The cumulative impact of macroeconomic shocks such as demonetisation, implementation of goods and service tax (GST) and COVID-19, over the past few years on the unincorporated sector enterprises (USE or informal sector enterprises) has been 4.3% of FY22-23 gross domestic product (GDP), says a report from India Ratings and Research (Ind-RA).
"The number of USE which were shut down between 2015-16 and 2022-23 is estimated at 6.3mn (million), leading to Rs11.5trn (trillion) economic and about 16mn informal sector job loss. However, this period also coincided with the rise in the formalisation of the economy, which has resulted in robust tax collections", says Dr Sunil Kumar Sinha, principal economist of Ind-Ra.
"No doubt, formalisation of the economy is the way forward, but the reduced footprint of the unorganised sector has implications for employment generation. Therefore, a judicious mix of policy which allows coexistence of both formal and informal sectors needs to be pursued in the interim," he added.
According to Ind-Ra, the size of USE was Rs15.4trn in FY22-23, growing at a CAGR of 4.3% between FY15-16 and FY22-23, which contrasts sharply with the CAGR of 12.9%, which USE had recorded between FY10-11 and FY15-16. "Had the pace of growth of USE remained at 12.9% during FY15-16 to FY22-23, the size of USE in FY22-23 would have been Rs26.9trn. This translates into a cumulative economic loss to the tune of Rs11.5trn, which is 4.3% of FY22-23 nominal GDP."
The annual survey of unincorporated sector enterprises (ASUSE) released recently by the Union ministry of statistics and programme implementation (MOSPI) shows that the total number of establishments in the non-agricultural sector increased to 65mn in 2022-23 from 59.7mn in 2021-22. Employment in this sector increased to 109.6mn workers from 97.9mn workers in the same period.
The unorganised sector contributes over 44% of the country's gross value added (GVA). It employs nearly 75% of the workforce employed in non-agricultural enterprises as per the periodic labour force survey (PLFS) 2022-23.
Ind-Ra says it is widely known that the majority or around 90% of the agricultural sector workforce, comes under the ambit of the informal sector. "However, information regarding the informal sector in the manufacturing, trade and other services (MTO), unlike the corporate sector, are not available easily. The National Sample Survey Office (NSSO) has been bridging the data gap by conducting detailed surveys of such enterprises since 1997."
A glance at the latest data suggests that the real GVA of USE in MTO in 2022-23 stood at about Rs9.51trn.
"Although the real GVA of USE grew 6.9% year-on-year (yoy) in 2022-23, it was still 1.6% lower than the levels attained in 2015-16. A long-term view at the real GVA of USE gives a better picture of the deleterious impact of the shocks on the sector. While the real GVA of USE had grown at a compounded annual growth rate (CAGR) of 7.4% between 2010-11 and 2015-16, its CAGR contracted by 0.2% between 2015-16 and 2022-23", says Paras Jasrai, senior analyst at Ind-Ra.
However, the picture at sectoral level is not uniform, the rating agency says. The real GVA of manufacturing and other services in 2022-23 was 7.4% and 1.5% higher than the pre-shock level (2015-16), respectively.
"USE by acting as suppliers and service providers of numerous goods and services are an integral part of the domestic value chain. Therefore, they also seem to have benefited from the high growth of manufacturing sector post FY20-21 as the fiscal impetus provided in most of advanced economies led to a high demand for merchandise goods. The real GVA of the trade sector in FY22-23 was 9.7% lower than the pre-shock level," it added.
Overall, according to Ind-Ra, the informal sector's share in the MTO GVA (real) stood at 18.2% in 2022-23, falling sharply from 25.7% in FY15-16. "The shrinkage has been sharper in other services and trade sector. The share of informal sector in these sectors dropped to 32.3%and 21.2% in 2022-23 from the pre-shock level of 46.9% and 34.3%, respectively. In the manufacturing sector, the share of the informal sector fell to 10.2% from 12.5% during the same period."
According to the report, the number of workers employed in the USE at 109.6mn in FY22-23 was lower than the 111.3mn employed in the pre-shock period of FY15-16. "This is primarily due to job losses in the manufacturing sector. The number of workers in manufacturing at 30.6mn in FY22-23 was 5.4mn lower than FY15-16 at 36mn. However, the number of workers employed in the trade and other services sector in FY22-23 was higher than the pre-shock level. This could be due to the emergence of e-commerce, which has led to a significant expansion of retail/wholesale trade and gig workers after the FY15-16 period."
On the other hand, Ind-Ra says the number of USE stood at 65mn in FY22-23, which was marginally higher than 63.4mn in 2015-16. An addition of 5.7mn USE between FY10-11 and FY15-16 translates into an additional of about 1.1mn USE annually.
"Had the macro shocks not taken place during the post FY15-16 period and the growth in USE followed the pattern between FY10-11 and FY15-16, the total number of USE would have reached 71.4mn in 2022-23. Similarly, the number of workers employed would have been 125.3mn, assuming that each USE employs about 1.8 persons, the same as during FY15-16. In other words, there has been a loss of 6.3mn informal establishments and 16mn job losses during the FY15-16 to FY22-23 period," the rating agency says.
