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Economic viability and underemployment in India's unorganized

manufacturing firms: evidence from nationally representative surveys

Article in Journal of the Asia Pacific Economy · July 2021

DOI: 10.1080/13547860.2021.1945992

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 Journal of the Asia Pacific Economy

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Economic viability and underemployment in

India’s unorganized manufacturing firms: evidence
from nationally representative surveys

Anamitra Roychowdhury

To cite this article: Anamitra Roychowdhury (2021): Economic viability and underemployment in
India’s unorganized manufacturing firms: evidence from nationally representative surveys, Journal
of the Asia Pacific Economy, DOI: 10.1080/13547860.2021.1945992

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JOURNAL OF THE ASIA PACIFIC ECONOMY
https://doi.org/10.1080/13547860.2021.1945992

Economic viability and underemployment in India’s

unorganized manufacturing firms: evidence from
nationally representative surveys
Anamitra Roychowdhury
Centre for Informal Sector and Labour Studies, Jawaharlal Nehru University, New Delhi, India

ABSTRACT KEYWORDS
Importance of the manufacturing sector in bringing about struc- Unorganised manufacturing;
tural transformation in the economy is well appreciated in litera- disguised unemployment;
ture. In India, with more than 70% of manufacturing employment economic viability; full-time
employment; cluster
originating in the unorganised segment, it becomes imperative to development; India
explore the dynamics of employment and growth of firms in the
unorganised manufacturing sector. Additionally, interest in the
sector arises since it is one of the prime avenues of employment
generation. In particular, this paper examines the economic viabil-
ity of unorganised manufacturing firms and underemployment
therein. Results on underemployment help us to conclude on the
prospect of full-time employment opportunities in the sector,
whereas an assessment of economic viability brings out the major
obstacles to growth plaguing unorganised manufacturing firms.
This article identifies the prime areas requiring policy intervention
and emphasises the need of implementing existing policies
on ground.

1. Introduction
Interest in India’s unorganised manufacturing sector arises for a variety of reasons.
First is a straightforward reason that the sector is under-researched. This is well
appreciated in literature; Chandrasekhar (2014, 41) notes: ‘Since most studies on
India’s industrial development focus on the modern, organised industrial sector, there
is considerable neglect of the large majority of small scale and unorganised sector
units in the country’. Anybody acquainted with studies on Indian industries surely
realises the validity of this claim for the manufacturing subsector. This relative neglect
of unorganised manufacturing in favour of the organised segment is probably due to
the single-minded pursuit of boosting output growth, especially in the period when
India embraced market-oriented policies. The policy establishment showed little con-
cern for employment. However, without such growth fetishism, the key role played
by unorganised manufacturing is well recognised. For example, P. C. Mahalanobis
noted while commenting on his four-sector planning model: ‘preference would be

CONTACT Anamitra Roychowdhury rcanamitra@gmail.com

ß 2021 Informa UK Limited, trading as Taylor & Francis Group
2 A. ROYCHOWDHURY

given to capital-light and labour-intensive small scale and household industries to cre-
ate as much employment as possible in the immediate future and, at the same time,
to release capital resources for the heavy industries’ (quoted in Patnaik 1995, 116).
More generally, the Mahalanobis plan ‘aimed at expanding employment opportunities
of which the bulk was to be provided by the unorganised sector’ (Banerjee 1988;
quoted in Rani and Unni 2004, 4568).1 Thus, the employment question underscores
the importance of unorganised manufacturing sector.2
Second, concern for the sector arises due to a direct fallout of the previous point
and plays out as follows. Economic reforms with their thrust on export promotion
were supposed to stimulate the economy and launch it to a higher growth path; for
example, Rani and Unni (2004, 4568) point out: ‘The economic reforms initiated in
1991 were also meant to reverse the poor growth performance. It was expected that
rapid and sustained growth of output and employment would reduce poverty’. This
specially applied to the manufacturing sector as India could tap into her large supply
of very cheap labour.3 This promise, however, has been largely belied. Nagaraj (2017,
62) documents: ‘After a quarter century of market-oriented reforms, … India fail[ed]
to … cement its reputation as a successful industrial nation with rising manufactur-
ing exports’. Poor performance of the organised manufacturing sector has been vari-
ously explained, although thoroughly contested, in terms of labour market rigidities,
and lack of skilled workers, among others. Unfortunately, underperformance of the
unorganised manufacturing segment has not been sufficiently examined. One of the
primary aims of this paper is to investigate the growth potential of firms in the
unorganised manufacturing sector.
Third, with close to 45% of the workforce still trapped in agriculture, India has
failed to undergo Lewisian transformation. Thus, unfulfilled structural transformation
remains a crucial concern for policymakers in India. However, due to unremunerative
returns and mechanisation in agriculture, there is evidence of people continuously
withdrawing from agriculture since 2004 (Mehrotra et al. 2014). Amidst this absolute
decline in workforce engaged in agriculture observed for the first time since
Independence, it becomes imperative to examine the scope for alternative (product-
ive/full-time) employment opportunities in non-agriculture. It is in this context, one
needs to explore the prospect of employment growth led by the manufacturing sector.
This is crucial since, Ghose (2019,198) points out reviewing the experience of South
Asian economies (except Bangladesh): ‘the employment intensity of services has been
and remains very low, a fact that stands in sharp contrast with what is observed in
other countries of the world’; therefore, reaching the inescapable conclusion that for
these economies: ‘Meeting the employment challenge will require rapid manufactur-
ing-led growth’ (ibid., 198). Herein is the relevance of unorganised manufacturing as
one of the major avenues for bringing about structural change in employment, quite
apart from simply addressing the question of employment generation.
Rest of the paper is structured as follows: Section 2 forms the background of the
study. The context is set by a brief description of the prominent features of unorgan-
ised manufacturing sector, along with a discussion on the data set. Section 3 presents
the main results of the study. In particular, I examine the economic viability of an
average unorganised manufacturing firm and estimate underemployment/disguised
 ECONOMIC VIABILITY AND UNDEREMPLOYMENT IN INDIA'S UNORGANIZED MANUFACTURING FIRMS 3

unemployment therein. This helps us to conclude about the growth potential of

unorganised manufacturing units. Drawing on the underemployment results, Section
4 explores the potential of unorganised sector to create productive/full-time employ-
ment, alongside discussing some aspects of policy intervention requiring urgent atten-
tion for better outcomes. The paper ends with some concluding observations.

