The Pace of Formalization: A Comparative Analysis of the Modi and Manmohan Singh Eras.....

The formalization of an economy, the process of shifting from informal, unregulated sectors to formal, regulated structures, is a key indicator of economic modernization and development. It leads to better tax compliance, improved social security coverage for workers, and more robust data for policy-making. The administrations of both Prime Ministers Manmohan Singh (2004-2014) and Narendra Modi (2014-present) implemented policies that influenced this process, albeit through different approaches and with varying outcomes amidst differing global and domestic economic conditions.

Pace of Formalization: Modi vs. Manmohan Singh

A direct comparison of the pace of formalization is complex due to a lack of a single, universally accepted official metric and changes in data calculation methodologies over time. The "current official formalization is 10%" is much lower than actual estimates (which still show a large informal sector, but not 90%). However, an analysis based on key indicators and the general economic climate of each era provides insight into the relative trends.

Manmohan Singh Era (2004-2014): Growth and Gradual Shifts

The Manmohan Singh era was characterized by a period of robust average annual GDP growth (around 8.1%) driven by liberalization policies and a booming services sector. This period saw:

Organic Growth in Formal Indicators: High growth rates in sectors like automobile sales, retail loans, and income tax collections suggested rising incomes and a growing consumer base, likely indicating a gradual, organic expansion of the formal economy.

Welfare Schemes: The UPA government focused on inclusive growth and launched major welfare schemes like MGNREGA, which, while providing a safety net, were primarily aimed at the rural and informal sectors.

Stable Tax-to-GDP Ratio: The average tax-to-GDP ratio was around 10.4%, with efforts to widen the tax base, though challenges in enforcement persisted.

The formalization during this time was steady, influenced by high economic growth and increasing prosperity that pulled people into formal consumption patterns and employment.

Narendra Modi Era (2014-present): Structural Reforms and Disruptions

The Modi government adopted a more assertive approach with major structural reforms aimed explicitly at formalization, though these were accompanied by significant economic disruptions:

Demonetization and GST: The 2016 demonetization and the implementation of the Goods and Services Tax (GST) were major interventions intended to bring informal transactions into the formal tax net. These measures significantly disrupted the informal sector, forcing many businesses to formalize or close down in the short term.

Digital India and Financial Inclusion: Initiatives like the push for digital payments and Jan Dhan bank accounts (financial inclusion) have created a more traceable economic environment, a prerequisite for formalization.

Improved Tax Compliance: The average tax-to-GDP ratio improved to approximately 11.5% under the Modi government, reflecting better tax compliance and a broader tax base due to the GST.

The Manmohan Singh era saw a higher average GDP growth rate, with formalization proceeding as a byproduct of broad economic expansion. In contrast, the Modi government has actively pursued formalization through structural and often disruptive policies. While the pace of growth in certain real-time economic indicators (like car sales or cement production) was slower under Modi compared to Singh's era, the Modi government's targeted reforms appear to have accelerated the structural shift towards a more formalized economy, despite short-term challenges. For instance, a recent report suggests 171.9 million jobs were added in the decade up to 2024 under Modi, compared to 29 million under the UPA, though the quality and formality of these jobs is a subject of debate. The Manmohan Singh government oversaw a period of high, broad-based economic growth during which formalization occurred organically and gradually. The Modi government's tenure is marked by intentional, high-impact structural reforms like GST and demonetization, which aimed to rapidly formalize the economy. This policy approach, while causing short-term pain to the informal sector, has potentially set the stage for a more tax-compliant and formalized economic structure in the long run. The data suggests that while the overall economic growth was higher under Manmohan Singh, the Modi government has been more aggressive in its direct efforts to expand the formal sector, resulting in a potentially faster pace of structural formalization, even if general economic indicators showed moderation in some areas.

The Data Landscape of an Informal Economy: Expectations for India's 90% Informal Sector.....

The formal economy is characterized by registered businesses, codified labor laws, traceable transactions, standardized contracts, and verifiable data that is collected, recorded, and regulated by government and official institutions. The informal economy, conversely, operates largely outside these structures. When an economy like India has an estimated 90% of its workforce and economic activity residing in this informal sphere, the nature, availability, and utility of "data" diverge significantly from what one would expect in highly formalized nations. The sheer scale of this informality in India does not just mean "missing data"; it signifies a fundamentally different data ecosystem—one that is fragmented, often qualitative rather than quantitative, and difficult to standardize.

