Formal Informal Linkages and the Question of Immiserisation at the backdrop of Agricultural Stagnation: A Study on India

Anirban Kundu12, Centre for Development Studies, Kerala. India

Saumya Chakrabarti34, Visva-Bharati University, West Bengal. India.

Abstract This paper presents a three sector model of formal-informal and agricultural sectors of a developing economy and shows that accumulation by dispossession, the prime motive of formal sector growth is the root cause of immiserising growth of informal sector. Such situation arises at the backdrop of agricultural resource-constraint in the short run leading to fundamental conflict between formal-informal sectors. Empirical findings using the data from India supports the theoretical argument.

Key words: Formal-Informal Linkages and Conflicts, Resource-conflict, Accumulation by Dispossession, Immiserising growth, India.

JEL: O11, O17, O20, Q18.

1 Ph.D. Scholar, Trivandrum-695011.anirbankundu2006@gmail.com 2 Part of the study is taken from the ongoing PhD dissertation of the first author. 3 Assistant Professor of Economics, Department of Economics and Politics; Hony. Director; Agro-Economic Research Centre, Santiniketan-731235. saumya.chakrabarti@visva-bharati.ac.in; saumya_chakrabarti@biari.brown.edu. 4 The authors are grateful to (late) Kalyan Sanyal and Arup Mallik. They also thank Sarmila Banerjee, Aparajita Mukherjee and Sravanthi Choragudi. However, the usual disclaimer applies.

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1. Introduction Study on industry-agriculture interlinkages in the context of developing countries, especially in India is not new. A substantial amount of literature has dealt with the effective demand problem of (formal) industry at the outset of vast agricultural sector; where formal industrial sector is characterised by facing Keynesian effective demand problem and the agricultural output is considered as supply constraint (Rakshit, 1982, 1989; Taylor, 1983, 1991). On the contrary, other set of studies (Kaldor, 1975 and 1979; Kalecki, 1976) perceives that agriculture affects industrial profits through cost-side of the industry (Dutt, 2001, 94). As industrial wage is indexed to agricultural price, increasing agricultural price leads to increasing industrial wage in terms of industrial output, which subsequently reduces the industrial profit and thereby reduces industrial investment and growth. However, so far as developing economy like India is concerned, we can observe the prevalence of large mass of informal non-agricultural sector (henceforth informal sector) both at the rural and urban segment of the economy. Hence, traditional dual economy model a la Lewis (1954), which is the basis of industry-agriculture interlinkage, failed to explain the preponderance of such vast portion of informal sector outside agriculture. Though Hariss-Todaro framework subsequently recognised the existence of urban informal sector, a vast part of rural informal sector (or rural non-farm sector) is untouched in the context of conventional (formal) industry-agriculture linkage studies. Rather, a wide range of studies deals with separately farm (agriculture) non-farm interlinkages (Mellor, 1976 and for the comprehensive survey see Haggblade, Hazell and Dorosh, 2006). In this context the primary aim of the paper is to develop an analytical framework incorporating informal sector within the structure of conventional agricultureindustry interlinkage and show that growth of informal economy is contra-cyclical with the growth of formal sector. However, such contra-cyclicality is due to accumulation through dispossession within formal sector leading to immiserising growth of informal economy. Further, we have empirically tested the proposition in the context of Indian economy which is characterised by existence of large segment of informal sector.

1. Supply and Demand side Conflict between Formal-Informal Sector and Our Departure Since both formal and informal sector coexist and cater to the common or segmented markets either staying independently or through interlinked process, the growth of the informal sector is affected by various micro and macro economic policies pertaining to formal sector of the economy. As a large portion of the labour force is concentrated within the informal sector [in India], any policy initiatives pertaining to the formal sector affect both labour and capital market of informal non-agricultural sector (Marjit and Kar, 2009, 61). Moreover, agriculture plays a pivotal role in this interlinked circuit. On the one hand, agriculture acts as a supply side factor providing agro-raw materials for production and wage goods to the workers of both formal and informal sector; on the other hand, it creates demand for both consumer and capital goods through farm nonfarm linkages. Hence, agriculture is also an integral part of this supply and demand driven growth of informal sector. Segmented labour market approach depicts that formal sector contraction leads to flow of surplus labour towards informal sector, which reduces informal wages that ultimately helps to expand informal sector through reduction in factor cost (Chaudhuri, 1989; Agenor and Aizenman, 1994; Ranis and Stewart, 1994; Marjit, 2003; Marjit and Kar, 2009 & 2011; Chaudhuri and Banerjee, 2007). Hence, supply side conflict of allocation of resources (such as labour and capital) between formal sector and informal sector is central to those studies. Even agricultural supply constraint in the short run gives rise to fundamental conflict between formal informal sector (Chakrabarti, 2009; Chakrabarti and Kundu, 2009) and between rural urban informal sector (Chakrabarti, 2009). It is so due to appropriation of agricultural resources by formal sector and urban informal sector leaving no means of subsistence for informal sector in general and rural non-farm sector in particular. However, demand side conflict can also be found in the work of Kelley (1994) where a structuralist multi-sector macroeconomic model has been developed to show the product market competition between formal and informal sector that hinders demand-led growth. In all those studies of

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interrelationship either agriculture is absent or implicit or there is lack of proper distinction between agriculture and non-agricultural informal sector. For instance, in Kelleys (1994) work agricultural sector is included within the resource-based goods sector that includes mining activities as well; while Marjit and Kar (2011) use the term agriculture and rural sector interchangeably (chapter 3 and 6) without making any distinction between informal non-agricultural sector and agricultural sector. On the contrary, work of Chaudhuri and Banerjee (2007) depicts agriculture as a separate entity producing exportable crops; and cash crops (which should be the subset of whole agricultural sector) are considered as non-traded intermediate inputs to the formal sector. Nonetheless, keeping in mind the importance of agriculture in the developing economies like India, we have developed a theoretical model incorporating formalinformal sector along with agriculture, which is a substantial improvement over conventional industry-agriculture interlinkages. Using this model we posit that there is a fundamental conflict between formal and informal sector. This conflict arises when agricultural resource-constraint is present, and it is connected to the specific features of the linkages between the formal sector and agriculture, on the one hand and informal sector and agriculture, on the other. Hence, rather than showing the input-output linkages between formal-informal sector, our study situate the broader perspective of interlinkages between these two through agricultural resource conflict. Furthermore, this conflict points to an even more fundamental contradiction of the contemporary doctrine of development management: On one side, while the state is supposed to promote and manage the informal sector, on the other, the requirements of accumulation and growth in the formal sector expropriates the very informal sector itself. The rest of the paper is organised as follows. The analytical framework of three sector model is described in section 2; and using the theoretical model we show the basic conflict between formal and informal sector at the backdrop of agricultural supply constraint in the short run. In section 3 we examine the empirical validity of the theoretical model using data from India. Section 3 concludes.

