Nature and Pattern of Subcontracting Linkages in the Informal Economy in India: Implications for Possibilities of Economic Transformation

Subcontracting linkages are seen in the literature as key channels to facilitate a transformation of the traditional informal enterprises into the larger modern ones and such linkages are expected to grow stronger with economic growth. Using nationally representative survey data for Indian informal manufacturing sector (IMS), focusing on the peak growth decade (2001-11), we examine the nature and pattern of subcontracting linkages in the IMS and interrogate whether these linkages have played the expected role of facilitating a transformation of the IMS. We estimate a fund – net accumulation fund – to capture the accumulation possibilities of informal enterprises and examine the impact of the linkages on the possibility of traditional IMS enterprises to accumulate and transition over time. Using this as our motivation, we characterize the nature of subcontracting linkages, examine their pattern of evolution, and investigate whether the nature is of the dynamic kind that is likely to facilitate a transformation. The subcontracting relations in the Indian IMS predominantly appear to be akin to traditional putting out system with very low possibilities to accumulate. Such putout enterprises can be categorized as a hybrid of a worker and an enterprise, which neither have an autonomy over the production processes nor are fully incorporated within the parent firm as a wage worker. The prevailing nature of the subcontracting linkages appear to be driven by distress and raises doubt on the ability of such linkages to enable the accumulation possibilities of traditional enterprises and facilitate an economic transformation of the IMS.