Opinion
India's informal sector may be adding more value to its economy than we know
Summary
- Arguments that the size of this sector—and contribution to GDP—is overestimated are flawed. PLFS data suggests that it's far likelier to have been undercounted.
The recent release of India’s second-quarter GDP estimates has provoked a lot of discussion, some of which is on predictable lines. One strand of it focuses on the fact that since a GDP base revision is long overdue, these estimates are unreliable because they do not adequately capture the informal sector (i.e., the household sector). Stated this way, the criticism is unexceptional because it is true that a GDP base revision is now overdue. However, some go on to conclude from this that the GDP estimates are consequently over-estimated.
This latter conclusion may be unwarranted. The argument for over-estimation is that the country’s informal sector after both demonetization and covid has seen a serious decline both in numbers and in its ability to contribute to economic value addition. Since GDP calculation estimates the contribution of this sector indirectly, by measurements drawn from the formal sector, the size and contribution of the sector is over-stated.
This line of argument is problematic, partly because the contribution of the informal sector is not entirely assessed in this way. Agriculture (which is almost 40% of the value added by the informal sector) is assessed through direct estimates of production. Construction, which is the second major component of this sector, is also assessed through the production of key inputs like cement, steel, etc.
Further, growth in value-added due to trade is inferred from data on tax collections. Thus, these significant components of informal sector activity are anchored in data elements that are reasonably robust. It is only for informal manufacturing and some services that the official inference on growth in value-added is drawn from indicators linked to the formal sector, such as the Index of Industrial Production and advanced estimates of corporate earnings from listed companies.
The Periodic Labour Force Survey (PLFS) data that recently became available gives us an alternative way of assessing informal sector activity more directly. The PLFS classifies ‘employment’ as people working for a regular salary wage, casual labour and those who are self-employed. The self-employed are further sub-categorized as those who are working on their own account (Code 11), as employers (Code 12), and unpaid helpers in household enterprises (Code 21). Codes 11 and 12 are clearly linked to the number of household enterprises, which are also part of the SME sector. Before proceeding, we must address a misconception around unpaid family labour. This employment, which is sometimes bashed as being unproductive, is not necessarily so; in a family enterprise, all workers collectively draw upon the earnings of that business and are often actively involved in its running. The classification of a single member as the owner or employer is based on socio-cultural norms of naming the household head.
The accompanying table shows that between 2017-18 and 2022-23, the Worker Population Ratio (WPR) for all ages (rural+urban) rose significantly—from 34.7% to 41.1%. This rise, combined with the rise in India’s population over the same period, will give us an idea of the total number of employed. Further, the share of self-employed in the total workforce has also increased from 52.2% to 57.3%. While the share of employers and own-account workers has remained more or less the same throughout, the rise in the WPR and aggregate population implies a substantial increase in the number of informal enterprises.
Thus, we see that at least in size terms, the informal sector has not declined. PLFS data gives us another insight into the contribution of the informal or household sector in that it reports average gross earnings. The data reveals that average gross earnings for self-employed persons changed from ₹11,885 per month during the July-September quarter of 2017 to ₹13,347 per month in April-June 2023. The accompanying graph depicts the change in average earnings for men, women and persons. The graph reveals some interesting dynamics. While the growth in earnings is unremarkable from July 2017 till June 2020, subsequently they show a steady rise. The growth in earnings post July 2020 would be almost 6.5% per year. The initial stagnation in earnings was probably a consequence of GST implementation in mid-2017 and lockdowns after the covid outbreak of early 2020. The subsequent revival could be explained in part not only by the government’s covid relief measures, but also by the momentum gained in financial inclusion and credit outreach aimed at the informal sector.
Putting these together, there does not appear to be a case that the contribution of the informal sector has declined. Moreover, GST collection data reveals a buoyancy in the economy which is also not adequately accounted for in the current computation methods arising out of the 2011-12 base series. This leaves open the possibility that GDP growth may in fact have been under-estimated.
The PLFS data has other interesting stories relating to growth in women’s and youth employment in recent years. These, however, would need a separate article.
