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ACKNOWLEDGEMENTS

It is a pleasure to acknowledge the support we received from the various quarters during the course of this study. We would like to extend our sincere thanks to the Reserve Bank of India for enabling the interaction between academicians and the policy makers through the Development Research Group (DRG). We are particularly thankful to Dr. Narendra Jadhav, the then Principal Adviser and Chief Economist, Department of Economic and Policy Research (DEPR) whose academic support was crucial at the initial stages of this study. We also acknowledge our thanks to the participants (for the comments and suggestions) at the seminar during which this study was proposed. We record our appreciation to each and everyone who was associated with the DRG, DEPR, Reserve Bank of India, since the inception of this study and has been instrumental in providing the logistic support necessary for the completion of this study. We would particularly like to thank Dr. Nishita Raje, Dr. Ramesh Golait, Dr. Snehal Herwadkar and Shri Gopal Prasad. We have used Tim Coelli’s softwares, DEAP (2.1 version) and SFPF (Front 4.1 version) and we are grateful to him for enabling researchers, including us, to use his software. We also express our gratitude to the anonymous referee whose valuable suggestions and comments have helped us to sharpen the focus of the study.

Not only during the course of this study but otherwise as well, Pushpa Trivedi was fortunate enough to discuss the various facets of productivity with Prof. K.L. Krishna, Prof. Subhash Ray, Prof. Biswanath Goldar, Prof. Arup Mitra, Dr. Deb Kusum Das and Dr. Abhiman Das, at various seminars and workshops. She expresses her gratitude to each one of them for sharing their expertise with her. We will be failing in our duties if we do not thank Amlendu Dubey and Jaison for their help, as and when needed. During the course of this study, Pushpa Trivedi’s productivity registered a sharp decline, due to her ill-health. She, therefore, thanks all those associated with the study for being patient with her and enabling her to complete this study. She would like to record her gratitude to Prof. Devang Khakhar (Director) and Prof. Rangan Bannerjee (Dean, Research and Development) of the Indian Institute of Technology Bombay, for ensuring a conducive environment for promoting research.

Needless to mention, the responsibility for errors, if any, is entirely our own.

Pushpa Trivedi
L. Lakshmanan
Rajeev Jain
Yogesh Kumar Gupta

ABBREVIATIONS

EXECUTIVE SUMMARY

India’s development strategy placed a heavy emphasis on the creation of a well-diversified industrial base to realise the dream of industry-led development. In order to maximise growth from limited resources, the importance of increasing productivity, efficiency and competitiveness needs no justification. It may not be out of place that though the concepts of productivity, efficiency and competitiveness are indicators of performance, these need not necessarily move in tandem with each other. However, improving these indicators should be conceived merely a means to an end (i.e., social welfare) and certainly not as an end in itself.

This study focuses on the performance of manufacturing sector by taking a disaggregate view of it. It examines the regional dimensions¹ (for 18 states of India), component industries² (6 industries within manufacturing sector), organised versus unorganised segments of the manufacturing sector, etc. The period of study is 1980-81 to 2003-04 for the disaggregated analysis. However, we have extended the study to include the period up to 2004-05 for the ‘Selected Public Ltd. Manufacturing Companies’ and up to 2007-08 in the case of overall organised manufacturing sector. The study uses both parametric and non-parametric methods to estimate productivity and efficiency of India’s manufacturing sector.

Before we report the major findings of the study, we deem it necessary to report a few stylised facts pertaining to India’s manufacturing sector. These are as follows. First, the average share of manufacturing sector in real GDP has marginally increased from about 13 per cent during 1970- 75 to about 15.6 per cent in 2007-08, i.e., approximately by about 2.6 percentage points over a period of almost four decades. Despite the emphasis on manufacturing sector in India’s planning process, the contribution of this sector, at best, is modest. It needs to increase so as to absorb more workers and to enable people to improve their standard of living. Second, the employment and output generation within the manufacturing sector exhibits a major imbalance. According to the latest available data, the unorganised sector accounts for about 80% of employment and only about 33 % of income of the manufacturing sector. Third, as regards the position of manufacturing sector of the various states, Maharashtra, Tamil Nadu and Gujarat are the states which consistently rank as the first three topmost states in terms of both output and employment generation in the organised manufacturing sector. Deterioration of Bihar* and West Bengal, and ascent of Haryana, Karnataka, Punjab and Rajasthan is noticeable in these regards. Fourth, over the period of the study, ‘Metal’ and ‘Machinery & Transport Equipment’ industries accounted (each of them) for almost one-fifth of gross value added (GVA) of the organised manufacturing sector. These industries are followed by the chemical industry which accounted for about 13 percent of GVA of the organised manufacturing sector. However, in terms of job provision, these are not the topmost industries. Textiles and Food (including beverages & tobacco) industries together account for about 41 per cent of jobs in the organised manufacturing sector. Fifth, during 2000-01 to 2008-09, the growth rate of exports (in US $ terms) of Metal and Engineering goods has been highest at about 24 per cent per annum (pcpa) as against the overall growth of exports of about 17 pcpa and that of manufactured products of about 15 pcpa. Growth rates of exports of Textiles and Leather (LEATH) industry have been quite low ranging between 6 and 7 pcpa. Lastly, it is not too much to expect that, with the growth of manufacturing sector, workers would benefit in terms of rising per capita real wages. However, the worrisome feature of the organised manufacturing sector in India is stagnancy of per capita real wages of workers. The plight of workers in unorganised sector is much worse, as the wage differentials between organised and unorganised manufacturing sectors are rather sharp.

The major findings of this study are as follows.

• As regards the organised manufacturing sector, the estimates of Total Factor Productivity Growth (TFPG) are sensitive to the methodology applied. For the period 1980-81 to 2003-04, we get the estimates of TFPG for total organised manufacturing sector as 0.92 pcpa by Growth Accounting Approach (GAA) which is almost half of that obtained by the Production Function Approach (PFA), i.e., 1.81 pcpa. Hence, the contribution of TFPG to growth of output by these two approaches lies between 13 to 25 percent. The RBI dataset on public limited companies gives us estimate of TFPG of about 1.5 pcpa for the period 1993-94 to 2004-05.

