Speaker: Prof. Arup Mitra, Institute of Economic Growth, New Delhi and Director General, NILERD

This study reviews both the old and new perspectives relating to informal sector growth. Exploring the interlinkages between the formal and the informal sectors it examines if regions performing better in terms of the formal manufacturing are some of the industrialised states in the country. Secondly, whether the regions showing a higher level of ef?ciency in the formal sector, also replicate similar experiences for the informal sector? This proposition is of great signi?cance from the inter-sectoral point of view as the positive spillover of the growth effect in the formal sector is likely to get captured through this. While the formal–informal interlinkages – the indicators of percolation effects or positive spillover – do not seem to be of any signi?cance for the informal sector, the household enterprises and those that are not purely non-household enterprises within the informal sector are somewhat inter-connected. Our evidence is not supportive of technological dissemination across ?rms and across sectors, implying that the informal sector may not bene?t even when the formal sector experiences improvements in ef?ciency-use of resources, productivity growth and earnings. Poor skill levels and inadequate ?nancial capital possibly constrain the informal sector units from undertaking any major investment in upgrading their technological capabilities and enhancing performance levels. The organized/formal sector enterprises do respond to the rise in income as demand tends to shift in favour of quality products. If we take urbanisation level as a proxy for agglomeration economies, again the impact seems to be positive only in the case of the formal sector. Secondly, when we consider the infrastructure-speci?c variables one after another, they show positive impact only on the ef?ciency of the formal sector. Further business sub-contracting does not seem to be contributing to employment generation in the informal establishments in manufacturing or trade activities. Therefore, we may infer that not necessarily faster industrialization leads to ancillarization and growth in productive employment in the small units as usually believed in the literature. The growth in petty activities could be because of sluggish employment prospects in the high productivity sector even in the so called advanced regions. Capital intensive technology restricts the employment growth even when rapid industrialization follows, which in turn leads to expansion in residual type absorption. However, services reveal a positive impact, indicating that large units get their work done by the small units in the unorganized sector. In fact, several new services have emerged in the recent years as Rakshit (2007) points out, corresponding to which large ?rms actually contract out work to the small ?rms. Similarly the wage rate in the informal sector is not seen to be influenced by the fact that firms have business contract with large firms from the formal sector. Rather asset of the worker is a strong determinant of the informal sector wage rate, possibly indicating that work consignments are delivered largely to those who have certain resources to pursue them. Hence, state support for asset creation is crucial for bringing in improvement in livelihood in the informal sector.