India is the second fastest growing economy in the world, but it also has a very large informal sector. In the manufacturing sector, nearly 99% of enterprises and 81% of employment are in the unorganized sector. In the services sector, the estimated size of the unorganized sector ranges from 74% to 90% of employment, depending on the definition used.. The Indian economy has undergone amazing structural transformation during the last two decades, but the share of the unorganized sector has remained high (Ghani et al., 2011a, b). The employment share in the unorganized sector for manufacturing in 2005 is almost exactly the same as it was in 1989 at 81%. So the unorganized sector is also exceptionally persistent. India provides a good case study to examine how urbanization and formalization have interacted and evolved over time? Are formal sectors moving out of urban areas? Is informal sector moving into cities? Do cities generate agglomeration economies in the informal sector? Has the spatial allocation of plants improved across urban and rural locations?

Ghani et al (2012) examine the trends in the spatial location of organized and unorganized enterprises in India. They combine the enterprise data from the Annual Survey of Industries for the organized (formal) sector and from the National Sample Survey for the unorganized (informal). The organized manufacturing sector is surveyed by the Central Statistical Organization every year through the Annual Survey of Industries (ASI), while unorganized manufacturing establishments are separately surveyed by the National Sample Survey Organization (NSSO) at approximately five-year intervals. These surveys identify for each establishment whether or not it is in an urban or rural location. Establishments are surveyed with state and four-digit National Industry Classification (NIC) stratification. The authors note: “On the whole, India’s manufacturing sector became more urbanized, with the share of workers in urban areas rising from 33% of employees in 1989 to 41% in 2005 (Figure 3a). Urbanization growth was most dramatic from 1989 to 1994, but slowed down from 1994 to 2000. The urbanized employment share was basically flat from 2000 to 2005. This pattern of increasing urbanization was also present when looking just at manufacturing plant counts, but the opposite trend is observed for manufacturing output. The latter has increasingly moved towards rural areas”.

The differences in the relative movements of the organized and unorganized sectors, shown in Figures 3b and 3c, are striking. Specifically, “Throughout the 1989-2005 period, the organized sector moved from urban to rural locations, with its urban employment share declining from 69% in 1989 to 57% in 2005. On the other hand, urban employment share for the unorganized sector increased from 25% to 37%. Since the unorganized sector accounts for about 80% of employment in India’s manufacturing sector, the total urbanization level increased for the employment measure. Likewise, the organized sector accounts for over 80% of India’s output, such that the aggregate output series instead becomes more rural” (Ghani et al. 2012).

The authors conclude that large firms in India with high capital and land intensity are more likely to locate in rural areas in districts. There is evidence to support this from both within- district and betweendistricts movements. They both tend to work in the same direction for the urbanization of the unorganized sector and the de-urbanization of the organized sector.

Could these changing patterns in the urbanization of informal sector and the de-urbanization of formal sectors be explained merely by changing definition of urbanization? The definition of an urban setting in India has been mostly stable since the 1961 census. India uses a more demanding set of criteria than most countries to define what is ‘urban’. For example, substantial parts of U.S. metropolitan areas like Atlanta or Phoenix would be classified as rural in Indian statistical analyses because their population densities fall below 1,000 persons per square mile (Ghani et al, 2012).

10