Informal Economy and Remittance Estimates of India Using Nighttime Imagery

Abstract

Accurate estimates of the magnitude and spatial distribution of both formal and informal economic activity have many useful applications. Developing alternative methods for making estimates of these economic activities may prove to be useful when other measures are of suspect accuracy or unavailable. This research explores the potential for estimating the formal and informal economy for India using known relationships between the spatial patterns of nighttime satellite imagery and economic activity in the United States (U.S.). Regression models have been developed between spatial patterns of nighttime imagery and Adjusted Official Gross State Product (AGSP) for the states of the U.S. The slope and intercept parameters derived from the regression models of the U.S. were blindly applied to India, resulting in an underestimation of Gross State Income (GSI) for each state and Union Territory (UT) of India because of the lower level of urbanization in India in comparison to the U.S. However, a comparison of estimated GSI from the nighttime lights image and the official Gross State Product (GSP) of the states and UTs of India indicates a high correlation between them (r = 0.93). The different levels of urbanization (i.e. percent of population in urban areas) in the U.S. and India are used to adjust the Estimated Gross Domestic Income (EGDI) by multiplying by the ratio of the percentage of the population in urban areas for the two countries. This gives the Adjusted Estimated Gross Domestic Income of India (AEGDI), which is compared with the official Gross National Income (GNI) estimates of India’s states and UTs. The results suggest that the magnitude of India’s informal economy and the inflow of remittances are 150 percent larger than their existing official estimates in the GNI.