Budget 2018

Pakodanomics: Economic Survey serves up formula for government to claim bigger formal sector

The new approach measures the formal sector through GST registration, rather than enrolment in social security programmes.

Earlier this month, Prime Minister Narendra Modi responded to a question on his government’s failure to provide jobs by telling the interviewer that even someone selling pakodas on the streets should be counted as being employed. Modi also cited a new study that used a new method to conclude that 7 million formal non-farm jobs will have been added over the course of this fiscal year. Both of those claims prompted much commentary over how to measure jobs in India. In the Economic Survey, tabled in Parliament on Monday, Chief Economic Adviser Arvind Subramanian adds his take on the issue.

Subramanian also takes a separate approach, suggesting that data collected as a result of the roll-out of the Goods and Services Tax could be used to estimate how many workers have formal jobs. As per his calculations, as many as half of India’s non-farm workers might actually be in the formal sector – but only if it is defined differently from the way it usually has been in India.

The survey lists out the two potential definitions for formal employment:

  1. When employees are provided social security by their companies, usually measured through figures from the Employee Provident Fund Organisation and the Employees’ State Insurance Corporation.
  2. The new approach that Subramanian also uses is through GST data. Using this measure, would basically count any company registered under GST as being “formal” and all of its claimed employees as being within the formal sector.

The Survey uses both these definitions to build a table that puts together all possible combinations of this: Employees and firms that can be considered as being formal based on either social security programmes or GST registration or both, and using data from the National Sample Survey Office’s 73rd Survey Round, it also estimates the number of those who do not fall into either category and so are informal.

Based on this, it comes up with some interesting numbers, such as the fact that only 0.6% of firms – which account for 38% of total turnover – are in both the social security net and registered for GST. On the other end, 87% of firms, accounting for 21% of total turnover, fall outside both the definitions of formality.

But the big conclusion that is drawn is on the size of the formal non-agricultural payroll, meaning employees outside of agriculture who would be counted as being in the formal net. Using the social security approach would indicate that just 31% of the non-agricultural workforce is in the formal net. The new method, however, puts this number at 12.7 crore, accounting for 53% of India’s 24 crore non-agricultural workforce – a huge difference.

If one were to take that measure, it would mean counting workers for GST-registered firms – such as say a kirana store or delivery professionals – as formal employees, even if they are receiving none of the benefits of those within the net, such as provident fund or insurance. Even if someone were running an auto dealership or a small retail store and claiming to employ a few people, with no job security and no certainty that the worker is getting any of the supposed benefits of being in the formal system, they will still be counted as being part of the formal sector.

Subramanian does not draw any conclusions from this, in part because it is not comparable to anything in the past and so cannot be touted as growth. But that is to be expected from a formal document tabled in Parliament. It is easy to see how a government that is now being questioned on its inability to provide economic growth or jobs might use a formula like this to claim it has increased formalisation of the economy, simply by tweaking its definition.

As the chapter points out, GST data will provide a very interesting window into the workings of the Indian economy, including insights that we may not have had access to before. But, approaches like this and Modi’s reference to pakoda sellers and the Employee Provident Fund Organisation study, which many have questioned, might give an indication of how the government and the Bharatiya Janata Party may attempt to shift the conversation on job creation and formalisation as India moves into an election year.

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