The recently announced new labour codes are likely to transform the employment landscape of India. The discourse on employment, however, primarily centres on the need to “create more jobs”, yet a closer look at the workforce reveals a more fundamental challenge — most working Indians are not in jobs at all, they are self-employed in millions of unincorporated household enterprises that operate with low levels of capital, productivity, and technology adoption. These enterprises form the backbone of India’s labour market — absorbing more than 12 crore workers in 7.3 crore enterprises across the country in 2023-24. Yet their potential for growth and job creation remains severely constrained. Strengthening them is not just desirable, but essential for creating gainful employment for India’s working-age population.
The Annual Survey of Unincorporated Enterprises (ASUSE) provides a granular breakdown of the dynamics of these non-agricultural businesses. Own Account Enterprises (OAEs) — those that do not hire any workers — make up an overwhelming 87 per cent of all non-agricultural enterprises. Not surprisingly, a small minority, the Hired Worker Enterprises (HWEs), operate at a scale where they employ workers, generate nearly 7.5 times the Gross Value Added (GVA) produced by OAEs. These numbers underline an uncomfortable truth: India’s self-employment dominance is not a symbol of entrepreneurial dynamism but of economic necessity. Just like small farmers, most of the small enterprises function at a subsistence level, earning only enough to keep the business and family afloat.
What makes this more concerning is the composition of the sector. The bulk of these enterprises operate in the services sector, which now accounts for nearly 74 per cent of all unincorporated establishments. More than half — 52 per cent — are located in rural areas. The education levels of proprietors are low, with less than 15 per cent holding a graduate degree and only around 9 per cent having technical or vocational training. When enterprises lack both – the capital and the capability, their growth prospects tend to be limited.
This is where the policy conversation must shift. Rather than viewing employment generation solely through the lens of large industry or government programmes, India must confront the reality that its employment future is tied to the productivity of its smallest enterprises. The question is not only how many new firms are created but how many can grow from being an OAE that employs none to a high productivity, job creating HWE.
Why does productivity matter for job creation?
The ASUSE data show a clear relationship between enterprise productivity and employment expansion. Our analysis using data from all three rounds of the ASUSE surveys (2021 to 2023) reveals that a 10 per cent increase in GVA is associated with a 4.5 per cent increase in the number of hired workers. In simple terms, when small businesses grow, they start hiring labour. Such a linkage underpins the broader economic transition – from an economy of self-employed individuals to one of job-creating enterprises, where entrepreneurship evolves from subsistence to transformation.
Although services dominate the unincorporated sector – accounting for over 70 per cent of enterprises and workers — manufacturing remains more labour-intensive, employing about four workers per unit compared to three in services. The recent divergence in sectoral trends reinforces this — services are increasingly driven by capital deepening, while manufacturing has added jobs even during periods of output decline. Together, these patterns suggest that labour-intensive manufacturing offers a more reliable pathway for sustained job creation.
What holds these enterprises back?
Non-recovery of dues has been a perennial issue faced by the MSME sector. The RBI’s Expert Committee Report on MSMEs in 2019 pointed at it as one of the key factors affecting the growth of the sector. In the ASUSE survey, one out of four HWE and OAE identified this as one of the key problems ailing enterprise growth. While the Government of India made an amendment to the Finance Act in 2024 to disallow tax deductions for delayed payments made to MSME suppliers, the effect of this amendment needs to be closely monitored in the coming years.
Further, the entrepreneur’s choice to remain unregistered – without a GST number or any other business registration — is seen not as a liability, but a survival strategy. It creates a self-imposed bottleneck that chokes off the very growth and stability these businesses seek. While the government has championed the “Ease of Doing Business”, a significant portion of our economy remains trapped in a low-growth cycle because the perceived costs of formalisation outweigh the immediate benefits.
The challenges faced by the sector are further compounded by two major structural constraints that hinder enterprise development: (1) access to credit; (2) technology adoption and usage. ASUSE data show that only about 10–12 per cent of unincorporated enterprises have outstanding loans, indicating limited access to formal credit that not only restricts capital investment but also prevents enterprises from reaching efficient scales of operation.
Our analysis estimates that access to formal credit can be transformative. For a medium-sized enterprise, access to institutional credit lifts predicted GVA from Rs. 3 lakh to Rs. 5 lakh — a 72 per cent increase. For large enterprises, the GVA jumps more than threefold, from Rs 11 lakhs to Rs 36 lakhs. This suggests that medium and large informal enterprises have substantial latent potential that credit can unlock. Small enterprises see more modest gains, indicating that credit must be paired with softer support- such as training, market access, and managerial skills — to improve productivity.
The second barrier-technology adoption — is equally consequential. Only about 5-6 per cent of enterprises use computers, and fewer than 26 per cent use the internet. Yet firms that adopt even basic ICT tools see higher GVA across all sizes. The gains are especially pronounced for larger firms, which have more capacity to leverage digital tools for efficiency and market expansion. Bringing micro enterprises into the digital fold — through online marketplaces, or digital payments — can therefore be a major lever for transformation.
A pathway for employment-led growth
The evidence from ASUSE leads to three clear, actionable lessons:
First, and overall, India must focus on lifting productivity among OAEs by improving credit and technology access along with vocational training. With nearly nine out of 10 enterprises hiring no worker, enabling even a fraction to upgrade into HWEs could dramatically expand employment opportunities.
Second, and specifically, while the MUDRA scheme’s classification of loans into Shishu, Kishor, and Tarun is a useful framework for segmentation of loans, the real challenge lies in ensuring that credit truly matches the enterprise’s evolutionary stage — shifting from mere microcredit for subsistence to providing working capital for stabilisation and, most crucially, growth capital for genuine expansion. High Non-Performing Assets (NPAs) and restrictive documentation hurdles are symptoms of this underlying mismatch, demonstrating that a mere supply of funds does not automatically translate into improved productivity or job creation. Credit strategy must be differentiated and responsive, not just categorised.
Third, digital adoption remains low, and existing programmes like Digital MSME, UPI incentives, UDYAM, ONDC and DISHA need adaptation to deliver real gains. Beyond payments, enterprises require digital skills, handholding support through local facilitation, and clear market linkages —such as onboarding to e-commerce and digital procurement platforms — so that technology translates into higher productivity and business growth.
What emerges is a simple but powerful insight — India’s employment prospects lie not in a handful of large factories but in millions of small enterprises that already form the bedrock of its economy. Helping them grow-by easing credit constraints, expanding digital access, and capacity building — can transform the prospects for quality employment for millions. India’s entrepreneurship story is not waiting to be created; it already exists in every small shop, home-run unit, and local service establishment. What it needs is multi-pronged support to scale up.
Afridi is professor of Economics, ISI, Delhi, and visiting professor, NCAER. Thakur is associate fellow, NCAER
Rather than viewing employment generation solely through the lens of large industry or government programmes, policy must confront the reality that employment generation is tied to improving the productivity of its smallest enterprises. 
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