babies (small formal companies that grow) rather than dwarfs (small informal companies that stay small). Economists have often used the words informal, unorganised, and small interchangeably.

Informal is illegal, but there is nothing wrong with small. India will create many honest, small and formal enterprises over the next decade. Some of these enterprises will be self-employment. Some of them will stay small. But many will grow to offer the productive wage employment that India’s youth need.

Featured in Economic Times