Post on 25-Feb-2023
Bhupinder S. Juneja
Why India Does Have a Large Informal Sector
Introduction: As per Annual report (2009-10) published by Ministry of Labor and
Employment , roughly 94% are employed in unorganized or informal sector out of which ~60%
are employed in agricultural sector, ~6% in construction and remaining are employed in
manufacturing and service sectors. The report published by ILO (2012) claims that six countries
(India, Brazil, Mexico, Vietnam, Pakistan and Philippines) account for three-fourths of total
informal employment. A general consensus is that in India, labor from historical perspective like
most primitive economies was predominantly informal in nature with majority of labor engaged
in agricultural sector. In that regard, Informal sector has always been there, and has existed far
longer than formal sector. It‟s also reasonable to claim that all workers were predominantly
informal in nature until they raised their voice for formal recognition, legal protection and
regulation, which is what led to creation of a formal workforce. In wake of this, one is compelled
to ask a question as to why India never managed to get rid of informal sector and in-turn
managed to fully formalize its workforce. The question gets puzzling esp. when asked in context
of six decades of industrialization led growth post independence, for historically industrialization
has created more jobs in the formal sector elsewhere. Then one is bound to be intrigued to ask as
to what was so peculiar in India‟s industrialization led growth that it failed to formalize a
reasonable size of its informal labor. I thereby attempt to identify and explain factors causing the
“large size of informal sector” via posing an indirect question as to “What factors played a part
to prevent India from formalizing its workforce during industrialization?” An answer to this
question would in turn provide us answer to original question. In terms of layout, Section-1,
Section-2 cover motivations for topic and definition of informal sector. Section-3 and Section-4
briefly cover the history of informal labor from 2nd
Century BC to Colonial era that ended in
1947. Section-5 gets into bulk of the argument exploring six decades of dynamics of
industrialization led growth and its role in formalization of Indian Labor. Section-6 includes a
conclusion and future work.
In this course paper, I refrain from exploring into post neo-liberal reform era (1991
onwards) and instead keep majority of focus on roughly five decades of Industrialization era
from 1947-1991. This is because neo-liberal reforms had very similar upward trend towards in-
formalization of labor across the planet with an exception that India perhaps embarked on reform
with a high baseline for size of informal labor given that there is widespread consensus among
scholars that India‟s large size of informal sector predates neo-liberal reforms (Agarwala R.
2009, Basole A, Basu D, (2011)-1).Moreover neo-liberal reforms have increased size of informal
economy, not just in India but across majority of peripheral economies of Latin America, Africa
and Asia (Koob S., Portes, A., (1987), Agarwala R. 2009). Hence neo-liberal reforms aren‟t that
likely to be an explanatory factor for large size of an informal sector in India.
Section 1: Motivation.
“Labor is a creative process of transforming nature and the devising of effective techniques for
that purpose lies at heart of culture. Hence we can understand genesis and character of culture
through the position, standard and creativity of labor enshrined in it. From this point of view the
study of labor factor is of paramount importance in the study of a cultural system” (Jain P.C
1971). My past experiences of interacting with informal labor in India, operating their micro-
enterprises along roadsides of most densely populated city in India; Kolkata, West Bengal were
mostly a combination of heightened optimism followed by extreme pessimism. On one hand, I
saw them as the most autonomous functioning unit operating with such a finesse that would put
even most efficient and sophisticated enterprises in West to shame however on other hand,
another set of informal labors pushed to brink of destitution despite being most skillful and hard
working, made me question as to why State didn‟t enact any policies to ensure that as human
beings they did deserve a minimum decent wage and an acceptable standard of living. These
glaring contradictions followed by ubiquitous presence of informality in Indian labor pushed me
to question the very nature of labor in India and in particular why India has such a large Informal
sector.
Section 2: Definition(s) of Informal Sector.
(Sassen S., 1994) defines informal sector in relation to formal economy i-e an economy that is
engaged in income earning activities outside the domain of formal economy. A schematic of this
definition is captured in Fig1.
