Formalization would improve productivity of small firms, provide secure employment to workers and generate higher tax revenues, we were told.
The government’s cheerleaders proclaimed victory soon after the war began. They claimed that the twin shocks of demonetization and GST had managed to purge the Indian economy of undesirable informal elements.
Without any credible evidence, they claimed that small informal enterprises were getting registered with the GST network in large numbers. Growth in GST registration itself became a proxy indicator of formalization.
To what extent the growth in overall GST numbers reflected the usual growth of corporate enterprises and to what extent it reflected a shift of informal enterprises to the formal sector was never answered.
A nationally-representative survey of unincorporated enterprises released earlier this year provides a reality check. 63% of unincorporated enterprises in the country were not registered with any statutory authority in 2022-23, it found.
This is only a marginal improvement compared to 2015-16, when 69% of unincorporated enterprises were found to be unregistered. By definition, unincorporated enterprises exclude firms registered under the Companies Act.
So, surveyors asked these enterprises whether they were registered under any other central or state Acts (such as the GST Act, Shops and Establishment Act, etc).
As economists Ajit Ranade and Kiran Limaye pointed out in Mint, entering the GST net is a disadvantage for micro enterprises selling directly to consumers at wafer thin margins, since they are unable to claim any input tax credit. Hence, only large unincorporated enterprises were found to have a GST registration.
The survey data also suggests that unincorporated enterprises accounted for a lower share of gross value added (GVA) in 2022-23 than they did in 2010-11.
Since our official GVA and gross domestic product (GDP) estimates are pegged to the 2010-11 survey and have relied on formal sector proxies for quarterly and annual updates, the shrinking share of the informal sector hasn’t been recorded in the national accounts till now.
If our national accountants and their advisors do an earnest job in the ongoing base revision exercise, they would have to lower informal sector estimates in the new GDP series and downgrade informal-sector growth in the back-series.
Despite its decline, the informal sector continues to employ a sizeable section of the Indian workforce. Till well-paid salaried jobs remain scarce, the informal sector will remain an important safety net for India’s workforce.
Our policymakers would do well to recognize this fact. They must also learn to distinguish between two very different kinds of informal activity—one that is meant to escape the law and another that is just a means of survival.
‘Informality’ is a catch-all term that includes a wide range of activities: from selling pakoras to peddling drugs. When the International Labour Organization first introduced the ‘informal’ classification in the 1970s, it faced criticism from scholars who found the categorization ambiguous.
Yet, the concept gained acceptability over the next few decades, with some multilateral organizations using the term ‘shadow economy’ interchangeably with ‘informal economy.’ This creates the impression that there is something illicit or undesirable about this sector.
However, a large part of the informal sector comprises tiny enterprises run by a single person trying to eke out an honest living, often with assistance from family members.
The umbrella classification of MSME (micro, small and medium enterprises), which includes both listed corporate entities and millions of tiny proprietorships, also tends to hide more than it reveals. The needs of SMEs are quite different from those of micro enterprises.
SMEs tend to have relatively better access to markets and formal credit. Micro enterprises run by individuals or households often rely on friends and family to raise capital or access new markets.
Timely and accurate data can help shape friendlier policies for micro enterprises. The ministry of statistics and programme implementation (Mospi), which used to conduct surveys of unincorporated enterprises every five years, is now doing so annually.
That is a good first step. It now needs to integrate data from other sources, including the Reserve Bank of India and National Payments Corporation of India, to provide more high-frequency indicators for this segment.
It should work with state statistical bureaus to improve coverage and accuracy of state-level enterprise registers. These could be used to launch quick assessment surveys.
Given the fluid nature of household enterprises, some of which may be involved in multiple economic activities, non-conventional data-gathering tools may also be needed. Mospi should collaborate with the research community to conduct detailed longitudinal studies of the household sector.
These studies could provide a richer understanding of household enterprises. Better mapping of the household economy would help prevent policy missteps.
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