There are signs of increasing formalisation of the economy, but more precise data is needed to capture the trend accurately

In the absence of data, it is difficult to know for sure, both, the extent to which the informal economy continues to struggle, and the permanent gains to the formal segment.

The first quarter GDP data showed that the Indian economy was around 9 per cent lower than its pre pandemic level. High frequency indicators suggest that in the period thereafter, parts of the economy have recovered to pre Covid levels. However, there continues to be uncertainty over the extent of the distress in the informal sector. By all accounts, the impact of the pandemic has been felt more by the unorganised sector — this is also the third shock to this segment following demonetisation and GST. Some have argued that these shocks, coupled with various policy initiatives have led to a sharp increase in the pace of formalisation in the economy. But in the absence of data, it is difficult to know for sure, both, the extent to which the informal economy continues to struggle, and the permanent gains to the formal segment.

According to an estimate presented by an officer at the National Statistical Division of the Ministry of Statistics and Programme Implementation, the informal/unorganised sector in India accounted for 52.4 per cent of the total value added in the economy in 2017-18, and employed around 87 per cent of the total labour force. Economists at SBI, who have tried to quantify the extent of formalisation in the economy, argue that value added by the informal sector has declined from 52.4 per cent in 2017-18 to 15-20 per cent in 2020-21. Such a large decline appears improbable. But it is difficult to arrive at precise estimates.

Shifts from the unorganised to the organised sector occur at two levels — one, the formalisation of the firm, and two, the formalisation of the informal labour force. While in the case of the former, enterprises are essentially shifting from the informal to the formal part of the economy, the latter could be a consequence of both, formalisation of the firm, and/or formalisation of the informal labour force of an existing formal enterprise. But this debate on the extent to which the formal sector has gained at the expense of the informal raises several questions. First, considering that economists have argued that informal enterprises are characterised by high birth and death rates, have these informal enterprises permanently shut shop? Are the gains to the formal sector permanent? Second, have these organised sector firms absorbed this part of the informal labour force leading to a rise in the formal workforce? If not, then this forced formalisation would have simply exacerbated the employment problem. There is also the issue of estimation. Informal employment typically implies workers with no written contracts, or paid leave and other benefits including some form of social and job security provided by employer, or the government. Mere registration of unorganised workers on the e-Shram portal does not imply formalisation. However, notwithstanding these concerns, the high demand for work under MGNREGA signals continuing distress in the informal economy. Though in the absence of data its difficult to gauge precisely the extent of the distress.

This editorial first appeared in the print edition on November 5, 2021 under the title ‘The worker count’.

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