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Non-agricultural informal sector in India: Impacts of agrarian conditions

Article  in  Indian Journal of Labour Economics · January 2010

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The Indian Journal of Labour Economics, Vol. 53, No. 2, 2010 

NON-AGRICULTURAL INFORMAL SECTOR IN INDIA:

IMPACTS OF AGRARIAN CONDITIONS

Anirban Kundu and Saumya Chakrabarti*

This paper analyses the impacts of agrarian growth and land distribution and of
corporate led or supported crop diversification on the rural non-farm sector, in
particular, and the informal sector, in general. It shows that the informal sector
benefits from agriculture if it is constituted mostly of marginal and small farmers,
as they demand a majority of the primary equipments for farming and non-farm
business. Moreover, the agricultural growth-induced expansion of the rural non-
farm sector is conditional upon the size class of landholdings; it is the marginal
holdings that have a prosperity-induced impact on the rural non-farm sector. Next,
the paper proposes a distress-led eviction of the petty non-farm sector, which
largely depends on traditional farming, as agriculture goes for corporate led or
supported crop diversification towards high-value crops. An analysis of informal
manufacturing units engaged in the processing of agricultural products reveals
the dominance of labour-intensive coarse crops processing firms and thereby
questions the view that high value crop cultivation would pave the way for non-
farm employment generation in the processing sector. On the other hand, it has
been found that the wholesale and retail trade of high-value crops is dotted with
micro-entrepreneurs who may not be able to compete with the corporate-driven
modern agricultural supply chain. Finally, it is argued that crop diversification
may create problems of micro food security for the informal producers.

I. INTRODUCTION
According to the proponents of the traditional development theory, economic development
hinges on the growth of ‘modern’ sector through the accumulation of capital. Accumulation
proceeds via realisation and re-investment of surplus (value), produced by using fixed capital
with labour transferred from the labour-surplus ‘traditional’ sector. However, this ‘progression’
can be sustained only if adequate supply of food to the modern sector is guaranteed. Such a
process is supposed to transform the traditional sector as well into a modern one and thereby
to ensure self-sustained growth of the less developed economy.
This was the dominant development strategy during the 1950s and 1960s. However, since
early 1970s, it has been argued that this ‘Lewisian’ path is ineffective as far as broad-based
employment generation is concerned. Studies have shown that hardly 2 to 3 per cent of the total
* Anirban Kundu is an M.Phil. scholar, Centre for Development Studies, Thiruvananthapuram, Kerala.
E-mail: [email protected]. Saumya Chakrabarti is a Senior Lecturer in Economics, Department
of Economics and Politics, Visva-Bharati University, Santiniketan, West Bengal. E-mail: [email protected].
The authors are grateful to Kalyan Sanyal, Arup Mallik and Sarmila Banerjee. They would also like to thank Kunal
Sen, Dibyendu Maiti, Vijaymohanan Pillai, Sravanthi Choragudi, Aparajita Mukherjee, Sarmishtha Sen, Snehashish
Bhattacharya, Anirban Dasgupta, Rajesh Bhattacharya and the anonymous referees. The usual disclaimer applies.
200 The Indian Journal of Labour Economics

increased workforce has been employed in the large-scale manufacturing sector in countries like
India, Pakistan and Bangladesh (Amjad, 1988). Consequently, the focus has shifted towards
the informal sector (INF)1 as a potential candidate capable of creating widespread income and
employment. INF is no longer considered as a residual segment. It is argued that instead of
getting withered away through structural transformation, the INF is rather acting as a dispersed
development engine. In fact, we witness a paradigm shift (Mellor, 1976; Saith, 1991; Ranis
and Stewart, 1993; Bangasser, 2000; Lanjouw and Lanjouw, 2001; see also Sanyal, 2007 for
a critique). The need for nurturing the labour-intensive INF has been recognised in India as
well. Its dynamics and the pattern of its dependence on other sectors, especially agriculture,
have become important issues of research. Substantial empirical work has been done on the
question of farm–non-farm linkages in India as agricultural development has been recognised
as an important determinant for the progress of the informal sector. The impacts of agrarian
conditions, induced either by policy or by market forces, on the informal sector (INF), in general,
and the rural non-farm sector (RNF), in particular, have become serious issues of research.
In this paper, the authors wish to revisit this issue by invoking old questions and introducing
newer aspects of agrarian conditions and their effects on the labour-intensive INF.

II. OBJECTIVES AND METHODOLOGY OF ANALYSIS

Mainly three broad agricultural situations can be identified in the course of post-Independence
economic development in India, which are the policy-driven era of land reforms, and the Green
Revolution, and the current phase of both policy- and market-induced crop diversification
towards high-value crops (HVC) under the institutional set up of contract farming. Hence,
the target in this paper is to conduct an enquiry of the pattern of agriculture–INF linkages
under these alternative policy environments or institutional arrangements.
In order to address the above-mentioned issues, the focus is basically on three specific
aspects: firstly, the impact of agrarian land distribution on labour-intensive INF; secondly,
the possible impact of variations in agricultural production on INF; and finally, the tentative
effects on that part of the informal sector which is engaged in the processing and trading of
agricultural produce due to agrarian production diversification towards high-value crops and
the associated changes in the institutional arrangements of the production and distribution
of agricultural produce.
This study undertakes cross-section analyses involving several states of India based on
the data of the National Sample Survey Organisation (NSSO) and the Centre for Monitoring
Indian Economy (CMIE), and the impacts of agrarian production and land distribution on
INF are assessed from different angles. On the one hand, by analysing the intensity of asset
use for farming and the non-farm business and the engagement of farmers in RNF activities
across the size class of land possessed by farmer households, the dependence of marginal
and small farmers on INF has been shown. On the other hand, we establish the relation
between various indicators of INF (such as aggregate value added, total employment and
total number of units), both in the rural and urban segments and different characteristics of
agriculture (such as agricultural production and agrarian land distribution) using correlation
NON-AGRICULTURAL INFORMAL SECTOR IN INDIA 201

coefficient matrix followed by regression analysis, are established. In particular, the regression
analysis helps to understand how agrarian land distribution and agricultural production have
a significant impact on RNF controlling for either of the two aspects.
As far as agricultural production is concerned, the question could be raised on the type
of agriculture that may have a perceptible impact on INF. In this context, it is relevant
to bring in the issue of corporate driven or supported crop diversification and to compare
the impacts of the two different patterns of cultivation—traditional agriculture involved in
producing coarse crops and HVC cultivation driven by contract farming—on INF, in general,
and RNF, in particular. The impact of crop diversification on INF is captured by forming
a correlation coefficient matrix between Simpson’s crop diversification index (constructed
by using CMIE data) and various indicators of INF across several states of India (from the
NSSO data).
It is a well known fact that a large segment of the INF is engaged in the processing
and trading (both wholesale and retail) of agricultural products. Hence, the impact of crop
diversification can also be reflected on that segment of the INF which is using coarse crops
and HVCs either as raw materials for processing or for final trading in the market. For this
analysis, two NSSO unit level databases are used—Unorganised Manufacturing Enterprises
(2005-06) and Non-agricultural Enterprises in the Informal Sector (1999-2000). In order to
show the comparative reliance of INF on coarse crops and HVCs, the informal enterprises
are segregated into two groups based on materials used for production and marketing, and
then the exercise is undertaken from different angles.
The unit level data of NSSO pertaining to unorganised manufacturing enterprises have
systematically provided the information on the raw materials consumed for the production
process at the enterprise level. Moreover, the description of raw materials used is codified
according to the Annual Survey of Industries Commodity Classification Code 2004 (ASICC).
Using this ASICC, the enterprises have been divided by using coarse crops and HVCs as
raw materials for processing and the number of units engaged in each group have been
found. Moreover, the average capital-intensity across those two types of enterprises has been
analysed. It is important to note that enterprises which fall under the category of informal
manufacturing have been separated from the entire set of unorganised manufacturing.
In a similar fashion, the NSSO unit level data of the informal sector (1999-2000) has
been used to extract information on enterprises which are engaged in wholesale and retail
trade. As far as the final trading of final products is concerned, the information is provided
on economic activity at the enterprise level according to the five-digit National Industrial
Classification 1998 (NIC 1998). Hence, for the analysis, the enterprises falling under the
category of trading of cereals and pulses, trading of fruits and vegetables, and finally trading
of flowers and plants, have been selected. These enterprises are compared with each other
in terms of several categories like number of units, capital-labour ratio, etc.
Lastly, the food consumption pattern of the farmer households is examined by using
NSSO data to enquire whether large-scale crop diversification may erode the micro food
security of the farmers thereby having a significant impact on INF as well.
202 The Indian Journal of Labour Economics

The paper is constructed on the basis of the following structure. The entire discussion
has been categorised under two broad headings concerning the issue of agrarian land
distribution and the issue of crop diversification guided or supported by corporate contract
farming. Using the relevant writings on different phases of agricultural development in India
and its consequences as the context of the study, the empirical findings on agriculture–INF
linkages have been incorporated here. Thus, this paper essentially takes up the literature as
the object of the analysis and the authors intervene with our own empirical exercises. Hence,
the literature and the specific authorial intercessions are presented simultaneously.

