In an economy with abundant labour and scarce capital, informal sector plays an important role as the value of output and value added per unit of capital stock in informal sector is expected to be usually high.
NAS data does not unequivocally validate such a perception; however, in general, capital intensity is on the increase. Average value of output per unit of net capital stock for the economy as a whole declined from 0.626 in 2011-12 to 0.576 in 2019-20.
For the household sector also, average value of output per unit of net capital stock declined from 0.645 in 2011-12 to 0.548 in 2019-20. This decline is almost across all sectors except manufacturing and utilities. Output per unit of capital stock in household or informal sector in 2019-20 has fallen below the average of all institutional producers.
Two significant observations on capital intensity, however, is in order. First, for the overall economy, capital intensity has generally moved in a narrow range, but significant inter sector differences are visible. Capital intensity has increased for mining, construction and road transport in particular as reflected by a decline in value of output per unit of net capital stock during 2019-20 relative to 2011-12. Capital intensity has declined for professional and other services.
Second, for the household sector, increase in capital intensity on an aggregate basis is much sharper, as reflected by a decline in average value of output and value added per unit of net capital stock in 2019-20 compared to 2011-12.
The increase in this intensity is greater for sectors like mining, construction, trade, road transport and other services. Utility services and manufacturing have surprisingly witnessed decline in capital intensity.
Increase in capital intensity in mining, construction and trade does indicate substitution of capital machinery for labour and an increasing shift to digital payments. But the narrowing of the ratio or catching up of capital intensity by the household sector has implications for future employment possibilities in the household sector.
Skills development
In addition this also requires a careful examination of the need to look at skill development of the existing stock of labour employed in these sectors.
Informal household sector is also characterised by having a higher ratio of value added to value of output as the labour (own or hired) is the principal input. Data confirms that perception. The average ratio of value added to output for household sector has indeed been way above other institutions (Chart 1).
The average value added to output ratio of private corporate sector, overall economy and the household sector during 2011-12 to 2019-20 was, respectively, 35.4, 48.6 and 63.2.
Efficiency gains
The ratio varied significantly across activity groups. In the case of the overall economy, the ratio has improved from 45.9 in 2011-12 to 50.9 in 2019-20, for the private corporate sector from 31.9 in 2011-12 to 38.1 in 2019-20 and for household sector from 61.7 in 2011-12 to 64.8 in 2019-20, indicating relatively higher efficiency gains for the private corporate sector (Chart 2).
There has been a view that demonetisation, GST and pandemic affected small businesses significantly, not only in its share in product market, but also through significant erosion in their net worth and assets. There was an increase in non-performing assets of the financial institutions providing credit support to these entities.
RBI has been releasing an annual report on the financial stocks and flows (FSF) account for the Indian economy, presenting sectoral outstanding positions and transactions through financial instruments on a ‘from-whom-to-whom’ (FWTW) basis. This provides insight into the sources and uses of funds and movements of sectoral financial balances.
The latest such publication pertains to July 2020, around the beginning of the pandemic, but nonetheless provides good insights and also on the impact of the other two policy decisions.
Data do suggest that between 2011-12 and 2016-17, financial assets and net worth of the household sector declined by about 5 per cent. The trend did reverse in subsequent years indicating that perhaps the initial shock to a significant extent was absorbed (Chart 3).
One way of explaining the reverse of decline post demonetisation and GST introduction is that the informal sector units helped each other by providing capital which was destroyed during the two events. Data indicating the impact of the pandemic are, however, still awaited.
Gopalan is a former Finance Secretary, and Singhi is a former Senior Economic Adviser, Ministry of Finance