Source: The post India’s GDP accurately includes informal sector despite measurement debates has been created, based on the article “India’s informal sector is being tracked better than ever before” published in “Live Mint” on 20th June 2025
UPSC Syllabus Topic: GS Paper3– Indian Economy – Issues relating to growth, development and employment.
Context: A recent World Bank projection, cited by NITI Aayog, stated that India has become the world’s fourth-largest economy. This sparked debate on whether India’s GDP accurately captures the informal sector. Some claim it is either underestimated or overestimated, leading to widespread speculation.
For detailed information on India’s Informal Sector read this article here
Understanding Informal Sector Definitions
- ILO vs SNA Interpretations: The term “informal sector” is often misused. The International Labour Organization (ILO) defines it as informal employment—jobs without contracts or job security. In contrast, the System of National Accounts (SNA) defines it as value added by household enterprises lacking formal accounting.
- India’s Adoption of Global Standards: Since 2011–12, India’s national accounts have used the SNA approach. Chapter 7 of the National Account Statistics 2025 provides detailed aggregates from the household sector, confirming that informal activity is part of GDP.
- Misconceptions about Exclusion: The claim that informal output is not measured in GDP is incorrect. The inclusion of household sector data reflects its formal consideration in GDP estimates.
Criticism of Overestimation Post-2015
- Post-Reform Doubts: Some critics argue that GDP data overstates informal sector activity, citing disruptions from demonetization, GST, and the COVID-19 pandemic. They claim these shocks were not properly captured in the revised series.
- Sector-Wise Composition: Agriculture and construction, which form over 56% of the household sector, use independently verified production data under the commodity flow method, reducing chances of estimation errors.
- Base Year Methodology: For other parts of the household sector, GVA in 2011–12 was based on NSS employment data and 2010–11 surveys on unincorporated enterprises. The new approach also applied effective labour weights based on job types.
Indicators Used for GVA Estimations
- Sector-Based Proxies- After the base year, GVA growth was tracked using specific indicators:
- Transport: Growth in commercial vehicles
- Trade: Shifted from sales tax to GST
- Manufacturing: Based on IIP and ASI
- Other Sectors: Linked to corporate sector growth
- GST and Informality: The introduction of GST did not automatically formalize small firms. Enterprises below ₹1.5 crore turnover still operate informally, often under the GST composition scheme without formal books.
Improved Data Collection and Sector Trends
- Frequent Surveys by NSS: Since 2017–18, the NSS has conducted regular employment and enterprise surveys, now conducted monthly. These provide consistent insights.
- Trends in Informal Sector: Three years of survey data show strong informal sector growth. Informal employment is at a 20-year high, especially in household enterprises.
- Evolving Structure of Employment: Employment composition is changing. The idea of effective labour needs ongoing refinement for accurate GDP estimation.
Towards Continuous GDP Measurement
- Better Data, Better Estimates: Improved and regular informal sector data opens the door to continuous national accounting, reducing reliance on major base revisions.
- Aligning with Global Norms: India can now revise GDP methodology only when global standards change, improving transparency and long-term stability.