III. GREEN REVOLUTION vs. LAND REFORMS: ISSUES OF LAND DISTRIBUTION

AND AGRICULTURAL PRODUCTION
In a pioneering work, Vaidyanathan (1986) shows that where agriculture is unable to
provide sufficient employment, rural INF picks up a part of the slack. Thus, an inverse
relationship between farm and non-farm employment is proposed (see also Bhaumik, 2002).
However, contrary to this ‘residual sector’ hypothesis, there is a vast literature that proposes
a positive relationship between farm and non-farm growth. Hazell and Haggblade (1990),
while considering state and district level data for India, have calculated that on an average,
a 100-rupee increase in agricultural earnings is associated with a 64-rupee increase in non-
farm income; thus the rural non-farm sector is viewed as a dynamic sector (Lanjouw and
Lanjouw, 2001, pp.13; Lanjouw and Shariff, 2004). These studies confirm Mellor’s (1976)
hypothesis that the Green Revolution generates an increased demand for locally produced
labour-intensive RNF goods and services. In these studies, expansion of agricultural production
is considered to be the harbinger of the growth of RNF even if it is mostly based on large-
scale farming. But the position that even the big farmer class could be the driving force for
non-farm growth has been questioned by several researchers (Dunham, 1991).
Using examples from India, Pakistan and Taiwan, Johnston and Kilby (1975) highlight
the role of the small farmer in boosting the demand for fertilisers and other inputs as well
as for minor equipments and repair services provided by local artisans. According to Hazell
and Roell (1983), small and middle peasants have a much higher propensity to consume
labour-intensive rurally produced goods as compared to that of their larger counterparts. In
such cases, non-farm employment multipliers are also substantial (Krishna, 1976). In this
context, the study by Bhalla and Chadha (1983) on Punjab (India) can be cited, wherein
they found that middle peasantry and not the big or very big farmers constitute the dominant
source of demand for non-farm goods and services. A survey (Harriss, 1991) on Arni,
Tamil Nadu (India) has revealed that agricultural expansion has not encouraged the local
production of labour-intensive consumer goods; rather it has disproportionately expanded
trade in ‘big city’ products. Based on this survey, Harriss (ibid) concludes that not only
agricultural output and income growth but also its pattern have serious implications for
the development of labour-intensive INF. In particular, he asserts that it is the egalitarian
growth process in agriculture that is essential for the progress of the decentralised labour-
intensive non-farm sector (see also, Lanjouw and Shariff, 2004). Similarly, the importance
NON-AGRICULTURAL INFORMAL SECTOR IN INDIA 203

of re-distributive land reforms in promoting localised INF activities has been emphasised
by several researchers (Saith, 1991, 1992; Ray, 1994).
Tables 1 and 2 have been introduced in support of this latter position that it is the small
and marginal farmers who are more closely associated with INF. This association is discussed
in various ways: some of the non-farm products that are directly used and the non-farm

Table 1
Average (per hectare) Number of Productive Assets for Farm and Non-farm Business
Possessed per 1000 Farmer Households by Size Class of the Land Possessed (Kharif)
Items / Size Class (hectare) 0.01-0.40 0.41-1 1.01-2 2.01-4 4.01-10
Andhra Pradesh
Sickle, chaff-cutter, axe, spade, chopper, plough 16521 6792 3819 2226 1327
Power tiller, tractor 5 4 16 7 11
Machinery and equipments 576 129 126 22 4
Bihar
Sickle, chaff-cutter, axe, spade, chopper, plough 24107 7877 4188 2185 1259
Power tiller, tractor 10 13 22 35 63
Machinery and equipments 590 7 2 5 0
Gujarat
Sickle, chaff-cutter, axe, spade, chopper, plough 28854 12027 6856 3760 1792
Power tiller, tractor 5 48 23 22 27
Machinery and equipments 585 38 4 28 4
Karnataka
Sickle, chaff-cutter, axe, spade, chopper, plough* 22376 7991 4468 2652 1310
Power tiller, tractor* 0 4 5 20 11
Machinery and equipments* 224 115 31 6 2
Maharashtra
Sickle, chaff-cutter, axe, spade, chopper, plough 28332 9401 5071 2708 257
Power tiller, tractor 0 6 9 9 11
Machinery and equipments 1263 220 86 22 7
Orissa
Sickle, chaff-cutter, axe, spade, chopper, plough 25295 9397 5318 3261 1369
Power tiller, tractor 0 4 14 0 6
Machinery and equipments 376 138 34 10 0
Punjab
Sickle, chaff-cutter, axe, spade, chopper, plough 18751 9793 5373 3396 1903
Power tiller, tractor 10 244 106 243 162
Machinery and equipments 1341 75 36 81 1
Tamil Nadu
Sickle, chaff-cutter, axe, spade, chopper, plough 14654 6804 3742 2359 1174
Power tiller, tractor 10 10 6 33 42
Machinery and equipments 580 157 68 1 14
Uttar Pradesh
Sickle, chaff-cutter, axe, spade, chopper, plough 26629 10702 6587 3327 1748
Power tiller, tractor 20 45 49 91 95
Machinery and equipments 937 62 26 34 4
West Bengal
Sickle, chaff-cutter, axe, spade, chopper, plough 21698 8387 5162 2703 1425
Power tiller, tractor 20 38 20 20 26
Machinery and equipments 805 194 53 12 0
Note: Sickle, chaff-cutter, etc. are considered as primary implements. Power tiller and tractor are considered
as capital-intensive implements. Both are used for the farm business. Machinery and equipments are
used for the non-farm business.
204 The Indian Journal of Labour Economics

incomes directly earned by the farmers are discussed; on the other hand, the association of
INF activities in general with the overall agrarian conditions are analysed.
First, the manner in which the intensity of non-agricultural activities varies across
the size class of land possessed by farmer households is analysed. The extent of non-farm
activities by the farmer households is captured through their ownership pattern of productive
assets (Table 1) and their income from non-farm business (Table 2). On the other hand,
the ownership pattern of minor farm implements across the size class of land possessed by
farming households (Table 1) gives an indication of the nature of dependence of the labour-
intensive non-farm sector producing petty farm implements on agriculture
From Table 1, it can be inferred that the marginal (up to 1.00 hectare of land) and
small (1.01-2.00 hectares of land) farmers are much more dependent on the INF across
the major states of India for minor implements meant for the farm and non-farm business.
Conversely, INF should get a definite boost for production from these segments of peasantry.
The primary tools, machinery and equipments meant for farm and non-farm business, except
the capital-intensive implements for farming, are chiefly used by the small and marginal
farmers. Consequently, the average (per hectare) number of productive assets for the farm
and non-farm business except the capital-intensive ones for farming possessed per 1000
farmer households drastically fall as the land size rises. Thus, the petty production sector
of the informal economy should benefit mostly from the marginal and small farmers as they
demand a majority of the primary implements for farming and the equipments for non-farm
business, which are usually rudimentary ones. That ‘(t)here is a clear and statistically significant
negative relationship between the size of the holding and the per hectare possession of all
productive assets (minor farm implements and animal husbandry assets) except tractors’ for
farming households of India is also reported in Bhalla (2008).
It could be argued that the marginal and small farmers use petty farm and non-farm
implements under distressed conditions as they cannot afford the more ‘productive’ ones and
hence the dependence of petty INF on small and marginal farmers is nothing but a mark of
distress. But the situation is assessed from a totally different perspective here. The primary
target here is to enquire how far and in which way the labour-intensive INF, in general, and
the petty rural non-farm sector, in particular, is dependent on the farm sector. The point
being made is that if the labour-intensive INF needs to be promoted, marginal and small
farmers could be a source of support. The pattern of agricultural development in general is
not the focal point of concern in the current situation; it is the specific requirements for the
progress of labour-intensive INF that is of interest and in this context comes the relevance
of small and marginal farmers.
The engagement of small and marginal farmers in RNF activities, on the other hand,
is highlighted in Table 2, which shows the net income of the farmers of different states
of India from the non-farm business per hectare of land possessed. It shows that mostly
smaller farmers are engaged in the non-farm business across India. Here, the issue is not the
engagement of farmers in the non-farm business. It is rather that of the non-farm activities,
which not only benefit the smaller farmers but also support a larger population by directly
NON-AGRICULTURAL INFORMAL SECTOR IN INDIA 205

