3.4 Trade Pattern, Formal and Informal Firms, West Bengal, 2015

FIGURE 3.4 Trade Pattern, Formal and Informal Firms, West Bengal, 2015

Source: based on transaction-level data of the Annual Survey of industries and the unorganized manufacturing Enterprises Survey.

Table 3.2 offers summary statistics of informality indicators in the state-level sample. On average, fewer than 7 percent of the observations on informal firms are registered with tax authorities, varying from 0.1 percent in Arunachal Pradesh to 60.0 percent in Daman and Diu, the former union territory. Meanwhile, the formal sector accounts for more than 70 percent of total output and employs 28 percent of all firm workers. The share of formal firms ranges from 7.4 percent to 5.8 percent after VAT adoption, but the t-statistics are insignificant. The share of formal sector output rises significantly, from 56 percent to 84 percent, and the share of formal sector employment increases from 26 percent to 31 percent. The state-industry-level sample shows similar results except that the share of formal firms increases by 5 percent after VAT adoption. The share of formal sector output and employment expanded by 18.4 percent and 7.8 percent, respectively.

EMPIRICAL RESULTS

The analysis takes advantage of the various dates of VAT adoption by Indian states to test the effect of the adoption on the share of informality at the extensive and intensive margins. Unlike previous work, the approach involves the calculation, that is, not only the share of formal firms but also the share of formal sector output and the share of formal sector employment relative to informal firms. This helps in determining both margins of informality.