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Understanding Effects Of GST, Digitalisation, Demonetisation Driven Changes On Economy

The formalisation of an economy is a positive outcome from a policy perspective. As per International Monetary Fund (IMF), even Europe's informal economy is estimated at 20 per cent of GDP, according to the report.

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India’s informal economy has shrunk to around 15-20 per cent of the formal Gross Domestic Product (GDP) as against 52 per cent three years ago due to the central government policies like the implementation of Good and Services Tax (GST), accelerated digitalisation and demonetisation driven changes, as per State Bank of India’s (SBI) economic research department report. 

The report stated that after 2016 several measures which accelerated digitisation of the Indian economy and the emergence of the gig economy have facilitated higher formalisation of the economy - at rates generally faster than other countries.

"I believe, demonetisation and the implementation of GST has paved the way for cashless transactions in business and reduced the economy's cash intensity. These reforms sparked a shift in the economy's structure from one dominated by cash to one in which formal finance, such as banks and payment institutions, play a larger role," said Joint President and Head- Branch, Franchisee and Digital Business, Kotak Securities, Suresh Shukla. 

In the last few years, approximately Rs 13 lakh crore of economic activity has come under the formal economy via several mediums, the SBI report said. Apart from that, the State Bank's research estimated that about 36.6 lakh jobs have been formalised till August 2021. 

The recently launched E-Shram portal by the central government which is the first national database of unorganised workers via which social security schemes are facilitated is a big step towards the formalisation of employment. The rate of formalisation of unorganised labour due to E-Shram at around 17 per cent i.e. Rs 6.8 lakh crore or 3 per cent of GDP in just 2 months. 

According to the SBI report, more than 5.7 crore workers have registered in the portal until October 30. A total of 62 per cent of workers belong to the age group of 18-40 years old. Meanwhile, 92 per cent have a monthly income of less than Rs 10,000. 

"The onset of COVID -19 has also resulted in a wider proliferation of digital transactions. Digital payments have reached a new high in the past 2 years and I expect this trend will continue in the future," said Shukla. 

The formalisation of an economy is a positive outcome from a policy perspective. As per International Monetary Fund (IMF), even Europe's informal economy is estimated at 20 per cent of GDP, according to the report.  

"I don't think this will have a negative impact on us because the government has previously announced various steps to formalise the informal sector. While the informal sector has faced obstacles during the transition, the true benefits of formalisation will be seen in enhanced productivity, formal jobs, and increased economic competitiveness," Shukla mentioned, while talking about upcoming negative effects on the Indian economy due to policies like GST implementation, demonetisation.