What We Could Expect of Data in a 90% Informal Economy

If 90% of an economy operates informally, the expectations for data can be categorized into several key areas: data availability and quality, economic visibility, policy challenges, and alternative data sources.

1. Poor Data Availability and Quality

The most direct expectation is the absence of reliable, official data for the vast majority of economic activity.

Missing Core Economic Indicators: Standard metrics like GDP contributions by specific sub-sectors of the informal economy, precise employment figures, and real-time wage data become estimates at best. National statistical organizations must rely heavily on periodic, large-scale sample surveys rather than routine administrative data.

Lack of Firm-Level Data: Data on business formation, revenue, expenditure, and investment for millions of small, unregistered enterprises (e.g., street vendors, home-based workers, small-scale agriculture) are virtually non-existent in official registries.

Untaxed and Untracked Transactions: Because transactions are often cash-based and unregistered, administrative data gathered from tax receipts (like the Goods and Services Tax, or GST) captures only a fraction of the total economic flow, leading to a significant "dark figure" of economic activity [1].

2. Limited Economic Visibility and Inaccurate Policy Making

The lack of reliable data creates a visibility problem for economists and policymakers, leading to expectations of:

Inaccurate Official Narratives: Official economic growth figures may underrepresent the true economic resilience or vulnerability of the informal sector. The data fails to tell the full story of how most citizens live and work.

Ineffective Policy Calibration: When the data on the primary labor market is sparse, government interventions—whether minimum wage laws, credit availability schemes, or social security programs—struggle to effectively reach the intended beneficiaries. Policies designed for the formal sector often fail to translate to the needs of informal workers.

Vulnerability Assessment Difficulties: It becomes nearly impossible to accurately assess the impact of sudden shocks (like a pandemic or a natural disaster) on the most vulnerable populations without real-time, accurate data on their livelihoods and savings.

3. Fragmentation and Siloed Information

The existing data in such an economy is expected to be fragmented across different sources.

Siloed Data Sources: Instead of unified data systems, information is likely scattered across various local government bodies, non-governmental organizations (NGOs) focused on specific worker groups (e.g., waste pickers' unions), microfinance institutions, and academic research projects.

Reliance on Alternative and 'Big Data': There is an increased reliance on "proxy data" or "alternative data." This might include satellite imagery for agricultural tracking, mobile phone data for population movement and commerce patterns, or digital payment data from financial technology (FinTech) firms operating in the space. These sources offer new insights but come with their own biases and privacy concerns.

4. The Emergence of 'Qualitative' Data Importance

In the absence of robust quantitative data, qualitative research methods become crucial.

Case Studies and Ethnography: The data that is available often comes from in-depth case studies, ethnographic research, and localized surveys conducted by researchers to understand the nuances of informal markets, supply chains, and social networks. This data provides rich context but is not easily scalable or generalizable to the national level.

In an economy where 90% of activity is informal, the expectation of data must be fundamentally managed. The data ecosystem will be characterized by significant gaps, measurement challenges, and a reliance on fragmented, often non-traditional data sources. The journey toward greater formalization, as seen in recent initiatives in India like the push for digital payments and labor registries (such as the e-Shram portal), is essentially a journey to create better data. Until that formalization is achieved, policymakers must navigate a challenging landscape where broad national statistics tell an incomplete story, necessitating innovative approaches to data collection and a nuanced understanding of the vast, complex, and data-sparse informal reality.

If Savings from Russian Oil is Used to Provide Interest Subsidy or Subvention.....

 India, a major oil importer, has leveraged geopolitical shifts since February 2022 to purchase substantial volumes of discounted Russian crude oil. This pragmatic energy strategy has resulted in significant savings on the nation's overall import bill, estimated at least $17 billion between April 2022 and June 2025. While these savings have primarily accrued to state-owned and private refiners' profit margins and helped stabilize the nation's macro-economic indicators (such as the trade deficit and inflation), the proposition is to re-channel these "excess" funds into targeted interest subsidy and subvention schemes to directly enhance the competitiveness of critical domestic industries.

