A 2024 joint study of the International Labor Organization and the Small and Medium Enterprise Development Authority (SMEDA) estimated Pakistan's undocumented economy at $457 billion. While other South Asian nations, particularly Bangladesh and India, do include estimated undocumented GDP figures in their official GDP, Pakistan's official GDP figures do not include such estimates. If the Pakistani government decides to include estimates of the informal economy in its official figures, the country's GDP would jump to $1,059 billion in market exchange terms and over $4,000 billion in PPP terms.
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| Pakistan's Total GDP, including Undocumented, Estimated at over $1 Trillion |
In 2023 when the ILO-SMEDA study was conducted, Pakistan's official GDP was $340 billion (34% less than the undocumented GDP), bringing the total real GDP for 2023 to $797 billion. Pakistan's official GDP figure for 2025-26 is projected to be $452 billion. Assuming that the undocumented GDP has grown at the same rate as the official GDP, the undocumented GDP today works out to $607 billion, bringing the total GDP (documented and undocumented) to over $1 trillion. In terms of purchasing power parity, the total national economy, including the informal economy, is estimated to be over $4 trillion, which translates to over $16,000 per capita.
Being the largest employer, Pakistan's undocumented sector acts as a critical shock absorber for the labor force and sustains millions of low-income households. But it also restricts the government tax collection which could be invested in education, healthcare and infrastructure development. There is a temptation in Pakistan to force documentation of the entire economy as the Indian government has attempted to do. However, it will create a mass unemployment problem as many small businesses would be forced to close.
India is an example of what can go wrong in attempting to bring the informal sector into the tax net too quickly. Demonetization and GST taxes together have decimated the informal sector. But the Indian government continues to significantly overestimate its annual economic growth, particularly by misjudging the size and trajectory of the country's informal (undocumented) sector. Because of these estimation errors, researchers, including India's former Chief Economic Adviser Arvind Subramanian, estimate that the absolute level of India's real GDP may be overstated by 22% to 31%. This implies the average citizen's actual standard of living is lower than official data suggests.
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13 comments:
I have been discussing this with Pakistanis for a long time. The “Informal” or cash based economy is larger than the taxed economy there.
So, Riaz Sb estimates that Pakistan's economy has a size of $1 Trillion while India with its 6 times larger population has an economy that is actually only 3.5 times larger at around $3.5 Trillion (accounting for this supposed 22% over-estimation)?
But I find it counter-intuitive that a $1 Trillion economy with a population of 250 million (one-sixth that of India's) sell 11 times fewer two-wheelers and 22 times fewer cars than the $3.5 Trillion India, which according to this estimation must have significantly lower living standards than Pakistan. (As I have pointed out before, though cars seem to be quite pricey in Pakistan compared to India, the prices of commuter two-wheelers - that much of the middle classes of both countries depend upon for personal mobility - are at par after currency conversion. So, why is a supposedly more affluent Pakistan seeing disproportionately smaller car and even two-wheeler sales than India?)
Secondly, why is this $1 Trillion economy so chronically dependent on IMF bailouts to prevent bankruptcy? And why is its foreign exchange reserves so low? (At the time of writing, Pakistan's forex reserves stand at $22 billion while India's is at $670 billion.)
And what exactly are the industrial products that this $1 Trillion economy manufactures and exports other than the relative low-value items like textiles, surgical instruments and sports goods?
If you ask me, the claim of Pakistan being a $1 Trillion economy just doesn't add up. It sees so few sales of motor vehicles despite not having a developed public transportation system. It is chronically dependent on IMF bailouts to keep itself afloat. Its forex reserves are quite low (much smaller Nepal has as much forex reserves as Pakistan, while Bangladesh has larger). And it seemingly has few industrial exports to support this supposed $1 Trillion economy other than low-value products like textiles, surgical instruments, sports apparel etc.
If Pakistan's economy were that big in proportion to India's, their relative size should reflect in other economic indicators and numbers.
Most of Modi’s achievements in India can be tied to the regularization of India’s economy by digital buying and selling.
Ras: “ Most of Modi’s achievements in India can be tied to the regularization of India’s economy by digital buying and selling”
You should read Ashoka Mody’s “India is Broken”. He’s a Princeton economist who argues that Modi’s efforts to document the economy, such as demonetization and GST implementation, have killed the informal sector and caused mass unemployment in India. Millions of Indians have returned from cities to farms to eke out a living. Other top independent economists agree with Ashoka Mody’s assessment.
Vineeth: “But I find it counter-intuitive that a $1 Trillion economy with a population of 250 million (one-sixth that of India's) sell 11 times fewer two-wheelers and 22 times fewer cars than the $3.5 Trillion India“
1. Vehicle sales comparison is not a good indicator of economy in countries with low levels of motorization.
2. Most vehicle sales are financed by bank credit which is not prevalent in countries with large informal economies.
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Data from Google AI:
Vehicle ownership rates in India and Pakistan show a similar trend: high two-wheeler ownership but very low car ownership. In both countries, motorcycles are mass-market commuter vehicles, while passenger cars remain primarily aspirational and concentrated among wealthier urban households.
