Template-type: ReDIF-Paper 1.0
Author-Name: Djidonou, Gbenoukpo Robert
Author-Email: djidonou@merit.unu.edu
Author-Workplace-Name: UNU-MERIT, Maastricht University
Author-Name: Foster-McGregor, Neil
Author-Email: foster@merit.unu.edu
Author-Workplace-Name: UNU-MERIT, Maastricht University
Title: Stagnant manufacturing growth in India: The role of the informal economy
Abstract: 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.
Classification-JEL: E26, L16, L60, O14, O17, O47, O53
Keywords: Manufacturing, stagnation, formal economy, informal economy, productivity,
	 worker's movement, India
Series: UNU-MERIT Working Papers
Creation-Date: 20200908
Number: 2020-041
File-URL: https://unu-merit.nl/publications/wppdf/2020/wp2020-041.pdf
File-Format: application/pdf
File-Size: 275 Kb
Handle: RePEc:unm:unumer:2020041