• The industry-wise performance of organised manufacturing in terms of TFPG as measured by the GAA indicates the worst performance by Food, Beverages and Tobacco (FBT) industry, followed by the Textiles (TEX) industry. The best performers are Machinery and Transport Equipment (MTE) and Chemical (CHEM) industries. The TFPG varied between -0.41 (for FBT) and 1.47 pcpa (for MTE). As indicated earlier, the estimates of TFPG are sensitive to the methodology used. The PFA estimates provide us with the range of TFPG between 3.05 for TEX and 0.97 for Leather (LEATH) pcpa. Also, we do not see complete consistency in the ranking of the industries based on these two alternative approaches.

• The inter-state performance of TFPG of organised manufacturing sector across the states (as measured by the GAA) indicates that Bihar*, Rajasthan and AP turn out to be best performers while the worst performers are Tamil Nadu, Gujarat and Punjab. Bihar* exhibits the highest TFPG of 1.55 pcpa and Tamil Nadu exhibits the lowest TFPG of 0.65 pcpa. This is not surprising if we combine this information with the fact that Bihar* witnessed a negative growth rate of employment (-1.8 pcpa) and Tamil Nadu witnessed growth rate of employment of 2.5 pcpa in comparison to the corresponding national figure of 0.5 pcpa. Bihar* and West Bengal witnessed growth rates of output in their manufacturing sectors which were lowest across the states, for the former it was 3.7 pcpa and for the latter, it was 3.4 pcpa. That is precisely why, we caution against using TFPG figures unconditionally as indicator of welfare of the masses in general and labourers in particular. It is quite possible that if output growth is low and this low growth rate is accompanied by ‘falling levels of employment’, it can show up as high TFPG.

• It is not only TFPG, but also the level of TFP that should be paid attention to. Maharashtra features as the best performing state in terms of level of TFP in the organised manufacturing sector and Gujarat ranks as the best performer in terms of TFPG, as per the PFA estimates. These results are not unexpected, given the extent of industrialisation of these two states.

• Though we also attempted estimating efficiency using the ASI unit level data for organised manufacturing and used stochastic frontier production function (SFPF) methodology so as to avoid the outliers affecting our results, the problem of measurement of capital stock cannot be resolved unless the identification codes are provided to the users. Though this is possible only for the census sector. We have reported these results more for the sake of highlighting the data limitations, rather than as findings on efficiency based on the unit level ASI data.

• Using the RBI dataset, we have estimated efficiency of 449 companies for the period 1993-94 to 2004-05, using both data envelopment (DEA) and SFPF approaches. The mean efficiency levels by the former approach range from 0.72 to 0.78 and by the latter approach from 0.66 to 0.67, under the alternative assumptions. These figures highlight the fact that there existsan ample scope for improving efficiency in the Indian manufacturing sector. The SFPF approach also highlights the lowest mean efficiency of FBT and TEX. These results neatly coincide with the empirical evidence on TFPG emanating from GAA. Moreover, the TFPG measured using the Malmquist Index for this dataset also identifies the FBT and TEX as the poorest performers with TFPG of the former being -1.5 pcpa and of the latter being 0.5 pcpa. Top performers are the MTE and (METAL) and their productivity estimates range between 2.2 and 2.4 pcpa. This throws some light as to why the TEX has been one of the poorest performers on exports front and the Metal and Engineering goods industries have been the top performers.

• The estimation of TFPG for the unorganised sector was constrained due to the data limitations we faced in the construction of capital stock series. In view of this, we estimated labour productivity for the unorganised sector and compared it with that of the organised manufacturing sector. We observe that labour productivity in both organised and unorganised sectors has increased over time. Labour productivity in various component industries of the organised manufacturing sector ranged from 1.6 to 2.2 times in 2000-01 as compared to that in 1989-90. The respective range for the unorganised sector was 1.7 to 2.8 times. In other words, growth of labour productivity in unorganised sector has increased more or less in tandem with that in the organised sector during the above-mentioned period. However the disparity in the levels of labour productivity, are rather sharp and have perpetuated. Organised manufacturing sector had labour productivity which was 13, 14 and 15 times of that witnessed by its unorganised counterpart in years 1989-90, 1994-95 and 2000-01, respectively.

• Considerable research has been done on the issue of whether policy reforms and liberalization have led to improvement inTFPG and in order to do so, much of the literature depends on use of dummy variables for demarcating ‘pre’ and ‘post’ reforms period. Two major problems arise in this context. First, it is difficult to isolate the impact of reforms from the other factors which affect TFPG. Second, there could be time-lags only after which the impact of reforms could be felt on TFPG. By the use of dummy variable for the pre and post-reform period, we have tried to capture whether TFPG for the organised manufacturing sector (as it was not possible to test it with the other databases used in this study) was higher or lower in the two periods for the various industries and states. It turns out that TFPG has witnessed either deceleration or no acceleration across industries (except for Metal industry) and across states (barring West Bengal and Haryana) as per the GAA. The policy dummy in PFA indicates a shift in production function only for Maharashtra. However, when we take the averages of TFPG over shorter periods (see Table 5.9A and 5.9B), there seems to be revival of TFPG in the post-nineties. Except Bihar*, Madhya Pradesh, Orissa and Rajasthan, all states have witnessed higher TFPG during the post nineties, compared to the preceding quinquennium. Similarly, all industries except metal industry have witnessed revival of TFPG post-nineties period as compared to the preceding quinquennium. In some sense, one could interpret it as an evidence of a J-curve effect of the policy reforms.

• We also tried to isolate the impact of one of the components of the policy reforms and used it along with the other potential determinants of productivity to explain the TFPG of the organised manufacturing sector. Trade barriers (as measured by the ratio of import duties to import payments) turned out to be a significant determinant of TFPG of organised manufacturing sector with a negative sign, indicating that the dismantling of the trade barriers has had a positive impact on TFPG. The competition to export (as captured by the growth of exports) also turned out to be positively associated with TFPG of the organised manufacturing sector.

