Rethinking Institutions: Innovation and institutional Change in India's Informal Economy

Abstract

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.