Growth & Productivity of the Unorganized Manufacturing Sector in India

Author(s): R. Mariappan
Source: Indian Journal of Industrial Relations, Vol. 47, No. 1 (July 2011), pp. 20-35
Published by: Shri Ram Centre for Industrial Relations and Human Resources
Stable URL: http://www.jstor.org/stable/23070551
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Growth & Productivity of the Unorganized
Manufacturing Sector in India

R. Mariappan

This study attempts to estimate the Introduction

economic returns to scale, mar
ginal productivities of labour and
capital inputs for two-digit level
industries in India's unorganised
manufacturing sector. The results
show that the elasticity of output
with respect to labour and capi The availability of a rich database gen
tal has increased and signifi
cantly contributed to the output
growth during the post-reform
period compared with pre-reform
period. The sum of elasticities of
labour and capital is greater than
unity in all types at industries in
2005/06 at the aggregate level.
The estimated coefficient of the
year dummy variable for 1989/90
is negative in the Cobb-Douglas,
Translog and CES production
functions. The coefficient esti
mates for year dummies reflect the
noticeable output differential at
aggregate and sub-sector levels
in 2005/06.
R. Mariappan is Assistant Professor of Economics,
Department of Commerce, M.GR College of Arts
and Science, Hosur, Tamil Nadu. E
mai I: :mari_mariappan@yahoo.com
The studies on the unorganised sec
tor or 'informal sector' have taken their
impetus from the seminal work of
Keith Hart on informal income oppor
tunities in urban Ghana (Hart 1973).
erated through surveys of NSSO and
the CSO has served as a vast canvas
for research work on this sector
(Chadha& Sahu 2006). The
unorganised sector provides liveli
to about 70-80 per cent of the
workforce in the developing economies
(Agenor 1996). In India, this sector
accounts for 93 per cent of the
workforce and 60 per cent of GDP
(Kabra 2003). The manufacturing fac
tory sector is designated as organised
or registered and the non-factory sec
tor is called the unregistered or
unorganised segment on the basis of
employment, size of plant, machinery
etc. Among the sub-sectors of the
unorganised sector like manufacturing,
trade & repair service, construction,
hotel & restaurant, transport, storage
& communication, finance, real estate,
health & social work, the share of en
terprises in manufacturing sector alone

The Indian Journal of Industrial Relations, Vol. 47, No. 1, July 2011 20

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 Growth & Productivity of the Unorganized Manufacturing Sector in India

comes to 32 per cent of enterprises and Sources of Data

provides employment for about 37 per
cent of the workforce in the Indian National Sample Survey Organisatio
economy (NSSO 1999/2000). The 62nd (NSSO)'s quinquennial enterprise sur
round of NSSO (2005/06) has reported provides information about the
that there were 17 million unorganised
unorganised manufacturing sector enter
manufacturing enterprises providing prises on things like employment, enter
prises, fixed capital, gross value added
jobs for about 36 million people in 2005/
06. During 2006-07, the manufacturing
per worker/enterprise and total inputs at
sector had a share of about 16 pertwo-digit
cent level enterprises viz., Own Ac
in the GDP at factor cost. count Manufacturing Enterprises
(OAMEs), Non-Directory Manufactur
Studies have compared the growthing Establishments (NDMEs) and Direc
rate of employment, enterprises and tory Manufacturing Establishments
productivities of labour and capital(DMEs)
be at the states and industry lev
els. We have excluded the data available
tween organised and unorganised sectors
for the year 1978-79 because of non
during the pre- and post-reform periods
using the NSSO and CSO data (Kundu comparability of information given for the
1993, Mitra 1994, Kundu & Lalitha 1998,
types of enterprises (OAMEs, NDMEs
Mitra 1998, Unni & Rani 2003, Mukheijee
and DMEs). This study is confined to the
data available from the NSSO of 40th
2004, Rani & Unni 2004, Chadha & Sahu
2006). There are a few studies (Goldar
round (1984/85), 45th round (1989/90),
& Mitra 1999, Unni et al. 2001) which
51st round (1994/95), 56lh round (2000/
have analysed the total and partial fac
01) and 62nd round (2005/06). However,
certain information like number of enter
tor productivities in the unorganised
prises, employment, fixed capital and
manufacturing sector during the 80s and
90s. There is hardly any study which gross
at value added are not available from
tempted to apply the production function
the reports of NSSO for DMEs for 1984/
as a tool to analyse the marginal 85 and 1989/90. For these years, the data
productivities of labour and capital andcollected by the Central Statistical
degree of economies of scale by enterOrganisation (CSO) is used.
prise types in the context of Indian
unorganised manufacturing sector. This Productivities of Labour, Capital
study estimates the returns to scale, elas&CapitaI Intensity
ticities and marginal productivities of
labour and capital inputs for two digit in The performance of partial produc
dustry groups at the aggregate and subtivity is assessed in response to various
sector levels, besides, analyzing theproductivity indicators like labour pro
growth rate of employment, enterprises, ductivity (Q/L), capital productivity (Q/
fixed capital, gross value added and parK), capital intensity (K/L), unit labour
tial productivities of labour and capitalcost (ULC) and wage over labour ratio
and capital intensity. (W/L). These ratios indicate the trend

