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The Informal sector and economic transformation in India

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Kesar, Surbhi




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In the literature on development and modernization, it has been expected that with economic growth and a consequent increase in per capita income, the dualism between the formal and informal economic sectors will wither away, leading to a structural transformation and formalization of the economy. However, in India, in spite of a long period of sustained economic growth, the informal sector has continued to persist and to provide employment to a vast majority of the population. The interaction of informal economy with the process of economic growth has been widely debated in the literature from two competing perspectives – (i) the segmentation / dualist views, which sees the informal economy as a residual sector that absorbs the excess labour force in the economy. This view supports the ‘need’ for a transition towards a full-fledged formal/ ‘modern’ economy as the ideal path of development (Ranis and Stewart, 1999; Mandelman and Montes-Rojas, 2009; La Porta and Shleifer, 2014); and (ii) the micro-entrepreneurial view, which sees the informal economy as dynamic in nature, with risk taking and profit-maximizing enterprises that can act as the engines of economic growth. This strand views the self-employment in informal sector as the seedbed for modern capitalism in the Third World countries, thereby implicitly arguing that the issue of transformation is already resolved (De Soto, 1989; Fajnzylber et al, 2006). It has been further argued that the informal economy might be the preferred destination for the workforce than being employed as formal salaried workers (Maloney, 2004). On the other hand, there has been a concern that has also been raised about a possible stalling of the transformation process across developing economies (Timmer & Akkus, 2008; DeVries et al, 2012). Specifically, in the Indian context, some recent works have argued that the growth process has been largely exclusionary, leaving out a major part of the workforce outside the dynamics of transformation (Sanyal, 2007; Bhaduri, 2017), while it has also been argued that if the growth process can be made more inclusive, it would eventually lead to a large scale transformation of the Indian economy (Bardhan, 2009).
Palabras clave
Segmentación , Visión microempresaria , Informalidad , India
Segmentation , Micro-entrepreneurial view , Informality , India