In this paper we distinguish a traditional informal and a modern informal sub-sector and, based on existing literature, contrast two views on the effect of outsourcing on the size and composition of the informal sector. The first one, related to the structuralist school, argues that formal firms impose stringent conditions on the cost of outsourced products, so outsourcing helps recreating the survivalist characteristics of informal firms and works against modernization of the informal sector. The second view argues that formal firms outsource to modern informal firms but not to traditional informal firms, because the level of risk associated with product quality and delivery time is much larger for traditional informal firms. The empirical analysis, using nationally representative survey data of Indian manufacturing firms for the period 1995-2006, shows no support for the view that outsourcing works against the modernization of the informal sector: evidence for a significant relationship between formal sector outsourcing and informal sector employment is found only for relatively very modern informal activities.