Persistence of Informality in India a Mark of Capital's Weakness or Expansion?

38 Pages Posted: 6 Jun 2017

See all articles by Saumya Chakrabarti

Saumya Chakrabarti

Visva-Bharati University - Department of Economics and Politics

Date Written: June 6, 2017

Abstract

In this work, it is shown that, the exceptionally large and expanding volume of the Indian informal sector and its growing (intra-sectoral) dualities/fissures are actually a consequence of the very growth process of the Indian economy, driven by the formal/modern sectors. Therefore, the answer to the problem of informality may not lie within this growth. Only a minor part could gain out of it; but, a much larger segment needs to organize itself as a clustered entity for its own survival.

The dominant discourses consider that, either:

(a) the prevalence of the informal sector could be mitigated through economic growth complemented by some institutional reforms or,

(b) this sector could be induced and transformed into a dynamic development engine.

But, our preliminary observations on India contradict both these propositions. Curiously, the Indian informal sector is expanding in tandem with her overall economic expansion; and only a part of it is showing evolutionary tendencies, while a much larger segment is languishing.

Subsequently, a macro-model is presented which tries to provide an explanation for these typical trends. It is shown that, instead of the weakness of the formal sector, rather its expansion engenders the spread of the informality along with its diverse/dual (intra-sectoral) tendencies of evolution as well as involution. Finally, the hypotheses derived from this macroeconomic framework are tested with the help of Indian state- and firm-level data. This empirical exercise establishes that, it is the expansion of the formality that itself is inducing the volume of Indian informality and also creating deep fissures within it (and thereby producing a dualism).

Given these findings, it is proposed that, as the expansion of the formality itself creates a fissured informality, the latter has to organize and pose itself against the former; and a suitable method for that could be a cluster formation.

Keywords: growth; capital-accumulation; price-shock; agrarian-distress; resource-conversion/extraction; migration; employment-diversification; expansion of informality; push and pull; evolution and involution; political-economy of (non-)transition.

JEL Classification: E11, E24, E26, O11, O17, P16

Suggested Citation

Chakrabarti, Saumya, Persistence of Informality in India a Mark of Capital's Weakness or Expansion? (June 6, 2017). Available at SSRN: https://ssrn.com/abstract=2981501 or http://dx.doi.org/10.2139/ssrn.2981501

Saumya Chakrabarti (Contact Author)

Visva-Bharati University - Department of Economics and Politics ( email )

Santiniketan 731235, West Bengal
India

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