Share Of Informal Economy May Have Shrunk To 20% From 52% In FY18: SBI Research

SBI Ecowrap Report

A large chunk of the total workforce in India earns its livelihood as informal workers. Though the pandemic has led to huge devastating impact on all the sectors of the economy, the impact has been felt more by the informal sector. While, the formal sector is almost now back to its pre-pandemic level, the informal sector still continues to bear the brunt. In this context, India’s estimate done as of FY2018 suggests the size of informal economy at 52% of the economy. This number was expressed by NSC.

Even globally, informal economic activity is not specifically defined. Given existing GDP measurement dispensations, worldwide, heavily dependent on surveys and administrative data, it adds to the challenge of measuring informal economy. As such a globally accepted statistical framework of measuring informal economy is still awaited.

Interestingly, if one leaves out illegal activity, informal economic activity at its core is either a data capture issue or a compliance issue. Recording economic activity is an issue where goods and services are produced by entities not registered with a government body. However, when a registered entity for purpose of tax evasion may under-report production or revenues it’s a compliance issue, that could be traced through digital footprints.

A sizeable informal economy is not just the issue of emerging and developing economies.

For example, as per IMF, even in Europe informal economy is estimated at 20% of GDP. For India, post 2016 plethora of measures which accelerated digitisation of the economy, emergence of gig economy have facilitated higher formalisation of the Indian economy - at rates possibly much faster than most other nations.

Our starting point is an assumption that the shrinkage in economy post pandemic is mostly informal and hence the loss in output across sectors gives us a measure of the informal sector. By making this assumption, we ensure that the size of the informal economy is still overstated as the shrinkage in economy also consisted of formal. This ensures that our estimate is at least free from any downward bias in measurement.

Employing this methodology and rigorous data validation, this article estimates that currently informal economy is possibly is at max 15%-20% of formal GDP. There is wide variation across sectors, though, with formal sectors like finance and insurance expanding post pandemic.

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