and indirectly creating productive employment opportunity for non-agricultural population,

demanding local inputs from other non-farm units, and supplying cheap products to the
local population.
Table 2
Net Receipts (Per Hectare of Land) from Non-farm Business (Rs.)
State / size class 0.01-0.40 0.41-1 1.01-2 2.01-4 4.01- 10
Andhra Pradesh 595.122 225.5319 140.1993 20.63228 43.96859
Assam 1746.341 275.1773 77.07641 16.97171 228.8365
Bihar 1039.024 249.6454 69.76744 55.57404 99.78587
Gujarat 497.561 214.1844 85.71429 47.92013 23.12634
Haryana 1595.122 487.9433 233.2226 73.21131 24.69665
Karnataka 1473.171 173.0496 79.73422 50.58236 15.98858
Maharashtra 980.4878 303.5461 43.18937 73.54409 184.868
Orissa 614.6341 208.5106 55.81395 139.1015 111.4918
Punjab 3360.976 238.2979 226.5781 108.8186 17.41613
Tamil Nadu 1243.902 194.3262 93.68771 66.22296 11.99143
Uttar Pradesh 1087.805 217.0213 78.40532 64.55907 -10.1356
West Bengal 1951.22 390.0709 380.0664 142.0965 49.10778

Source: Calculated from NSS 59th Round, Report no. 497 (59/33/5).
In this context, it will not be out of place to quote Bhalla (2008), who notes that for all
India, the ‘per hectare (rural) non-farm income decrease(s) with an increase in the size of
holdings’; this negative relation is found to be statistically significant.
After assessment of the non-farm sector from the perspective of farming households,
the issue of association of the overall INF with agriculture is taken up. It is argued through
Tables 3 and 4, and especially through the subsequent regression results, that INF is
considerably dependent on small and marginal farming and not that much on the larger
segments of agriculture. It could again be argued that this observation essentially supports
a view of agrarian distress-led development of INF; INF develops as there is a prevalence
of petty/backward agriculture. But it is clearly found that INF is significantly associated
with agricultural output/income and per capita land operated, which marks the possibility
of agricultural expansion-led development of INF as well.
From Table 3 we can note the following observations:
Firstly, it is evident that both informal own account enterprises (OAEs) and establishments2
are linked with agriculture since the fourth column Table 3 shows that agricultural output/
income has a positive and significant relation with informal sector in all respects. Furthermore,
there is a positive and significant correlation between almost all the above-mentioned indicators
of the informal sector and the per capita area operated by holdings across states. This is
evident from column five of Table 3. But, it is also clear from the values of correlation
coefficients shown in columns six to nine of Table 3 that the inter-linkage between agriculture
and the informal sector is significant only in the case of small holdings. An increase in the
average size of the small holdings has positive and significant association with the level of
employment of rural and urban OAEs and rural establishments. In case of the number of
206 The Indian Journal of Labour Economics

Table 3
Correlation Coefficients between Various Indicators of Informal Sector and
Different Characteristics of Agriculture across States of India
Indicators of Enterprise Type Region NSDP from Per Average Average Average Average
INF across Agriculture Capita Size of Size of Size of Size of
States across Area Marginal Small Medium Large
States Operated Holding Holding Holding Holding
by across across across across
Holdings States States States States
Aggregate OAE Rural 0.789*** 0.269 - 0.220 0.076 - 0.038 0.182
Annual Urban 0.929*** 0.452** - 0.032 0.314 0.096 - 0.024
Value Added
Establishments Rural 0.746*** 0.326* - 0.292 0.306 0.036 - 0.017
across states
Urban 0.600*** 0.324* - 0.040 0.091 0.070 - 0.087
Total OAE Rural 0.860*** 0.330* - 0.073 0.336* 0.003 0.247
Number of Urban 0.919*** 0.419** - 0.045 0.356* 0.077 0.054
Units across
States Establishments Rural 0.809*** 0.306 - 0.290 0.311 0.023 0.075
Urban 0.800*** 0.401** - 0.035 0.219 0.086 0.006
Total OAE Rural 0.854*** 0.331* - 0.077 0.340* 0.011 0.213
Number of Urban 0.943*** 0.445** - 0.003 0.351* 0.093 0.011
Workers
Establishments Rural 0.810*** 0.299 - 0.255 0.325* 0.033 0.064
across States
Urban 0.755*** 0.380** - 0.021 0.209 0.086 - 0.016
Note: Table 3 has been calculated for 29 major states (including the union territories) of India. Data on
NSDP from agriculture are taken for the year 2000, while that on the informal sector are taken for
the year 1999-2000. Latest data on landholdings and on the area operated by holdings are available
for the year 1996 and are hence incorporated for our estimation. Only for Andaman and Nicobar and
Delhi, the data on landholdings and the area operated are not provided for the year 1996, and hence
data for the year 1991 has been taken for those cases.
Source: Calculated by using CMIE-EIS 2006 and NSSO 55th Round: Informal Sector in India 1999–2000
(Report No.459). Note: *** significant at 1%, ** significant at 5%, and * significant at 10%.

units, the number of urban and rural OAEs is increasing with the increased size of holding
of small farms. Thus, it is interesting to note that though INF is significantly associated
with agricultural production and largely with the per capita area operated by (all) holdings
across the states and union territories, it is not significantly dependent on the average size
of the marginal, medium and large holdings. INF is influenced partially by the average size
of small holdings. Thus, we can say that the overall agricultural production, overall per
capita land operated across, and the average size of small holdings may positively influence
the size of the INF.
The issue of association of INF with land distribution in agriculture is examined more
closely in Table 4, though it must be added that the subsequent regressions will be more
revealing.
Table 4 shows that as the share of the number of marginal holdings to the total holdings
increases, it leads to an increase in the number of units and level of employment in both rural
OAEs and rural establishments. On the other hand, an increase in the share of semi-medium
holdings has significant negative impacts on the above-mentioned variables.
This relation between land distribution and rural INF, on one hand, and that between
agricultural production and the latter, on the other hand, are tested simultaneously with the
following regressions in Table 5.
NON-AGRICULTURAL INFORMAL SECTOR IN INDIA 207

Table 4
Correlation Coefficients between Different Indicators of the
Informal Sector and Share of Holdings across Different Size Classes
in the Total Number of Holdings and across Different States of India
Enterprise Type Indicators Region Share of Share Share Share of Share of
of Informal Marginal of Small of Semi- Medium Large
Sector across Holdings Holdings Medium Holdings Holdings
States in Total in Total Holdings in Total in Total
Number of Number of in Total Number of Number of
Holdings Holdings Number of Holdings Holdings
Holdings
Rural 0.328 - 0.242 - 0.321 - 0.227 - 0.153
OAE
Value Urban 0.067 - 0.016 - 0.049 - 0.70 - 0.056
Added Rural 0.316 - 0.229 - 0.291 - 0.022 - 0.2194
Establishments
Urban - 0.058 0.150 - 0.081 - 0.023 - 0.064
Rural 0.339* - 0.207 - 0.340* - 0.254 - 0.193
OAE
Number of Urban 0.194 - 0.059 - 0.187 - 0.177 - 0.157
Units Rural 0.382* - 0.290 - 0.362* - 0.261 - 0.210
Establishments
Urban 0.050 0.023 - 0.029 - 0.072 - 0.075
Rural 0.349* - 0.198 - 0.352* - 0.268 - 0.2123
OAE
Number of Urban 0.139 - 0.054 - 0.125 - 0.124 - 0.108
workers Rural 0.358* - 0.259 - 0.340* - 0.250 - 0.209
Establishments
Urban 0.047 - 0.047 0.001 - 0.064 - 0.083
Note: * significant at 10%. Share of number of holdings in each category is estimated by calculating the
number of holdings in that category divided by the total number of holdings across major states in
India for the year 1996. The calculation is based on 25 major states and union territories.
Source: Calculated by using CMIE-EIS 2006 and NSSO 55th Round: Informal Sector in India, 1999–2000
(Report No. 459).

