SBI report claims informal sector shrank sharply in 2020-21

An SBI report claims a massive jump in formal economy of India.

SBI report claims informal sector shrank sharply in 2020-21

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• The story: SBI's latest report suggests that the share of India's large informal sector in overall economic activity dipped sharply in 2020-21, showing a shift towards formalisation. But informal workers continue to bear the brunt of joblessness.
• The numbers: SBI report concluded that the share of the informal economy may have gone down to no more than 20% of the economic output from about 52% in 2017-18. SBI considers it a 'positive development'.

1. 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, with at least ₹13 lakh crore coming into the formal economy through various channels in recent years.
2. IMF had 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.
3. A National Sample Survey of 2014, around 93% of the workforce earned their livelihoods as informal workers.

• What is the informal sector: 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. So as per SBI, 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.

1. The report estimated that about ₹1.2 lakh crore of cash usage has been formalised since the COVID-19 pandemic. Formal agriculture credit flows have grown ₹4.6 lakh crore between 2017-18 and 2020-21, with digital payments for petrol and diesel rising around ₹1 lakh crore in the same period.
2. The pandemic led to a huge devastating impact on all the sectors of the economy, but the impact has been felt more by the informal sector.
3. While the formal sector is now back to its pre-pandemic level, the informal sector still continues to bear the brunt.

• What factors crushed the informal: Post-2016, many measures that accelerated digitisation of the economy, emergence of gig economy, facilitated higher formalisation of the economy — at artificially higher rates. The IMF noted that formalisation of economy has increased since the adoption of GST, enhanced digitalisation and demonetisation. But this has proved troublesome for the informal sector.
• SBI's taxpayer estimates: SBI gave a massive new number of 57.2 crore people as part of the formal economy now! It calculated that each household supports an average family of 5, that  makes it 11.4 crore which is roughly equal to the number of tax payers in the economy. Adjusting for the consumption of those below poverty line, these 11.4 crore tax paying households — 8.5% of the population — contribute to 65% of the private final consumption expenditure.
• Summary: The SBI report has made fantastic claims, while many other indicators clearly show severe distress in the economy. Over the next few quarters, the truth will slowly emerge.
• EXAM QUESTIONS: (1) Explain the message the SBI report on informal sector is trying to give. (2) What are the infirmities that informal sector workers suffer from, in the Indian context? Explain.

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