How to formalise the informal economy.

Byline: Jawaid Bokhari

THE PTI government has made strenuous efforts to document the economy with an exclusive focus on increasing tax revenues with partial success.

The number of registered taxpayers has touched a record high of 2.7 million but the tax collection has not been significant owing to clogged economic activities and stubborn resistance from a strong segment of those sought to be brought in the tax net.

The formalisation of the informal economy is not only important for raising tax revenues but for technology-driven, skilled-based upgrading of economic activities, scaling up the operational size of small enterprises, boosting and diversifying production and improving the lot of low-wage earners.

Given the formidable size of the informal sector embracing multidimensional activities, the government's target to raise economic growth to 4-5 per cent and increase total revenue to 3pc of GDP over the next three years, the need for formalising the informal economic activities cannot be emphasised enough.

Though the estimates about the size of the informal economy vary, it is generally quoted at 35pc or one-third of the country's GDP. However, depending on the methodology adopted, the estimates of its size go up from 50-60pc to 90pc of the GDP.

In 2019-20 agriculture, much less affected by Covid-19, and small industries in the informal sector, though affected by lockdown, have posted positive growth as opposed to the sharp contraction in all economic activities in the documented sector.

Studies show that large-scale enterprises in the documented sector have hidden part of their production and assets from regulatory and tax authorities

The Covid-19 triggered lockout has also brought into the spotlight the plight of millions of wage earners in the undocumented sector who have lost their jobs. Around 67pc of urban employment is in the informal sector. Outsourcing of non-core activities by firms and hiring informal contract labour by industry to cut costs is a normal practice.

The informal sector provides 70pc of the total jobs in non-agriculture economic activities. Then agriculture, which is largely in the informal sector, provides employment close to 40pc of the country's total working labour force.

International research reports indicate that poverty levels among people with informal employment in developing states are, on an average, twice as high as that in the documented sector because of low productivity, low incomes and limited...

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