When capital is accumulated in the labour-intensive informal sector, then the economy witnesses growth, stagnant employment in the formal sector, persistent unemployment and wage gap between formal and informal sector. Whereas investment in the capital-intensive formal sector leads to increase in unemployment during the initial phases of growth, however, if investments are continued, then full-employment conditions with closure of the wage gap are observed. Growth accounting exercise for the “establishment” and “own account enterprises” for the informal sector in India revealed that capital is more responsive in “establishments.” Also, subsidised capital in the formal sector will lead to full-employment conditions with closure of the wage gap.