• We also tried correlating competitivenss scores (which are for the states as such and not for the manufacturing sector) and TFPG of the organised manufacturing sector at the state level. We could not find a neat relationship between competitivenss of states and TFPG of its organised manufacturing sector.

• Based on the following findings of the study, we reiterate the need to improve productivity and efficiency of India’s manufacturing sector. The contribution of TFPG to output growth for organised manufactuing sector ranges between 13 and 25 percent using alternative methodologies. The mean efficiency levels for the RBI dataset ranges between 0.66 and 0.78. Moreover, the ratio of labour productivity of organised to unorganised sector ranges between 13 and 15 combined with the fact that about 80 % of the workers in India’s manufacturing sector are in the unorganised sector. The states like Bihar* and West Bengal and industries like Food and Textiles need urgent attention. Needless to mention that this should be achived with growing and not with falling employment if the development process in the country needs to be ‘regionally balanced’ and ‘inclusive’

¹ 1 We have selected 18 states, which are listed as 15 states. These are: Andhra Pradesh, Bihar*, Delhi, Gujarat, Haryana, Karnataka, Kerala, and Madhya Pradesh*, Maharashtra, Orissa, Punjab, Rajasthan, Tamil Nadu, Uttar Pradesh* and West Bengal. The three states suffixed with ‘*’ indicate that these were bifurcated in the year 2000. In this study, Bihar* includes Bihar and Jharkhand; Madhya Pradesh* includes Madhya Pradesh and Chhattisgarh; and Uttar Pradesh* includes Uttar Pradesh and Uttarakhand.

² The industries selected for detailed investigation are: Food, Beverages & Tobacco, Chemical & Chemical Products, Leather & Leather Products, Metal & Metal Products, Machinery & Transport Equipment and Textiles & Textile Products.

PRODUCTIVITY, EFFICIENCY AND COMPETITIVENESS OF THE INDIAN MANUFACTURING SECTOR

Pushpa Trivedi#, L. Lakshmanan, Rajeev Jain, Yogesh K Gupta

1. Introduction

As a reaction to the colonial past, India’s development strategy focused on self-reliance. In pursuit of the same, it placed a heavy emphasis on the creation of a well-diversified industrial¹ base to realise the dream of industry-led development. Though this strategy assigned the prime responsibility of developing heavy industries to the public sector, private sector was also allowed to play a supplemental role. Almost until the beginning of the eighties, a myriad of measures to control the private sector, such as, licensing requirement for installation of capacities, quantitative and tariff restrictions on imported inputs, regulation of monopolies and trade practices, foreign exchange regulation, nationalisation of commercial banks, price controls, etc., constituted an integral part of India’s industrial policy. The socialistic fervor in the minds of policy makers got reflected in the policy measure, such as, reservation of labour-intensive manufacturing products for the small scale industries (SSIs), preferential treatment to the SSIs, stringent labour laws against firing of labour in large firms, etc. The industrial policy was primarily designed to protect the ‘infant’ industries from external competition. Unfortunately, it inhibited internal competition as well. By the end of seventies, Indian manufacturing suffered from high costs of production, sub-standard quality of products and lack of competitiveness of its exports. It is no surprise that the regulatory framework of the pre-1980s, inter alia, has been held responsible for low growth rate of output and productivity of India’s manufacturing sector (Ahluwalia, 1991).

The first bout of industrial policy reforms that were initiated in the eighties attempted to lift the economy from industrial stagnation through measures, such as, removal of hurdles on capacity expansion, enabling availability of imported inputs, liberalization of price controls, etc. The primary intent of these reforms was to unleash the growth potential of India’s industrial sector. The second bout of reform process was initiated in 1990-91 in the wake of macroeconomic crisis. Economic and institutional reforms are being fine-tuned since then, depending on the unfolding of situations both at the external and domestic fronts. It may also be worth noting that the reforms of the eighties were centered primarily on industrial and fiscal sectors, whereas, the reforms initiated in the early nineties were more in the nature of comprehensive macro-economic reforms. Stabilisation and structural adjustment process constituted the core of reforms in the nineties and these were deemed to be pre-requisites for the pursuit of growth and viable balance of payment. In brief, the reforms in the nineties differed in their characteristics from those of the eighties. The reforms in the eighties have been branded as ‘pro-business’, whereas, the latter as ‘pro-market’ (Rodrik and Subramanian, 2005 and Kohli, 2006).

It has been argued by Ahluwalia (1991) that the reforms of the eighties resulted in an upward shift in growth rate and productivity of the Indian economy and in particular that of industrial/manufacturing sector. The comprehensive reforms of the nineties gained wide publicity as these pulled the economy from a crisis situation and succeeded in alleviating foreign exchange constraint and controlling inflation. As substantial liberalisation in terms of tariff reductions and removal of quantity restrictions on imported inputs (needed for growth of manufacturing sector) took place during the nineties, it was expected that these reforms would also enable the economy to follow growth and productivity paths higher than those witnessed during the eighties. However, as noted by Rodrik and Subramanian (2005), no such structural break in either growth or productivity is evident after the initiation of reform process of the nineties. Perhaps, the reforms of nineties targeted primarily the external and financial sectors, which have impacted the real sector indirectly.

The emphasis that needs to be placed on productivity has been well articulated in the literature (Krugman, 1994 and Young, 1995). A higher growth path on account of higher productivity is considered to be a preferable alternative as compared to that due to increased application of inputs. The latter is deemed to be unsustainable due to supply constraints and also due to the phenomenon of diminishing returns. However, this can be a contentious issue, if it pertains to application of labour input, especially so in the context of a labour abundant economy like India. If increased productivity is attained by downsizing employment, it may not bode well for the social fabric and it ought to be a cause of concern to the policy makers. As the basic objective underlying the argument for increasing productivity is to increase social welfare, a situation of rising productivity coupled with shrinking employment may be neither socially desirable nor politically sustainable. A higher growth path, enabled by productivity growth and combined with ‘employment generation’ ought to be considered as an ideal trajectory from the point of view of sustainable growth of an economy. The link between productivity and social welfare (poverty alleviation) can best operate through employment generation. The importance of productivity in poverty reduction via employment generation has been duly emphasised in the World Employment Report 2004-05 (International Labour Office, 2005), by an apt choice of theme for the report, viz., ‘Employment, Productivity and Poverty Reduction’. In other words, increase in productivity needs to be conceived merely as a means to an end (i.e., social welfare) and certainly not as an end in itself.

