Informal sector in India and adoption of digital technologies

According to the Government of India’s Ministry of Labour and Employment Report (2015), almost 90% of the Indian workforce can still be categorized as informally employed, generating approximately 50% of the national product. Challenges with data availability have made a rigorous analysis of the informal economy in India often difficult and inadequate for policy formulations. This study aims to fill the gap by providing an empirical analysis of the informal economy in India using micro-data from the World Bank’s Informal Enterprise Surveys.

The authors contribute by empirically testing the association between the adoption of digital technology (payments) and firm performance proxied by firm sales. Matching models are used to mitigate sample selection bias arising out of simultaneous sample selection.

The results suggest that the participation in digital platforms, namely, use of digital payment instruments, is associated with higher sales for firms. The results of this study also show that adoption of digital payments helps in both situations – whether a firm has been using digital technology or has just started using it since the outbreak.

More in-depth data over time, spanning across more cities of India, is needed to conduct a further detailed investigation.

The results should allow policymakers in India to reconsider youth-centric and women-centric business needs, even within the informal sector, which does not often enter the purview of the government but remains responsible for the growth and sustenance of 90% of the country’s workforce. If further research on this issue could engage with the impact of demonetization of currency in 2016 as a lagged shock on sales and reestimate subsequent growth, it would perhaps offer a wider spectrum of how the performance of the informal economy in India affects the entire economy, which has over the last four years and before the onset of Covid reported slower growth.

Productivity is measured in terms of sales of informal firms in India in a regular month or in recent period like last month. Adoption of technology such as making payments using digital platforms can enhance productivity of firms by lowering standard transaction costs and time spent for visiting banks or financial institutions. Albeit not extensively, the literature has investigated digital technology adoption in the context of firms achieving comparative advantage (D’Ippolito et al. 2019; Scuotto et al. 2017), firms generating value creation (Magistretti, Dell’Era and Petruzzelli, 2019), and in helping with strategic initiatives and agility of firms (Ghezzi and Cavallo, 2018; Piccoli and Ives, 2005). Nonetheless, it would incur certain fixed costs, including acquiring skills and awareness, to manage digital platforms. In addition, physical access to instruments such as smartphones or computers and internet connectivity are prerequisites for productivity enhancements. Firms belonging to the informal sector in India generally face these challenges but may also benefit significantly following successful adoption. To the best of the authors’ knowledge, this is the first study to conduct a preliminary empirical analysis of the impact of digital technology adoption on the performance of informal sector firms in India.