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Despite the overall increase in the formalisation of the economy in the past five-six years, the key component of an informal economy — cash in circulation (CIC) as a percentage of GDP — has continued to rise year after year, barring in the year of note ban in 2016 when it fell to 8.7 per cent, according to a report. According to the report by SBI Research, almost 80 per cent of the economy has been formalised in the past five years with every aspect of the non-cash component of the economy including agri credit, gaining traction.

In a detailed report on Monday, SBI Research said that after dipping to 8.7 per cent of GDP in 2016 (after the note-ban), cash in circulation (CIC) as a percentage of GDP has climbed again to 13.1 per cent so far this fiscal. It is only marginally down from the peak of 14.5 per cent in FY21, which could be because of the pandemic-driven sense of insecurity and uncertainties.

During FY08-FY10, when the economy was on a scorching growth rate, sniffing at almost double-digits growth, the CIC trended at 12.1, 12.5 and 12.4 per cent, respectively. The same trend continued with minor variations in the next five years also peaking at 12.4 per cent in FY11 and falling to 11.4 per cent in FY15, according to the SBI report pencilled by Soumya Kanti Ghosh, its group chief economic adviser.

Ghosh attributes the high 14.5 per cent CIC in FY21 to the collapse of the economy due to the pandemic, wherein the GDP reported the worst contraction of 7.3 per cent.

If the circumstances were normal, nominal GDP growth in FY21 and FY22 would have been much higher and as a result, CIC would also have followed the trend as witnessed pre-note ban.

According to him, without the pandemic-induced GDP collapse, the CIC-GDP ratio would have been at 12.7 per cent as against 12.4 per cent in FY11 as because of the pandemic, people might have held as much as Rs 3.3 lakh crore in cash as a precaution.

Coming to digital transactions, 3.5 billion transactions worth Rs 6.3 lakh crore were recorded through UPI in October 2021, which is 100 per cent more than the same period last month and in terms of transaction value, it is 103 per cent more than October 2020.

Data also show that UPI transactions have jumped 69 times since 2017, while debit card transactions have stagnated indicating people preference and shift to UPI.

UPI transactions have jumped 69 times in the past four years — from Rs 1,700 crore in 2017 to Rs 15,100 crore in 2018 to Rs 29,900 crore in 2019, to Rs 57,100 crore in 2020 to Rs 1,17,100 crore so far in 2021.

Similarly, credit card spends rose manifold between 2012, when it was only Rs 1,500 crore, and 2018 when it touched Rs 10,100 crore. It then steadily added 30 per cent more in two years to cross Rs 13,000 crore and peaked at Rs 13,500 crore in 2020, according to the report.

It added that the credit card spends are on course to set a record this year as already YTD (year-to-date), it has reached Rs 13,300 crore, according to the report.

Again, debit card spends also continued to gain traction with 2012 seeing Rs 12,100 crore of transactions, which climbed to Rs 38,800 crore in 2016 but declined steeply in 2017 to Rs 15,600 crore. It more that doubled the next year to Rs 32,700 crore and peaked at Rs 56,300 crore in 2019 and again steeply fell to Rs 13,800 crore in 2020 and continued to head southwards in 2021 at Rs 9,700 crore, the report said.

Ghosh also noted that tax as percentage of GDP has also jumped since FY16 but declined after FY19, reflecting the changes in the Budget of 2019. The tax-GDP ratio has jumped in the pandemic year again reflecting formalisation efforts.

The tax-GDP ratio jumped from 10.5 per cent in FY16 to 11 per cent in FY19 but retreated since then, as the exemption limit was raised to Rs 5 lakh in the Budget FY20.

On the macrofront, the economy formalised much larger: The share of the informal sector GVA to total GVA for FY18 stood at 52.4 per cent. Employing this methodology (except for agricultrue and allied activities), the informal economy is possibly only around 15-20 per cent of the formal GDP, according to the report.

Even agriculture formalised if the numbers of Kisan Credit Cards (KCCs) are any indication. In the past three-four years, the per-card outstanding has increased from Rs 96,578 in FY18 to Rs 1,67,416 in FY22, an increase of Rs 70,838, that translates into agri credit formalisation at Rs 4.6 lakh crore and there are 6.5 crore KCCs.