Fig1
The Sengupta Commission in (NCEUS 2007) report adopted the following definition of the
informal sector in India: “The unorganized sector consists of all unincorporated private enterprises
owned by individuals or households engaged in the sale and production of goods and services operated
on a proprietary or partnership basis and with less than ten total workers. Thus three major criteria,
legal status, participation in the market and firm size (number of workers) are used to define an informal
firm or enterprise.” Per NSSO criteria, total number of workers working in an enterprise is key
aspect of differentiating formal from informal sector.
The definition proposed by ((Sassen S., 1994) , Sengupta Commission) however fails to
capture the embedded nature of informal sector despite the fact they do define informal sector in
relation to formal sector, they still treat it as an isolated entity. On the contrary, (Agarwala R.
2009) proposes a relational definition of informal sector which states that an informal sector is
neither temporary i-e a feudal remnant of colonial past nor an isolated entity. Rather it is deeply
embedded in production relationship with state, formal sector and society to an extent that it‟s
actually a necessary requirement of prevailing relations of production. The embedded nature of
informal sector is such that formal sector actually relies on intricate network of cheap and
informal workers to lower their production costs and remain competitive in market. The States
needs informal labor so they don‟t have to worry about providing social security and other
benefits to workers where as society rely on the cheap goods and services of informal labor in
order to afford costs of their own reproduction. Thus, in this manner the relational definition
helps us gain better insight into the structures, networks and political institutions that expose how
the informal sector is closely intertwined with formal sector. For my purpose, I will stick to this
relational definition of informal sector as I anticipate it will be more effective to isolate the
explanatory variables directly connected to size of informal economy.
Section 3: History of Informal Labor in Ancient India.
Initial evidence of the documented history of labor in India and the cultural fabric it was
embedded in can be traced back to perhaps 2nd
century BC in scriptures like Atharvaveda which
has notion of an ideal craftsman God “Visvakarma- The maker of Universe”. The scripture puts
an artisan as a direct descendent of Visvakarma and hence at most supreme position in society,
comparable or higher than that of a priest. Likewise, other scriptures like Rig Veda , perhaps
written around 2200-1600 BC talk about position of a carpenter as one of most esteemed one in
society. The Indian society at its very origins was organized around notion of “dignity of labor
and glory of work”. Each individual‟s quest in life required them to learn a skill and through
attainment of mastery of that skill, they would consequently attain their position close to that of
God “Visvakarma”. The social structure was based on a caste system that in turn carried a
profession based identity or a utilitarian consideration as opposed to heritage based identity. The
four primary castes based on such profession based identity included Brahmins (priests),
Ksatriyas (fighters), Vaisyas (peasants), Sudras (carpenter, artisan , wine maker etc.) whereby
Vaisyas and Sudras were seen as the backbone of entire social system owing to their ability to
engage in work related to arts, crafts, agriculture and other manual work. They were seen as the
key constituents of society‟s social fabric upon which rested the strength and stability of rest of
society. In this sense, the Indian society and its cultural fabric from its very onset can be seen as
built on strong notion of labor oriented society where skills related to art, carpentry and
agriculture were seen as most important basis of a social existence. A profession based social
identity as opposed to heredity based identity thereby dominated ancient India. Another aspect of
nature of labor was its social mobility which implied that a worker at any point in their life could
choose to switch their profession and accordingly migrate to a different caste e.g. a
kstriya(fighter) could choose to plow the land (hence became a vaisya (peasant)). The social
mobility in that manner enabled people to choose different professions at different stages of their
lives and hence move into different castes. Ancient Indian philosophical texts like Mimamsa
dictated code of conduct in working relations cite that working class, in particular peasants,
craftsmen cannot be treated as slaves or gifted to one other. The strict code of conduct also led
the precedence that the working class maintained an autonomous status in society and engaged in
