While it is tempting to think of manufacturing as cutting-edge large factories, the reality in most emerging market economies including India can be very different from this. A lot of manufacturing in India, not just on employment but also the production front, is actually carried in the informal sector which are small sweatshops rather than capital-intensive, high-tech factories. The concluding part of this three-part data journalism series (Part I and Part II) will highlight this aspect of Indian
Formal sector manufacturing has a disproportionate share in output vis-à-vis employment Formal sector manufacturing has a disproportionate share in output vis-à-vis employment
There is official data in India on the scope of both formal sector and informal sector manufacturing. Data on the former comes from the Annual Survey of Industry (ASI) , which looks at factories which are registered and above a threshold size, such as factories employing at least 10 workers using power or 20 without power; although it also looks at some establishments outside manufacturing. Data on the latter comes from the Annual Survey of Unincorporated Sector Enterprises (ASUSE) conducted by the National Sample Survey Office (NSSO) across establishments in manufacturing, trade, and other services. The latest period of data from ASI and ASUSE is for 2023-24. This shows that formal sector manufacturing (as seen in ASI) had Gross Value Added (GVA) which was 6.1 times more than the estimated GVA generated by informal sector manufacturing firms that participate in the market. On the other hand, the estimated employment in ASUSE was 2.2 times that in ASI. This underlines the within sector inequality problem in Indian manufacturing.
But states that do well in formal sector manufacturing also do better in informal sector manufacturing
While it is not the case that the ranks of different states are exactly same in formal and informal manufacturing GVA, there is a correlation between the two. For example, Maharashtra, Gujarat, Tamil Nadu, and Uttar Pradesh are ranked in the top five in both ASUSE and ASI manufacturing, but their ranks change by one or two places. Karnataka, which is ranked fourth in ASI manufacturing, does not figure in the top five in ASUSE, but it is still ranked seventh. This suggests that even informal manufacturing needs a formal manufacturing sector to thrive.
While the formal sector’s long-term share in manufacturing value added has remained stable…
This can be seen by comparing ASI manufacturing GVA with India’s total manufacturing GVA. ASI’s share in total manufacturing GVA has hovered between 50% (in 2001-02) and 65% (in 2011-12) between 1995-96 and 2022-23, the period for which the Centre for Monitoring Indian Economy (CMIE) allows one to separate the manufacturing part of ASI. To be sure, it is possible that some fluctuations seen in the data, or its lack, is just because of methodological changes. For example, ASI started counting rent earned from buildings as a factory’s output only from 2018-19. However, ASI’s share in overall manufacturing increasing since 2018-19 must not be read as a long-term trend becoming evident when data became consistent. A like-for-like comparison of GVA is possible using ASI’s unit-level data, which allows one to decide how to calculate output and input. This shows that open factories in ASI manufacturing had a 62% share in country’s manufacturing in 2008-09 (first year of the use of new NIC (expand) codes) and 63% in 2022-23 (last year for which unit-level data is available). These numbers are not drastically different from the ASI manufacturing as published in the reports, which shows this number at 65% in 2008-09 and 62% in 2022-23.
Labour’s share in fruits of growth are unequally distributed
By one measure, the trend in India’s formal manufacturing has turned in favour of the shop floor workers. The share of workers’ wages – workers in ASI do not include managers – in gross value added has reversed its long-term falling trend in the last two decades. This means that wages are now a bigger share of the value created by workers. However, the data also shows that factories are now employing a greater share of contract workers and this number has increased almost three times in the last three decades. Contract workers are generally given lower wages and other benefits than permanent workers and therefore it ought to be seen as a cost-cutting measure by factories. When seen in the backdrop of the larger trend of manufacturing growth remaining stable over the long-term in India, this suggests a greater preoccupation with cost cutting than unlocking a higher level of value creation.
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