‘Share of large informal sector in economic activity dipped sharply in 2020-21’

Informal workers continue to bear the brunt of pandemic’s adverse effects, says SBI report

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.

The informal sector consists of “own-account” or unorganised enterprises employing hired workers, with the highest share of such unorganised activity being in agriculture where holdings are small and fragmented.

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.

“Though the pandemic has led to a huge devastating impact on all the sectors of the economy, the impact has been felt more by the informal sector. While the formal sector is now back to its pre-pandemic level, the informal sector still continues to bear the brunt,” the report pointed out, emphasising that its projections are based on the assumption that “the shrinkage in economy post-pandemic is mostly informal”.

“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,” Mr. Ghosh said.

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

‘Review fuel taxes’

Estimating that 57.2 crore people are now part of the formal economy, the report said: “If we take each household supporting a family of 5, we get 11.4 crore which is roughly equal to the number of tax payers in the economy. Adjusting for the consumption of those below poverty line, these 11.4 crore tax paying households — 8.5% of the population — contribute to 65% of the private final consumption expenditure.”

Mooting a rethink of high fuel taxes in this context, the SBI’s top economist said: “We believe that the Government should ensure that the existing tax structure is favourable to this tax paying population that constitutes 8.5% but cross subsidises 91.5% of the population. To that extent, the existing tax structure particularly of indirect taxes on fuel should not be consumption negative.”

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