The national statistical agency, in 2011-12, began providing GDP data in terms of factor share comprising compensation to employees and operating surplus/mixed income of entrepreneurs or self-employed persons. The two together make up net value added (NVA). The only exclusion is the depreciation which gets included in gross value added, but is actually a user charge on capital. There has hardly been any discussion on factor shares. The factor share is important for policy perspective of wages, interest rates, and factor productivity.
The Indian economy is significantly different from others. Of the total workers in India, 56% are self-employed and their share has increased. Most of them operate family-run establishments, which are largely subsistence in nature; 44% are either salaried employees or casual labourers. Of the workforce in construction, 80% are casual. More than two-thirds of the total workers are engaged in proprietary firms or establishments with fewer than five workers.
Between 2017-18 and 2024-25, NVA in the economy increased at an average annual rate of 8.7%, with a growth of 4.2% per worker. Employee compensation and operating surplus of self-employed entrepreneurs rose by 2% and 7.2% respectively. There are inter-sectoral differences which are indicated in the table.
We chose the period from 2017-18 to 2024-25 due to structural changes in the economy like demonetisation, GST, pandemic and post-pandemic recovery. This period also witnessed fluctuating inflation and corresponding monetary policy response. The availability of data on workers through the Periodic Labour Force Survey also helped. The results are startling.
First, self-employment increased from an average of 52.2% in 2017-18 to 56.2% in 2024-25. It increased across all sectors except other services. Sharp growth was seen in agriculture, mining, manufacturing, and construction with the exception of trade and hotels and food services. The shift was more towards subsistence sectors where skills are not a dominant factor. As the policy thrust was to compulsively create job providers than help job seekers, the quality of jobs suffered.
Second, the increase in self-employment was associated with a negative growth in its contribution to overall NVA in real terms. Overall operating surplus/mixed income of self-employed persons at current prices grew by just 2%. With consumer price index (CPI) inflation averaging 5.1% during this period, net contribution declined. Further, negative growth even at current prices was seen in manufacturing, trade, transport, and hotels. The negative growth in certain entrepreneur operator establishments indicates inadequacies in credit, marketing, skill development; these were not transformed while seeking to create job providers. Labour reforms raised the wages of hired workers, reducing the residual accrual to owners. Though the NSSO survey of unincorporated enterprises peg small and own account enterprises at 87%, there was hardly any meaningful support mechanism for them. Policy interventions covered only the remaining 13% of registered MSMEs and hired worker establishments.
Third, the share of labour compensation in NVA increased during this period from 38% to 43%. The sharpest increase in compensation growth of employees was observed in agriculture, followed by other services and manufacturing. The high growth in agriculture owed to own labour substituted employees (resulting in a net decline in hired workers) and also the employment guarantee scheme that raised wages. Due to labour reforms, revisions also raised wages in manufacturing. Increase in employee compensation in other services is largely due to the significant proportion of the organised segment, such as financial services, professional services, public administration, and defence where compensation increase is usually automatic and aligned to inflation. In electricity and utilities and construction, compensation recorded the lowest growth, lower than CPI inflation. Construction is mostly unorganised and big companies hire via intermediaries. Even public sector entities use intermediaries, resulting in limited percolation of labour reforms.
Fourth, labour productivity in India is among the lowest. According to ILO data, output per hour worked (GDP constant 2021 international $ at purchasing power parity) in India in 2025 was only $10.8 — one-third of the global average and 10% of the top 10 countries. KLEMS data indicate an average unweighted labour productivity growth of 4.6% during 2017-2023, nearly aligning with the growth of overall NVA per person. The sectoral composition of labour force and size of an establishment are factors responsible for the low productivity and are clearly known. Nearly 62% of even the non-agricultural workforce is engaged in units employing fewer than five persons. Thus, in the medium term, the economy’s structure may not see any significant changes either in the dominance of sectors or the nature of labour absorption. Relocating labour does not seem to be even a medium-term solution. It must be recognised that India’s labour force is largely made up of entrepreneurs, that too small ones. The focus of policy should shift to one-person employee-cum-entrepreneurs or family-run outfits.
Credit for such entrepreneurs for capital without any collateral, management help through clusters, marketing assistance, skill development, freedom from regulations, and infrastructure support are policy needs for such enterprises.
The authors are former civil servants
Disclaimer: The views expressed are the author’s own and do not reflect the official policy or position of Financial Express.
