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Rethinking Institutions: Innovation and institutional change in India's informal economy*



India has the largest informal, unregistered economy in the world, infrastructurally backward, yet vital for both growth and livelihoods. In the first section of this article, five economic institutions that shape this economy are introduced: small firms, informality, non-metropolitan towns, innovation and innovation systems, and the state's regulative impact on the economy it does not directly regulate. In the second section, we trace the development of the commodity economy of a South Indian town taken for case study over 40 years, before exploring three kinds of innovation in the third section: invention, adaptive, and adoptive innovation. In the fourth section, the formal and informal institutions that nurture informal innovation are analysed: family business, business associations, banks and finance, informal insurance and gold, hybrid state–private institutions, and informal innovation inside the state. The conclusion confirms the innovative dynamism of the informal economy and the complex pathways of institutional change that both shape, and are shaped by, innovation.



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The fieldwork for this study was carried out with Gilbert Rodrigo to whom I am extremely grateful. I am also grateful to Partha Mukhopadhyay and the Modern Asian Studies reviewers. The fieldwork was funded through a DFID-ESRC grant RUYGO-ES/I033769/1 ‘Resources, Greenhouse Gas Emissions, Technology and Work in Production and Distribution Systems: Rice in India’. The topic was suggested by the need to understand possible obstacles to innovation in a low carbon transition. The funding agencies are not implicated in the arguments and interpretations made here.



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1 Acemoglu, Daron, Johnson, Simon, and Robinson, James, ‘Institutions as a Fundamental Cause of Long-run Growth’, chapter 6, pp. 386–415, in Aghion, Philippe and Durlauf, Steven N. (eds), Handbook of Economic Growth, Volume IA (New York: Elsevier, 2005).

2 Behrens, Peter, ‘The Firm as a Complex Institution’, Zeitschrift für die Gesamte Staatswissenschaft/Journal of Institutional and Theoretical Economics 141, no. 1, 2nd Symposium on the New Institutional Economics (1985), pp. 6275 .

3 Kumar, Arun, ‘The Black Economy: Missing Dimension of Macro Policy-Making in India’, Economic and Political Weekly 34, no. 12 (1999), pp. 681–94.

4 That is, without the right to work, rights at work, the right to organize or rights to social security, International Labour Office, Decent Work (Geneva: ILO, 2002).

5 Data in Mukesh Eswaran, Kotwal, Ashok, Ramaswami, Bharat, and Wadhwa, Wilima, ‘Sectoral Labour Flows and Agricultural Wages in India, 1983–2004: Has Growth Trickled Down?’, Economic and Political Weekly 44, no. 2 (2009), pp. 4655 .

6 Sinha, Anushree and Adam, Christopher, ‘Modelling the Informal Economy in India: an Analysis of Trade Reforms’, chapter 6, pp. 306–63, in Harriss-White, Barbara and Sinha, Anushree (eds), Trade Liberalization and India's Informal Economy (New Delhi: Oxford University Press, 2007).

7 Raj, Rajesh and Sen, Kunal, Out of the Shadows: The Informal Sector in Post Reform India (New Delhi: Oxford University Press, 2016), p. 88 .

8 The non-corporate sector is highly differentiated. For every listed corporate firm there are 250 unlisted companies and an estimated 7,500 micro and small enterprises. For this and the growth rate debate, see Nagaraj, R., ‘Size and Structure of India's Private Corporate Sector: Implications for the New GDP Series’, Economic & Political Weekly 50, no. 45 (2015), pp. 4147 .

9 Evidence reviewed in Chen, Martha and Raveendran, G., ‘Urban Employment in India: Recent Trends and Patterns’, Margin: the Journal of Applied Economic Research 6, no. 2 (2012), pp. 159–79; see also National Sample Survey Organisation, Informal Sector and Conditions of Employment in India NSS Report No. 557 (New Delhi: NSSO, 2014), p. 53.

10 Raj and Sen, Out of the Shadows, p. 95.

11 National Commission on Enterprises in the Unorganised Sector, Report on Conditions of Work and Promotion of Livelihoods in the Unorganised Sector (New Delhi: National Commission on Enterprises in the Unorganised Sector, Government of India, 2007).

