India’s informal economy shrunk to 15-20% of the formal GDP as against 52% three years ago, says a report by the SBI economic research department, attributing it to the adoption of GST, demonetization and enhanced digitalization.
The SBI Ecowrap report highlighted that a plethora of measures, which accelerated the digitization of the economy and the emergence of the gig economy, have facilitated higher formalization at rates that are possibly must faster than that of most other nations. It stated that at least Rs 13 lakh crore has come into the formal economy through various channels over the last few years, including the recent scheme on the e-Shram portal.
“Our starting point is an assumption that the shrinkage in the economy post COVID-19 pandemic is mostly informal and hence the loss in output across sectors gives us a measure of the informal sector,” the report said. “By making this assumption, we ensure that the size of the informal economy is still overstated as the shrinkage in economy also consists of formal.”
The report stated that this ensures that their estimate is at least free from any downward bias in measurement. However, it also said that it is difficult to measure the exact amount of formalization in the agriculture sector as a huge chunk of labor has reverse-migrated.
Moreover, the SBI report highlights that the government has made many efforts to formalize the informal sector in the last few years. “EPFO payroll is one of the sources to analyze the extent of formalization. As many as 36.6 lakh jobs have been formalized since August 2021. Next is the e-Shram portal, which is the first-ever national database of unorganized workers. 5.3 crore unorganized workers have registered in the first two months after its launch, with 62% of workers belonging to the age group of 18-40 years and 92% registered workers having monthly income of less than Rs 10,000”
Furthermore, of the 5.3 crore registered workers, 80% of 4.2 crore have bank accounts but only 25% of them or 1.1 crore workers have Aadhaar-linked bank accounts. The e-Shram is a big step towards the formalization of employment, with the SBI research team’s calculation indicating that till date, the rate of formalization of unorganized labor due to e-Shram is around 15%, Rs 6.4 lakh crore, 3% of GDP in just two months.
The report believes formalization of an economy is always better from a policy perspective. “Our estimate shows that 11.4 crore tax paying households, 8.5% of the total population contributes to Rs 75 lakh crore or 65% of the private final consumption expenditure and cross subsidies 91.5% of the population.”