2. Salient features of unorganised manufacturing sector

Before concentrating on the unorganised manufacturing segment, a quick review of
the overall manufacturing sector may be useful to set the stage for later discussion. A
defining and persistent feature of Indian manufacturing sector is its stagnant share in
aggregate output and employment. In the preceding almost four decades, share of
manufacturing output hovered around 14–16% while the share of the sector in total
employment never breached 13% (Figure1).4
This outcome, as already mentioned, is contrary to the expectations raised by eco-
nomic reforms.5 As Nagaraj (2003, 3711) puts it: ‘By doing away with the reported
import substitution bias in industrial policy, reforms were expected to boost output
and exports of labour-intensive manufacturers [hence employment] … the experi-
ence of the 1990s seems to be at variance with the priori expectation’. Output and
employment trends beyond the nineties follow similar pattern. Commenting on later
employment trends, Thomas (2014, 17) notes:
[E]mployment in manufacturing increased by just 5.1 million in India during the seven
years after 2004–05. And the rate of job creation in this sector decelerated from 1.2
million jobs a year between 1993–94 and 2004–05 to 0.7 million jobs a year between
2004–05 and 2011–12. Manufacturing employment had, in fact, declined in absolute
numbers, by three million, between 2004–05 and 2009–10. However, staging a recovery,
eight million manufacturing jobs were added in the country during the next two
years (2009–12).
Evidence suggests that around one million manufacturing jobs were again lost
between 2011–12 and 2017–18 (Roychowdhury 2021). Within a year, between
Periodic Labour Force Survey (PLFS) 2017–18 and PLFS 2018–19, the manufacturing
sector further shed 1.29 million jobs. This is reflected in the declining share of manu-
facturing employment from 12.6% (2011) to 12.1% (2018) (Figure 1).
India’s inability to undergo structural transformation implies that a very large pro-
portion of her workforce still remains trapped in low productivity agriculture. This is
in sharp contrast to many of her Asian neighbours where a rise in the relative share
of manufacturing in gross domestic product (GDP) has led to a significant decline in
the proportion of their workforce dependent on agriculture (Table 1). This shortcom-
ing of the Indian manufacturing sector is well recognised, as Nagaraj (2017, 61)
points out:
Though India has avoided deindustrialisation – defined as a decline in the
manufacturing (industrial) sector’s share in GDP, or share in workforce – it stares at a
quarter century of stagnation, in contrast to many Asian economies that have moved up
the technology ladder with a rising share of manufacturing in domestic output and
global trade.
4 A. ROYCHOWDHURY

Figure 1. Share output and employment: manufacturing sector. Note: Employment share is from
the nearest National Sample Survey (NSS) round (1983–84, 1993–94, 1999–2000, 20011–12); 2018
data from PLFS. Source: National accounts statistics, (GoI). 2014 and NSS, various issues.

Table 1. Share of manufacturing output and agricultural employment in 2018.

Country Manufacturing output/GDP (%) Agricultural empt./total empt. (%)
China 27.8 26.1
Thailand 19.9 29.6
S. Korea 26.6 5
Malaysia 21.5 10.7
Indonesia 20.7 0.74
Singapore 26.7 32.1
India 14.6 43.3
Source: World Bank.

Anxiety over this failure probably gets articulated in the target set by ‘Make in
India’ programme to raise manufacturing output to 25% of GDP. A similar target
was set by the previous government (United Progressive Alliance-II) in its National
Manufacturing Policy 2011.6
Let us now turn our attention to the unorganised manufacturing sector and distin-
guish it from the organised segment. Organised manufacturing sector encompasses
manufacturing units registered under Section 2m(i) and 2m(ii) of the Factories Act,
1948. Statistical information on these firms is collected by Annual Survey of
Industries (ASI) on a yearly basis.7 Definition of unorganised manufacturing used in
this paper is the same as employed by National Sample Survey Organisation (NSSO)
in its Enterprise surveys, conducted as follow-up surveys of the Economic Census
(GoI 2018; for details see pp. 1 and 7). According to this definition, unorganised
manufacturing sector comprises manufacturing units: (a) not covered in ASI; (b) reg-
istered under Section 85 of Factories Act, 1948; (c) engaged in cotton ginning,
 ECONOMIC VIABILITY AND UNDEREMPLOYMENT IN INDIA'S UNORGANIZED MANUFACTURING FIRMS 5

Table 2. Relative importance of organised and unorganised manufacturing in India (%)

2010–11 2015–16
Variables Organised Unorganised Organised Unorganised
GVA 84.2 15.8 82.6 17.4
Employment 26.7 73.3 28.4 71.6
Source: Organised sector from Annual Survey of Industries and unorganised sector from characteristics of unincorpor-
ated non-agricultural enterprises (excluding construction) in India: (GoI). 2013 and (GoI). 2018.

cleaning and baling, other than firms already registered under Factories Act, 1948
and (d) engaged beedi and cigar production excluding those registered under The
Beedi and Cigar Workers (Conditions of Employment) Act, 1966.
However, this dividing line between organised and unorganised manufacturing on
the basis of Factories Act is mainly functional in nature. This is because even in the
Factory sector, minimum wages and reasonable working conditions are frequently
violated and registered firms ‘are not always units that meet the attributes expected of
modern, industrial establishment, [but] this is the closest one can get to making a
division between the unorganised and organised or informal and formal that must
necessarily be arbitrary’ (Chandrasekar 2004, 17). More fundamentally, the organise-
d–unorganised divide in India ‘is not a phenomenon determined primarily by the
incidence or not of factory legislation, but the consequence of the larger socio-eco-
nomic context and its evolution’ (ibid, 19).
It is time to describe the data base. The study uses two rounds of NSS survey on
Unincorporated Non-Agricultural Enterprises (Excluding Construction) conducted
between July 2010–June 2011 (67th round) and July 2015–June 2016 (73rd round),
covering the whole of Indian Union. The 67th round survey was the first NSS survey
covering the entire unincorporated non-agricultural sector (excluding construction)8
as a follow-up survey of the 5th Economic Census. Therefore, the study covers the
whole of unorganised manufacturing sector. The 73rd round was a repeat survey of
the NSS 67th round with similar scope.
Next, we look at the organised-unorganised divide in data. Table 2 explains the
preoccupation with organised manufacturing and palpable neglect of the unorganised
segment mentioned above. This is primarily because more than 84% of manufactur-
ing GDP in 2010–11 originated in the organised segment. It has marginally shrunk in
2015–16; therefore, it is natural that a discourse dominated by output growth will
concentrate on the organised sector.9 The picture, however, dramatically changes if
the focus shifts on employment. Unorganised sector constituted 73% of manufactur-
ing employment in 2010–11 and nearly 72% in 2015–16.10 Therefore, importance of
unorganised manufacturing comes to the fore once concern for employment arises.
Next, we concentrate on the unorganised sector alone. It is populated by two kinds
of firms: (a) own account enterprises (OAE) operating without any hired worker
(these are primitive enterprises functioning solely on the basis of unpaid family
labour and owner); and (b) establishments that employ at least one hired worker
(relatively less primitive) (for details see, GoI 2017, 9). Another indicator of primi-
tiveness, namely, location of firms within household premises, also shows that the
proportion of such firms in OAE segment is about three times higher than in the
establishment segment (Roychowdhury 2020).
6 A. ROYCHOWDHURY

Table 3. Relative importance of OAE and establishment.

Firm type 2010–11 2015–16
Firms (%)
OAE 84 86
Establishment 16 14
Employment (%)
OAE 60 63
Establishment 40 37
Gross value added (GVA) (%)
OAE 37 39
Establishment 63 61
Source: NSS reports on unincorporated non-agricultural enterprises (excluding construction) in India: (GoI). 2013 and
(GoI). 2018.

Table 3 brings out a disconcerting fact about the unorganised manufacturing sec-
tor, namely the increase in dominance of primitive firms (OAE) in all categories
(number of firms, workers and output) between 2010–11 and 2015–16, over and
above an already high level (except GVA).
The other disturbing feature of unorganised manufacturing is brought out by
Appendix Table A1. Not only is the distribution of activities in this segment con-
centrated in just six relatively simple11 industry groups primarily producing con-
sumer non-durables, but such concentration seems to have persisted between
2010–11 and 2015–16. Given this background, we now examine economic viability
and underemployment in an average firm in the unorganised manufactur-
ing sector.