income earning activities via means of contractual agreements. Thus an artesian could be
commissioned to build a monument via a contractual agreement. At the end of such agreement,
the artisan would go back to their place of origin and either engage in apprenticeship, enact an
autonomous business unit in collaboration with other artisans or look for another contractual
arrangement. This sort of income earning and production relationship could be approximated or
loosely compared to contemporary setting “informal economy” where majority of working class
was either independent producers or engaged in contract based activities. To summarize,
“bondage free” and “autonomous” nature of Indian labor has been hallmark of ancient Indian
civilization. As the society evolved, the specialization of skills further developed, inter and intra
caste class structures emerged (such as wealthy vs. poor farmers), bonded or slave labor that was
shunned in Vedic period also emerged in post-Vedic period. Nevertheless the very nature of
relations of production and modes of wage earning remained largely informal in nature with a
key aspect that during Vedic period, almost everyone was engaged in agriculture in addition to
acquiring a secondary skill. The production relations were largely barter based, where a cow
was fundamental unit of exchange that in later period gave way to gold as unit of exchange (Rig-
Veda). The history of labor in ancient India, does however offers a fragmented evidence of
formalization of wage-labor relations that involved notion of an employer hiring an employee to
perform a job. This relationship was managed by labor legislation enacted by state that protected
employee from injustices in hands of employer. Some legal statutes as referred in (Arthasastra,
370 BC) included notion of a common accepted minimum wage, a penalty to employer for not
paying wages to employee on time, the penalty amounted to 5 times the amount of wage,
nevertheless the formalization was still based on a contractual agreement between employer and
employee and was only applicable in bounds of the agreement. However such legislation was
mostly visible in government sector or industrial sector such as weaving, textiles etc and didn‟t
apply to agriculture sector which was the predominant profession to engage in since Vedic times
(2nd
Century BC).
Section 4: Landscape and Nature of Indian Labor at onset of colonization.
At the time just before British arrived in India, it was primarily Mughals who controlled
large parts of India including North and Central regions. Mughals effectively ruled from 1500s
till around 1700s after which they faced a sharp decline and Indian state experienced an era of
deep chaos and unrest. During Mughal rule, there did exist an idea of State governed by laws
(mostly based on Persian legal structure), nevertheless there was no sign of industrialization as
such. Indian economy largely remained a rural, agrarian economy which was engaged in paying
taxes to Mughal state in exchange for working on lands that were mostly controlled by or
awarded to kins of those who had direct contacts with Mughal court. This was done to keep any
undue usurping in check. In summary Mughal rule was characterized by absence of
technological innovations in agrarian sector, little industrialization and little or no organization
of labor in commercial or industrial sector. Majority of industrialization occurred in weaving
sector; nevertheless the labor that worked in these industries remained largely informal in its
functioning. It did however exhibit very strong class characteristics which were mostly
byproduct of caste, migration of foreigners and in equal distribution of surplus. Eventually the
Mughal Empire disintegrated in middle of eighteenth century and the era was largely marked
with political instability, warfare and fragmentation. This phase of disintegration in-turn
coincided with rise of British in India and by 1857, British crown had formally established their
firm and formal control. British rule in India from 1857-1947 can be aptly divided into two
periods, a) formative period lasting till early 1900s during which the rule was largely autocratic
and despotic. During this phase, the key goal of British rule remained largely profit extraction
via tax revenue and surplus collection from peasants. British did help set up a network of feudal
lords in rural areas who acted as intermediaries between rulers and peasants. b) Routine period
during which the control largely became a routine affair. Coincidently, it‟s during this phase that
a bulk of industrialization, mass movements and India‟s prime role in helping to fulfill Britain‟s
global desires also began to take shape. The Indian labor engaged in agriculture during onset of
20th
century faced from two key challenges, first it was imposition of tax collection by British,
and second British own reluctance to invest in Industrialization of India. Thus, the lack of
