BackAn estimate of a big formal shift that stretches credulity too far
India’s informal economy has shrunk since covid began but it couldn’t have reached European levels
PremiumSBI Research in a recent report said that the size of India’s informal economy had shrunk from 52% of gross domestic product (GDP) in 2017-18 to around a current maximum of 15-20%. The report does not define ‘informal economic activity’, saying that there is no specific definition globally. Indeed, it is difficult to define it, which is precisely why it’s called informal, but there has to be a starting point if such a bold claim is to be made.
As per the International Labour Organization (ILO): “Labour force surveys are typically the preferred source of information on the informal economy." One doesn’t expect the research department of India’s largest bank to carry out a countrywide survey. The trouble is that even government surveys seem to have taken a backseat.
As David Spiegelhalter and Anthony Masters write in Covid By Numbers about the importance of surveys: “In the memorable image of the survey researcher George Gallup, you do not need to eat a whole pot of soup to find if it needs more salt: you only need a spoonful, provided it has been stirred well." This explains why surveys are very important.
And given that we lack credible recent survey data in this case, the conclusions drawn by SBI Research needed to be tempered with ifs, buts and maybes. This has not been done. One data point that SBI Research uses to conclude we have a high degree of formalization is the launch of the E-Shram portal. As it points out: “The portal is [a] national database of unorganised workers, including migrant workers, construction workers, gig and platform workers." Around 57 million workers have registered on the website since its launch on 16 August.
How the act of informal workers signing themselves up on the portal could reflect formalization, the report does not explain. The report believes that E-Shram is a big step towards the formalization of employment because it facilitates the extension of social-sector scheme benefits to informal workers. The question is: Are all the 57 million workers who have registered on the portal getting the benefits of these schemes? The report is silent on that.
Further, the report points out that the average amount outstanding per Kisan Credit Card (KCC) has grown from ₹96,758 in 2017-18 to ₹1.67 lakh in 2021-22. Overall, this has led to the formalization of ₹4.6 lakh crore. The KCC is primarily a way for banks to give short-term crop loans to farmers. Of course, that doesn’t formalize agricultural activity. It does formalize banking, though. Nonetheless, as the Report of the Internal Working Group to Review Agricultural Credit published in September 2019 pointed out: “Approximately 30 per cent of agricultural households still avail credit from non-institutional sources only… In Tamil Nadu, Andhra Pradesh, Kerala and Karnataka, 71 per cent of the crop loans are disbursed outside of KCC."
Also, much of SBI Research’s analysis rests on looking at data during a period in which the country was hit by the second covid wave. This is like looking at the cash-to-GDP ratio as of March 2017, a few months after demonetization, when it was at an all-time low because the demonetized money was being replaced at a slow pace, and concluding that cash in the economy has gone down. As the demonetized money got replaced, cash in the system went up again.
Along similar lines, businesses in the informal sector have been destroyed by pandemic disruptions. Nonetheless, as an ILO document titled Measuring Informality points out: “There is a high birth and death rate among informal sector units." This means that as the economy recovers, informal enterprises will start springing up.
Also, formal enterprises can employ informal workers. Take the case of a listed real estate company which outsources the actual building of an apartment block to a contractor, which then informally hires workers by the day. In fact, considering gig workers a part of the formal economy is also a stretch, given that their incomes aren’t protected if the business is negatively impacted.
Further, the formal sector tends to be more productive than the informal sector, and over the years its capacity utilization has been low. In this scenario, increasing formalization could possibly mean the destruction of informal jobs.
As Spiegelhalter and Masters write: “In the words of the statistician John Tukey, it is better to get an approximate answer to the right question than get a precise answer to the wrong question." The right question to ask here would have been whether the so-called increasing formalization of the Indian economy has led to formalization of jobs as well. But that has not been done.
To conclude, there is no denying that India’s informal economy has shrunk since covid began. Work demanded under the Mahatma Gandhi National Rural Employment Guarantee Scheme through this financial year has been almost similar to what was demanded last year, telling us that the informal sector is in trouble. But that doesn’t mean that its size has contracted from 52% to 15-20% and reached European levels, as the SBI report suggests.
Nonetheless, as we often say in journalism, think of the headline first and then work towards justifying it. The SBI Research report looks like an example of such an approach.
Vivek Kaul is the author of ‘Bad Money’.
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