3. Economic viability and underemployment in unorganised

manufacturing units
Before discussing economic viability of a manufacturing unit, on average and under-
employment therein, one must clearly state the definition of economic viability and
underemployment to be used. Economic viability of an average firm is assessed at
two levels: (a) ability to sustain simple reproduction and (b) scope for expanded
reproduction, if it meets criterion (a).
Job scarcity in developing countries like India rarely takes the form of open
unemployment (because people simply cannot afford to remain unemployed) and
mostly manifests as disguised unemployment/underemployment.12 Robinson (1936,
225–6) states the matter clearly:
In a society in which there is no regular system of unemployment benefit … a man
who is thrown out of work must scratch up a living somehow or other by means of
his own efforts. … [Anything that] reduces the amount of employment offered in
the general run of industries will not lead to ‘unemployment’ in the sense of
complete idleness, but will rather drive workers into a number of occupations –
selling match-boxes in the Strand, cutting brushwood in the jungles, digging
potatoes on allotments – which are still open to them. … Thus a decline in … the
general run of industries leads to a diversion of labour from occupations in which
productivity is higher to others where it is lower … and it is natural to describe the
adoption of inferior occupations by dismissed workers as disguised unemployment
(emphasis in original).
 ECONOMIC VIABILITY AND UNDEREMPLOYMENT IN INDIA'S UNORGANIZED MANUFACTURING FIRMS 7

Then the question arises as how to use this idea in an empirical test. This requires
a functional definition of disguised unemployment and Robinson’s observation of
‘diversion of labour from occupations in which productivity is higher to others where
it is lower’ – as a result of shrinkage in full-time job opportunities, is key in this
regard. Insofar as capitalists while paying wages refer to labour productivity,13 for a
job to be considered as productive full-time employment, it has to be attached to a
wage rate. According to Robinson’s definition, when the labour market is tight (say,
for large effective demand), most jobs will pay wages at par with those offered in pro-
ductive full-time employment. On the contrary, when the labour market is slack,
many jobs will pay wages less than those paid for productive full-time employment;
and those receiving lower wages can then be identified as disguised unemployed.
Clearly, it is important to identify the wage rate attached to productive full-time
employment, and is indeed difficult to arrive at. National minimum wage recom-
mended by an expert committee (Anoop Satpathy committee) is undoubtedly a good
measure in a normative sense; unfortunately, it is widely violated (Rani and Besler
2012). Another candidate is Mahatma Gandhi National Rural Employment Guarantee
Scheme (MGNREGS) wages, but such wages are paid for at most 100 days, and not
applicable to urban areas. Therefore, we took the NSS 2011–12 figures of wage paid
to casual labour (in other than MGNREGS and public works) as our benchmark to
define productive full-time employment.14 This wage may rightly be criticised as too
low for defining productive full-time employment, especially when a large pool of
casual workers is engaged in the unorganised sector without much bargaining power
or institutional backing, and this expresses itself, inter-alia, as depressed wages. But
we deliberately use this15 wage (much lower than minimum wage) as our benchmark,
for using a stricter functional definition of disguised unemployment. Needless to say,
the estimates provided below are, therefore, conservative estimates requiring revision
if institutionally protected higher wages were used. Further, the following exercise
based on casual wages should not deter, in any way, implementation of at least min-
imum wages.
We are now ready to examine economic viability of a typical firm and under-
employment therein; this is carried out separately for the OAE segment and establish-
ments due to their fundamentally different characters. The analysis is further carried
out according to the location of firms, that is, separately for rural and urban areas.

3.1. Analysis of OAE-rural

Let us first analyse data for 2010–11. Analysis is carried out at the level of an average
firm16 and column D (Table 4) represents the surplus (output left after paying rent
and interest) available to an average unit run solely on the basis of unpaid family
labour and owner – thus, it can also be seen as the total product available for sharing
among family members engaged in the unit. Column E shows the daily casual wage
(127.11) in 2010–11 [this is obtained by adjusting the 2011–12 rural casual wage
(138.62) for inflation by Consumer Price Index (Rural Labour)]. We obtain the
annual wage fund17 required to employ one worker in Column F.18 Note that the
value in F (39,658) is more than D (31,131; surplus available for sharing) – thus, a
 8
A. ROYCHOWDHURY

Table 4. Economic viability and underemployment in a typical rural OAE unit.

Annual casual
(GVA-R-I)/ wage bill/worker Full-time empt./
Interest/ Rent/ firm Daily casual [F ¼ (E)  firm Worker/ Under-empt. rate
Year GVA/firm (A) firm (B) firm (C) (D ¼ A  B  C) wage (E) (26  12)] (G ¼ D/F) firm (H) [I ¼ 1  (G/H)]
2010–11 32,052 116 805 31,131 127.11 39,658 0.78 1.45 0.46
2015–16 48,565 335 464 47,766 190.89 59,558 0.80 1.35 0.41
Note: Columns (A)–(F) in Rupees; Columns (G)–(I) unit free.
Source: Same as Table 3.
 ECONOMIC VIABILITY AND UNDEREMPLOYMENT IN INDIA'S UNORGANIZED MANUFACTURING FIRMS 9

typical rural-OAE unit, with only one worker, was unable to sustain simple reproduc-
tion if casual wages were paid.
Now with the amount of surplus in column D – the number of individuals who
can be employed full-time (i.e., paid casual wage according to our functional defin-
ition) is shown in column G (0.78) and obtained by dividing D by F. Column H
shows the actual number of persons dependent (1.45) on an average rural-OAE unit.
Note that there are larger number of individuals (H) actually engaged in a typical
unit than can be provided with full-time employment (G). Thus, H minus G gives
the magnitude of underemployed (1.45  0.78 ¼ 0.67) and column I estimates the pro-
portion of disguised unemployment (0.46) in an average rural-OAE unit in the
year 2010–11.
Next, we turn our attention to 2015–16. An invariant standard is required in order
to compare the results overtime. Bearing this in mind, the 2015–16 daily casual wage
(190.89) is obtained by simply updating the 2011–12 wage for inflation. As before,
note that the value of column F (59,558) is greater than D (47,766); implying that
even in 2015–16, a typical rural-OAE unit with only one worker could not sustain
simple reproduction with casual wage payment.
However, in column H, note that the number of workers actually engaged in an
average firm is more than one (1.35) and following the same methodology, only 0.80
workers (column G) could be provided full-time employment with the available wage
fund. Once again H minus G gives the magnitude of underemployed
(1.35  0.80 ¼ 0.55) and column I estimates the proportion of disguised unemploy-
ment (0.41) in an average rural-OAE unit in 2015–16.
Interestingly, the underemployment rate fell between 2010–11 (0.46) and 2015–16
(0.41); and the magnitude of underemployment in an average firm declined by 0.12
(¼0.67  0.55). However, note that bulk of the decline in underemployment is due to
the decline in workers per firm 0.10 (¼1.45  1.35; column H) and only a small
amount is due to the enhanced ability of firms to offer full-time employment
(0.80  0.78 ¼ 0.02). The decomposition of underemployment decline does not show
an encouraging result for the future of full-time employment creation in this segment.
These units continue production due to subsistence compulsion in absence of better
employment opportunities for those engaged here; unable to sustain even simple
reproduction, their economic conditions do not permit growth.

3.2. Analysis of OAE-urban

For analysing an average urban-OAE unit in 2010–11, the urban casual wage of
2011–12 (170.1) is adjusted for inflation by Consumer Price Index (Industrial
Workers) [CPI (IW)] and the 2010–11 wage appears in column E (156.24) (Table 5).
Following the same procedure, note that with the available surplus in column D
(49,473) and the annual wage bill of employing one worker as 48,747 (column F),
only 1.01 workers (column G) could be gainfully employed (at casual wage).
However, 1.44 workers (column H) were actually dependent on a typical urban-OAE
unit. Thus, such a unit was incapable of sustaining simple reproduction in 2010–11.
 10
A. ROYCHOWDHURY

Table 5. Economic viability and underemployment in a typical urban-OAE unit.

