Informal Sector Shrinking fastly: Is it not Good? (GS 3, Economics, The Hindu, Indian Express)  


News/ Context: Signalling a greater shift towards formalisation of the economy, the share of the large informal sector in overall economic activity dipped sharply in 2020-21 even as informal workers continue to bear the brunt of the pandemic’s adverse effects, the SBI said in a research report. Concluding that the share of the informal economy may have shrunk to no more than 20% of the economic output from about 52% in 2017-18, SBI group chief economic advisor Soumya Kanti Ghosh termed this “a positive development” amid the pandemic.

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, with at least ₹13 lakh crore coming into the formal economy through various channels in recent years.

An IMF policy paper earlier this year 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. As per a National Sample Survey of 2014, around 93% of the workforce earned their livelihoods as informal workers.

India in 2015 has changed its base of the National Accounts to 201-12. It is currently the sixth largest economy measured in terms of PPP. The contribution of various sectors to total GVA are presented in Table 1. The agriculture sector which employs more than 40% of the workforce contributes 17-18% of the Gross Value (GVA) added of the economy. The services sector (excluding construction) contribute 50% of the GVA. The comparison with 2011-12 is because of 2011-12 is the base year for the new series which was released in 2015.

The terms unorganised/ informal sector are used inter changeably in the India context. The informal sector/unorganised sector consists of enterprises which are own account enterprises and operated by own account workers or unorganised enterprises employing hired workers. They are essentially proprietary and partnership enterprises. Table 2 presents the contribution of formal informal sector to total GVA. It may be mentioned that India treats unincorporated enterprises maintaining accounts as quasi corporates and are treated as part of the formal sector. The table presents the share of informal /unorganised sector GVA to total as shown in Table 2 is more than 50% across all years. However, as stated if quasi sector is also taken into account, the share reduces below 50%. The share of unorganised sector is highest in agriculture as the holdings are small and fragmented. This is followed by trade, construction, real estate, professional services etc and other services.

Structure of Informal employment in India 3 Informal worker as defined as a worker with no written contract, paid leave, health benefits or social security. The table 3 gives a sense of the formalisation of the workforce over the period 2011-12 to 2017-18. In terms of employment share the unorganised sector employs 83% of the work force and 17% in the organised sector. There are 92.4% informal workers (with no written contract, paid leave and other benefits) in the economy. There are also 9.8% informal workers in the organised sectors indicating the level of outsourcing. These are possibly the contract workers. In 2017-18 the share of unorganised sector employment has increased by 3.6 percentage points while on the other hand the share of formal employment has increased by 0.9 percentage points. There has been an increase in share of formal employment. This also indicates the efforts of the government to provide social security to workers in the unorganised sector.

Informal agriculture sector shrinks

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 of cash usage has been formalised since the COVID-19 pandemic. Formal agriculture credit flows have grown ₹4.6 lakh crore between 2017-18 and 2020-21, with digital payments for petrol and diesel rising around ₹1 lakh crore in the same period.

For India, post-2016, a plethora of measures which accelerated digitisation of the economy, emergence of gig economy, have facilitated higher formalisation of the economy — at rates possibly much faster than most other nations.

Since 2017-18, a lot has changed in the economy landscape. The IMF has noted that formalisation of economy has increased since the adoption of GST, enhanced digitalisation and demonetisation.

Md Layeeque Azam, Economics Faculty

plutus ias daily current affairs 01 nov 2021