The share of the informal economy can be up to one-fifth

The said column makes four points regarding the SBI report. This opp provides detailed feedback to each.

The first point relates to research methodology. The column in question constructs a hypothetical model of India’s gross domestic product (GDP) by assuming equal shares of the formal and informal sectors. It then assumes a post-Covid GDP, assigning losses to the formal and informal sectors, and then re-estimates the post-Covid share of each. It then compares these figures with another set of numbers assuming zero loss for the formal sector, stating such an assumption in the SBI report. Obviously, when these two sets of data are compared, the informal part is much higher in the second case. The column uses these numbers to conclude that the SBI report suffers from this loophole.

However, the column misses out on an important point. The SBI report clearly stated, “Our starting point is an assumption that the post-pandemic shrinkage in the economy is mostly informal and hence the reduction in output across all sectors gives us a measure of the informal sector. Thus, it is It is important to note that Ecowrap is “mostly informal” and not entirely informal in describing the post-Covid GDP loss. Second, since we do not want to use the informal to formal ratio for any estimate, We took a completely hybrid approach, so let us illustrate our methodology with numbers.

Assume a quarterly pre-pandemic GDP level 100 in April-June 2019. Now suppose the level of the economy was 75 in April-June 2020, when covid lockdown happened, loss of production 25. Let’s also assume it went well 88 in April-June 2021, which means the economy still had to make up for losses of 12. Smoothing, Average of 75 more 88 is 81.5, by goal 82. We make a logical assumption that whatever the economy has done is entirely due to the formal sector. The formal economy is at its peak on the basis of 82 And the informal economy is projected as residual 18. However, if we make this assumption, we will get an upward bias in our estimation of the informal sector, as there are clearly disadvantages to the formal sector which we are ignoring. However, a recent column in Mint, using the ratio approach incorrectly, reinterprets the entire loss as uneconomical.

Second, why did we use the pandemic as a reference point? This is a fair question. The column acknowledges that it is easier for informal firms to restart operations than large firms. This is in contrast to the widespread belief that the informal sector disappeared during the pandemic, an assumption we had made. We reiterate that our sole purpose of using the pandemic was to measure the extent of GDP destruction for the formal and informal sectors, and nothing else. It is always better to use real-time data than surveys.

The third point is that we estimate that our GDP figures accurately capture the informal sector. this is not right. We have just made an overall effort to capture the informal sector’s share using a different methodology. We are surprised that so many articles, including the column, only mention the headline unofficial number. Our report also clearly states that the agriculture sector is still 75% informal and even the trade, hotel and construction sectors have an informal share of 35%-45%. However, sectors such as finance have an informal component that is close to zero, thanks to a number of government initiatives, and that averages out the headline numbers. In fact, only the finance sector was the one that grew 10% after the pandemic.

Finally, we unequivocally acknowledge that a large section of India’s workers are deprived of formal contracts, including social-security benefits, as the column says. The informal economy is indeed heterogeneous. Self-employment and wage-employment are different. However, the government is making efforts in this direction by going on overdrive to regularize informal workers on the e-shram portal. But another noted economic commentator said in a recent article that it is foolish to talk of formality if such people are not entitled to Social Security benefits. Well, the SBI report only said that it is an ongoing process. Recall that when Jan Dhan accounts were first opened, more than 95% had zero balance and this was consistently highlighted as a policy failure; Nevertheless, these accounts are now acting as a vehicle for women empowerment.

Finally, an increase in India’s currency-to-GDP ratio to 14.5% in 2020-21 from 12.4% in 2010-11 is also cited to support the argument for continued informality. But if we adjust for pandemic losses in 2020-21, the ratio is only 12.7%. A similar example is the tax-to-GDP ratio that rose from 10.5% in 2015-16 to 11% in 2018-19 and has since retreated, as the exemption limit was raised to tax. 5 lakh in 2019-20. But critics miss such tax changes and consider the fall in that ratio after 2018-19 as a less formality. Aren’t these examples of convenient statistics?

Soumya Kanti Ghosh is the Group Chief Economic Advisor of State Bank of India. These are personal views of the author.