The percentage of the vast informal sector in total economic activity fell considerably in 2020-21, signalling a larger trend toward formalisation of the economy, the SBI stated in a research paper, even as informal workers continue to face the brunt of the pandemic’s negative impacts.
SBI group chief economic adviser Soumya Kanti Ghosh called this “a good outcome” amid the pandemic, concluding that the informal economy’s proportion of economic production may have dropped to no more than 20% from over 52 percent in 2017-18.
Although formalisation levels vary widely across sectors, the SBI estimates that the informal economy would account for 15 percent to 20 percent of formal GDP in 2020-21, with at least Rs 13 lakh crore flowing into the formal economy via various routes in recent years.
According to an IMF policy paper published earlier this year, India’s informal sector contributed 53.9 percent of Gross Value Added (GVA) in 2011-12 and increased just slightly to 52.4 percent in 2017-18. According to a 2014 National Sample Survey, 93 percent of the workforce earns their living as informal labourers.
The informal sector comprises “own-account” or unorganised businesses that hire people, with agriculture accounting for the largest percentage of such unorganised activity due to tiny and fragmented holdings.
The informal agricultural industry is dwindling
According to SBI predictions, the informal agricultural sector has declined from 97.1 percent of the industry’s GVA in 2017-18 to only 70 percent to 75 percent in 2020-21, owing to higher credit penetration through Kisan credit cards. Informal activity in real estate has also decreased significantly, from 52.8 percent in 2017-18 to 20 percent -25 percent last year.
Since the COVID-19 epidemic, the research estimates that nearly 1.2 lakh crore of currency has been formalised. Between 2017-18 and 2020-21, formal farm loan flows increased by 4.6 lakh crore, while digital payments for fuel and diesel increased by roughly 1 lakh crore.
“Although the epidemic has had a major catastrophic effect on all sectors of the economy, the informal sector has been hit the worst. While the official sector has recovered to pre-pandemic levels, the informal sector continues to bear the burden, according to the research, which emphasises that its estimates are based on the premise that “the post-pandemic loss in the economy is predominantly informal.”
“For India, a slew of policies that have expedited digitalisation of the economy, as well as the advent of the gig economy, have permitted increased formalisation of the economy — at rates perhaps far quicker than most other countries,” Mr. Ghosh said.
“The economic landscape has shifted dramatically since 2017-18. The IMF also said that “with the implementation of GST, expanded digitalization, and demonetisation, the formalisation of the economy has risen.”
Fuel taxes should be re-examined
“If we take each home supporting a family of 5, we get 11.4 crore, which is almost similar to the number of taxpayers in the economy,” the research added, estimating that 57.2 crore individuals are now part of the formal sector. When the spending of individuals below the poverty line is taken into account, these 11.4 crore tax-paying families — or 8.5 percent of the population — account for 65 percent of private final consumption expenditure.”
“We believe that the Government should guarantee that the present tax system is fair to this tax-paying group that comprises 8.5 percent yet cross subsidises 91.5 percent of the population,” the SBI’s senior economist said, suggesting a reassessment of high gasoline taxes in this context. In that regard, the current tax system, notably indirect fuel taxes, should not be consumption negative.”
Source: The Hindu