Who shrunk India’s informal sector?

A sizeable informal economy is a global issue. As per IMF 2020 estimates, the informal economy in Europe is estimated at 20% of GDP. In sub-Saharan Africa and Latin America it’s 34%. In this context, India’s estimate done as of 2018, suggests the size of the informal economy at 52%. This number was expressed by NSC (National Statistical Commission) with very limited methodological details. We argue that this is a gross overestimation and based on publicly available digital data, India’s informal economy currently is no more than 15-20% of the formal economy. How is the informal economy measured? Estimating the size of the informal economy is always tricky and a globally accepted statistical framework of measuring it is still awaited. The large swath of people who are employed in the informal economy are in agriculture and MSMEs. GoI is making earnest efforts to bring such unorganised employment into the formal stream by incorporating MSMEs through the GST portal. It also recently launched the e-Shram initiative that is creating a comprehensive database of unorganised employment in India. Second, the consumption of the informal sector can be captured through digital footprints. For instance, an informal wage-earner’s trace in the economy may be captured by the shampoo-sachet or glucose biscuit she may be purchasing. Likewise, a small entity may be a seller in an online platform and accepting UPI-based payments. Unfortunately, such societal trends supported by digital infrastructure are not fully captured in administrative data used in measuring economic activity. What does the data tell us? As per e-Shram portal, 6.6 crore informal workers out of an estimated 34.4 crore (as per PLFS survey) have already registered in two months (November 5, 2021). This is 19% of the informal labour force. If we quantify the consumption of these 6.6 crore workers, it is at Rs 8 lakh crore. As per the National Sample Survey (NSS) 73rd round, during the period FY-2016, there were 633.9 lakh unincorporated non-agricultural MSMEs. If we look at the GST portal, from August 2018-March 2021 the total number of new MSMEs incorporated is 499.4 lakh. If we look at the turnover, around 99% of these lie under the MSME category. Thus around 494 lakh crore new MSMEs are under GST. No wonder, even at the peak of the pandemic, GST collections consistently topped Rs 1 lakh crore, indicating that a higher proportion of the transactions were in the formal sphere. The EPFO portal shows that around 2.25 lakh business units have been formalised since that data has been made online. This translates into formalisation of 36.6 lakh jobs and Rs 64,000 crore of consumption getting captured. The total number of outstanding KCCs (Kisan Credit Cards) is currently at 6.5 crore. The credit offtake per KCC translates into agri-credit formalisation of Rs 4.6 lakh crore. Enhanced access to credit reduces dependence of MSMEs and small farmers on informal sources of funding or credit from loan-sharks and is a major driver of formalisation of the micro balance sheet. This is also likely to significantly enhance cash flow based lending by banks based on pure data analytics and not merely traditional collateral-based. What’s the role played by digital infrastructure? In terms of digital infrastructure, India has also made rapid progress. The need is to leverage macro-digital footprint to reduce the exclusive dependence of survey and administrative tax data. It is an irony that India does not have a system of measuring GDP by using GST data. Since the pandemic, the total transactions through UPI have jumped to Rs 4.3 lakh crore. Separately, the usage of credit and debit cards has increased significantly post-pandemic, if we consider the incremental increase in digital transaction through cards to be Rs 4,000 crore in the last year. Fuel transactions are another source of cash transactions that’s getting rapidly digitised. Our estimates show that at least Rs 1 lakh crore of fuel transaction has moved from cash to digital mode. More interestingly, we also find out that nearly Rs 1 lakh crore of financial savings has moved into equity markets during the pandemic. To sum up, if one leaves out illegal activity, informal economic activity at its core is either a data-capture issue or a compliance issue. The writers are Group Chief Economic Advisor, SBI and Partner & Associate Director, BCG. Views are personal