mobility and imposition of taxes left Indian labor with no alternative except to put up with
circumstances that eventually pushed them on brink of poverty and destitution. It was not
informality of labor as such but the harsh economic circumstances that Indian labor engaged in
peasantry were exposed to that led to deterioration of their living conditions. Industrialization in
India began around onset of First World War and grew reasonably large, mostly to cater to the
needs of war-related demand. However the industrialization didn‟t result in creation of formal
job market as usually anticipated. Instead the hiring of workers was mediated via a network of
contractors or patronage network who in-turn had links to different villages from where workers
were sought out. The workers instead had to pay a commission to get the job. Nevertheless few
sectors including mining, steel did exhibit a formal recruitment and employment. Overall Indian
Industry did grow rapidly around Second World War but nature of employment largely remained
contractual. The informal nature of Indian labor during colonial era didn‟t imply that labor was
unorganized as well. In fact the early evidence of labor unions is available around First World
War and first documented reports of organized strikes are available from 1919 onwards, starting
from Textile workers strike in Kanpur in November 1919. This strike led to formal set up of
trade unionism in India in 1919-1920. (Joshi C., 2003). The strike and formal trade union set up
was attributed to be inspired from Bolshevik revolution in Russia in 1917 however the attempt to
further organize and formalize the labor were marred by another factor, i-e caste composition of
workforce that was largely diversified and rigged with inter-caste animosity. This in-turn
prevented any cohesive attempt to seek formalization of labor (Niehoff, A. (1959)).
In summary, colonial state barely made any attempts to formalize labor. In many ways it
was a fairly limited state, primarily designed to collect enough tax revenues so as to finance their
rule in India. Whatever infrastructure was introduced was largely introduced so as to ensure the
British rule could maintain its status-quo. Industrialization did take place but it was limited in
nature whereby factory based production in general contributed to 7-8% of GNP. Overall, the
economy grew at rate of 1% per annum (Raychaudhuri T, Habib A, Kumar D, (2008)). At the
end of colonial rule, India was still predominantly an agrarian economy, largely occupied with
informal labor.
Section 5: What Inhibited growth of formal sector during six decades of Industrialization
era?
At the time of independence, the formal labor amounted to about 2% of total labor force
(Kohli, 2004). Indian state at onset of Independence in 1947 was modern and democratic in its
functioning to some extent i-e it had a reasonably well set up legacy state apparatus left intact by
including presence of judiciary, army, civil service, a political unity. Nevertheless it did lack a
well oiled industrial economy that would eventually help in creation of a formal economy based
on more modern capital relations of production that would also facilitate uprooting of feudal and
semi-feudal relations of production that prevailed in India‟s rural agrarian economy during
colonial era. With this goal in mind, State engaged a directed industrialization in urban centers.
The four decades of Industrialization however failed to produce desired results and despite a
mixed success in enacting an industrialized economy, Indian labor largely remained informal
with majority of labor working in agricultural sector whose contribution to GNP had decreased
from 66 % to 57% by the onset of reform era (Basole A, Basu D, (2011)-1). (Kohli, 2004) argues
that industrialization led growth was marked with various inefficiencies and roadblocks that in
one way or other pointed fingers at fragmented nature of political party in power (Indian
National Congress from 1947-1990) that largely used industrialization as a facade to maintain its
own status quo rather than working for up-liftment of masses. Below I explore three different
mechanisms that ruling party used to ensure its own sovereignty which in turn inhibited the
growth of formal sector to a size that could have effectively helped to reduce size of an
overwhelmingly large informal sector.
Section 5.1- Caste politics and Political legacy of Indian National Congress.
Section 5.2- Mass scale rural to urban migration and politics of dispossession.
Section 5.3- Ineffective Industrialization.
Section 5.1 Caste politics and Political legacy of Indian National Congress.
A theoretical model to explain “Caste” as a tool used by State to Intervene in Industrial Sector.
Assume following preconditions:
Caste operates in society by pigeon holing individuals into separate boxes or
compartments.