How Interest Subsidies Enhance Competitiveness

Interest subvention (subsidy) is a policy mechanism where the government bears a part of the interest burden on loans for specific sectors, effectively reducing the final interest rate for borrowers. Channeling the Russian oil savings into such programs would increase competitiveness through several key mechanisms:

Lowering the Cost of Capital: Reducing borrowing costs directly improves the viability of business operations and new investments, making Indian goods and services more price-competitive both domestically and globally.

Improving Liquidity: MSMEs, which often operate on thin margins and face working capital constraints, benefit immensely from cheaper credit, enabling them to procure raw materials, manage production cycles, and meet operational expenses without financial strain.

Stimulating Investment and Modernization: Affordable credit encourages businesses to invest in new technologies, upgrade machinery, and expand operations, which are crucial for enhancing efficiency and scaling up to compete with international players.

Promoting Targeted Sectoral Growth: Funds can be directed to priority sectors, such as labor-intensive exports (textiles, gems, and jewelry), to maximize job creation and foreign exchange earnings.

Data and Examples

India has existing frameworks for interest subvention, which provide clear examples of their impact:

Export Promotion Mission (NIRYAT PROTSAHAN): The government has already launched this scheme, with a total outlay of ₹25,060 crore (for FY 2025–26 to FY 2030–31), which includes a base interest subvention of 2.75% on pre- and post-shipment export credit for eligible MSMEs. This initiative aims to reduce the cost of export finance and improve global competitiveness.

Impact Data: The previous Interest Equalisation Scheme (IES) effectively brought down actual borrowing rates for MSMEs from a range of 9-12% to about 5-7%, significantly reducing financial pressure on exporters. This historical data demonstrates the direct positive effect of such schemes.

Potential Funding: India saved an estimated $8.2 billion in FY 2023–24 alone from Russian oil imports when discounts were wider. Rerouting a portion of such large sums could substantially bolster the NIRYAT PROTSAHAN fund or similar schemes, making them more impactful and sustainable.

Reinvesting the savings from Russian oil imports into interest subsidy and subvention programs presents a powerful, pragmatic strategy to enhance India's economic competitiveness. Instead of allowing the gains to remain concentrated in corporate profits or solely buffer general government finances, this approach would directly inject capital support into the productive sectors of the economy. By lowering the cost of credit for MSMEs and exporters, India can foster a more resilient, dynamic, and globally competitive industrial base, leading to sustained export-led growth and job creation. This policy action would effectively translate a geopolitical advantage into long-term domestic economic strength. Using the savings from importing discounted Russian oil to provide interest subsidies would significantly boost India's economic competitiveness by stimulating key sectors, particularly Micro, Small, and Medium Enterprises (MSMEs) and exports, by lowering borrowing costs, increasing liquidity, and encouraging investment. 

The RBI's Credibility and the Private Sector Response.....

The Reserve Bank of India (RBI) operates within a flexible inflation-targeting (FIT) framework, which aims to anchor inflationary expectations and ensure price stability while also supporting economic growth. While the RBI's forecasts have shown occasional significant misses, particularly concerning volatile food and fuel prices, recent data suggests the central bank has built considerable credibility. The private sector, in turn, is heavily influenced by the RBI's official stance, contributing to a self-reinforcing economic environment, though private investment remains a key variable for sustained, long-term growth.

The RBI's Credibility in Forecasting

The RBI's forecasting performance has been a mix of successes and challenges. The institution uses a comprehensive framework involving various models, historical trends, and expert consultations, and its officials maintain that there is no systematic bias in its projections.

Successes: Since the adoption of the FIT regime in 2016 (with a target of 4% CPI within a 2-6% band), inflation has become better anchored, and the central bank has been successful in managing price volatility during various shocks. A cross-country analysis of inflation forecast errors suggests that India's errors are in line with other emerging economies, often linked to the high share of food in the CPI basket.

