Capital Productivity in the Informal and Formal Manufacturing Sectors - A Disaggregated Study

Abstract

The levels of productivity are important parameters used to measure the contribution of a sector to the economy relative to the resource that it uses. It has often been accused that the productivity levels in the Informal Manufacturing Sector are very low. Hence, policy-makers are often tempted to ignore this sector, hoping that with time it will transform itself into 'formal' sector. However, that has not happened in India, and the informal sector has been an important component of the manufacturing sector. It is now accepted that it is here to stay. Moreover, it is found that the labour productivity, though low, is steadily increasing over time for all the segments of the informal sector. The only exceptions have been the urban DMEs and urban NDMEs, which suffered a decline in labour productivity during 1984-89, but recovered thereafter and in 1994 overtook the 1984 figures also. Barring a few exceptions, per enterprise productivity are also increasing over time. The most important aspect however, is that whereas the labour productivity levels are not satisfactory, the informal sector exhibits satisfactory levels of capital productivity, indicating efficient use of capital. This has greater significance in light of the capital scarce nature of our economy. In fact, it may be postulated that the informal manufacturing sector has greater efficiency in using capital resource than their formal counterparts. The present paper studies the validity of this hypothesis. The structure of the paper is as follows. The next section discusses the Data sources and the Methodology used. The subsequent sections deal with - A general overview of Productivity levels in the Informal manufacturing sector in India; Comparative analysis of capital productivity levels in the informal and formal manufacturing sectors, and the Conclusion.