Caste is associated with a certain social, political and economic standing in society (e.g.
majority elites belong to higher caste groups).
Works on principle of inclusion/exclusion.
For our purpose, we assume 4 high level castes B (Brahmins or priests), K (Kshytriya or
warrior), V(Vashiyas or Peasants), S(Shudras or crasftsmen) whereby assume following
ordinal relation between 4 castes based on the social/political/economic status enjoyed by
each caste group B > K > V > S
Assume I = Industrialized sector engaged in generating formal jobs; operating under an
interventionist state.
We therefore have following a simple closed system model of Society-Labor pool-State-
Market as shown in Fig 2.
Fig2
Case1: State intervention ensures that Industrial sector remains oblivious of caste.
In this case, Industrial sector would treat available labor pool as a homogenous entity. The
preferences of market to hire a specific worker for a given job (assume market has one job to
offer) would then be solely governed by skill and level of education that matches job
requirement. Caste would have no role to play as labor enters formal job solely based on their
skills and qualification.
Case2: State is sensitive to caste led exploitation on lower caste workers.
Interventionist action on Part of State: It decides to annul its effect by introducing a
quota/reservation in market for workers belonging to lower caste, however still guarantees that
market remains obvious of caste.
Industry’s Adoption to Intervention: Assume single job exists in market and 2 applicant
workers carrying same skills and qualifications but belonging to different caste groups apply for
same job. In this case, the applicant favored by quota / reservation will be awarded the job.
Case3: State is aware of caste dynamics but decides not to interfere in functioning of
Industrial sector.
In general, industries end goal is to maximize profit, productivity and capital accumulation. In
closed system, it should still voluntarily choose to be oblivious to caste and decide to hire a
worker that best serves interests of the market and job responsibilities.
Observation: In a closed system considered above, caste really has no role to play in a sector‟s
decision to hire a worker from available pool of labor. The industry running with a goal of
capital accumulation only seeks its own profit maximization and has no incentive to consider
“caste” into the equation. This implies following scenarios:
The ruling party responsible for managing the State seeks to benefit from “caste and its
associated social and political status” as a means to control functioning of such formal
job created by industrial sector by using it as a poke/bait.
There exist some external factors outside and beyond the domains of State that manage
to intervene in the functioning of market via State. In this case State and its apparatus are
porous and incapable to provide needed protection to formal job market from external
factors in order to ensure its smooth functioning.
In next section, we explore these observations in detail and attempt to identify pathways
that inhibit the effectiveness of industrialized markets‟ ability to generate jobs in formal
sector and allocate it without concern to “caste”.
India‟s independence, even though came about as a result of relatively cohesive mass movement
was never free from its caste based identity. M.K. Gandhi and his Indian National Congress
(INC) were mostly supported financially from the middle class bourgeois engaged in textile
industry which in-turn belonged to upper caste echelons. Gandhi did succeed in mobilizing
masses for nationalist cause, yet he was cautious to maintain a safe distance from lower caste
groups (collectively known as Harijans or people of God or Chosen ones).He often directed them
to continue working in their professions that he claimed were awarded to them by none other
than God. Ample evidence is available in his speeches delivered to masses where he firmly
affirmed that the economic activities that humans engaged in present lifetime were a result of
their past life sins and they had to go through it in order to attain higher and more noble lives in
next birth. This stance on part of M.K Gandhi was based on Hindu ideology and he had chosen
same despite the fact that he had readily acknowledged and embraced in early 20th
century, the
ideologies of Russian anarchists like Peter Kropotkin and Mikhail Bakunin which firmly
attacked the illicit affair between God and State, including how State effectively used God as a
tool to maintain control of masses (Fagg, H. (2002)). Gandhi had also embraced their ideas on
minimum or no governance and idea of a sustainable society. Yet when it came to enact a mass
movement and a party that would carry out the agendas of freedom of struggle, he needed
support from people and support in terms of finance. So in order to secure a financial base, he in-
turn formed close ties with middle class Bourgeois traders, businessmen and at times the feudal
lords in rural areas in exchange for promised favors after India was liberated from colonial rule.
