The implication is that the productivity growth of an industry is enhanced by the entry of new firms. In his seminal work, Jovanovic departs from this line of thinking and suggests an alternative approach. He postulates that heterogeneous firms enter the industry without knowing what their true productivity is.
Once they enter the market, they learn about the distribution of their own profitability, based on noisy information from realized profits. By continually updating such learning, the firm decides to expand, contract, or to exit. Hopenhayn developed a model to capture these market dynamics in long rum equilibrium of an industry composed of a large number of price-taking firms producing a homogeneous output. His model predicts that surviving members of the entering firms have a higher productivity than those members that exit.
Thus only high productivity entering firms remain in the industry whereas the less productive ones exit. Another important prediction of the model is that the productivity of any member of continuing firms at time t is greater than that of the member of entering firms. This is because as the continuing firms age, more selection takes place and surviving members concentrate a higher proportion of high productivity units. In both these models, establishments are basically passive, acting in response to market signals.
They find that both types of models generate similar results. Success is not guaranteed by investment in active learning. They conclude that new firms are either passive learners or active explorers. If they survive they grow and enter in larger classes. One of the main theoretical implications of these models is that new entrants will, on an average, have lower productivity and a higher probability of exit than the incumbents.
They survive if their productivity is higher than those who exit and if they survive their productivity grows further through the selection process.
The entry effects are therefore likely to be small. Aghion et al. While building on Aghion et al. If the incumbent is close to the technology frontier, it will innovate more to escape and survive entry.
This is more likely to happen in technologically laggard industries. But, if the incumbent is farther from the frontier, he cannot compete with the entrant and will have to exit. Thus, in technological advanced industries where the incumbent firms cannot survive entry by more productive firms and exit, entry will have only direct effects but in technologically laggard industries entry will induce indirect effects.
Thus, entry effects may be relatively smaller in laggard industries as compared with technologically advanced countries. Research Methodology Based on the extensive literature survey and applying the relevant analysis to current data and the past data, this study aims to analyse the behaviour of manufacturing industry since the reform period till the year It focuses on different factors which are responsible for low productivity and stagnation in manufacturing Industry.
Low productivity is explained in terms of output per capital, output per labour and capital per labour. This elaborately gives detail regarding the condition of manufacturing industry of India. And also explains how reforms in have remained unsustainable for its growth in productivity and efficiency. The research has placed more emphasis on technology. How the Indian manufacturing industries have lack behind due to age old use of technology.
The study involves the use of both qualitative and quantitative research methodology to understand containment in the process of manufacturing industry. The research was undertaken in three phases: First, existing literature was reviewed to investigate whether any similar studies have been conducted before and to determine the nature of views and thoughts advocated.
Second: it combines all the elements of different research to generally state the reasons behind stagnation in the manufacturing sector and critically examine the new theory that the economic growth can be achieved through service sector surpassing manufacturing industry, and the theory that new entrants are important agents of change. Third: it opens up further scope of study in determining how to increase contribution towards GDP. In the second phase productivity in terms of output per capita, output per labour and capital per labour is provided that explain how increase in production has been possible over the years.
In this phase it also states where India stands in terms of productivity while comparing with the productivity of other countries. The variables used in the methodology are value of output, capital invested and wages employed. With the use of Cobb-Douglas production function, returns to scale for the period from to , to and to is explained. Further, recommendations are also given that can be beneficial for the industry.
The main focus of the study is to put forward the real image of the industry in terms of efficiency gained over time since the post-reform period. Environment for Industrial Development pre and post After independence, India embarked on a strategy of state-led industrialization based on import substitution. An elaborate set of controls were devised to direct the process of industrialization to suit the path of development envisaged in the various 5-year Plans.
The main instrument of industrial controls was the industrial licensing policy, which regulated entry, exit and expansion of industrial units rather tightly.
Private sector participation was excluded from a number of sectors by reserving them only for the public sector companies. Maneuverability of private firms was regulated even in those sectors where their entry was allowed. They needed a license to open a new factory, change location, produce a new product or expand capacity by more than a specified margin.
