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LATEST NEWS UPDATES | How India’s informal economy is shrinking, and why that’s good news in the long term -Ila Patnaik and Radhika Pandey

How India’s informal economy is shrinking, and why that’s good news in the long term -Ila Patnaik and Radhika Pandey

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published Published on Nov 5, 2021   modified Modified on Nov 6, 2021

-ThePrint.in

Greater formalisation will see a shift from low-paying, labour-intensive jobs in informal sector to more productive, formal-sector jobs. This could lead to disruption in short term.

A report issued by the State Bank of India (SBI) last month estimated that India’s informal economy has shrunk to 15-20 percent of the GDP in 2020-21 from 52 percent in 2017-18. The report uses employment and digitisation to assess the extent of formalization in the economy. The report finds that Rs 13 lakh crore has come under the formal economy through various channels over the last few years. 

This raises the important question of what the formal sector is. Formalisation has alternatively been understood to be a move to formal finance such as banks or digital payment systems, an increase in the share of output produced by firms in the tax net, an increase in the number of employees in registered enterprises, or an increase in GDP produced in enterprises that are part of the tax net. 

‘Formal’ measured by financial transactions 
In the SBI report, the measure used appears to be the use of digital channels or formal finance. 

The use of digital payments, formalisation of agricultural credit through Kisan Credit Cards and the increase in online purchases during the last three years have contributed to increasing the share of transactions made using formal finance. 

A combination of demonetisation and implementation of GST set the pace for cashless transactions in business and reduced the cash intensity of the economy. These reforms triggered a process of transformation of the economy from one that is typically dominated by cash to one in which the formal finance or banks and payment banks have a larger role. 

Though these laid the foundations, it was the Covid-19 pandemic that provided a further opportunity to accelerate the process of digitalisation. Formalisation got a boost during this time through the greater proliferation of digital transactions. Concerns over contracting infection propelled people not only in metros but also in small towns to shift to digital payments. Digital payments touched a record high from all channels from the United Payments Interface (UPI) and the Aadhaar-enabled Payment System (AePS).

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ThePrint.in, 5 November, 2021, https://theprint.in/ilanomics/how-indias-informal-economy-is-shrinking-and-why-thats-good-news-in-the-long-term/761659/?amp&fbclid=IwAR1zmLrMiip2IMfWstZIW8O8BakdBYW9dFVnHLyh4rbMMcK1MmPvp-7Zr14


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