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

A comparative analysis of total factor productivity (TFP) growth in the formal and informal segments of Indian manufacturing industries is undertaken, along with an analysis of differences in the level of TFP between the two segments of these industries. The period covered for the analysis of TFP growth is 1980-81 (1980) to 2011-12 (2011), which is broken into three-sub-periods, 1980-1993, 1994-2002 and 2003-2011. The period covered for the analysis of TFP level differences is 2003-04 to 2011-12. From the analysis of TFP growth trends, it is found that the average growth rate in TFP in the informal manufacturing sector during 1980-2011 was significantly lower than that in the formal manufacturing sector (0.6% per annum as against 4.4% per annum, based on value added function framework). 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 Coke and refined petroleum products industry with additional contributions made by Food, beverages and tobacco products, Chemicals and chemical products, and Textiles and leather products. 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 industry with additional contributions made by Wood and wood products, Food, beverages and tobacco products, and Chemicals and chemical products. The comparison of the level of TFP between the formal and informal segments of Indian manufacturing industries for the period 2003-2011 brings out that it is substantially lower in informal manufacturing than formal manufacturing.