Possible routes to faster output growth are higher investments and productivity growth. While investment-driven growth creates a set of linkages and spillovers in the economy, productivity growth enhances the workers’ welfare. As small enterprises absorb a large proportion of the workforce, labour productivity growth would enhance the welfare of a large section of workers in the long run.

Given the diverse nature of activities and the geographical spread of small enterprises, an understanding of productivity growth and its determinants is a prerequisite for effective policy formulation. The issue is complicated by the disparities between rural and urban enterprises, across industries and the nature of ownership.

Labour productivity in SMEs is considerably higher in the urban segment than the rural segment, though the gap is narrowing from the last decade. In the mid-eighties, the rural-urban gap was to the extent of 2.75 times and in 2005-06 it came down to 1.91 times. Both in rural and urban segments, Gujarat had the highest labour productivity in the eighties but now Maharashtra registers high labour productivity in the urban segment and Haryana in the rural.

An enterprise-type-wise study reveals that output per worker is the highest in the ?tiny? segment in Haryana, followed by Punjab and the least in Orissa. Labour productivity in Haryana is about four times higher than that of Orissa. In the case of the ?mid-sized? units, Maharashtra has the maximum labour productivity and Orissa the lowest. Among the comparatively ?big? enterprises, SMEs in Haryana has the maximum labour productivity and AP the lowest. Gujarat registered a decline in labour productivity in the ?tiny? section in recent times.

Overall, the labour productivity of the ?big? is more than three times that of the ?tiny? but only 1.2 times that of the mid-sized enterprises. These differences are striking even in states like Orissa, which has got substantially low labour productivity levels compared to other states, as productivity in the big firms among SME in Orissa is more than six times than that of the tiny ones.

Analysing productivity growth at the regional level will be helpful in identifying regions that have caught up and that have lagged behind during changes in the policy regime. However, trends in labour productivity growth reveals only a partial picture—after ignoring the effects of the other factors of production, especially capital. A comprehensive picture can be arrived at only by examining growth of total factor productivity (TFP).

An analysis of 15 major states reveal that only six states have recorded a higher growth of TFP in the reform period. These six states pushed up the overall TFP rate. States like Bihar, Kerala, Orissa, Punjab and Uttar Pradesh saw a decline in TFP.

The TFP growth is marginal in the rural sector. Interestingly, TFP growth has been higher for both rural and urban segments in industrially advanced states like Gujarat, Karnataka, Maharashtra and Tamil Nadu. Within the rural sector, TFP grew fast in Karnataka, Gujarat and Maharashtra while it declined in UP, Bihar, Kerala and Orissa during the reforms period. In the case of urban enterprises, the TFP growth is high in Maharashtra, Karnataka and Gujarat and lower in UP, Madhya Pradesh, Kerala and Bihar.

Across states, the TFP growth in big and mid-sized enterprises is higher than that of tiny firms. In fact, the average TFP growth in tiny firms has not grown at all in the reforms period. Thus, the picture that emerges is that the more industrialised states have recorded a faster growth in TFP in the reforms period in both rural and urban sectors and in bigger enterprises. This points to some early mover advantages for these states, and there is scanty evidence of regional ?catching up? taking place.

To locate the factors that affect productivity growth, we need to unravel the components and its effects. In SMEs technical efficiency has declined across states in the reform period. Both in rural and urban enterprises there have been a decline in technical efficiency. The decline in efficiency is also uniform across tiny, mid-sized and big firms. This has important implications.

Enterprises could achieve technological progress by investing in new machinery, but efficiency is also related to other factors, including the skill level and human capital endowments of the workers and entrepreneurs. Moreover, technological progress could touch the upper bounds faster for SMEs because of their limited financial options for investments in new machinery. SMEs are also handicapped by the excessive transaction costs and bureaucracies, which keep them out of the formal economy. This calls for concerted attempts to enhance efficiency by administering tailor-made policies suited for different regions to promote a business atmosphere in which enterprises can have a low cost access to markets.

The analysis of productivity reveals that there has been a significant growth in labour productivity in recent years. Equally encouraging are the trends in overall productivity across industries and states. Capital intensity has increased, especially in the urban areas, indicating more investment flows. Capital intensity and labour productivity growth have implications for employment generation, which is reflected in the declining growth of employment per enterprise. This point to growth of capital-intensive production contributing to less employment generation, which is a disturbing trend.

Excerpts from a study, titled Productivity and Efficiency of Unorganised Manufacturing Sector, done by Rajesh Raj and Suresh Babu who are economists with CMDR Dharwad and IIT Madras, respectively