Annual casual
wage bill/ Full-time
Interest/ Rent/firm (GVA-R-I)/firm Daily casual worker empt./firm Under-empt. rate
Year GVA/firm (A) firm (B) (C) (D ¼ A  B  C) wage (E) [F ¼ (E)  (26  12)] (G ¼ D/F) Worker/firm (H) [I ¼ 1  (G/H)]
2010–11 51,631 317 1841 49,473 156.24 48,747 1.01 1.44 0.30
2015–16 84,699 506 3548 80,645 232.19 72,443 1.11 1.35 0.17
Note: Columns (A)–(F) in Rupees; Columns (G)–(I) unit free.
Source: Same as Table 3.
 ECONOMIC VIABILITY AND UNDEREMPLOYMENT IN INDIA'S UNORGANIZED MANUFACTURING FIRMS 11

As earlier, the magnitude of underemployment turns out to be 0.43 (¼1.44  1.01)

and underemployment rate as 0.30 (column I).
The inflation updated wage of 2015–16 [by CPI (IW) of the 2011–12 wage] is
232.19. Again, note that with surplus at 80,645 and annual wage bill of single worker
at 72,443 – only 1.11 workers could be employed full-time, whereas, 1.35 workers
were actually employed. Thus, even in 2015–16, an average urban-OAE manufactur-
ing unit was unable to continue simple reproduction. Further, the magnitude of
underemployment is 0.24 (¼1.35  1.11) and the underemployment rate is 0.17.
The magnitude of underemployment came down by 0.19 (¼0.43  0.24) between
2010–11 and 2015–16 – but a decomposition shows that around half of it was driven
by fall in workers per firm (0.09 ¼ 1.44  1.35; column H) and the rest was driven by
improved paying capacity of an urban-OAE unit (1.11  1.01 ¼ 0.10) to offer full-time
employment. Hence, this manufacturing segment holds limited prospect of offering
full-time employment and workers seem to be stuck here in order to eke out a living.
Once again, without meeting the condition for simple reproduction, these units are
ill-suited for growth.

3.3. Analysis of establishment – rural

We now focus on an average rural establishment – hiring at least one worker – in
2010–11 and assume that all workers engaged in an average unit are paid according
to the rate of hired worker. From columns A and B19 (Table 6), we find that an aver-
age firm generates surplus 68,469 (column C). Thus, on average, these firms show
potential for expanded reproduction.
However, column D shows average number of workers per firm (5.42) in 2010–11
and we already know from Table 4 that annual wage requirement to employ one
worker on full-time basis is 39,658 (column E in Table 6). Thus, the wage fund
required to employ all workers (5.42) full-time is 215,056 (column F). Thus, even
with full-time workers20 (i.e., paid casual wage), an average rural establishment was
capable of generating a surplus of 28,215 (column I). So, it is still poised for
expanded reproduction and since labour cost dominates, in labour units, an average
rural establishment could employ 0.71 fresh full-time worker (column J).
But are workers paid casual wages? Note that with total emoluments 174,801 (col-
umn B), only 4.41 workers could be employed full-time (column G). Thus, the mag-
nitude of underemployment is 1.01 (¼5.42  4.41) and underemployment rate is 0.19
(column H). This implies that in reality more than 0.71 workers could be hired since
workers were paid less than casual wages.
Next, we analyse data from 2015 to 16. Applying the same logic and inspecting
column C (surplus with emolument) and I (surplus with casual wage) – it can be
concluded that an average rural establishment could carry out expanded reproduction
and in labour units could freshly employ 1.95 full-time workers. However, note that
4.91 workers were actually engaged in a rural establishment as against 4.63 workers
who could be gainfully employed. Thus, average underemployment was 0.28
(¼4.91  4.63) and underemployment rate 0.06 (column H). Interestingly, decline in
underemployment by 0.73 (¼1.01  0.28) between 2010–11 and 2015–16 is mostly
 12
A. ROYCHOWDHURY

Table 6. Economic viability and underemployment in a typical rural establishment.

Full-time Expanded reprod.
(GVA-R-I)/ Emol./ (GVA-R-I-E)/firm Wrk/ Full-time Full-time wage empt./firm Under-empt. rate (GVA-R-I-CW)/ (labour units)
Year firm (A) firm (B) (C ¼ A  B) firm (D) wage bill/wrk (E) fund (F ¼ D  E) (G ¼ B/E) [H ¼ 1  (G/D)] firm (I ¼ A  F) (J ¼ I/E)
2010–11 243,271 174,801 68,469 5.42 39,658 215,056 4.41 0.19 28,215 0.71
2015–16 408,407 275,847 132,560 4.91 59,558 292,333 4.63 0.06 116,074 1.95
Note: Columns A, B, C, E, F, I in Rupees; other columns in pure number.
Source: Same as Table 3.
 ECONOMIC VIABILITY AND UNDEREMPLOYMENT IN INDIA'S UNORGANIZED MANUFACTURING FIRMS 13

due to decline in firm size, that is, 0.51 (¼5.42  4.91) and only to a limited extent
for an average firm paying casual wages to a greater proportion of workers, that is,
0.22 (¼4.63  4.41).

3.4. Analysis of establishment – urban

Finally, we analyse a typical urban establishment in 2010–11. Once again, we find
from columns C and I that an average urban establishment was fit for expanded
reproduction and capable of freshly employing 2.45 full-time workers (Table 7).
Further, values in columns D and G do not indicate the prevalence of underemploy-
ment and this is captured by column H. Thus, a typical urban establishment was cap-
able of paying its workers casual wages.
The figures for 2015–16 show that an urban establishment could freshly employ
3.7 workers with the available surplus 268,307 (column I) and remarkably 5.43 work-
ers could be employed full-time, whereas only 4.59 workers were actually employed.
Thus, according to our definition, underemployment rate turned negative in column
H (0.18) and employed workers, on average, received more than casual wage (com-
pare columns B and F).
Thus, although expanded reproduction in an average rural establishment partially
depended on wage compression (paying less than casual wages), this was not true for
urban manufacturing establishments. So what expansionary strategy was adopted by
the latter units? We turn to Table 8 for an explanation.
Note that majority of OAE firms in both years, irrespective of location, operated
on a normal day for 0–7 h. This is dramatically different for establishments. At
least 12% of establishments, on average, operated for more than 11 h a day in both
locations, on both years. Further, over 70% of rural establishments and around
80% of urban establishments operated between 8 and 11 h on any day in 2010–11
and 2015–16. Thus, if the usual length of a working day is 8 h, then – in a sector
dominated by labour cost – the ability of rural establishments to undertake
expanded reproduction seem to depend on the twin strategies of wage compres-
sion (causing underemployment) and lengthening the work day (raising absolute
surplus value). A typical urban establishment, without any trace of underemploy-
ment, principally banked up on extended working hours to achieve expanded
reproduction.
However, extended working hours have an important bearing on the reported
underemployment rates in establishments. Recall that underemployment rates in a
rural establishment are lower than in OAE firms and does not exist in an urban
establishment. Given the definition of underemployment, this means that rural estab-
lishments paid closer to casual wages (compared to OAE) and urban establishments
paid casual wages. But they also extended working hours; thus, workers in establish-
ments received payments/earnings/income per day equivalent to the magnitude of cas-
ual (or close to casual) wage figures because they were working, on average, more
than normal hours.21
Therefore, it becomes important to distinguish between wages and daily incomes/
earnings. Dobb (1941, 26–27) does this clearly:
 14
A. ROYCHOWDHURY

Table 7. Economic viability and underemployment in a typical urban establishment.