Though the concepts of productivity, efficiency and competitiveness are indicators of performance, these need not necessarily move in tandem with each other. These terms have rather different conceptual underpinnings and hence, the policy makers need to focus on movement of each of these in accordance with the socio-economic objectives. As regards the two concepts of productivity, viz., labour productivity and total factor productivity (TFP), these are pertinent for policy makers, since the former has a direct link to standard of living and the latter indicates the economical use of resources in the process of production. ‘Productivity’ per se is a descriptive measure of performance and it can be estimated² independently for a decision making unit, whereas, measurement of ‘efficiency’ entails a comparison with a peer group and is a normative measure of performance (Ray, 2004). The concept of ‘competitiveness’ has many more dimensions to it, as compared to the concepts of efficiency and productivity. Competitiveness implies increasing share of market in relation to other decision making units³. The Global Competitiveness Report (GCR) 2009-10 published by the World Economic Forum (2009) provides the ranks for Global Competitiveness Index (GCI) and scores for various countries along with their component indices. These indices try to capture both the micro and macro determinants of global competitiveness. The pillars of GCI (as outlined in GCR, 2009) are classified into the basic requirements (institutions, infrastructure, macroeconomic stability, and, health & primary education), efficiency enhancers (higher education and training, goods and market efficiency, labour market efficiency, financial market sophistication, technological readiness, market size) and innovation and sophistication factors (business sophistication and innovation). Hence, the policy makers have to ensure that these basic requirements are provided within the macroeconomic policy frame. The State also has an additional task of providing policy environment to firms that is conducive for enhancing their efficiency and attaining technological and managerial sophistication. In brief, the gains in terms of productivity, efficiency and competitiveness, have to percolate across sectors, regions and income groups so as to enhance the social welfare. The cross-country comparison shows that India is far lower in terms of GCI rank (GCIR) and GCI score (GCIS) as compared with the other Emerging Market Economies (EMEs). India’s GCIR is 49 among 133 countries and the GCIS is 4.3 in the 7 point scale.⁴ In terms of the efficiency enhancers sub-index, which includes pillars critical for countries in the efficiency-driven stage, India stands at 33rd place among 134 countries.

Though the study highlights some aspects of competitiveness, it primarily focuses on productivity and efficiency of ‘manufacturing sector’ for the following reasons. First, manufacturing/industrial sector has received much attention of the policy makers in India in terms of financial allocations in planning process. Second, during the process of transition (i.e., when growth of an economy is being driven by manufacturing and tertiary sectors rather than by the primary sector), manufacturing sector is known to generate employment for both unskilled and skilled labour and the employment potential of manufacturing sector is higher as compared to that of the tertiary sector. Third, the growth of manufacturing sector is also necessary for the overall growth of the economy, as it can supply inputs and provide market to other sectors. Lastly, we also view that the solution to the agrarian crisis will also be found in the growth of output and employment of manufacturing sector.

The motivation for this study was derived from the fact that the Reserve Bank of India has displayed a keen interest in the arena of productivity trends in the Indian economy (Reddy, 2005). Unlike many other countries, India has not witnessed a stylised sectoral growth process during her developmental process. India’s service sector led growth in the recent years has been viewed with some apprehension in terms of fostering inequalities across regions and sections of population. Concerns have also been raised about the widening regional and sectoral dispersion of growth (Ahluwalia, 2000) and jobless growth in the context of economic reform process that gathered momentum in the early nineties.

The objectives of this study are as follows: (i) To estimate productivity and efficiency both at industry⁵ and state⁶ levels for India’s manufacturing sector; and, (ii) To examine the path of efficiency and productivity in the context of economic reforms undertaken by the Indian manufacturing sector; (iii) To provide a comparative view of the performance in organised and unorganised sectors of India’s manufacturing sector and, (iv) To identify the determinants of growth and productivity of the Indian manufacturing sector.

The remainder of this study is organised as follows. Section 2 provides some stylised facts about India’s manufacturing sector. Section 3 provides a synoptic review of the literature pertaining to efficiency and productivity of India’s manufacturing sector. Section 4 presents the details of the coverage of the study, methodology and data used in the study. Section 5 presents the estimates of productivity growth and efficiency obtained by the various methodologies for the different datasets. Section 6 provides the overall view of the results obtained in the study in a holistic perspective and policy implications emanating from the previous sections of the study.

2. Stylised Facts

The share of manufacturing sector in India’s real GDP has risen over the years. However, this increase has not matched the expectations for two main reasons. First, the expectations from manufacturing sector were high due to the emphasis on heavy industries led development in the planning process in India; and, second, the countries with similar levels of development on the eve of planning in India, especially the East-Asian Economies including China, have been able to make their presence felt in the global market for manufacturing products to a far greater extent than India.

In Box 2.1, we provide the description of concepts and definitions used in the context of disaggregated data in India’s manufacturing sector.

Box 2.1: Classification of Manufacturing Sector in India

The manufacturing sector covers all manufacturing, processing and repair & maintenance services units irrespective of their employment size, investment and location. The first classification of the manufacturing sector is into two broad sub-sectors: (i) registered or organised; and, (ii) unregistered or unorganised. The data on manufacturing in the organised sector is collected through Annual Survey of Industries (ASI), annually, whereas, the data on unorganised sector is collected by National Sample Survey Organisation (NSSO).

Registered (Organised) manufacturing sector : The registered manufacturing sector includes all factories covered under sections 2m (i) and 2m (ii) of the Indian Factories Act (IFA), 1948 which refers to the factories employing 10 or more workers and using power or those employing 20 or more workers but not using power on any day of the preceding 12 months ( for the entire country except the states of Arunachal Pradesh, Mizoram, and Sikkim and Union Territory of Lakshadweep). It also includes Bidi and Cigar establishments registered under Bidi and Cigar Workers (Condition of Employment) Act, 1966 with the same employment and use of power criteria as mentioned above. All electricity undertakings engaged in generation, transmission and distribution of electricity registered with the Central Electricity Authority (CEA) were covered under ASI irrespective of their employment size, until 1997-98. Since 1998-99, the electricity units registered with the CEA and the departmental units such as railway workshops, RTC workshops, GOVT. MINTS, sanitary, water supply, gas storage, etc. are not covered under ASI.

