Complementarity between Formal and Informal Manufacturing in India: The Role of Policies and Institutions

Sundaram, Asha; Ahsan, Reshad N.; Mitra, Devashish

In this paper, we have investigated the relationship between the formal and informal manufacturing sectors in India. We find that the employment, output and the value added of the informal part of each of the manufacturing industries in the various Indian states are strongly positively correlated with the same variables for the formal part of the respective industry in these states. Our results provide support for complementarities between formal and informal manufacturing arising possibly from both agglomeration and outsourcing. We also find fairly strong support for the role of labor market flexibility in enabling this complementarity. Trade liberalization also turns out to have an important role.

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Academic Units
Program on Indian Economic Policies
School of International and Public Affairs, Columbia University
Program on Indian Economic Policies Working Papers, 2012-1
Published Here
May 2, 2012