12 Saumyajit Bhattacharya, ‘Is Labour Still a Relevant Category for Praxis? Critical Reflections on Some Contemporary Discourses on Work and Labour in Capitalism’, Development and Change 45, no. 5 (2014), pp. 941–62. The point about relative independence is related to, but separate from, one about poverty, where there is no option but to use case material for conclusions that ‘a large part’ is operating under distress conditions compared with those for wage work (see Corbridge, Stuart, Harriss, John, and Jeffery, Craig, ‘“Lopsided”, “Failed”, or “Tortuous”: India's Problematic Transition and its Implications for Labour’, chapter 8, pp. 157–83, in Davin, Delia and Harriss-White, Barbara (eds), China–India: Pathways of Economic and Social Development (Oxford: Oxford University Press, 2014) for a review stressing distress in self-employment; and see Harriss-White, Barbara, Olsen, Wendy, Sanso, Penny Vera, and Suresh, V., ‘Multiple Shocks and Slum Household Economies in South India’, Economy and Society 42, no. 3 (2013), pp. 400–31 for the opposite conclusion. The ‘employers in disguise’ may themselves be under the six-worker threshold for ‘directory enterprises’ and count legally as ‘labour’. See Kamala Sankaran, ‘Flexibility and Informalisation of Employment Relationships: The Role of Labour Law’, Paper prepared for the conference ‘Blurring Legal Boundaries: Commercialisation and Informalisation of Work, International Institute for the Sociology of Law’, Onati, Spain, 2010.

13 For the history of the concept, see Martha Chen, ‘Rethinking the Informal Economy: Linkages with the Formal Economy and the Formal Regulatory Environment’, United Nations Department of Economic and Social Affairs Working Paper No. 46 (New York: DESA, 2007).

14 Raj and Sen, Out of the Shadows, pp. 7–10.

15 It was ‘huge at Independence’: Das Gupta, Chirashree, State and Capital in Independent India: Institutions and Accumulation (Cambridge: Cambridge University Press, 2016), p. 133 .

16 Labour, migration status, civil rights, tax, health and safety, land use, and environmental damage are increasingly prominent theatres of informality, even in the so-called developed economies of the West. See Larsen, Jane, ‘Informality, Illegality and Inequality’, Yale Law and Policy Review 20, no. 1 (2002), pp. 137–82.

17 NSSO, Informal Sector and Conditions of Employment, pp. 51–66 and tables therein; Chen and Raveendran, ‘Urban Employment in India’.

18 Denis, Eric and Marius-Gnanou, Kamala, ‘Toward a Better Appraisal of Urbanization in India: A Fresh Look at the Landscape of Morphological Agglomerates’, Cybergeo, No. 569 (2011), pp. 132 ,, [accessed 17 July 2017]; World Bank, GDP Growth (Washington: World Bank, 2016),, [accessed 17 July 2017].

19 Kunal Sen, ‘The Indian Economy in the Post-Reform Period: Growth without Structural Transformation’, chapter 2, pp. 27–63, in Davin and Harriss-White, China–India and citations to De Long (2003) and Rodrik and Subramanian (2004) therein.

20 Corbridge, Harriss and Jeffery, ‘“Lopsided”, “Failed”, or “Tortuous”’, p. 160; Ayona Datta, ‘City Forgotten’, Open Democracy,, [accessed 17 July 2017]; Sen, ‘The Indian Economy in the Post-Reform Period’.

21 ‘The percentage of urban population in these two city size-classes increased from 15.6 per cent in 1981 to 22.6 per cent in 2011, and from 12.1 per cent in 1981 to 20.0 per cent in 2011 respectively’: Sen, ‘The Indian Economy in the Post-Reform Period’, p. 56.

22 Sharma, Kalpana, ‘Rejuvenating India's Small Towns’, Economic & Political Weekly 47, no. 30 (2012), pp. 6368 .

23 Denis and Marius-Gnanou, ‘Toward a Better Appraisal’.

24 Ibid. See also Remi De Bercegol and S. Gowda, ‘Slumdog Non-Millionaires: Small and Medium-Sized Towns in India on the Fringes of Urban Development’, Metropolitiques EU (2014),, [accessed 17 July 2017].

25 Ahluwalia, Isher, ‘Foreword’, in High Powered Expert Committee (HPEC), Report on Indian Urban Infrastructure and Services (New Delhi: Ministry of Urban Development, Govt of India, 2011).

26 Kamala Sharma, ‘Slumdogs and Small Towns’ (2008),, [accessed 17 July 2017].

27 Ranjeet Laungani, ‘Demand Spotting: The Rise of the Indian Small Town’ (Nielson, 2013),, [accessed 17 July 2017].

28 Pradhan, B. K., Ratha, D. K. and Sarma, Atul, ‘Complementarity Between Public and Private Investment in India’, Journal of Development Economics 33 (1990), pp. 113–36.