Such licenses were given in accordance with the macro-economic plan targets. Over the years, the government added more tools to this basic instrument of industrial policy, further tightening the entry and movement of industrial units. Apart from this restrictions on foreign technology imports and high tariff and non-tariff barriers on imports were levied. While entry was tightly regulated, exit was discouraged at any cost. Closure of an industrial unit was considered to be a social loss due to loss of employment and, hence, this outcome was avoided wherever possible.
In order to facilitate operation of the sick industrial units, government owned banks and financial institutions were directed to provide them credit at subsidized interest rates.
In , through an amendment in the Licensing Act, the central government was empowered to take over industrial undertaking with special emphasis to sick units. In , a merger policy was announced which offered fiscal incentives to healthy industrial units to merge sick units with them.
Several concessions were also announced by the RBI from time to time to encourage banks to bail these units out. A series of piecemeal reforms were introduced with the objective of improving productivity in existing units. The process of reforms was accelerated in and marked a departure from the earlier development strategy. These reforms laid a strong emphasis on enabling markets and globalization.
Licensing was abolished for all industries except those that were related to defence or were potentially environment-damaging. The number of industries reserved for the public sector was cut down from 17 to 3. By the end of the s, most manufacturing units were allowed per cent FDI under automatic approval. Procedures for the procurement of technology from abroad were also simplified. Until the end of the eighties, prices of most infrastructure and basic intermediates were controlled by the government on a cost-plus basis, under the aegis of the administered price regime APR.
In the nineties, the APR was also abandoned. Further, trade barriers were considerably relaxed and non-tariff barriers were completely removed, intensifying import competition in the economy. Since , India has been initiating comprehensive reforms in pursuit of higher growth and development. The wide-ranging reforms have included a major shift from a policy of inward looking industrialization towards outward orientation in order to generate higher export growth and achieve higher rates of gross domestic product GDP and development.
The composition of the overall output of the Indian economy, in the period of to , points to the relatively large share of the non-agricultural sectors. Among the non-agricultural sectors, manufacturing accounts for 23 per cent; electricity, water supply and gas, mining and construction sub-sectors account for 9 per cent, and service sector, comprising all other sub-sectors, accounts for the remaining 43 per cent.
With GVA of Rs. The large size of the population and the base for industrialization that was set up in the s and s enabled growth of manufacturing in India in the subsequent two decades. However, the performance of the manufacturing sector in recent times, particularly in the post reform period has been controversial and has attracted the attention of several researchers.
The sustained growth of this sector has now been threatened primarily by the lack of competitiveness of the sector in a period where trade liberalization policies have been implemented.
One of the major determinants of international competitiveness of a country is its productivity in comparison with that of its competing countries and trading partners. Thus, it becomes imperative to examine the status of manufacturing productivity in India in the post-reform period. The average growth rate of manufacturing in the s has been lower than in the s.
Nevertheless, the study by Tendulkar and Goldar have argued that the trade reforms seem to have contributed to acceleration in employment growth in organised manufacturing in the post-reform period, mainly due to better access to inputs including capital through foreign direct investment and to the growth in export-oriented industries, which are more labour-intensive.
Thus, combining the larger employment with a lower growth in manufacturing between and than in eighties, one may infer that the manufacturing output growth has been input-driven from the mids. A National Manufacturing Survey conducted by Chandra and Sastry at the Indian Institute of Management in Ahmedabad shows that material cost comprises about 65 per cent of the total production cost, direct labour accounts for about 9 per cent and other costs including overheads account for the remaining 26 per cent between and The survey clearly indicates that efforts to improve the competitiveness of the manufacturing sector need to be targeted on reduction in material costs as well as overheads.
In other words, manufacturing firms in India appear to be operating inside their production frontier. The Manufacturing Sector Has Contributed Little to Income, Export and Employment Growth Production has been shifting away from agriculture, but mostly into services rather than manufacturing. Despite important product market reforms in the early s, such as trade liberalisation and abolition of industrial licensing, the share of manufacturing in GDP has remained stagnant over the past decades.
Economic growth in the last 15 years was led by services, leaving manufacturing sector behind. The manufacturing sector grew by 8. The sector has remained one of the engines of economic growth since the start of Industrial growth averaged 7.