The Indian Journal of Industrial Relations, Vol. 47, No. 1, July 2011 21

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 R. Mariappan

and growth of factor productivity and

Gross output/value added per em
are used as proxy to productivity and it
ployee measures the amount of
can also be considered as related to the
productivity
efficiency between output and inputs. generated by each
employee.
Porter (1990) has stressed that pro
ductivity is the prime determinant ofPartial
a Productivities at All India
Level
country's level of competitiveness,
standard of living and sustained growth
in the long run. The term 'labour pro At an aggregate level, average produ
ductivity' implies that the ratio of physi tivity of labour has increased from Rs.371
cal output achieved in a given period in 1984/85 to Rs. 15683 in 2005/06 (Tab
to the corresponding amount of labour 1). The productivity of capital has also
expended i.e., gross output/value added creased from Rs.0.388 in 1984/85 to
per employee measures the amount of Rs.0.536 in 2005/06. The capital intensity
productivity generated by each em has increased from Rs.9587 in 1984/85 to

ployee. This ratio reflects the improve Rs.29498 in 2005/06. The manufacturing
ments in the quality of labour, produc industries with relatively high capital inten
tion technologies, labour management sity will be the companies with more
relations, work attitudes and
management efficiency. Simi Table 1: Trends in Partial Productivities of Labour,
Capital & Capital Intensity
larly, capital productivity is
measured in terms of total out Type of Year Labour Capital Capital
Productivity Productivity Intensity
put produced per unit of capi
OAME 1984-85 2124 0.240 8848
tal and it indicates the degree 1989-90 3429 0.957 3582
of utilization of fixed capital 1994-95 6081 0.821 6223
and their efficiency with which 2000-01 9824 0.661 14862
capital is utilized. And, the 2005-06 11417 0.566 20166
NDME 1984-85 6005 0.532 11261
capital-labour ratio, which is 1989-90 2522 0.224 11282
popularly known as capital in 1994-95 15675 0.736 21295
tensity, is defined as the ratio 2000-01 26339 0.469 56143

of gross fixed capital per em 2005-06 26473 0.366 72377

DME 1984-85 62408 2.025 30805
ployee and this reflects the 1989-90 9989 1.510 6612
amount of fixed capital allo 1994-95 19159 0.821 23325
cated to employees at a time. 2000-01 29628 0.555 53378
Here, an estimation of 2005-06 23695 0.696 34020
All Types 1984-85 3713 0.388 9587
productivities of labour, capital 1989-90 4379 0.8433 5192
and capital intensity is very im 1994-95 9720 0.856 11353
portant for taking appropriate 2000-01 15750 0.567 27761
investment decision in maxi 2005-06 15683 0.536 29498

mizing output as well as effiSource: Calculated from NSSO (1984/85, 1989/90, 1994/95,
ciency of the factor inputs. 2000/01 and 2005/06) and CSO (1984/85 and 1989/90)

22
The Indian Journal of Industrial Relations, Vol. 47, No. 1, July 2011

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 Growth & Productivity of the Unorganized Manufacturing Sector in India

chances of embodied technical progress reform period, as well as Arunachal

(Ahluwalia 1991). More or less similar Pradesh, Delhi, Gujarat, Haryana, Jammu
trend is observed in the productivities of & Kashmir, Kerala, Maharashtra, Punjab
labour, capital and capital intensity in the and Puducherry registered higher level
unorganised manufacturing sector enter of capital intensity in the post-reform pe
prises at disaggregate levels (OAMEs, riod. All other states have recorded a low
NDMEs and DMEs). The trend rate of level of capital intensity. Here a higher
productivities of the labour, capital and capital-labour (K/L) ratio indicates that
capital intensity has significantly im there is high capital intensity, while a
proved both at aggregate and disaggre lower ratio refers to a lower level of tech
gate levels during the post-reform period nological inputs used and dependence on
compared with during the pre-reform labour intensive methods of production
period. in the unorganised manufacturing sector.
The overall the estimates of partial
Partial Productivities at State Level
productivities of labour, capital and capi
tal intensity have improved after the pre
economic reform period at aggregate and
The study has found that in 1989/90,
disaggregate levels.
1994/95, 2000/01-2005/06 the productiv
ity of labour has recorded the highest level
particularly in the states of Arunachal
The present study estimated returns
Pradesh, Delhi, Haryana, Himachalto scale, elasticities and marginal
Pradesh, Maharashtra and Punjab in the
productivities of labour and capital through
a simple
pre-reform and post-reform periods, folCobb-Douglas Production Func
tion pro
lowed by the lowest status of labour (CDPF) in the unorganised manufac
turing sector using the NSSO and CSO
ductivity posted by Andhra Pradesh,
data for the years 1984/85, 1989/90,1994/
Orissa and West Bengal in the pre-reform
95,2000/01
period, as well as Andhra Pradesh, Bihar, and 2005/06. Alternative for
mulations
Madhya Pradesh, Orissa and West Ben viz. Translog and CES have
gal in the post-reform period in been also applied pooling the five cross
compari
section
son with other states. Only four data.
states We also estimated the value
Andhra Pradesh, Assam, Maharashtra of substitution between labour and capital
and West Bengal top the list in the matter test the validity of hypothesis of uni
to
of capital productivity during the pre-retary elasticity of substitution.
form period and only three states namely
Arunachal Pradesh, Assam and Orissa Cobb-Douglas Production Function
registered increase in the capital produc (CDPF)
tivity during the post-reform period.
The Cobb-Douglas Production func
Capital intensity is higher for thetion is expressed without time-dummy
states of Arunachal Pradesh, Delhi, variables as:
Gujarat, Haryana, Himachal Pradesh,
Maharashtra and Punjab during the preQ, = AL: K; e (1)

