A week ago, SBI’s Research department released a report stating that India’s informal economy has shrunk to 20% of its GDP. And since there’s been a lot of debate about this number, we thought we’d unpack it a bit in today’s Finshots.


The Story

If you begin a Google search with words “is the informal economy”, the first autofilled result shows “ is the informal economy illegal”. So, let’s clear something up. The informal economy is not an illegal economy.

Think of the fruit and vegetable stalls in the market, the hawkers selling your fried peanuts at traffic lights, labourers working to build that house next door. None of what they do is illegal. They are all part of the economy trying to eke out a living. They all contribute to the GDP. In fact, the International Labor Organization (ILO) estimates that nearly 60% of the world’s adult labour force is part of the informal economy. They work without contracts, paid leaves, health benefits, or social security.

But there’s another problem here — a problem that manifests itself on the aggregate level. How do we accurately measure the informal economy? Especially when no one, including government bodies, seems to know what the informal sector actually entails. Well, the truth is, we can’t. Because the only thing we have right now is some decent estimates — not the most accurate ones. So whenever you hear stories about India’s informal economy making up as much as 50% of the GDP, know that they may not entirely be precise. And as such, anybody making predictions about the size of the informal GDP must tread carefully.

With this introduction out of the way, let’s talk about the matter at hand — The SBI Research team and their assessment that India’s informal economy has shrunk from about 50% to 20%. Now the team believes that the the gig economy is a big driver of formalization. That the likes of Uber and Zomato has introduced a large number of the unorganized labour forced into the formal economy. And while that seems like a reasonable proposition, are these people really part of the organized labour force?

Think about it — These people still don’t have social security (for instance, access to Employee Provident Fund). And experts will tell you that this is a key feature to distinguish between those in the formal economy and those that don’t fall under this ambit. And while the government will likely introduce policies to offer gig economy workers a better safety net in the future, there’s a lot of room for interpretation until then.

Then there’s the fact that the SBI arrived at the infamous “15%–20%” figure by using data from a pandemic year. That most of their projections are based on the fact that the informal sector was hard hit during the last year. And this is problematic for a whole host of reasons. As data journalist, Pramit Bhattacharya notes — "The second problem with SBI’s analysis is that it uses an extraordinary reference point (the pandemic year) to make a claim about a structural transformation in the economy. Imagine a drought year where half of India’s agricultural output and employment gets wiped out. That will bring down the share of farm jobs in the economy, but the very next year that share would rebound as the farm sector recovers. It would be absurd for anyone to claim just after the drought that the structure of the Indian economy has changed. Similarly, it would make no sense to claim that the informal sector has disappeared simply because many informal enterprises shut shop during the pandemic."

Even the methodology they used to estimate the share of the informal economy has come under a lot of scrutiny. Bottom line — “While there is ample evidence to suggest that the informal economy is being formalized, there’s still a lot of debate about the pace at which progress is being made.”

Until then…

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