India
Two-Wheelers: Over 60% of households own at least one motorcycle or scooter.
Cars: Less than 10% of households own a car or a jeep. Overall car penetration sits at roughly 7.5% to 8% nationally.
Pakistan
Two-Wheelers: Approximately 53% to 58% of households own a motorcycle, mirroring India's widespread two-wheeler adoption.
Cars: Car ownership is notably low, with an estimated 6% to 8% of households owning a car. The overall national average is roughly 11 cars per 1,000 people.
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Vehicle debt levels in India and Pakistan differ significantly in volume and market penetration, reflecting the contrast between their respective automotive industries and broader economies.
Key Comparison Points
Market Penetration: In India, auto loans are highly pervasive, with approximately 80% of passenger vehicles financed. Conversely, Pakistan's vehicle debt penetration is lower relative to its overall population due to higher inflation and more prohibitive auto loan regulations.
Volume and Values: Outstanding auto loans in Pakistan have recently seen a resurgence, crossing the PKR 369 billion mark in financing stock, driven by a slight uptick in local kit imports and sales recovery. In India, the sheer scale is significantly larger; for example, out of roughly 4.5 million cars registered in a recent year, around 3.6 million were bought on credit.
Interest Rates & Policy: Both nations have navigated macroeconomic hurdles affecting consumer debt. In Pakistan, high interest rates have historically pressured the financing market, although auto loans have periodically risen as the State Bank of Pakistan implements temporary policy relief and targeted programs like the proposed AIDEP (2026-2031) to make locally assembled cars more affordable. India's massive vehicle debt market is buoyed by a robust domestic manufacturing sector, but remains sensitive to policy shifts like high import tariffs (up to 60%) that dictate overall car pricing and accessibility.
What I was referring to were Modi’s accomplishments as they appear on paper. The slogan of the world’s 4th largest economy etc. is fueled by regularization. India’s problems are significantly greater than Pakistan. The kind of poverty that I saw there in 2004 has not disappeared under Modi.
Google AI and ChatGPT show both countries include informal sector in their estimate GDP estimates PARTIALLY but what is left out is a higher percentage in Pakistan than in India.
In case of Pakistan informal sector size ranges from 35% to 64% of total economy. Including it fully would boost Pakistan gdp from 610B to 741B.
But regardless, it is clear that these gdp numbers from all, but specially from 3rd world countries are highly questionable. So any gloating or grieving based on these numbers is rather amusing.
See: https://www.google.com/search?q=Does+Pakistan+include+informal+economy+in+its+gdp+estimates%3F&ie=UTF-8&oe=UTF-8&hl=en-us&client=safari&udm=50&fbs=ABfTbFVyMZGZf1hfvX9uKjN_-G8cY2oODYyTyZk24Xz37_7FQ33TJTgGUSXMPMOdfjOY7e2Q30AopdyVXXfWdu5WnLoZ7OaK7xKq84xDlGjllpbuklNXWFey9etu4YRNzS0WK-BybrRSk9QXwdUtZ7MbgTlE89bOBLa6ttjzIFGMIAbpvOXU3BJIRjkY_XjX2S3MBJCquDDlHtkYXGIk05s679mEMaY0IQ&aep=10&ntc=1&mstk=AUtExfCOQSoIXeNrkna34VgGRh6vTe2KsYMrXOUfyM57rqbvkIzFM7xElodprof-2OZ6UGz3-mwEtJdOwNC1mcg1MGq0P1GLLWTQH2T7NRMyQOGIMO4yeY2w5yKdsPIY5LpbjqI0iRGEcOuZ3V8_qxuINXjh4Btx_iGvJ6gFZ-COt3LZ_WteH-9sn9PGzwP02l6FxLQE7TZa4XMYcaY5QygrXF3IATHEldXzh-9UKXT3hLTYRPqr25G2pjeEoyRMbCSyqNjgU4AhBrhPDeK4MEdms4RLLAfb6q6xrCtWeqgb-Oua1Pc_zMgA-5NTxbq8BEidahspXUxQDwqTpA&aioh=3&csuir=1&mtid=fHI1arvCNsWm0PEPyrHE2Ag
Riaz Sb,
Do not trust your life on AI. These AI algorithms aren't perfect (yet). They often miss out on nuances and often misread their sources. It would be better to quote from the actual sources for these numbers.