Unregistered (Unorganised) manufacturing sector: The unregistered manufacturing sub-sector, a complement set to the registered manufacturing sub-sector, covers all the residual units which are not covered under the registered manufacturing sector. Thus, the unregistered manufacturing sector covers all the manufacturing, processing, repair & maintenance services units employing less than 10 workers and using power or less than 20 workers and not using power. The data on unorganised sector is collected through periodic surveys by the NSSO. Further classification of the unorganised sector is as indicated below.

1. Own Account Manufacturing Enterprise (OAME) : These enterprises are engaged in manufacturing and/or repairing activities and are run without any hired worker employed on a regular basis.

2. Establishment : An establishment employs at least one hired worker on a fairly regular basis. Paid or unpaid apprentices, paid household member/servant/ resident worker in an enterprise are considered hired workers. Establishments are further categorised into two types: non-directory and directory manufacturing establishments.

2.1 Non-directory Manufacturing Establishment (NDME) : It is an establishment engaged in manufacturing and/or repairing activities and employs less than six workers (household and hired workers taken together).

2.2 Directory Manufacturing Establishment (DME): A directory establishment engaged in manufacturing and/or repairing activities employs six or more workers (household and hired workers taken together).

Source : http://mospi.gov.in/mospi_asi.htm (for ASI coverage)
http://mospi.nic.in/rept%20_%20pubn/ftest.asp?rept_id=nad09_2007&type=NSSO (for NAS coverage)
http://mospi.nic.in/rept%20_%20pubn/ftest.asp?rept_id=524&type=NSSO (for unorganised manufacturing coverage)

2.1 Contribution of Manufacturing Sector to Real GDP

In Table 2.1, we provide a synoptic view of the importance of the manufacturing sector and its two components, viz., registered and unregistered manufacturing in India’s real GDP. It can be seen from Table 2.1 that the average share of manufacturing sector in real GDP increased from about 13 per cent during 1970-75 to about 15.1 per cent during 2002-07, i.e., approximately by just about 2 percentage points over a period of more than three decades. Even in the year 2009-10, the share of manufacturing sector in India’s real GDP is just about 16.1 percent.

During 1970-75, India’s real GDP of manufacturing sector was more or less equally distributed between its registered and unregistered segments. Over the years, the growth of real income in the registered manufacturing has been higher than that of unregistered manufacturing sector, resulting in the average contribution of the unregistered sector shrinking to almost half of that of the registered sector during 2002-07. The situation has remained more or less unchanged even during the post 2007 period.

Kochhar et al (2006) demonstrate that given the per capita GDP and size of India, the share of manufacturing sector in GDP was in conformity with the stylised growth pattern of other countries. According to them, manufacturing sector in India underperformed since 1981 and this perception about its underperformance is also due to its comparison with China⁷. China was a significant positive outlier (i.e., China’s manufacturing sector contributed more to its national income as compared with the historical evidence on countries of similar levels of development) in 1981. To put it differently, India had approximately the normal share of output and employment in manufacturing in 1981, if compared with countries at a similar level of development and size. Over the next two decades, (when reforms were implemented, so as to remove the constraints on manufacturing sector), it failed to keep pace with the growth of manufacturing sector in other countries with similar levels of development. This is not to deny the fact that India has done reasonably well as compared to its own past performance.

The composition of India’s manufacturing sector is also crucial from the point of view of intra-sectoral equity. In Figure 2.1, we provide the proportion of real GDP originating in unregistered manufacturing in the total manufacturing sector.

The unorganised manufacturing sector accounts for about 80 percent of the employment generated in manufacturing sector. However, its contribution to the income generation or to real GDP of manufacturing (as seen in Figure 2.1) is much less in proportion to its employment generation. Furthermore, the relative income contribution of the unregistered sector vis-à-vis registered sector in manufacturing has been consistently declining over the years. In the first half of the eighties, this share was approximately 45 per cent and it has fallen to about 32 per cent during 2002-07. Even in 2008-09, the share of unorganised sector in real GDP of manufacturing sector was about 33.2 percent. In brief, the income originating in unregistered segment of India’s manufacturing sector is much lower than the proportion of workforce it supports. This has implications for the differences in labour productivity in registered and unregistered segments of India’s manufacturing sector.

2.2 Contribution of Manufacturing Sector to Employment

A vast body of literature has accumulated over the problem of lack of tandem between income and employment generation across various sectors in India. Though the composition of GDP in India has undergone substantial changes over the years, the dependence of workforce on manufacturing sector has hardly increased. Historically, during the transition process, manufacturing sector has been the main absorber of mass unskilled labour that gets released from agricultural sector. Unlike the East Asian economies, India failed to draw employment from agriculture into manufacturing in any significant magnitude (Kochhar et al, 2006).

In Table 2.2, we provide the data on employment generation in the industrial sector of India which includes manufacturing sector. In the year 2000, agriculture in India accounted for almost 60 per cent of total employment which is the highest in comparison to the countries listed in the Table. It is even higher than the respective figure for the lower middle income countries. Industry accounted for just about 18 per cent of total employment, which means the contribution of manufacturing to employment generation is even lower. Though, in the case of India, services sector has been able to absorb much more labour than the manufacturing sector, labour absorption by this sector is lowest as compared to other countries and it is almost similar to that witnessed by the low income countries. In brief, the manufacturing sector in India has failed to generate adequate employment in general and in organised manufacturing sector in particular. This implies inequalities in inter-sectoral and intra-sectoral distribution of purchasing power.

In Table 2.3, we present a synoptic view of the employment generation in India’s unorganised sector vis-à-vis that in the organised sector.

