The shrinking unorganized sector has a larger share in gross value added

Chennai: While the share of the unorganized sector in gross production has declined over the last five years, its share in gross value added has increased, it has a larger share in the total operating surplus and it receives less production subsidies.

The share of the unorganized sector, which includes the household sector and unincorporated private enterprises, in gross output declined to 33 per cent in FY23 from 34.9 per cent in FY18 due to events such as introduction of demonetisation, introduction of goods tax and services and the spread of Covid-19.

The unorganized sector, which generates 40% of the economy’s capital expenditure, acts as a safety net for people who join the labor force every year but do not find employment in the organized sector. Moreover, the organized sector often uses the subcontracting model to engage labor and source products from the unorganized sector to remain competitive, says India Ratings.

In contrast to the declining share in gross output, the unorganized sector’s share in gross value added has shown an upward trend since FY16. Both the organized and unorganized sectors have been able to reduce their input-to-output ratio over the years. However, better control of input costs has led to an increase in the share of the unorganized sector in gross value added. This is because the unorganized sector does not fall under the purview of many labor/employee-related statutory provisions that are mandatory for the organized sector.

Moreover, the share of the unorganized sector in the total operating surplus of the economy is 58.5%. was higher than 41.5 percent. organized sector in FY 2023. In fact, the operating surplus to output ratio of the unorganized sector was 2.9 times of the organized sector in FY 2023. The operating surplus of the unorganized sector includes the wages of self-employed/family workers.

The data also shows that while production taxes less production subsidies for the organized sector were negative, those for the unorganized sector were positive in every year during FY12-23. This means that on a net basis, the organized sector receives production subsidies and the unorganized sector pays production taxes to the government. This anomaly is due to the fact that the goods and services provided by sectors such as electricity, gas and water supply, railways, road transport, water transport and communication services are classified as public goods and therefore receive significant government support to make making them affordable for the masses.