by: Prof Arun Kumar
ndia is a culturally diverse country and the world’s largest democracy. The usual sectors primary, secondary, and tertiary are there but these are further subdivided between public and private and organized and unorganized sectors. The primary, secondary, and tertiary sectors are further subdivided into agriculture, manufacturing, finance, and so on. So, there are roughly 27 sectors to contend with.
Beyond these sub-divisions, there are the large, medium, small, and micro sectors in the non-agriculture sector. In agriculture, there are the large, medium, marginal farms and the landless. The technologies they use and the productivity they have are also vastly different so that the incomes differ widely across sectors. The divides are also between the rural and urban areas and backward and advanced states.
The largest sector in GDP is the tertiary sector, then the secondary, and lastly the primary sector. Agriculture provides 46% of the employment but only contributes 14% of the GDP. Since it is largely in rural areas, they have a much lower income than the urban areas. The unorganized sector of which agriculture is an important part employs 94% of the workforce but contributes 45% to the GDP. Thus, incomes here are very low compared to the organized sector where 6% of the workers work and produce 55% of the output.
Agriculture has a large amount of disguised unemployment since work on the farm is declining with mechanization in agriculture. More use of tractors, harvester combines and threshers are displacing labor. Such labor has nowhere to go since non-farm employment is not available. The unorganized sector in non-agriculture is often a residual sector because those who do not find work resort to some kind of self-employment to sustain their family.
Unorganized Sector: Issues
The share of employment in the unorganized sector has hardly changed in the last 30 years. This is a result of the increasing mechanization and automation in the modern organized sectors. While most of the investment goes there, it generates little work. So, people remain stuck in the unorganized sector. In this sector to, while investment is low it is also mechanizing, like, in agriculture. So, employment generation here is also inadequate.
The unorganized sector consists of the small and the micro sectors. The average employment in a micro sector unit is 1.7 workers. In agriculture every small farm (below 5 hectares) has the entire household involved. Consequently, there are no scale economies and they mostly depend on low technology, resulting in low productivity. They also do not have the wherewithal to upgrade technology. They also lack marketing and finance. Often, they have to borrow at high-interest rates from the informal money markets. The result is high costs and low profits. To increase profits, they have to squeeze wages.
The unorganized sector producers supplying to the large and medium scale businesses do not pay them in time and squeeze the sector, resulting in working capital shortage. It could ultimately lead to closure of the unit.
In brief, the unorganized sector constitutes a low-profit and low-wage island in the economy. Due to the low per capita income, they consume very little. This reduces demand in the economy. The impact is substantial since it employs the vast majority. That slows down the economic growth.
Role of Education and R&D
Imports from China are impacting the market for both the organized and the unorganized sectors. This is because the Chinese are able to produce at scale and their labour is highly productive so that they are able to produce cheaply. Not only are they producing high technology goods like APIs but also India’s cultural symbols, like Ganesh statues and Diwali lights.
Technological up gradation and entrepreneurship depend on the quality of education. The vast majority of children get poor education. This is testified to by the ASER reports since 2005. Many businesses say that youth is unemployable. According to NHFS-5 literacy has risen in the country to about 80%. Most children are in school but teaching and infrastructure are poor so very few enter higher education and its quality is found wanting. The definition of literacy needs to be changed to `capacity to absorb modern technology’ and not just the ability to read and write.
R&D is not only weak, but investment in it is small by world standards. Consequently, we mostly import technology. That further sets back R&D in the country. It leads to a) inability to absorb modern technology, b) innovation, c) weak entrepreneurship, and d) lack of employment. There is also `Jugad’ and poor quality production.
Mechanization and Artificial Intelligence are already posing a challenge to the unorganized sector. Due to their small scale of operations, they cannot afford to adopt it even if they had the skill to do so. This challenge is only going to grow in the coming years and one needs to prepare for it from now.
Consequences of Neglect of Unorganized
The growth of the organized sector at the expense of the unorganized sector has huge consequences. Because the latter employs 94% of the workers, its decline has led to growing unemployment. Even before the pandemic, official data showed that unemployment had reached a 45 year high. Labour force participation rate is abysmally low. 190 million individuals in the relevant age group have stopped looking for work. The position of women and educated youth is particularly worrisome.
The consequence can also be seen in the dramatic rise in inequality in the economy with a large number of billionaires. The result is economic, social instability which spoils the investment climate.
The above points to the linkage between the various problems facing the economy and the decline in the unorganized sector. Most of these problems are policy-induced. So, there is urgent need to change policies and support the unorganized sector. Currently policy is promoting the organized sector and doing little for the unorganized sector.
There is need to support the unorganized sector by promoting access to finance, technology and marketing. Cooperatives need to be formed to enable this to happen. Government’s steps in this direction are rather inadequate. Expenditures on education and R&D need to be sharply increased. GST is a last point tax. So, it should be collected at the last point only and not at each intermediate point of production and distribution. That will simplify the tax without causing any loss of revenue. As Arun Jaitley used to say 5% of the units pay 95% of the GST. The complications associated with ITC, e-way bill and so on will then get eliminated, business climate in the country would improve and the unorganized sector will revive. (C-Counter Currents)
Prof. Arun Kumar, is a retired Professor of Economics, JNU.