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A few days ago, RBI Governor, Shakti Kanta Das reportedly said that there were signs of economic recovery. According to him, consumption demand triggered by the festive season’s pent-up demand was the key factor responsible. Das believed business firms would encourage expanding their capacities and that would in turn boost employment.

The reporter was talking to Vijay Dewan, MD, Apeejay Surrendra Park Hotel and Chairman of Confederation of Indian Industry (Eastern Region) about the Indian economy a few weeks ago. Some other industry persons were also present. Dewan was very optimistic about the recovery of the Indian economy. He believed the economy was reviving fast and pointed out the possibility of double-digit growth in the FY 2021-22 and pointed to robust government revenue including high GST collection, adequate liquidity, rising indices of equity markets, etc. as the indicators of revival. But when matters like poor employment generation, declining informal sector, rising inflation and rise in cost of production of many sectors came up, the discussion turned uncertain. The problem of the unorganised sector in the economy needs special addressal.

SBI research on the unorganised sector

A few days ago, the State Bank of India (SBI) research unit published a report on the rising formalisation of the Indian economy. It has shown that the Indian economy has undergone significant formalisation during the pandemic phase. According to the SBI research findings, in 2020-21, the contribution of the informal sector in producing GDP has sharply declined to about 20% from 52.4% in 2017-18. India is one of those countries where the size of the informal sector is among the highest. According to the data of Ministry of Statistics and Programme Implementation, the informal or unorganised sector in India accounted for 52.4% of the total value added (of precisely GDP) in the economy in 2017-18 and employed around 87% of the total labour force.

The quantification of contribution of GDP by the informal sector by the SBI research team has created some controversy. According to the SBI study, formalisation has increased because about `5 lakh crore has gone to farmers’ and to some small entrepreneurs’ accounts as loan from the government. That means a huge number of farmers and small entrepreneurs have been utilising separate bank accounts (other than their own financial accounts), a character of formalization.

A section of economists and national media is doubtful about the estimation of formalization. They want to know, has employment also increased in the formal sector? Can mere taking any short-term loan be a factor for changing the character of informalisation? Actually, regarding employment generation, SBI research has no data to establish its estimate on formalization of the economy. Questions are also emerging regarding desirability of the formalization in this way where there is no scope for enhancing employment. It is also being asked by many observers whether the change of status to formalization will last for long or it will come back close to the former position in due course.  These are some of the questions that have no answers yet. But the issue raised by the SBI is being discussed at various levels and more information will come in the public domain in the coming days.

Sustained inflation has been a problem in Indian economy

The wholesale inflation (WPI) in India surged to 12.5% in October 2021, up from 10.6% in September. This rise has been the highest in the last five months. This has been a cause for concern. The rise of WPI in October was due to rise in prices of fuel, food and metals. WPI was 11.6% in August and 11.5% in July. Some points are important here. The increase in fuel has been checked for a few weeks in the international market. At the same time, taxes on fuel in the domestic market have been cut in most of the parts of the country. This is why Adity Nayar, Chief Economist, ICRA, thinks that depending on the high base, WPI may go down to 7.5% to 8.5% in the coming month. As a result, a portion of the rising cost of products can be passed on to the consumers. That may help the producers.  At the same time, overall inflation was also pushed up to 12.04% in October compared to that of 11.4% in September.

Retail inflation has been below 6%. That is at the comfort level of the RBI target. But core inflation, that is, consumer price inflation without fuel and food inflation, is still close to 6% and is a cause for concern. The unemployment level is very high and the purchasing power of the people is low. In this situation, the government has to take some steps to moderate the retail inflation of CPI.  

Possibility of sustenance of inflation

Many observers think that the prevailing high price inflation in India will stay for long. This is because India has been experiencing it for several years. That means it was either close to or above the RBI’s comfort zone 4 +/2% since 2019. In the pandemic situation, when the level of demand came to very low levels, the WPI was still high.  

Moreover, inflation, at present, has been a global phenomenon.  It is known that in the US, inflation is highest (year on year basis) in the last three years. Several countries like Germany (4.5%), Russia over (7%), Brazil (10%), Turkey (20%), and surprisingly Argentina (50%) have been experiencing inflation.  In most of the countries, economic growth is not at all impressive but inflation is high. This is called a situation of stagflation. It is very difficult for policy makers of an economy to check the stagflation situation of a country. So international impact will also have influence on the Indian economy to keep prices high in at least the medium term.