INTERVIEW | SBI's Soumya Kanti Ghosh: Real estate, construction have seen most formalisation

In his latest report, State Bank of India Chief Economic Advisor Soumya Kanti Ghosh has said that the size of the informal economy may have shrunk to no more than 20 percent from 52 percent in 2017-18.

Speaking to Moneycontrol after the release of the report, Ghosh said that apart from sustained formalisation efforts by the government, the COVID-19 pandemic also played a part in shrinking the size of the informal economy. Ghosh said that the real estate and construction sector have seen the most formalisation, while tourism and hospitality may have seen substantial job losses in the informal sector.

Edited excerpts:

What are the policy implications of your findings?

Measuring the size of the informal economy is a difficult job. India is not an exception. In fact, in developed economies also like the European Union, the informal economy accounts for around 20 percent. For India, the last estimate, which came out in 2018, estimated the size of the informal economy at about 52 percent. Our assessment is that it now stands at not more than 20 percent

I think the policy implications are huge. It is unfortunate that we don't have a system of measuring gross domestic product using Goods and Service Tax data. GST data is a sureshot proxy of the formal economy. At some point of time, we must ensure that GST collections are factored into GDP data

In 2015-16, there was a survey by the NSO that said that the total number of unincorporated non-agricultural MSMEs in the country was around 633.9 lakh. Now if you go to the GST portal, the number of new MSMEs which were incorporated in the last four years was 499.4 lakh. It is because of this reason that even when the pandemic was at its peak, the GST collections were healthy. Formalisation is the reason GST collections did not collapse during the pandemic.

You also mentioned the government e-Shram portal in your report, which registers informal sector workers.

As per a labour force survey, the total number of informal workers in the country is around 34 crores. Now, if you look at the e-Shram portal, in only the last two months, six crore informal workers have registered, which is 18 percent of 34 crore. If you want to quantify in terms of consumption, these people earn less than 10,000 rupees per month.

If you multiply that with the number of informal workers, that is approximately Rs 7 lakh crore of consumption could be formalized at the lower end. This will help the government identify the loopholes in the tax structure.

It is extremely important that the economy continues to be formalized. The taxpaying households in the country make up only 9 percent of the population but still contribute close to 65 percent of the overall consumption. A large part of our economic consumption is not formalized. More formalisation means we can design our tax structure properly.Over a longer period of time, the more we formalize the better it will be for the country to bring down the tax rates on a uniform basis.

What was the bigger reason for the shrinking of the informal sector? Increased formalisation or COVID-19-induced slowdown?

It's a very interesting question. To be honest, I think a lot of it is also because of the COVID-19 slowdown. A large part of the economy, which we were unable to measure earlier, we are now measuring. Because of COVID-19, the size of the economy may have also shrunk because a part of the informal sector may not have survived to celebrate. But effectively, formalisation has been a continuous process for the last few years, we should pay a dividend in the near future.

Which sectors have formalized the most? And which sectors have seen more job losses among informal workers?

If you ask me, the sectors which have formalized the most are real estate and construction sectors. Some sectors, like the financial sector, have actually enlarged during the pandemic. There are some sectors which are yet to travel the distance, like the agriculture sector. The e-Shram initiative by the government should lead to more formalisation in agriculture. But most of the benefits have happened in construction and real estate

The trade-transport-tourism sector seems to have been the worst hit. Our estimates show that 30-40 percent of these sectors are still informal. This is something the government needs to work on.