Table 5
Regression Result
Regressand: Value Added in Regressand: Value Added in
Rural Informal Sector as a Share of NSDP Rural Informal Sector as a Share of NSDP
Regressors Coefficient   Regressors Coefficient
Constant -0.03 (-1.19)   Constant 0.03 (1.01)
share of marginal holdings 0.0010683***   Share of large holdings -0.0056325*
(5.36) (-2.03)
NSDP from agriculture as a 0.1282086*   NSDP from agriculture as a 0.1739729
share of NSDP (2.11)  share of NSDP (1.68)
R2 = 0.7668   R2 = 0.3597
Adj. R2 = 0.7202   Adj. R2 = 0.2316
No of Observations: 13   No of Observations: 13
Note: ***significant at 1%, **significant at 5%, *significant at 10%. In parenthesis t-value is given. Value
added in rural informal sector (combining OAE and Establishments) is taken for 13 major states of India
having more than 1 million informal enterprises, such as Andhra Pradesh, Bihar, Gujarat, Karnataka,
Kerala, Madhya Pradesh, Maharashtra, Orissa, Punjab, Rajasthan, Tamil Nadu, Uttar Pradesh and
West Bengal. The rural informal sector is constituted of 56 per cent of the total estimated enterprises.
Other categories are considered as before. The regression is corrected for heteroskedasticity and
multicollinearity and hence the share of marginal holdings and that of large holdings could not be
used together.
Source: Calculated by using CMIE-EIS 2006 and NSSO 55th Round: Informal Sector in India, 1999–2000
(Report No.459).
208 The Indian Journal of Labour Economics

Table 5 shows interesting outcomes for rural INF. The value added in rural INF as a
share of NSDP for 13 majyor states is explained by the land distribution pattern, positively
by the share of marginal holdings, and negatively by the share of large holdings controlling
for NSDP from agriculture as a share of the overall NSDP. At first sight, it may seem that
it indicates a distress-driven growth of rural INF: as marginalisation in agriculture increases
the share of rural INF’s value added in NSDP. But the same regression result, especially
the first part, also tells a different story. It is seen that controlling for the land distribution
pattern, especially the share of marginal holdings if the NSDP from agriculture as a share
of the NSDP rises, the value of the regressand rises as well. Thus, rural INF is boosted
by agricultural expansion, given that the land distribution has a bias towards marginal
farming. Hence, it could be argued that even marginal farm-based agriculture (in India, we
just have such a case now) might induce the progress of labour-intensive rural INF, if an
appropriate policy of agrarian expansion consistent with existing land distribution pattern
is undertaken.

IV. ISSUE OF CROP-DIVERSIFICATION, CONTRACT FARMING AND

AGRICULTURAL MODERNISATION
We now turn to our analysis of the probable impacts on INF due to crop diversification
of agriculture in India. It has been noted above that the pattern of agricultural growth is
supposed to have a significant influence on the course of development of INF. Hence, it
seems quite likely that crop diversification as well should have serious implications for
non-farm progress. We propose, contrary to the usual belief, that the particular type of
agricultural growth based on diversification towards high-value crops (HVC) could rather
affect the labour-intensive INF activities adversely.

Table 6
Correlation Coefficients between Different Indicators of the Informal Sector and
Crop Diversification Index of Agriculture across Various States of India
Indicators of Informal Sector Enterprise Type Region Simpson’s Index of Crop
across States Diversification across seven States
Rural 0.243
Aggregate Annual OAE
Urban 0.690*
Value Added across States Rural 0.596
Establishments
Urban 0.839**
Rural 0.196
Total Number of OAE
Urban 0.776**
Units across States Rural 0.522
Establishments
Urban 0.661
Total Number of Rural 0.288*
OAE
Urban 0.7 26*
Workers across States
Rural 0.558
Establishments
Urban 0.723*
Note: For Simpson’s index, only seven states have been taken: West Bengal, Tamil Nadu, Punjab, Andhra
Pradesh, Orissa, Gujarat and Haryana for the year 2000 (for Punjab, 1999).3
Source: Calculated by using CMIE-EIS 2006 and NSSO 55th Round: Informal Sector in India 1999 –2000
(Report No.459). Note: *** significant at 1%, ** significant at 5%, and * significant at 10%.
 Table 7
Simpson’s Index of Crop Diversification for Different Provinces and All-India
State Year 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002
West Bengal 0.43 0.40 0.39 0.40 0.41 0.41 0.40 0.40 0.38 0.39 0.38 0.44 0.46 0.47 0.46 0.49 0.45
Gujarat 0.64 0.64 0.63 0.61 0.63 0.61 0.64 0.65 0.65 0.66 0.67 0.68 0.68 0.70 0.70 0.71 –
Tamil Nadu 0.52 0.52 0.55 0.57 0.55 0.57 0.63 0.56 0.58 0.60 0.61 0.60 0.59 0.59 0.58 0.57 0.61
Punjab – – – – – – – 0.29 0.25 0.25 0.31 0.32 0.30 0.25 – – –
Orissa 0.41 0.41 0.43 – 0.43 – 0.40 0.39 0.39 0.40 0.41 0.42 0.42 0.42 0.39 0.37 –
Haryana – – – – – – 0.50 0.45 0.45 0.44 0.46 0.47 0.44 – 0.40 – –
Andhra Pradesh 0.53 0.51 0.54 0.55 0.56 0.58 0.59 0.61 0.60 0.61 0.62 0.61 0.62 0.62 0.61 0.59 –
All India 0.42 0.42 0.44 0.44 0.45 0.47 0.49 0.48 0.49 0.49 0.51 0.51 0.50 0.50 0.51 0.51 0.51
Note: Calculated for foodgrains, fruit and nuts, fibres, oilseeds, plantations, spices, vegetables, etc. from CMIE (2006).
NON-AGRICULTURAL INFORMAL SECTOR IN INDIA
209
210 The Indian Journal of Labour Economics

Let us now take up certain empirical exercises to understand the impact of crop
diversification on the informal sector. We study the probable nature of dependence of the
informal sector on diversified agriculture. Stated otherwise, we enquire about the pattern
of development of the informal sector in rural and urban areas, and across several states of
India depending on the process of crop diversification in agriculture.
Table 6 captures how crop diversification is related to the informal sector. From Table
6, the following observations can be noted:
Simpson’s diversification index shows that the higher the agricultural diversification, the
higher is the aggregate annual value added, the total number of units and the total number of
workers in urban informal own account enterprises and establishments across seven selected
states of India. It may be due to this reason that diversified crops (mainly food) are mostly
used for processing in urban areas and hence crop diversification is inducing urban informal
processing. And it can be the case that this inducement is getting reflected in the prevalence
of the urban informal sector in those states where the intensity of crop diversification is
higher. However, a disaggregated sector-wise analysis would help in developing a more
appropriate picture (also see Table 7).
An assessment of the employment scenario throws up one interesting proposition: crop-
diversification probably leads to a distress-led employment growth in the urban informal
sector in states with high SDI. Perhaps, it is the case that once the linkage between the
rural non-farm and farm sectors is distorted due to the substitution of traditional cultivation
with HVC, the labour force engaged in the processing of traditional crops and in supportive
activities related to traditional agriculture in the rural areas would not be able to cope with
the introduction of new processes and practice (farm-related services), and hence it might
lead to an outward migration of the rural non-farm labour force, which, in turn, would lead
to increased participation in urban establishments and OAEs.
It is generally argued that the rural and urban informal sectors are heavily dependent
on agricultural produce for processing, canning, grinding, milling and related activities
(along with the basic coarse crops for self-sustenance). Hence, a large number of rural
and urban enterprises rely on agriculture for the necessary agro-based raw materials used
in their production processes. In order to capture this phenomenon, we have divided the
agro-processing enterprises into two groups: enterprises which carry out their production
on the basis of coarse crops, and those that carry out their production operation on the
basis of HVCs.4 Since no information is provided on the nature of raw materials used for
manufacturing in the NSS 55th Round (1999-2000), we have used the unit level data from
the NSS 62nd Round (2005-2006) on the unorganised manufacturing sector in India and
extracted the part of ‘informal manufacturing’.5 It is evident from Table 8 that the largest
section of the informal agro-processing sector depends on basic crop production and not on
HVC cultivation.
NON-AGRICULTURAL INFORMAL SECTOR IN INDIA 211

Table 8
Share of Value of Coarse and Diversified – High-value Crop Used as
Raw Materials for Processing to Gross Value Added and Number of Enterprises, 2005-066
Sector Number
of
Share of value of only coarse crops used as raw materials to gross value added (%)
OAME Rural 20.57 15.62 109266
Urban 32.62 23.24 23485
NDME Rural 15.28 10.66 13054
Urban 14.84 8.91 9182
DME Rural 4.29 1.71 1102
Urban 18.19 8.92 1600
Share of only diversified high-value crop used as raw materials to gross value added (%)
OAME Rural 46.73 43.47 12816
Urban 88.58 64.55 8953
NDME Rural 59.36 62.29 2033
Urban 95.79 66.72 3779
DME Rural 55.39 54.81 1104
Urban 63.43 17.72 495
Source: Calculated from NSSO 62nd Round: Unorganised Manufacturing Enterprises (2005 -2006) Unit Level
Data (schedule 2.2). The estimated number (population) of enterprises has been calculated from the
NSSO sample by using weights and then the values in the above table are derived for respective
categories.

