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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