The Indian Journal of Industrial Relations, Vol. 47, No. I, July 2011 23

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 R. Mariappan

Table 2: OLS Estimates of C-D Production Function for UOM Sector, 1984-85.

Independent Dependent Variable: Natural log of gross value added

Variables State Industry
OAME NDME DME All OAME NDME DME All

Types Types

(1) (2) (3) (4) (5) (5) (7) (8)

Constant 0.417 1.308 -1.161 16.19 8.11 -3.860 11.038 .723

(0.79) (1.69) (-0.28) (6.788) (11.03) (-1.38) (5.07) (5.76)

Labour -0.015 0.038 0.077 -0.420 0.618 0.353 -0.193 -0.205

(-0.17) (0.278) (0.31) (-.578) (7.80) (1.03) (-0.09) i

OO -J

Capital 0.971 0.911 1.1080 .353 0.216 0.395 0.653 0.570

(22.15) (8.78) (8.62) (2.250) (3.39) (1.28) (9.92) (4.24)
o + p 0.956 0.949 1.185 -0.067 0.834 0.748 0.460 0.365
Adjusted R Square 0.986 0.957 0.826 .269 0.961 0.629 0.842 0.498

MPl
*
I
4 210* 15959* -3666* 1351 2316* -70184* -2021

mpk 0.327 0,467 7.591 0.228 0.046 0.209* 4.433 0.499

N 31 31 31 31 19 19 19 19

Note: Figures in parentheses are't' values

* Underlying coefficient not statistically significant at 10 per cent or above

The log transformation of the speci using wholesale price index. Similarly the
fication is: value of fixed capital is also converted
to constant prices. The state and indus
In Q, = lnA0+ a InL, + InK, + u (2) try levels data for the years 1989/90,
1994/95,2000/01 and 2005/06 have been
Where, subscript i refers to the ith pooled and the panel data has been used
industry. The dependent variable is gross to estimate production functions (Tables
value added in rupees. Number of per 7-9).
sons employed (L) and value of fixed
capital in rupees (K) are taken as inde The Cobb-Douglas production func
pendent variables, a and are the elas tion used with time-dummy variables is
ticities of output with respect to inputs specified as:
of labour and capital respectively, u is the at \r 51D 52D2i 3D?i u /"i\
disturbance term. The estimate of regres i-AL; K, e e e e (3)
sion coefficients of Cobb-Douglas pro
duction function at the aggregate and the Where, in equations (4), (5)
sub-sector levels for two digit industries dummy variables, D1 takes th
of unorganised sector are given in Tables if the year is 1989/90 and 0
2- 6, The output measured by gross value D2 takes value of 1 if the yea
added is converted to constant prices and 0 other wise, and D3 take

24
The Indian Journal of Industrial Relations, Vol. 47, No. 1, July 2011

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 Growth & Productivity of the Unorganized Manufacturing Sector in India

Table 3: OLS Estimates of C-D Production Function for UOM Sector, 1989-90

Independent Dependent Variable: Natural log of gross value added

Variable State Industry

OAME NDME DME All OAME NDME DME All

Types Types

(1) (2) (3) (4) (5) (5) (7) (8)

Constant 3.339 6.381 7.5617 .404 0 .965 5.243 14.88 3.148

(3.44) (5.38) (2.27) (3.67) (3.64) (4.88) (0.58) (2.35)

Labour 0.339 0.621 0.615 0.250 0.353 0.356 0.951 0.187
(4.14) (5.59) (3.38) (1.643) (3.66) (3.74) (1.33) (8.45)
Capital 0.633 0.340 0.233 0.522 0.599 0.700 -0.877 .751

(6.85) (2.93) (1.12) (2.986) (5.92) (6.73) (-0.63) (2.32)

u +P 0.972 0.961 0.848 0.772 0.952 1.056 1.074 0.938
MPL 1156 5912 5689 1668 1206 3474 16319* 4273
MPK 0.544 0.288 0.287* 0.253 3.830 0.349 0.869* 0.486

Adjusted R Square 0.986 0.983 0.632 .856 0.971 0.958 0.012 .927
N 32 32 32 32 22 22 22 22

Note: Figures in parentheses are't' values

* Underlying coefficient not statistically significant at 10 per cent or above

Table 4: OLS Estimates of C-D Production Function for UOM Sector, 1994-95

Independent Dependent Variable: Natural log of gross value added

Variable State Industry
OAME NDME DME All OAME NDME DME All

Types Types

(1) (2) (3) (4) (5) (5) (7) (8)