According to the GST portal, between August 2018 and March 2021, the number of new MSMEs (micro, small and medium enterprises) incorporated stood at 499.4 lakh and came under GST.



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SBI Report, BFSI News, ET BFSI

Personal Finance

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Mumbai, The digitisation drive and pandemic-induced emergence of the gig economy have led to a faster formalisation of the economy, with the share of the informal sector shrinking to just 15-20 per cent in 2021 from 52.4 per cent in 2018, according to an SBI Research report. Share of the informal economy has fallen drastically to 15-20 per cent of the gross value added (GVA) or the formal GDP in 2020-21 from 52.4 per cent in 2017-18 due to digitisation and the rapidly expanding gig economy, said Soumya Kanti Ghosh, the group chief economic advisor at SBI.

The share of the same had stood at 53.9 per cent in 2011-12.

According to Ghosh, many measures since the note-ban in November 2016 have accelerated digitisation of the economy, and the pandemic-induced emergence of the gig economy has facilitated higher formalisation of the economy, at rates possibly much faster than most other nations.

The note ban hit hardest the informal sector which then constituted 93 per cent of the workforce. The second blow to the informal economy was the GST and the final and the hardest hit came from the pandemic.

At least Rs 13 lakh crore has come under the formal economy through various channels over the past few years, including the recent scheme on the E-Shram portal, the report said.

Real GDP was estimated at Rs 135.13 lakh crore in FY21 but lost 7.3 per cent of that in FY22 after the worst economic contraction on record due to the pandemic.

The 2011 Census pegged the size of the informal sector in trade, hotels, transport, communication and broadcasting at 40 per cent; in construction at around 34 per cent; 16 per cent of public administration; and 20 per cent of manufacturing and almost 100 per cent formalisation in finance, insurance and utilities, and to a large extent in real estate and agriculture.

The formal financial sector has even expanded by 10 per cent post-the pandemic, with the DBT transfers gaining traction and that of formalised utility services size expanded by 1 per cent during the pandemic, according to the report.

The report, quoting the monthly EPFO payroll data, said that since FY18, almost 36.6 lakh jobs have been formalised till July 2021 and the report expects that this fiscal formalisation rate will be higher than FY20 but lower than the FY19 level.

Since FY18, the agriculture sector has been formalised by 20-25 per cent due to the increasing penetration of KCC credit and now the informal agriculture sector is 70-75 per cent.

Over the years, usage of Kisan credit cards has also increased significantly as the per card outstanding has gone up from Rs 96,578 in FY18 to Rs 1,67,416 in FY22, an increase of Rs 70,838. And there are 6.5 crore such cards, the amount formalised is Rs 4.6 lakh crore, the report noted.

It also said payments worth Rs 1 lakh crore have been made at petrol pumps alone in the past five years.

A sizeable informal economy is not just an emerging and developing economy feature, and according to the IMF, 20 per cent of the European GDP is an informal economy.

On the impact of the just-launched E-Shram portal, a first-ever national database of unorganised workers, on the formalisation of the economy, the report said as much as 5.7 crore unorganised workers have registered in the first two months after its launch in August, with 62 per cent of workers belonging to the 18-40 age-group and 92 per cent of the registered workers having monthly income of under Rs 10,000.

Ghosh considers the E-Shram portal to be a big step towards employment formalisation as to date the rate of formalisation of unorganised labour due to E-Shram is around 17 per cent or Rs 6.8 lakh crore, which is 3 per cent of GDP in just two months.

He also called for more rationalisation of indirect taxes like GST and excise, saying just 11.4 crore tax-paying households or 8.5 per cent of the total population contribute Rs 75 lakh crore or 65 per cent of the private final consumption expenditure and cross-subsidies to 91.5 per cent of the population.

As of the 2014 NSSO survey, as much as 93 per cent of the workforce earned their livelihoods as informal workers, who were hit the hardest by the pandemic too.



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