Full-time Expanded reprod.
(GVA-R-I)/ (GVA-R-I-E)/firm wage bill/ Full-time wage Full-time Under-empt. Rate (GVA-R-I-CW)/ (labour units)
Year firm (A) Emol./firm (B) (C ¼ A  B) Wrk/firm (D) wrk (E) fund (F ¼ D  E) empt./firm (G ¼ B/E) [H ¼ 1  (G/D)] firm (I ¼ A  F) (J ¼ I/E)
2010–11 355,843 237,408 118,435 4.85 48,747 236,462 4.87 0.00 119,381 2.45
2015–16 600,557 393,683 206,874 4.59 72,443 332,250 5.43 (2) 0.18 268,307 3.70
Note: Columns A, B, C, E, F, I in Rupees; other columns in pure number.
Source: Same as Table 3.
 ECONOMIC VIABILITY AND UNDEREMPLOYMENT IN INDIA'S UNORGANIZED MANUFACTURING FIRMS 15

Table 8. Distribution of firms by working hours in a normal day (%).

Rural Urban
Working hours (h) OAE Establishment OAE Establishment
2010–11
0–7 56.6 13.1 51.6 6.8
8–11 40.6 73.1 44.5 79.7
>11 2.6 13.5 3.4 13.3
2015–16
0–7 68.5 16.5 53.7 6.3
8–11 29.2 71.4 41.6 80.2
>11 2.3 12.1 4.7 13.6
Source: Same as Table 3

Finally there is the important distinction to be made between wage-rates and earnings.
When we speak of a wage-rate, we refer to the amount paid to the worker per hour or
per normal working day or for performing a certain job. When we talk about … a
worker’s earnings [it] will vary according to the number of hours for which he secures
employment … If a worker at one time works each day for one or two additional
hours’ overtime, and at another time does not, his earnings will be different at the two
periods even though wage-rates per hour are the same. (emphasis added)
From the foregoing discussion, it follows that if workers’ earnings in establish-
ments are adjusted for normal working hours, then the reported underemployment
rates seem to be an underestimate. In other words, prevailing production conditions
in unorganised manufacturing expressed themselves differently in the OAE and estab-
lishment segment. With most OAE firms operating around normal working hours, the
existing labour compensation rate exhibited high underemployment, whereas establish-
ments generally running more than normal working hours displayed downward under-
employment bias. Also, notice that the question of growth does not arise in OAE
segment as these firms are not even suited for simple reproduction. On the other hand,
growth of rural establishments is contingent on wage compression and workday exten-
sion; while growth depended on extension of the workday for urban establishments.
Therefore, inability to generate sufficient surplus (at casual wage rate and normal
working hours) acts as a hindrance for the growth of unorganised manufacturing
firms. This is in sharp contrast to the findings of Economic Survey 2018–19, investi-
gating the barriers to growth of small firms (less than 100 workers) in the organised
manufacturing sector. The basic proposition of Economic Survey is best captured by
the following observation:
[There are] policies [that] create a ‘perverse’ incentive for firms to remain small. If the
firms grow beyond the thresholds that these policies employ, then they will be unable to
obtain the said benefits. Therefore, rather than grow the firm beyond the said threshold,
entrepreneurs find it optimal to start a new firm to continue availing these benefits (GoI
2019, 63).
Hence, it is suggested that small firms in the organised manufacturing sector vol-
untarily restrain growth. Although testing Economic Survey’s hypothesis is beyond
the scope of this paper, nonetheless, its striking dissimilarity with respect to the fet-
ters to growth that withhold unorganised manufacturing firms is worth noting.
Incidentally, the benefits firms supposedly derive from remaining small are listed
down by the World Bank (2010, 79–80):
16 A. ROYCHOWDHURY

[T]here still exist a number of fiscal subsidy programmes and policies that discourage
firm growth. For instance, there are fiscal and credit market benefits to enterprises
below a certain size. Thus there are built-in disincentives for enterprises to go beyond
this size limit. In addition, labour laws on wages, benefits, and job security apply to
units above the critical [employment] size’ (emphasis in original).
It can be shown that every parameter identified by World Bank is a redundant
constraint for firms in the unorganised manufacturing sector.
Let us first look at the fiscal benefits. Since unorganised manufacturing firms are
basically part of the micro, small and medium enterprises (MSME) sector22 (see
Mehrotra and Giri 2019), fiscal benefits available to the latter also apply to the for-
mer. For example, Goods and Services Tax (GST) composition scheme allows pay-
ment of GST at a flat rate for businesses with turnover up to Rs. 1.5 crore; similarly,
businesses with turnover below Rs. 4 crore are allowed exemption under Central
Excise law (GoI 2019, 70). Yearly turnover of firms, on average, in both segments of
unorganised manufacturing is nowhere near these thresholds (Tables 4, 5, 6, and 7).
We now turn to the credit market benefits. MSMEs are eligible for priority sector
lending that stipulates banks to mandatorily lend a certain portion of their total credit
disbursement to these sectors at subsidised interest rates. Now for the smallest cat-
egory, that is, a micro enterprise, the limit on fixed investment per firm to be
counted in priority sector is Rs. 25 lakh (https://m.rbi.org.in/Scripts/BS_
ViewMasDirections.aspx?id=10497). Even an urban establishment, with highest fixed
asset per firm among unorganised manufacturing units in 2015–16, held only Rs. 8
lakh on average in the form of fixed assets. Moreover, small enterprises with fixed
investment up to Rs. 5 crore per firm are also included in the priority sector.23
Certainly, the fear of losing credit market benefits does not arise.
Next, consider labour laws on wages and job security regulations (JSR). Now JSR
applies only to firms with 100 or more workers24 (Storm 2019); however, unorganised
manufacturing units are far short of this threshold. Moreover, firm size fell across the
board between 2010–11 and 2015–16; therefore, JSR cannot operate as a disincentive
for growth. As for law on wages, World Bank must be referring to minimum wages.
But compliance to minimum wages in India does not depend on firm size in the first
place, but on scheduled employments.25 Further, test on economic viability suggests
that unorganised manufacturing firms actually pay much less than minimum wages26
and simply do not have the capacity to pay minimum wages and continue produc-
tion.27 It is clear from the discussion that unorganised manufacturing firms – in
sharp contrast to small (less than 100 workers) organised manufacturing firms as
noted by the World Bank – involuntarily remain small, primarily due to lack of funds
for reinvestment. We shall now explore the prospect of full-time employment cre-
ation in unorganised manufacturing sector.

4. Prospect of full-time employment in unorganised manufacturing sector

To be sure, according to the NSS definition, around 85% workers were employed
full-time (Table 9). NSS uses major time criterion without any reference to wages, to
define full-time employment. The NSS division between full-time and half-time
employment is as follows:
 ECONOMIC VIABILITY AND UNDEREMPLOYMENT IN INDIA'S UNORGANIZED MANUFACTURING FIRMS 17

Table 9. Distribution of full-time workers by NSS definition (%).

