Manufacturing growth & employment pattern in India since 1990s.

AuthorJain, Hansa


The economic reforms of 1991 have enabled the Indian economy to cross the barriers of Hindu rate of growth. The gradual dismantling of industrial licensing, removal of import licensing for nearly all manufactured and capital goods; tariff reduction and relaxation of rules for foreign investment were all focused to improve the industrial efficiency, productivity and competitiveness of manufacturing industries on the one hand, and on the other, its spillover effects were expected to increase employment opportunities for the skilled, semi-skilled and poor people. The manufacturing sector offers greater prospect for capital accumulation, technical change and intersectoral linkages (Vinish Kathuria, et al. 2010). Thus the dynamic outward oriented manufacturing sector was presumed as a panacea for problems of unemployment and poverty.

There is a large body of literature on productivity growth, its components and determinants in the manufacturing sector in India. Studies are also available on the relationship between growth of manufacturing sector and employment. Few of them were found to be optimistic (Gersbach, 2000; Nickell, 1999; Papola, 2005). They opined that changing market conditions and the attraction of large investments, particularly foreign direct investment (FDI) would prompt greater flexibility in employment and utilization of labor. Majority of the scholars have found adverse relationship between growth of manufacturing output and employment (Sharma & Abraham, 2005; Kannan & Reveendran, 2009). They found that manufacturing industries performed quite well in terms of output during the post reform period, yet this performance was not reflected in employment growth. Many scholars have analyzed this issue of jobless growth and arrived at various reasons for it which include but are not limited to, job security regulations, increased wages, increased labor productivity, increased capital intensity, labor market flexibility, casualization, weakening of trade union strength among others (Goldar, 2000; 2002; Nagraj, 2000; Kannan & Raveendran, 2009; Bhalotra, 1998; Nath, 2008; Ghose, 2005; Deshpande et al., 2004; Pachanan Das, 2007). Various studies have found inconsistency between the manufacturing output growth and employment (Pushpangadan & Shanta, 2008; Bhalotra, 1998; Nath, 2008). According to Rajshri Majumdar (2008), globalization process is leading to further squeezing of the labor market. Goldar (2011) has found some mixed effects. During the early years of reforms, 1995-96 to 2003-04, employment in the organized manufacturing sector had fallen at the rate of 1.5 percent per annum while during 2003-04 to 2008-09 it increased at a very high rate of growth of 7.5 percent per annum, thus invalidating the impression of jobless industrial growth. Sharma (2006) and Papola (2008) have attributed this increase in employment to the relaxed enforcement of labor laws leading to flexible practices at the ground level.

Industrial sector plays a dominant role in the development of the Indian economy. The industrial sector comprises all types of economic activities including mining, manufacturing, construction, electricity, gas and water supply. Among them, the manufacturing sector itself contributes 86 percent to the growth of the industrial sector (Economic Survey, 2011-12). The growth rate of manufacturing sector is 9.4 percent during 2011-12 and it is attracting about 79 percent of the foreign direct investment (FDI). It also contributes a major portion to the Indian exports (53%). But its contribution to employment is highly disappointing as it gives employment to only 17 percent of the work force. This might have an adverse effect on the aggregate demand. Also the services sector has grown at still higher rate in recent years, raising its share in the GDP much faster than the industrial sector. This high growth of services may not be sustainable without significant growth of the manufacturing sectors (Pachanan Das, 2007).

Manufacturing sector is an important sector as it interlinks all the sectors of the economy. Any policy regime in this sector, especially in terms of investment and technological up-gradation, results into adjustments and re-adjustments of both the industry and the workforce in the short and the long run. Thus the problem relating to the impact of the growth of manufacturing sector on pattern of employment needs serious attention.

Against this backdrop, the focus of this paper is to find how the manufacturing sector in India is affecting the quantity and quality of employment. The objectives of the study are as follows:

  1. To examine the growth pattern of the organized manufacturing sector in India since 1990s.

  2. To determine the changes in the employment pattern in the organized manufacturing industries.

  3. To determine the factors responsible for the inconsistent relationship between manufacturing output and employment in the organized sector.

Data & Methodology

This study is based on the data obtained from the Annual Survey of Industries (ASI) from 1990-91 to 2009-10 at 3-digit and 4-digit levels. ASI covers the industrial units registered under the Factories Act, 1948. The primary unit of enumeration in the ASI is a factory. The ASI records relevant figures on the basis of reporting units. As the number of non-reporting units varies randomly from year to year across states, we normalize the value of gross output and number of workers by the number of reporting factories. The wholesale price index for industrial products provided by the CSO is used in calculating real values of output from the nominal values. Industries were arranged as per the latest available industrial classification (NIC-2008) and made comparable through concordance. The estimates at the 2-digit level of industrial classification were then obtained by aggregating the relevant 3-digit and 4-digit level industries. All the monetary values were adjusted for 2004-05 prices by using the wholesale price indices relevant to specific industry group at 2-digit level.

The variables considered important to find the relationship between growth of manufacturing output and employment are as follows:

(a) Output: Gross value added (GVA) is used as the measure of output as in the empirical literature (Goldar, 1986; Ahluwalia, 1991; Balakrishna & Pushpangadan, 1994). Griliches and Ringsted (1971) argued that...

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