Constant 2.278 0.805 8.591 3.684 6.702 9.785 7.523 6.051

(2.75) (1.42) (17.3) (2.683) (4.22) (13.9) (4.37) (6.14)

Labour 0.401 0.204 0.815 0.293 0.671 0.971 0.756 0.432

(2.36) (2.06) (18.4) (1.622) (5.40) (13.2) (5.07) (6.54)

Capital 0.663 0.850 0.158 0.665 0.296 0.010 0.230 0.477

(5.87) (12.45) (6.75) (6.751) (2.16) (0.18) (1.72) (6.82)

a + 1.064 1.054 0.973 0.964 0.971 0.982 0.986 0.914

mpl 2315 4612 11879 3159 5561 15413 14739 22805

mpk 0.503 0.930 0.153 0.295 0.305 0.007* 0.063 0.415

Adjusted R Square0.945 0.980 0.959 0.852 0.959 0.972 0.906 0.963

N 32 32 32 32 22 22 22 22

Note: Figures in parentheses are't' values

* Underlying coefficient not statistically significant at 10 per cent or above

The Indian Journal of Industrial Relations, Vol. 47, No. 1. July 2011 25

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 R. Mariappan

Table 5: OLS Estimates of C-D Production Function for UOM Sector, 2000-01

Independent Dependent Variable: Natural log of gross value added

Variable State Industry
OAME NDME DME All OAME NDME DME All

Types Types

(1) (2) (3) (4) (5) (5) (7) (8)

Constant 6.360 8.169 6.918 9.968 0.189 6.975 3.693 o OO

(7.88) (9.56) (8.05) (5.72) (0.65) (1.59) (4.28) (4.47)

Labour 0.599 0.653 0.567 0.741 0.238 0.652 0.402 0.404

(8.80) (8.38) (7.75) (5.45) (4.78) (11.94) (6.39) (6.97)

Capital 0.363 0.269 0.073 0.361 0.831 0.324 0.604 0.578

(5.05) (3.54) (5.15) (1.94) (2.41) (5.90) (8.97) (8.52)

a + [3 0.962 0.922 0.640 0.774 1.068 0.976 1.006 0.982

MPl 7104 17853 18190 10895 2806 17826 12897 7355

mpk 0.239 0.126 0.040 0.018 5.454 0.152 0.335 0.327

Adjusted R Square 0.990 0.987 0.985 0.934 0.996 0.994 0.991 0.991

N 35 35 35 35 24 24 24 24

Note: Figures in parentheses are't' values

Table 6: OLS Estimates of C-D Production Function for UOM Sector, 2005-06

Independent Dependent Variable: Natural log of gross value added

Variable State Industry
OAME NDME DME All OAME NDME DME All

Types Types

(1) (2) (3) (4) (5) (5) (7) (8)

Constant 7.935 * 7.483 8.305 6.419 7.476 6.995 6.001 8.744

(6.18) (7.17) (6.39) (5.98) (5.11) (4.40) (2.18) (4.19)

Labour 0.625 0.541 0.433 0.436 0.640 0.523 0.444 0.895

(6.28) (5.65) (4.36) (5.34) (6.71) (4.54) (2.37) (14.0)

Capital 0.282 0.367 0.403 0.475 0.296 0.395 0.500 0.248

(2.68) (4.08) (3.89) (5.63) (2.64) (3.24) (2.46) (2.10)

a+P 0.907 0.908 0.836 0.911 0.936 0.918 0.944 1.143

mpl 245 385 189 196 7581 19112 24443 21510

mpk 0.361 0.255 0.337 0.465 0.174 0.190 0.375 0.152

Adjusted R Square 0.948 0.962 0.958 0.961 0.977 0.963 0.891 0.930
N 35 35 35 35 24 24 24 24

Note: Figures given in parentheses indicate't' values

26 The Indian Journal of Industrial Relations, Vol. 47, No. 1, July 2011

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 Growth & Productivity of the Unorganized Manufacturing Sector in India

Table 7: Estimation Results of C-D Specification for UOM Sector

Independent Dependent Variable: Natural log of gross value added

Variable State Industry

OAME NDME DME All OAME NDME DME All

Types Types

(1) (2) (3) (4) (5) (5) (7) (8)

Constant 5.192 9.782 6.055 4.638 0.951 6.136 0.618 4.364

(8.34) (4.77) (8.96) (7.06) (2.00) (8.22) (0.28) (4.26)
Labour 0.489 1.123 0.478 0.385 0.289 0.560 -0.070 0.322
(9.51) (5.21) (8.41) (7.63) (5.70) (9.78) (-0.43) (5.41)
Capital 0.466 -0.058 0.469 0.562 0.766 0.398 0.993 0.615
(8.47) (-0.32) (8.12) (10.38) (17.71) (6.90) (6.88) (8.70)
Dummy -0.427 -4.308 -0.669 -0.645 0.070 -0.612 -0.109 -0.311
(1989/90) (-2.95) (-6.11) (-3.68) (-4.14) (0.39) (-3.75) (-0.14) (-1.55)
Dummy -0.106 -0.237 -0.367 -0.060 0.362 0.081 0.935 -0.029

