An Estimate Of A Big Formal Shift That Stretches Credulity Too Far

Context: Bold claims of formalization do not stand chance pertaining to data on the ground.

Issues associated with formalization of Indian economy

• Not proper definition of informal economic activity: As it is difficult to define informal.
• Lack of credible data due to improper source of information: Source of information on formalization is based on various researches instead of Labour force surveys.
• Methodological defect: Registrations at E-Shram portal used by SBI research to point out high degree of formalization without any substantial basis. As question arises
  • Are all the 57 million workers who have registered on the E-Shram getting the benefits of social-sector schemes?
• Data mismatch: SBI research points out data from Kisan Credit Card (KCC) usage to show formalization of agriculture. But Report of the Internal Working Group to Review Agricultural Credit pointed out that“
  • Approximately 30% of agricultural households still avail credit from non-institutional sources.
  • In Tamil Nadu, Andhra Pradesh, Kerala and Karnataka, 71% of the crop loans are disbursed outside of KCC.
• Low-capacity utilization of formal sector: In this scenario, increasing formalization could possibly mean the destruction of informal jobs.
• Formal enterprises can employ informal workers: Real Estate Company outsource the actual building of an apartment block to a contractor, which then informally hires workers by the day.
• Considering gig workers considered as part of the formal economy even if their incomes aren’t protected if the business is negatively impacted.
• Disruptions due to pandemic: Due to replacement of demonetized money, cash in the system went up again after pandemic.
• Due to recovery of economy, informal enterprises may start springing up: As ILO document titled Measuring Informality points out: “There is a high birth and death rate among informal sector units." 
• Trouble in informal sectors: Businesses in the informal sector have been destroyed by pandemic disruptions putting burden on formal sector.
  • As Work demanded under the Mahatma Gandhi National Rural Employment Guarantee Scheme through this financial year has been almost similar to what was demanded last year.

Conclusion: There is no denying that India’s informal economy has shrunk since covid began. But that doesn’t mean that its size has contracted from 52% to 15-20% and reached European levels, as the SBI report suggests.

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