Rediscovering the unorganised service sector: some policy implications

Abstract

The World Economic Forum developed the Global Competitiveness Index (GCI) to provide a more holistic overview of the factors crucial to drive productivity and competitiveness. It is grouped into nine main factors, called the nine pillars of competitiveness. Improvement in none of these factors alone can ensure a better competitiveness as they work in an intertwined manner. The scope for public policy to improve business sophistication is somewhat limited, but clustering, i.e., fostering geographical concentration of firms, suppliers and service providers can significantly improve business performance. In this context, it becomes essential to identify specific shortfalls and concentrate to improve those specific aspects instead of attempting to divide scarce resources equally among all the factors in all the areas. Hence, a comprehensive policy to address the issues together alone can ensure transition into a more growing and competitive economy. For more than one decade, the contribution of service sector in national income is growing. Long back, it has exceeded both the primary and secondary sectors, and is now contributing to about 54 per cent of the Gross Domestic Product at factor cost. It is the largest employer of urban work-force and, after agriculture, employs the rural work-force the most. Like all other sectors, the unorganised segment of the service industries contribute much more than its organised counterpart. The unorganised sector not only reduces the cost of operations for the formal sectors through production of goods and services sourced at a cheap rate by the formal sectors, but also provides employment in far greater number compared to its formal counterpart. While the entire organised non-agricultural sector employed about 51 million persons, the unorganised non-agriculture sector enterprises employed more than 107 million persons in 1999-2000. The unorganised non-agricultural sector contributed to about34 per cent of the Net Domestic Product (NDP) at factor cost compared to contribution of 20 per cent by the private organised and 23 per cent by the government. The unorganised segment s contribution in almost all areas of service is phenomenal. It provides 75 per cent of trade, 83 per cent in transport other than railways, 74 per cent in real estate, renting and business activities and 30 per cent in other services. With majority of the unorganised sector being manned by self-employed persons running the own account enterprises (i.e., enterprises without any hired worker on a regular basis), and more than 80 per cent of the value addition attributed to mixed income of these persons, growth of this sector directly implies growth in income of the poorer segment of the society, thereby obviating any need of an additional redistributive mechanism (and associated administrative costs) to percolate the fruits of economic growth to the bottom segment of the population. The problems associated with the growth of informal service sector has been studied and explained so far like the proverbial description of an elephant by four blind persons. These studies have shown different problems at different places in different services. Using data on 3 nation-wide surveys of the National Sample Survey Organisation, this study was to find a method to identify the factors responsible to hinder growth of specific segments of the unorganised service sector, be it related to education, health, social security of the self-employed or the employees or the factors affecting general business environment like value addition, loans, government support, employee emoluments, etc. First a subset of 27 activities (industrial sub-classes of the National Industrial Classification 1998) in the informal service sector have been identified which can produce sustainable value addition (mainly comprising of mixed income for the self-employed and the employees) without a high investment of fixed capital, thereby ensuring that the not-so-well-off informal entrepreneurs can launch these ventures. As these 27 activities cover more than 71%of the workers and above 63% of the annual aggregate GVA from the informal service sector activities, after finding the more important factors affecting the industries through use of test of association and data mining technique of classification and regression trees, an index (Sustainable Industrial Performance Index) has also been developed to rank these 27 unorganised service sector industries. This index is also expected to act as a ready reckoner for identifying the specific areas, which, if addressed, would enhance the performance of the specific industry sub-group.