Small versus large manufacturing units: how efficient are they?¹

1. The authors thank three anonymous referees for their valuable comments on the paper. They are also thankful to Mr Chandan Jain, MSc (Economics), TERI University for his help in analysing the data and to Mr Gunajit Kalita of ICRIER for his help with the processing of unit level NSS data.

Abstract

Keeping in mind the much discussed huge employment potential of small manufacturing units, this study examines the performance of enterprises across organised or formal and unorganised or informal sector enterprises. The analysis tends to offer little evidence in favour of positive links between sectors in terms of performance index, i.e. technical efficiency. The formal sector units obviously are better performers than their informal sector counterparts. The informal sector units are not able to benefit in the process of rapid overall growth, suggesting that growth is not inclusive. The demand side factor or agglomeration-specific factor also does not seem to impact on the performance of the informal sector enterprises favourably. On the other hand, the organized manufacturing sector, covered by ASI (annual survey of industries) is responsive to increases in income, which possibly can be explained in terms of the quality differences in the products manufactured by the formal and the informal sectors. The infrastructure variables also do not show a positive effect on the informal sector, while the formal sector efficiency improves with a rise in the availability of infrastructure. On the whole, the informal sector enterprises exist only to provide means of survival; they seem to lack all dynamism.

Keywords:

• technical efficiency
• informal sector
• small units

JEL classification codes:

• J20
• L60
• O33.

Notes

1. The authors thank three anonymous referees for their valuable comments on the paper. They are also thankful to Mr Chandan Jain, MSc (Economics), TERI University for his help in analysing the data and to Mr Gunajit Kalita of ICRIER for his help with the processing of unit level NSS data.

2. See Hulme and Mosley (1996) for issues on poverty and finance.

3. See the study by Sharma and Dash (2006).

4. Establishment with 1–5 workers (household and hired together) fall into the domain of NDME segment and the DME segment in the informal sector comprises units with 6–9 workers and units 10–19 workers without using power.

5. For details on the topic, see Bhalotra (1998), Goldar (2000), Nagaraj (2000) and Tendulkar (2000).

6. See Goldar (2002).

7. The data on per capita income for various states are taken from estimates of state domestic product, central statistical office, Ministry of Planning and Programme Implementation.

8. The population census provides information on the level of urbanisation across states.

9. Figures on electricity consumption per capita, state-wise total length of roads per 1000 km² and tele-density are taken from India-Stat.