It can be seen from Table 2.3 that the contribution of unorganised sector in employment generation in manufacturing sector hovers around 80 per cent or so. In other words, the share of organised sector in total employment generation of manufacturing sector is just about one-fifth. This, when put together with the data reported in Table 2.1, indicates that only about 32 per cent of income of the total manufacturing sector was generated in the unorganised sector, which employs almost 80 per cent of labour of the manufacturing sector. In other words, we see not only the disproportion between income and employment generation across sectors, but also within the manufacturing sector, i.e., between its organised and unorganised segments. Moreover, we also observe from Table 2.3 that economically backward states have much higher proportion of employment in unorganised manufacturing in comparison to that in the organised manufacturing.

2.3 Growth of India’s Organised Manufacturing Sector: A Profile

In this sub-section, we highlight various dimensions of growth of India’s organised manufacturing sector. In Figure 2.2, we plot the average growth rates of real output, real wages and real emoluments⁸ in India’s organised manufacturing sector.

It can be seen from the Figure 2.2 that average growth of output of the organised manufacturing sector during the various quinquennia spanning from 1980-85 to 2005-08 ranged between 6.9 and 12.7 pcpa. The growth performance of the manufacturing sector had been rather impressive since the eighties itself. The pro-business policies of the eighties, according to Rodrik and Subramanian (2004), were responsible for a markedly improved growth performance of the Indian economy during the eighties as compared to the earlier three decades. There does not seem to be a statistically significant ‘improvement’ in the growth performance of the Indian manufacturing sector in the early nineties, i.e., after the initiation of the next bout of economic reforms. Nonetheless, the growth momentum of the eighties has been ‘maintained’ during the pro-market reforms of the nineties. It can be seen from Figure 2.2 that the growth performance of manufacturing sector has indeed been impressive in the last three years. Hashim, et al (2009) argue that the major liberalization undertaken during 1990s led to structural transformation of the Indian economy. Therefore, the enormity of change associated with transition from old inefficient structure to a new globally more efficient structure was characterised initially by a slowdown in GDP growth in sectors undergoing such transition.

Figure 2.3 indicates that the ratio of emoluments to both gross value added and value of output has registered a consistent decline since the eighties. In the first half of the eighties, the average ratio of emoluments to gross value added (value of output) was about 43 (9.3) per cent which declined to about 25 (4.7) per cent during 2000-05 period. This has further gone down to 19.5 (3.8) percent during 2005-08 period, despite an impressive growth performance of the economy. In other words, the ratio of wages and emoluments in income generated in organised manufacturing has shrunk over the years.

Figure 2.4 highlights the employment situation in the organised manufacturing sector of India. As can be seen from Figure 2.4, almost up to 1986-87, employment in organised sector witnessed a declining trend. After that almost for the next ten years, employment trend was positive. Thereafter, again we see a period of not only jobless but job loss growth. This situation has been arrested in the earlier years of the next decade and the latter half of the next decade presents an impressive performance on the employment front.

One of the areas of concern regarding the reform process in Indian manufacturing sector has been the deceleration in the rate of growth of real emoluments (see Figure 2.2). Growth of real emoluments has been shrinking over the years and it was in fact negative during the latter half of the nineties. However, we see a revival in the same since the midnineties and a ‘U’ shaped pattern in the growth of real emoluments can be seen in Figure 2.2. Emoluments consist of wages to the shop-floor workers (skilled and unskilled) and compensation to the ‘other supporting staff’, including the managerial staff. However, the worrisome feature of Indian manufacturing sector is stagnancy of per capita real wages. In Figure 2.5, we plot the per capita real wages and per capita real remuneration to staff other than workers. It can be seen that the growth rate of compensation to supporting staff has increased since the late nineties, in relation to the workers directly engaged in production process. This can have an adverse effect on the motivation for the shop-floor workers. It also explains as to why most of the engineering graduates do not prefer to pursue their engineering skills on the shop-floor and instead prefer to take up managerial positions. It is necessary for manufacturing sector to retain technologists who are engaged in production process and for this the real per capita incomes to technologists have to move in tandem with those for the other managerial staff. Productivity increases depend both on technology as well as managerial improvements and we can ill-afford to neglect either of these.

Another concern pertaining to India’s manufacturing sector has environmental point of view, i.e., the growth of manufacturing sector has been material resource intensive. Figure 2.6 highlights this phenomenon. Total value added constitutes barely 20 per cent of the value of output in India’s organised manufacturing sector. The ratio of material inputs to total value of output has ranged between 58 and 65 per cent and the respective range for the fuel inputs is between 6 and 7 per cent. If we compare it with the resource intensity in the United States (see Figure 2.7), the proportion of value added in gross output is about half as compared to about one fifth in India. Material inputs account for about two-thirds of value of output in India in comparison to just about one-third in the United States. Fuel inputs account for about 5 to 7 percent of value of output in India as compared to merely 2 percent in the United States. For Germany, the average ratio of value added to gross output was about one-third during 1998-2007, i.e., for the last 10 years for which the data are available⁹. It is true that the composition of the manufacturing sector of the US or Germany and that of India are quite different. However, if the Indian manufacturing sector is not able to add as much value to the intermediate inputs, as is done by the other countries, it will need restructuring in order to be globally competitive. In other words, there is scope for improving efficiency and productivity in Indian manufacturing sector, if we have to benchmark India with the globally competitive advanced nations. Even in China, the average ratio of value added to gross output of the industrial sector during 1998-2007 was about 29 per cent (China Statistical Yearbook, 2009), In other words, benchmarking against the most competitive economies is mandated, if we need to compete with the manufacturing giants in this era of globalization.

In this study, we have selected six major industry groups (listed in Table 2.4) across the eighteen states of India (these include the three states which were created in the year 2000). In Table 2.4 and 2.5, we provide the relative positions of the various industries and states in India’s organised manufacturing sector. It may be mentioned here at the outset that we have been able to do the aggregate country level analysis in this study for the period 1980-81 to 2007-08. However, for the state by industry analysis of organised manufacturing sector, the time-span of the study is 1980-81 to 2003-04 and we have used the ASI 2-3 digit level data. We also procured the unit level data from ASI for the time-span 1993-94 to 2003-04 and estimated productivity for this dataset as well¹⁰. For the company level data obtained from the RBI, we have been able to do industry level analysis from 1993-94 up to 2004-05.

