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.
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