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CONTRIBUTION OF FACTOR PRODUCTIVITY IN MICRO, SMALL & MEDIUM

SCALE SECTOR’S EXPORT EARNINGS IN INDIA

Ms. SONAL S. YADAV DR. MITA H. SUTHAR

Senior Lecturer, Department of Economics Head, Department of Economics

H.L. Institute of Commerce H.L. Institute of Commerce

Ahmedabad University Ahmedabad University

Abstract:

This paper focuses on the contribution of labour vis-à-vis capital productivity in the export

earnings of the Small Scale Industry (SSI) sector in India over the years from 1975-76 to

2009-10. It is observed that this sector has registered a substantial and steady growth in the

production, generation of employment, exports and investment of fixed capital. We have tried

to link growth in the labour productivity as well as capital productivity with employment,

production and exports since 1975. It is observed that after the economic reforms, the direct

exports from the SSI sector accounted for nearly 35% of total exports of India. Empirical

analysis through two-stage least squares method suggests that capital and the use of better

technology play a positive and significant role in the production and export growth of SSI

sector. Labour intensity has similar, but greater impact on export earnings as compared to

capital. Thus, there is a need to focus more on improving the labour employability in the SSI

sector. Better / improved working conditions, higher wage rate, training and labour welfare

schemes can help in improving labour employability, while technological up gradation and

innovation can help in increasing efficient utilization of capital. Thus, it is observed that there

is a scope for improvement in the area of utilization of both labour and capital, but more so

for labour. However, it needs to be borne in mind that the use of capital should be such that it

complements the labour. This, in turn, will ensure greater export earnings for the SSI sector.

KEY WORDS:

Labour Productivity, Output-Capital Ratio, Export Earnings

JEL CLASSIFICATION:

F16, O14, O33

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I. INTRODUCTION:

Indian industrial sector comprises of a large number of Small Scale Industries (SSI) apart

from medium and large-scale industries. SSI sector, now defined as the Micro, Small and

Medium Enterprises (MSMEs) contributes significantly to total output, export earnings,

employment generation and regional development of Indian economy. There are enormous

opportunities as far as growth of this sector is concerned due to extensive promotion and

support by the government and increasing domestic demand as well as export potential of this

sector. This paper is an attempt to identify the specific factors that contribute to the

production growth and export earnings of the SSI/MSME sector.

Recognizing the contribution and potential of the sector, the definitions and coverage of the

Small Scale Industry (SSI) sector were broadened significantly under the Micro, Small and

Medium Enterprises Development (MSMED) Act, 2006 which recognized the concept of

“enterprise” to include both manufacturing and services sector besides, defining the medium

enterprises.

The limit for investment in plant & machinery and in equipment for manufacturing

enterprises and service enterprises is shown in table 1. The table shows that a large number

of enterprises can be covered in the MSMEs category through this classification.

Table 1: Limit of Investment in Micro, Small & Medium Enterprises in India

Manufacturing Sector

Enterprises Investment in plant & machinery

Micro Enterprises Does not exceed twenty five lakh rupees

Small Enterprises More than twenty five lakh rupees but does

not exceed five crore rupees

Medium Enterprises More than five crore rupees but does not

exceed ten crore rupees

Service Sector

Enterprises Investment in equipment

Micro Enterprises Does not exceed ten lakh rupees:

Small Enterprises More than ten lakh rupees but does not

exceed two crore rupees

Medium Enterprises More than two crore rupees but does not

exceed five core rupees

Source: http://dcmsme.gov.in/ssiindia/defination_msme.html

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Table 2: Economic Indicators of MSMEs in India at a Glance (2007-08)

SSIs/MSMEs in India

• Estimated No. of Units 27.28 million

• Total Employment 62.63 million

• Employment per unit 2.30 persons

• Fixed investment at constant prices 558190 crore

• Share in total industrial Production 44.86%

• No. of exporting units 40,504

• Share in overall Total Exports

34%

• Total Number of Items Produced Over 6000

• Number of Reserved Items 326

• Labour productivity 85000

• Output Capital Ratio 0.95

Source: Compiled from MSME Annual Reports www.msme.gov.in

According to 4th

MSME census, there are 94.06% unregistered MSME units and 5.94%

registered units in India. The size of unregistered enterprises is estimated to be 245.48 lakh

and that of registered is 15.64 lakh units. Among the total working MSMEs, there is steep

pyramid as 94.94% are micro enterprises, 4.89% are small enterprises and 0.17% are medium

sized enterprises. This comprises of 67.10% manufacturing enterprises and 32.90% services

enterprises and about 45.23% of enterprises are located in rural areas.