It can be seen from Table 2.4 that ‘metal’ and ‘machinery & transport equipment’ industries are the two major industries and each one of these accounted for about one-fifth of GVA in the organised manufacturing sector. These industries are followed by the chemical industry which accounts for about 13 percent of GVA of the total organised manufacturing sector. However, in terms of job provision, these are not the topmost industries. Textiles and Food industries together account for about 38 per cent of jobs in the organised manufacturing sector. Leather industry is the least important industry from the chosen industries. We have included this industry in our analysis despite its low share in value added in organised manufacturing in India, because its contribution to export earnings has been higher than its importance in the production contribution in the organised manufacturing sector. Table 2.5 (and Tables 2.5a to 2.5f) highlights the importance of various selected manufacturing industries in the selected states. The following observations can be made regarding the ranking of the organised manufacturing sector of the various states of India (also refer to Annexure 2.1 and Annexure 2.2).

• Looking at the average contribution to the national output of organised manufacturing sector, the five topmost states (in the descending order of importance) are: Maharashtra; Gujarat; Tamil Nadu; West Bengal and UP. The five bottom states are: Delhi; Orissa; Rajasthan; Kerala and Bihar*.

• In 1980-81, Maharashtra, Gujarat, Tamil Nadu, West Bengal, and UP* ranked topmost states in terms of their contribution to value of output of organised manufacturing sector. Of these states, Maharashtra, Gujarat, Tamil Nadu and West Bengal together accounted for more than 50 per cent of value of output of India’s organised manufacturing sector. Orissa, Delhi, Rajasthan and Haryana were the states with lowest contribution to the output of organised manufacturing sector in India.

• Maharashtra topped in terms of output contribution in 1980-81 and the contribution of Gujarat was almost half of that of Maharashtra. However, by 2007-08, Gujarat has significantly caught up with Maharashtra in terms of its share in the output.

• In 2007-08, Maharashtra continues to be the topmost State in terms of value of output of manufacturing sector in the country. West Bengal lost its position as one of the topmost 5 states. Gujarat, Andhra Pradesh, Karnataka, Haryana and UP* improved their shares significantly in terms of output contribution in 2007-08 as compared with 1980-81 position. Growth of Hyderabad and Bengaluru’s IT industry in the recent years seems to be related to the improvement of ranking of manufacturing sectors of the respective states.

• The share of Maharashtra, West Bengal, Bihar*, UP*, MP* in total employment in organised manufacturing declined over the period 1980-81 to 2007-08. As against this, the relative contributions of employment of Tamil Nadu, Gujarat, AP, Karnataka, Punjab, Haryana and Rajasthan increased over this period.

• As regards industry-wise position of various states, Maharashtra, UP*, AP, Gujarat and Tamil Nadu are states that top in the production of food, beverages and tobacco, whereas, Orissa, Bihar*, Delhi, Rajasthan and Haryana belong to the bottom (refer Table 2.5a).

• As regards the chemical industry, Gujarat and Maharashtra are the two major states which account for more than half of the national output of this industry. Worth noting is the fact that the relative contribution of Maharashtra to the national output of chemical industry has registered a substantial decline over the period of the study, whereas, exactly the opposite is true for Gujarat. The average contribution of Tamil Nadu, UP* and AP to output ranged between 5 to about 8 per cent (refer Table 2.5b).

• Leather industry is concentrated mainly in three states, viz., Tamil Nadu, UP* and West Bengal. In 1980-81, these three states accounted for about 84 per cent of the national output of leather industry and the respective figure was 70 per cent in 2003-04. Tamil Nadu and West Bengal have registered decline in terms of their relative contributions to output of leather industry and the opposite is true for UP*. Haryana also has emerged as one of the largest producers of leather goods in the recent years (refer Table 2.5c).

• Maharashtra, MP*, Bihar* and Gujarat accounted for about 47 per cent of national output of metal industry in 2003-04. The other major metal producing states are Tamil Nadu, UP*, West Bengal, and AP (refer Table 2.1d).

• Machinery and Transport Equipment industry is located mainly in Maharashtra, Tamil Nadu, Haryana, UP*, Karnataka and Gujarat. Of these states, only Maharashtra’s relative contribution to national output of this industry has declined, whereas, reverse is true for all the other states. Notable among these are Haryana, UP* and Karnataka (refer Table 2.5e).

• The leading states (in descending order of importance) in the case of production of textiles industry during the period of study have been Tamil Nadu, Maharashtra, Gujarat, Punjab and Rajasthan. In 1980- 81, the leading states were Maharashtra, Gujarat, West Bengal, Tamil Nadu and Punjab. By 2003-04, Maharashtra lost its first position to Tamil Nadu and West Bengal did not remain one of the five topmost states. Gujarat and Punjab retained their second and fifth positions respectively, whereas, Rajasthan climbed to the fourth position.

• Two states which have performed poorly in terms of manufacturing production in all industries are Bihar* and West Bengal. Both these states slipped down by 5 notches in 2003-04 as compared with their ranking in 1980-81. Two states which performed well consistently in all industries are Haryana and UP*. The ascent of Haryana is notable. It has moved from the rank 12 to the rank 7 as regards overall manufacturing output. Though Maharashtra has retained its top position, this is mainly due to its significantly larger production compared to other states in 1980-81 (refer Annexure 2.1).

• Maharashtra, West Bengal, Tamil Nadu, Gujarat UP* and Andhra Pradesh were the topmost states in terms of employment generation in 1980-81. By 2003-04, West Bengal did not occupy its place in one of the five topmost states. Andhra Pradesh caught up as the third topmost employment generating states. Maharashtra lost its first rank to Tamil Nadu. Gujarat and UP* retained their fourth and fifth positions, respectively.

• The fall in positions of Bihar* and West Bengal in terms of employment generation in manufacturing sector has been significant and it is true for all industries. As against this, the rise of Haryana’s manufacturing sector as employment provider is laudable. In brief, Bihar* and West Bengal have performed poorly on both employment and output counts, whereas, opposite is true in the case of Haryana (refer Annexure 2.2).

