Will Covid-19 impact on informal sector disrupt GDP estimates in FY21?

While the informal sector has been affected more severely than the formal, it is also resilient and can revive quickly, say experts

The National Statistical Office has predicted that India’s gross domestic product will fall 7.7 per cent in the financial year ending March 31, 2021, which has been badly affected by the Covid-19 pandemic. This estimate, in line with the Reserve Bank of India’s recent assessment, is strongly suggestive of a faster-than-expected economic recovery, as the earlier estimates were close to 10 per cent real contraction in the economy. 

More than the second advance estimates, which are released in February, the provisional estimates which come out in May are likely to revise the GDP number considerably. Same goes for the revised estimates that would be released in subsequent years.

But even though the informal sector occupies the lion’s share of the Indian economic pie, the national accounts are not well equipped to measure the developments in the sector properly. Survey data on the sector for the base year (2011-12 in this case), and the use of appropriate rates and ratios typically give the value added in informal sector for a particular year, say 2019-20, or the current year 2020-21. 

Now this activity does not get reflected in quarterly GDP estimates, nor even in the advance annual estimates, which are based on barely seven months of data. Informal sector activity typically gets reflected in the provisional estimates (May of subsequent FY), and then in the revised estimates of GDP (January of subsequent FY). 

Will the informal sector pull down the current GDP estimate of minus 7.7 per cent? Or has the sector recovered rapidly from the Covid-19 lows? We will need to go into data, to find answers to these questions. 

Firstly, GDP estimates always get revised as new and direct data becomes available over time, with lags. For example, annual financial results of companies and government are available almost 8-9 months after the closing of financial year. The Annual Survey of Industries is available after almost two years. 

If we go by the historical revisions in GDP estimates in the past 15 years, they get divided in two parts. Revised estimates tended to be higher than advance estimates for most years till 2017-18, save for a few years. 

“The direction in revisions suggests that in most years since 2004-05, advance estimates have been an underestimation of the actual GDP growth rate,” Amey Sapre and Rajeswari Sengupta wrote in a 2017 paper that delved on these frequent revisions. 

But in the past two years, revised and provisional estimates have been considerably lower than advance estimates, data shows. 

This very period was characterised by a sequential slowdown in the economy, visible in the quarterly as well as annual GDP growth numbers. The advance estimate could not capture the impending slowdown in the coming months, which got captured as more direct data was used in later estimates. 

Now this year, the final months of FY21 are expected to show a better performance than the initial few months, even if we assume the natural seasonality in the economy. 

As this year marked the lowest point of economic growth and has already embarked on recovery, many experts believe actual economic growth may print at a level higher than the official prediction. 

But what about the informal sector? After all, the share of informal sector in the economy has not changed at all from 2011-12 to 2017-18, according to a research paper. 

Its share in India’s gross value added (GVA) was 52.4 per cent in 2017-18, close to the 53.9 per cent of 2011-12, S V Ramana Murthy, a retired NSO official who headed the national accounts division, wrote for an International Monetary Fund conference. 

In fact, he found the share of informal employment in total employment has actually worsened, from 82.6 per cent to 85.5 per cent in the same period.

In 2020-21, the impact on the informal sector has been tremendous. A recent comprehensive study on the same, by the World Bank, tries to quantify the impact for three points of time in the period: December 2019 for pre-Covid, April 2020 for peak-Covid, an August 2020 for post-lockdown. 

Summary excerpts of what the South Asia Economic Focus issue of Fall 2020 had to say:

• About 43 per cent of those employed in December 2019 were either unemployed or out of the labour force (OLF) in April 2020

• Among those employed in the informal sector in December 2019, over 44 per cent were not employed (that is, unemployed or OLF) by April 2020

• About 31 per cent of those initially employed in the formal sector were in informal employment by April 2020. Transitions from formal to informal employment do not occur at such high rates in better times.

• More than 20 per cent of those unemployed/OLF as of April 2020 were employed by August 2020, an unusually high rate of entry into employment

• .Among those still holding formal sector jobs as of April 2020, 51 per cent were in informal employment by August 2020

• Nearly 30 per cent of those still in formal jobs in April 2020 were self-employed in August 2020, while another 22 per cent were in informal wage jobs

Whether this will reduce or increase the GDP number is still not decipherable. But the study added that the impact could be much more than mere revision in official estimates. 

“The current crisis will increase the size of the informal economy. Urban non-traded services were disproportionately affected (due to the pandemic): labour productivity in these sectors is not as high in manufacturing and exports, although they employ the vast amount of informal subsistence workers,” it noted.  

Eight of ten respondents expected that informality will either significantly or somewhat significantly amplify the economic costs of the pandemic. 

“The impact on informal workers also explains why a recovery in GDP will not immediately translate into a recovery in livelihoods,” it added. 

But economists also think that the informal sector is the most resilient sector in the economy. 

“The nature of the informal sector enterprises is dynamic. The births and deaths of enterprises are also very fast,” Ramana Murthy notes in the first paper cited above. 

Pronab Sen, the first and former chief statistician of India, told this newspaper that the impact of the pandemic and restrictions on the informal sector would not be as harsh as what demonetisation—the scrapping of 86 per cent of currency in the economy—perpetrated on it.

He said that the pick up in the informal sector has been slower than that in the formal sector. 

N R Bhanumurthy, vice chancellor at Bengaluru's Dr B R Ambedkar School of Economics, had a balanced view about the impact of Covid-19 on India’s massive informal sector. 

“It may not be correct to assume the informal sector is dead. True, some entities might have vanished in the Covid-19 ordeal, but revival in demand and strong supply side measures must have generated new formal and informal enterprises as well,” he told Business Standard. 

For instance, he said, the rural sector has seen a lot of support from direct governmental spending. 

“Coupled with Budgetary support, rural areas had, and some even have it today, a surplus labour supply. This must have re-ignited rural economic activity in agriculture, construction, trade and other areas, which make up the strong driving force behind India’s informal sector,” he said. 

While the views of economists and experts may vary on the magnitude of the impact, the fact that most enterprises in it are just households working out of their small houses, and that they are largely under-financed, unregulated and unprotected, could make them the most serious victim of the economic turmoil.