The pandemic abandoned several old lanes and built many new. The informal sector suffered relentlessly, taking the hardest brunt perhaps when the pandemic began. It still struggles and has been trying to find its way out through online doors.
Last month, the State Bank of India (SBI) issued a report, estimating that the informal sector of the country has shrunk to somewhere between 15 to 20 percent of the GDP in 2020-21 from 52 per cent in 2017-18. While formalisation would be a hard arena to put boundaries to, the report used bases like employment and digitalisation to assess the extent of formalisation in the country.
Defining Formalisation
No globally accepted statistical framework to measure the informal economy is available yet. Different countries could pick up their own perspective to look at it. Yet economists all over the world consider certain parameters essential to analyse formalisation in an economy. The SBI report picked up four factors; increase in formal finance such as banks or digital payment systems, an increase in the share of output produced by firms in the tax net, an increase in the number of employees in registered enterprises, or an increase in GDP produced in enterprises that are part of the tax net.
The Factors Explained
Increasing digital payments were the first factor considered for measuring the upgrade.
The report cited “demonetisation and implementation of GST” as the engines pushing for “cashless transactions in business and reduced the cash intensity of the economy”. With their own downfalls, these initiatives triggered the Indian audience to look into possible digital financial alternatives.
These schemes might have introduced cashless options to the masses, the Covid-19 pretty much engraved these options into peoples’ lives, with or without consent. With physical contact becoming a strict no-no, digital payments were the safest option to dive into. Quite recently, digital payments touched a record high from all channels from the United Payments Interface (UPI) and the Aadhaar-enabled Payment System (AePS).
Presence in the tax net was the next factor. When GST was introduced, firms that were competing with the formal sector saw a rise in sales while firms in the informal sector suffered from compliance costs. The provisions under the GST discourage registered businesses to deal with unregistered entities in the informal sector. Consequently, the informal sector is encouraged to get itself registered to remain in the supply chain.
The number of employees working in the formal sector is a very obvious lens to pick up. One source the RBI picked up was the monthly EPFO payroll report. This report provides data on establishments remitting the first ECR (Electronic Challan-cum-Return), an electronic monthly return. It has member-wise details of the wages and contributions in a particular month. Based on this data, the SBI report estimates that from 2017-18, almost 36.6 lakh jobs had been formalised till 21 July. The Annual Survey of Industries (ASI) conducted by the Central Statistics Office (CSO) gathers information on “registered” or formal sector firms, further certified this information.
The E-Shram portal was also counted in as an indicator to measure stats. India’s first national database of unorganised workers, “it facilitates extending benefits of social sector schemes to the workers in the unorganised sector”.
The portal saw several registrations by the end of October, around 5.3 crores. Based on the monthly incomes of the registered workers, the report estimates that roughly half of the Rs 13 lakh crore formalisation is through the E-Shram portal. In this case, the worker is “registered”.
Questions remain
Even though the figures are pleasing to see and one might expect immediate healthy repercussions in the economy, the actual scenario may possibly be far from it yet.
To begin with the very fundamental understanding of formalisation by SBI, some economists argued that the metrics considered were not enough and all the metrics should be looked into to ascertain the extent of formalisation of the unorganised sector.
Moreover, the high levels of formalisation should have been reflected in the tax-to-GDP ratio, a metric that shows how well the government controls a country’s economic resources. The said ratio had stood at 11.22% in 2017-18 and at 10.97% in 2018-19. In 2021-22, it is expected to be at 10.8%, showing no signs of progress.
Also, mere registrations on the E-Shram portal may not be very solid evidence to claim improvement in formalisation.
Though the numbers are difficult to certain and no one can, for now, say for sure where formalisation stands currently, with time the picture would get clearer. An economy with registered participants not just benefits the entire economic scenario but is also essential for the employees who thrive to sustain in it. Higher productivity, formal jobs and improved competitiveness continue to remain the economy’s goals. If the numbers reported by SBI state out to be true, the trend must continue without stressing out the informal players and simultaneously creating a virtuous cycle. And even if not so, the centre must continue to strive for an economy with a safe and level economic field for all.