(1994/95) (-0.86) (-0.35) (-3.07) (-0.46) (2.25) (0.61) (0.13) (-0.19)

Dummy -0.072 -0.061 -0.415 -0.097 0.066 -0.072 -0.385 -0.218
(2000/01) (-0.61) (-0.10) (-3.73) (-0.79) (0.44) (0.60) (-0.57) (-1.54)
a +P 0.955 1.065 0.946 0.947 1.056 0.958 0.923 0.937
Adjusted R Square 0.965 0.581 0.961 0.960 0.971 0.940 0.556 0.910
N 133 133 120 133 92 92 92 92

Note: Dummy variable 2005/06 is reference category, 't'- statistics are in parentheses

Table 8: Estimation Results of Trans log Specification for UOM Sector

Independent Dependent Variable: Natural log of gross value added
Variable State Industry
OAME NDME DME All OAME NDME DME All
Types Types

(1) (2) (3) (4) (5) (5) (7) (8)

Constant 8.863 8.286 0.362 3.330 0.057 1.202 0.457 1.529

(3.31) (2.32) (0.07) (4.36) (0.13) (0.26) (0.18) (0.24)
Labour 0.678 1.265 0.157 0.317 -0.113 0.836 -1.684 -0.342
(2.75) (1.27) (0.22) (1.34) (-0.51) (3.09) (-1.86) (-0.98)
Capital 0.035 -0.214 1.210 1.723 1.264 0.766 1.912 1.137
(0.10) (-0.55) (1.50) (5.62) (9.67) (1.48) (3.50) (1.72)
(Labour)2 -0.031 -0.016 -0.010 0.006 -0.002 -0.029 0.021 -0.025
(-3.07) (-0.29) (-0.33) (0.77) (-0.26) (-2.47) (0.57) (-2.02)
(Capital)2 0.002 -0.020 -0.025 -0.035 -0.026 -0.016 -0.042 -0.019
(0.14) (-1.07) (-0.74) (-4.74) (-5.79) (-1.21) (-1.81) (-1.31)
In L*ln K 0.028 -0.023 0.027 0.026 0.031 0.021 0.063 0.028
(4.57) (-0.62) (0.437) (4.63) (4.38) (3.74) (0.42) (4.29)
Dummy( 1989/90) -0.467 -4.789 -0.726 -0.741 -0.283 -0.743 -0.445 -0.263
(-3.44) (-5.83) (-3.36) (-5.27) (-1.61) (-4.60) (-0.42) (-0.40)
Dummy( 1994/95) -0.092 -0.407 -0.373 -0.115 0.249 -0.061 0.022 -0.042
(-0.80) (-0.58) (-3.11) (-0.98) (1.76) (-0.48) (0.03) (-0.29)
Dummy(2000/01) -0.060 -0.059 -0.415 -0.904 0.128 -0.074 -0.475 -0.256
(-0.56) (-0.09) (-3.72) (-0.81) (1.01) (-0.68) (-0.70) (-2.04)
Adjusted R Square 0.971 0.576 0.961 0.968 0.980 0.950 0.560 0.930
N 133 133 120 133 92 92 92 92

Note: Dummy variable 2005/06 is reference category, 't'- statistics are in parentheses

The Indian Journal of Industrial Relations, Vol. 47, No. 1, July 2011 27

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 R. Mariappan

Table 9: Estimation Results of CES Specification for UOM Sector in India

Independent Dependent Variable: Natural log of gross value added
Variable State Industry
OAME NDME DME All OAME NDME DME All

Types Types

(1) (2) (3) (4) (5) (5) (7) (8)

Constant 5.365 10.666 4.528 4.605 0.949 5.768 0.371 4.532

(8.45) (5.08) (1.31) (6.37) (1.99) (7.62) (0.15) (4.27)

Labour 0.594 0.697 0.174 0.375 0.240 0.391 -0.199 0.400

(6.13) (2.12) (0.26) (3.40) (2.01) (3.81) (0.37) (2.99)

Capital 0.365 0.356 0.773 0.573 0.810 0.573 1.097 0.541

(3.80) (1.18) (1.14) (5.15) (7.71) (5.47) (2.52) (3.99)

(Lnk-lnL)2 0.008 -0.046 -0.014 -0.007 -0.004 -0.013 -0.005 0.005
(1.28) (-1.70) (-0.45) (-0.11) (-0.46) I
VO oo
I
o k> (0.65)
Dummy( 1989/90) -0.364 -5.111 -0.625 -0.649 0.033 -0.797 -0.042 -0.265
(-2.38) (-6.06) (-3.02) (-4.03) (0.17) (-4.29) (-1.25)
Dummy( 1994/95) -0.087 -0.553 -0.365 -0.612 0.343 -0.018 0.093 -0.011
(-0.70) (-0.79) . (3.05) (-0.46) (2.04) (-0.13) (0.13) (-0.07)
Dummy(2000/01) -0.065 -0.093 -0.416 -0.096 0.064 -0.076 -0.390 -0.208
(-0.55) (-0.15) (-3.73) (-0.78) (0.42) (-0.65) /-N
1
P Ltt OO (-1.45)
a+ P 0.959 1.053 0.946 0.947 1.050 0.963 0.898 0.941
a 1.076 0.717 0.826 0.993 0.959 0.896 1.043 1.047
Adjusted R 0.966
Square 0.587 0.961 0.959 0.971 0.942 0.551 0.909
N 133 133 120 133 92 92 92 92

