Has India’s Informal Economy Really Shrunk? The Actual Story Is Different

A recent SBI report, which states that the informal economy has declined, avoids even defining ‘informal economy’.

5 min read
Hindi Female

A recent edition of “Ecowrap”, a publication of the research team of the State Bank of India (SBI), has claimed that India’s informal economy has sharply declined from 52.4 per cent in 2017-18 to between 15 and 20 per cent in 2020-21 in the three years since 2017-18. This finding by the SBI research team (SBIRT) makes India comparable to Europe in terms of the size of its informal economy.

The SBIRT estimates show that two sectors witnessed the sharpest declines in their shares of the informal economy, namely, construction and accommodation, food services and trade. In the former, the share of the informal economy declined from nearly 75 per cent in 2017-18 to between 35-40 per cent in 2020-21, while in the latter, the decline was even larger, from nearly 87 per cent to 40-45 per cent. The share of informal economy halved in real estate and ownership of dwellings, from 53 per cent to 25 per cent. Agriculture, in which the share of the informal economy was over 91 per cent in 2017-18, witnessed a decline of nearly 30 per cent, according to SBIRT.


The Report Doesn't Even Define 'Informal Economy'

The report suggests that a combination of several policy initiatives and other measures that the government has taken post-2016, or in other words, post-demonetisation, caused this dramatic transformation in the Indian economy. Two measures were singled out, namely, accelerated digitisation of the economy and the emergence of the gig economy. Using the payroll data of the Employees’ Provident Fund Organisation (EPFO), the SBIRT estimated that 36.6 lakh jobs have been formalised until August 2021. And last but not the least, the registrations on the E-Shram Portal, which was launched in August 2021 as a database of unorganised sector workers, has been credited with the formalisation of workers in the informal economy.

How credible is this narrative, given that the report chooses not to define what the “informal economy” is, while presenting a disparate set of indicators for the purported increase in formalisation of the Indian economy? The most significant shortcoming of the report is that it avoids defining the “informal economy” by saying that “informal economic activity is not specifically defined”. Why did the SBIRT choose to side-step the definitional issue when well-established definitions are available? This was done possibly to put forth arbitrary indicators to support its contention that the informal economy has declined.


The Shadow Economy Can't Be Measured Accurately

We would argue that once the definitional issues are taken care of, as we shall do in the following discussion, the question of whether formalisation of the Indian economy has indeed taken place, can be easily understood.

As is well known, the term “informal economy” has two conceptual moorings. The first refers to the “shadow economy”. The second, as explained by the International Labour Organization (ILO), is used to indicate the conceptual whole of informality covering both production and employment relationships.

Digitisation of the Indian economy, the introduction of GST and the increased use of Kisan Credit Cards, which the SBIRT argued have boosted formalisation of the Indian economy, are at best steps towards reducing the shadow economy.

However, since the shadow economy cannot be measured with any degree of accuracy, it is difficult to estimate the contribution that these three measures have made in increasing the formalisation of the Indian economy.

SBIRT has argued that the major push towards reducing the size of the informal economy has come from the employment side. According to the ILO, the informal economy includes workers of the informal sector and informal workers outside the informal sector. The latter category, namely, “informal workers outside the informal sector” is especially relevant in India, where growing evidence of casualisation in the formal (or organised) sector is an important characteristic of the labour market.


No, Gig Economy Is Not the Reason

The International Conference of Labour Statisticians had defined informal employment as all remunerative work (both self-employment and wage employment) that is not registered, regulated, or protected by existing legal or regulatory frameworks, as well as non-remunerative work undertaken in an income-producing enterprise. Informal workers do not have secure employment contracts, workers’ benefits, social protection, or workers’ representation.

Thus, the transition from informal to formal must necessarily entail legal protection of workers' rights and ensuring social protection. These have been long-standing demands of the informal workers, which successive governments have ignored.

Therefore, it is fallacious to argue, as the SBIRT has done, that emergence of the gig economy has led to the formalisation of the Indian economy. Less than two months back, the Indian Federation of App-Based Transport Workers (IFAT), representing app-based transport and delivery workers, and two individual drivers who have worked with cab aggregators, had filed a Public Interest Litigation (PIL) before the Supreme Court arguing that gig workers must be registered as “unorganized workers” or “wage workers” under the Unorganised Workers’ Social Security Act, 2008. They argued that failure to do so would be a violation of their rights to work, livelihood, decent and fair conditions of work, equality before the law, and equal protection of laws, granted by the Constitution. The workers further argued that denial of social security had resulted in their exploitation through forced labour as per Article 23 of the Constitution.


Mere Registration on E-Shram, Without Benefits

Earlier this year, the Supreme Court of the United Kingdom gave its ruling in a case brought by Uber drivers against the company for denial of benefits. In a landmark judgment, the Court ruled that the cab aggregator must recognise the drivers as platform workers and pay minimum wage and holiday pay protections. Unless a similar decision in favour of the gig workers comes in India, there is no justification for the SBIRT to include these workers in the formal sector.

From the perspective of the labour market, the SBIRT claim that the introduction of the E-Shram portal for registering informal workers has contributed to the formalisation of the labour force over the past three years is seriously flawed for two reasons. First, the E-Shram portal was unveiled in August 2021 – surely its impact would not have been felt prior to its launch. Secondly, it is impossible to understand how a mere registration on the portal would make a worker in the informal sector make her a formal sector worker, unless she is able to get all the social security benefits listed on the portal as a matter of right.

(Biswajit Dhar is Professor at Centre for Economic Studies and Planning, School of Social Sciences, Jawaharlal Nehru University. This is an opinion piece and the views expressed above are the author’s own. The Quint neither endorses nor is responsible for the same.)

(At The Quint, we are answerable only to our audience. Play an active role in shaping our journalism by becoming a member. Because the truth is worth it.)

Read Latest News and Breaking News at The Quint, browse for more from opinion

Topics:  Indian Economy   SBI 

Speaking truth to power requires allies like you.
Become a Member
3 months
12 months
12 months
Check Member Benefits
Read More