The vast informal sector of the developing world in general and of India in particular is
increasingly considered as a ‘dispersed development engine’ by the orthodox schools. It is
also argued, though sizeable portion of informal sector exists independent of formal sector, a
large segment bears a complementary relationship with these formal productions. However,
on the contrary we propose a fundamental conflict between the two sectors given the generic
food-supply-constraint. To analyse such a proposition we construct a multi-sector
macroeconomic framework and also show that agriculture-formal sector interaction is
distinctly different from agriculture-informal sector linkage. Next, we examine the impacts
of variations in agricultural productivity and that of fiscal policy changes on this
formal-informal conflict. In the first case of increasing agricultural productivity while both
formal and informal sectors expand, the former benefits proportionately more than the latter.
In the second case of expansionary fiscal policy the informal sector expands even at the cost
of contraction of the formal one.