The employment potential of micro enterprises is 70.19%, small enterprise is 25.17% and

medium enterprise is 4.64%. This sector comprises of more than 80% per cent of the total

industrial units in the country and produces over 6000 products. Further, this sector has

consistently registered a higher growth rate than the rest of the industrial sector. Its

contribution in total industrial production in 2008-09 (at 1999-2000 prices) was 44.86% and

its share in GDP was 8.72% (Annual Report 2011-12). The major advantage of this sector is

its employment potential at low capital cost. It provides good opportunities for both self-

employment and wage-employment. As per available statistics, the labour intensity of MSME

sector is almost four times higher than the large enterprises. Although there is steady increase

in the contribution of SSI/MSMEs in the total industrial production as well as labour

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productivity at constant price since 1973-74 till 1989-90. However, there is drastic fall in the

production and labour productivity in 1990-91.

This might have happened due to the change in the policy of government. The importance of

the government was shifted from labour intensive industries to capital intensive industries

because of the Liberalization, Privatization and Globalization (LPG) of Indian economy.

Though, capital and the use of better technology play a positive and significant role in the

production and export growth of SSI sector, there is a need to focus more on improving the

labour employability in the SSI sector as this will ensure greater export earnings for the SSI

sector. Employment generation as well as productivity of labour is of paramount importance

in our labour surplus and capital scare economy.

II PERFORMANCE OF SSIs/MSMEs:

As evident from table 3, this sector has emerged as India's engine of growth in the

past few years due to its contribution in Gross Domestic Product (GDP), employment

generation, production and exports. The MSME sector produces over 6000 products

ranging from traditional to high-tech items and provides the maximum opportunities

for both self-employment and jobs after agriculture sector. It is also observed that

manufacturing jobs are ideal for the workers transitioning out of agriculture sector.

The Indian manufacturing sector has the potential to elevate Indian population above

the poverty line by absorbing the huge amount of work force out of agriculture sector.

Table-3

Year

Units

(Mn.)

Production

Crore At

Constant

Prices

Employment

(Mn.)

Production

per

Employee

Thousand

at Constant

Prices

Fixed

Investment

at Constant

Prices

Crore

Output-

Capital

Ratio

Average

Annual

Exchange

Rate ( / $)

SSI

Export

Crore

1975-76 0.55 42500.00 4.59 93.00 123791 0.34 8.68 500

1976-77 0.59 46800.00 4.98 94.00 134097 0.35 8.98 800

1977-78 0.67 52800.00 5.40 98.00 146178 0.36 8.59 800

1978-79 0.73 58200.00 6.38 91.00 163218 0.36 8.23 1100

1979-80 0.81 66400.00 6.70 99.00 170304 0.39 8.10 1200

1980-81 0.87 72200.00 7.10 102.00 150310 0.48 7.91 1600

1981-82 0.96 78300.00 7.50 104.00 150836 0.52 8.97 2100

1982-83 1.06 84700.00 7.90 107.00 164560 0.51 9.67 2000

1983-84 1.16 93500.00 8.42 111.00 165423 0.57 10.34 2200

1984-85 1.24 104600.00 9.00 116.00 173574 0.6 11.89 2500

1985-86 1.35 118100.00 9.60 123.00 184965 0.64 12.23 2800

1986-87 1.46 133600.00 10.14 132.00 201065 0.66 12.78 3600

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1987-88 1.58 150500.00 10.70 141.00 217389 0.69 12.97 4400