It is evident from Table 8 that at the all-India level, the number of units using coarse
crops as raw materials is substantially higher in all cases except rural DMEs, as compared
to the number of units using HVC for processing. Hence, though the average (and median)
share of raw materials to the total value added is higher in the case of diversified crops, the
number of units relying on traditional crops for processing is much higher in number.

Table 9
Capital Intensity of Units Using Different Raw Materials, 2005-06
Sector Mean Median Estimated Number
of Enterprises
Capital-labour ratio of enterprises using coarse crops as raw materials
OAME Rural 1.49 0.10 30700
Urban 2.35 1.00 13278
NDME Rural 1.24 0.30 8799
Urban 2.68 1.85 5894
DME Rural 3.26 0.46 967
Urban 6.68 3.70 1000
Capital-labour ratio of enterprises using diversified crops as raw materials
OAME Rural 2.52 0.49 9608
Urban 2.64 0.29 5736
NDME Rural 1.78 1.37 1443
Urban 5.97 0.86 2075
DME Rural 19.95 1.73 487
Urban 0.30 0.34 261
Note: Capital is considered as value of plant and machinery of enterprise. Labour is considered as total
labour hour used by enterprise annually.
Source: Calculated from NSS 62nd Round: (Unorganised) Manufacturing Enterprise (2005 -2006) Unit Level
Data..
212 The Indian Journal of Labour Economics

Further, we try to understand whether the capital intensity of HVC processing units is
higher than that of processing units of coarse crops, which, in turn, would explain whether
HVC processing firms have been using significantly more labour or not. Table 9 depicts the
capital intensity of both the categories and finds that on an average, coarse crop processing
units are more labour-intensive.
Even if the medians for three urban categories are higher for coarse crop processing,
the median values for all the rural categories and all the mean values except the last one for
capital intensity measured through the capital-labour ratio are higher for the HVC processing
informal units. Hence, the argument that with increasing HVC cultivation, labour-intensive
processing would come up in a big way, thereby paving the path for employment generation,
is not supported by the data in Table 9. It is more likely that the HVC processing units
have been set up more recently as compared to the traditional/old coarse crop processing
units. Even then, the HVC processing firms are more capital-intensive, which contradicts
the claim that HVC cultivation would lead to a higher volume of employment generation
in the informal processing industry as compared to coarse crop processing. Since even the
informal HVC processing units are more capital-intensive as compared to traditional crop
processing, it is quite likely that the HVC processing of the formal sector would generate
much less employment. Hence, the corporatisation of the food processing sector would not
only affect the traditional crop processing units but also act as a threat to the informal HVC
processing sector.
Going beyond the processing industries, we performed similar exercises for the informal
trading sector, since apart from manufacturing (agro-processing), agricultural trading also
forms a significant portion as far as the dependence of INF on agriculture is concerned. In
this context, it is noteworthy that according to the NSS 55th Round on the informal sector
in India, 39 per cent of the total informal enterprises belong to the trading and repairing
services. Moreover, 32.54 per cent and 46.85 per cent of the total workforce engaged in rural
and urban OAEs, respectively, comprise these trading and repairing services. These figures
for establishments are 15.52 per cent and 33.87 per cent, respectively. For our analysis of
petty agricultural trading, we have used the 55th Round unit level data7 to broadly categorise
the informal trading activities into three parts: trading of cereals and pulses, trading of
fruits and vegetables, and trading of flowers and plants. Further, it is observed that land
and building, and transportation equipments constitute the major source of capital used for
trading activities. Hence, we have separately constructed the capital-labour ratio with land
and building, and transportation equipments.
It is evident from Table 10, where land and building are considered as capital, that a
large number of OAEs and establishments are involved in the wholesale trading of cereals
and pulses as compared to the meagre number of rural and urban OAEs and establishments
trading in flowers and plants. Moreover, the median value of the capital intensity is lower
for the former in relation to the latter, which indicates (on an average, avoiding the outliers)
that even the wholesale trading of cereals and pulses is more labour-intensive in nature than
that of flowers and plants.
NON-AGRICULTURAL INFORMAL SECTOR IN INDIA 213

On the other hand, from Table 10, we can see that the number of rural OAEs and urban
establishments engaged in the wholesale trading of cereals and pulses is higher than that of
fruits and vegetables, while the reverse is true for urban OAEs and rural establishments.
However, the average (and median) capital intensity (considering land and building) of the
units (both rural and urban OAEs and establishments) is higher in the case of the wholesale
trading of cereals and pulses in relation to fruits and vegetables. This only portrays the popular
understanding regarding the fruits and vegetables trading sector. This sector is dotted with
thousands of micro-entrepreneurs, who are unable to afford the substantial establishment
costs of proper sorting, packaging and preservation of fruits and vegetables. Therefore,
these traders either dispose off their produce very soon provided that the distance between
production and consumption points is minimal, or sell the produce to large merchants who
have access to sophisticated supply chains. On the other hand, the trading of cereals and
pulses needs substantial space for storage facilities, but without the burden of sorting,
packaging and preservation with sophisticated techniques, it could be affordable even for
the informal wholesalers. Perhaps, this is the reason why the value of land and building
used for the wholesale trading of cereals and pulses is much higher than that used for the
wholesale trading of fruits and vegetables. Stated otherwise, informal wholesalers can afford
to use the requisite supply chain for cereals and pulses, but they mostly rely on traditional
techniques and processes while trading in fruits and vegetables.
In a similar fashion, we performed an exercise considering transport equipment as
capital, which is shown in Table 11. It is evident that the average (median) value of the
capital intensity of rural OAEs engaged in the wholesale trading of cereals and pulses is
lower in relation to that in wholesale trading of fruits and vegetables. However, for the
other three cases the situation is reverse. This phenomenon, in turn, partially supports the
previous argument given above.
Table 10
Capital Intensity of Units Engaged in Wholesale Trading, 1999-2000 (Rs.)
Enterprise Type Rural Urban
Mean Median No. of Mean Median No. of
Enterprise Enterprise
Wholesale Trade of Cereals and Pulses
OAE 12920.21 7000 50777 64430.70 13333.33 27265
Establishment 39886.46 30000 3534 126774.14 62500 25006
Wholesale Trade of Fruits and Vegetables
OAE 4080.71 0 33714 456.86 0 33703
Establishment 3893.11 0 8779 52421.81 32750 12036
Wholesale Trade of Flowers and Plants
OAE 11079.63 10000 1004 16000 16000 192
Establishment 14175.78 50000 153 – – –
Note: Capital consists of land and building only and labour is considered as total workers.
Source: Calculated from NSS 55th Round: Non-agricultural Enterprises in Informal Sector (1999-2000) Unit
Level Data.
214 The Indian Journal of Labour Economics

Table 11
Capital Intensity of Units Engaged in Wholesale Trading, 1999-2000 (Rs.)
Enterprise Type Rural Urban
Mean Median No. of Mean Median No. of
Enterprise Enterprise
Wholesale Trade of Cereals and Pulses
OAE 2422.33 0 50777 1342.28 0 27265
Establishment 14324.45 0 3534 3993.29 0 25006
Wholesale Trade of Fruits and Vegetables
OAE 4080.71 0 33714 456.86 0 33703
Establishment 3893.11 0 8779 1628.13 0 12036
Note: Capital consists of transport equipment only and labour is considered as total workers.
Source: Calculated from NSS 55th Round: Non-agricultural Enterprises in Informal Sector (1999-2000) Unit
Level.

