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The Complementarity Between the Formal and Informal Sub-sectors of the Indian Industry

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Abstract

Indian economy is categorized as one of the fastest growing advancing economies. Much of the growth has been attributed to the industrialization process post-independence especially after economic reforms of 1990s. However, the formal industrial sector has been unable to absorb the growing labor force and thus majority of labor force have been forced to derive and find self-employment options in the informal sector. The current study is an attempt to analyze the Indian industry in light of this formal and informal bifurcation. Using the stochastic frontier analysis, the production functions are validated and technical efficiency (TE) is predicted. The study reveals that the formal industrial sector in India is relatively efficient. However, the informal sector, apart from absorbing higher number of labor force, is performing better than dictated by hitherto classic theoretic predictions. The study also analyzes the factors influencing the TE of the formal and informal sectors. The study concludes that the formal and informal sectors mutually reinforce the industrial growth in India, have positive linkages and contribute efficaciously to economic outcomes like output and employment.

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Source Table 7

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Source Table 8

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Notes

  1. Liberalization, Privatization and Globalization.

  2. The government of India has loosely been following the IMF’s definition of the formal and informal sectors which is motivated by the fiscal aspects. The aim of this definition is to bring more and more units under the tax-paying regimes. On the other hand, the developmental economists consider equitable development to be the defining feature of the same.

  3. National Industrial Classification is a classification code maintained in India in order to statistically classify the business units across the country and maintain a common standard.

  4. Small retail household utility shops.

  5. Fast Moving Consumer Goods like soft drinks and fast-foods have a limited shelf life.

  6. Periodic Labor Force Survey Data Set.

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  1. Department of Economics, Islamic University of Science & Technology, Awantipora, J&K, India

    Mehak Majeed

  2. Department of Economics, University of Kashmir, J&K, India

    Saeed Owais Mushtaq

  3. Department of Higher Education, J&K, Jammu, J&K, India

    Zahid Gulzar Rather

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Majeed, M., Mushtaq, S.O. & Rather, Z.G. The Complementarity Between the Formal and Informal Sub-sectors of the Indian Industry. Ind. J. Labour Econ. 65, 981–1006 (2022). https://doi.org/10.1007/s41027-022-00407-4

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