1988-89 1.71 169900.00 11.30 150.00 243976 0.7 14.48 5500

1989-90 1.82 189900.00 11.96 159.00 219311 0.87 16.65 7600

1990-91 6.79 84728.00 15.83 54.00 93555 0.91 17.94 9664

1991-92 7.06 87355.00 16.60 53.00 100351 0.87 24.47 13883

1992-93 7.35 92246.00 17.48 53.00 109623 0.84 30.65 17784

1993-94 7.65 98796.00 18.26 54.00 115795 0.85 31.37 25307

1994-95 7.96 108774.00 19.14 57.00 123790 0.88 31.40 29068

1995-96 8.28 121175.00 19.79 61.00 125750 0.96 33.45 36470

1996-97 8.62 134892.00 20.59 66.00 130560 1.03 35.50 39248

1997-98 8.97 146263.00 21.32 69.00 133242 1.1 37.16 44442

1998-99 9.34 157525.00 22.06 71.00 135482 1.16 42.07 48979

1999-00 9.72 170379.00 22.91 74.00 139982 1.22 43.33 54200

2000-01 10.11 184401.00 24.09 77.00 147348 1.25 45.68 69797

2001-02 10.52 282270.00 24.93 112.00 154349 1.83 47.69 71244

2002-03 10.95 306771.00 26.02 116.00 162317 1.89 48.40 86013

2003-04 11.40 336344.00 27.14 122.00 170219 1.98 45.95 97644

2004-05 11.86 372938.00 28.26 130.00 178699 2.09 44.93 124417

2005-06 12.34 418884.00 29.49 140.00 188113 2.23 44.27 150242

2006-07 26.10 471663.00 59.46 79.00 500758 0.94 45.28 182538

2007-08 27.28 532979.00 62.63 85.00 558190 0.95 40.24 202017

Source: RBI Handbook of Statistics on Indian Economy 2011,

Micro, Small & Medium Enterprises Annual Report 2010-2011

Note: Based on the Author’s calculations from the data on production and employment, the data of Production

per employees for 2006-07 and 07-08 varies from the data published in the MSME Annual Report.

Trends in units, employment, production and productivity

When we compare the growth of SSI in terms of number of units and employment

before and after the economic reforms it is clearly observed that there is rapid growth

in the number of units and employment since 1990-91 and also expected to grow at

this rate for many decades in the future. As per the data given in the above table, the

total number of SSI units has increased from 18.2 lakh in 1989-90 to 67.9 lakh in

1990-91 and further increased to 298.08 lakh in 2009-10. The employment increased

from 119.6 lakh in 1989-90 to 158.3 lakh in 1990-91 and further increased to 695.38

lakh in 2009-10.

When we compare the annual growth in the production during 1989-90 to 1990-91 it

reduced drastically from 12% to -55% at constant price and from 24% to -40% at

current price. While in terms of rupees, production at constant price reduced from

189900 crore to only 84728 crore during the same time period. Same trend was

observed at current price also, production reduced from 132300 crore to 78802

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during the same time period. While in 2007-08, the production at constant price was

worth 532979.00 crore and at current price it was worth 790759 crore.

As far as production per employee (labour productivity) during 1989-90 to 1990-91 is

concerned, it reduced from 159000 to 54000 at constant price after that it

increased continuously till 2005-06 but again reduced substantially. The total amount

of exports by MSME stood at 202017 crore in 2007-08. Thus, its contribution in

total national exports was about 34%. In 2007-08, the projected growth rate of SSI

sector (at 2001-02 base Index of Industrial Production IIP) was 13.00% which was

higher than the overall growth rate of industrial sector (8.70%). (MSME, Annual

Report, 2011-12)

Chart-1 indicates unprecedented growth in the number of units and employment in the

SSI/MSME sector in the year 1990-91 and 2006-07. The main reason behind the fast

growth was due to the economic reforms on one hand and change in the definition of

MSME in 2006-07 on the other hand. However, there is fast increase in the number of

unorganised/unregistered MSMEs over the years which are run by self, with or

without the help of unpaid family members. With fast development of

industrialisation, it is very important to concentrate on the small scale industries

which provide high level of employment. This is possible by increasing productivity

and giving suitable environment to the enterprise or by raising investment especially

in export oriented units. This will lead to increase in output, economic growth,

expansion of domestic industries, increase in income and investment thereby

increasing employment level. According to Dr. Manmohan Singh, “the key to our

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success in employment lies in the success of manufacturing in the small scale sector.”

Chart-2 shows too much volatility in the production and productivity trends.

However, there is drastic reduction in the labour productivity after 1991 and also after

2005-06, which indicates neglect of labour in this sector. While the total production is

showing continuously increasing trend. This may be due to the fast increase in the

total employment in the micro enterprises which are less capital intensive and highly

labour intensive in nature. The labour to capital ratio in such enterprises is much high

than the large industries.

III COMPARATIVE ANALYSIS OF MSMEs PERFORMANCE: PRE AND

POST REFORMS

Table 3

Year No.

of

Units

Employment Production Average

Productivity

of Labour

Average

Productivity

of Capital

Exports

1975-1991 26.55 8.81 6.86 -0.69 6.92 22.88

1991-2008 10.41 10.03 11.84 4.06 2.57 20.09

Comparative analysis of two time segments i.e. pre reform period and post reform

period shows a significant increase in average productivity of labour from -0.69 to

4.06. This implies that the MSME sector units are performing at the increasing returns

stage as per the theory of returns to variable factor proportion. On the other hand the

average productivity of capital decreased significantly from 6.92 to 2.57 during the

same time period. This implies that the MSME sector units operate at the diminishing

returns stage as per the theory of returns to variable factor proportion.