OAE Establishment
Year Rural Urban Rural Urban
2010–11 85 84 96 98
2015–16 87 91 96 98
Source: Same as Table3

Table 10. Point growth rate of firms and workers between 2010–11 and 2015–16 (%).
OAE Establishment
Rural Urban Rural Urban
Firms 14.9 19.3 6.1 7.3
Workers 7.1 11.6 15.0 1.4
Source: Same as Table3

A worker engaged for more than half of the normal working hours of the enterprise will
be treated as full time worker. A part time worker is a person who works for less than
or equal to half of the period of normal working hours of the enterprise on a fairly
regular basis. (GoI 2018, 24).
The moment wage criterion is introduced to define full-time employment, we
know that a very large part of OAE workers, especially in rural areas, are actually dis-
guised unemployed. This is true for a sizeable share of urban-OAE workers as well.
Interestingly, the very high proportion of full-time workers in establishments by NSS
criterion matches well with the method described above, as to how these units man-
age to report lower (or no) underemployment rate by stretching the workday and
paying for the extra time.
What can we say about (full-time) employment generating capacity of the sector as
a whole? For this, we calculate the simple point growth rate (as opposed to com-
pound annual growth rate) of firms and workers between 2010–11 and 2015–16
(Table 10). Remember that underemployment in the sector, on average, declined in
this period, and this was mostly driven by firms shedding workers. This is reflected
in Table 10; note that point growth rate for firms in all segments is greater than that
of workers’, as average firm size declined across the board.
Therefore, statistical employment growth depended on entry of firms. Note that
rural establishment units shrank and this led to a greater decline of workers, since
existing firms reduced workforce. Thus, this segment has little scope to generate full-
time employment. As for other segments, note that their order of employment growth
closely follows the order of the growth of firms in the respective segment. Hence,
entry of firms seems to be the necessary condition for full-time employment creation
in a situation of declining firm size.
Nonetheless, it is not a sufficient condition because, as already mentioned, OAE
segment is plagued with significant underemployment. This is not revealed in case of
urban establishments due to payment for extra hours. In other words, a large part of
statistical employment growth in OAE segment would actually be disguised
unemployment and apparent full-time employment growth in urban establishments
is, in reality, extra payment for extra work.
18 A. ROYCHOWDHURY

Table 11. Distribution of firms and workers: 2015–16 (%).

OAE Establishment
Rural Urban Rural Urban
Firms 53.4 32.1 4.7 9.8
Workers 39.3 23.6 12.5 24.6
Source: Same as Table 3.

Table 12. Perceived growth status of firms in last 3 years: 2010–11 (2015–16) (%).
OAE Establishment
Growth status of firms Rural Urban Rural Urban
Expanding 29.2 (22.5) 24.2 (24.7) 40 (36.6) 36.6 (32.4)
Stagnant 48.8 (49.7) 42.1 (44.9) 36.6 (34.3) 34.7 (39.8)
Contracting 11 (15) 9.7 (13.6) 7.3 (11.2) 6.7 (9.6)
Shares may not add up to 100 for firms operating less than 3 years not reported. Figures within parenthesis relate
to 2015–16.
Source: Same as Table 3.

In order to understand the capacity of unregistered manufacturing sector to gener-

ate full-time employment, consider Table 11. In 2015–16, highest share of firms and
workers are in rural-OAE also registering highest underemployment rate (41%);
urban-OAE with around one-third of firms and about one-quarter of employment
recorded 17% underemployment rate. Rural establishments have lowest shares on
both counts, and in any case registered negative growth, whereas, urban establish-
ments with ‘revealed’ full-time employment accounted for only 10% of firms and 25%
of workers. Given the overwhelming dominance of OAE manufacturing firms with
such high underemployment rates, chances of full-time employment in the sector is
considerably poor.
This aspect can be grasped from another angle, namely, self-reported growth status
of firms (Table 12). It is easy to understand that firms hire labour either on part-time
or full-time basis depending upon expected market conditions. Insofar as expectations
about market are formed from past experience, chances of full-time employment rise
with vibrant market conditions prevailing in earlier periods.
Note that the share of OAE firms – unable to sustain even simple reproduction –
reporting in the expanding category was considerably lower compared to establish-
ment units in both years. Further, notice that shares of expanding firms were declin-
ing over time across the board (except urban-OAE). Thus, in a sector with
employment heavily concentrated in OAE segment, overwhelmingly reporting stag-
nant or contracting status and such status spreading across every manufacturing seg-
ment over time shows the limited opportunity of full-time employment creation in
unorganised manufacturing.
It follows that effective policy intervention is required for sustained growth of
unorganised manufacturing units and enhancing the scope of full-time employment
in the sector. This requires identification of the most pressing problems faced by
firms. Table 13 presents the major obstacles that firms encounter in their expan-
sion path.
Note that firms report demand shortfall as the most crucial factor holding back
growth in both years.28 This probably underscores the importance of extending
 ECONOMIC VIABILITY AND UNDEREMPLOYMENT IN INDIA'S UNORGANIZED MANUFACTURING FIRMS 19

Table 13. Distribution of firms by major problems faced (%).

Rural Urban
Problems faced OAE Establishment OAE Establishment
2010–11
Demand shrinkage 13.7 9.2 21.1 7.5
Financial dues non-recovery 7.8 8.9 5.2 5.6
No/high credit cost 7.2 6.9 6.2 5.4
Erratic power supply 7.3 19.9 6.1 14.6
Labour disputes 0.2 2.7 0.3 3.1
Raw material shortage 7.5 6.7 3.3 3.8
2015–16
Demand shrinkage 18.9 17.5 16.2 15.5
Financial dues non-recovery 7.1 11.7 4.4 7.9
No/high credit cost 7.4 10.6 5.7 6.3
Erratic power supply 4.9 14 3.9 10.3
Labour disputes 0 0.7 0 0.4
Raw material shortage 5.2 5.6 3.6 2
Shares may not add up to 100 for only major problems faced are reported here and one firm can report under up
to two categories.
Source: Same as Table 3.

assistance for marketing the products of unorganised manufacturing units. Further, a

variety of supply side factors like, non-recovery of financial dues, erratic power sup-
ply, shortage of raw materials and credit constraints are more or less given equal
importance (and continue to dominate over time) while identifying factors constrain-
ing firms’ growth. Interestingly, labour disputes appear to be a fringe factor arresting
firms’ expansion – this is understandable in a sector dominated by firms using family
labour (OAE); however, labour-related problems are few and display a declining trend
in establishments as well. This is possibly a reflection of diminishing bargaining
power of workers in the organised manufacturing sector (Bhattacharjea 2021).
To be sure, the government is not unaware of the areas requiring attention; in
fact, policies already exist in these domains. By virtue of unorganised manufacturing
firms being part of the MSME sector in practice, policies targeted at promoting
MSMEs also apply to firms in the unorganised manufacturing sector. These are listed
in Table 14 and it may be seen that, except for non-recovery of financial dues and
erratic power supply, there are policies already in place targeted to address the spe-
cific problems plaguing unorganised manufacturing firms. For example, purchase
preference policy at some assured price (price preference policy), along with market
assistance scheme and ability to submit tender applications free of cost, are all
designed to address the problem of demand shortfall. Likewise, financial support for
purchase of raw materials is tuned to alleviate raw material shortages. Also, priority
sector lending and credit guarantee scheme are meant to ease severe credit constraints
often faced by these firms.
However, Table 15 reveals that the policies have mostly remained on paper and
hardly translated to the ground, as almost no firm (95% and above) received any
assistance in case of need. If anything, over time, there has been a marginal increase
in the share of firms not receiving government assistance.
Further, as unorganised manufacturing firms predominantly belong to the MSME
sector and there are several instances of MSMEs being part of industrial clusters29,
20 A. ROYCHOWDHURY