In Tables 12 and 13, the issue concerning the retail trade of cereals and pulses vis-à-vis
fruits and vegetables is taken up. It is evident that though the former is more capital-intensive
in nature as long as land and building are concerned, the number of enterprises (both OAE
and establishments in the rural and urban sectors) engaged in the retail sales of cereals and
Table 12
Capital Intensity of Units Engaged in Retail Sales, 1999-2000 (Rs.)
Rural Urban
Mean Median No. of Mean Median No. of
Enterprise Enterprise
Retail sale of Cereals and Pulses and Others*
OAE 19408.95 10000 1986527 59860.60 350000 852509
Establishment 32543.02 20000 51062 77595.85 53333.33 111801
Retail sale of Fresh Fruits and Vegetables
OAE 5716.60 600 792883 9395.12 0 783202
Establishment 23214.23 15000 4025 30508.82 15250 12662
Note: Capital consists of land and building only. * Others include coffee, spices, flour and other basic food
items.
Source: Calculated from NSS 55th Round: Non-agricultural Enterprises in Informal Sector (1999-2000) Unit
Level.
Table 13
Capital Intensity of Units Engaged in Retail Sales, 1999-2000 (Rs.)
Rural Urban
Mean Median No. of Mean Median No. of
Enterprise Enterprise
Retail sale of Cereals and Pulses and Others*
OAE 662.18 0 1986527 1306.69 0 852509
Establishment 1307.30 0 51062 984.86 0 111801
Retail sale of Fresh Fruits and Vegetables
OAE 557.34 0 792883 911.87 350 783202
Establishment 343.57 0 4025 418.43 0 12662
Note: Capital consists of transport equipment only. * Others include coffee, spices, flour and other basic
food items.
Source: Calculated from NSS 55th Round: Non-agricultural Enterprises in Informal Sector (1999-2000) Unit
Level.
NON-AGRICULTURAL INFORMAL SECTOR IN INDIA 215

pulses is higher than that of the enterprises engaged in the retail sales of fruits and vegetables.
A similar result has been found as far as transport equipment is concerned (Table 13).
Tables 12 and 13 try to convey the message that though in many cases wholesale trade
and retail sales of cereals and pulses are more capital-intensive in nature as compared to the
trade in fruits and vegetables and/or flowers and plants, the number of units engaged with
the former is much more than the latter. Hence, a significant portion of informal services
is engaged with the coarse crop-producing farm sector. Furthermore, the units engaged in
the trading of fruits and vegetables are really tiny ones with very low capital-labour ratio in
general. In most of the cases, these are even smaller than the small informal units engaged
in the trading of cereals and pulses. It is quite obvious that these units trading in fruits and
vegetables are no match for the large corporate traders or merchants and hence it is quite
likely that the former are the exploited ones. Furthermore, if corporatisation of the food
supply chain takes place, these traders would be the first to be affected adversely.
Having derived these empirical observations and critically studied the literature, we can
put forward the following propositions regarding the probable impact of crop diversification
on the informal sector, in general, and the rural non-farm sector, in particular. HVC farming
could serve well the current course of industrialisation by providing (processed) food to
the relatively well-off population engaged in the modern sector and through the supply of
raw material for sophisticated processing meant primarily for exports (Singh, 2004; Sidhu,
2005). On the other hand, HVC cultivation could be a better option for large farmers (Sen
and Raju, 2006) either having access to modern storage or processing and transportation
facilities, or having the ability to get attached with the big agro-business firms through
‘corporate contract farming’. Thus, the entire chain of crop diversification, entailing
processing, packaging and retailing could be organised through firm–farm contract. It is seen
that generally the large processing companies favour big farmers for undertaking contract
farming, perhaps due to the high transaction cost involved in case of the smaller counterparts
(Singh, 2004; Dev and Rao, 2005; Kumar, 2006; World Bank, 2007, pp. 127). Conversely,
the large farmers happen to use products produced in the formal sector for production and
consumption purposes. Contract farming itself ensures the use of modern inputs and modern
farm –services, thereby creating the diversion of agricultural purchasing power in favour of
‘big city’ products, and initiating a substantial leakage of the potential demand away from
the labour-intensive non-farm sector. Thus, this HVC-cultivating segment of agriculture
could easily get integrated with the so-called modernisation process. Nevertheless, it might
de-link a large part of agriculture from the rural labour-intensive non-farm sector with far-
reaching implications.8
It is generally seen that the production and distribution of HVC on a large scale necessitate
various types of costly technological support, which large farmers and traders could afford
or the small farmers could access only by entering into farm–firm contracts with large
corporations. Table 14 indicates such a requirement. It is evident from Table 14 that the
average (as well as the median) value of the capital intensity of warehousing of agricultural
produce, which is stored without refrigeration, is considerably less than that of the produce
216 The Indian Journal of Labour Economics

stored with refrigeration. Moreover, the number of warehousing enterprises in the former
case is also higher than in the latter case. Large-scale cultivation of HVC creates the need
for sophisticated storage facilities with refrigeration in contrast to the cultivation of coarse
crops like cereals and pulses. Hence, it can be inferred from Table 14 that large-scale
HVC cultivation needs a substantially higher expenditure for storage. Moreover, it is also
seen from Table 14 that refrigeration facilities are biased towards the urban segment of the
economy. It may be viewed as a support of the observation that the HVC-cultivating segment
of agriculture is integrated more with the urbanisation process (Joshi, et al., 2004; Rao, et
al., 2006; World Bank, 2007), which is not so for the coarse crop cultivating segment.
Table 14
Capital Intensity of Units Engaged in Warehousing of Agricultural Products, 1999-2000 (Rs.)
Rural Urban
Mean Median No. of Mean Median No. of
Enterprises Enterprises
Warehousing of Agricultural Products without Refrigeration
OAE 20087.08 15000 126 – – –
Establishment – – – – – –
Warehousing of Agricultural Products with Refrigeration (Cold Storage)
OAE – – – – – –
Establishment – – – 2,00,000 2,00,000 93
Note: Capital consists of land and building only.
Source: Calculated from NSS 55th Round: Non-agricultural Enterprises in Informal Sector (1999-2000) Unit
Level Data.

When small and marginal farmers get involved in the process of crop diversification as
a survival strategy, they have to face great hurdles/uncertainties (Joshi, et al., 2004; Rao,
et al., 2006; Sen and Raju, 2006) due to the lack of access to modern inputs, technology,
knowledge, modern storage, processing, transportation and packaging facilities, and most
importantly, to the market.9 This creates the scope for intervention by the big capital.
Only huge investments in collection, transportation, storage, processing, packaging and
finally retailing could effectively help realise the potentials of crop diversification (Rao,
et. al., 2006; Sen and Raju, 2006).10 Hence, the entry of big capital in this elaborate chain
of activities becomes imminent either through spot contracts or through the integrated
institution of contract farming. However, it is opined that such institutional arrangements
may bring back a kind of ‘interlocking of markets’, which is surely harmful for the petty
farmers (Singh, 2008). The diversified HVC is siphoned off for ‘big city’ consumption or
for exports, and on the other hand, modern inputs and modern farm services are introduced
into the agricultural sector. The same channel could even be used to sell ‘big city’ products
in rural areas without consideration for the local economy (Singh, 2008). Thus, there
could be loss of the local relative autonomy (ibid.). If small farm-based agriculture gets
integrated into the extended circuit of ‘capital’ through contract farming, and thus the
linkages of agriculture with INF are severed, this petty production-based non-farm sector
may face extinction. The complementarity between agriculture and INF is replaced with a
NON-AGRICULTURAL INFORMAL SECTOR IN INDIA 217

tacit conflict, wherein development of ‘modern’ agriculture displaces rural non-agricultural