8

0

100000

200000

300000

400000

500000

600000

Am

ou

nt in

Rs. C

ro

re

Year

Chart 1: Correlation between SSI Exports and SSI Production

Production ₹ Crore At Constant Prices SSI Export ₹ Crore

From this, it can be concluded that it would be more advantageous for the MSME

units to focus more on the employment of labour rather than increase in investment in

capital.

IV CONTRIBUTION OF LABOUR AND CAPITAL IN EXPORT

EARNINGS OF THE SSI SECTOR:

The quantum of SSI exports depends on the growth in the production of the SSI

sector. The following chart indicates that these two are closely correlated. It is

evident that the growth in SSI production has been volatile, with the year 1990-91

registering a sharply negative growth in production and the year 2001-02 registering a

high growth in production. There is no such evidence of volatility in the export

growth, and it has been much slower than the growth rate of production.

9

0

0.5

1

1.5

2

2.5

0

100000

200000

300000

400000

500000

600000

Ou

tp

ut-C

ap

ita

l R

atio

SS

I P

ro

du

ctio

n a

nd

Exp

ort E

arn

ing

s i

n R

s. C

ro

re

Year

Chart 3: Impact of capital on SSI production and export earnings

Output-Capital Ratio Production ₹ Crore At Constant Prices SSI Export ₹ Crore

0

20

40

60

80

100

120

140

160

180

0

100000

200000

300000

400000

500000

600000

La

bo

ur P

ro

du

ctiv

ity in

Rs. T

ho

usa

nd

SS

I P

ro

du

ctio

n a

nd

Exp

ort E

arn

ing

s i

n R

s. C

ro

re

Year

Chart 2: Impact of Labour Productivity on SSI Production and Export Earnings

Production per Employee ₹ Thousand at Constant Prices Production ₹ Crore At Constant Prices SSI Export ₹ Crore

Further, charts 2 and 3 indicate that production in the SSI sector depends on the

efficiency of labour and capital, measured in terms of production per employee and

output-capital ratio respectively. The charts suggest a possibility for a positive

relation between factor efficiency and production in case of both labour and capital.

Then the question is, which factor of production is a more significant determinant of

SSI production and thus drives the export growth – labour or capital? To investigate

this, two-stage least squares method is used. The justification for this is the fact that

production is a function of labour and capital, whereas export earnings are a function

of production. To avoid ambiguity in this functional relation due to the currency

appreciation / depreciation, the export earnings are adjusted for exchange rate

fluctuations. Thus, the econometric model is defined as follows:

y1,t = a'X1,t + b'Y2,t + u1,t ,

Y2,t = G1X1,t + G2X2,t + U2,t ,

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t = 1, 2, 3, ....., n,

where y1,t is a scalar dependent variable, Y2,t is a vector of other dependent variables,

X1,t is a vector of common exogenous variables, possibly including 1 for the constant

terms, and X2,t is a vector of additional explanatory variables for Y2,t.

The equation for y1,t is the first equation of a classical simultaneous equations system

B.Yt = GXt + Ut,

where Yt = (y1,t, Y2,t')' and Xt = (X1,t', X2,t')'.

The equation for Y2,t is just the corresponding part of the reduced form equation

Yt = B-1

GXt + B-1

Ut.

The equation for y1,t is of particular interest in this model, since it indicates the

interrelation between the dependent variable on one hand and instrumental and

exogenous variables on the other hand.

For the current analysis the variables are defined as follows:

y1,t = ln[SSI Export Adjusted for Exchange Rate]

Y2,t = ln[SSI Production Rs. Crore at Constant Prices]

X1,t =

Table 4: 2SLS Estimation Results

VARIABLE 2SLS ESTIMATE t-VALUE

(p-VALUE)

Ln[SSI Production Rs. Crore at

Constant Prices]

1.8150 8.838

(0.000)

LAG1[ln[SSI Production Rs. Crore at

Constant Prices]]

-0.3735 -1.925

(0.054)

Ln[Production per Employee Rs. -1.4063 -14.188

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Thousand at Constant Prices] (0.000)

Ln[Output-Capital Ratio] 0.4259 4.190

(0.0003)

Intercept -4.2529 -4.607

(0.000)

R-square 0.983964 -

Adjusted R-square 0.981589 -

The estimation results given in table 4 indicate the following:

1. The overall explanatory power of the 2SLS model is very high with the

adjusted R-square equal to 0.981589, indicating that the model describes the

factors responsible for export earnings of the SSI-MSME sector in India.

