The manufacturing sector in India is crucial for two main reasons: It has significant potential to
provide modern employment to a growing labor force, especially that of less skilled type and
second by its own healthy growth, stimulate and provide a foundation for, organic growth in
other sectors of the economy. On both these counts, however, the manufacturing sector has so far
not performed to its potential. In an attempt to identify the factors responsible for this
phenomenon, the present study examines in detail the main determinants of factor employment,
their shares, and output growth.
The findings on the determinants of employment of labor indicate that wages have started
playing an equally important role as that of technology With regard to the sources of output
growth, it was found that much of the growth in output had come from capital (82%), followed
by labor (12%), and productivity (6%) The low contribution of productivity can be attributed
mainly to the heavy decline in capacity utilization following the 1990s reforms as a result of a
time lag between investment and output growth. But pure productivity, devoid of the effects of
capacity utilization, must have improved post-reforms. Output growth then is not sustainable
with suppression of labor demand. But if stringent labor laws did force firms to do so, firms may
continue to suppress demand for labor and sacrifice the growth in output. Hence adequate
reforms in labor laws are necessary to ensure sustainability of output growth which in turn would
also unshackle the employment potential