The unregistered business sector is depriving companies and jobs

The latest data from the National Bureau of Statistics paints a worrying picture of unregistered businesses: The sector lost almost 1.8 million establishments and 5.4 million jobs between July 2015 and September 2023, indicating a significant recession in a segment crucial to the Indian economy.

NSO’s analysis shows that the number of unincorporated enterprises fell by 9.3%, from 19.7 million in 2015-16 to 17.82 million in 2022-23. This decline is even more visible in employment data: the sector saw an almost 15% decline in the number of employees, from 36.04 million to 30.6 million. These numbers illustrate not only the loss of businesses, but also the significant human impact, affecting millions of livelihoods.

Understanding Unregistered Businesses

Unregistered enterprises typically include small businesses, sole proprietorships, partnerships, and other informal sector entities. These enterprises are an integral part of the Indian economy, contributing significantly to employment and GDP while supporting the formal sector as suppliers and service providers. Their role in the country’s value chain cannot be overemphasized. These enterprises often operate with minimal regulatory oversight, which, while providing flexibility, makes them vulnerable to economic shocks and policy changes.

Over the past decade, the unincorporated sector has faced multiple economic shocks, starting with demonetization in 2016, followed by the introduction of the Goods and Services Tax (GST) in 2017, and the unprecedented disruption caused by the Covid-19 pandemic.

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Demonetization, intended to curb black money and promote digital transactions, unexpectedly crippled small businesses that relied heavily on cash. The sudden withdrawal of high-denomination notes led to a severe liquidity crunch, leaving many small businesses struggling to pay their employees and suppliers. The implementation of the GST, intended to simplify the tax system, imposed compliance costs that were burdensome for small businesses unaccustomed to such rigorous tax documentation and procedures. Sudden lockdowns during the COVID-19 pandemic have 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 the period saw the lowest number of establishments and workers, with a gradual improvement observed only from July 2021 onwards. The subsequent recovery has been slow and uneven, with the manufacturing sector showing only a modest annual growth of 2.22% in the number of establishments from 2021-22 to 2022-23.

The impact of the pandemic was not just a temporary disruption, but a catalyst that exposed the underlying weaknesses of the informal sector. Many small businesses, already weakened by previous economic shocks, were unable to withstand prolonged periods of inactivity and financial stress. Falling demand, supply chain disruptions and health-related absences have compounded their challenges.

The human cost

Unorganised SMEs are among the largest providers of non-farm employment. Successive economic shocks have led to a sharp slowdown in the sector, contributing to a significant decline in non-farm employment. The rise in self-employment post-pandemic suggests a survival strategy rather than a sign of economic health.

The loss of 5.4 million jobs is not just a statistic, but a story of personal and societal hardship. These jobs often support entire families, especially in rural and semi-urban areas where alternative employment opportunities are limited. The reduction in household income has a knock-on effect, affecting the education, health and overall quality of life of millions of people.

A ray of immunity

Despite these challenges, unregistered businesses have shown some resilience. The total number of establishments across all non-farm sectors increased by 5.88% per annum from 2021-22 to 2022-23. During the same period, the number of employees also increased by 7.84%, indicating some recovery, although not enough to compensate for previous losses. This resilience is partly attributed to the sector’s inherent flexibility and entrepreneurial spirit, which drives many to launch their own ventures despite adverse conditions.

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, average annual earnings of informal workers rose slightly, reflecting improved wage conditions. However, these gains are modest compared with the massive scale of job losses and business closures.

Better productivity rates suggest that surviving businesses are perhaps more efficient and better adapted to new economic realities. However, marginal wage growth indicates that the overall economic environment remains difficult, with many workers still earning barely enough to meet their basic needs.

Political implications

The closure of unincorporated businesses highlights the need for targeted interventions. Addressing the weaknesses in this sector, which forms the backbone of India’s informal economy, is crucial. Measures should include providing direct financial assistance 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 liquidity needed to manage operating costs and expand operations.

Another critical area is regulatory relief. Simplifying regulatory compliance can reduce the burden on small businesses, enabling them to focus more on their core business rather than dealing with complex administrative requirements. This could include streamlining tax procedures, offering tax incentives and reducing the paperwork required to ensure compliance.

Skills development programs are essential to increase the employability of the workforce. Investing in training and development can equip employees with new skills, making them more susceptible to changes in industry needs and improving their prospects on the labor market. It can also help companies 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 a broader customer base and more stable sources of revenue. This can be facilitated through digital platforms, public procurement policies and support for marketing and export activities.

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

The plight of these businesses is 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 in which these businesses can thrive, contributing to a more robust and resilient economy that benefits all segments of society.