2. Model of FormalInformal Dichotomy5 Basic features of the economy are as follows: (a) Four sectors: a capitalistic formal industrial sector (formal sector), a non-capitalistic agriculture producing food, a non-capitalistic non-agricultural informal sector and the government. (b) Formal sector is characterized by excess capacity, unemployment and mark-up pricing. Price is cost-determined and output is demand-determined. This is the standard Kaleckian structure. (c) All profits in formal sector are saved whereas all wages are consumed. A part of wage-income is spent on food so that there is the possibility of formal sector facing an agricultural supply-constraint. (d) A fixed marketable surplus of food represents the agricultural supply-constraint for formal sector as well as for informal sector. Consequently, the price of food is demand-determined. The total capacity is given in the short-run due to natural, technological and also institutional rigidities.6 (e) Contrary to the formal sector with capital-labour dichotomy and accumulation-motive as the driving force for production, non-agricultural informal sector is characterized by the consumption motive the

5 In this context we refer Chakrabarti, 2009, 2011; Chakrabarti and Kundu, 2009. These frameworks have been modified, extended and developed substantially. We need to introduce and reorient these frameworks for the sake of continuity of analysis and most importantly, for a comparative study of agriculture-formal sector and agriculture-informal sector linkages. 6 In fact, this agricultural supply-constraint represents the generic resource-limitation. To capture the whole lot of resources required for both the formal and informal sectors we are using food as a proxy. Essentially, formal and informal sectors share different types of economic resources like, food, agro-raw materials, minerals, water-resources, forest-products and most importantly, physical space that is very crucial for densely populated countries of Asia and even Latin America. Across many countries of the Third World the bone of contention between the formal/centre and its outside/informal has been the water-forest-land resources (jaal-jangal-zameen).

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motive of satisfaction of basic needs (Sanyal, 2007, 211-3; Chatterjee, 2008, 587), self-employment and absence of capital.8 Moreover, there is surplus-labour in informal sector. Informal sector is essentially a subsistence economy where there is no net surplus; i.e. no surplus value is produced for accumulation. It is essentially comprised of petty commodity producers who produce for the sole purpose of consumption and use only indigenous resources. We can refer to ILO definition on informal sector (Bangasser, 2000) for most of these characteristics (also see: NSSO report no.459, 1-2). It is found in India that, while the annual emolument per hired worker in rural informal establishments hiring labor on fairly regular basis is Rs.14108, annual value added per worker in overwhelmingly large population of own account enterprises not hiring any laborer on fairly regular basis is Rs.13443. The corresponding urban values are Rs.21681 and Rs.25054 respectively (NSSO report no.459, pp. III); all these being less than the government stipulated minimum wage in the corresponding period. Thus, it could be safely assumed that even the informal entrepreneurs behave like wage-earners having consumption as the general motive of participation in production. The following Table 1 on Indian informal sector is also revealing the micro-size of the informal sector units.

Table 1: Informal Sector in India 1999-2000 (combining establishment and own account Enterprise

Indicator Rural Urban Combined

Average no. of worker/enterprise 1.6 2.1 1.8

Estimated annual value added/worker Rs. 15008 (334$ approx.) Rs. 33437 (743$ approx.) Rs. 24242 (539$ approx.)

Estimated value of assets/enterprise (owned+hired)

Rs. 27332 (607$ approx.) Rs. 153528 (3412$ approx.)

Rs. 82297 (1829$ approx.)

Source: NSSO 55th Round (Report No. 459, pp. III-IV).

(f) Informal sector is self-sufficient in terms of both implements and non-food consumption. However, like formal sector it has to depend on agriculture for food which is obtained with the proceeds received through sale of net output (net of requirements for self consumption and reproduction) to agriculture itself. (g) Aggregate agricultural income is earned by selling marketable surplus in the combined food-market, which is purchased by the agents of both formal and informal sectors. These two sectors purchase food at a single price. This income, in turn, is spent on the products of both formal and informal sectors. The division of income depends on the relevant terms of trade. (h) We have balanced trade between agriculture and informal sector, on one hand and between agriculture and formal sector, on the other.9 (i) The government purchases formal sector products by money creation. It constitutes the domestic

exports for formal sector and relaxes the effective-demand-constraint by providing the home market. (j) The distribution of income among different classes is determined exogenously and there is social resistance to any drastic change in this pattern. (k) We assume away any interaction between formal sector and informal sector. As a very small part of informal sector is able to interact with the sophisticated formal sector this seems to be a plausible assumption (see: Sanyal, 2007; Chakrabarti and Kundu, 2009).10 (l) Ours is a short-run static analysis and we assume a closed economy set-up.

7 The fundamental logic that underlies the operations of corporate capital is further accumulation of capital, usually signified by the maximization of profit. For (informal sector), while profit is not irrelevant, it is dominated by another logic that of providing the livelihood needs of those working in the units. 8 Simple tools produced in informal sector itself are used. However, these means of production cannot be capital, because of the absence of profit motive (Bhaduri, 1986). More importantly, as these rudimentary tools are produced indigenously, they do not limit the production capacity unlike the case of fixed (limiting) capital of modern sector. 9 Unbalanced trade is financially unsustainable. It is also a simplifying assumption (see: Chakrabarti, 2001, 2005). 10 .while some informal workers provide low-cost inputs to global production systems, the majority are excluded from the opportunities of globalization and confined to restricted markets (World Commission on the Social Dimension of Globalization, 2004, 60).

