India’s informal economy has shrunk to around 15-20 per cent of the formal GDP as against 52 per cent three years ago following the adoption of GST, enhanced digitalisation, and demonetisation, a report by the State Bank of India’s (SBI) economic research department has said.
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 e-Shram portal, according to SBI Ecowrap.
Since 2016, a plethora of measures, which accelerated the digitisation of the economy and the emergence of the gig economy, have facilitated higher formalisation at rates that are possibly much faster than that of most other nations, the SBI report said.
Over the last couple of years, the government has made many efforts for formalisation, the report said. One of the sources to analyse the extent of formalisation is the monthly EPFO payroll report which provides data on establishments remitting first ECR (Electronic Challan-cum-Return) in a particular month, it said.
“Based on this data we estimate almost 36.6 lakh jobs have been formalised till August 2021,” the SBI report said.
Then there is the e-Shram portal, India’s first national database of unorganised workers, on which 5.7 crore workers have registered until October 30. Sixty-two per cent of workers are in the 18-40 age group, and 92 per cent have a monthly income of less than Rs 10,000, it said.
State-wise data show that the top four states accounted for 72 per cent 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 per cent of registration, followed by the construction sector (13 per cent).
Of the 5.7 crore registered workers, 81.2 per cent — or 4.6 crore — have bank accounts, but only 24 per cent of them (1.1 crore workers) have Aadhaar-linked bank accounts.
“E-Shram is a big step towards the formalisation of employment as our calculation indicates that till date the rate of formalisation of unorganised labour due to e-Shram is around 17 per cent or Rs 6.8 lakh crore or 3 per cent of GDP in just 2 months,” the report said.
“Even in agriculture, the usage of KCC cards has increased significantly and we estimate Rs 4.6 lakh crore formalisation only through KCC route, with more marginalized farmers coming under the banking sector ambit through such usage,” the report said.
However, not everyone is reading the numbers this way. Madan Sabnavis, chief economist at Care Ratings, said the extent of formalisation in the economy will depend on the way it is defined.
“If I am looking at the total workers registered with EPF and unorganised 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,” Sabnavis said.
“Two large sectors, farming and SMEs, are out of it. While 25-30 per cent of the GDP comes from SMEs, they are mostly informal; also, over 60 per cent 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 per cent but around 42-44 per cent of the GDP — and while there has been a rise in formalisation, the informal sector has definitely not halved,” the analyst said.
“In case of high levels of formalisation, the tax-to-GDP ratio would have gone up significantly. However, it has only gone up from around 16.5 per cent to 17.5 per cent,” the analyst added.
Around 93 per cent 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 per cent. The informal sector in construction is around 34 per cent, and that in public administration around 16 per cent. Manufacturing sector has an informal component of around 20 per cent.
But the government’s formalisation efforts have led to almost 100 per cent formalisation in finance, insurance and, to a large extent, real estate. Since FY18, agriculture has been formalised by 20-25 per cent 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 per cent, the SBI report said.