Organized Versus Unorganized Manufacturing Performance in India in the Post-Reform Period

Posted: 30 Jan 2010

See all articles by Vinish Kathuria

Vinish Kathuria

Indian Institute of Technology (IIT), School of Management, Bombay

Rajesh Raj

Centre for Multi-Disciplinary Development Research (CMDR)

Kunal Sen

University of Manchester

Date Written: January 30, 2010

Abstract

This paper analyses the productivity performance of the Indian manufacturing sector using unit level data, which is aggregated at four-digit industry level for the period 1994-95 to 2004-05 for 15 major states. The study focuses on both the organized and unorganized segments of the manufacturing sector. Both partial and total factor productivity (TFP) measures have been employed to trace the productivity performance of formal and informal manufacturing sector. TFP is estimated using Cobb-Douglas production functions at the four-digit industry level. The estimation is carried out by employing the Levinsohn-Petrin method, which uses intermediate inputs as the proxy to address the potential simultaneity bias in production function estimations.

Our analysis reveals that labour productivity has increased for the organized sector over time whereas both labour productivity and capital intensity growth have slowed down in the unorganized sector during the 2000-01 to 2004-05 period. The production function analysis shows that capital has played a more significant role in the production process in both the sectors. TFP growth accelerated in the organized manufacturing sector during 2001-05 over 1995-2001 while the TFP decline that started in the first period (1995-2001) continued unabated even in the second period (2001-2005) in the unorganized manufacturing sector. We also find that output growth in both the sectors is productivity driven and not input driven. The improvement in TFPG of organized manufacturing in the post-2000 period as compared to the second half the 1990s across most states in India and that output growth was mostly productivity driven are important positive features of manufacturing performance in the post-reform period. However, the declining total factor productivity on one hand and increasing capital intensity of the unorganized sector is a cause of worry and raises several important questions.

Keywords: Productivity, Organized Manufacturing, Unorganized Sector, Industrial Sector

JEL Classification: D24

Suggested Citation

Kathuria, Vinish and Raj, Rajesh and Sen, Kunal, Organized Versus Unorganized Manufacturing Performance in India in the Post-Reform Period (January 30, 2010). Available at SSRN: https://ssrn.com/abstract=1544689 or http://dx.doi.org/10.2139/ssrn.1544689

Vinish Kathuria

Indian Institute of Technology (IIT), School of Management, Bombay ( email )

IIT Bombay, Powai
400076
India

Rajesh Raj (Contact Author)

Centre for Multi-Disciplinary Development Research (CMDR) ( email )

Dr. B R Ambedkar Nagar
Lakamanahalli
Dharwad, 580004
India

Kunal Sen

University of Manchester ( email )

Oxford Road
Manchester, M13 9PL
United Kingdom

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