The informal sector and informal employment relations occupy a prominent place in India's economy: one of their key features is the apparent absence of the state from labour regulation. This article seeks to trace the emergence of the division between the formal and informal sectors in India's economy from a historical perspective: it shows how the state, far from being absent, played a fundamental role in creating the dichotomy. This is done through a close study of labour legislation and the politics around it, taking South India as a case study. The article examines the enactment of four laws in Madras province in the late 1940s, ostensibly aimed at protecting workers, and their subsequent implementation by the Madras government. It shows how these laws ended by excluding workers from small unorganized industries (such as beedi-making, arecanut-processing, handloom-weaving, and tanning) from legal protection. It explores the ramifications of this exclusion and argues that the reinforcement of the formal–informal divide was the outcome of a complex political struggle between employers, workers' unions, and the state during this formative period. [ABSTRACT FROM AUTHOR]