In other words, Maharashtra, Tamil Nadu, Gujarat and UP* are the states which consistently appear in the first five topmost states in terms of both output and employment generation in the organised manufacturing sector. The deterioration of Bihar* and West Bengal and the ascent of Haryana are noticeable.

2.4: Contribution of Manufacturing Sector to India’s Exports

In Table 2.6, we provide the contribution of manufacturing sector to exports of the Indian economy. It can be seen from Table 2.6 that India’s exports have multiplied almost 4.2 times during 2008-09 over 2000-01. Manufactured exports as well as exports of selected industries have multiplied by 3.6 times during this time-span. Share of exports of manufacturing sector as also leather, chemical and textiles industries¹¹ in India’s exports have declined especially during the post-2003-04 period (which is mainly due to rise in exports of petroleum products) despite their impressive compound growth of about 15.3 pcpa in US $ terms. The exports of selected industries account for about half of India’s export earnings. The major change which we see as regards composition of exports of selected industries is in terms of decline in contribution of textiles and leather (traditional) industries and a rise in share of engineering goods. The compound rates of growth of exports (EXg) of traditional manufactured goods, such as leather and textiles were quite low (about 7 pcpa) in comparison to the engineering goods (24 pcpa) and chemical industry (16 pcpa).

2.5: Summary

• The average share of manufacturing sector in real GDP has marginally increased from about 13 per cent during 1970-75 to about 16.1 per cent in 2009-10, i.e, approximately by about 3.1 percentage points over a period of more than three decades. Thus, this increase has not matched the expectations from this sector.

• During 1970-75, India’s real GDP of manufacturing sector was more or less equally distributed between its registered and unregistered segments. Over the years, the growth of real income in the registered manufacturing has been higher than that of unregistered manufacturing sector, resulting in the average contribution of the latter to real GDP of manufacturing sector shrinking to almost half of that of the registered sector in 2007-08.

• The average contribution of unregistered manufacturing sector to real GDP of manufacturing has been consistently declining over the years. In the earlier half of the eighties, this share was approximately 45 per cent and it has fallen to about 33 per cent in 2008-09.

• The unorganised manufacturing sector employs (2005-06, the latest year for which the data are available for unorganised sector) almost 80 per cent of workforce manufacturing sector. In other words, we see the disproportion not only between income and employment generation across sectors, but also within the two segments of manufacturing sector, i.e., between its organised and unorganised segments. Moreover, we also observe that economically backward states, such as, Bihar* and West Bengal have much higher proportion of employment in unorganised manufacturing in comparison to that in the organised manufacturing.

• There are six major concerns regarding the growth of manufacturing sector. These pertain to growth of output, growth of employment, real wages and emoluments, resource intensity, inequalities within the manufacturing sector and regionally imbalanced growth of manufacturing sector.
  
  1. Despite the emphasis on manufacturing sector in India’s planning process, the contribution of this sector, is at best, modest and it needs to be increased so as to enable people to improve their standard of living.
  
  2. As regards employment in organised sector, it witnessed a declining trend almost up to 1986-87. After that employment trend was positive until mid-nineties. Thereafter, again we see a period of not only jobless but jobloss growth. Though this trend has been arrested in the present decade the employment contribution of this sector should increase.
  
  3. The discouraging side of the reform process is in terms of growth of real wages and real emoluments in the organised manufacturing sector, especially since the nineties. Growth of real wages (i.e., to skilled and unskilled shop-floor workers) has been shrinking over the years and it was in fact negative during the latter half of the nineties. As against it, we see the revival of growth rate of emoluments (i.e., compensation to both workers and the ‘other supporting staff’, including the managerial staff). To put it differently, the growth rate of compensation to supporting staff has increased in relation to the workers who are directly engaged in production process. This can have an adverse effect on the morale of the shop-floor workers, especially the skilled ones. This also explains the fact that most of the engineering graduates do not prefer to pursue their engineering skills on the shop-floor, instead prefer managerial positions. The reform process cannot neglect this issue, if productivity and innovations need to drive India’s growth process. It would also be interesting to examine the role of the labour market flexibility in employment generation. This would be possible if the ASI provides the data on employment of those workers and supporting staff who are permanent and contracturally employed.
  
  4. Growth process in the organised manufacturing sector has been resource intensive. Total non-primary inputs constitute almost 80 per cent of the value of output. The ratio of material inputs to total inputs has ranged between 58 to 65 per cent and the respective range for the fuel inputs is between 6-7 per cent. This has implications for both environmental degradation as well as sustainability of growth of manufacturing sector in the years to come. The proportion of value added to the gross output in the US is more than half and for Germany it is one third, as compared to India’s one fifth. It is almost 29 percent for China. This has implications for competitiveness, especially in a globalised world where the costs of material inputs are rising.
  
  5. The employment and output generation in organised and unorganised manufacturing sector exhibit a major imbalance. The unorganised sector accounts for almost 80 per cent employment and generates only about 33 per cent of output of the manufacturing sector. This causes sharp inequality between the per capita output (and also wages) between the organised and unorganised segments of India’s manufacturing sector.
  
  6. Maharashtra, Tamil Nadu and Gujarat, are the states which consistently appear in the first three topmost states in terms of both output and employment generation in the organised manufacturing sector. Deterioration of Bihar* and West Bengal, whereas, ascent of Haryana, Karnataka, Punjab and Rajasthan is noticeable.

• ‘Metal’ and ‘Machinery & Transport Equipment’ industries are the two major industries in India and each one of these accounted for almost one-fifth of GVA in the organised manufacturing sector during the period of the study. These industries are followed by the chemical industry which accounted for about 13 percent of GVA of the total organised manufacturing sector. However, most of the jobs are provided by Textiles and Food (including beverages & tobacco) industries. These industries together account for about 41 per cent of jobs in the organised manufacturing sector.

• During 2000-01 to 2008-09, the growth rate of exports of Metal and Engineering goods has been highest at about 24 pcpa as against the overall growth of exports of about 17 pcpa and that of manufactured products of about 15 pcpa. Growth rates of exports of Textiles and leather industries are quite low ranging between 6 to 7 pcpa.