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Long-run Performance of the Organised Manufacturing Sector in India
The Indian manufacturing sector has not increased its share in output or employment along expected lines. The aggregate trends in this sector at the 3-digit level of the National Industrial Classification from 1983 to 2017 are investigated here. Using data from the Annual Survey of Industries obtained from theEPWRFITS, it identifies three sub-periods within the overall period: 1988–96, 1996–2006, and 2006–17. A shift-share decomposition is used to show that most of the decline in the labour to capital ratio can be explained by within-industry changes. Finally, industries are analysed with respect to their capacity to deliver job and wage growth.
The authors thank Arjun Jayadev, Deepankar Basu, the anonymous reviewer for comments, and Zico Dasgupta for help with EViews. Responsibility for errors lies with the authors.
The manufacturing sector, in particular the sub-sector consisting of relatively larger and profit-oriented firms, occupies a place of importance in development economics from the point of view of structural transformation (Lewis 1954). In recent decades, however, it has become clear that many developing countries are failing to increase the share of manufacturing in total value added or employment (Rodrik 2016). In India, for example, the workforce has been shifting from agriculture to the informal economy, mostly in construction and services, such as petty retail and domestic work (Basole et al 2018). Recent evidence also suggests that, since the 1990s, the manufacturing sector is no longer as important a driver of economic growth as it once was (Szirmai and Verspagen 2015). South Asia, in particular, as opposed to East and South-east Asia, seems to be in the service-led structural change category, with India leading the pack (Amjad et al 2015). On the other hand, there is also the view that no country has become high-income on a sustained basis without a substantial increase in manufacturing share of the gross domestic product (GDP) and employment. Hence, developing countries should not give up on manufacturing-led structural change yet; rather there is need for a more nuanced understanding of what works and what does not work, at the policy level (Haraguchi et al 2018).
Table 1 (p 36) shows the share of manufacturing in value added and employment in India since the early 1980s. As can be seen, the sector has failed to expand by either measure. However, analyses at the aggregate level hide substantial variation across different manufacturing industries. Further, if we make a distinction between relatively larger firms in the organised sector versus microenterprises in the unorganised sector, a more complex story emerges. Organised manufacturing employment as a share of total manufacturing employment declined from 25.5% in 1983 to 15.4% in 2004. But, since then has increased to 27.5%. Particularly since 2005, employment in the unorganised manufacturing sector has risen much more slowly compared to the organised sector (Thomas and Johny 2018).
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