29 See Prahalad, C. K. and Hart, Stuart, ‘The Fortune at the Bottom of the Pyramid’, Strategy and Business 26, no. 1 (2002), pp. 1–15. This fortune is not new. Shampoo and soap were being retailed in sachets in periodic marketplaces in South India in the early 1970s.

30 See Birtchnell, Thomas, Indovation: Innovation and a Global Knowledge Economy in India (Basingstoke: Palgrave, 2013); Radjou, N., Prabhu, J., and Ahuja, S., Jugaad Innovation: a Frugal and Flexible Approach to Innovation for the 21st Century (London: Random House, 2012); R. Tiwari and C. Herstatt, ‘India—A Lead Market for Frugal Innovations? Extending the Lead Market Theory to Emerging Economies’, Working Paper No. 67 (Hamburg: Institute for Technology and Innovation Management, Hamburg University of Technology, 2011).

31 Agricultural innovation systems (AIS), for instance, are systems of individuals, organizations and enterprises that bring new products, processes, and forms of organization into social and economic use to achieve food security, economic development, and sustainable natural resource management.

32 Fløysand, Amt and Jakobsen, Stig-Erik, ‘The Complexity of Innovation: A Relational Turn’, Progress in Human Geography 35, no. 3 (2011), pp. 328–44.

33 Gupta, Akhil, ‘Blurred Boundaries: The Discourse of Corruption, the Culture of Politics, and the Imagined State’, American Ethnologist 22, no. 2 (1995), pp. 375402 .

34 Das Gupta, State and Capital, pp. 133–37, pp. 141–58.

35 Polzin, Christine, ‘Institutional Change in Informal Credit: Through the Urban–Rural Lens’, chapter 9, pp. 229–250, in Harriss-White, Barbara (ed.), Middle India and Urban-Rural Development: Four Decades of Change (Heidelberg and New Delhi: Springer, 2016).

36 Data for the organized sector in the latest 2015 round of national accounts is boosted by the expansion of the private corporate sector's data base. This would shrink the relative contribution of the informal sector were it not for the fact that the top 100 companies provide 75 per cent of GVA, leaving the contribution of the ‘real universe’ of close on a million other working companies unknown (R Nagaraj, ‘Size and structure’). The unorganized sector is a residual, using census indicators of labour and gross value added extrapolated from benchmark indicators. Since the organized manufacturing sector has been reclassified to be more inclusive than the earlier registered manufacturing sector, some informal enterprise may have been reclassified as formal and the sector shrunk as a result: Ministry of Statistics and Programme Implementation, Changes in Methodology and Data Sources in the New Series of National Accounts, Base Year 2011–12 (New Delhi: Government of India, 2015), pp. 13–19.

37 Flyvbjerg, Bent, ‘Five Misunderstandings about Case-study Research’, Qualitative Inquiry 12, no. 2 (2006), pp. 219–45.

38 Harriss-White (ed.), Middle India and Urban-Rural Development.

39 This section is derived from Barbara Harriss-White, ‘Introduction: The Economic Dynamism of Middle India’, Chapter 1, pp. 1–28, in Harriss-White (ed.), Middle India and Urban-Rural Development.

40 Kennedy, Loraine (ed.), ‘Industrialisation and Socio-Cultural Change in the Tannery Belt of the Palar Valley (Tamil Nadu)’, Pondy Papers in Social Sciences No. 32 (Pondicherry: French Institute, 2004), pp. 3152 .

41 Basile, Elisabetta, Capitalist Development in India's Informal Economy (London: Routledge, 2013); Pamela Cawthorne, ‘The Labour Process Under Amoebic Capitalism: A Case Study of the Garment Industry in a South Indian Town’, Development Policy and Practice Research Group Working Paper No. 23 (Milton Keynes: Faculty of Technology, Open University, 1992).

42 M. V. Srinivasan, ‘Arni's Workforce: Segmentation Processes, Labour Market Mobility, Self-Employment and Caste’, chapter 3, pp. 65–96, in Harriss-White (ed.), Middle India and Urban-Rural Development.

43 N. Arikkuvarasi, ‘The Making and Unmaking of Handloom Silk Weaving in the Arni Region’, chapter 8, pp. 201–28, in Harriss-White (ed.), Middle India and Urban-Rural Development.

44 Schmitz, Hubert, ‘On the Clustering of Small Firms’, Bulletin Institute of Development Studies 23, no. 3 (1992), pp. 6469 ; Jason Stanley, ‘A Future Not So Golden: Liberalization, Mechanization and Conflict in Arni's Gold Ornaments Cluster’, chapter 5, pp. 131–50, in Harriss-White (ed.), Middle India and Urban-Rural Development.