Challenges/Misses: The RBI has faced criticism for significant forecasting errors, especially related to the volatility of food prices and external shocks. For example, the central bank failed to foresee the sharp disinflation that followed demonetization in 2016, which led to a high real interest rate regime that hampered investment. More recently, the RBI's quarterly GDP and inflation projections have sometimes deviated significantly from actual outcomes, leading some private economists to question the accuracy of its near-term forecasts.

How the Private Sector Follows Official Forecasts

The RBI's communications and forecasts play a crucial role in shaping market expectations, which can lead to a self-fulfilling prophecy.

Anchoring Expectations: The central bank's communication of its future inflation trajectory and policy stance is a primary driver of private sector inflation expectations. Private forecasters and businesses adjust their own expectations and decisions based on the RBI's stated outlook and the perceived future interest rate path, thus helping to reinforce the central bank's desired outcome.

Monetary Transmission: When the RBI maintains an accommodative stance and signals future rate cuts based on its forecasts, banks and financial institutions adjust their lending rates and credit conditions, which in turn influences private investment and consumption decisions.

Recent Examples and Data

Growth Forecasts (2025-2026): In December 2025, the RBI revised its GDP growth projection for FY 2025-26 upwards to 7.3% from an earlier 6.8% estimate, reflecting a robust domestic economy driven by strong private consumption and public investment. This optimistic outlook was echoed and reinforced by several international agencies, strengthening overall market sentiment.

Inflation Forecasts (Late 2025): In late 2025, India experienced exceptionally low CPI inflation, falling below 1% in November. While some private economists predicted even lower inflation (e.g., Deutsche Bank's forecast of 0.7% for a specific quarter), the RBI's more cautious projection of around 2% for the same period was seen as a way to maintain policy credibility and not prematurely declare victory over inflation. The RBI's decision to maintain the repo rate in the face of falling inflation demonstrated its commitment to the medium-term target of 4%, which helped anchor long-term expectations.

Private Capex Response: Despite a conducive environment of low inflation and supportive financial conditions engineered by the RBI, private sector capital expenditure (capex) has remained muted in recent quarters, with the government driving most investment. This suggests that while the private sector is influenced by the RBI's signals, it also awaits stronger, sustained demand visibility before committing to large-scale investments, indicating a nuanced interaction between official forecasts and private decision-making.

The RBI holds significant credibility in managing the overall macroeconomic environment in India, primarily through its commitment to the inflation-targeting framework, which has successfully anchored long-term price expectations. While its near-term forecasts can be subject to errors, especially due to external supply-side shocks inherent in an emerging market economy, the central bank's communication and projections heavily influence the private sector's outlook. The private sector largely aligns its expectations with the RBI's guidance, creating a self-reinforcing cycle of economic sentiment and activity. However, the transmission of monetary policy and the translation of positive sentiment into large-scale private investment remain key areas that determine the ultimate success of the RBI's forecasts in reinforcing sustainable economic growth.

The Pace of Human Capital Depreciation and Economic Growth in India.....

 The Pace of Human Capital Depreciation and Economic Growth in India

Human capital, encompassing the skills, knowledge, education, and health of a population, is a fundamental driver of long-term economic growth and innovation. In India, with its significant "demographic dividend" of a large youth population, the effective development and preservation of human capital are crucial for transforming this potential into sustained economic prosperity. While human capital generally appreciates with continuous investment in education and health, it is also subject to depreciation through mechanisms like aging, illness, long-term unemployment, and, critically, skill obsolescence due to rapid technological change. The pace of this depreciation and the effectiveness of mitigation strategies directly influence India's overall economic trajectory.

Pace of Human Capital Depreciation in India

Quantifying human capital depreciation is challenging, but several indicators and data points illustrate its pace and impact in India.

Skill Obsolescence: Rapid technological advancements in a globalized economy mean skills can quickly become outdated. A significant challenge in India is aligning skill development with market needs, as skill mismatches can effectively depreciate the value of existing education. This is particularly evident in sectors where advanced education does not guarantee employment; for instance, as of some reports, highly educated females face high unemployment rates, suggesting a mismatch or underutilization of existing capital.

