An estimate of a big formal shift that stretches credulity too far

News: SBI Research in a recent report said that the size of India’s informal economy had shrunk from 52% of gross domestic product (GDP) in 2017-18 to around a current maximum of 15-20%. However, the report is inaccurate in many accounts.

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Why the recently released report by the State Bank of India (SBI) research team is said to be inaccurate?

Firstly, the report believes that E-Shram is a big step towards the formalization of employment because it facilitates the extension of social-sector scheme benefits to informal workers. However, it is silent on, whether all the 57 million workers, who have registered on the portal, getting the benefits of these schemes.

Secondly, the report points out that the average amount outstanding per Kisan Credit Card (KCC) has grown in 2021-22 and this has led to the formalization of ₹4.6 lakh crore. However, the Report of the Internal Working Group to Review Agricultural Credit (2019) pointed out that, approximately 30 percent of agricultural households still avail credit from non-institutional sources.

Thirdly, much of SBI Research’s analysis relies on data during a period in which the country was hit by the second covid wave. During this period, businesses in the informal sector have been destroyed by pandemic disruptions. So, the informal activity would remain low, and the data obtained would be inaccurate. As the economy recovers, informal enterprises will start increasing.

Fourth, also, formalisation itself doesn’t mean decreasing informalisation. Formal enterprises can employ informal workers. For example, a listed real estate company outsources a job to a contractor, which then informally hires daily wage workers.

Finally, considering gig workers a part of the formal economy is also not a correct measure, because their incomes aren’t protected if the business is negatively impacted.

Source: This post is based on the article “An estimate of a big formal shift that stretches credulity too far” published in Live mint on 17th November 2021.

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