It accelerated slightly to 7. However, since industrial growth has accelerated markedly on the back of recent strong GDP growth. This trajectory of manufacturing industry has elaborately explained in this research with the help of Cobb-Douglas Production Function. Efficiency and Growth in Manufacturing Industry Technology development is critical to a country's efforts in improving productivity, efficiency and competitiveness of its industrial sector.
Factor cost advantages are being replaced by technology related factors such as zero-defect product quality and international certification of firms' quality assurance systems e. Central to maintaining competitiveness is the ability of producers to respond quickly and effectively to the changing demands of the international market. Technological capabilities can be best described in terms of three levels: the basic level involves the ability to operate and maintain a new production plant based on imported technology, the intermediate level consists of the ability to duplicate and adapt the design for an imported plant and technique elsewhere in the country or abroad, while an advanced level involves a capability to undertake new designs and to develop new production systems and components.
Indian firms present a full spectrum of technological capabilities - while there are few firms close to the international frontier in terms of product design capability and process technology, technological capabilities of most players are extremely limited due to growing technological obsolescence, inferior quality, limited range and high costs.
This adversely affects the ability of the organizations to respond to the challenges, not only of increasing international competition from other low-wage countries like China, but also from trade liberalization within the context of WTO. Most Indian manufacturing firms appear to be stuck at the basic or intermediate level of technological capabilities. Though Indian manufacturing industry has mastered standard techniques it has remained dependent for highly expensive and complicated technologies.
As a result of which productivity level has remained almost constant if it is measured in terms of efficiency, even though it shows increased productivity in its trend. Total employment outside of agriculture rose by about 51 million between and , but only 6 million jobs were created in the manufacturing sector.
Moreover, most of them were informal labour. However, the rapid growth of the services sector much before the manufacturing industry attaining maturity is not a healthy sign. A knowledge-based economy cannot be sustained in the long run unless it is adequately supported by a growing manufacturing economy. Moreover, a service economy cannot continue to thrive on a long-term basis in a country where the working population is increasing, especially in a labour intensive country. Hence, to have more forward and backward linkages with agriculture and service sector, the manufacturing sector should be given more attention.
Without reform, agriculture will continue to suffer from endemic underemployment, low wages and monsoon dependency. This will result in continued urban migration, but without the development of an industrial sector this will lead to rising unemployment in the cities.
This pattern is unsustainable is growing. It is estimated that India needs to create million new jobs each year outside agriculture to stay at its current unemployment level of 7 percent. Manufacturing jobs are ideal for workers transitioning out of agriculture as service jobs require high level of education and professionalism.
The revival of manufacturing sector can create close to 2. With the removal of all quantitative restrictions on imports and the falling import tariffs under the WTO regime, it is all the more important for the Indian industry to improve its competitive edge. The sheer volume of international trade with over 70 per cent of the seven trillion dollar market being in processed manufacturing, strongly indicates the necessity of developing global competitiveness in this sector.
Thus, growth of manufacturing industry in India is critical to ensure healthy balance of income parity, employment generation and sustenance of growth. It is mainly because of increased use of inputs. Productivity, as everyone knows, is the ability to transform inputs into output. To allow measurement, this ability is often dressed as a ratio of output to inputs. In this fashion productivity seems so transparent that its deeper meaning is easily lost sight of. However, a sense of mystery unfolds when one wonders how the value of this ratio may be greater than one.
The production has increased due to increased use of capital and labour. It can be traced from the fifth and sixth column of given table. In the fifth column, productivity per capital is given. It has not shown much improvement in the productivity level. It has remained almost constant hovering around 1. The sixth column shows productivity per labour which is constantly increasing but at a slower rate. It has increased from It clearly shows that manufacturing industry in India is labour-intensive which requires combination of technological changes to improve productivity.
And the seventh column shows capital per labour which is increasing with the increase in time period. Productivity Analysis Using Cobb-Douglas Production Function Empirically, the dynamics of productivity growth are captured by productivity decomposition methodologies. A wide range of decomposition methods are offered in the literature to assess sources of industry productivity growth.
These methodologies decompose productivity growth by using two input factor productivity. This gives the result of economic scale of returns at specific time interval. The second time interval is the economic growth that picked up after inflow of Foreign Direct Investment, rising per capita income and reduced restrictions. The third time interval is policy initiatives by the government.
