Banknote ban, GST and COVID reduce informal sector GDP by 4.3%

MUMBAI: The cumulative impact of GST implementation, currency ban and the pandemic on the informal sector was as much as 4.3 per cent of GDP in fiscal 2023, or about Rs 11.5 trillion, an analysis has revealed.

According to India Ratings, the unorganised sector has been badly hit by demonetisation, GST and the COVID-19 pandemic as the number of such units is estimated to have closed down between 2015-16 and 2022-23. This has led to a loss of Rs 11.5 trillion in economic losses and around 16 million jobs in the informal sector.

The size of the informal sector stood at Rs 15.4 trillion in fiscal 2023, growing at an annual rate of 4.3 per cent between fiscal 2016 and fiscal 2023. This is in sharp contrast to the annual growth of 12.9 per cent recorded between fiscal 2011 and fiscal 2016. Had they not been affected, their size would have been Rs 26.9 trillion in fiscal 2023. This translates to a cumulative economic loss of Rs 11.5 trillion or 4.3 per cent of GDP in fiscal 2023.

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

But that period also coincided with an increase in the formalization of the economy, which resulted in higher tax revenues, said Sunil Kumar Sinha, the agency’s chief economist.

To arrive at these figures, the agency analysed trends in the non-industrial sector’s share of the overall economy, as well as long-term trends in the real gross value added of these units, the sectoral composition of jobs and establishments, and estimates of the economic and operational losses to the sector due to these shocks.

The unorganised sector contributes over 44 per cent of the GVA and employs almost 75 per cent of the non-farm workforce as of PLFS 2022-23. Around 90 per cent of the agricultural workforce falls under the informal sector.

A glance at the latest data from the National Sample Survey on informal enterprises shows that their real gross value added (GVA) in fiscal year 2023 was around Rs 9.51 trillion.

“While real GVA grew by 6.9 per cent YoY in FY23, it was still 1.6 per cent lower than the levels achieved in FY16. A longer-term perspective on their real GVA gives a better picture of the detrimental impact of the shocks on the sector. While their real GVA grew at an annual rate of 7.4 per cent between FY11 and FY16, the same shrank by 0.2 per cent annually between FY16 and FY23, according to Paras Jasrai, a senior analyst at the agency.

The picture at the sectoral level is mixed, with real gross value added (GVA) in manufacturing and other services in fiscal year 2023 being 7.4 percent and 1.5 percent higher than pre-shock levels, respectively. Real gross value added (GVA) in trade in fiscal year 2023 was 9.7 percent lower than pre-shock levels.

The informal sector’s total share of GVA was 18.2 percent in fiscal 2023, down sharply from 25.7 percent in fiscal 2016. The decline was more pronounced in other sectors, including services and trade. The informal sector’s share in these sectors fell to 32.3 percent and 21.2 percent in fiscal 2023 from pre-shock levels of 46.9 percent and 34.3 percent, respectively. In the manufacturing sector, the informal sector’s share fell to 10.2 percent from 12.5 percent during the same period.

The number of workers employed in the informal sector in fiscal year 2023, at 109.6 million, was lower than the 111.3 million employed in the period preceding the shock in fiscal year 2016, mainly due to job losses in the manufacturing sector. The number of workers in the manufacturing sector, at 30.6 million in fiscal year 2023, was 5.4 million lower than the 36 million in 2015-16.

However, the number of workers employed in the trade and other services sector in fiscal 2023 was higher than before the shock, which may be due to the emergence of e-commerce.

On the other hand, the number of informal sector units stood at 65 million in fiscal year 2023, up slightly from 63.4 million in fiscal year 2016. Between fiscal year 2011 and fiscal year 2016, it added 5.7 million units, translating to an increase of about 1.1 million per year.

In the absence of macro shocks, the total number of small businesses would have reached 71.4 million in fiscal year 2023. Similarly, the number of employed workers would have reached 125.3 million. In other words, between fiscal year 2016 and fiscal year 2023, there was a loss of 6.3 million informal establishments and 16 million layoffs.