45 Though without the implication (from Schmitz, ‘On the Clustering of Small Firms’) that there is a consensual development culture underpinning collective efficiency.

46 Barbara Harriss-White and Gilbert Rodrigo, ‘“Pudumai”—Innovation and Institutional Churning in India's Informal Economy: A Report from the Field’, Oxford, School of Interdisciplinary Area Studies, Working Paper 9 (2013),, [accessed 17 July 2017].

47 Basile, Capitalist Development.

48 Harriss-White, Barbara, ‘Collective Politics of Foodgrains Markets in S. Asia’, Bulletin of the Institute of Development Studies 24, no. 3 (1993), pp. 5463 .

49 Basile, Elisabetta and Harriss-White, Barbara, ‘The Politics of Accumulation in Small-town India’, Bulletin of the Institute of Development Studies 30, no. 4 (1999), pp. 3138 .

50 North, Douglass, Institutions, Institutional Change and Economic Performance (Cambridge: Cambridge University Press, 1990).

51 Harriss-White, Barbara, India Working: Essays in Economy and Society (Cambridge: Cambridge University Press, 2003).

52 Harriss, Barbara, ‘Innovation Adaption in Indian Agriculture: the High Yielding Varieties Programme’, Modern Asian Studies 6, no. 1 (1972), pp. 7198 .

53 Notably in motorcycles and looms.

54 Automated Teller Machine (cash machines); National Electronic Fund Transfer—instant cash transfer.

55 Some 27,000 motorcycles, new and second hand, were sold in Arni between 2008 and 2012.

56 Harriss-White, Barbara, ‘Capitalism and the Common Man’, Agrarian South: Journal of Political Economy 1, no. 2 (2012), pp. 109–60.

57 Olsen, Wendy and Morgan, Jamie, ‘Institutional Change from Within the Informal Sector in Indian Rural Labour Relations’, International Review of Sociology 20, no. 3 (2010), pp. 535–55.

58 Basile, Capitalist Development, uses the lens of Gramsci's theory of hegemony—in which the economic interests of capitalism use non-economic, political, and cultural means to co-opt subaltern classes.

59 Caste is defined as a hierarchy of social status associated increasingly loosely with occupations, by Basile, Capitalist Development.

60 Arni's silk association has a long history of state-connived containment of informal wages for weavers.

61 This requires published maximum retail price indication, lists of inventory, certified weights and measures and quality control in retail, none of which was being observed in Arni, which was resolved (conceded by the state) by an agreement for incremental and delayed implementation.

62 Including those for rice, silk cloth, groceries, gold, the Red Cross (reflecting human rights impulses in town), the Lions, Rotary, and the Chamber of Commerce.

63 Achievements through the ministerial route include a reduction of power-cuts for rice mills and an informal agreement to let women apprentice themselves, so as to enter tailoring.

64 de Soto, Hernando, The Mystery of Capital (London: Bantam Press, 2000).

65 Up to Rs 100,000. In 2012, Rs 1–2000 was reported to be a common outstanding amount for Dalit sanitary workers. This has subsequently risen.

66 See the earlier suggestion in Roman, Camilla and Harriss-White, Barbara, ‘On the Insecure Lives of Tamil Nadu's Silk Weaving Families’, Frontline 20, no. 24 (2003),, [accessed 17 July 2017].

67 Stanley, ‘A Future Not So Golden’; Barbara Harriss-White, ‘Local Capitalism and the Development of the Rice Economy, 1973–2010’, Chapter 4, pp. 97–130, in Harriss-White (ed.), Middle India and Urban-Rural Development.

68 Those with formal threshold qualifications for driving are fit for employment in information technology and will not work on lorries.

69 Mahatma Gandhi National Rural Employment Guarantee Scheme.

70 In 2012, one president called them ‘Rs 15–25,000 officers’.

* The fieldwork for this study was carried out with Gilbert Rodrigo to whom I am extremely grateful. I am also grateful to Partha Mukhopadhyay and the Modern Asian Studies reviewers. The fieldwork was funded through a DFID-ESRC grant RUYGO-ES/I033769/1 ‘Resources, Greenhouse Gas Emissions, Technology and Work in Production and Distribution Systems: Rice in India’. The topic was suggested by the need to understand possible obstacles to innovation in a low carbon transition. The funding agencies are not implicated in the arguments and interpretations made here.

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