Anyways, lets take these numbers at face value. If one were to conclude that 60% of Indian households own a motorcycle/scooter while nearly as much (53-58%) of Pakistani households own one too, how do we explain the greater disparity of India's new two-wheeler registrations for 2025 being nearly 10-12 times (i.e. nearly double in per-capita terms) than Pakistan? Or the car ownership among Indian households being 7.5-8% compared to 6-8% among Pakistani households, even as India's new car registrations for 2025 were a whopping 22 times that of Pakistan's (even accounting for the latter's used car import market)?
Is it that a far greater proportion of car and two-wheeler purchases among Pakistani households tend to be for older "used" or "pre-owned" cars and two-wheelers rather than new ones (due to lack of affordable vehicle credit for new purchases) compared to India? India has a pretty large used-car market too (6 million units in FY2026) rivalling the size of the new car market (4 million units in FY2026).
https://www.autocarindia.com/car-news/indias-used-car-market-to-reach-10-million-units-by-fy31-redseer-report-439745
Leaving aside the story of vehicle sales, another point to note here is that if Pakistan's "informal" (and "untaxed") economy were as large as it is made out to be, then Pakistani households should have a greater disposable income in comparison to their Indian counterparts. This should in turn reflect in greater consumer spending (if people were to keep their money in their pockets and do not spend them, economy wouldn't grow). Do we see greater per-capita spending on consumer items among Pakistanis in comparison to Indians? You have explained away the disparity in vehicle sales as due to the lack of vehicle credit. How about consumer spending in other sectors that do not usually need a credit?
Question: Does consumption indicate higher informal gdp in Pakistan?
Yes, exceptionally high consumption—relative to official Gross Domestic Product (GDP)—is one of the primary macroeconomic indicators pointing to a massive informal economy in Pakistan.Here is how the relationship works:Consumption-Led Growth: Household final consumption in Pakistan typically accounts for 80% to 85% of its GDP. This is significantly higher than the global average (around 65%).The Income Discrepancy: High consumption requires money. In Pakistan, tax-to-GDP ratios are very low and official incomes often seem insufficient to support the observed spending. The money to fuel this purchasing power comes from undocumented, untaxed, or informal economic activities.The True Size of the Economy: Because of this hidden income, studies estimate that the informal economy actually makes up anywhere from 35% to 56% (or more) of Pakistan's total true GDP.The Institute for Strategic Studies, Research and Analysis notes that this shadow economy employs the vast majority of the workforce and acts as a vital survival mechanism for the population. However, it severely limits government revenue, as detailed by the Global Political Review.
Ras Siddiqui,
"India’s problems are significantly greater than Pakistan."
India's problems looks "significantly greater" likely because its population size is significantly greater. No doubt there are a lot of poor in India, but if you were to take the average or median of the whole population India's could be slightly worse, at par or slightly better than Pakistan's depending on the social or economic indicators you are looking at.
Either way, the bottom line I see here is that irrespective of whether Pakistan's informal, untaxed economy acts as a "buffer" or "shock absorber" or whether it encourages spending by leaving greater (i.e untaxed) disposable income in the hands of the population, Pakistan has no choice but to formalize these and bring them under the tax net (as India has done) if it wants to stabilize its macro-economic fundamentals and pursue sustainable growth. It is well known that Pakistan's previous growth spurts have been consumption-driven that drove up imports rather than exports and these time and again brought it to the familiar territory of a balance-of-payments crisis and an IMF bailout programme soon after.
But if Pakistan were to bite the bullet by "formalizing" and taxing this "informal" economy it would inevitably face the similar situation as India, wouldn't it? Greater taxation would leave smaller disposable income in the hands of the people and consumer spending would go down as well (bringing down these touted GDP numbers with it). Ultimately, Pakistan needs to increase its tax base, reduce its imports and increase domestic manufacturing and exports to balance its accounts. That's where the real test for Pakistani economy lies in the long term, and not the "cushion" of its informal economy (which is actually responsible for driving the country towards default time and again).
And by the way, India's real success at formalizing its shadow economy seems to have been through popularizing digital payments based on UPI, not demonetization or GST. Today its common to see even road-side vendors and small shops advertising QR Codes for cashless digital payment to their accounts. When I go for a walk every morning I pay the roadside tea vendor through Google Pay. Saves the hassle of carrying cash and coins.
Since you're into figures, please let me know the comparison of GDP (including informal sectors that are included in the officially announced figures of Bangladesh and India) and annual exports (goods and services, not including overseas workers remittances) for the following:
1. Exports to GDP proportion of Pakistan (GDP excluding informal sector, figures as reported officially)
2. Exports to GDP proportion of Pakistan (GDP including estimates of informal sector).
3. Exports to GDP proportion of Bangladesh.
4. Exports to GDP proportion of india.
Hamid,
Pakistan’s exports and tax revenues look much worse when you include informal gdp. Clearly exports and tax collections are Pak weaknesses.
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