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2.1. AgricultureFormal Sector Interaction and Government Excess capacity in formal sector implies a given labor-output ratio l, and we take l=1 by appropriate choice of unit. Hence, L=Y (1) Here L and Y are formal sectors total employment and output respectively. Using equation (1), mark-up price (p) over unit wage-cost (w) in formal sector can be represented as:

p=(1+)w (2)

Here is a constant mark-up. Workers demand for a targeted real-wage in formal sector is given by:

w/pf = (3)

Here pf is the food price and is a positive constant. Using equations (2) and (3), real-wage in terms of formal sector output and terms of trade between agriculture and formal sector can be written, respectively, as,

(w/p)=1/(1+)= (3.1)

(pf/p)=1/[(1+)]= (3.2)

and are exogenously determined. The basic income-expenditure accounting equation for formal sector using the features of section 2 can be written as: Total formal sector output = (Total formal sector wage-bill in terms of formal sector output)11 + (Total formal sector investment in terms of formal sector output) + (Total government expenditure on formal sector in terms of formal sector output) (4) We assume, real investment (I) in formal sector and nominal government expenditure (G) on formal sector output are exogenously given at I0 and G0. These assumptions along with equations (1), (3.1) and (3.2) transform equation (4) as:

Y=L=(w/p).L+I0+(pf/p).(G0/pf) =.Y+I0+.(G0/pf) (5)

Solution of (5) gives, L*=[I0+.(G0/pf)]/(1-) (6) Now, food-demand per worker employed in formal sector, given equations (3.1) and (3.2), can be expressed as: af=af(w/p, pf/p)=af0 (a positive constant). (7) Hence aggregate food-demand from formal sector is,

Df=af0.L*=af0.[I0+.(G0/pf)]/(1-) , (8) There is an inverse relation between food-price and aggregate food-demand from formal sector. As food-price falls, money wage is reduced reducing formal sector-price as well. Consequently, given nominal domestic exports, real domestic exports rise raising the level of formal sector employment following equation (8) and hence increasing the demand for food. Now, we assume that for the time being a fixed amount of marketable surplus of food is supplied to formal sector12, which can be written as: F=F0 (9) Using equations (8) and (11), food-market equilibrium condition is:

F0=Df=af0.[I0+.(G0/pf)]/(1-) (10) Equation (10) determines the equilibrium food-price pf*. It can be represented in a simple food-market demand-supply diagram with linear approximation (figure 1).

11 A part of wage-bill though spent on food, it fully comes back to formal sector as agriculture-formal sector trade is balanced. 12 However, only a fraction of food-supply should go to formal sector in presence of informal sector as we see below. But, for the time being we assume away such a presence of informal sector. As we introduce informal sector the relevant conditions will be modified.

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Figure 1: Food-market equilibrium representing agricultureformal sector interaction. Pf

Pf* E

Df 0 F0 Df , F Equilibrium food-price, pf* determines the equilibrium money-wage, w* in formal sector, given equation (3). w*, in turn, determines equilibrium price, p* of formal sector output, given equation (2). Consequently, the equilibrium size of the real government expenditure, g* is endogenously determined as: g*=G0/p*. This equilibrium real domestic exports, in turn, can determine equilibrium employment and output in formal sector using equation (5).

2.2. Interaction between Agriculture and Informal Sector Let us now turn to agriculture-informal sector interactions separately from agriculture-formal sector linkage. First, from the condition of labor-surplus informal sector we can specify constancy of food requirement rate at the minimum subsistence level. This is a Classical assumption. Hence, afi=afi0. This is the constant per capita food consumption rate in informal sector. The absence of fixed (limiting) capital in informal sector implies fixity of labor-output ratio (li). Thus, li=li0, a constant. We also assume without loss of generality that the fraction of intra-sectoral utilization of output in informal sector for self-consumption and reproduction (i) is constant. Hence, i= i0, a constant. All these combined together indicate that the real average cost of production in informal sector due to food and non-food consumption and due to use of implements and raw materials is structurally determined and is constant. Furthermore, as there is no surplus, the food and non-food consumption-cost and implements and raw materials costs solely determine the informal sector product-price. This price can be expressed as, pi=pf.afi0.li0+pi.i0 Here pi is informal sector output-price and pf is food-price as before. Assuming, li0=1 (for simplicity) we have, pi/pf=afi0/(1- i0)=1/t0 (say) (11) Thus, absence of fixed capital and the assumption of surplus-labor along with the fixity of the fraction of intra-sectoral utilization of output, jointly imply a given terms of trade between informal sector and agriculture.13 Moreover, at these given terms of trade the supply of net output, Si will be perfectly elastic and hence its value is demand-determined. Consequently, the Si curve will be horizontal on the Si pi/pf plane (figure 2). As the perfectly elastic Si and hence informal sector output, Yi and informal sector employment, Li are demand-determined, the equilibrium values of these variables are solely set by the portion of marketable surplus of food or more precisely, that of agricultural income transacted with informal sector. As supply of informal sector output is perfectly elastic and as it is determined only by the food-supply, we get a crucial result that demand for food from informal sector is also perfectly elastic. Agriculture is not facing any demand problem so far as the informal sector is concerned. Thus, we have a sharp dichotomy between agricultureformal sector and agricultureinformal sector inter-linkages. The value of aggregate demand for informal sector output is equal to the part of aggregate agricultural income spent on it

13 While agriculture-formal sector terms of trade is fixed through class-bargaining, agriculture-informal sector terms of trade becomes rigid following the logic of survival. Thus there is distinct difference in the two apparently similar symptoms. As the requirement of survival binds the agriculture-informal sector terms of trade, it cannot change. But, the other terms of trade may change depending on the structure of the economy.

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Hence, pi.Di=i.(pf.F) 12)

Here Di signifies aggregate demand for informal sector output and i is the fraction of aggregate agricultural income spent on or that of aggregate marketable surplus of food transacted with informal sector.14 From the basic feature (g) of section 2.2 we know that the aggregate agricultural income is earned by selling marketable surplus which is purchased by the agents of formal sector and informal sector separately. This income, in turn, is spent on the products of formal sector and informal sector. As we have formulated earlier, the division of this income depends on the relevant terms of trade.

