A report by the State Bank of India’s (SBI) economic research department has said, India’s informal economy has dipped to around 15-20 percent of the formal GDP as against 52 percent in 2017-18 following the adoption of GST, enhanced digitalization, and demonetization.
The informal sector consists of own-account or unorganized enterprises employing hired workers. An IMF policy paper in 2021 estimated that the share of India’s informal economy in the Gross Value Added (GVA) was at 53.9% in 2011-12 and improved only marginally to 52.4% in 2017-18.
There are wide variations in the formalisation levels in different sectors but the SBI estimated that the informal economy is possibly at a maximum of 15% to 20% of formal GDP in 2020-21.
The SBI projections suggest that the informal agriculture sector has shrunk from 97.1% of the sector’s GVA in 2017-18 to just 70%-75% in 2020-21, driven by the increased penetration of credit through Kisan credit cards.
Real estate has also seen a significant dip in informal activity from 52.8% in 2017-18 to 20%-25% last year.
The report estimated that about 1.2 lakh crore rupees of cash usage has been formalized since the COVID-19 pandemic. Formal agriculture credit flows have grown 4.6 lakh crore rupees between 2017-18 and 2020-21, with digital payments for petrol and diesel rising around 1 lakh crore rupees in the same period.
Over the last couple of years, the government has made many efforts for formalization, the report said. The accelerated digitization of the economy since 2016, and the emergence of the gig economy, have facilitated higher formalization at rates that are possibly much faster than that of most other nations, the SBI report said.
According to SBI Ecowrap, at least Rs 13 lakh crore has come into the formal economy through various channels over the last few years, including the recent scheme on the -Shram portal. India’s first national database of unorganized workers, on which 5.7 crore workers have registered until October 30. Sixty-two percent of workers are in the 18-40 age group, and 92 percent have a monthly income of less than Rs 10,000.
“E-Shram is a big step towards the formalization of employment as our calculation indicates that till date the rate of formalization of unorganized labour due to e-Shram is around 17 percent or Rs 6.8 lakh crore or 3 percent of GDP in just 2 months,” the report said.
One of the sources to analyze the extent of formalization is the monthly EPFO payroll report which provides data on establishments remitting the first ECR (Electronic Challan-cum-Return) in a particular month. “Based on this data we estimate almost 36.6 lakh jobs have been formalized till August 2021,” the SBI report said. State-wise data show that the top four states accounted for 72 percent of total registrations, with West Bengal on top followed by Odisha and Uttar Pradesh.
According to the SBI report, workers from the agriculture sector account for 55 percent of registration, followed by the construction sector (13 percent) of the 5.7 crore registered workers, 81.2 percent — or 4.6 crore — have bank accounts, but only 24 percent of them (1.1 crore workers) have Aadhaar linked bank accounts.
“Even in agriculture, the usage of KCC cards has increased significantly and we estimate Rs 4.6 lakh crore formalization only through KCC route, with more marginalized farmers coming under the banking sector ambit through such usage,” the report said.
Madan Sabnavis, the chief economist at Care Ratings, said the extent of formalization in the economy will depend on the way it is defined. “If I am looking at the total workers registered with EPF and unorganized workers registered at e-Shram portal then it would seem to be going up. However, if I see it from a GDP calculation perspective, it will be different.
“Two large sectors, farming, and SMEs, are out of it. While 25-30 percent of the GDP comes from SMEs, they are mostly informal; also, over 60 percent of employment in the farm sector is informal. If you see trade, transport, restaurants, retail, wholesale trade, and mandis, they are not in the formal sector,” he said.
A top economic analyst with a global financial firm also disagreed with SBI’s assessment. “I think the informal sector was not 52 percent but around 42-44 percent of the GDP — and while there has been a rise in formalization, the informal sector has definitely not halved,”. “In case of high levels of formalization, the tax-to-GDP ratio would have gone up significantly. However, it has only gone up from around 16.5 percent to 17.5 percent,” the analyst added.
Around 93 percent of India’s workforce is part of the informal economy (NSSO 2014). Although the pandemic has impacted all sectors, it has been felt more by the informal sector. While the formal sector is now back to pre-pandemic levels, the informal sector continues to struggle, the SBI report said.
According to the report, the informal size of the trade, hotels, transport, communication, and broadcasting sectors, which employ around 17 crore households as per the 2011 census, is 40 percent. The informal sector in construction is around 34 percent, and that in public administration around 16 percent. The manufacturing sector has an informal component of around 20 percent.
But the government’s formalization efforts have led to almost 100 percent formalization in finance, insurance, and, to a large extent, real estate. Since FY18, agriculture has been formalized by 20-25 percent due to the increasing penetration of KCC credit. This implies that in the agriculture sector informal share is now in the range of 70-75 percent, the SBI report said.
Source: The Indian Express, The Hindu