Labor productivity in Indian manufacturing: A temporal and regional analysis

A rapid rate of growth in the manufacturing sector is vital to India’s future growth strategy. Attaining high labor productivity is central in this process. This paper examines both the temporal and regional trends in labor productivity in the Indian manufacturing sector. This paper utilizes the theory of index numbers and the Fisher index to decompose the changes in labor productivity at the aggregate manufacturing sector into two effects – the effect of variations in ‘pure’ labor productivity and the effect of variations in structural composition of the manufacturing sector. A comprehensive analysis, both over time and across states, is carried out to obtain meaningful policy implications. The study examines data from the Annual Survey of Industries, India for the years 1998-99 to 2007-08. The results reveal that labor productivity grew at an annual average rate of 8.4% in the manufacturing sector over the sample period. Most of this increase in productivity came from an increase in ‘pure’ productivity. The structure of the manufacturing sector improved very little in favor of the more productive industries. Comparison across states reveals that some of the large manufacturing states (such as Tamil Nadu, Karnataka, Uttar Pradesh, and Andhra Pradesh), lag in terms of labor productivity. For states that have very low labor productivity, it is the ‘pure’ labor productivity effect that dominates, rather than the industry structure effect. This implies that if India is to become competitive in the global market in terms of its manufacturing products and exports, it is necessary to focus on improving the productivity of labor in the manufacturing sector.  Further, since most of the labor productivity improvements as well as the share of manufacturing employment is concentrated in the capital intensive industries, government policy should be more focused on the growth of these industries. Similarly, education policies should be focused on preparing the labor for skills that would make them employable in the capital intensive industries.