Recently, Indian GDP measurement came under considerable discussion in the media on account of an observation emanating from the Niti Aayog based on a projection made by the World Bank—that India has become the world’s fourth largest economy. As part of this discussion, some commentators speculated that Indian GDP is underestimated because “a very significant informal sector is not measured in the GDP." This allegation can be fairly easily dismissed.
Recently, Indian GDP measurement came under considerable discussion in the media on account of an observation emanating from the Niti Aayog based on a projection made by the World Bank—that India has become the world's fourth largest economy. As part of this discussion, some commentators speculated that Indian GDP is underestimated because "a very significant informal sector is not measured in the GDP." This allegation can be fairly easily dismissed.
The 'informal sector' is a term that is loosely used by many economists. There are two different conceptual approaches to defining this term. First, by the International Labour Organization, which tends to focus on 'informal employment,' primarily referring to work that happens without written contracts, job security and often on daily wages. Second, by the UN's System of National Accounts (SNA), which refers to value added within the household sector, covering those establishments that do not maintain regular books of accounts.
Also Read: GDP's dirty little secret: Why we should be tracking GVA instead
Since 2011-12, the Indian System of National Accounts has used this globally accepted definition to measure the informal economy. If we look at the recent National Account Statistics 2025 released by the ministry of statistics and programme implementation, in chapter 7 we will find various aggregates pertaining to the household sector of the economy. This alone is enough to indicate that the informal economy is included in India's GDP measurement.
A second type of criticism arises from the argument that the informal sector in GDP data is actuallyoverestimatedin the current series.
This criticism has been around since the series was revised in 2015, with proponents arguing that demonetization and GST introduction had a severe impact on the informal sector and since this was not 'adequately' reflected in the data, the numbers may be faulty. Subsequently, the covid pandemic was also added to this list.
This criticism requires more careful analysis, and understanding it requires a closer look at the composition of the household sector (shown in the pie-chart for 2023-24). Remember that national accounts calculate value added in each of these segments differently.
Also Read: Mint Quick Edit | India's GDP: A key test lies ahead
The contribution to gross value added (GVA) by agriculture and construction (which account for over 56% of the household sector), is computed through a 'commodity flow' method. The production data for these sectors is separately and independently verifiable, leaving little scope for under- or over-estimation. For the remaining segments, GVA computation in the base year 2011-12 was done using employment data from the National Sample Survey's (NSS) employment-unemployment numbers and establishment-level value added data from the 2010-11 NSS on unincorporated enterprises.
The major innovation introduced in the revision was to use a measure of effective labour that assigned different weights for different types of employment (regular, casual, etc).
In years after the base year, the GVA was moved using different indicators; in transport, the indicator was based on growth in commercial vehicles; in trade, it was drawn from sales tax collections (which probably shifted to GST post 2017); and in manufacturing, it was drawn from the Index of Industrial Production and Annual Survey of Industries. In other segments, it was based on the growth in the corresponding corporate segments.
Also Read: Kaushik Basu: Redefine prosperity; GDP tunnel-vision could prove costly
The possibility of mis-measurement then depends on the dissonance between the chosen indicator and the sector itself. In this context, it should be noted that the mere introduction of GST does not by itself lead enterprises to formalize, since enterprises under a certain size ( ₹20 lakh in services and ₹40 lakh in goods) are not required to register.
Even those above this norm with a turnover up to ₹1.5 crore can pay a fixed tax rate under the GST composition scheme and are not required to maintain books of accounts. In effect, enterprises with turnover below ₹1.5 crore remain in the household (i.e., informal) segment.
Also Read: It's time to lay the great Indian GDP controversy to rest
Since 2017-18, the NSS has been conducting annual and quarterly surveys of employment, which from this year have become monthly. Since 2021-22, it has also been conducting an annual survey of unincorporated enterprises.
As of now, three years of data from this survey are available. The survey is conducted on a design similar to the earlier quinquennial survey of unincorporated enterprises done in 2010-11 and 2015-16. Data from these surveys taken together suggests that the informal sector has been growing robustly, undermining simple arguments of over-estimation.
In fact, the employment survey seems to indicate that employment in the informal sector is now better than at any time in the last 20 years. However, its compositional character has shown changes, with a very rapid growth in employment within household enterprises. Going forward, the concept of effective labour requires us to carefully assess its impact on value added.
Also Read: TCA Anant: How India's statistical system could win the ongoing war of narratives
The timeliness and regularity of informal sector data now available through the NSS is better than it has ever been. This creates an opportunity for the ongoing base revision to measure informal sector value added in a manner that offers more clarity. It should be possible for us to reduce our dependence on episodic base revisions and have a genuinely continuous series of national accounts. Base revisions could then be undertaken (as is done globally) only to account for changes in the global methodology as and when they occur.
The author is a visiting professor at the Institute for Studies of Industrial Development and former chief statistician of India.