By R Gopalan & MC Singhi,
The informal sector in India dominates agriculture and allied services, the non-agricultural sector, and micro, small, and medium enterprises, except in finance, public administration, and defence, and the transport sector, excluding road transport. Currently, data on the sector is available from both the National Account Statistics (NAS) and the National Sample Survey Organisation (NSSO) for 2015-16 and 2022-23. The intervening period had demonetisation, introduction of a nationwide goods and services tax, and the Covid-19 pandemic, which make the two points perfectly comparable.
The all-India survey of unincorporated enterprises excluding agriculture for 2015-16 estimated the total number of enterprises at 63.4 million in manufacturing, trade, and other services, employing a total of 111.3 million people. The fixed assets per establishment were estimated at `2.3 lakh and value added per enterprise at `1.8 lakh. In the survey for 2022-23, the number of establishments increased to 65 million (at an average annual rate of 0.4%) but employment declined to 109.6 million (at an average rate of 0.2%). Manufacturing enterprises faced the brunt of this decline. The value added per enterprise, value added per person employed, and fixed assets per enterprise show a moderate annual increase of 3.9%, 5.2%, and 4.6% respectively, lower than the rate of inflation during this period. Increase in the number of enterprises could be due to a lack of alternative job opportunities and a fallback position.
The aforementioned information is contrasted with the NAS for the formal and informal sector for these two years in the table, from which the following conclusions can be drawn.
First, in terms of the two parameters of net capital stock (NCS) and gross value added (GVA), the informal sector, as reflected from the NAS (NAS-IS), has outperformed the informal sector, as reflected in NSSO data (NSSO-IS). In fact, the NAS-IS has outperformed the formal sector as well (NAS-FS). The NAS-IS does not reflect the adverse impact of policy changes between 2015-16 and 2019-20. The impact was the same as that on the formal sector. The growth of the comparable NAS-IS at 10.06% was more than double the growth of the NSSO-IS. The growth of the formal sector, measured by overall GVA at 9.95%, was also lower than the informal sector, indicating the resilience of this sector to withstand policy changes.
Second, the concept that the informal sector has low capital intensity is also questioned by the data. While overall capital intensity, as indicated by the ratio of capital stock to GVA for the informal sector, is lower it has been catching up. Further, if we exclude the agriculture sector, which is mainly within the informal sector, the capital intensity of the non-agriculture sector according to NAS is higher for the informal sector in 2022-23. It has overtaken the formal sector with an increase in capital intensity from 3.64 in 2015-16 to 4.57 in 2022-23. The capital intensity of the formal sector increased from 3.84 to 4.10 during this period. Compared to the NSSO-IS, the capital intensity of NAS-FS is very high.
Third, if we compare the return on capital invested (inverse of capital intensity and defined as GVA/NCS*100), the returns are not unambiguously one-sided. The agricultural formal sector has a return of under 10% (lower than the overall GVA growth), compared to an informal sector growth of over 80%, primarily because agriculture has not seen capital deepening in most areas. Construction is another sector with similar differences in formal and informal sector returns. But in the core informal sectors of trade, transport, manufacturing, and other services, the formal sector has better returns in services, while the informal sector has better returns in manufacturing. However, the NSSO-IS depicts very high returns because of lower capital intensity. Surprisingly, the NAS-FS for the non-agriculture sector shows better returns (24.37% in 2022-23) than the NAS-IS at 21.9%. Higher returns seen in the NAS numbers in the services sector may partly be due to public administration and defence, which has an exclusive presence in the formal sector, and which invariably has a lower capital intensity and consequently higher returns of capital employed.
The policy implications of the analysis are very different than we are familiar with. First, given the increasing capital intensity of the NAS-IS, which is actually converging to the formal sector, the credit flow and institutional capital flows are important – especially capital credit without collateral. In fact, non-agricultural NAS-IS is graduating to formalisation faster than NSSO data would like us to believe. Secondly, given the employment per enterprise in the informal sector, which the Periodic Labour Force Survey data also confirms, nearly 50% of total enterprises (formal and informal) are own account enterprises, which makes the factoring of services and digitisation even more relevant for the informal sector. Third, given the data differences between NSSO and NAS numbers, policy options are significantly different and often deviate to different directions. The difference between NSSO and NAS data is not confined to the informal sector alone, but are of the same magnitude in data relating to private consumption expenditure. The ministry of statistics and programme implementation should attempt to reconcile the differences quickly. Fourth, our analysis definitely points to reallocation of resources for optimising return from capital, a relatively scarce resource in the country.
The authors are former civil servants.
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