Hence, we can write: i=i(pf/p, pf/pi); with i10. (13)

But, putting equations (3.2) and (11), in equation (13) we get: i=i0 (14) Now, rearranging equation (12) and putting equations (14) and (11) in it and assuming a fixed marketable surplus of food, F0, we have,

Di=(pf/pi).i0.F0=t0.i0.F0=Di0 (15) This gives a vertical Di0 curve on the Dipi/pf plane (figure 2).

Figure 2: informal sector-market equilibrium (pi/pf) Di0 (pi/pf)*=1/t0 E Si

O Si* = Di0 Si, Di From our characterization of Si (the net output in informal sector) as demand-determined and using equation (15) we get equilibrium Si as:

Si*=Di0=t0.i0.F0 (16) This equilibrium is shown graphically in figure 2. As Si is the net output in informal sector, gross output (Yi) and employment (Li) could be derived, given i0 the constant fraction of informal sector output utilized intra-sectorally.

Now, in presence of informal sector only (1-i) fraction of the aggregate food-supply is directed to

formal sector instead of the full F0. Thus, formal sector faces shrinkage of food-supply to [(1-i0).F0] from F0 (which would have been the supply of food to formal sector in absence of informal sector). This supply-side squeeze reduces formal sectors potential employment and output. Contrarily, if we assume that, given an informal sector-agriculture complex the formal sector-agriculture composite is incorporated into the economy, the former circuit gets constricted. The introduction of formal sector siphons off crucial food-supply from informal sector and destroys it. On the other hand, formal sector simultaneously fills the shortage of non-food due to informal sector contraction through supply of formal sector goods and services to agriculture. Thus, we have a basic conflict between the formal and informal sectors in terms of employment and output in presence of (the generic) agricultural-supply-constraint.

2.3. FormalInformal Conflict: Accumulation by Dispossession A change in the price of food has the following consequences. On one side, given the assumption of fixed per capita food consumption by the workers, if the price of food rises, expenditures on formal

14 As we have a single food-market and agriculture-informal sector and agriculture-formal sector balanced trades, i represents

fraction of both agricultural income and marketable surplus of food transacted with informal sector. i fraction of aggregate agricultural income is spent on informal sector products and hence, informal sector obtains the same fraction of marketable surplus of food. Thus, this is a demand-driven outcome and the division of agricultural supply is just a result of that.

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sector output will fall. However, under the assumption of formal sectoragriculture balanced trade this leakage of demand from workers is just counterbalanced by increased income and hence increased expenditure on formal sector output by the farmers. Thus food-wage adjustment has no demand-side impact on formal sector. As money-wage is assumed to be fixed, say at w0, formal sector price p is fixed, say at p0. Hence, product-

wage in terms of formal sector output is fixed at, (w0/p0)=1/(1+)=, but food-wage-rate, (w0/pf) is variable. Moreover, terms of trade between agriculture and formal sector, (pf/p0) is also variable. Now, given the earlier notations and w0, p0 and variable pf/p0, equation (6) is modified (through

modifications of equation, 5) as: L*=(I0+g0)/(1-) (17) Now, food-demand per worker employed in formal sector is assumed as af0, a positive constant. The relatively well-off formal sector population consumes a fixed amount of food per capita, irrespective of real income. Hence, food-demand from formal sector can be written as:

Df=af0.[(I0+g0)/(1-)]=Df0 (18) This gives us the vertical food-demand curve for formal sector, i.e. Df on Df pf plane as in figure 3.

Next, we turn to food-supply. Till now we have i as exogenous. We need to relax it to explicate the probable impacts of change in terms of trades. Putting equation (11) and the condition, p=p0 in equation

(13) we have: i=i(pf/p0, t0), with i10, Ff2>0 (22) It implies a positively slopped Ff curve on Ffpf plane (figure 3). Consequently, equations (18) and (22) modify the equilibrium condition (10) as:

Ff(pf/p0, F)=Df0=af0.[(I0+g0)/(1-)] . (23) This equilibrium condition (23) modifies figures 1by making Ff (earlier F) curve positively slopped instead of being vertical. The fundamental difference is that, now expansionary thrust is effective in expanding formal sector. But, we will see, it happens at the cost of expropriation of informal sector. The substitutability of food-supply to formal sector and to informal sector (given the aggregate potential) can be captured through a production-possibility-frontier (PPF). Assuming perfect substitutability the PPF becomes a straight line (figure 3). Hence, F0=(Ff+Fi) (24) Now using equations (20 to 24) we can formulate figure 3 as below:

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Figure 3: Simultaneous effects of expansionary policies on formal and informal sectors represented through food-market equilibrium for formal sector and informal sector-market equilibrium. Fi Si e Di a

e Di a a e Di a pi/pf 1/t0 O Df Df Ff pf

pf E E

pf E Ff Ff

pf Next, we take up some policy issues, given these formal sector-agriculture-informal sector interactions as represented by figure 3. Let us start from the initial equilibria E and e generated through the interactions between the sets of demand and supply curves (Df, Ff) and (Di, Si) respectively and mediated by the PPF. Now, we assume an increase in g0 (or I0) pushing up Df to say, Df. Consequently, the food-market equilibrium representing formal sector-agriculture interactions shifts to E moving along Ff curve raising the equilibrium food-price from pf to pf and hence, drawing resources towards formal sector. This squeezes resources for informal sector. Furthermore, rise in pf shifts Di to the left (Di) following equation (20). Hence, we get the new informal sector equilibrium e through the interaction between Si and Di. Thus, expansionary boosts to formal sector are effective, but that happens at the cost of contraction of informal sector. As formal sector expands, it drives up food-price, which, in turn, raises informal sector-price, given agriculture-informal sector terms of trade. But formal sector-price remains the same, given money-wage and mark-up. Hence, formal sector-informal sector relative-price falls reorienting (induced) demand and thus food-supply away from informal sector. Modernisation of the economy through expansion of formal sector is not at all a cost-less phenomenon. And it is quite possible that the social costs are higher than the corresponding benefits, not only in the short-run but also in the long-run. Contractionary effects on informal sector due to formal sector expansion, as above, could be checked, only if simultaneous and appropriate increase in aggregate food-supply F is ensured (that can be captured