In the same way APL is ranging from 3. Here, it states that APL is constant over many years since the reform period. MPC has decreased between and , if compared with earlier period, then again increased but remained same as it was before MPL is ranging from MPL was large during the period between and as compared to negative digits during to Later, it has again increased, which shows good sign in terms of productivity.
It makes clear that how much capital and labour input is giving in return in terms of output. Sectoral Composition of Manufacturing Industry: Its productivity and Growth The growth of various manufacturing industries can be traced from chart 3 and chart 4 that show sectorial composition of manufacturing industries from till This is because of technological changes in these industries that have caused production level to increase at reduced input cost.
Automotive Industry: The Indian auto-components industry has experienced healthy growth over the last few years. Some of the factors attributable to this include: a buoyant end-user market, improved consumer sentiment and return of adequate liquidity in the financial system. A stable government framework, increased purchasing power, large domestic market, and an ever increasing development in infrastructure have made India a favourable destination for investment.
Automobile Industry: The Indian auto industry is one of the largest in the world. The industry accounts for 7. The Two Wheelers segment with 81 per cent market share is the leader of the Indian Automobile market owing to a growing middle class and a young population. Moreover, the growing interest of the companies in exploring the rural markets further aided the growth of the sector.
The overall Passenger Vehicle PV segment has 13 per cent market share. India is also a prominent auto exporter and has strong export growth expectations for the near future.
In April-March , overall automobile exports grew by 1. Pharmaceutical Industry: The Indian pharmaceuticals market is the third largest in terms of volume and thirteenth largest in terms of value, as per a report by Equity Master. India is the largest provider of generic drugs globally with the Indian generics accounting for 20 per cent of global exports in terms of volume. Of late, consolidation has become an important characteristic of the Indian pharmaceutical market as the industry is highly fragmented.
India enjoys an important position in the global pharmaceuticals sector. In initial years of reforms productivity increased steeply but in later period it remained quite stagnant. Low productivity was the main cause of less skilled labour. Some industries which emerged as exporting industries largely became capital intensive. As a consequence, TFP increased and gained advantage of low cost per unit.
But in many other industries such as textile industry displayed stagnant growth in later years of reform period. The government expenditure on manufacturing sector was also low as a result of which the potentiality remained unearthed. India was ranked low in terms of doing business though the ranking has improved in recent year. The situation is on the verge of improvement now as many positive reforms by the government have been introduced. This has created an atmosphere for growth and development of manufacturing industry.
But, now it is to see how these factors turn out to be beneficial for the economy. Problem Statement Though many researchers have traditionally and even in more advance way indulged in evaluating the Indian manufacturing industries, the concept of measuring productivity and efficiency are different.
Schumpeter , , Hopenhayn states that how the productivity increases with new entrants in the market, However this has not proved in case of India. Achieving higher growth rate by skipping development of manufacturing industries is possible for short period but in the long run the growth get affected. It is also important to review manufacturing industry with the time lag. Review of Literature The study of Bulent Unel states the pre and post reform period shows remarkable difference in factor productivity in manufacturing sector.
The comparisons indicate that the labour productivity and factor productivity increased by 24 per cent and 46 per cent respectively. Sean M.
Doughterty, Richard Herd, Thomas Chalaux , has added to the existing evidence on the productivity of Indian firms. They argued that production shifts first from agricultural to manufacturing and only at a later stage of development from manufacturing into services.
The paper also highlights on the issue of institutional breakdown. Goldar B. Comparison of level of TFP between formal and informal segments of Indian manufacturing revealed that the informal manufacturing enterprises are relatively less efficient.
The study also states that enterprises with small size of employment tend to have lower TFP as compared to large firms. The study of the Manpreet kaur and Ravi Kiran shows a comparative picture of pre liberalisation and liberalisation period depict a slower growth of manufacturing sector of India in the post reform era for aggregative as well as for disaggregative i.
Bhat emphasized on the backwardness of manufacturing sector in terms of less progressive technology, skill development, education, innovations etc. The Economic survey of India places emphasis on Indian manufacturing to a key policy objective of the new government, identifying this sector as the engine of long-run growth.