Note: Dummy variable 2005/06 is the reference category. Figures in parentheses are t value

if the year is 2000/01 and 0 otherwise and cal change as direct interaction between
u is the disturbance term. Taking natural inputs and time. The Translog production
logarithms the equation to be estimated is function (Christensen et al. 1973) can be
written as:

In Q; = In A+ a lnL, + InK; + 8,0,;

In Q, = In (3 + , InLj + 2 InK, + ,
+ 82D2,+ 8,D3i+ u i = 1, 2...N (4)
(InLj) + 4 (InK, Y+ 5(lnL,*lnK,)

Translog Production Function

+ 5,Dli + 8Ai+6Ai+u (5)
(TPF)
Constant Elasticity of Substitution
The Cobb-Douglas production func
(CES)
tion is restrictive in the sense that it is
homogenous of degree 1 and the elastic Arrow, Chenery, Mmhas and Solow
(1961) suggested a flexible functional
ity of substitution is one (unity). To over
come these restrictions, we use Translog
form which overcomes the assumption
and CES production functions. Translog the unit elasticity of substitution of
of
production function considers technologi
Cobb-Douglas production function. This

28 The Indian Journal of Industrial Relations, Vol. 47, No. 1, July 2011

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 Growth & Productivity of the Unorganized Manufacturing Sector in India
function is characterized by a constant
elasticity of substitution (CES) between
two factors-labour and capital. Next we
try to relax the assumption of unitary elas
ticity of substation and specify a CES pro
duction function of the following type:
Q, = A[Kjp + (l-5)L,"p]x/p (6)
where, Q is gross-value added, A is
efficiency parameter, L and K are inputs
respectively, p is substitution parameter
between labour and capital inputs, is
distribution parameter and X is scale pa
rameter. The log transformation of the
specification is as stated below:
InQ, = InA- (A,/p) In
[5K, P + (1 -5) L, p] (7)
Based on Kmenta (1967), a second
order linear approximation of the produc
tion function including dummy variables
for years, the CES can be written as:
InQ, = lnA+X 5 InK, + >.(1-5)
InL, - (1/2) p , 8 (1- 5) [lnK-lnL];
+ 8|D + 52D2i+ 53D3j+u (8)
(or) lnQ. = ao + ai lnKi + a2 InL,
+ a, [In K-ln L],2 + 5tD
+ 52D,,+ 5jD3i+ Li
Where a0 = InA, a, = x 5, a2 = X (1
5) and a3 = - (1/2) p \ (l-g). If the
estimated value of a3 in equation (9) is
not different from zero, the production re
lation would imply a Cobb-Douglas pro
duction function. In CES production func
tion, the elasticity of substitution (cr) is
equal to 1 /'(!+ p). If p = 0, the elasticity
The Indian Journal of Industrial Relations, Vol. 47, No. I, July 2011
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of substitution is equal to unity which
means the production function is the same
as Cobb-Douglas production function. Re
turns to scale is equal to \ in the CES
specification and there is increasing re
turns to scale if X > 1, decreasing returns
to scale if (X, < 1) and constant returns to
scale if X, = 1. Now when comparing
equation (9) with (4) we see that the CES
equation is simply the C-D equation plus
a3 "correction term" involving [In K-ln L].2
an additional variable. The coefficient of
this correction term include p and a test
of this coefficient for significant differ
ence from zero is a test for hypothesis p
= 0, i.e., the hypothesis that the CDPF can
be rejected.
Empirical Results
The OLS parameter estimates of
CDPF for all types at state level and in
dustry level (1984/85) are reported in col
umns 4 and 8 of Table 2. The elasticity
of output with respect to capital has posi
tive effect on gross value added and sta
tistically significant at 5 per cent level
both at state and industry levels. The re
sults suggest that one percent increase
in input of capital increase the gross value
added by 0.35 and 0.57 percent respec
tively at state level and industry level in
(9)
1984/85, whereas the elasticity of labour
was found to be not significant with nega
tive sign in 1984/85. The elasticities of
gross value added with respect to capi
tal and labour were high for all types in
2000/01 and 2005/06 as compared with
1984/85. The high elasticities with refer
ence to capital and labour indicate that
higher productivity can be obtained by in
creasing inputs.
29
 R. Mariappan

