India’s informal economy has not shrunk

According to a recent research report by State Bank of India (SBI), the informal economy in India has been shrinking since 2018. The formalization has happened through consumption through the Gross Value Added (GVA) route, increased digital payments, the report said. , and employment routes. Let’s examine each of these.

The report claims that the share of the informal sector is just 15-20% in 2021, as compared to 52.4% in 2018. If that were the case, India would have become an overnight ‘miracle’ economy, as there would be no upper-middle-income economy. Latin America or ASEAN or any lower-middle-income country has achieved such a transformation. On the other hand, since the outbreak of COVID-19, informality of enterprises and workers has increased in all such economies.

There is an internationally recognized definition of informality of enterprises and workers. In the 15th International Conference of Labor Statisticians of the International Labor Organization (1993), domestic enterprises are not constituted as separate legal entities, which are independently owned by those families or household members, and for which no Full account is not available, they are classified as informal enterprises. , In the 17th Convention (2003) informal workers were defined as those without social security. Based on these definitions, internationally, comparable estimates of both types of informality are available. India’s level is 80% and 91% respectively. The latter is higher because there are also informal workers within formal enterprises.

misleading claim

SBI study adopts multiple definitions of formalities (digitization, registration in GST, cashless payments) which are not used by anyone. These can be potential means of encouraging formality, but they cannot be combined with formality separately or even together. The SBI study confuses the impact of COVID-19 on the economy with the formalization and shrinking of the informal sector’s share of GDP due to demonetisation. The informal sector was adversely affected by the lockdown and the resultant economic contraction. The sectors most impacted by the lockdown were areas with high informality. Even the formal sector activities which are considered informal (outsourcing and contractual activities) were drastically curtailed during the lockdown. The decline in informal activities may be the reason for the decline in the share of the informal sector in GVA. Defining it as a formality is confusing at best and cruel at worst.

We do not know whether this GVA decline is temporary or permanent. This has clearly led to a decline in employment, especially in the non-farm sector, while the share of agricultural workers in total employment increased sharply between 2018-19 and 2019-20 (NSO’s Periodic Labor Force Survey). Agriculture is almost entirely informal for enterprises and workers. Disastrously, already for informal workers, the absolute number of workers in agriculture increased from 200 to 232 million between 2018-19 and 2019-20. This was a reversal of the trend of structural change in employment that has been going on since 2004–05 – shown by the first absolute decline in labor in agriculture from 2012 to 2019.

Registration on e-Shram

Another reason that SBI claims that informality has declined is the number of workers registered in the new e-shram portal. Since the launch of the portal, more than 9.9 crore unorganized workers have registered themselves. However, registration means documentation, not a formality, of workers. Workers who are ‘formalists’ receive Social Security benefits. It is not the purpose of the Portal to provide such benefits; It aims to develop a national database of unorganized workers. After registering on the portal, workers receive a 12-digit unique number card, which is a good thing. The government has announced to link accident insurance with e-labor registration.

At present, there is no reliable database for the unorganized workers of India. In 2020, the government expressed its inability to provide numbers relating to the number of migrant workers who suffered or died during the lockdown. These migrant workers were and are part of the wider unorganized sector.

Mere registration under this portal does not guarantee institutional social security benefits or coverage under labor laws. Benefits like provident fund, gratuity and maternity benefits will remain out of reach of the unorganized workers, as conceptualized in the Social Security Code of 2020. All these equipment were available only to establishments with 10 or 20 or more workers. Moreover, the SBI study notes that West Bengal tops the list in registration. This is no surprise. More than 1.3 crore unorganized workers are already registered under various social security schemes in West Bengal. A part of them are now registering themselves on the new portal.

Furthermore, the study treats the formal sector as a homogeneous entity. In fact, there are different layers within the formal sector. Not all workers engaged in the formal sector are ‘formal’. There has been a large-scale informalization of the formal sector over the past three decades through contracting and outsourcing of labor. From 1999-00 to 2011-12, the ratio of temporary, casual and contract workers to salaried workers in the organized sector increased. After that it decreased marginally but the pandemic changed the numbers once again. Thus, a significant portion of the output attributed to the formal sector is actually produced by an informal workforce within the formal sector.

a blurred distinction

The systematic dismantling of employer-employee relations in the labor market blurs the distinction between formal and informal. The entire building of the formal sector is based on informal workers. There are layers of middlemen between employers and workers creating a disconnect between them. Such a disconnect is intentional rather than organic. For example, most of the production in manufacturing is attributed to the formal sector. But most workers in the construction sector are informal. They do not have access to Social Security benefits or protective labor laws. They remain informal throughout their lives, even though their contribution is credited to the formal sector. Thus, contrary to what has been said in research, the contribution of the formal sector has been underestimated and the contribution of the informal sector has been underestimated.

Eighty-four percent of Indian non-agricultural establishments are informal by their own account. Some may be registered under miscellaneous laws but this does not mean that they have become formal. Registration under Factories Act or Employees Provident Fund or State Insurance means that these organizations are formal as the organization requires 10 or 20 employees to be registered under these laws. But mere registration under other enactments like local municipal acts or tax laws does not imply formality.

Thus, SBI’s claim that significant formalization has taken place in India is baseless.

Santosh Mehrotra is a Research Fellow at IZA Institute of Labor Economics, Bonn; Kingshuk Sarkar is the Labor Commissioner, Kolkata.