The role of the informal sector in structural transformation: Some Indian evidence

The aim of this paper is to highlight the role of the informal sector in the Indian economy. The paper notes that in occupational distribution in India, particularly during the 1970s, it is the informal sector (I-sector) which accounted for most of the increase in non-agricultural employment and that this growth of I-sector employment occurred not only in activities traditionally thought to be associated with the I-sector expansion (such as trade, construction and services) but also importantly in manufacturing, and there is a strong presumption that the manufacturing segment of the informal sector expanded faster than its services segment. Evidence further suggests that the I-sector was not a passive absorber of labour but a dynamic sector responding successfully to changing demand in the economy and contributing significantly to income and output. The paper also offers a hypothesis that, simultaneously with these changes in economic structure, there is likely to have occurred a change in the composition of rural-urban migrants with the share of those who go to the informal sector and have only informal sector jobs as their targets (usually members of the poorer households in the rural areas) increasing and that of those who go to the formal sector (usually well-educated members of the relatively well-to-do land-owning families in the rural areas) declining; further, migration by the members of the poorer rural households is likely to have increased not because their rural income declined but because the informal sector income increased.