Informality in Indian Manufacturing

This paper characterizes informality in output and employment in the Indian economy for the period 1978-2005, with a special emphasis on the manufacturing sector. We first present statistics on growth and employment for India as well as for three sectors - agriculture, industry and services- for the time period 1950-2005. We also present data on employment in informal and formal enterprises using National Sample Survey data and highlight how informality in both formal and informal enterprises has grown over the years. This is further confirmed by comparing India with 40 other developing countries, where we find that the share of informal employment in non-agricultural employment is the highest among all the countries, and Indian manufacturing is a sector where the degree of informality is strikingly high. We document informality in Indian manufacturing carefully by examining detailed data on value added, employment, capital-labor ratios and trade at the 3 digit level for the manufacturing industries during the 1978-2010 period and highlight those industries in which informality has been increasing and dominant. Importantly, the level of informality in Indian employment has remained persistently high despite the rapid growth in GDP and GDP per capita seen since 1991, which is when India initiated the process of liberalizing the domestic industrial policy as well as its trade policy.