In this paper we analyze the formal-informal sector relationship, distinguishing a traditional and a modern informal subsector. Based on existing literature, we argue that modern informal firms have a forward production links with formal firms, while traditional informal firms do not. We show that in Indian manufacturing, growth and competitiveness in the formal sector benefits the modern informal sector, in line with this production linkage. The link does not exist for the traditional informal sector. Our results emphasize the importance of accounting for informal sector heterogeneity when analyzing the formal-informal relationship, and when designing appropriate policies.