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by an appropriate outward shift of PPF as shown in figure 3) counterbalancing the impacts of food-drain to formal sector. This could be materialised when formal sector expansion takes place only in conjunction with bumper harvest so that food-supply rises appropriately and the new formal sector-agriculture equilibrium is at E. Food-price does not change and hence, informal sector-demand Di does not shift from the initial position. Formal sector expands without changes in informal sector output and employment. However, impact of increase in food-supply, say through bumper harvest, without any simultaneous expansionary demand-boost for formal sector is revealing. As food-supply rises, PPF shifts out and food-supply to formal sector i.e. Ff shifts to Ff. Consequently, food-price pf falls to pf shifting out informal sector-demand Di to Di. Thus, informal sector expands, without any effect on formal sector. Though food-supply rises, reducing food-price, formal sector-price cannot fall due to money-wage rigidity. Thus formal sector-informal sector relative-price rises, raising (induced) demand for and hence, food-supply to informal sector. As food-price falls and there is redistribution of real income to formal sector-workers away from farmers, workers demand for formal sector rises; but, farmers demand for formal sector falls by an equivalent amount under balanced trade. Hence we do not have any effect on formal sector.

3. Formal-Informal-Agriculture Interaction: An Empirical Analysis Informal sector is not a homogeneous entity. So far as Indian economy is concerned, a large portion of informal activities are set up in rural segment; while other segment is established in urban part of the economy. Hence, our empirical analysis on India captures separately formal sector-rural informal sector and formal sector-urban informal sector relationships in the general context of other sectoral and overall economic activities. However, beyond rural-urban divide, there is fundamental dichotomy between Own Account Manufacturing Enterprises (OAME), which has 86 percent share of the entire informal manufacturing; and Establishment within the informal sector.15 We show that there is a fundamental conflict between these two segments also. In this regard, our empirical analysis using Input-Output Table first show the dependency of formal and informal manufacturing sectors on agriculture and compare and contrast the input coefficients of both the sectors. Subsequently, we focus on informal manufacturing sector and show analysing unit level data that marginalisation along with immiserising growth has been taken place within the informal sector over a span of five years. Finally, we enquire the causes of immiserising growth. In this regard we find out the probable influence of other sectors of the economy such as, formal and agricultural sectors that affect the growth of informal sector. For Input-Output analysis we have confined to agro-based enterprises which have astonishing 86 percent share within informal manufacturing (NSSO 2005-06, iii). Following are the industry-groups under our consideration: manufacture of textiles and wearing apparel etc. (NIC 2004 division 17 & 18), manufacture of food products and beverages (NIC div.15), manufacture of tobacco products (NIC div.16), manufacture of leather and leather products (NIC div.19), manufacture of wood and wood products and furniture etc. (NIC div.20 & 36104). However, rest of the analysis consists of the entire informal manufacturing.

3.1. Methodology and Database For input-output analysis we use the Input Output Transaction Table (IOTT) commodity by commodity matrix provided by Central Statistical Office (CSO), Government of India for the year 2003-04. IOTT matrix consists of one hundred thirty major sectors comprises of primary, secondary and tertiary sectors of the Indian economy. We combined first twenty sub-sectors to make overall agricultural sector. However, apart from food and non-food crops (which are the core of agricultural sectors) there are other sectors, such as, animal husbandry, forestry & logging and fishing sector which are the part of natural economy and thereby considered along with the agricultural sector. Altogether, we consider agriculture and allied activities for our analysis. Further, nineteen sub-sectors of the IOTT are aggregated and

15 OAMEs are family based enterprises without hiring labour on a regular basis, mostly run by family labour. Contrary, establishments are those which hire at least one labour on a regular basis.

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reduced to five major manufacturing industry groups (agro-based) using the table provided by CSO on Sector Specification for the Input-Output Transactions 2003-04. Since our study is confined to those five major agro-based industry groups, we left other sub-sectors of the IOTT matrix untouched. In the next step we have segregated the input used and output produced by formal and informal sectors (manufacturing only) in the following manner. IOTT is constructed based on the input used and output produced by informal and formal industries separately and all the inputs (i.e. materials consumed) and outputs (i.e. products and by-products) are codified into Annual Survey of Industries Commodity Classification 2000 (ASICC). However, from the published data only the aggregate figure combining both formal and informal sector is produced. So we need to distinguish the input used and output produced by each respective sector from the aggregate figure given by IOTT. Moreover, Annual Survey of Industries (ASI) provides the data on formal manufacturing. The data on informal manufacturing is provided by National Sample Survey Organisation (NSSO) which conducts survey on unorganised manufacturing enterprises in India (henceforth NSS data). Aggregate IOTT provided by CSO is built up based on this two data source. For segregation, we start with ASI. First, we segregate the materials consumed by formal industries (i.e. inputs) across various industry groups using the ASICC-NIC concordance. This gives the input demand by each industry groups from other industries (both intra- and inter-industry). Further, we subtract those input figures (in value terms in terms of Indian Rupee) from the aggregate input demand by each industry shown in IOTT matrix. Consequently, the residual figure shows the value of input emanating from informal sector. On the contrary, we split the aggregate output supply of each of the industry, as shown in the IOTT, into formal and informal segment using the share of domestic output from registered and unregistered manufacturing 2003-04 published by National Accounts Statistics (NAS), CSO.16 Splitting aggregate demand and aggregate supply into formal and informal segments we find out the input used and the output demand by each segment from its own segment and from the other segment across the industry-groups. This is done simply by examining that if the demand for inputs of an industry of a particular segment (say formal segment) is less than its own supply; if so, it is logical that the rest of the inputs is supplied by the other segment (informal segment in our case). Finally, we compute input coefficient for each segment using the standard method: aij = Xij/Xj, where aij is the input coefficient of jth industry (formal and informal); Xij is the aggregate output of the ith industry used by jth industry and Xj is aggregate output of the jth industry. For inter-temporal comparison of the aggregate number of enterprise and GVA per enterprise across various sub-segments of the informal sector, we have divided the entire informal sector into five broad sub-classes of labour viz. 1-2, 3, 4-5, 6-19 and 20 & more; and the period under study is confined to two periods, viz. 2000-01 and 2005-06. Mean and median is estimated for inter-temporal analysis using the multiplier assigned across sub-samples and the unit of observation for our analysis is individual enterprise. We have deflated the GVA by consumer price index of industrial worker (CPIIW) for respective year with the base period of 1993-94. For inter-sectoral analysis we employ least square dummy variable (LSDV) regression method pooling the aggregate data on various indicators of informal sector and other sectors (such as formal and agricultural) across thirteen major states over three periods under study, viz. 1994-95, 2000-01 and 2005-06. For the pooled regression we use 1994-95 as the base year. We use Annual Survey of Industries (ASI), National Sample Survey Office (NSSO) and National Accounts Statistics of Central Statistical Office (CSO) Government of India data that cover various aspects of formal sector, informal sector, agriculture and other sectoral and aggregate activities for India.