Table 14. Government assistance to unorganised manufacturing firms (as part of MSME policy).
Schemes Objectives
Purchase preference policy Certain products (either in full or up to 75%) are reserved
for exclusive purchase from MSMEs
Price preference policy For selected items that are produced by both small scale
and large-scale units, price preference is given to small
firms; which amounts to a 15% premium over the
lowest price quotation of large-scale units
Marketing assistance scheme Provides assistance to MSMEs for the following activities:
organisation of exhibitions abroad, co-sponsoring of
exhibitions organised by other organisations, organising
buyer–seller meets, intensive campaigns and marketing
promotion activities
Benefits in tendering MSMEs can avail benefits such as availability of tender sets
free of cost, exemption from payment of earnest money
deposit, exemption from payment of security deposit
Raw material assistance scheme of National Small To help MSMEs with financing the purchase of raw
Industries Corporation (NSIC) material (both indigenous and imported)
Priority sector lending Direct and indirect finance at subsidised interest rates for
loans given to micro and small enterprises
Credit guarantee fund scheme Collateral-free credit to the micro and small enterprises
Source: Adapted from Economic Survey (GoI 2019, 69–70)

Table 15. Share of firms not receiving any government assistance (%).
Rural Urban
Year OAE Establishment OAE Establishment
2010–11 99.1 95.2 98.9 97.3
2015–16 99.2 96.1 99.1 98.2
Source: Same as Table 3.

the results of Table 15 also reveal the failure of cluster development programs
in India.
Now firms, similar to OAEs and establishments, are often found to be members of
some industrial clusters because of various policy initiatives of the government30 and
the potential benefits of membership. Clusters help small firms to improve their
productivity and competitiveness by harnessing external economies of scale. This is
because certain services/arrangements unaffordable for individual firms (on account
of their size) may, nonetheless, be supported by common initiatives in a cluster. For
instance, a group of firms coming together to form a cluster can establish service
centres for facilitating common/bulk purchase from specialised raw materials (machi-
neries; parts and components) suppliers, linking up with designers and Business
Development Service providers, locating markets, arranging institutional finance for
working capital, providing technological and skill support, subcontracting and train-
ing, and the like. In fact, internationally, cluster formation is an important strategy
for survival and sustainable growth of small firms (UNIDO 2020).
Interestingly, in its report, the working group on cluster and aggregation of the
12th Five Year Plan (2012–17) underscored the importance of clusters in promoting
economic development. It recognised the potential of clusters acting as an instrument
of poverty alleviation, generating sustainable employment, innovation and more
broadly achieving the goals of inclusive growth (GoI 2011, 10). Therefore, it urged
 ECONOMIC VIABILITY AND UNDEREMPLOYMENT IN INDIA'S UNORGANIZED MANUFACTURING FIRMS 21

the government to play a ‘catalytic role’ in cluster formation. The working group also
identified several shortcomings in cluster development policies. In fact, Table 15
shows that even after almost two decades of the Abid Hussain Committee Report
which first recommended cluster development in 1997, unorganised manufacturing
firms hardly receive any government assistance.
Failure of government policies to reach unorganised manufacturing firms may be
part of a general problem that characterises cluster programs. For example, 12th FYP
working group notes that cluster schemes often adopt a one-size-fits-all approach and
heavily focus on infrastructure development, at the cost of neglecting interventions on
market linkages, training, capacity building, skill improvement, finance, marketing
inputs, product development and design. Therefore, it is essential to develop a
demand driven, ‘bottoms up’ flexible approach at the implementation stage with a
keen eye on specific requirements for better targeting of resources and other support
services. The working group also recommends policy support not only at the time of
cluster formation but even at later stages, although with reduced intensity. It appears
then, without careful policy intervention, scope of firms’ growth and full-time
employment creation in the unorganised manufacturing sector remains bleak.

5. Conclusion
This paper aimed to explore growth and employment dynamics of firms in the
unorganised manufacturing sector. Interest in the sector arises from the possibility of
whether it can bring about structural transformation in employment and insofar as it
can address the employment crisis India is currently facing. In particular, it aims to
answer three questions: (a) whether economic conditions of firms in unorganised
manufacturing sector are well-suited for growth; (b) if there are traces of disguised
unemployment among unorganised manufacturing firms (along with estimating its
magnitude) and (c) scope of full-time employment generation in the sector.
Analysis of economic conditions suggests lack of surplus, for reinvestment acts as
a major barrier to growth. Specifically, OAEs, with smaller firm size than establish-
ments, were not even capable of sustaining simple reproduction at casual wages, let
alone grow. As for rural establishments, growth hinged on the twin factor of wage
compression and longer working hours; whereas, urban establishments solely
depended on extension of workday.
Empirical results also showed prevalence of underemployment at casual wages in
OAEs and rural establishments. However, ‘revealed’ underemployment was non-exist-
ent for urban establishments, only because it was camouflaged by extra pay for extra
work. The observed growth pattern of firms and workers in different segments of
unorganised manufacturing showed poor prospect of full-time employment growth,
due to heavy presence of disguised unemployment.
This result is corroborated by the self-reported growth status of firms overwhelm-
ingly reporting either stagnant or contracting growth status. It led us to explore the
policy options available for promoting the growth of unorganised firms alongside
full-time employment creation in the sector. Interestingly, state policies already exist
to support unorganised manufacturing firms (as part of MSME policies); however,
22 A. ROYCHOWDHURY

evidence suggests that such policies have mostly remained on paper. Review of cluster
development programs in India revealed several shortcomings requiring urgent re-
orientation in policy for effective implementation.

Notes
1. This was perceived to be necessary, ‘considering the existence of large surplus labour,
including household labour, whose opportunity cost is close to zero, [therefore]
promotion of the decentralized methods of production may not only encourage greater
use of the abundant resource, but may also contribute to greater equity’ (Nagaraj
2014, 287).
2. This is particularly important in the current scenario as India is facing an unprecedented
employment crisis with absolute number of jobs declining between 2011–12 and
2017–18; there is a real possibility of India finding her potential ‘demographic dividend’
ending up in a ‘demographic disaster’ (Jaffrelot and Kalyankar 2019).
3. The role of manufacturing sector is emphasized in particular for a variety of reasons;
Majid (2019, 2) succinctly captures these factors: ‘Kaldor’s growth laws are more
specifically about the primacy of manufacturing over services, where manufacturing as
the initial engine of growth is superior in scale economies and has a higher income
elasticity of demand and a higher propensity to employ less-skilled workers’.
4. Right after Independence, in 1951, the manufacturing sector contributed 9% of GDP,
employing an equal percentage of workforce.
5. This does not mean manufacturing growth did not pick up after reforms, as trend
‘growth rate [in manufacturing] after the reforms is higher than in the preceding quarter
century’ (Nagaraj 2017, 61). But it is equally true that: ‘Between 1980–81 and 2009–10,
manufacturing sector’s share in domestic output, for instance, barely inched up by 2
percentage points to 16% in 2009–10, compared to a 6-percentage point rise in GDP
during the three decades, 1951–52 to 1979–80’ (Nagaraj 2014, 274). Thus, there seems to
be over enthusiasm around reforms insofar as their ability to bring about structural
transformation in the economy is concerned.
6. Although raising manufacturing share in output may not be sufficient in bringing about
structural change – defined as drawing out people from traditional agriculture – if
capital-intensive methods are used, nonetheless, it may be necessary since services sector
typically has low employment elasticity of output for most South Asian countries
(Ghose 2019).
7. Firms covered by ASI employ either 10 or more workers using power, or 20 or more
workers without using power.
8. Earlier follow-up surveys of NSS covered only unorganised manufacturing sector.
However, both 67th and 73rd round cover trade and other services in the unorganised
sector along with manufacturing. This study concentrates only on unorganised
manufacturing activity.
9. However, the registered–unregistered/organised–unorganised divide in gross value added
(GVA) obtained from National Accounts Statistics (NAS) is substantially different from
the NSSO; for example, in 2012–13, share of unregistered segment in manufacturing
GDP was 28.9% (NAS 2014; NAS discontinued providing division of output between
registered–unregistered segments from 2015).
10. This more or less matches with the Census estimate; for example, employment share of
factory (i.e. registered/organised) manufacturing was 27.7% in 2011.
11. Predominance of simple activities can be understood given the weightage of OAEs.
12. Although recently India has recorded very high open unemployment rates; for example,
PLFS 2017–18 reported highest unemployment rate in 45 years at 6.1%. PLFS 2018–19
also showed 5.8% unemployment rate.
 ECONOMIC VIABILITY AND UNDEREMPLOYMENT IN INDIA'S UNORGANIZED MANUFACTURING FIRMS 23