According to the study there are two gains to shifting resources from the traditional to the new sectors: first, a compositional gain, which is a gain in economy-wide productivity achieved by shifting the weight of the economy from low to high productivity sectors; second, a subsequent dynamic gain as these resources experience rapid productivity growth. The economic survey has advocated this phenomenon more explicitly.
Pulapre Balakrishnan and M. In the study of the evolution of the Indian manufacturing sector over close to three decades, the annual average rate of growth in the nineties is found to have risen almost across the board at the two-digit level of industry.
Nevertheless, the acceleration is not particularly impressive for what is often hailed as the most significant policy-regime shift since There is a hefty rise in investment, however, though without a corresponding increase in its efficiency. Chalapati Rao, Biswajit Dhar, K. Ranganathan Rahul N. Choudhury and Vipin Negi, the foreign investment study team , focused on the direction of FDI inflows in manufacturing sector in India.
Instead of focusing on FDI, the policy makers need to address the problems faced by the domestic enterprises. The implication is that the productivity growth of an industry is enhanced by the entry of new firms. In his seminal work, Jovanovic departs from this line of thinking and suggests an alternative approach.
He postulates that heterogeneous firms enter the industry without knowing what their true productivity is. Once they enter the market, they learn about the distribution of their own profitability, based on noisy information from realized profits. By continually updating such learning, the firm decides to expand, contract, or to exit.
Hopenhayn developed a model to capture these market dynamics in long rum equilibrium of an industry composed of a large number of price-taking firms producing a homogeneous output. His model predicts that surviving members of the entering firms have a higher productivity than those members that exit. Thus only high productivity entering firms remain in the industry whereas the less productive ones exit. Another important prediction of the model is that the productivity of any member of continuing firms at time t is greater than that of the member of entering firms.
This is because as the continuing firms age, more selection takes place and surviving members concentrate a higher proportion of high productivity units. In both these models, establishments are basically passive, acting in response to market signals. They find that both types of models generate similar results. Success is not guaranteed by investment in active learning. They conclude that new firms are either passive learners or active explorers. If they survive they grow and enter in larger classes.
One of the main theoretical implications of these models is that new entrants will, on an average, have lower productivity and a higher probability of exit than the incumbents. They survive if their productivity is higher than those who exit and if they survive their productivity grows further through the selection process. The entry effects are therefore likely to be small. Aghion et al. While building on Aghion et al. If the incumbent is close to the technology frontier, it will innovate more to escape and survive entry.
This is more likely to happen in technologically laggard industries. But, if the incumbent is farther from the frontier, he cannot compete with the entrant and will have to exit. Thus, in technological advanced industries where the incumbent firms cannot survive entry by more productive firms and exit, entry will have only direct effects but in technologically laggard industries entry will induce indirect effects.
Thus, entry effects may be relatively smaller in laggard industries as compared with technologically advanced countries. Research Methodology Based on the extensive literature survey and applying the relevant analysis to current data and the past data, this study aims to analyse the behaviour of manufacturing industry since the reform period till the year It focuses on different factors which are responsible for low productivity and stagnation in manufacturing Industry.
Low productivity is explained in terms of output per capital, output per labour and capital per labour. This elaborately gives detail regarding the condition of manufacturing industry of India. And also explains how reforms in have remained unsustainable for its growth in productivity and efficiency.
The research has placed more emphasis on technology. How the Indian manufacturing industries have lack behind due to age old use of technology.
The study involves the use of both qualitative and quantitative research methodology to understand containment in the process of manufacturing industry. The research was undertaken in three phases: First, existing literature was reviewed to investigate whether any similar studies have been conducted before and to determine the nature of views and thoughts advocated.
Second: it combines all the elements of different research to generally state the reasons behind stagnation in the manufacturing sector and critically examine the new theory that the economic growth can be achieved through service sector surpassing manufacturing industry, and the theory that new entrants are important agents of change.
Third: it opens up further scope of study in determining how to increase contribution towards GDP. In the second phase productivity in terms of output per capita, output per labour and capital per labour is provided that explain how increase in production has been possible over the years. In this phase it also states where India stands in terms of productivity while comparing with the productivity of other countries.
