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

  • Kathuria, Vinish
  • Seethamma Natarajan, Rajesh Raj
  • Sen, Kunal

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.

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Paper provided by University Library of Munich, Germany in its series MPRA Paper with number 20317.

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Date of creation: 16 Jan 2010
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Handle: RePEc:pra:mprapa:20317
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  1. Mukherjee, Dipa, 2004. "Productivity in the Small Manufacturing Enterprises: Determinants and Policy Issues," MPRA Paper 4867, University Library of Munich, Germany.
  2. Zilibotti, Fabrizio & Redding, Stephen & Burgess, Robin & Aghion, Philippe, 2008. "The Unequal Effects of Liberalization: Evidence from Dismantling the License Raj in India," Scholarly Articles 4554127, Harvard University Department of Economics.
  3. Krishna, Pravin & Mitra, Devashish, 1998. "Trade liberalization, market discipline and productivity growth: new evidence from India," Journal of Development Economics, Elsevier, vol. 56(2), pages 447-462, August.
  4. MA Hossain & ND Karunaratne, 2004. "Trade Liberalisation and Technical Efficiency: Evidence from Bangladesh Manufacturing Industries," Journal of Development Studies, Taylor & Francis Journals, vol. 40(3), pages 87-114.
  5. Bulent Unel, 2003. "Productivity Trends in India's Manufacturing Sectors in the Last Two Decades," IMF Working Papers 03/22, International Monetary Fund.
  6. James Levinsohn & Amil Petrin, 2000. "Estimating Production Functions Using Inputs to Control for Unobservables," NBER Working Papers 7819, National Bureau of Economic Research, Inc.
  7. Kumar, Surender, 2004. "Decomposition of total factor productivity growth: A regional analysis of Indian industrial manufacturing growth," Working Papers 04/22, National Institute of Public Finance and Policy.
  8. Olley, G Steven & Pakes, Ariel, 1996. "The Dynamics of Productivity in the Telecommunications Equipment Industry," Econometrica, Econometric Society, vol. 64(6), pages 1263-97, November.
  9. Pattnayak, Sanja S. & Thangavelu, S.M., 2005. "Economic reform and productivity growth in Indian manufacturing industries: an interaction of technical change and scale economies," Economic Modelling, Elsevier, vol. 22(4), pages 601-615, July.
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