15 highlights
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Over the last few years, the word ‘formal’ slowly crept into discussions about the Indian economy. I heard comments like this:
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“Demonetisation may have been tough for small business, but it succeeded in formalising the Indian economy.”
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A question I asked myself is, how do you measure ‘formalisation’?
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GST collections may be a good place to start, since the belief is that more formalisation equals higher tax collection.
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Skipping the last couple of years, which were disturbed by COVID, I compared GST collections over the last three months of this year with collections for the same period in 2017. At Rs. 3.59 lc, this year’s GST take was 27% higher than the number for 2017, which was Rs. 2.83 lc.
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For a meaningful comparison, we need to adjust the numbers for inflation over these four years. At a rate of 5% a year, inflation accounts for 22% of the growth in GST collections, leaving us with a real growth of 5%, or a little over 1% per annum.
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The number of registered companies provides a more direct count of the formal sector. I turned to data from the Registrar of Companies (ROC).
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The largest companies in the country, whether Reliance Industries, or Infosys, are what are called listed public companies, meaning that you can buy and sell their shares on the stock exchanges. Between March 2016 and March 2021, the number of active public limited companies has actually gone down, from 6796 to 6740.
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In the same period, 2016-2021, the number of active unlisted public companies has gone up, from 63568, to 65492. This growth of 4% is under 1% per annum.
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Private limited companies, which are generally the smallest kind of companies, have seen somewhat more growth - from 1.02 mn., to 1.23 mn. This is a little less than 4% per annum.
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Employment is the data point that most severely challenges the story of growth in the formal sector of Indian business.
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Whichever way you look at it, growth in the formal sector of the Indian economy has been limited, at best. Could ‘formalisation’ then mean that the share of the formal sector has grown, because of degrowth in the non-formal sector?
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Corporate results in 2017 showed a huge bump in the fortunes of Indian listed companies. Both turnover and profits seemed boosted by demonetisation. Many commentators saw this as evidence that demonetisation was good for the economy.
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While the distress for small businesses was evident, a related issue kept bothering me, namely, that every producer is also a consumer.
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Let’s say 10 biscuit factories shut down because they can’t cope with no cash, or with funds tied up in GST returns, or with workers who have returned home. Meanwhile, Britannia keeps running, and supplies the biscuits that the small bakeries once did. Clearly Britannia’s market share goes up, and since its turnover and profits are recorded, so does GDP. Meanwhile, the workers in the small bakeries have lost jobs and income, and so have the bakery owners. Their ability to consume everything, from tea to biscuits, goes down. Yes, Britannia now has a larger share of the biscuit market, but the market itself is slowing, even stalled.