The variables used in the methodology are value of output, capital invested and wages employed. With the use of Cobb-Douglas production function, returns to scale for the period from to , to and to is explained. Further, recommendations are also given that can be beneficial for the industry. The main focus of the study is to put forward the real image of the industry in terms of efficiency gained over time since the post-reform period.
Environment for Industrial Development pre and post After independence, India embarked on a strategy of state-led industrialization based on import substitution. An elaborate set of controls were devised to direct the process of industrialization to suit the path of development envisaged in the various 5-year Plans. The main instrument of industrial controls was the industrial licensing policy, which regulated entry, exit and expansion of industrial units rather tightly.
Private sector participation was excluded from a number of sectors by reserving them only for the public sector companies. Maneuverability of private firms was regulated even in those sectors where their entry was allowed.
They needed a license to open a new factory, change location, produce a new product or expand capacity by more than a specified margin. Such licenses were given in accordance with the macro-economic plan targets.
Over the years, the government added more tools to this basic instrument of industrial policy, further tightening the entry and movement of industrial units. Apart from this restrictions on foreign technology imports and high tariff and non-tariff barriers on imports were levied. While entry was tightly regulated, exit was discouraged at any cost. Closure of an industrial unit was considered to be a social loss due to loss of employment and, hence, this outcome was avoided wherever possible.
In order to facilitate operation of the sick industrial units, government owned banks and financial institutions were directed to provide them credit at subsidized interest rates. In , through an amendment in the Licensing Act, the central government was empowered to take over industrial undertaking with special emphasis to sick units.
In , a merger policy was announced which offered fiscal incentives to healthy industrial units to merge sick units with them. Several concessions were also announced by the RBI from time to time to encourage banks to bail these units out. A series of piecemeal reforms were introduced with the objective of improving productivity in existing units. The process of reforms was accelerated in and marked a departure from the earlier development strategy.
These reforms laid a strong emphasis on enabling markets and globalization. Licensing was abolished for all industries except those that were related to defence or were potentially environment-damaging. The number of industries reserved for the public sector was cut down from 17 to 3. By the end of the s, most manufacturing units were allowed per cent FDI under automatic approval. Procedures for the procurement of technology from abroad were also simplified. Until the end of the eighties, prices of most infrastructure and basic intermediates were controlled by the government on a cost-plus basis, under the aegis of the administered price regime APR.
In the nineties, the APR was also abandoned. Further, trade barriers were considerably relaxed and non-tariff barriers were completely removed, intensifying import competition in the economy. Since , India has been initiating comprehensive reforms in pursuit of higher growth and development.
The wide-ranging reforms have included a major shift from a policy of inward looking industrialization towards outward orientation in order to generate higher export growth and achieve higher rates of gross domestic product GDP and development. The composition of the overall output of the Indian economy, in the period of to , points to the relatively large share of the non-agricultural sectors. Among the non-agricultural sectors, manufacturing accounts for 23 per cent; electricity, water supply and gas, mining and construction sub-sectors account for 9 per cent, and service sector, comprising all other sub-sectors, accounts for the remaining 43 per cent.
With GVA of Rs. The large size of the population and the base for industrialization that was set up in the s and s enabled growth of manufacturing in India in the subsequent two decades.
However, the performance of the manufacturing sector in recent times, particularly in the post reform period has been controversial and has attracted the attention of several researchers.
The sustained growth of this sector has now been threatened primarily by the lack of competitiveness of the sector in a period where trade liberalization policies have been implemented. One of the major determinants of international competitiveness of a country is its productivity in comparison with that of its competing countries and trading partners.
Thus, it becomes imperative to examine the status of manufacturing productivity in India in the post-reform period. The average growth rate of manufacturing in the s has been lower than in the s. Nevertheless, the study by Tendulkar and Goldar have argued that the trade reforms seem to have contributed to acceleration in employment growth in organised manufacturing in the post-reform period, mainly due to better access to inputs including capital through foreign direct investment and to the growth in export-oriented industries, which are more labour-intensive.
Thus, combining the larger employment with a lower growth in manufacturing between and than in eighties, one may infer that the manufacturing output growth has been input-driven from the mids. A National Manufacturing Survey conducted by Chandra and Sastry at the Indian Institute of Management in Ahmedabad shows that material cost comprises about 65 per cent of the total production cost, direct labour accounts for about 9 per cent and other costs including overheads account for the remaining 26 per cent between and The survey clearly indicates that efforts to improve the competitiveness of the manufacturing sector need to be targeted on reduction in material costs as well as overheads.
