The informal economy in India, a critical source of livelihood for the vast majority of the workforce, presents a paradoxical challenge. While subcontracting between larger formal enterprises and informal ones has been hailed as a pathway for growth and transition into the formal sector, recent insights reveal a starkly different reality. Subcontracting, in theory, should empower informal enterprises by providing market access, credit, technology transfer, and entrepreneurial development.

However, data from 2001 to 2016 shows that less than 30 per cent of informal enterprises engage in such linkages, with a notable decline in urban areas. This raises critical questions about the true efficacy of subcontracting in fostering substantial economic growth and development within the informal sector. The financial dynamics within these subcontracted enterprises further underscore the challenges.

Despite the promise of growth, subcontracted enterprises tend to have significantly lower accumulation funds compared to their non-subcontracted counterparts. Over a 15-year period, the disparity has widened, with non-subcontracted enterprises accumulating nearly three times more resources by 2015-16. This stagnation suggests that subcontracting, rather than being a catalyst for growth, may actually be limiting the financial potential of these informal enterprises. One of the key reasons behind this stagnation is the nature of subcontracting relationships. The majority of subcontracted enterprises operate under a traditional ‘putting-out’ system, where the parent firm controls essential aspects of production while the subcontracted enterprise remains formally independent.

These enterprises receive raw materials and design specifications from the parent firm and supply their entire output back to it. This arrangement strips the subcontracted enterprises of autonomy and limits their opportunities for innovation and growth. Such a system not only curtails the potential for these enterprises to evolve but also perpetuates a cycle of dependence and low productivity. The parent firms effectively utilise these subcontracted enterprises as cost-saving appendages, providing minimal technology transfer and keeping the subcontracted units at a subsistence level.

This dynamic is particularly detrimental to women-headed and household-based enterprises, which are disproportionately represented in these put-out relationships due to socio-economic constraints. The impact on women-owned enterprises is particularly concerning. Women entrepreneurs in the informal sector, already facing significant barriers to credit and market access, are more likely to enter putout subcontracting relationships. While these relationships offer assured demand for their products, they also ensure that these enterprises remain at the lowest rung of the economic ladder, with the least potential for growth and transition into the formal sector.

This situation calls for a re-evaluation of the role of subcontracting in the informal economy. Rather than being seen as a straightforward pathway to growth, subcontracting must be critically assessed for its potential to perpetuate inequality and dependence. Policy interventions should focus on creating more equitable and dynamic subcontracting relationships that genuinely empower informal enterprises, particularly those led by women. Only then can the informal economy realise its full potential as a driver of inclusive economic growth.