Abstract
Despite witnessing a decade of rapid economic growth, an acceleration of growth in the organised manufacturing sector has eluded India. Using state-level data from the Annual Survey of Industries, we examine the factors constraining the growth of output and employment in this sector. We find that states with inflexible labour regulations witnessed slower growth in employment and output than states with flexible labour regulations. However, it would be incorrect to put the entire onus of the dismal performance of this sector on labour regulations as firms are responding to rigidities in the labour market by greater use of contract workers. Factors such as restrictive product market regulations and infrastructural bottlenecks have also adversely affected the performance of the manufacturing sector. Importantly, given that the days of industrial licensing are gone, much of the action for improving the business environment needs to be taken at the state level.
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