13. This is to ensure capitalists’ surplus and has nothing to do with marginal productivity
theory of wage determination.
14. We did not use the 2009–10 figures since it was a drought year and the labour market
was unusually depressed. However, by 2011–12, employment growth picked up and there
was some tightness observed in the labour market (Mehrotra et al. 2014).
15. This also helps us to draw a comparative picture about the prospect of wage employment
in unorganised manufacturing vis-a-vis rest of the unorganised sector.
16. Figures (in columns A, B, C) at the average firm level are obtained by dividing the
aggregate sector-wise values by total number of firms, all through.
17. Note that casual wage is imputed to unpaid family labour to check full-time employment
opportunities. Similarly, the surplus mentioned here is notional surplus for the workers
and owners are indistinguishable in OAEs.
18. It is assumed that the person works for 26 days each month throughout the year.
19. Emolument per firm is obtained by multiplying emoluments per worker with number of
workers per firm (column D), on average.
20. The condition for simple reproduction is thus met.
21. For a similar discussion in case of organized manufacturing sector, see Nagaraj (1994).
22. In fact, 90% of unorganised manufacturing firms are microenterprises, owning plant and
machinery valued up to Rs. 25 lakh (Basole and Chandy 2019, 10).
23. Credit guarantee fund scheme is another benefit that firms derive to avail collateral-
free credit and the eligibility condition is same as for priority sector lending (see
Table 14).
24. The new labour code on industrial relations (IR Code 2020) raised this threshold to 300
workers at one go and would be implemented very soon.
25. Scheduled employment means an employment mentioned in the Schedule added to the
Minimum Wages Act 1948, applicable to industries with a minimum of 1000 workers.
Moreover, the Code on Wages 2019, although yet to be implemented, extends minimum
wage payment to all categories of employment, that is, irrespective of schedule or non-
schedule employment.
26. The proposed daily national floor level minimum wage for unskilled work in September
2016 was Rs. 350 (see https://labour.gov.in/sites/default/files/MW_notification.pdf, 15),
whereas, in 2015–16, rural (urban) casual wage was Rs. 190.89 (232.19). Majority of firms
were unable to pay even casual wages.
27. Prevalence of such low wages is well recognised in literature; for example,
Chandrasekhar (2004, 18) notes, ‘[as] barriers to entry into many areas of
unorganised production are limited, the supply of commodities from these kinds of
[manufacturing] units tends to be elastic, with production at extremely low wages and
prices that reflects small or negligible “margins” occurring as when … demands
manifest themselves’ (emphasis added).
28. Except firms in the establishment segment in 2010–11; this, however, changed
dramatically in 2015–16.
29. Such that the Ministry of MSME in 11th Five Year Plan (2007–12) identified cluster
development as one of the thrust areas of policy.
30. For example, the Micro and Small Enterprises – Cluster Development Programme
(MSECDP) and Scheme of Fund for Regeneration of Traditional Industries (SFURTI)
initiatives run by Ministry of MSME.

Acknowledgements
Author wishes to thank C.P. Chandrasekhar, Satyaki Roy, Debarshi Das and two anonymous
referees of this journal for helpful comments on earlier drafts of the paper. Aishwariya Bhuta
helped at a later stage. None of them are responsible for the errors that may remain.
24 A. ROYCHOWDHURY

Disclosure statement
No potential conflict of interest was reported by the author.

Funding statement
Author received no funding for this research.

Third-party material
No Third-Party Material used in the paper.

Notes on contributor
Anamitra Roychowdhury teaches economics at Jawaharlal Nehru University, New Delhi, India.
His areas of interest include development economics, labour economics, Indian economy and
macroeconomics. His book titled Labour Law Reforms in India: All in the Name of Jobs was
published by Routledge in 2018.

Data sharing statement

Paper uses data published by Government of India and available in public domain (http://
mospi.nic.in/NSSOa).

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Appendix

Table A1. Concentration of manufacturing activity: enterprises, workers, GVA in

2010–11 (2015–16).
Manufacturing of Enterprise share (%) Worker share (%) GVA share (%)
Food products 11.8 (11.57) 12.7 (13.23) 13.4 (13.73)
Tobacco products 13.1 (16.65) 8.8 (10.95) 2.6 (3.37)
Textiles 15.4 (13.24) 16.8 (13.81) 14.5 (11.13)
Wood products 9.22 (6.06) 8.12 (6.04) 6.34 (4.59)
Other manufacturing 6.1 (4.83) 6.68 (5.2) 7.69 (6.54)
Wearing apparel 25.1 (28.53) 18.7 (21.82) 16.2 (19.29)
Wood 1 other 81 (81) 72 (71) 61 (59)
manf. 1 food 1 tobacco 1 textile 1 wearing
apparel
Cotton ginning, cleaning and bailing 0.03 (0.01) 0.04 (0.03) 0.04 (0.03)
Beverages 1.23 (0.94) 1.07 (0.95) 0.81 (0.71)
Leather products 0.68 (0.79) 0.93 (1.27) 1.02 (1.6)
Paper and paper products 0.69 (0.55) 0.98 (0.68) 1.30 (0.73)
Printing and reproduction of recorded media 0.91 (0.82) 1.4 (1.28) 2.76 (2.22)
Coke and refined petroleum products 0.01 (0.01) 0.03 (0.03) 0.04 (0.04)
Chemicals and chemical products 1.22 (0.88) 1.38 (1.03) 1.33 (0.87)
Pharmaceuticals, medicinal chemical and 0.03 (0.03) 0.06 (0.06) 0.13 (0.1)
botanical products
Rubber and plastics products 1.04 (0.63) 1.6 (1.16) 2.32 (2.36)
Other non-metallic mineral products 3.45 (3.12) 8.16 (7.79) 7.95 (6.6)
Basic metals 0.33 (0.26) 0.37 (0.49) 0.65 (0.8)
Fabricated metal products, except machinery 3.62 (4.01) 5.23 (5.61) 9.21 (9.2)
and equipment
Computer, electronic and optical products 0.08 (0.07) 0.18 (0.1) 0.40 (0.24)
Electrical equipment 0.21 (0.19) 0.37 (0.5) 0.69 (1.11)
Machinery and equipment N.E.C. 0.44 (0.41) 0.87 (1.52) 2.14 (5.36)
Motor vehicles, trailers and semi-trailers 0.11 (0.11) 0.27 (0.27) 0.74 (0.56)
Other transport equipment 0.06 (0.03) 0.12 (0.06) 0.26 (0.16)
Furniture 3.52 (4.43) 3.46 (4.59) 4.94 (6.32)
Repair and installation of machinery 1.73 (1.83) 1.64 (1.55) 2.43 (2.33)
and equipment
Total 100 (100) 100 (100) 100 (100)
Source: Same as Table 3.
Note: Figures in parenthesis relate to 2015–16.

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