The contribution of Small Manufacturing Enterprises (SMEs) to the economy is being questioned on grounds of their low productivity and their sustainability is argued to depend on improving labour productivity through technological upgradation. In a developing economy this is a costly proposition due to capital scarcity, and the effect of technological changes on productivity levels has to be estimated before taking such policies. However, for the SMEs, technological diffusion is more important rather than the ‘modernity’ of the technology itself. This paper seeks to disassociate the effects of pure Technological Progress from those of Technological Efficiency Changes in few selected industries within the SMEs and examines their relative importance. It is found that in about 70 per cent of the situations where indeed there has been some technological improvement, technological diffusion has by far outstripped the role of pure technical progress. A combination of better technology and wider diffusion is thus recommended for productivity rise.