Opinion
The performance of the informal sector demands indepth analysis
Summary
- Reliably measuring the informal sector’s contribution to the economy is a highly complicated task and we can’t draw inferences from PLFS data. The numbers we have do not support the argument of this sector being underestimated in Indian GDP.
In an op-ed in Mint titled ‘India’s informal sector could be adding more value than we know’ (13 December 2023), (bit.ly/4apOtTb), author T.C.A. Anant, former chief statistician of India, avers that arguments of the size of India’s informal sector being overestimated in gross domestic product (GDP) estimates are flawed, and that Periodic Labour Force Survey (PLFS) data suggests that it is far likelier to have been undercounted. In support of this assertion, he has plotted, besides the Worker Population Ratio (WPR) and share of self-employed in the workforce over recent year, the movement of (30-days) gross earnings by the self-employed reported by quarterly PLFS surveys since July-September 2017 to argue that this reading was unremarkable from July 2017 till June 2020, but average earnings have shown a steady growth of 6.5% annually since July 2020.
At the outset, we all know that wages or earnings are reported at current prices and adducing growth in nominal values would be nugatory. For a meaningful comparison, effect of inflation must be excluded therefrom. The average Consumer Price Index during July-September 2017 and April-June 2023 was 134.9 and 179.4 respectively. Thus, adjusted for inflation, nominal earnings of ₹11,885 in July-September 2017 will be the equivalent of ₹15,806 by April-June 2023. Therefore, the actually observed average earnings of ₹13,347 in the later period is actually a decline of 15.5% in real terms. Seen in a proper perspective, the earnings level observed from mid-2017 to till mid-2020, which the author described as “stagnant," is in fact a fall of 18.9% in real terms. As for the growth phase after that, when adjusted for inflation, what is presented as a buoyant annual growth of 6.5% from July-September 2020 to April-June 2023 would be a relatively prosaic 4.2%. Also, instead of CPI, if the Wholesale Price Index (WPI) were to be used as the deflator, earnings growth in April-June 2023 over July-September 2020 would be merely 2%.
Equally importantly, since formal-sector growth is used in the National Accounts to estimate informal-sector figures only for manufacturing and some service sectors, if one intended to study that informal part for whether or not it is over- or under-stated in GDP calculations, the contribution of all other segments like agriculture, etc, should have been excluded from the workforce analysis as well, instead of taking overall figures from PLFS reports. Not doing so, in our opinion, render the inferences drawn weak.
Also, the base year of the current series of GDP is 2011-12 and all the questions being raised today over the contribution of the informal or unorganized sector, assessed on the pattern of these businesses’ respective organized-sector counterparts, have been raised ever since its inception. Hence, for a proper appreciation, if at all the WPR is to be compared from year to year, the analysis should have commenced from 2011-12, when the WPR was 38.6% and the 41.1% ratio in 2022-23 would only be a marginal increase during the preceding 11-year period, instead of a bigger gap over a period of 5 years when compared against a lower WPR of 34.7% in 2017-18 displayed in the article’s graph. We refrain from calling it cherry-picking, but the selection deserves comment. A caveat here. Somebody may argue that the 2017-2022 workforce data is from PLFS, whereas for 2011-12, all we have available are results of the 68th annual National Sample Survey (NSS) round. The definition, however, of ‘usual status’ in the PLFS is the same as in the earlier employment-unemployment NSS surveys conducted till 2011-12.
On a closer look at the data we have, although the share of self-employment in the overall workforce increased from 52.22% to 57.32% from 2017-18 to 2022-23, ‘Own-account and Employer’ together constituted about 39% of the workforce in both the years 2017-18 and 2022-23, and almost the entire net increase is due to the share of ‘Helpers’ increasing significantly from 13.22% to 18.29%. It is evident that even with the same WPR and self-employment rate, an increase in population would have resulted in a larger number of workers and enterprises. However, the assertion that the country’s increase in the proportion of self-employed implies an increase in the number of household enterprises in the instant case as well is not tenable, since almost the entire increase has come about from an expanded share of ‘Helpers,’ which in itself tells us little about enterprises.
It is to be noted that in PLFS reports, the average earnings in respect of workers in self-employment have been calculated by excluding Helpers in household industries (classified as Code 21 in the PLFS), whose earnings are taken as zero for computing average earnings. As the share of Helpers in 2022-23 is almost 40% higher than that in 2017-18, the corollary would be that the decline of real average earnings per self-employed person (that is, including Helpers) in 2022-23 would be much sharper than the 15.5% referred to earlier.
In conclusion, the data presented by the op-ed’s author to disprove contentions of overestimation of the informal sector in India’s GDP supports this perception instead. Of course, the issue of reliably measuring the informal sector’s contribution to the economy and its temporal changes is highly complicated. But its resolution warrants a well thought-out critical approach and a nuanced discourse.
