Economic performance of informal sector during liberalization period: an empirical study of India

Abstract

Since 1991, India initiated the process of national and sub-national economic reforms which included liberalization of economic agents from administrative controls and regulations and integrate the domestic economy with the global economy. Because of its economy-wide coverage, liberalization, in general, has impacted on the entire Indian economy, comprising both the formal and informal sectors. Specifically, performance of both the formal and informal sectors in terms of their size and growth of income, employment, technical efficiency and productivity have been changing between pre and post liberalization period. In fact, the growth and contribution of the informal sector in India raises analytically interesting and policy useful researchable issues on the relevance, applicability and impact of liberalization measures, especially for the informal sector. Thus, it is important to know the policy and non-policy factors which influence the economic performance of the informal sector during the liberalization period. This thesis focuses on descriptions and analyses of the nature and magnitude of economic impact of liberalization on the economic performance (through contribution to output and employment generation) of the informal sector. It begins with a broad framework for analysis of output contribution and growth of the informal sector. Liberalization is measured by openness indices and inter-sectoral linkages. Impact of liberalization on growth contributions of informal sector is captured by openness indices (i.e. degree of openness to trade and principal component scores) and on technical efficiency (measured by Data Envelope Analysis and estimated by Tobit Censored Regression model) and components of productivity (computed by Malmquist total factor productivity index) of the informal enterprises by inter-sectoral linkages. The linkages are modeled theoretically in a neo-classical growth theory and empirically measured by sub-contracting arrangements between formal and informal enterprises.