India’s Informal Sector-share has fallen to just 20% (52.4 % in 2018)

About 80% of economy now formal following digitisation drive, pandemic.

A sizeable informal economy is not just an emerging and developing economy feature, and according to the IMF, 20 % of the European GDP is an informal economy.

The digitisation drive and pandemic-induced emergence of the gig economyhave led to a faster formalisation of the economy, with the share of the informal sector shrinking to just 15-20 % in 2021 from 52.4 % in 2018 due to digitisation and the rapidly expanding gig economy.

Many measures since the note-ban in November 2016 have accelerated digitisation of the economy, and the pandemic-induced emergence of the gig economy has facilitated higher formalisation of the economy, at rates possibly much faster than most other nations.

The note ban hit hardest the informal sector which then constituted 93 % of the workforce. The second blow to the informal economy was the GST and the final and the hardest hit came from the pandemic.

The 2011 Census pegged the size of the informal sector in trade, hotels, transport, communication and broadcasting at 40 %; in construction at around 34 %; 16 % of public administration; and 20 % of manufacturing and almost 100 % formalisation in finance, insurance and utilities, and to a large extent in real estate and agriculture. The formal financial sector has even expanded by 10 % post-the pandemic, with the DBT transfers gaining traction and that of formalised utility services size expanded by 1 % during the pandemic. Almost 36.6 lakh jobs have been formalised till July 2021.

Since FY18, the agriculture sector has been formalised by 20-25 % due to the increasing penetration of KCC credit and now the informal agriculture sector is 70-75 %.

POWER OF FORMAL ECONOMY IS LARGE: 8.5% OF THE POPULATION CONTRIBUTING TO 65% OF THE CONSUMPTION

According to the World Bank data, 61.7% of our population lived 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, if we take each household supporting a family of 5, we get 11.4 crore 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 HH or 8.5% of the population contributes to Rs 75 lakh crore or 65% of the private final consumption expenditure.


Impact Analysis

· Accelerated formalisation is behind the surge in tax collections

· Direct tax collection jumped 47% in the June quarter from the pre-pandemic level

· This seemingly-accelerated shift towards formalisation, coupled with cost-cutting by India Inc, have boosted the profitability of large companies, leading to strong growth in the corporation tax collection

· This has led to greater consumer reliance on the formal sector

· The consumption pattern gravitates more towards discretionary items, including luxury goods (which attract higher GST rates) than the essentials

· A shift in wealth distribution away from the poor and the lower-middle class to the upper-middle class or the rich boosts income tax mop-up because the tax regime is usually progressive

· The formal/tax-paying portion of the non-agriculture economy has gained market share at the cost of the balance, benefiting from the structural shifts generated by demonetisation, GST as well as the Covid shock

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