Time for a policy shift

Ever since E.F. Schumacher, a British economist, published in 1973 his book Small is Beautiful, implying that small units are better in terms of performance indicators and labour absorption, several studies have endorsed the same idea and argued in favour of promoting small units. Stretching the argument a little further, it may be emphasised that small units are the epicentres of pro-poor growth.

In the context of the manufacturing and agriculture sectors, the debate on small versus large dominated the intellectual space for several decades. Small units are usually thought to be efficient in terms of resource use and management, and technically more efficient. However, small units do not have access to several kinds of resources, particularly in relation to credit and marketing facilities, and are not able to reap the economies of scale. Thus, large units may reveal better performance indicators and may have an edge in market competition.

The unorganised manufacturing sector, which includes both household and non-household units, accounts for a large majority of total manufacturing employment in India and the units in this sector are by definition small in size. To ensure decent wages to the workers in this sector and to ensure pro-poor growth, the units in this sector have to be made economically viable. Enhancing the technological capabilities of such units and getting them integrated into national and regional value chains is obviously important to ensure their economic viability.

Organised versus unorganised units

One way of judging the economic viability of unorganised manufacturing units is to consider the performance index in terms of ‘technical efficiency’ — or the ability of an industrial unit to transform inputs into output judged against the best practice units in the same industry — relative to the organised sector units. The research on technical efficiency and total factor productivity (a concept akin to technical efficiency) of unorganised manufacturing industrial units in India undertaken by us and by other scholars tends to offer little evidence in favour of positive links between the organised and the unorganised sector units perceived in terms of inter-sectoral efficiency differences and associations between them. Within the unorganised sector, units seem to reveal similar characteristics in terms of performance indicators, while organised sector units are much better performers. More importantly, unorganised sector units are not able to benefit in the process of rapid economic growth. The demand side factor or agglomeration-specific factor does not impact on the performance of unorganised sector enterprises in a favourable way. On the other hand, organised sector units respond positively to a rise in income in the region where they are located, which possibly can be explained in terms of quality differences in the products manufactured by the organised and unorganised sectors.

With a rise in income, demand for products shifts away from the unorganised to the organised sector. Though the process of ancillarisation is expected to benefit unorganised sector units indirectly by creating greater opportunities through inter-sectoral linkages, the increasing role of labour intermediaries and payment of wages on piece rate basis do not seem to be facilitating the process of positive spillover. The level of infrastructure also does not exert a positive impact on the performance of the unorganised sector, while the efficiency of the organised sector improves with a rise in the availability of infrastructure. On the whole, unorganised sector enterprises exist to provide means of survival only, which is especially true for household units. Even when opportunities exist to make them dynamic with enhanced participation in the growth process, several mechanisms appear to be counterproductive.

Policy implications are to be perceived in terms of product quality improvement within the unorganised sector so that demand for the products of the unorganised sector can expand. Second, steps need to be initiated for improving their accessibility to infrastructure provisions. There are many unorganised sector units, particularly ones that are operated by households, which are located in remote rural areas.

Unorganised manufacturing units in a sense cater only to local markets and are not able to expand their market size in a significant way. The lack of favourable impact of road length on unorganised sector units that we found in our research needs to be interpreted as the inadequacy in the availability of infrastructure. Also, the kinds of facilities (such as credit and marketing assistance) they actually require are often absent. Issues related to the pricing of infrastructure, particularly electricity, have also to be revisited in order to determine the optimal price that unorganised sector units can afford. Besides, the role of institutions is important to ensure due share to unorganised sector enterprises. In spite of the inter-sectoral linkages, the units are not able to benefit in the process of growth as the mechanisms through which the transactions operate are not necessarily positive or generative in the face of their poor bargaining power.

The urban advantage

Findings of some past research on the efficiency of India’s unorganised manufacturing sector point to higher technical efficiency of small industrial units in urban areas than their counterparts in rural areas, reflecting certain advantages accruing to small industrial units if they are located in urban areas. Evidently, the government policy initiatives for promoting urbanisation in India, particularly the ‘Smart Cities’ programme, are expected to help make unorganised manufacturing more economically viable. Several small towns (census towns) which have been recognised as urban by Census 2011 but still do not have urban local bodies are not able to draw investment meant specifically for urban areas. Once they are treated as a part of urban areas, unorganised sector units in such localities will benefit significantly. Since engagement in sub-contracting activity enhances to some extent technical efficiency of unorganised manufacturing units and the incidence of sub-contracting is relatively greater in urban areas, it follows that a process of rapid urbanisation will help.

Within unorganised manufacturing, household-based units with only family labour are known to be much less efficient than non-household manufacturing units, also known as ‘establishments’, which are relatively bigger in employment size and make use of non-family hired labour. In terms of labour standards, household units perform far worse than unorganised non-household units. Therefore, an important policy question is whether the unorganised manufacturing sector should be helped to restructure increasingly from household units to establishments. Such a transformation will provide efficiency gains to unorganised manufacturing, but may come at the cost of some loss in employment.

Bishwanath Goldar and Arup Mitra are with the Institute of Economic Growth, Delhi University.

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Printable version | Aug 9, 2020 12:38:46 PM |

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