population. It is sometimes argued that contract farming may reinforce the trend towards
proletarianization of the peasantry (ibid.) and thus the foundations for the rural non-farm
sector could get shattered.
In this context, one could argue that if large farms are diversified and get engaged
with the modern/corporate sector and practise modernised farming, it would release the
workforce who could migrate to petty non-farm activities, thereby resulting in a possible
expansion of the non-farm sector. We put our counter-arguments as follows: Firstly, petty
agro-based non-farm activities would not be able to compete with the modernised supply
chain integrated with modernised farming. Secondly, if the migrating population moving
out of agriculture tries to get engaged into non-agriculture based non-farm activities, they
may face both a demand problem and the problem of food availability, as the petty non-farm
population largely depends on local demand and local food supply, which become constrained
because large farms get integrated with the modern sector both in terms of food supply
and in terms of the demand for non-agricultural goods and services. Thirdly, even if we
accept the argument that in spite of all these problems, if the displaced population is forced
to be engaged in a newly developed INF, it could really be an interesting case, especially
given our earlier observation that agricultural prosperity based on the small farm economy
is conducive to INF expansion. But according to the present argument, we find that farm
sector growth is rather inducing a distress-led expansion of INF. In that case, it could be
argued that this new INF is not a mark of success, but a mark of misery. Hence, comparing
our earlier observation and the present counter-position, we could surmise that INF growth
is not necessarily a sign of progress and it is the pattern of agricultural development that
determines the qualitative conditions of INF. All these arguments are also tenable in a case
wherein the small farmers are compelled to move out due to large-scale corporate induced
or supported crop diversification and are forced to get engaged in INF.
Another argument could be that since small farmers spend a lot of time on agriculture for
maintaining their subsistence level, they could utilise surplus time for non-farm activity when
their productivity rises through crop diversification and farm–firm contracting. But Hymer
and Resnick (1969) have shown that under such conditions of productivity improvement and
remunerative contracts, the farmers are likely to concentrate on these productivity-enhancing
activities, even replacing the other traditional engagements. Such a tendency would shrink
the non-farm sector, in our case as well, thereby destabilising the non-agricultural population
which is dependent on the non-farm sector.
Agricultural diversification induced by contract farming may jeopardise local and
household level food security (Singh, 2008). It could be a problem for the petty producers
both in agriculture and in INF. Food insecurity makes the farmer households dependent on
external resources. However, as the non-farm households lose their work, they are doubly
affected. They neither have the access to local food supply nor do they have sufficient
entitlement to exchange with. The fact that crop diversification may lead to the erosion of
micro food security, especially for the small and marginal farmers, could be hypothesised,
218 The Indian Journal of Labour Economics

given the following observations.11 Lanjouw and Shariff (2004) note that the marginal
expenditure on local products is about 80 per cent in all the Asian countries surveyed. Of
this, 45 per cent is spent on local food. The remark of NSSO’s Report No. 424 should also
be noted: the proportion of growers’ consumption out of their own produce is found to be
64 per cent for rice, 69 per cent for wheat, 53 per cent for jowar and bajra, and 68 per
cent for maize, considering India as a whole. For each of these crops, the proportion of the
growers’ consumption of ‘other cereals’ from home produce works out to about 55-65 per
cent at the all-India level. Similarly, NSSO’s Report No. 474 points that the proportion of
all rural households consuming only from homegrown stock is relatively high for rice (24
per cent) and wheat (30 per cent), and it is also noted (NSSO’s Report No. 512) that in rural
areas, the households who are self-employed in agriculture show the lowest percentage of
seasonal inadequacy of food. Those poorer households depend largely on cereals even after
diversification of consumption as proposed by many experts is evident from Table 15.
Table 15
Monthly per Capita Consumer Expenditure (MPCE) Shares (%) over different
‘Food’ Items for Farmer Households across Size Class of Land Possessed (in Rs.)
Size class Per capita MPCE class Share of Share of Share of
of land consumption expenditure on expenditure on expenditure
possessed expenditure cereals, cereal vegetables, fresh on beverages,
substitutes, and dry fruits refreshments and
gram, pulses and processed food
their products
Andhra Pradesh
0.01 – 0.40 435.96 420 – 470 51.06 11.59 5.31
0.41 – 1 483.83 470 – 525 47.9 12.02 5.63
1.01 – 2 542.34 525 – 615 47.41 11.59 6.35
2.01 – 4 647.87 615 – 775 44.85 11.88 6.79
4.01 – 10 879.36 775 – 950 42.44 12.89 6.79
Assam
0.01 – 0.40 430.35 420 – 470 49.33 12.43 3.89
0.41 – 1 466.14 420 – 470 49.33 12.43 3.89
1.01 – 2 544.39 525 – 615 44.43 13.1 4.52
2.01 – 4 644.74 615 – 775 41.37 3.76 4.77
4.01 – 10 697.02 615 – 775 41.37 3.76 4.77
Bihar
0.01 – 0.40 339.84 300 – 340 56.1 13.47 2.85
0.41 – 1 434.43 420 – 470 49.7 13.87 3.08
1.01 – 2 532.13 525 – 615 45.87 12.77 3.6
2.01 – 4 590.00 525 – 615 45.87 12.77 3.6
4.01 – 10 930.82 775 – 950 37.67 14.69 4.62
Gujarat
0.01 – 0.40 486.07 470 – 525 34.45 15.79 5.63
0.41 – 1 500.54 525 – 615 32.53 52.05 5.73
1.01 – 2 604.64 525 – 615 32.53 52.05 5.73
2.01 – 4 660.36 615 – 775 28.63 15.75 6.66
4.01 – 10 836.96 775 – 950 27.1 15.4 6.89
NON-AGRICULTURAL INFORMAL SECTOR IN INDIA 219

Karnataka
0.01 – 0.40 436.23 420 –
470 43.45 12.39 10.11
0.41 – 1 434.72 420 –
470 43.45 12.39 10.11
1.01 – 2 508.11 470 –
525 44.38 12.15 9.42
2.01 – 4 615.47 615 –
775 41.37 12.27 11.02
4.01 – 10 672.26 615 –
775 41.37 12.27 11.02
Maharashtra
0.01 – 0.40 475.88 470 – 525 41.62 14.8 5.55
0.41 – 1 500.59 525 – 615 39.88 15.95 5.25
1.01 – 2 506.47 470 – 525 41.62 14.8 5.55
2.01 – 4 593.33 525 – 615 39.88 15.95 5.25
4.01 – 10 760.20 615 – 775 37.90 15.73 6.35
Orissa
0.01 – 0.40 288.6 255 – 300 62.78 14.22 3.6
0.41 – 1 362.8 340 – 380 56.59 16.78 5.19
1.01 – 2 406.8 380 – 420 52.43 16.87 5.62
2.01 – 4 537.6 525 – 615 54.75 17.92 7.3
4.01 – 10 554.2 525 – 615 54.75 17.92 7.3
Punjab
0.01 – 0.40 658.44 615 – 775 25.39 11.26 6.96
0.41 – 1 833.44 775 – 950 22.36 11.66 7.08
1.01 – 2 940 775 – 950 22.36 11.66 7.08
2.01 – 4 1010.34 950 + 19.34 11.97 7.28
4.01 – 10 1351.03 950 + 19.34 11.97 7.28
Tamil Nadu
0.01 – 0.40 507.50 470 – 525 41.76 13.91 9.55
0.41 – 1 583.18 525 – 615 39.07 14.68 11.07
1.01 – 2 724.31 615 – 775 39.38 14.26 11.27
2.01 – 4 838.86 775 – 950 38.10 13.93 10.87
4.01 – 10 862.04 775 – 950 38.10 13.93 10.87
Uttar Pradesh
0.01 – 0.40 362.15 340 – 380 47.88 14.33 3.79
0.41 – 1 435.54 420 – 470 43.72 13.93 4.23
1.01 – 2 573.54 525 – 615 38.46 14.22 5.09
2.01 – 4 761.23 615 – 775 35.75 14.26 5.14
4.01 – 10 1035.69 950+ 27.4 12.8 6.29
West Bengal
0.01 – 0.40 437.73 420 – 470 48.83 13.65 4.21
0.41 – 1 561.13 525 – 615 44.95 14.44 4.33
1.01 – 2 731.50 615 – 775 41.26 14.17 5.15
2.01 – 4 896.98 775 – 950 39.59 13.94 5.71
4.01 – 10 987.54 950 + 35.41 15.76 6.47
All India
0.01 – 0.40 434.54 420 – 470 44.65 13.43 5.02
0.41 – 1 485.81 470 – 525 42.92 13.36 5.18
1.01 – 2 572.36 525 – 615 39.94 13.68 5.66
2.01 – 4 670.00 615 – 775 36.33 13.38 6.17
4.01 – 10 841.09 775 – 950 32.69 13.31 6.45
Source: Computed from NSSO 59th Round, Report No. 495 (59/33/4) and Report No. 497 (59/33/5).
220 The Indian Journal of Labour Economics