Unemployment and Underutilization: Long periods of unemployment lead to a decline in skills and productivity. While the general unemployment rate in India has shown improvement, declining to 3.2% in 2022-23, youth unemployment remains a concern, which indicates an underutilization of a crucial part of the workforce. A study using a production model estimated a general skill depreciation rate of 4.3% per year, while the returns on experience were 6.8%, highlighting the need for continuous skill upgrades to counter this depreciation.

Health Disparities: Poor health outcomes also contribute to the depreciation of human capital by reducing an individual's capacity to work and learn. Data shows that around 35.5% of children in India under five are stunted, which risks cognitive and physical limitations and an estimated 1.4% loss in economic productivity per 1% of adult height loss due to stunting.

Educational Quality Gaps: The quality of education and the actual learning outcomes (learning-adjusted years of schooling) are vital. The World Bank's Human Capital Index (HCI) for India indicated a learning-adjusted expected 5.8 years of schooling, despite an expected 10.2 total years, suggesting a significant gap between enrollment and effective learning, which is a form of potential human capital loss.

Human Capital and Economic Growth in India: Data & Relationship

The relationship between human capital and economic growth in India is well-established in theory and supported by various empirical studies.

Positive Correlation: Studies consistently find a strong positive relationship between investments in education and health and GDP growth. For example, studies found that a rise in average years of schooling and GDP growth rates increased simultaneously between 1981 and 2016.

The Human Capital Index (HCI): India's HCI score improved from 0.44 in 2018 to 0.49 in 2020. This score means a child born in India today will be 49% as productive in adulthood as they could be with complete education and full health. This score is better than the South Asian average, but highlights the significant potential yet to be fully realized. The Utilization-adjusted HCI for India, which also accounts for non-employment, is even lower at 0.24, underscoring the challenge of utilizing the existing human capital effectively in the workforce.

Sectoral Growth: The slow pace of structural economic change, particularly the slow shift of the workforce out of low-productivity agriculture, has hindered the full realization of human capital benefits.

The pace of human capital depreciation in India is closely linked to issues of skill mismatch, health deficiencies, and the underutilization of the educated workforce. While India has made progress in improving its Human Capital Index and economic growth is robust, the existing gaps in health and the quality/relevance of education present a substantial risk to maximizing its demographic dividend. To ensure sustained and inclusive economic growth, India must prioritize continuous and targeted investments in skill development, quality education, and healthcare to effectively mitigate human capital depreciation and harness the full potential of its large population.

Magnitude of the Black Economy and its Potential.....

India's true economic potential is widely considered to be significantly higher than its official Gross Domestic Product (GDP) figures due to the massive presence of a "parallel economy" or black money. Unofficial estimates suggest that if unaccounted income were included, India's GDP could potentially be an $8 trillion economy, and its per capita income could be as much as seven times higher than current reported levels. Black money refers to income that is not reported to tax authorities, whether generated through illegal activities (like crime and corruption) or legal activities where taxes are evaded. Because this money operates outside formal channels, it is not accurately captured in official GDP calculations, leading to an understatement of the actual economic activity.

Various estimates have been put forward regarding the size of this shadow economy, though exact quantification is difficult:

Some unofficial estimates have placed the black economy as high as 62% to 75% of the official GDP.

More conservative estimates, such as those by the World Bank, have suggested figures around 20% of GDP in recent years.

The assertion that India's GDP would be $8 trillion and per capita income seven times higher stems from specific economic analyses, such as one cited in The Hindu newspaper, which highlighted the vast amount of wealth lost to the black economy. The leakage of potential tax revenue (estimated at 40% of black income) means significant underfunding for public goods and services, ultimately hindering overall development.

Why the Government Struggles to Curb Black Money Generation

Despite numerous laws and policy interventions, including demonetisation, the government faces significant challenges in eradicating black money due to a combination of systemic, administrative, and cultural factors.

Key Challenges and Data

Dominance of the Informal Economy: More than 80% of employment in India is in the informal sector, where cash transactions are prevalent and income is rarely reported, creating fertile ground for tax evasion.

Complexity of Tax Laws and High Tax Burden (historically): Historically high tax rates and complicated tax systems have incentivized evasion. While rates have been rationalized, the habit of non-compliance persists, and procedural complexity still encourages operating outside the formal system.