3.2. Interlinakges through Input Output Market The following Table 2 shows that agricultural input intensities (i.e. input coefficient) are higher for informal industries compared to formal industries, barring wood and leather industries, which majorly depend on forestry and animal husbandry. On the contrary, the input requirement from sectors like

16 Registered and unregistered are synonymous to formal and informal. In India these terms are used in NAS.

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forestry, logging & fishing and animal husbandry is relatively high for formal industries than the informal one. Hence, it is evident from the Table 2 that agricultural resource constraint (along with extended agricultural sector such as animal husbandry and forestry) could affect both formal and informal industries. Further, it depicts that informal industries would be affected relatively more than that of formal industries due to agricultural supply shortage as the input coefficients are higher for the former sector than the latter one.

Table 2: Input Coefficient across Formal and Informal Industries (2003-04)

Output

Food (F)

Food (INF)

Bev. (F)

Bev. (INF)

Tobacco (F)

Tobacco (INF)

Textiles (F)

Textiles (INF)

Wood (F)

Wood (INF)

Leather (F)

Leather (INF)

Input

Agriculture 0.32 0.34 0.01 0.08 0.2 0.03 0.06 0.11 0.005 - 0.05 0.02

Forestry etc.

0.02 - - - 0.07 0.005 - - 0.29 0.14 - -

Animal Husbandry

0.09 0.01 - 0.001 - - - 0.004 - 0.004 0.2 0.08

Food (F) 0.06 0 0.17 0.09 0.01 0.004 - 0 - - - -

Food (INF)

0.01 0.04 0 0.14 0 0.012 - - 0 - - 0

Bev. (F) - 0 0.05 0 0 - - - - - 0

Bev. (INF) - - 0.02 0.02 0 - 0 - 0 - -

Tobacco(F) - - 0 - 0.08 0 - 0 0.003 0 0 0

Tobacco (INF)

0 - 0 - 0.02 0.06 0 - 0 - 0 0

Textiles (F) 0.001 0 - 0.009 0.002 - 0.18 0 0.02 - 0.01 0

Textiles (INF)

- 0.001 0 0.007 0 0.001 0.07 0.09 0 0.002 0.002 0.004

Wood (F) - 0.001 - 0 0.001 0 - - 0.004 0 - 0

Wood (INF)

0 0.01 0.001 - 0.01 - 0 0.005 - 0.004 - 0.002

Leather (F) - 0 0 - 0 0 0.001 0 - - 0.16 0

Leather (INF)

0 - 0 - 0 0 0.001 0.001 0 - 0.22 0.03

Note: - means the values are negligible. Source: Computed using IOTT matrix 2003-04, CSO.

Before analysing the impact of formal sector expansion on informal sector at the outset of agricultural supply constraint, we show that there is growing marginalisation followed by immiserising growth of informal sector. Further, we argue that such immiserising growth of informal sector could be explained through sectoral inter-dependency across the board.

3.3. Immiserisation and Marginalisation of OAME Unit level analysis depicted in Table 3 and 4 reveals that overwhelming share of rural OAME (86 percent) is confined to the size class of 1-2 during the period of 2000-01and the share has increased to almost 89 percent within five years. On the contrary, the share of urban OAME remains same over the same period under study. However, barring exception for the size class of 6-19, the share of both rural and urban OAME across all other higher size-classes has declined.

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Table 3: Estimated Number of Enterprises across Labour Class (2000-01)

Size-class of labour per enterprise

OAME OAME Establishment Establishment

Rural Urban Rural Urban

1-2 9537464 (86.25) 3144844 (87.18) 226457 (25.84) 284740 (19.21)

3 999590 (9.04) 306319 (8.49) 209601(23.92) 346808 (23.39)

4-5 483348 (4.37) 136266 (3.78) 190628 (21.75) 446779 (30.14)

6 1 9 37894 (0.34) 5453 (0.87) 225670 (25.75) 392053 (26.44)

>=20 23 (0) 51 (0.01) 23996 (2.74) 12183 (0.82)

Total 11058319 3607171 876352 1482563

Note: Share (%) of each observation in each column is shown in parenthesis. Source: Computed from NSSO Unit Level, 56th Round (2000-01)

Table 4: Estimated Number of Enterprises across Labour Class (2005-06)

Size-class of labour per enterprise

OAME OAME Establishment Establishment

Rural Urban Rural Urban

1-2 9932612 (89.44) 3079139 (87.84) 284451 (27.9) 292620 (20.34)

3 819748 (7.38) 265327 (7.57) 223570 (21.93) 346719 (24.1)

4-5 299968 (2.7) 141157 (4.03) 233144 (22.87) 369104 (25.66)

6 1 9 53309 (0.48) 19926 (0.57) 255380 (25.05) 411211 (28.59)

>=20 312 (0) 1 (0) 22862 (2.24) 18737 (1.3)

Total 11105949 3505550 1019407 1438391

Note: Share (%) of each observation in each column is shown in parenthesis. Source: Computed from NSSO Unit Level, 62nd Round (2005-06)

Hence, concentration of small size of OAMEs within the lower stratum of size-class is prominent. In sharp contrast to OAME, rural establishments are almost evenly distributed across the all range of relevant size-classes. However, the share of rural establishment under the size class of 1-2 has increased from 26 percent to 28 percent, which is contrary to next size class of 3, where the fall in share is visible during the period under study. So far as urban establishment is concerned, we find the mixed outcome. In general, one can argue that large portion of OAME especially rural OAMEs, are getting concentrated within the lower stratum of labour size class. In other words, fragmentation of OAME within the smaller size class is the mark of marginalisation of this segment. Further enquiry on the real gross value added (RGVA) per enterprise across the relevant size classes reveals that RGVA has declined (median value) over a period of five years for rural and urban OAME in all dominant size classes (see Table 5 and 6). So we can observe concentration of OAMEs towards lower stratum of labour class along with growing immeserisation in terms of declining income per enterprise. On the contrary, so far establishment is concerned; we find a sharp increase in RGVA per enterprise across all size classes of labour barring the size class of 4-5 for urban establishment.