Another evidence of this alliance with middle class business comes from INCs stance to oppose
the first strike of Textile workers in Kanpur in 1919 and decided to not seek support of working
class/laborers in political movements (Joshi, C. 2003). From INC‟s perspective, labor movement
was largely militant in nature and went against agenda of peace fostered by Gandhi (Joshi, C
2003).Another reason was that Gandhi himself saw the laborers working in factories as largely
uneducated and uncultured bunch which he thought would be very hard to get organized and
offered to financial base as such, hence a consensus decision of INC to stay away from cause of
labor and their class struggle. Another aspect of this decision was that majority of laborers
engaged in textile industry and later on in Labor movements belonged to lower classes As per
Indian Labor Census (ILC), roughly 70% were chamaars or untouchables- (Joshi, C 2003)) and
any alignment with them would have easily irked the middle class businessmen which funded
INC and its agenda for middle class largely relied on abundant supply of pool of labor from
lower caste groups for their businesses and household needs. As a result of their estrangement
from major political party, those associated with Labor movements aligned themselves with
more leftist parties and were often engaged in more violent uprisings against exploitation, so
much so that they labeled the independence of country as nothing more than a mere “transfer of
trade” where the colonization was eventually passed on from British to Indian Bourgeois who
would continue to hark on same policies as adopted by British to exploit India , albeit under a
nationalist agenda (B.G. Ranadive, 1955). The INC on other hand, after coming into power in
1947 carried forward its promise of awarding their patronage that helped it to grow and succeed
i-e the elites and middle class businessmen. The era of industrialization started post
independence sought to extend favors to elite while at same time attempting to support the poor,
albeit at superficial level. On one hand, the State led by INC supported setting of large scale
Public-private collaboration sector undertakings in areas of steel and power generation, which
were mostly awarded to indigenous entrepreneurs, primarily TATA that had staunchly supported
INC in their struggle for freedom .On other hand, it curbed the large scale expansion of Textile
industry in urban areas, which could have otherwise helped formalize the mass labor engaged in
weaving and small scale industries in rural as well as urban sectors like Kanpur (Kohli, 2004).
The INC policy for textile sector was in-turn to develop co-operatives in rural area (called
handlooms) that could help generate employment in rural areas, esp. for women. These co-
operatives intended to keep prevailing rural informal sector setup comprising of lower caste
groups , engaged in weaving , artisan , carpentry largely intact and instead sought to provide
them a conduit through which informal sector would get access to markets in urban areas to sell
their produce. Women spun cloth at their homes using the raw material provided for by co-ops
and earned their wages in exchange for surplus. The industrialization in urban sector on other
hand, strived to generate formal employment but the awarding of jobs was largely controlled by
State and its bureaucratic apparatus. It largely awarded executive and managerial level jobs in
these public sector undertakings to elites and middle class bourgeois belonging to upper castes
who had served the interests of party in one form or another. Nevertheless there was still an
enough supply of jobs at shop-floor for which labor from informal sector was sought out,
however such hiring of casual workers was mostly based on patronage networks, rather than any
stringent entry criteria. The industrial sector overall grew at a modest rate of 7% per annum
(Kohli, A. (2004)) during first decade of Independence after which it experienced a sharp decline
in growth and almost plunged into stagnation.
