Shrinking of Informal sector in 2020-21: SBI report

Economic Affairs Informal sector

01-Nov-21

Context: According to the SBI in a research report, there has been a greater shift towards formalisation of the economy.
Key highlights of the report

The share of the informal sector in overall economic activity has reduced sharply in 2020-21 even as informal workers continue to bear the brunt of the pandemic’s adverse effects.
The informal sector consists of “own-account” or unorganised enterprises employing hired workers, with the highest share of such unorganised activity being in agriculture where holdings are small and fragmented.
The share of the informal economy may have shrunk to no more than 20% of the economic output from about 52% in 2017-18, the report termed this “a positive development” amid the pandemic.

There are wide variations in the formalisation levels in different sectors but the SBI estimated that the informal economy is possibly at a maximum of 15% to 20% of formal GDP in 2020-21.

An IMF policy paper earlier this year estimated that the share of India’s informal economy in the Gross Value Added (GVA) was at 53.9% in 2011-12 and improved only marginally to 52.4% in 2017-18.
As per a National Sample Survey (NSS) of 2014, around 93% of the workforce earned their livelihoods as informal workers.
The informal sector consists of “own-account” or unorganised enterprises employing hired workers, with the highest share of such unorganised activity being in agriculture where holdings are small and fragmented.

Other sector takes a hit

The SBI projections suggest that the informal agriculture sector has shrunk from 97.1% of the sector’s GVA in 2017-18 to just 70%-75% in 2020-21, driven by the increased penetration of credit through Kisan credit cards.
Real estate has also seen a significant dip in informal activity from 52.8% in 2017-18 to 20%-25% last year.
The report estimated that about Rs 1.2 lakh crore of cash usage has been formalised since the COVID-19 pandemic.
Formal agriculture credit flows have grown Rs 4.6 lakh crore between 2017-18 and 2020-21, with digital payments for petrol and diesel rising around Rs 1 lakh crore in the same period.

Key Suggestions

Report mooted to rethink high fuel taxes, the Government should ensure that the existing tax structure is favourable to this tax paying population that constitutes 8.5% but cross subsidies 91.5% of the population.
To that extent, the existing tax structure particularly of indirect taxes on fuel should not be consumption negative.

Informal Sector in India

The informal sector is the part of any economy that is neither taxed nor monitored by any form of government.
The workers who indulge in the informal sector are informal sector workers or informal workers. It generally provides critical economic opportunities for the poor.
It is largely characterized by skills gained outside of a formal education, easy entry, a lack of stable employer-employee relationships, and a small scale of operations.
Unlike the formal economy, the informal sector’s components are not included in GDP computations.

Need to Protect Informal Workforce

India’s estimated 450 million informal workers comprise 90% of its total workforce, with 5-10 million workers added annually.
Further, according to Oxfam’s latest global report, out of the total 122 million who lost their jobs in 2020, 75% were lost in the informal sector.
Job loss and further increasing informalisation due to the Covid-19 pandemic and subsequent lockdown has resulted in lack of social protection to poors.
Moreover, in the financial year 2020-21, the economy contracted by 7.7%. So, there is an urgent need to revive the economy by generating employment and the informal sector is more labour intensive.

Some Initiatives by the Government