Table 5: Estimated Real Gross Value Added per Enterprise (Rural) across Size-class of Labour

Size Class of Labour per Enterprise

1-2 3 4-5 6-19 >=20

2000-01

OAME Mean 7936.07 12630.05 17603.65 23587.43 26149.11

Median 5717.94 9901.8 12865.36 21128.48 26149.11

Establishment Mean 21218.11 31308.02 50996.83 109536.5 477625.2

Median 18234.64 26302.52 37187.52 66760.42 324764.95

2005-06

OAME Mean 7376.55 12861.1 19003.12 20811.56 918781.7

Median 4747.63 9233.4 13753.32 15398.48 1356261.86

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Establishment Mean 25056.7 39537.9 57838.54 174589.26 735481.08

Median 20908.92 32476.28 49571.16 98567.36 392544.59

Source: Computed from NSSO Unit Level, 56th Round (2000-01) and 62nd Round (2005-06)

Table 6: Estimated Real Gross Value Added per Enterprise (Urban) across Size-class of Labour

Size Class of Labour per Enterprise

1-2 3 4-5 6-19 >=20

2000-01

OAME Mean 12024.33 23887.98 29769.38 49139.03 -

Median 8311.93 17948.75 23129.76 34063.57 -

Establishment Mean 33139.1 52587.54 83400.58 184172.99 615431.58

Median 29252.14 44837 73217.5 147202.05 397989.42

2005-06

OAME Mean 11057.68 20883.5 25885.19 50653.94 10298444.97

Median 6774.19 12296.02 20698.29 28463 10298444.97

Establishment Mean 35485.88 66914.32 90737.13 228138.5 975772.63

Median 29874.76 45199.24 72108.16 152903.23 422817.84

Source: Computed from NSSO Unit Level, 56th Round (2000-01) and 62nd Round (2005-06)

Hence, we can see the dichotomy within the informal sub-segment, where a large section of OAME is getting immiserised. In next section we explore the probable cause of such dichotomous movement of various segments of informal sector. However, our sectoral analysis is adhered to the theoretical modelling of resource conflict and the consequent immiserisation at the aggregate level.

3.3. Sectoral Relation: Pooled Regression Ramsey RESET test indicates the absence of non-linearity in the specification of equation and hence we adopt the following double logarithmic functional form: Xit = 1i + 2it Zit + 3iD1t + 4iD2t + uit Where Xit is the aggregate GVA of a segment of informal sector of a particular state i for the period t, Zit is vector of variables which are relevant to explain the GVA, D1t and D2t are the intercept dummy for the year 2000-01 and 2005-06 respectively, uit is the random error term. LSDV estimates are shown in the Table 7 and 8 for both categories of enterprises across rural and urban segment. Growth of agricultural sector, captured through agricultural net state domestic product (Agr.NSDP), has significant positive influence on the GVA of rural OAME, while controlling the overall GVA of rural establishments and population (equation 1). Further enquiry reveals that formal sector growth inversely affects the growth of rural OAME at the backdrop of agricultural supply constraint (equation 2); however, rural establishment by no means can influence the growth of rural OAME which is contrary to urban establishments that influence the growth of urban OAME (equations 5 and 7). Population has positive significant influence on the growth of rural OAME (equation 1 to 4). Hence, a vast part of rural OAME is like surplus population, associated mainly with petty-agriculture and population. Moreover, the rural-urban conflict is evident between urban OAME and overall rural informal sector (equation 5, 6 and 7) while we control the growth of agricultural sector. Hence, intra-sectoral analysis reveals the presence of resource conflict in the backdrop of agricultural supply constraint. Apparently, formal sector growth has ambiguous effect on the growth of urban OAME (see equation 5 and 6). It is so due to the following reason. Urban establishment has significant positive impact on the growth of urban OAME (equations 5 and 7). Further, formal sector has positive influence on the growth of urban establishment as well (equation 13). Now when we control for the growth of urban establishments, we find the negative relationship between the growth of urban OAME and formal sector (equation 5); otherwise (i.e. without controlling urban establishment as in equation 6), the influence of formal sector on urban OAME works indirectly via urban establishments and the resultant outcome shows the significant positive impact of formal sector on urban OAME. Hence, we find out from our regression estimates that after appropriate controlling the influence of other sub-segments of informal sector and most importantly the growth of