Corruption and Weak Enforcement: Corruption at political and administrative levels facilitates black money generation. Tax officials sometimes collude with taxpayers, and a lack of deterrent punishment means offenders often face minimal consequences.

Vulnerable Sectors (Real Estate, Gold, Education): Certain sectors are notorious for cash transactions. The real estate sector, for example, is estimated to involve 30% to 50% unaccounted cash payments, often through undervaluation of property deeds to avoid stamp duty and capital gains tax.

Offshore Tax Havens and Complex Financial Instruments: Black money is often moved abroad to tax havens through methods like trade mis-invoicing, round tripping (routing money back as foreign investment through countries like Mauritius or Singapore), and Participatory Notes (PNs). International cooperation mechanisms like the Automatic Exchange of Information (AEOI) are helping, but tracking remains difficult.

The existence of a vast parallel economy significantly distorts India's official economic indicators, preventing the nation from reaching its full potential of a possible $8 trillion GDP. The problem is deeply embedded in the nation's socio-economic fabric, driven by a complex interplay of high cash usage, systemic corruption, and regulatory loopholes. While the Indian government has implemented significant measures such as the Black Money Act, demonetisation, and international cooperation agreements, these efforts are often hampered by enforcement challenges and the adaptive nature of black money generation. A complete solution requires sustained political will, systemic reforms that incentivize transparency, and a shift in societal tax compliance culture.

How to Maximise INDIA's Growth Rate...

 India, as the world's fastest-growing major economy, stands at a crucial juncture, with the potential to become a high-income nation by 2047, requiring ambitious structural reforms to sustain its momentum, create millions of jobs for its vast youth bulge, and integrate its informal economy into formal frameworks, moving beyond consumption-led growth to investment-driven expansion.

Key Strategies & Data-Driven Examples:

Boosting Manufacturing & Investment:

Data: Currently, over 90% of India's workforce is informal, and youth unemployment is high.

Action: Streamline land/labor laws, incentivize FDI in sectors like electronics (PLI scheme), and leverage digital supply chains (e.g., Estonia's model) to attract manufacturing investment, creating formal jobs.

Example: Expand Production Linked Incentive (PLI) schemes to sectors like seafood and processed meat for export.

Investing in Human Capital & Digital Infrastructure:

Data: High potential workforce entering annually, but skills gaps persist.

Action: Enhance education, health, and skills training. Expand affordable, high-speed internet (BharatNet) to digitize informal sectors.

Example: Success of India's UPI system (172 billion transactions in 2024) shows how digital ecosystems formalize economic activity.

Modernizing Agriculture & Rural Economy:

Data: Agriculture employs ~58% of the population, often with low productivity.

Action: Shift subsidies from electricity to solar, build rural infrastructure (cold storage via MGNREGA funds), and promote export-oriented crops.

Example: Fund rural roads and storage with funds reallocated from less effective schemes to boost farm-to-market efficiency.

Reforming Fiscal Policy & Trade:

Action: Simplify tax codes, reduce exemptions to raise tax-to-GDP ratio (target 15%), and focus on debt-to-GDP reduction. Strengthen trade deals (EU, US) and reduce non-tariff barriers.

Example: Reduce import duties on manufacturing inputs to lower costs, boosting domestic production.

Green Growth & Urban Planning:

Action: Rapidly scale renewable energy (solar, wind) to meet demand and sustainability goals. Develop robust urban planning for productive cities.

Example: Invest in energy-efficient buildings and factories, building on India's 209 GW renewable capacity.

Achieving high growth requires India to transition from reliance on services to a robust manufacturing and digital economy, tackling systemic challenges like informality, skills gaps, and infrastructure deficits through bold reforms, strategic investments, and technology adoption, mirroring successful models while leveraging its demographic dividend to become a global economic powerhouse. To maximize India's growth, it must aggressively boost investment, especially in manufacturing and infrastructure, through simplified regulations and FDI; develop human capital via better education and skills training; leverage technology for digital inclusion (like UPI's success); and reform labor/land laws to create formal jobs, transforming its large informal sector and young workforce into productive assets, while strategically increasing exports in high-potential sectors like electronics and food processing, drawing from examples like China's manufacturing model and Estonia's digital governance.