There has been a lot of discussion on the possible adverse impact of the three major structural changes in the Indian economy, — demonetisation, introduction of Goods & Services Tax and pandemic and the related lockdown on the informal sector in the economy.

How did these three events impact the informal sector?

The National Accounts do not per se define informal sector. It provides disaggregate data for Gross Value Added, Gross Capital Formation (fixed capital formation and overall including the inventories and stocks), Net capital stock (fixed capital stock and overall for public sector, private corporate sector and the households).

The households sector comprising own account enterprises and other unincorporated ones, is usually taken to correspond the informal sector. The Periodic Labour Force Survey report of 2019-20 (July 2019 to June 2020), has defined informal sector to cover partnership and propriety enterprises as informal sector, though it has recognised informal employment in formal sectors as well based on labour conditions and terms of service. The survey has estimated 77.1 per cent of the total workforce to have been engaged in informal sector. Agriculture, construction, trade and road transport are the dominant sectors in this segment.

Shift in the shares of the household sector

Notwithstanding the recent policy related changes and the pandemic, there is hardly any evidence of any significant decline in the share of informal sector in the economy. As per the first revised estimates of National Accounts released on January 31, 2022, the overall share in gross value added (GVA) of the household sector has declined from 45.5 per cent in 2011-12 to 43.5 per cent in 2020-21. In fact this share has generally been stable at 44 per cent since 2015-16, prior to demonetisation and GST.

Even pandemic which resulted in a decline in GVA in 2020-21, did not affect the share of household sector. Overall growth of GVA of 8.8 per cent during 2011-12 to 2020-21 of household sector at current prices was only a shade lower than the economy wide growth of 9.3 per cent during this period. The share of non agriculture GVA of household sector, however, witnessed a sharper fall, particularly in 2020-21. The share of the household sector in gross capital formation (GCF), however, witnessed a consistent fall from 43.3 per cent in 2011-12 to 39.0 per cent in 2020-21, due to perhaps lower average annual growth.

Overall GCF growth of household sector during 2011-12 to 2020-21 at 4.4 per cent was significantly lower than the economy wide growth of 5.6 per cent. The observed GCF levels were, to a considerable extent, facilitated by a higher growth of 9 per cent of the public sector, including the core government. The share of household sector had in 2015-16 decelerated to 31.2 per cent because of a negative growth in GCF in that year.

While this decline may be due to the inclusion of results of survey of unincorporated non-agriculture enterprises that was released then, it is hard to explain an upsurge later in 2016-17 and 2017-18. With availability of data from a new survey likely to come in future, we may perhaps see corrections to these numbers as well.

Demonetisation, GST and pandemic in fact witnessed an increase in share of GCF post 2015-16 on a continuous basis. The share of household sector in fixed and total capital stock had continued to rise until 2019-20 (the latest year for which this data is available). This being a stock variable and indicative of capital accumulation, a lower accretion may not affect the overall stock.

There has, however, been a sharp decline in share of outstanding non food bank credit to sectors predominantly in the informal sector, but such decline is seen in post pandemic period and not during demonetisation of GST. This share, however, shows some improvement in the current year and was 28.4 per cent as on end December 2021, an increase of 2 percentage points. Based on shift in shares, pandemic has indeed affected the informal sector more than proportionately.

Inter-sectoral shares

While there is near doubling of the share of household sector in the activity group ‘utility services’ comprising electricity, gas, water supply and other utility services, there is a sharp decline in the share in ‘Real Estate and Professional Services’.

Household sector had no presence in financial services and services of public administration and defence. The dominant position of household sector continued in 2019-20 for agriculture and allied activities; construction; road transport; and trade and hotels. While a decline in the share in professional services, including real estate services, may be due to consolidation under demand pressure, an increase in the share in utility services is somewhat difficult to explain.

While the new initiatives on water supply and sanitation, coverage of households for other sources of fuel has raised the share of this activity in 2019-20 to 2.6 per cent from 2.3 per cent in 2011-12, which is indicative of wider inclusion in service generation and delivery.

For GCF, share of household sector has increased in activity groups of mining and quarrying; construction; trade and hotels; and to an extent in other services, but it has declined for transport, storage and communication; and real estate and professional services.

Increase in the share in GCF in certain sectors is indicative of increasing importance of minor minerals for construction, increased emphasis on housing in rural and urban areas and increased opportunities in trade.

These two activity groups of trade and hotels, being contact intensive sectors may, however, face erosion in generation of capital during pandemic and post pandemic period. This perception can only be validated by the next series of NAS.

However, a consistent increase in the share of household sector in overall GCF since 2015-16 and until 2020-21(which has been the most affected pandemic year), suggests that sectoral shift in shares may not perhaps be significant.

Further, from the disaggregated NAS data available now, it is difficult to attribute such shifts to the three structural factors of demonetisation, GST and the pandemic.

Third, the low share of agriculture and allied sector in capital stock relative to their share in GVA is a historical fact and the share of household sector has also been in line with this trend.

An increase in the share of household sector in activity groups mining, construction and trade and hotels is also in line with their increase in share in GCF as capital stock is nothing but the accumulated capital formation.

However, a sharp increase in the share of household sector in capital stock in activity group other services is perhaps indicative of expansion of household activities in this sector covering hospitality services, education and personal care. The impact of pandemic on these activities is mixed. The current data, however, do not suggest any collapse of household or informal sector, as is being made out.

However, we need to wait for National Accounts 2022 report and the Report of the Survey of unincorporated enterprises which is underway to have a definitive view about this.

Gopalan is a former Finance Secretary, and Singhi is a former Senior Economic Adviser, Ministry of Finance