West Bengal, 2015

The distribution of informal firms. The analysis ranks all informal firms by their output and selects the firms at the 5th, 25th, 50th, 75th, and 95th percentiles to calculate their size measured by output relative to an average formal firm.

On average, an informal firm produces 1.5 percent and 2.4 percent as much revenue as an average formal firm in downstream and upstream industries, respectively. The median informal firms only produce 0.5 percent to 0.6 percent as much revenue as an average formal firm, while the 75th percentile informal firm produces around 1.5 percent of the revenue of an average formal firm (figure 3.2).

Figure 3.3 illustrates the output distribution of formal firms relative to informal firms. Most informal firms produce less than the small formal firm in the 10th percentile. The overlap in output distribution between formal and informal firms is limited, implying that informal firms are smaller and substantially different from formal firms. Farrell (2004) documents a bunching problem whereby a productive informal firm restricts its revenue below a certain threshold to avoid being detected. Annex 3E plots the histogram of the size of informal firms and does not find evidence of bunching near that threshold.

Trade structure

A less well-documented feature of the informal sector is the trade pattern. A key constraint in the analysis of domestic trade is the lack of interfirm transaction data.

FIGURE 3.2 Informal Firms Relative to the Average Formal Firm, by Revenue, West Bengal, 2015

Source: Based on data of the Annual Survey of Industries and the Unorganized Manufacturing Enterprises Survey.