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LATEST NEWS UPDATES | Don't believe everything they tell you about breakneck formalization -Pramit Bhattacharya

Don't believe everything they tell you about breakneck formalization -Pramit Bhattacharya

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published Published on Nov 9, 2021   modified Modified on Nov 9, 2021

-Livemint.com

There is good reason to doubt the reported decline in the informal sector’s share of Indian GDP

A State Bank of India (SBI) report that grabbed headlines recently suggests that India’s informal sector has shrunk dramatically in recent years. Given that the claim comes from the economic research team of a major state-owned financial institution, it deserves scrutiny.

The SBI report examines the likely loss of output or gross domestic product (GDP) across sectors in the pandemic year (fiscal 2020-21), assumes this GDP loss to be concentrated in the informal sector, and on the basis of that assumption, arrives at a striking claim that the informal sector’s share in India’s GDP has shrunk from about 52% three years ago to a “max 15-20%" of GDP.

There are four key problems with this analysis. Firstly, the assumption that the entire GDP loss in 2020-21 represents the loss of just the informal sector is too simplistic. The informal sector was undoubtedly hard hit. But given the widespread evidence of revenue losses suffered by the formal sector, it is hard to justify the assumption of zero loss in the formal sector. The report acknowledges the possibility that the formal sector was hit, but justifies its extreme assumption on the ground that it prevents a “downward bias" in its conclusions. This justification doesn’t hold water. A simple example can show how this assumption actually leads to the extraordinarily low share of the informal sector that the report arrives at.

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Livemint.com, 9 November, 2021, https://www.livemint.com/opinion/columns/big-claims-of-rapid-economic-formalization-are-suspect-11636390573314.html


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