The romanticism around employment-generating and cost-cutting characteristics of these informal firms have made us believe that informality is forced by excessive cost of regulation
Atmanirbharta, or self-reliance, has been a holy grail for the Indian economy. In its present avatar, the idea hovers around increasing competitiveness and growth of the manufacturing sector, and rightly so. The manufacturing sector in India has been bypassed by the tentacles of economic growth over past three decades, with services sector heralded as engine of growth with a high share in output and employment.
This might just be the right time for India’s manufacturing sector to exhibit a coming of age, with thrust on competitiveness. Competitiveness arises from productivity differentials, which, in turn, are a function of firm size, especially in manufacturing. Larger firms are more productive with higher value added per capita, and higher levels of sales and output per employee. Formal status is another empirically established characteristic of productive firms across countries. World Bank’s micro and informal enterprise surveys show that for India the wedge between value added per employee in a registered and unregistered firm is 35 per cent, that between a small registered firm and a large firm is 68 per cent, and that between a large registered firm and an unregistered firm is 212 per cent.
Source: Business Standard
