The Informal Sector and Structural Transformation

This chapter examines the role of the informal sector in the structural transformation of the Indian economy at the beginning phases of this transformation. While the background of the study is the period between 1951–1981, the special focus is on the 1970s when progressive structural changes overturned some of the regressive structural features that had appeared in the economy. We show that the informal sector played a critical role in this transformation. In occupational distribution, it is the informal sector which accounted for most of the increase in non-agricultural employment and that this growth of the informal sector employment occurred not only in activities traditionally thought to be associated with the informal 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 informal 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, and attracting and sustaining labour in its own rights.