West Bengal, 2015

Several stylized facts on informality show that (1) informal firms are pervasive, but they only produce a small portion of total output; (2) most informal firms are small relative to an average formal firm; and (3) formal firms mainly trade with other formal firms, and informal firms mainly trade with other informal firms.

Size of the informal sector

Informal firms are prevalent in the Indian manufacturing sector, particularly in downstream industries. Following Antràs and Chor (2013), the downstream index is calculated for each four-digit Indian National Industrial Classification industry using the Indian input-output table for 2015. Industries with a downstream index above the median value are categorized as downstream industries, and the rest as upstream industries. Annex 3A documents the construction of the downstream index at the four-digit industry level. Figure 3.1 shows that 95 percent of firms in the manufacturing sector are informal. The share of informal firms is 98 percent among downstream industries compared with 92 percent among upstream industries. Despite their large share, however, informal firms only produce 21 percent of the total output (measured by revenue) in the manufacturing sector. The share of informal output is 31 percent among downstream industries compared with 16 percent among upstream industries. The result is consistent with the finding of Medina and Schneider (2018) that the informal sector produces 18 percent of gross domestic product (GDP) in India. In addition, 77 percent of workers are employed in the sector.

FIGURE 3.1 Informal Firms, by Share in Total Firms and in Total Output, West Bengal, 2015

Source: Based on data of the annual survey of industries and the unorganized manufacturing enterprises survey. Note: The downstream category includes firms with downstream indexes above the median value. The upstream category includes firms with downstream indexes below the median value. The downstream indexes are calculated according to the method of antràs and Chor (2013).