SBI Research has said in a recent report that the size of India’s informal economy has shrunk from 52% of Gross Domestic Product (GDP) in 2017-18 to the current maximum of 15-20%. The report does not define ‘informal economic activity’, adding that there is no specific definition globally. In fact, it is difficult to define, which is why it is called informal, but should be a starting point if such a bold claim is to be made.
According to the International Labor Organization (ILO): “Labor force surveys are generally the preferred source of information on the informal economy.” The research department of India’s largest bank is not expected to conduct a nationwide survey. The trouble is that even government surveys seem to have lagged behind.
As David Spiegelter and Anthony Masters write about the importance of surveys in Covid by Numbers: “In the memorable image of survey researcher George Gallup, you don’t have to eat an entire pot of soup to find out if it has More salt is needed: You only need a teaspoon, provided it’s stirred well.” This explains why surveys are so important.
And given that we lack reliable recent survey data on the matter, the conclusions drawn by SBI Research need to be tempered with if, but and perhaps. This has not been done. One data point that SBI Research uses to conclude that we have a high degree of formality is the launch of the e-Shram portal. As it states: “The portal is [a] National database of unorganized workers, including migrant workers, construction workers, gig and platform workers.” Nearly 57 million workers have registered on the website since its launch on 16 August.
The report did not elaborate on how the work of informal workers who signed themselves up on the portal could represent a formality. The report believes that e-labor is a major step towards formalization of employment as it facilitates extension of benefits of social sector scheme to informal workers. The question is whether all the 57 million workers registered on the portal are getting the benefits of these schemes? The report is silent on this.
Further, the report shows that the average outstanding amount per Kisan Credit Card (KCC) has increased From 96,758 in 2017-18 1.67 lakh in 2021-22. Overall, this has given rise to the formality of 4.6 lakh crores. KCC is primarily a way for banks to give short-term crop loans to farmers. Of course, this does not formalize agricultural activity. However, it formalizes banking. Yet, as noted in the report of the Internal Working Group for the Review of Agricultural Credit, published in September 2019: “Nearly 30 percent of agricultural households still obtain loans only from non-institutional sources… Tamil Nadu, Andhra Pradesh In Kerala and Karnataka, 71 per cent of crop loans are disbursed outside the KCC.”
Moreover, much of SBI Research’s analysis hinges on looking at data during the period in which the country was in the grip of the second Covid wave. This is like looking at the cash-to-GDP ratio of March 2017, months after demonetisation, when it was at an all-time low as demonetised money was being slowly replaced, and that cash was terminated. The economy has collapsed. As soon as the demonetised money was replaced, the cash in the system again increased.
Similarly, businesses in the informal sector have been decimated by the disruptions of the pandemic. Nevertheless, according to the ILO document titled Measuring Informality: “There is a high birth and death rate among units of the informal sector.” This means that as the economy improves, informal enterprises will begin to emerge.
Also, formal enterprises can employ informal workers. Take the case of a listed real estate company, which outsources the actual building of an apartment block to a contractor, who then informally hires workers during the day. In fact, even considering gig workers as part of the formal economy is a stretch, given that their income is not secure if the business is negatively impacted.
In addition, the formal sector tends to be more productive than the informal sector, and its capacity utilization has been low over the years. In this scenario, increased formality could potentially mean the destruction of informal jobs.
As Spiegelhalter and Masters write: “In the words of statistician John Tukey, it is better to get an approximate answer to the right question than to get an accurate answer to the wrong question.” The right question to ask here would have been whether the so-called increasing formalization of the Indian economy has also led to formalization of jobs, but this has not been done.
To conclude, it cannot be denied that India’s informal economy has shrunk since the onset of Covid. The work demanded under the Mahatma Gandhi National Rural Employment Guarantee Scheme through this financial year is almost the same as last year, which is telling us that the informal sector is in trouble. But this does not mean that its size has shrunk from 52% to 15-20% and reached European levels, as the SBI report suggests.
However, as we often say in journalism, think of the title first and then work towards justifying it. The SBI Research report looks like an example of such an approach.
Vivek Kaul is the author of ‘Bad Money’.
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