A report by the State Bank of India late last year estimated that India's informal economy has shrunk due to an increased rate of formalisation. It pegged the informal economy at 15-20% of the total GDP. The report proposed four ways to measure 'formalisation'. 

  1. Measured by financial transactions
  2. Measured by the presence in the tax net
  3. Measured by employment in registered companies
  4. Measured by share of output produced by registered enterprises

Here, we'll focus on the formalisation by the share of employees working in registered enterprises. The informal economy represents enterprises that are not registered and where employees do not get social security benefits. In India, the Annual Survey of Industries (ASI) by the Central Statistics Office surveys the registered or the 'formal sector firms. These are firms that typically have more than 10 employees.

One of the other sources to measure the extent of formalisation is the monthly EPFO payroll report. It provides data on establishments remitting their ECR (Electronic Challan cum return) with information on details of the wages and the EPF contributions for their employees. 

Even before the Covid-19 pandemic, India was going through an economic slowdown. The pandemic just accentuated the trends. In a country of 1380 million, just 137 million people are employed in 1.72 million firms governed under the EPFO having more than 20 employees. These 1.72 million firms are establishments that have paid their EPF returns regularly in each of these months. Even among establishments of various sizes, only 4% of firms (>500 employees) have 60% of the total formalised workforce on their payroll. 

Since 2019, while the number of large and medium-sized (50-200 employees) firms has increased, the number of small firms (<50 employees) has seen the gains of 2019-20 wiped out because of the pandemic. From January 2019 to January 2020, the number of small firms grew by 4%. In the year 2020-21, these small firms declined by 3.5%. Here, we look at the number of firms that pay their EPF returns every month and hence have considered only January as it was the only month through 2020 and 2021 that did not have any lockdowns.

Over the same period, the number of employees in these smaller firms reduced by 9% in Jan '21. While medium and large firms saw a decline by 6% and 2% respectively.

Overall, the impact of Covid-19 has been far more pronounced for the smaller firms. While the larger firms have been able to absorb the employees they had to let go of through the pandemic, the smaller firms have failed to recover. The previous snapshot was for January. In January 2020, India had no effects of Covid-19 and Jan '21 was the peak of recovery from Covid-19. However, the extent of damage can be gauged only once you look at the historical data. 

Throughout 2019-20, the employees in firms of all sizes were steadily increasing. Through 2020-21, employees in large organisations recovered to their previous highs before the second wave hit. After a minor setback, larger firms were once again quick to recover. However, there was no recovery in sight for employees working in the smaller firms. As compared to 2019, there are still 9% fewer employees working in the smaller firms.

Drilling further into the sectoral makeup of these smaller firms, it is only trading firms that have seen an increase in employees. Trading firms only employ 7% of the total 13.8 million employees in the small firms. Manufacturing (26%) and services (64%) which account for the largest number of employees have seen a reduction of more than 8% since Jan '19. 

Drilling down further, two sectors have taken the most beating - hospitality and F&B. Among the top 30 employers in small establishments, both sectors have lost more than 30% of their employees since Jan 2019. Among a total of 55 sectors in manufacturing and trading, consulting services account for 23% of the employees. These business activities are self-disclosed by the firms themselves. 

Biggest losers

4% of the employees work in the Food and Beverages sector, while Hospitality accounts for a little less than 1%. For both these sectors, smaller firms account for a smaller part of the employee base (F&B: 22%, hospitality:15%). A large proportion of employees work in larger firms. Both the sectors have seen a similar impact (>25% decrease) in large and medium-sized firms. 

Another sector that has not fared well is Education. It accounts for 14% of the total employees in small-sized firms, and has seen a 24% reduction in the total employee base. Here, the impact is much more severe for smaller education firms (-24%) than large (-15%). 

Biggest gainers

The IT industry has been one of the least affected sectors and has added employees and new firms rapidly. 80% of the employees in IT work in large firms. However, smaller IT firms have added 25% more employees in the two years. Similarly, housekeeping services have added 14% more employees since 2019.

In the next edition of the Databyte, we will look at geographical hubs of key sectors like textile, automobile, engineering and others to see how they're doing. 

Sales Pulse provides high frequency and granular insights from more than 15 different sources cutting across rural and urban areas. To access the data in this edition and more, start your free trial now!