Stagnant manufacturing growth in India: The role of the informal economy
Gbenoukpo Robert Djidonou & Neil Foster-McGregor
#2020-041
The growth of the manufacturing sector is important for overall
productivity growth. Indeed, the rising importance of the manufacturing
sector at early levels of development is considered one of the stylised
facts of development. Recently, several developing countries have
skipped this step however, with stagnant growth of the manufacturing
sector. In this paper, we investigate the role of the informal segment
in the stagnant growth of the manufacturing sector in the context of
India. To do so, we initially compute the drag imposed by informality on
the productivity growth of the manufacturing sector before investigating
whether the movement of workers between the formal and informal segments
of the manufacturing sector is having an impact on manufacturing
productivity growth using a relatively long time series of data for the
period 1980-2011. We find that the informal segment is harmful to the
growth in productivity of the manufacturing sector. Using a modified
shift-share analysis with the introduction of the informal segment, we
find that labour reallocation to the informal segment of the
manufacturing sector is growth reducing in the Indian manufacturing
sector. The main source of this growth reduction is the within
sub-sector structural change effect, indicating that workers move on
average from productive formal to less productive informal employment
within sub-sectors. In terms of movements across sub-sectors, there has
been a movement towards more productive informal activities, but this
has not been enough to offset the negative within sub-sector effect.
Mainly, we have seen limited growth-reducing structural change after the
1994 liberalisation, implying that employment has moved to less
productive informal firms after liberalisation.
Keywords: Manufacturing, Stagnant, formal, informal, productivity,
worker's movement
JEL Classification: E26, L16, L60, O17