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Sunday, January 29 2023
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Is India’s shrinking informal economy good news for the formal economy?

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Overview of India’s informal economy

Many countries around that world are plagued by an increase in informal trading activity, particularly post 2020, however, the same cannot be said by India. Last year, under all the restrictions and trade limitations set out by governments around the world, people turned to informal sellers of goods that they were looking for that were unavailable for purchase at that particular time. This led to an increase in activity within the informal sector, and ultimately, the informal economy. This has a long-reaching impact on the overall economy of a country, as it means that certain trade and income taxes are not paid to the relevant bodies, which reduces the funds collected by the country. Taking a closer look at India in particular, it is reported that the country’s informal sector workers were hit hardest by the formal sector workers amid the global conditions of 2020. The informal sector is estimated to employ 80% of the country’s labour force and produces about 50% of the gross domestic product. However, given the nature of the informal sector, it is difficult to report the most correct and up-to-date figures.

While the informal sector can be difficult to manage, ignoring problems that exist within it can have a very dire impact on citizens. It can lead to job losses and the loss of income for many, higher inflation, and ultimately reduce the standard of living for much of the country’s population.

What it means for the formal economy

Studies and writings on India’s economy have noted that between 2020/2021, the country’s informal sector has been declining. During this period, activity in the sector is said to have declined to a mere 15 to 20 percent, marking a considerable decline from the 2017/2018 figure that was reported at an estimated 52.4%. The shrinking informal economy has been beneficial for the formal economy, to an extent. Amid the shrinking informal sector, there have reportedly been improved figures on stock markets, direct tax collection and overall business sentiments and activity. Understanding that there has also been a growing interest in stock and currency trading around the world, that also acts as a contributor to tax collection for governments as forex trading profits are taxable in some parts of the world. This is especially true for those who trade through online forex brokers in the USA, many of which are known to be credible and in compliance with regulations and governing forex trading laws.

While the move towards the formalisation of India’s economic activity has been welcomed by some, industry insiders have highlighted the need to have an improved and more structured tax system. This will ensure that the tax collection process benefits the country as a whole and that the correct taxes are being paid accordingly. Moreover, there have been great strides in formalising as much economic activity as possible, as almost 100% of the finance and insurance industry has been formalised. Further, the real estate industry and agricultural sector are also said to be formalised to a large extent. While the economy is still largely informal, improved structures and tax processes are being implemented to better manage the country’s economy.

Photo by Mathieu Stern on Unsplash

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