Note-ban, GST, COVID shave off 4.3% of GDP of informal sector

This period also coincided with the rise in the formalisation of the economy, which had resulted in robust tax collections.
Demonitisation - Representational Image.
Demonitisation - Representational Image.(File Photo)

MUMBAI: The cumulative impact of the GST roll-out, note-ban along with the pandemic on the informal sector has been a whopping 4.3 per cent of FY23 GDP or worth about Rs 11.5 trillion, shows an analysis.

According to India Ratings, the unorganised sector was severely impacted by demonetisation, GST and the COVID-19 pandemic as the number of such units shut down between 2015-16 and 2022-23 are estimated at 6.3 million. It lead to Rs 11.5 trillion economic and about 16 million informal sector job losses.

The size of the informal sector was Rs 15.4 trillion in FY23 growing at an annual rate of 4.3 per cent between FY16 and FY23. This contrasts sharply with the annual growth of 12.9 per cent they recorded between FY11 and FY16. Had they not been hit, their size would have been Rs 26.9 trillion in FY23. This translates into a cumulative economic loss to the tune of Rs 11.5 trillion or 4.3 per cent of FY23 GDP.

While the disastrous demonetisation was announced in November 2016, the lop-sided uniform indirect tax, that GST was supposed to be, was from July 2017 and the pandemic wreaked havoc from April 2022 through October 2021.

But this period also coincided with the rise in the formalisation of the economy, which has resulted in robust tax collections, says Sunil Kumar Sinha, the principal economist at the agency.

The agency has analysed the trends of the share of the unorganised sector in the overall economy and also the long-term trends in real gross value added of these units, the sectoral composition of jobs and enterprises, and the estimate of the economic and operational loss to the sector because of these shocks to arrive at these numbers.

The unorganised sector contributes over 44 per cent to the GVA and employs nearly 75 per cent of the work force employed in non-agricultural enterprises as of PLFS 2022-23. Around 90 per cent of the agri-sector workforce comes under the ambit of the informal sector.

A glance at the latest National Sample Survey data on informal enterprises suggests that their real GVA in FY23 stood at about Rs 9.51 trillion.

“Although the real GVA grew 6.9 per cent y-o-y in FY23, it was still 1.6 per cent lower than the levels attained in FY16. A long-term view at their real GVA gives a better picture of the deleterious impact of the shocks on the sector. While their real GVA has grown at a annual growth rate of 7.4 per cent between FY11 and FY16, the same contracted by 0.2 per cent annually between FY16 and FY23, according to Paras Jasrai, a senior analyst at the agency.

The picture at sectoral level is not uniform as the real GVA of manufacturing and other services in FY23 was 7.4 per cent and 1.5 per cent higher than the pre-shock level respectively. The real GVA of the trade sector in FY23 was 9.7 per cent lower than the pre-shock level.

Overall, the informal sector’s share in GVA stood at 18.2 per cent in FY23, falling sharply from 25.7 per cent in FY16. The shrinkage has been sharper in other services and trade sectors. The share of the informal sector in these sectors dropped to 32.3 per cent and 21.2 per cent in FY23 from the pre-shock level of 46.9 per cent and 34.3 per cent respectively. In the manufacturing sector, the share of the informal sector fell to 10.2 per cent from 12.5 per cent during the same period.

The number of workers employed in the informal sector at 109.6 million in FY23 was lower than 111.3 million employed in the pre-shock period of FY16 primarily due to job losses in the manufacturing sector. The number of workers in manufacturing at 30.6 million in FY23 was 5.4 million lower than 2015-16 when it was 36 million.

However, the number of workers employed in the trade and other services sector in FY23 was higher than the pre-shock level, which could be due to the emergence of e-commerce.

On the other hand, the number of informal sector units stood at 65 million in FY23 marginally higher than 63.4 million in FY16. There was an addition of 5.7 million units between FY11 and FY16 which translates into an addition of about 1.1 million annually.

Had the macro shocks not taken place the total number of small units would have reached 71.4 million in FY23. Similarly, the number of workers employed would have been 125.3 million. In other words, there was a loss of 6.3 million informal establishments and 16 million job losses between FY16 and FY23.

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