The Relative Performance of Formal and Informal Sectors in India

Abstract

We evaluate the relative performance of formal and informal sectors in India by looking into their productivity difference. Recognizing the intersectoral linkages in the economy, the competitive general equilibrium prices are computed; these signal the productivities. Our model synthesizes frontier analysis with the general equilibrium approach to generate shadow prices. The formal activities are found to be more productive than the informal. However, the informal services sector is as efficient as the formal one. There would be an overall productivity gain of 22% to the economy if factors were allocated to productive activities. The shadow prices from the model indicate that the formal capital and informal capital are scarce factors, while it has been the opposite for formal (regular) and informal (casual) labour. Formal labour is more productive than its informal counterpart; formal capital and informal capital are equally productive.Productivity, Formal and informal sectors, Competitive prices, General equilibrium,

Macroeconomic Impacts of Gender Inequality and Informality in India

“…The steady state share of domestic exports in the foreign consumers' consumption bundle, α * x , is calculated endogenously 42. This is consistent with the estimates inSahoo and Raa (2009), who find that the formal sector activities are strictly more productive than the informal ones in India 43. We choose this specification as home production can also be interpreted as the output produced by home based or self-employed workers, which falls within the definition of the informal sector 44.…”

“…Estimation results suggest a strong response of the Reserve Bank of India (RBI) to inflation deviations in the economy (α π = 3.2) and significantly lesser to output deviations (α Y = 0.32), along with considerable policy inertia (α i = 0.86). The estimates for α Y and α i are in the range of previous studies 49 , whereas α π is estimated to be slightly higher than the previous values in the literature, that range from 1.5 to 2.9 across different studies 50 . This may be the result of the combined shock-absorbing role of the informal sector and of low skilled female workers, because of which the RBI needs to be more aggressive in order to stabilize prices.…”

Gender difference and informal competition: evidence from India

“…In addition to its large size, the Indian informal sector has also shown better performance and productivity. Sahoo and Raa (2009) report that informal sector is as efficient as the formal one. They also show that formal capital and informal capital are equally productive.…”