India's informal sector could be adding more value than we know

Arguments of this sector's size being overestimated are flawed. PLFS data suggests it's far likelier to have been undercounted

- T.C. A. ANANT

The recent release of India's secondquarter GDP estimates has provoked a lot of discussion, some of which is on predictable lines. One strand of it focuses on the fact that since a GDP base revision is long overdue, these estimates are unreliable because they do not adequately capture the informal sector (i.e., the household sector). Stated this way, the criticism is unexceptional because it is true that a GDP base revision is now overdue. However, some go on to conclude from this that the GDP estimates are consequently over-estimated.

This latter conclusion may be unwarranted. The argument for over-estimation is that the country's informal sector after both demonetization and covid has seen a serious decline both in numbers and in its ability to contribute to economic value addition. Since GDP calculation estimates the contribution of this sector indirectly, by measurements drawn from the formal sector, the size and contribution of the sector is over-stated.

This line of argument is problematic, partly because the contribution of the informal sector is not entirely assessed in this way. Agriculture (which is almost 40% of the value added by the informal sector) is assessed through direct estimates of production. Construction, which is the second major component of this sector, is also assessed through the production of key inputs like cement, steel, etc.