India has seen a significant formalization of its economy between 2016 and 2023, according to a report released by the State Bank of India (SBI). The share of the informal economy decreased from 25.9% to 23.7% during this seven-year period, with a formalization of approximately Rs 26 trillion. The report used the recently released Annual Survey of Unincorporated Sector Enterprises (ASUSE) to estimate the share of the informal economy.
The report observed that the decline in the informal economy was primarily driven by the manufacturing sector representing industry gross value added (GVA) and the trade and other services sector representing services GVA. In absolute terms, the total amount of informal GVA increased from Rs 18.6 trillion in FY16 to Rs 58.4 trillion in FY23. The largest contribution to informal GVA came from informal agriculture (Rs 43 trillion), followed by informal services (Rs 11.8 trillion) and informal industry (Rs 3.6 trillion) in FY23.
However, the share of informal agriculture in total GVA increased to 95.9% in FY23 from 94.8% in FY11. On the other hand, the share of informal industry and informal services declined to 5.3% and 8.8% in FY23 from 6.6% and 13.8% in FY11.
The report also highlighted the growth of unincorporated enterprises, particularly in rural areas, driven by “other services and trade.” The number of unincorporated enterprises increased from 58 million in FY11 to 65 million in FY23. While there were stability trends in the workforce, with a greater number of workers in urban establishments and a shift from manufacturing to trade, rural establishments experienced higher growth in GVA. Rural establishments showed a 2.7 times growth in GVA compared to a 2.3 times growth for urban establishments.
The report emphasized the significance of the bottom of the pyramid, with 43% of private final consumption expenditure accounted for by this group. The SBI classifies those earning less than $3.65 per day as part of the “bottom of the pyramid,” based on World Bank data that indicates 44% of the population falls into this category.
Regarding the labor force, the report noted that 45% of the labor force (568 million) is still informal, with agriculture (25.5%) and services (13.9%) being the main contributors. These two sectors account for almost 40% of the total workforce and 88% of the informal workforce.
The report concluded by acknowledging that the economy is formalizing at a faster pace than the labor force, but it anticipates that the E-Shram portal could play a crucial role in accelerating the formalization of the labor force and migrant statistics. The E-Shram portal has already registered nearly 297 million unorganized workers, with a substantial percentage (47%) coming from migrant outbound states like Uttar Pradesh and Bihar.
Overall, the report provides insights into the formalization of the Indian economy, the shifts in the informal sector, and the potential for further formalization through initiatives like the E-Shram portal.