Another aspect that worried State and INC was a constant threat to its sovereignty, not in
wake of two hostile neighbor‟s i-e Pakistan and China but largely an internal threat from those
engaged in violent Labor movements and was largely leftist in nature. The labor movement and
leftist incursions became increasingly violent in 1967 and culminated in what‟s known as
Naxalite movement, which largely started as a militant peasant uprising in state of West Bengal
but by mid 1970s snowballed into a highly organized political uprising that associated itself
along ideology of Maoism-Leninism. This movement once again was largely composed of lower
caste groups that constantly felt exploited in hands of State and its bureaucratic apparatus and
was largely left out of development agenda of INC. So whereas INC sought mass scale
Industrialization of urban areas, it simultaneously was engaged in furthering the interests of rural
elite by indulging in coercive policies of dispossession under the guise of promoting rural
development. In words of (Kohli, 2004), the State failed to translate its grand economic
ambitions “owing to its fragmented authority characterized by inter-elite and elite-mass
schisms”. INC spent more time in worrying about its own political position and legitimacy than
focusing on rapid industrialization led growth. This situation was aggravated in rural sector with
pursuing of policies of dispossession and failure to implement the land redistribution reforms
which ultimately culminated in civil unrest in rural areas, starting from West Bengal in 1967 and
continued till early 1980s. The policies of dispossession focused largely on marginalized caste
groups (this continues to date in rural areas) combined with favoritism in allocating jobs in urban
industrial sector thereby resulted in a fragmented state of economy and esp. Caught up in this
double faced policy of industrialization and dispossession were those who worked in urban
sectors while still had strong familial ties to rural sector. This fragmented group was therefore
engaged in love and hate relationship with INC for decades; on one hand they felt benefitted by
jobs in urban centers while on other hand, they saw their family land in rural areas being taken
away from them. Such mass group felt increasingly alienated from State and eventually gave up
working in urban centers in formal sectors and returned to rural settings to work in informal
sector, largely with goal of becoming self-employed or micro entrepreneurs in mind. Lastly,
INC didn‟t focus on expanding industrialization of 2 key labor intensive sectors in Indian
economy i-e Agriculture and Textile that had bulk of informal labor [80% of Informal labor in
these sectors alone]. Further they were characterized by low technology and productivity.
Instead, INC‟s approach was to continue further industrialize the capital intensive sectors of steel
and power which had during colonial times experienced an industrialization led growth and a
formal labor workforce and had relatively lower percentage of informal workforce. In addition
these capital intensive sectors had a far lesser capacity to generate jobs in formal sector as
opposed to labor intensive sectors of agriculture and textile.
Section 5.2- Mass scale rural to urban migration and politics of dispossession.
The Province of Bengal under British rule (comprising of West Bengal, East Bengal i-e
Bangladesh, Orissa and Bihar), experienced a drastic famine from 1943-1947 during which close
to 3 million people perished from hunger and malnutrition. The hunger and malnutrition didn‟t
happen as a result of famine; rather it was caused coercive policies pursued by British to export
the food surplus to allied powers engaged in World War 2 instead of feeding local population.
((Sen A., Dreze, J. 1999), (Davis, M. 2001)). Those who survived were pushed on brink of
poverty and destitution. Between 1947-1967, these States also experienced violent peasant
uprisings in rural areas (which in culminated into Naxalite movement referred earlier in section
5.1) and finally these were also the same States with abundant supply of mineral deposits; coal
needed to feed the urban industrialized centers need for power and natural resources.
Consequently they faced brunt of INC‟s coercive policies of dispossession and displacement to
make way for mining activities. These factors effectively triggered mass migration from the
province of West Bengal to urban Industrial centers (primarily Bombay) in search for better
livelihoods and to escape from poverty. This essentially led to creation of “surplus labor “ in
urban centers for which the formal industrialized sector wasn‟t prepared at all to absorb for the
rate of formalization of jobs was much slower than the rate at which surplus labor increased in
the newly industrialized urban centers. As documented in (NCEUS 2007), the share of large
industry (factories of >100 workers) in manufacturing employment grew from around 5% in
1900 to 30% in 1980 and thereafter declined to around 25% (Roy 2000). The capital intensive
industry however was always marred with low employment elasticity and increasingly
unproductive use of surplus in finance. Therefore “surplus labor” that thronged these urban
centers that didn‟t get absorbed readily in formal sector ended up creating hubs of informal labor
characterized by large slum dwellings that sprang up in vicinity of industrialized hubs (e.g.