2. It is understandable that the quantum of production contributes to export

earnings positively and significantly.

3. At the same time, the lag effect of production on export earnings is negative

and highly insignificant.

4. The average productivity of labour, as measured by production per employee,

is negatively related and highly significant to the export earnings. In fact, one

unit change in the labour productivity causes 1.4063 units change in export

earnings in the opposite direction. Thus, if labour productivity declines due to

employment of more labour, export earnings will increase. This change is

welcome, as the production theory indicates that productivity is bound to

decline with greater employment of labour, but in the present case, this will

lead to greater rise in export earnings.

5. The average productivity of capital, as measured by output-capital ratio, is

positively related and highly significant to the export earnings. One unit

change in output-capital ratio leads to 0.4259 units change in the export

earnings in the same direction. Thus, increase in the capital investment in this

sector will also lead to a decline in the export earnings. This is very important

from the viewpoint of decision making, when producers in the MSME sector

have to make a choice between labour intensive and capital intensive

techniques of production.

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These results imply that a greater emphasis on employment of labour in the SSI-

MSME sector rather than using more and more capital intensive techniques of

production can contribute more to the export earnings of this sector. This may

contradict the tendency of the entrepreneurs to use more capital intensive techniques,

and avoid the employment of labour force. Moreover, focusing on labour

employment can help prevent higher cost of production, as the cost of capital is higher

in India as compared to the cost of labour.

II. LABOUR PRODUCTIVITY – EXPERIENCE OF SMALL SCALE

INDUSTRIES:

The productivity of labour is an essential condition for the progress of enterprises.

However, Indian MSME sector is facing problems due to which labour productivity is

showing decreasing trend in the recent time period. The important factors behind the

low productivity of labour are sub optimal scale of operation, technological

backwardness, supply chain inefficiency, increasing domestic and global competition,

shortage of fund, change in the manufacturing strategies, uncertain market scenario,

lack of infrastructure facilities at workplace and the low compensation. Along with

this, access to dependable supply of electricity, poor transportation facilities, excess to

new and large markets, well developed industrial estate etc. are the most crucial issues

which block the rise of productivity and output of small firms.

Several studies have been conducted with reference to factor productivity in Indian

manufacturing sector. Ahluwalia (1991) found that increase in the labour productivity

depends not only on the improved skill of labour, experience and better utilisation of

capabilities but also on the technological progress. He observed a deceleration in total

factor productivity during 1970s and improvement in total factor productivity in the

first half of the 1980s. This improvement in total factor productivity was mainly

because of increase in the labour productivity while capital productivity did not show

any change. This was observed mainly due to the use of inappropriate indices to

deflate the value added.

Papola (1994) observed that increases in real wages were generally accompanied by

increase in productivity across industry groups, resulting in lower unit cost across

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industry groups. Nagaraj (1993) disputes the extent of increase in real wages because

according to him, the increase in annual earnings was primarily accounted for by the

increase in the number of working days per worker during the year and thus only to

small increase in earnings per day.

Balasubramanyam and Mahambre (2001) found that the productivity in the Industrial

sector has declined after the reforms however the sector has benefited from the

reforms by expanding its capacity. While the study by Unel 2003, TSL 2003 had

found an acceleration in productivity growth in Indian industry.

Goldar ( Goldar & Kumari 2003 and Goldar 2004) observed that there is positive

influence of reforms on productivity but this was counteracted by a decrease in

capacity utilisation and decrease in the growth of agriculture production.

Topalova (2004) in his studies supports Goldar’s finding and added that productivity

growth of private enterprises was higher than the public enterprises.

The findings of the study by Eckhard Siggel and Pradeep Agrawal (2009) support

economic reforms because reforms helped in increasing access to foreign technology

by making imports cheaper.

The study by Siggel (2007) found that the reforms was beneficial to industries, their

employment and exports.

Following factors help in increasing labour productivity in MSMEs.

1. Financial Benefits and labour productivity

S.Kodithuwakku and H.M.S.Priyanath in their study on reasons for improvement of

labour productivity in tea plantation reveals that the financial benefits like increase in

salary, allowances, and overtime and loan facilities help in increasing labour

productivity. Similarly, non-financial facilities like housing facilities, education,

health, day-care centres, transport, electricity, strict management and application of

new technology plays an important role in increasing labour productivity through the

increase of labour satisfaction.

