Opinion How to make self-employment count

Of the working population, over half are categorised as self-employed — almost 60 per cent in rural areas and about 40 per cent in urban areas, with an uptick in this statistic between 2017-18 and 2023-24, particularly in rural areas and for women. There is a stark compositional difference in the self-employment of men and women. For males, the category of own-account worker dominates, while most self-employed women are “helpers in household enterprises”. Although the gender gap in the proportion of own-account workers has declined between 2017-18 and 2023-24, the proportion of self-employed females in the category of “helpers” has increased between 2017-18 and 2023-24.

This increase indicates a worrying rise in the informality of work. The criteria used in most economies to define formal jobs — coverage by the social security system; entitlement to paid annual or sick leave, and written employment contract — are missing for the self-employed. Two other features of self-employment are notable — low earnings and significant underemployment. Not only are the earnings of the self-employed barely above those engaged in casual labour, the gender gap in self-employed earnings has increased between 2017-18 and 2023-24, with the gap expanding more in rural areas.

This gap is likely worse than reported, given that women are more often engaged in household enterprises and almost all helpers (irrespective of gender) report zero earnings. Second, for both rural and urban self-employed women, the hours of work is very low, at less than 40 hours per week. Therefore, the proportion of workers who are available for additional work tends to be highest amongst the self-employed in rural areas.

The majority of self-employment work is also of poor quality and probably a fall-back option when better work opportunities are unavailable, particularly in rural areas and for women. What are the constraints to improving the quality of self-employed work, either in terms of the nature of work itself or to transition into salaried work?

Low education and skills, poor access to formal credit and legal support stand out as the main limitations. While these impinge on all self-employed workers, they are often particularly binding for self-employed women.

Education and vocational training: The proportion of self-employed with grade XII or above education was only 17 per cent in 2017-18 and has increased only marginally to 20.6 per cent in 2023-24. Education levels are particularly low for self-employed women – 9 per cent of these women had completed high school or beyond in 2017-18, which has inched to just 11.4 per cent in 2023-24. The proportion of all self-employed with any formal or vocational training is abysmal at 3 per cent.

Vocational training can be transforming in enhancing the quality of self-employment and entrepreneurship, broadening choices and expanding work opportunities. There needs to be a conscious attempt to link skill training to entrepreneurship. A recent NITI Aayog report on overhauling ITIs states that “hardly any ITI arranges for tie-ups with financing institutions to make credit accessible to ITI passouts for starting an enterprise. Though the PM Mudra Yojana is open for a range of self-employed people such as small manufacturers or artisans, ITIs so far have not been able to channel any start-up funds for their trainees.”

Access to formal credit: Lack of access to formal credit markets limits the size and scope of self-employment, entrepreneurship and the ability to create establishments that generate employment. For instance, 41 per cent of all unincorporated, non-agricultural establishments that employ about 10 crore workers in 2023, operate on a small scale and within household premises, as per the Annual Survey of Unincorporated Sector Enterprises (ASUSE). 5.53 crore of these establishments are Own Account Establishments (OAEs) — they have not employed even one hired worker on a fairly regular basis. This implies that less than 1/5th are Hired Worker Establishments (HWE) that create employment by hiring other workers. Not surprisingly, the annual Gross Value Added per worker, or worker productivity, in OAEs is about 50 per cent of that in HWEs (Rs 1 lakh vs 2 lakhs).

Lack of access to formal credit not only raises the cost of borrowing and reduces the size of available loans, it also restricts the capacity and size of the entrepreneur and her enterprise.

Administrative and legal support: Although the ease of doing business has been steadily improving in India, starting a formal enterprise remains challenging even when the entrepreneur has the technical know-how and access to credit. The administrative and legal landscape is often complex. The WDR 2024 notes that because their time and talent are limited, (firm) owners are compelled to manage firms through their families which inhibits their ability to grow. By some estimates, the lack of professional managerial support could account for 11 per cent of the difference in per capita incomes between India and the US.

Further, access to legal recourse in the event of business disputes is fraught with challenges. Inadequate legal access entails friction in contract enforcement, which lowers the aggregate productivity of establishments. Studies show that the efficiency of courts in India matters for future growth in the formal manufacturing sector. According to the ASUSE, a majority of the unincorporated enterprises that are proprietary or partnerships are run by minorities. Research shows that court quality has a disproportionately larger (negative) impact on the investment decisions of SC-ST entrepreneurs. This further limits the ability of these informal establishments to expand and create employment.

With the creation of jobs continuing to be a challenge, vocational training together with access to credit and legal support can enhance the quality of self-employment and entrepreneurial activity in the country.

The writer is professor of Economics at the Indian Statistical Institute (Delhi) and head, Digital Platforms and Women’s Economic Empowerment Programme. Views are personal