Table 15 shows that in most of the states, the households with a relatively smaller
amount of land spend a significantly higher proportion of their income on cereals and pulses
compared to the bigger counterparts. Moreover, for Bihar, Uttar Pradesh, West Bengal
and for all-India, and to some extent, for Andhra Pradesh, Assam, Orissa, Punjab, and
even for Gujarat, the ratios of the share of expenditure on cereals, grams, pulses and their
products to that on vegetables and fruits and to that on beverages, and processed food, fall
drastically as the size of the land possessed rises. If we examine the crop diversification
intensity of different states and contrast it with the above values of the consumption
pattern, we find in general (except in the case of Punjab, on one extreme, and Andhra
Pradesh, on the other extreme) that diversification is higher in the states wherein the share
of consumption of traditional food is proportionately lower. Thus, we can infer that tastes
and preferences are endogenised during the practice of crop diversification in different
states across India. Hence, the widespread practice of crop diversification with the motto
of ‘Evergreen Revolution’ may lead to a significant erosion of micro food security, which,
in turn, may destabilise the indigenous INF. Here, we can note an observation by Chand
(2007): “(d)espite dietary diversification involving a sharp decline in per capita direct
consumption of foodgrains, the demand for cereals and pulses is projected to grow at
about 2 per cent per year on account of the increase in population and growth in indirect
demand. This growth rate is almost four times the growth rate experienced in the domestic
production of foodgrains during the last decade.” (ibid. pp. 13). This problem of macro
food security may lead to a significant extent of pauperisation for the informal sector,
indeed even threatening its very existence.
One may argue that as the cropping pattern changes, INF survives on this HVC cultivation
itself. Evidently, it would not be possible since small farms would be tied up with the big
agro-based multinational corporations (MNCs) through the contract farming–diversification–
processing–retailing chain for both the inputs and the market. Even the small and marginal
farmers could accept this arrangement for their sheer survival as crop diversification becomes
unviable without such contracting. This whole agreement could drive out petty non-agricultural
activities by squeezing the demand as well as the supply side supports (World Bank, 2007).
Although the huge population engaged in different types of INF activities gets expropriated,
only a minor fraction of it would be able to attach itself with the so-called modernisation
process involving the formal sector and HVC-based agriculture.

V. CONCLUSION
This paper analyses the probable impacts of land distribution and crop diversification led or
supported by corporate capital on the rural non-farm sector, in particular, and the informal
sector, in general. An attempt has been made to show that the petty production sector of the
informal economy benefits from agriculture if it is constituted mostly of marginal and small
farmers, as they demand a majority of the primary implements for farming and equipments
for non-farm business. Moreover, the agricultural growth-induced expansion of the rural
non-farm sector is conditional upon the size class of landholdings; and it is the marginal
NON-AGRICULTURAL INFORMAL SECTOR IN INDIA 221

holdings that have a prosperity-induced impact on the rural non-farm sector instead of the
entire agricultural sector.
Going beyond this issue, the probable impact of corporate driven or supported crop
diversification on the informal sector is analysed and a distress-led eviction of the petty
non-farm sector is proposed that is dependent on traditional farming due to both demand as
well as supply side constraints. Further, an analysis of informal manufacturing units engaged
in the processing of agricultural products reveals the dominance of labour-intensive coarse
crops processing firms, thereby negating the view that high-value crop cultivation would
pave the way for non-farm employment generation in the processing sector. On the other
hand, there is a dominance of informal service activities such as wholesale and retail trade
of coarse crops in contrast to that of high value crops. However, it has been found that this
wholesale and retail trade of high-value crops is dotted with micro-entrepreneurs, who may
not be able to compete with the modern corporate driven or supported agricultural supply
chain. Finally, the process of crop-diversification induced or supported by farm–firm contracts
is critically evaluated and it is argued that such institutional arrangements may bring back
the interlocking of markets through various channels, which may not only be detrimental
for the petty farmers but also create problems of demand, supply and micro food security
for the petty informal producers.
In this context, the observations of the West Bengal Human Development Report
(WBHDR) 2004, need special attention. It is argued that as the growth of agricultural output
and income in West Bengal during the 1980s and 1990s has been achieved on the foundations
of land reforms, it has created a wider market for mass consumption goods and for different
locally produced inputs including rudimentary farm services. On the other hand, it has also
ensured vital micro (household and village level) food security. Thus, the small and marginal
farmers and the bargadars (having a formal right of share-cropping), concentrating mainly
on basic crop production, have been the source of food and raw materials for the local
non-farm sector. On the other hand, these sections of the rural population constitute the
vital local market for various non-farm goods and services. Consequently, 40 per cent of
the total rural workers in this state are engaged in such non-agricultural activities. A very
large part of these activities are undertaken in household enterprises. The NSSO Report
459 shows that the proportion (per 1000) of enterprises located within household premises
is very high (571) for West Bengal, and it is well above the national average (448). This is
particularly plausible given that the food security of the households is —ensured through
formal access to the produce.

Notes
1. In this paper we use the terms ‘non-agricultural informal sector’ and ‘informal sector’ interchangeably,
though agriculture also falls under the informal sector in a broader sense.
2. The NSSO (55th round: 1999-2000) has classified INF into two categories: own account enterprise and
establishment. An own account enterprise (OAE) is an undertaking run by household labour, usually without
any hired worker employed on a ‘fairly regular basis’. ‘Fairly regular basis’ means the major part of the
period of operation (s) of the enterprise during the last 365 days. Establishments are those enterprises
222 The Indian Journal of Labour Economics

which have got at least one hired worker on a ‘fairly regular basis’. It is also important to note that the
above-mentioned definitions are constructed as per with the definition provided by the 15th International
Conference of Labour Statisticians (ICLS-1993) at Geneva. It must be mentioned at the very outset that
the number of OAEs is significantly higher than that of the establishments.
3. We have used Simpson’s Diversification Index (SDI) to measure degree of crop diversification:
SDI = 1 - Σ(pi / Σ pi)2, where pi is the area under ith crop and i = 1,2,3,….n. is the number of crops.
4. For coarse crops (cereals and pulses), we have used the ASICC code ranging from 12301 to 12492. On
the other hand, for HVCs, the ASICC code ranges from 12103 to12279 and 13519 to 13929.
5. We have separated out the informal manufacturing units from the rest of the units, which fall under
unorganised manufacturing but not as informal manufacturing. For segregation, we have used the definition
adopted by the NSS 55th Round of Informal Sector. Moreover, we have considered those units which do
not register under any act or commission.
6. We have calculated both the mean and median, and used the median for our discussion instead of mean,
which is affected by outliers, since we are dealing with a large number of observations.
7. We have segregated the trading activities from the repairing activities by using unit level data of the 55th
Round.
8. In fact, in various studies, it is found that the regions practising intensive HVC cultivation in India have
been concentrated in urban and semi-urban areas (Rao, et al., 2006). “In the urban districts high value
agriculture accounts for 43 per cent of the value of agricultural output, compared to 35 per cent in the
near-urban and 32 per cent in the far-urban districts” (ibid. pp. 2750; see also Joshi, et. al., 2004).
9. In this context, we can refer to a recent study by Mukherjee and Chakrabarti (2009). They have found
that even if the small farmers in certain parts of West Bengal are compelled to take up crop diversification
as a survival strategy due to inappropriate soil, water and weather conditions that are unfavourable for
traditional cultivation, they face great hurdles in performing such diversified cultivation and earn very
little. A major part of the diversified crops is used for self-consumption under duress. However, even
contract farming may not save these small farmers much, because under such institutional arrangements,
the small farmers are exploited in different ways as reported in the context of contract farming practised
in Punjab (Singh, 2004).
10. Production, especially processing of HVC, seems to be more capital-intensive even across Africa. In
fact, Haggbade, et al. (1989) report that activities like oil extraction, sugar production, tea drying and
packaging, etc. are often performed in rural areas by large-scale enterprises. Such a situation can also be
found in Punjab where non-farm activities are actually labour-saving (Saith, 1991; Singh, 2004).
11. Micro food security is different from macro food security that may improve with increased productivity
under crop diversification and farm–firm contract. As surplus rises in diversified agriculture, it could be
exchanged with basic food. But the non-farm population is unable to do so as their productivity is not
rising and hence they are devoid of appropriate entitlement. Furthermore, it is seen that local food supply
and also many locally available agro-inputs are crucial for the survival of the petty non-farm sector. This
supply gets constricted under corporate driven or supported crop diversification.

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