The Shift In India's Informal Sector Through Demonitisation, GST & COVID; What Unfolded In Last 7 Years?

The latest Annual Survey of Unincorporated Enterprises (ASUSE) for 2021-22 and 2022-23, released by the Ministry of Statistics and Programme Implementation (MoSPI), offers critical insights. This survey sheds light on significant changes in employment and enterprise numbers against the backdrop of three major exogenous shocks-demonetisation, the rollout of the Goods and Service Tax (GST), and the COVID-19 pandemic.

A Decline in Informal Employment
The data reveal a notable reduction in the number of workers employed in the informal sector, dropping by 16.45 lakh or approximately 1.5% to 10.96 crore in 2022-23 from 11.13 crore in 2015-16. This decline is significant, considering the crucial role the informal sector plays in India's economy, providing employment to nearly 75% of the workforce in non-agricultural enterprises.

The survey results mark the first detailed analysis of informal sector employment since 2015-16, offering an understanding of the long-term impacts of demonetisation in November 2016, the GST implementation in July 2017, and the COVID-19 pandemic starting in March 2020. Each of these events posed unique challenges to the informal sector, affecting its growth and employment capacity.

An Increase in Unincorporated Enterprises
In contrast to the decline in employment, the number of unincorporated enterprises saw an increase, rising by 16.56 lakh to 6.50 crore in 2022-23 from 6.33 crore in 2015-16. This growth suggests resilience and adaptability within the sector, despite the external shocks it has faced. The data indicates that while employment numbers dipped, the entrepreneurial spirit remained strong, with more enterprises coming into existence.

State-Wise Variations in Employment Trends
The impact of the three economic disruptions varied across different states. Among the top ten states that account for nearly three-quarters of informal sector workers in India, five states-Maharashtra, Bihar, Gujarat, Madhya Pradesh, and Odisha-recorded an increase in informal employment between 2015-16 and 2022-23. Conversely, states like Uttar Pradesh, West Bengal, Tamil Nadu, Karnataka, and Andhra Pradesh saw a decline in the number of informal sector workers during the same period. These five states alone account for 42% of all informal workers.

Maharashtra stands out with a consistent increase in informal sector workers, rising to 1.15 crore in 2022-23 from 91.23 lakh in 2015-16. This trend highlights the state's capacity to generate informal employment despite broader economic challenges.

Uttar Pradesh, however, presents a mixed picture. While it recorded a decline in informal sector workers to 1.57 crore in 2022-23 from 1.65 crore in 2015-16, there was a notable increase from 1.30 crore in 2021-22. This fluctuation reflects the economic distress and possible shifts from the formal to the informal sector in response to immediate post-pandemic challenges.

West Bengal experienced a more pronounced decline, with informal sector workers dropping to 1.05 crore in 2022-23 from 1.35 crore in 2015-16. However, like Uttar Pradesh, there was a slight increase from 1.02 crore in 2021-22.

Bihar presented a unique trend. Known for being a significant source of migrant workers, Bihar recorded a decrease in informal sector workers to 43.22 lahks in 2021-22 from 53.07 lahks in 2015-16, only to see a sharp increase to 58.95 lakh in 2022-23. This surge surpassed pre-pandemic levels, indicating a robust recovery and possibly an increased reliance on the informal sector for employment.

Economic Contributions and Challenges
The informal sector's output, in terms of Gross Value Added (GVA), presents a mixed picture. According to India Ratings, the real GVA of unincorporated sector enterprises (USE) grew by 6.9% in 2022-23 but remained 1.6% lower than pre-pandemic levels. Over a longer period, the real GVA of USE grew at a compound annual growth rate (CAGR) of 7.4% between 2010-11 and 2015-16 but contracted by 0.2% between 2015-16 and 2022-23.

This contraction highlights the impact of the aforementioned shocks on the sector. Despite some recovery, the long-term growth trajectory of the informal sector has been negatively affected.

Key States for Unincorporated Enterprises
In terms of the number of unincorporated enterprises, Uttar Pradesh, West Bengal, and Maharashtra continue to hold the largest shares in both rural and urban areas. This concentration indicates the significant role these states play in the overall informal sector landscape of India.

Informal Sector's Broader Economic Role
The unorganised sector remains a vital part of India's economy, contributing over 44% to the country's GVA and employing a substantial portion of the workforce. The release of the ASUSE data after a long hiatus provides insights into this sector's health and its role as a job generator.

The informal sector is often seen as a critical buffer during economic slowdowns, absorbing labour that the formal sector cannot. The survey results show the need for targeted policies to support this sector, ensuring its resilience and capacity to provide employment during economic turbulence.

The ASUSE data for 2021-22 and 2022-23 highlights both the resilience and vulnerabilities of India's informal sector. While the sector has seen a reduction in employment, the increase in the number of enterprises points to an enduring entrepreneurial spirit. As India continues to navigate post-pandemic recovery and future economic challenges, understanding and supporting the informal sector will be crucial.