Informality and structural change: evidences from microenterprises in India's unorganised manufacturing sector

This article analyses the structural change in microenterprises located at India's unorganised manufacturing sector in terms of output mix, choice of technique and productivity during the last few decades.

Based on data collected from a quinquennial survey of unorganised firms, this study attempts productivity analysis by using the growth accounting technique.

The paper finds that there is a significant structural change which has occurred in the small firm sector in Indian manufacturing. The share of capital-intensive industries has increased substantially in recent years. Further, though small firms are more labour intensive, the labour productivity and total productivity of these firms are very low. The falling labour productivity and rising capital intensity indicates replacement of labour with capital in Indian small firm sector.

Low productivity of the sector is a cause for concern and this needs to be addressed by making the sector more competitive in the world market. To achieve this, policies should be designed so that small firms reach the efficient scale of production.

This is the first paper which examines structural changes in the Indian MSME sector. The findings have strong implications for creation of a viable ecosystem of entrepreneurship in the country.