Subcontracting Linkages in India's Informal Economy

Abstract

Subcontracting relations have often been considered a key channel to facilitate growth in traditional informal enterprises and enable them to transition into larger, modern enterprises. Such relations are expected to strengthen with economic growth. Using nationally representative survey data for the Indian informal manufacturing sector, this article examines the nature and patterns of subcontracting linkages for informal family-based household enterprises over the high-growth period of 2001–2016. The article estimates the net accumulation fund (NAF) for these enterprises, which measures their ability to accumulate, and studies the transition possibilities of subcontracted enterprises over time. Results show that the NAFs of subcontracted enterprises remained much lower than those of non-subcontracted ones, with the disparity growing over the growth period. A vast majority of subcontracted household enterprises are embedded in relations that are akin to a traditional putting-out system, with little control over their production processes. Female-owned enterprises and those located within the household are more likely to be in such put-out relations. Average NAF for put-out household enterprises has been lower than for relatively autonomous subcontracted and non-subcontracted firms, although over time the gap in NAF between put-out and non-put-out firms, and thus their differential ability to transition, has narrowed. The prevailing nature of subcontracting relations in India's informal economy, even during the peak growth period, appears to be starkly different from the dynamic linkages that are celebrated in the literature as a channel for facilitating growth and transition.