Call for Papers

The Informal Economy in India: size, dynamics and impact

India is the third largest economy in the world with a GDP of $9.174 trillion (in 2017 constant PPP international dollars) in 2019, the year before the pandemic distorted most economic comparisons. This compares with $20.563 trillion in the United States and $22.492 trillion in China. These comparisons are made on the relative sizes of the measured economy using compatible UN national accounting standards. These figures omit unmeasured estimates of the informal economy which can vary significantly from around 10% of GDP for developed economies to well over 40% and more of GDP for many emerging markets. The informal economy is India is known to be one of the largest in the world. Adjusting GDP to include it would not change the relative rankings of the top three economies, but would significantly reduce the gap between India and the USA and China, and given India’s favourable demographic profile, may shorten the period before it matches or even overtakes the two world giants. From the perspective of inequality and poverty levels, the Covid-19 pandemic will have hit workers in the informal economy harder in India with no government sanctioned support schemes and high levels of infections and a fall in remittances from the Indian diaspora. More information is needed.

There is no precise definition of the informal , or shadow economy, but it consists of economic activities, whether legal or illegal, which have a value and which would, as transactions, add to the size of GDP and to public sector tax revenues if recorded. The International Labour Organisation......

Call for Papers

The Informal Economy in India: size, dynamics and impact

India is the third largest economy in the world with a GDP of $9.174 trillion (in 2017 constant PPP international dollars) in 2019, the year before the pandemic distorted most economic comparisons. This compares with $20.563 trillion in the United States and $22.492 trillion in China. These comparisons are made on the relative sizes of the measured economy using compatible UN national accounting standards. These figures omit unmeasured estimates of the informal economy which can vary significantly from around 10% of GDP for developed economies to well over 40% and more of GDP for many emerging markets. The informal economy is India is known to be one of the largest in the world. Adjusting GDP to include it would not change the relative rankings of the top three economies, but would significantly reduce the gap between India and the USA and China, and given India’s favourable demographic profile, may shorten the period before it matches or even overtakes the two world giants. From the perspective of inequality and poverty levels, the Covid-19 pandemic will have hit workers in the informal economy harder in India with no government sanctioned support schemes and high levels of infections and a fall in remittances from the Indian diaspora. More information is needed.

There is no precise definition of the informal , or shadow economy, but it consists of economic activities, whether legal or illegal, which have a value and which would, as transactions, add to the size of GDP and to public sector tax revenues if recorded. The International Labour Organisation estimates that around 2 billion workers, or 60 percent of the world’s employed population ages 15 and older, spend at least part of their time in the informal sector.

There is also no internationally agreed statistical framework for measuring the informal economy and adjusting GDP to account for it. But statistics on the activities in the informal economy, are critical for designing targeted policies, and in some cases raising tax revenues.

The informal economy is an important source of employment for women. The ILO estimates that in developing economies, 92 percent of women workers are informally employed. This is the opposite of what we see in advanced and emerging market economies, where it is a greater source of employment for men. An inability to measure informality accurately means it is difficult to evaluate how inclusive economic growth really is and its impact on inequality.

The informal sector in India is of particular interest to World Economics given the sheer size of the Indian economy and the levels of inequality among its population. In India, estimates suggest that up to 90% of the workforce may be informally employed (with no written contract, paid leave and other benefits) and there are also around 10% of informal workers in the organised sectors indicating a high level of outsourcing. There have been a number of estimates of the size of the informal economy in India with estimates averaging around 50% or more of GDP, but one study using known relationships between the spatial patterns of night-time satellite imagery and economic activity in the United States suggest that the magnitude of India’s informal economy and the inflow of remittances could be 150% bigger than official estimates of national income.

Adjusting GDP upwards for the informal economy can also have a significant impact on the relative proportion of global funds invested in India and on the sustainability of the servicing of public debt.

There are many separate methods of estimating the informal economy, but most fall into two categories. The direct approach is based on surveys, voluntary replies, and other compliance methods to directly measure the number of informal workers and firms. There are problems with such methods given that people and businesses engaged in informal economic activity usually operate on a small scale or seek to avoid regulation. Such small-scale operations may be below the threshold required to register a business or pay taxes. Furthermore, some informal economic activity may be purposefully hidden associated with tax and social security evasion and illegal activities. Statistical agencies face major difficulties in measuring economic activity associated with informality.

Indirect methods focus on certain characteristics, or proxies, that can be observed and are related to informal economic activity. One frequently used econometric method is to estimate the size of the informal economy using Multiple Indicators Multiple Causes (MIMIC) which enables an estimation of an unknown variable with a set of data on known observable variables. Some studies have employed proxies for economic activity including electricity consumption, night-light satellite data, and cash in circulation. Using these methods, the share of the informal economy in total value added has been measured for most of the world’s economies and standard estimates are available on the World Economics site (www.worldeconomics.com).

Submissions on measuring the informal economy in India are welcome on data issues, methodology, growth, inequality and its economic impact on the formal economy, public finances, gender equality and sustainability. Papers are welcome using case studies, econometric findings, on statistical methodology and on the practical problems in gathering and interpreting data. Papers from 1,000 to 6,000 words plus will be considered by our editorial board.

Articles for submission for consideration for the World Economics Journal should be sent to editor@worldeconomics.com.