In other words, manufacturing firms in India appear to be operating inside their production frontier. The Manufacturing Sector Has Contributed Little to Income, Export and Employment Growth Production has been shifting away from agriculture, but mostly into services rather than manufacturing. Despite important product market reforms in the early s, such as trade liberalisation and abolition of industrial licensing, the share of manufacturing in GDP has remained stagnant over the past decades.
Economic growth in the last 15 years was led by services, leaving manufacturing sector behind. The manufacturing sector grew by 8. The sector has remained one of the engines of economic growth since the start of Industrial growth averaged 7. It accelerated slightly to 7.
However, since industrial growth has accelerated markedly on the back of recent strong GDP growth. This trajectory of manufacturing industry has elaborately explained in this research with the help of Cobb-Douglas Production Function. Efficiency and Growth in Manufacturing Industry Technology development is critical to a country's efforts in improving productivity, efficiency and competitiveness of its industrial sector. Factor cost advantages are being replaced by technology related factors such as zero-defect product quality and international certification of firms' quality assurance systems e.
Central to maintaining competitiveness is the ability of producers to respond quickly and effectively to the changing demands of the international market. Technological capabilities can be best described in terms of three levels: the basic level involves the ability to operate and maintain a new production plant based on imported technology, the intermediate level consists of the ability to duplicate and adapt the design for an imported plant and technique elsewhere in the country or abroad, while an advanced level involves a capability to undertake new designs and to develop new production systems and components.
Indian firms present a full spectrum of technological capabilities - while there are few firms close to the international frontier in terms of product design capability and process technology, technological capabilities of most players are extremely limited due to growing technological obsolescence, inferior quality, limited range and high costs. This adversely affects the ability of the organizations to respond to the challenges, not only of increasing international competition from other low-wage countries like China, but also from trade liberalization within the context of WTO.
Most Indian manufacturing firms appear to be stuck at the basic or intermediate level of technological capabilities. Though Indian manufacturing industry has mastered standard techniques it has remained dependent for highly expensive and complicated technologies.
As a result of which productivity level has remained almost constant if it is measured in terms of efficiency, even though it shows increased productivity in its trend. Total employment outside of agriculture rose by about 51 million between and , but only 6 million jobs were created in the manufacturing sector.
Moreover, most of them were informal labour. However, the rapid growth of the services sector much before the manufacturing industry attaining maturity is not a healthy sign. A knowledge-based economy cannot be sustained in the long run unless it is adequately supported by a growing manufacturing economy.
Moreover, a service economy cannot continue to thrive on a long-term basis in a country where the working population is increasing, especially in a labour intensive country.
Hence, to have more forward and backward linkages with agriculture and service sector, the manufacturing sector should be given more attention. Without reform, agriculture will continue to suffer from endemic underemployment, low wages and monsoon dependency. This will result in continued urban migration, but without the development of an industrial sector this will lead to rising unemployment in the cities.
This pattern is unsustainable is growing. It is estimated that India needs to create million new jobs each year outside agriculture to stay at its current unemployment level of 7 percent. Manufacturing jobs are ideal for workers transitioning out of agriculture as service jobs require high level of education and professionalism.
The revival of manufacturing sector can create close to 2. With the removal of all quantitative restrictions on imports and the falling import tariffs under the WTO regime, it is all the more important for the Indian industry to improve its competitive edge. The sheer volume of international trade with over 70 per cent of the seven trillion dollar market being in processed manufacturing, strongly indicates the necessity of developing global competitiveness in this sector.
Thus, growth of manufacturing industry in India is critical to ensure healthy balance of income parity, employment generation and sustenance of growth.
It is mainly because of increased use of inputs. Productivity, as everyone knows, is the ability to transform inputs into output. To allow measurement, this ability is often dressed as a ratio of output to inputs. In this fashion productivity seems so transparent that its deeper meaning is easily lost sight of. However, a sense of mystery unfolds when one wonders how the value of this ratio may be greater than one.
The production has increased due to increased use of capital and labour.
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