Pattern and drivers of profitability in India’s unorganised manufacturing sector

Abstract

Using data from National Sample Survey Organisation surveys, the paper analyses the profit rate and its drivers in India’s unorganised manufacturing sector for the period 2000–01 to 2015–16. The entire period has been subdivided into three smaller periods to examine the short-run fluctuations in profitability. The study has been carried out at disaggregate level, namely, state and industry levels as well. The output-capital ratio has behaved cyclically over the years, whereas a steady rise in the profit share has been the driver of cyclically rising profit rate over the period. A rapid growth in labour productivity with a non-commensurate rise in wage rate has been the reason behind the rise in profit share. The ranking of states and industries on profit rate has been found to be relatively unchanged.

KEYWORDS:

• Unorganised manufacturing industries
• profitability
• profit share
• labour productivity
• real wage

JEL Classifications:

• B51
• E11

Acknowledgement

We thank Deepankar Basu, among others, for helpful comments on an earlier draft. We would also like to thank two anonymous referees of this journal for their suggestions on an earlier version of this paper. The usual disclaimers apply.

Disclosure statement

No potential conflict of interest was reported by the author(s).

Data availability statement

The major data that support the findings of this study are openly available in Ministry of Statistics and Programme Implementation, Government of India, New Delhi at https://www.mospi.gov.in/reports-publications.

Notes

1 The reference period was ‘as on the date of survey’.

2 Here profit rate in organised sector is higher than unorganised sector. A part of the difference is due to a broader definition of profit in Basu and Das (2018).

3 For 2015–16, the states of Andhra Pradesh and Telangana were combined together to make it comparable over different time periods.

4 For 2010–11 and 2015–16, Manufacture of Food products and Manufacture of Beverages and Manufacture of Furniture and Other manufacturing were clubbed together to make them consistent with data of other years.

5 For minor estimations such as these the figures have not been reported for brevity. These can be provided on request.

6 Based on the labour-capital ratio, industries were categorised as labour-intensive or capital-intensive industries (number of workers employed divided by fixed assets in rupees multiplied by one million gives labour-capital ratio, see Table A.2 in Appendix for detailed data). For each industry we took an average of labour-capital ratio over the years. The median labour-capital ratio was around 8. An industry with a labour-capital ratio greater than 8 was considered as labour-intensive and the opposite for capital-intensive. Kapoor (2015) makes the distinction between labour and capital-intensive industries on a similar line.

7 $CAGR={\left(\frac{Newvalue}{Oldvalue}\right)}^{\frac{1}{t}}-1$, where t = number of years.

8 See Basu and Das (2017) for estimation of investment function in Indian manufacturing sector.

9 Detailed estimates can be provided on request.

10 These definitions have been taken from the reports, “Unorganised Manufacturing sector in India, Employment, Assets and Borrowings NSS 62nd round (July 2005-June 2006)” and “Economic Characteristics of Unincorporated Non-agricultural Enterprises (Excluding Construction) in India NSS 67th round (July 2010-June 2011)”.

Additional information

Notes on contributors

Md. Nasir Khurshid

Md. Nasir Khurshid is a PhD student in the Department of Humanities and Social Sciences at IIT Guwahati. This paper originates from his PhD thesis. His areas of interest include Development Economics, Macroeconomics and Political Economy.

Debarshi Das

Debarshi Das is a professor of economics at the Department of Humanities and Social Sciences, Indian Institute of Technology Guwahati, India. His areas of specialisation include development economics, macroeconomics and political economy. His articles have appeared in Cambridge Journal of Economics, Journal of Agrarian Change, Journal of Development Studies and other journals.

Amarjyoti Mahanta

Amarjyoti Mahanta is an assistant professor of economics in the Department of Humanities and Social Sciences at IIT Guwahati. He specialises in the field of Game theory, Auction Theory and Industrial Organisation. Prof. Mahanta's publications have appeared in reputed journals such as Metroeconomica, Economics Bulletin, Seoul Journal of Economics, Indian Growth and Development Review and Journal of Economics. In addition to research articles he has also published two book chapters.