The small and informal sector is the backbone of the Indian workforce. Over 82 per cent of the workforce is engaged in the informal sector which, by definition, comprises small enterprises. Nearly 40 per cent of these informal workers are also single, own-account workers.
As we move ahead, the small and informal sector will continue to be the primary source of employment and entrepreneurship. At the same time, despite engaging such a large proportion of the workforce, the productivity of such enterprises remains low.
Despite the massive workforce, the informal sector contributes to only about 50 per cent of India’s GDP. Improving access to formal skills can be a transformative lever for the informal sector. It can also help create mass entrepreneurs who are not single, subsistence-driven, but have the capacity to be job creators and help the workforce transition steadily from the informal to formal.
At present, small, often informal, enterprises face some unique impediments in availing themselves of formal skilling.
Limited awareness of the need and lack of incentives for engaging in formal skilling: Small and informal business owners often see limited benefit of formally skilled workers due to a lack of awareness of the productivity and income gains that can accrue because of skilling.
This problem also extends to parts of the formal sector, which is experiencing increased ‘contractualisation of labour’.
These formal employers might not see any incentive to invest in training, given the temporal nature of the occupation and high attrition rate for the ‘contract employees’.
Cost and time of training: Around half of the workers employed in the non-agriculture sector work in enterprises that employ less than two people on an average. This low number increases the opportunity cost of training per worker and discourages small and informal enterprise owners from investing in training.
Entrepreneurs also find it difficult to upskill themselves as they already face time and financial constraints in their business. Finally, potential workers who do get formally skilled, demand a wage premium that small enterprises are unable to afford.
Lack of alignment between current formal programmes and the skilling needs of small and informal enterprises: Small enterprises often depend on workers who perform multiple tasks and thus need their employees to be trained in multiple skills.
The current formal skilling programmes are often not designed for this and tend to be specific to a job role.
The current programmes also provide full-time and non-local solutions while firms need flexible, hyper-local models. This combination limits the effectiveness of the initiatives.
We see three categories of interventions that can help catalyse demand for formal skills.
Provide incentives and increase awareness to drive demand for formal skills training: Giving financial and non-financial incentives to enterprises in the informal sector has the potential to mitigate the cost and time pressures of engaging workers in formal training and increasing uptake of skilling programmes.
Further, as small firms experience the productivity gains from investments in skill building, the demand for skilling of their workforce will increase. For example, Kenya launched the Jua Kali Skill Voucher Program to catalyse adoption of skill training programmes among micro and small enterprises (MSEs) through demonstration effect.
After experiencing more than double the average sales, the MSEs increased their permanent training resources and staff. However, it is important to note that a detailed impact study showed that the programme was a high cost one and could not sustain without external funding support.
Any incentives, therefore, must be designed with the goal of sustainability, with firms eventually transitioning to skilling their workforce without needing external support.
Foster tailored models of skill provision: There is a significant need to create an enabling environment and dedicate resources to support testing of new models across the sector.
The ‘micro-training’ provider model in Rwanda is a case in point. It is a hyper-local and flexible training model operated by small enterprises that engage in production and sale of goods and services and provide training as a parallel service.
Introduction of this model resulted in an enrolment rate of twice as many trainees, compared to formal public training systems.
Recognise skills required through traditional apprenticeships or other non-formal channels: Workers and entrepreneurs in the informal sector often get trained by observing or working under master crafts persons or owners of small businesses.
Since they might not have any record of their training, developing mechanisms for formal recognition of an informal worker’s existing skills can benefit them tremendously.
Some platform aggregators, such as UrbanClap, are already supporting formal recognition and upskilling efforts in India, indicative of a rising trend. It helps formalise the service provider’s informally-acquired skill by providing a short-term up-skilling course and offering a certificate for the training.
Efforts in the skilling ecosystem so far have mostly focussed on serving the existing demand effectively. If we want India to transition to a high-skills equilibrium, it will be crucial to exponentially increase the demand for skilling. A concerted focus on the small and informal sector, will be the first step to achieving this.
The writers are Secretary, Ministry of Skill Development and Entrepreneurship, and Managing Director, Omidyar Network India, respectively. The views are personal