In a report on Indian economy moving towards greater degree of formalisation, the SBI’s economic research division has batted for the need for support through a better designed tax structure, particularly indirect taxes on items like fuel for tax paying households which are contributing majorly to the private final expenditure and cross subsidising the vast majority.

The latest ECOWRAP by the research unit of India’s largest bank says that 11.4 crore tax-paying households which constitute only 8.5% of India’s total population contribute to Rs 75 lakh crore or 65% of the private final consumption expenditure and cross subsidises 91.5% of the population.

FORMALISATION OF INDIAN ECONOMY

The report starts with an assessment of the degree of formalisation by stating that India has a large informal economy with around 93% of its total workforce earning their livelihoods as informal workers (NSSO 2014). Though the pandemic has led to huge devastating impact on all the sectors of the economy but the impact has been felt more by the informal sector. Still the report assesses that there is a positive development emerging in the Indian economy amidst the pandemic in form of increase in the formalisation of the economy due to the measures initiated by the government led by PM Narendra Modi.

By taking the shrinkage in economy post pandemic mostly in the informal sector as the starting point and calculating the loss in output across sectors to get a measure of the informal economy through rigorous data validation, the article estimates that currently informal economy in India is possibly at max 15%-20% of formal GDP in comparison to estimate done by NSC in FY2018 that suggested the size of informal economy at 52% of the GDP.

The article contends that there is wide variation across sectors, though, with formal sectors like finance and insurance expanding post-pandemic.

The report explains that even globally informal economic activity is not specifically defined and “existing GDP measurement dispensations, worldwide, heavily dependent on surveys and administrative data” which adds to the challenge of measuring informal economy.

It states that sizeable informal economy is not just the issue of emerging and developing economies. For example, as per IMF, even in Europe informal economy is estimated at 20% of GDP.

The report credits the various measures initiated by the Centre since 2016 towards accelerated digitisation of the economy, with having facilitated higher formalisation of the Indian economy – at rates possibly much faster than most other nations.

The report lists the enabling factors for formalisation in the last couple of years. It says that for example, one of the sources to analyse the extent of formalisation is the monthly EPFO payroll report which provides data on establishments remitting first ECR (Electronic Challan-cum-Return) in a particular month. Based on this data it estimates almost 36.6 lakh jobs have been formalised till Aug’21.

Next data factoring is the E-Shram portal, which is the first-ever national database of unorganised workers. It has 5.3 crore unorganised workers (Oct 27 and counting) have registered in the first two months after its launch, with 62% of workers belonging to the age-group of 18-40 years and 92.0% registered workers having monthly income of less than Rs 10,000.

Next, state-wise data shows that top four states accounted for almost 73% of total registration, with West Bengal on the top followed by Odisha and Uttar Pradesh. Occupation wise, workers from agriculture sector account for 55% of registration followed by construction sector (13%). Of the 5.3 crore registered workers, 80% or 4.2 crore have bank accounts but only 25% of them or 1.1 crore workers have Aadhaar-linked bank accounts.

According to the report, E-Shram is a big step towards the formalisation of employment as the SBI research’s calculation indicates that till date the rate of formalisation of unorganised labour due to E-Shram is around 15% which is money terms is equal to Rs 6.4 lakh crore or is 3% of GDP in just 2 months.

The government launched the E-Shram portal, a database of unorganised sector workers, on August 26, 2021. The portal is the first-ever national database of unorganised workers including migrant workers, construction workers, gig and platform workers. It facilitates extending benefits of social sector schemes to the workers in the unorganised sector.

The report contends that even in Agriculture, the usage of KCC cards has increased significantly with more marginalised farmers coming under the banking sector ambit through such usage.

Formalisation increase KCC according to the report, is depicted by the fact that in the last 3-4 years the per card outstanding has increased from Rs 96,578 in FY18 to Rs 1,67,416 in FY22, an increase of Rs 70,838. At 6.5 crore cards, the amount which is formalised is in the vicinity of Rs 4.6 lakh crore.

The total number of insurance and pension accounts that have been opened across several schemes for the unorganised as well as organised is as much as 68.9 crore are cited as another factor.

Based on specific examples, the report estimates that at least Rs 13 lakh crore has come under the formal economy through various channels over the last few years, including the recent scheme on E-shram portal.

SIZE OF THE INFORMAL ECONOMY

The report explains, “Informal sector in India consists of enterprises which are own account enterprises and operated by own account workers or unorganised enterprises employing hired workers. They are essentially proprietary and partnership enterprises. The share of unorganised sector is highest in agriculture as the holdings are small and fragmented.”

It argues that since FY18, a lot has changed in Indian economy landscape. IMF has also noted that formalisation of economy has increased since the adoption of GST, enhanced digitalisation and demonetisation.

Occupation wise, workers from agriculture sector now account for 55% of registration followed by construction sec- tor (13%). However, in some states like Odisha & Chhattisgarh the share of agriculture in total registration is more than 70%. Age-wise, 62% of workers belong to the age-group of 18-40 years and registered female workers are a tad more than registered male workers.

The report of the 5.3 crore registered workers, 80% or 4.2 crore have bank accounts but only 25% of them or 1.1 crore workers have Aadhaar linked bank accounts.

FORMALISATION THROUGH DIGITAL PAYMENTS AT PETROL PUMPS

The report finds positives in the the rise in economic activities that has led to increase in the consumption of petrol and diesel. It estimates the increase by 7215 million litres in FY22.

By assuming 50% of additional petrol and 25% of diesel is paid by digital modes at petrol, approximately Rs 23,686 crore according to the report has been formalised at petrol pumps.

In the final tally the report estimates that in the last five years, around Rs 1 lakh crore has been formalised.

POWER OF FORMAL ECONOMY IS LARGE

The report underlines that according to World Bank data, 61.7% of India’s population spent less than $3.2 per day, or Rs 224 per day and 20.6% of population lived on less than $1.9 per day or Rs 133 per day.

Considering 25% of population still lives below $1.9 per day and 47% of population lives below $3.2 per day, only 80% of the remaining 71.6 crore, i.e, 57.2 crore people work in the formal economy.

Furthermore, the report estimates each household supporting a family of five to get 11.4 crore people which is roughly equal to the total number of tax payers in the economy.

Adjusting for the consumption of those below poverty line, these 11.4 crore tax-paying households or 8.5% of the population contributes to Rs 75 lakh crore or 65% of the private final consumption expenditure.

The report says, “We believe that the government should ensure that the existing tax structure is favourable to this tax paying population which constitutes 8.5% of the population but cross subsidises 91.5% of the population. To that extent, the existing tax structure particularly of indirect taxes on fuel should not be consumption negative.”