Returns to Scale

The manufacturing enterprises of

An estimation 01 returns to scale
the unorganised sector have utilized
the resources more efficiently duranswer many questions on factor
can
substitution (technology of produc
ing the post-reform period (1994/95
2005/06) than during the pre-reformnature of productivity change,
tion),
period (1984/85-1989/90). operation of the business etc. It is also
an important device to determine the
Moreover, the CDPF shows that the impact of production inputs on the out
Elasticities of output with respect to labourput. The degree of returns to scale
and capital have positive effect on the can be estimated from the CDPF pro
gross value added and are statistically sig duction function by taking the summa
nificant from zero in all types in 1989/90, tion of elasticities of labour (a) and
1994/94,2000/01 and 2005/06. However, capital () inputs used in production.
as shown in Tables 4, 5 and 6, the elastici The sum of a+ equal to one implies
ties of labour and capital improved in 1994/constant returns to scale, one implies
95, 2000/01 and 2005/06 in comparisonincreasing returns to scale and less
than one decreasing returns to scale.
with 1984'85. Based on the results of the
CDPF, we conclude that the manufactur 6 shows that the sum of the two
Table
elasticities (labour and capital) was
ing enterprises of the unorganised sector
have utilized the resources more effi found to be greater than unity in all
ciently during the post-reform period types at industry level in 2005/06. At
(1994/95-2005/06) than during the pre-resub-sector level, the sum of the elas
form period (1984/85-1989/90). ticities of labour and capital was found
to be greater than unity, particularly,
The results of CDPF show that the in the case of DMEs at state level in
OAMEs, NDMEs and DMEs of 1984/85, NDMEs and DMEs at indus
try levelposi
elalsticities of labour and capital have in 1989/90, OAMEs and
NDMEs
tive effect on the gross value added and at state level in 1994/95,
are statistically significant and OAMEs and DMEs at industry level
different
from zero during the pre-reform in 2000/01.
and theIn the remaining enter
post-reform periods (Tables 2 - 7), prises the returns to scale are found
whereas the elasticity of labour is found to be less than unity which indicates
to be not significant with unexpected negathat these enterprises employ the fac
tive sign, particularly in the case of tors (capital and labour) beyond the
OAMEs at state level and DMEs at in optimum scale of production. The
findings
dustry level in 1984/85. Similarly, the esti of the study indicate that the
rateto
mated elasticity of capital is found of be
return to scale has declined in
some
insignificant with negative sign in the type of manufacturing enter
case
prises
of DMEs at industry level in 1989/90. due to the negative effect and
This
insignificance
implies that an increase in capital input of inputs used in the
causes a decline in its output. production process.

30 The Indian Journal oj Industrial Relations, Vol. 47, No. 1, July 2011

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 Growth & Productivity of the Unorganized Manufacturing Sector in India

the state and the industry levels during

The findings of the study indicate the pre-and post-reform periods. The
that the rate of return to scale has marginal productivity of labour has shown
declined in some type of manufaca negative value at the aggregate level,
turing enterprises due to the nega
as well as at the sub-sector level in
tive effect and insignificance of in at state level and DMEs at in
OAMEs
puts used in the production pro dustry level in 1984/85, representing ex
cess. cessive use of the labour input.

Marginal Productivities of Cross

Pooling Labour
Section Data
& Capital
The estimated regression coelticients
The CDPF function is used for com of the Cobb-Douglas, Translog and CES
puting marginal productivities of labourproduction functions using state and in
and capital for each type of enterprise dustry
in levels data for the unorganised
the unorganised manufacturing sector manufacturing sector at aggregate and
which are estimated by differentiating sub-groups levels are given in Tables 7
partially with respect to labour and capi9. The results of Cobb-Douglas (given in
tal from equation (2). Differences incolumns
es 4 and 8) show that the elastici
timated elasticities of labour and capital
ties of output with respect to labour and
inputs across type of enterprises reflectcapital are positive and these coefficients
differences in production technology. Theare statistically significant at 5 per cent
marginal productivity of labour is a negaat state and industry levels. The results
tive value in all types (at the state level
suggest that one percent increase in in
and industry level) in 1984/85, indicating
put of labour would increase the output
excessive use of the human input. On the by 0.38 and 0.32 percent, respectively at
other hand, the variation of marginal pro
state level and industry levelss. Similarly,
ductivity with respect to capital is not
the coefficient of capital has a positive
similar at sub-sector level and it has also effect on gross value added. The results
shown a decreasing trend for all types indicate that a one per cent increase in
the value of fixed capital increases the
(both at the state level and industry level)
during the post-reform period in compari gross value added by 0.56 and 0.61 per
son with the pre-reform period. The posicent respectively. The elasticity of capi
tive values of marginal productivities intal is found to be higher than that of
dicate that the manufacturing enterprises
labour. However the output elasticity of
have experienced a substantial growth oflabour is higher than that of capital at the
gross value added due to increased usesub-sector level (OAMEs, NDMEs and
of inputs (labour and capital) during theDMEs) at state level, which implies that
specified periods. It would be evident that
the gross value added is relatively more
the marginal productivity of labour is
responsive to labour employed in the
higher in the case of NDMEs and DMEs unorganised manufacturing sector. The
as compared with the OAMEs both atdummy variables for years are included

