Stagnant manufacturing growth in India: The role of the informal economy

Abstract

This paper examines the role of structural change in India's performance, and in particular the role of the informal segment in the stagnant growth of the Indian manufacturing sector. Using counterfactual analysis – including a modified shift-share approach – the paper considers to what extent the informal sector can help explain the poor performance of Indian manufacturing over the period 1980-2011. The results suggest that the informal segment of manufacturing has been a drag on overall manufacturing productivity growth, with the informal manufacturing segment unable to provide a productivity bonus when absorbing workers from the agricultural sector. Results from the shift-share analysis indicate that labor reallocation to the informal segment of the manufacturing sector is growth-reducing, with structural change being the main source of this reduction, an effect which in turn is driven by movements of employment within manufacturing sub-sectors.