Causes of low productivity and low technical efficiency in unincorporated manufacturing industry in India: Stochastic frontier analysis with firm level data

Manufacturing industry has a greater contribution to the economic growth of a country compared to other industries. Manufacturing is the driving force for growth, prosperity and sustainable development of the Indian Economy. Although unorganised manufacturing sector accounts for 80% of the total manufacturing sector, it generates only 33% of the total income generated from the total manufacturing sector in India. Therefore, it is the need of the hour to search the reasons behind low productivity of unorganised manufacturing industry in India and make necessary corrections. This study tries to measure the productivity and technical efficiency of the enterprises of the unorganised manufacturing industry in India and to find out significant reasons behind the low technical efficiency of these enterprises during the period from 2010–11 to 2015–16. In this study, we have used pooled cross-sectional unit level data of unincorporated manufacturing enterprises from 67^th and 73^rd round surveys of unincorporated non-agricultural enterprises (excluding construction) by the NSSO. We have used a semi-log stochastic frontier production function, in which gross value added is assumed to be the output and labour and capital are considered to be the inputs. To capture the effect of time on output, we have incorporated a time dummy variable in our production function. Technical inefficiency has been assumed to be a function of severe problems of insufficient demand and unavailable credit, government subsidy, location and sector of the enterprises. Our empirical results reveal that although both labour and capital had positive and significant effects on gross value added, contribution of capital on output was very small compared to that of labour on it. Our empirical result proves that problems of non-availability of credit and shrinkage of demand significantly reduced technical efficiency of the enterprises. We have also shown that government subsidies can reduce technical inefficiency significantly. Mean efficiency scores for all the groups were very small during the period of our study.