The Indian Journal of Industrial Relations, Vol. 47, No. 1, July 2011 31

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 R. Mariappan

as explanatory variables in all the speci Table 9. The results are similar but not
fications to control for the effect of time identical to those obtained using the
(year). In all regressions, 2005/06 is the Translog production function. This table
reference category. This result suggests shows a comparative picture of the elas
that the unorganised manufacturing en ticities of substitution between labour
terprises have produced significantly less and capital to test the validity of the
gross value added during the pre-reform hypothesis of unitary elasticity of sub
period (1989/90) compared with the post stitution (a) for state and industry level
reform period (2005/06). analysis. The estimated coefficients of
output (gross value added) with respect
to labour and capital are positive and sta
This result suggests that the
tistically significant at 5 per cent level
unorganised manufacturing enter
both state and industry levels respec
prises have produced significantly
less gross value added during the tively. But the coefficients of "a3" are
not significantly different from zero for
pre-reform period (1989/90) com
aggregate and sub-sector levels except
pared with the post reform period
in the case of NDMEs implying a Cobb
(2005/06).
Douglas production function. The esti
mated coefficient of dummy for the year
The estimated results of Translog pro 1989/90 is found to be negative and sta
duction function are reported in Table 8. tistically significant at 1 per cent level
The coefficient of capital is positive and at the aggregate and sub-sector levels.
statistically significant at 5 per cent level. The results of CES also suggest that the
This coefficient is also higher than that of unorganised manufacturing enterprises
labour at the aggregate level. The coeffi have produced less gross value added
cients of year dummy variables indicate during the pr-reform period in compari
that the gross valued added in unorganised son with the post-reform period. The
manufacturing sector is found to be lower value of elasticity of substitution (c)
in 1989/90 than that of gross valued added between labour and capital is found to
in 2005/06 as observed in Cobb-Douglas be greater than one at the aggregate
production function estimates. We ob level, as well as sub-sector levels par
serve that the regression coefficient of ticularly in the case of OAMEs at state
interaction term between inputs of labour level and DMEs at industry level.
and capital is positive and statistically sig
nificant at the 1 per cent level. At sub The coefficient of determination (ad
sector level, the coefficient of the same is justed R-square) provides the goodness
not statistically significant particularly in of fit for the regression line. As high as
the case of NDMEs at state level and 99 per cent of the variation in gross value
DMEs at industry level. added is explained by the independent
variables in all types both at the state lev
The estimated parameters of CES
els and industry levels in 1994/95,2000/
production function are presented01
inand 2005/06. This value is very high

32 The Indian Journal of Industrial Relations, Vol. 47, No. 1, July 2

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 Growth & Productivity of the Unorganized Manufacturing Sector in India

during 1994/95, 2000/01 and 2005/06 OAMEs and NDMEs at state level in
compared with 1984/85. 1994/95, OAMEs and DMEs at indus
try level in 2000/01. This indicates that
Conclusions these manufacturing enterprises oper
ated under the increasing returns to
scale.sec
The unorganised manufacturing At an aggregate level, the mar
tor plays an important role in economic
ginal productivity of labour has increased
development contributing to GDP,(at state level and industry level) from
export
earnings and creation of employment op
pre-reform period to post-reform period.
The estimated marginal productivity of
portunities in the Indian labour market.
This study has first examined thecapital
trendshas decreased at the aggregate
level and the sub-sector level from pre
and growth in manufacturing enterprises,
employment, fixed capital, gross value
reform period when compared with the
added, productivities of labour,post-reform
capital period.
and capital intensity. Secondly, we esti
mated the economic returns to scale,
The manufacturing industries in
marginal productivities of labour and capi
the unorganised sector have uti
tal have been estimated using produc
lized the resources efficiently.
tion functions at two digit industry groups
in the unorganised manufacturing sector
in India using NSSO and CSO dataBased
for on the CES production func
the period 1984/85 to 2005/06. tion, the elasticity of substitution (a) be
tween labour and capital is found to be
greater than one in all types at industry,
This indicates that these manufac
as well as sub-sector levels particularly
turing enterprises operated under
in the case of OAMEs at state level and
the increasing returns to scale.
DMEs at industry level. This indicates
that the manufacturing industries in the
The labour productivity and the unorganised
capi sector have utilized the re
tal intensity have shown increasing sources efficiently. However, the growth
trends during the post-reform period in rate of employment generation and val
comparison with pre-reform period in all ued added in unorganised manufactur
the selected Indian states. The produc ing sector could respond to certain in
tivity of capital has also increased dur dustrial, trade and credit polices after
ing the post-reform period. At an aggre 1995 (Unni and Rani 2003). The Cobb
gate level, the results of CDPF show Douglas production function results con
that the rate of return to scale is greater sistently show that the existence of in
than unity in all types at industry level. creasing returns to scale particularly in
At the sub-sector level, the rate of re the case of NDME at state level and
turn to scale is greater than one in DMEs OAME at industry level. Interestingly
at state level in 1984/85, NDMEs and we find that the Indian unorganise
DMEs at industry level in 1989/90, manufacturing sector at aggregate level

33
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 R. Mariappan

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Acknowledgements Kulshreshtha, A.C. & G. Singh (1999), "Gross

Domestic Product and Employment in the
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Kundu, A & N.Lalitha (1998), "Informal Manu
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