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agricultural sector, formal informal conflict prevails; and also the rural-urban conflict between urban OAME and overall rural informal sector is vivid. Now we turn our analysis towards the establishments shown in Table 8. Urban informal sector has positive influence on the growth of rural establishments (equation 10). Urban informal sector consists of urban OAME and establishment, and the latter one is positively affected by formal sector (equation 6 and 13). If we control the influence of urban informal sector, we find that growth of formal sector has negative impact on the growth of rural establishment at the outset of agricultural supply constraint (equation 10). Without controlling the growth of urban informal sector, we find the positive impact of formal sector on the growth of rural establishment (equation 9). It is so due to the indirect influence of formal sector to the growth of urban informal sector (which includes urban establishment) that subsequently influences the growth of rural establishment. On the contrary, rural informal sector has significant negative impact on urban establishment while controlling agricultural growth and the formal sector expansion (equation 11 and 12). Hence, unambiguously we find the rural-urban conflict in a large scale between rural and urban informal sector (considering equation 5, 6, 7, 11 and 12). Equation 12 and 13 are instructive in this context. Growth of formal sector on the one hand demands agricultural raw materials; on the other hand, it demands cheap raw materials from informal sector (due to its cost cutting measure). Now expansion of formal sector on one hand drives the growth of urban informal sector (or urban establishment); as a consequence urban informal sector draws agricultural resources and thereby creates agricultural supply shortage for rural informal sector. Already rural informal sector is in dire situation due to expansion of formal sector and the consequent shortage of agricultural inputs. Now further pull of resources from urban informal sector aggravates the situation. Hence, expansion of formal sector deteriorates the growth of rural sector (mostly rural OAME), and lead to expansion of urban establishments by pulling resources (mostly agricultural inputs) from rural segment. This is reflected through equation 13 where we find the expansionary impact of formal sector on urban establishment without prior controlling the rural informal sector. However, if we control the growth of the rural informal sector (equation 12), no significant relation is found between formal sector and urban informal sector, since controlling growth of rural informal sector restrict the flow of resources from rural to urban segment and thereby constrict the growth of urban informal sector. It indicates that the development of urban informal sector could be possible (due to exogenous shock such as expansion of formal sector) through immiserising the growth of rural non-farm economy at the backdrop of agricultural supply constraint.

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Table 7: Regression Results for OAME

GVA rural OAME

GVA rural OAME

GVA rural OAME

GVA rural OAME

GVA urban OAME

GVA urban OAME

GVA urban OAME

Equation No. 1 2 3 4 5 6 7

Const 5.27a (1.813) 9.88a (2.66) 5.27a (1.81) 5.79a (1.76) 10.88a (3.24) 6.31 (3.81) 9.26a (2.77)

Rural OAME worker 0.49a (0.06) 0.52a(0.04) 0.49a(0.06) 0.55a(0.06)

UrbanOAMEworker 0.86a (0.14) 0.91a (0.14) 0.84a (0.13)

Agr.NSDP 0.15b (0.09)

NVA of formal sector -0.05 (0.05)

GVA of rural informal

GVA of urban informal

GVA rural establishment

0.05 (0.04)

GVA urban establishment

Population 0.36b (0.15) 0.35a (0.1) 0.51a(0.07) 0.43a(0.09) 0.01 (0.19) 0.07 (0.2) 0.07 (0.16)

Per capita Agr. NSDP -0.07 (0.13) 0.15 (0.09) 0.09 (0.09) 0.33b (0.15) 0.14 (0.14)

Per Capita NVA formal -0.24b (0.09) -0.05 (0.05) -0.06 (0.07) 0.13c (0.07)

Per capita GVA rural informal

-0.3b (0.12) -0.19 (0.14) -0.26b (0.1)

Per capita GVA urban informal

0.24b (0.09) 0.05 (0.05)

Per capita GVA rural establishment

-0.03 (0.05) 0.05 (0.04) 0.01 (0.04)

Per capita GVA urban establishment

0.19a (0.06) 0.16a (0.05)

Dummy 2000-01 0.09 (0.07) 0.11c(0.06) 0.09 (0.07) 0.1 (0.07) -0.10 (0.10) -0.12 (0.1) -0.1 (0.1)

Dummy 2005-06 0.003 (0.07) 0.11 (0.06) 0.003(0.07) 0.01 (0.06) -0.17(0.1) -0.24b (0.11) -0.2b (0.09)

R2 0.92 0.94 0.93 0.93 0.93 0.92 0.93

N 39 39 39 39 39 39 39

Source: Authors Calculation based on various rounds of NSSO, ASI and NAS Note: a, b and c denote level of significance at 1%, 5% and 10 % respectively. Robust Standard Errors are in parenthesis

Table 8: Regression Results for Establishments

GVA rural Estb. GVA rural Estb. GVA rural Estb. GVA urban Estb.

GVA urban Estb.

GVA urban Estb.

Equation No. 8 9 10 11 12 13

Const 17.32a (2.5) 10.57a (2.36) 17.32a (2.77) 11.17a (2.34) 12.72b (5.17) 3.51 (2.92)

Rural Estb. worker 0.79a (0.06) 0.89a (0.07) 0.79a (0.06)

Urban Estb. worker 1.13a (0.04) 1.17a (0.12) 0.97a (0.06)

Agr. NSDP -0.39b (0.16) 0.03 (0.14) 0.1 (0.1)

NVA of formal sector -0.25b (0.09) 0.1c (0.05) 0.02 (0.06)

GVA of rural informal -0.29a (0.05)

GVA of urban informal 0.42a (0.11)

Population 0.06 (0.14) -0.19 (0.15) -0.15 (0.1) -0.21 (0.21) 0.15 (0.13)

Per capita Agr. NSDP -0.39b (0.16) 0.04 (0.18) 0.31b (0.13)

Per Capita NVA formal

-0.25b (0.09) -0.007 (0.14) 0.2b (0.08)

Per capita GVA rural informal

-0.33c (0.17)

Per capita GVA urban informal

0.42a (0.11)

Dummy 2000-01 0.19c(0.1) 0.17 (0.12) 0.19c (0.1) 0.09 (0.06) 0.1c (0.06) 0.03 (0.07)

Dummy 2005-06 0.6a (0.1) 0.50a (0.11) 0.61a (0.1) 0.29a (0.07) 0.32a (0.08) 0.14 (0.08)

R2 0.93 0.9 0.93 0.97 0.97 0.96

N 39 39 39 39 39 39

Source: Authors Calculation based on various rounds of NSSO, ASI and NAS Note: a, b and c denote level of significance at 1%, 5% and 10 % respectively. Robust Standard Errors are in parenthesis

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4. Concluding Remarks Growth of formal sector invariably distresses the growth of OAME, which has the major share (86 percent) of informal manufacturing in India; and such conflict arises due to siphoning off resource from the agricultural sector which is characterised by inelastic supply in the short run. Further, our empirical investigation hinges on the conflict between certain portion of rural and urban informal sectors. We argue both theoretically and empirically that accumulation by dispossession, the prime motive of formal sector growth is the root cause of immiserising growth of informal sector, and thereby the contra-cyclicality between formal and informal sector growth is inherent within the structure of the overall economy.

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