Dharavi, World‟s largest urban slum is mostly occupied with migrants from British province of
Bengal). Further as (Ranis, Gustav & Stewart, Frances, (1999)) argue that “the size of the
informal sector depends on the size of the formal sector. If the formal sector cannot supply jobs
to absorb the labor surplus and if real wages are too low people will, according to them, seek
employment within the informal sector. Also, low wages and low returns in the rural economy
will generate a rural to urban migration, providing that people believe they will earn higher
wages in the urban economy”. According to the International Labor Conference Report no. 6 of
2002 the informal sector grows due to migrants seeking non-existent formal sector jobs, and who
are thus forced to find informal employment. In case of India, formal sector was never geared up
for absorbing this surge of supply of migrant labor which eventually ended up engaging in
informal (and criminal) activities as a means for survival.
Section 5.3- A Case of Ineffective Industrialization:
At the time of India's Independence from colonial rule, it had ~ 70 % informal workforce
engaged in agriculture and perhaps another 15-20% engaged in Textile sector (that employed
weavers, tanners, artisans etc). Combined these two sectors alone would have made up ~90% of
informal labor composition which not only subsumed bulk of informal workforce but were also
marked by lack of technology and productivity as well. If State is considering industrialization as
an avenue to generate formal jobs that would eventually help shrink swollen informal sector, it
should in my opinion, rather focus on industrializing labor intensive sectors that are marked with
high informal labor. (Kohli, 2004) provides evidence that State never really paid any attention to
Agriculture sector during two decades of industrialization post independence and rather imposed
heavy taxes on the urban large scale textile industry coupled by their scheme of co-operatives
which intended to push the textile production in rural areas (as discussed in section 5.1). Instead
it focused on capital intensive industrialization of steel and power sector which anyway were
equipped with better technology and relatively higher productivity even during colonial era. A
study engaged in large size of Informal sector would therefore require an answer to this sector-al
level question as to “Why State didn‟t start with industrialization of labor-intensive sectors like
agriculture, textile etc before jumping into capital-intensive sectors during industrialization and
post reform era?”
One argument that can be made about State‟s inability to industrialize labor intensive
agricultural sector could be framed in context of relations of production that prevailed in
agricultural sector which were primarily semi-feudal in nature characterized by bondage labor,
unequal exchange, piece wages etc that are also representative of informal sector production
relations as well (Basole A, Basu D, (2011)-1). The State in post independence era did launch
redistributive land reforms in order to break these feudal relations of production however these
reforms failed to achieve in their desired goals including its inability to curb the power of rural
elite (Basole A, Basu D, (2011)-1). Unlike the case of China where the State took immediate
control of all agrarian land and awarded it to those who could till it, the State in India remained
ineffective in gaining control of land from rural elites despite enacting the land redistribution
reforms. Thereby the idea of industrializing agriculture couldn‟t be brought to see light of day
until all agrarian land holdings could be brought under State control, which never really
happened owing to fragmented nature of political party itself and its ongoing ties with rural elite
to keep itself in power. This however doesn‟t explain as to why Textile sector couldn‟t be
formalized via industrialization and instead State taxed any attempts to industrialize the sector
(Kohli, 2004).
Section 6: Conclusion and Future Work
It became clear during work on this course paper that in order to clearly identify the explanatory
variables that would help explain large size of informal economy, we would need to decompose
the informal economy into its sector wise constituents (including Agricultural, Textile, Steel etc)
where informal economy presides. This will help us identify sector level factors that are in-turn
causally linked with size of informal economy. In addition, the course-paper is missing on two
key aspects that would have helped to gain better insight into size of informal economy:
A general causal framework to explain size of an informal economy.
A Comparative perspective, whereby one could consider a hypothetical country that
shared similar colonial past as India followed by onset of era of industrialization, yet it
enjoyed a small size for informal sector.
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