Productivity Growth and Levels - A comparison of Formal and Informal Manufacturing in India*

In this paper, a comparative analysis of growth in total factor productivity (TFP) in the formal and informal segments of Indian manufacturing industries is undertaken, along with an analysis of differences in the level of TFP between these two segments of Indian manufacturing. The period covered for the analysis of TFP growth is 1980-81 to 2011-12, which is broken into three-sub-periods, 1980-81 to 1993-94, 1994-95 to 2002-03 and 2003-04 to 2011-12, and the period covered for the analysis of TFP level differences is 2003-04 to 2011-12. The analysis of TFP growth reveals that the average growth rate in TFP in informal manufacturing during 1980-2011was significantly lower than that in formal manufacturing (0.4 percent per annum as against 4.2 percent per annum). Both formal and informal manufacturing experienced a fall in the rate of TFP growth during 1994-2002 as compared to 1980-1993, and then achieved a marked acceleration in TFP growth during 2003-11. The acceleration in TFP growth in aggregate formal manufacturing in India in the period since 2003 is contributed mainly by improved TFP growth performance of Petroleum refining industry (about 4 percentage points) with some additional contribution made by Chemicals and chemical products industry (about one percentage point). In the case of informal manufacturing, the acceleration in TFP growth after 2003 is mainly traceable to the improved TFP growth performance of Textiles and Leather Products, Wood and wood products, and Chemicals and chemical products. Comparison of the level of TFP between the formal and informal segments of Indian manufacturing brings out that it is substantially lower in informal manufacturing than formal manufacturing. Comparing TFP growth of the formal segment of Indian manufacturing during 20032011with that of Korean manufacturing in the same period, it is found that the performance of Indian manufacturing was significantly better. Also, an analysis of sources of output growth for this period reveals that in a majority of industries, growth of intermediate inputs was a more important source of output growth in Korean manufacturing than Indian manufacturing.