SBI Says Informal Sector Shrunk, But Does 'Formalization' Mean More Jobs?

The State Bank Of India’s ‘Ecowrap’ report 2021 states that, “currently informal economy is possibly is at max 15%-20% of formal GDP”. It has cited the formalization efforts of the government in terms of EPFO (Employee Provident Fund Organization) payroll and registrations on the e-Shram portal for unorganized workers.

Launched in August this year, the e-shram portal has registered 5.3 crore unorganised workers until now, says the report.

Based on the number of establishments remitting first ECR (Electronic Challan cum Return) in the month, SBI has said that “36.6 lakh jobs have been formalised till Aug’21”.

However, the number of establishments in this category has gone down from 60,884 in 2018 to 46,656 at the end of 2020-21, showing a steady decline from 2018-19 onwards. Whereas the net number of new subscribers to the EPF scheme went up over three years between 2017-18 to 2020-21 from 15,52,940 to 77,08,375, 2020’s figure was a yearly decline of 1.5 lakh from 78,58,394 new subscribers in 2019.

The formalization rate based on EPFO data provided in the report is reproduced below:

The informal sector dominates the Indian workforce and this report only shows formalization in certain sectors which still excludes large sections of the working population. Agriculture, forestry and fishing, manufacturing, and Trade, repair, Accommodation, and Construction together accounted for 53.2% of the economy in 2017-18. All four sectors are dominated by the informal economy.

The following charts compare the informal share in these major sectors and the projections of this share for the year 2020-21 based on the Ecowrap report. 

It has projected that the contribution of the informal sector to the economy (GVA at basic prices) will come down to 15-20% from 52.4% in in 2017-18.

While there has been success in 100% formalization of  “finance, insurance, and to a large extent… real estate and agriculture”, projections for other sectors like manufacturing, mining and quarrying, and Transport, storage, communication do not show a significant decrease.

The ‘expansion’ of the formal sector need not necessarily mean that the informal sector’s share in the economy has reduced.

The Indian Express has quoted Madan Sabnavis, chief economist at Care Ratings, saying that the ‘increase’ in the formal sector has excluded large sectors of the GDP which are mostly informal: “If I am looking at the total workers registered with EPF and unorganised workers registered at e-Shram portal then it would seem to be going up. However, if I see it from a GDP calculation perspective, it will be different”.

The paper quoted another unnamed analyst at a “global financial firm” saying that “In case of high levels of formalisation, the tax-to-GDP ratio would have gone up significantly. However, it has only gone up from around 16.5 per cent to 17.5 per cent”

Additionally, the largest sector of informal economy, the agriculture sector, has increased its share to nearly 20% of the GDP after a 7.3% decline during the pandemic year. Also the report does not take into account migration of millions of people to villages after the lockdown.

 

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