2. Technological up gradation and labour productivity

SSI sector is ideally suited to build on the strengths of our traditional skills and

knowledge. It is possible to increase the efficiency of labour by infusion of

technologies, capital and innovative marketing practices. Neil D. Karunarante and

Yapa M.W.Y. Bandara have observed that capital intensive industries have performed

better than labour intensive industries in achieving and maintaining higher efficiency

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levels. Thus, Capital accumulation contributes directly towards an increase in

productivity of labour and living standard by providing more capital per unit of labour

input. Evidence from various studies suggests that diffusion of information

technology in firm has a significant positive impact on labour productivity.

In case of SSI/MSME, it is observed that there is little impact of the policy

instruments devised for upgrading technological capabilities. There is need for

promoting competitiveness and dynamic entrepreneurship especially in rural and

semi-urban areas. (Keshab Das)

The ministry of MSME has implemented the scheme for technology up gradation and

for obtaining ISO-9000/ISO 14000 series of certification in order to improve quality

of the product and marketing. Only 12.31% of the working enterprises have obtained

technical know-how either from abroad or through Domestic Collaboration

Company/Domestic R & D Institution/ Specialised Agency/Org, whereas only 3.47%

of working enterprises have obtained ISO-9000/ISO-14000 series of certification. (4th

All India Census) The ministry is also operating a scheme called Credit Linked

Capital Subsidy scheme (CLCSS) for technology up gradation of SSI. Under this

scheme between 2001-02 to 2006-07, the number of units assisted was only 2620.

Thus, there is need to bring more units under the scheme.

3. Improvement in health and education and labour productivity

There are two major components of human capital i.e. health and education. These

components have the potential to increase the rate of labour force participation and

productivity by a substantial amount in some cases. Because labour productivity

increases with their stock of human capital, employers demand relatively more labour

and offer higher wages to workers with attributes that reflect high human capital.

There will be lower risk of unemployment and the expectation of higher wages.

4. Training, innovation and labour productivity

Studies examining the effects of training on labour productivity states that training

can have significant impact on productivity. Laplagne, P and Bensted, L. in their

study found that the link between training and innovation are more prevalent in

workplace experiencing labour productivity growth. It appears that training is an

effective strategy for less efficient workplace as it is directly related to the

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employment activities of the trainees and usually given in their place of employment

while innovation promotes labour productivity growth in both technically efficient

and inefficient work places.

5. Capital accumulation and labour productivity

Capital formation, especially the M&E capital, also raises the productivity of all other

inputs, in other words increases total factor productivity (TFP), by facilitating an

effective utilisation of new and the state of the art technologies. Hence, capital

accumulation contributes both directly and indirectly towards raising labour

productivity. Therefore, M&E is needed to realize fully the benefits of technological

progress. Karunaratne, Neil D. and Bandara, Yapa M.W.Y are of the opinion that

capital intensive industries have performed better than the labour intensive industries

in achieving and maintaining higher technical efficiency level.

6. Exports and labour productivity

Hemlut Fryges and Joachim Wagner (2007) have applied a newly developed

Generalised propensity Score (GPS) methodology to estimate the relationship

between a firm’s export-sale ratio and its labour productivity growth rate. A survey of

recent 54 micro-econometric studies reveals the productivity levels of exporting firms

are higher than non-exporting firms .(Girma, Greenaway and Kneller, 2002 among

other). In the case of Morocco, Clerides et al. (1998) find that Moroccan exporting

firms do better than non-exporter in term of productivity. This result is, however, less

robust in Morocco than in Mexico and Colombia.

Exports and economic productivity are positively related because it will increase

capacity utilization, promote technical change and allow a firm to take advantage of

large scale economies and overall productivity. Exports expose the developing

country firms to new techniques that can be used to improve new production methods

(Bouoiyour 2003a). Furthermore, firms with large capital stocks are more likely to

export. In other words, firms with higher level of exports face more competition from

abroad and have been forced to become more competitive to meet this challenge on a

sustainable basis. Therefore, it is advisable to accept the challenge of globalisation

and improve the product quality to effectively deal with the forces of competition.

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III. CONCLUSION:

The Small Scale sector has an important contribution to make in enhancing the

competitive strength of Indian industry, increase an avenue for new employment and

harness the entrepreneurial skills available in abundance in the economy. Considering

the significant growth trends in the production and export earnings of the MSMEs, the

most important challenge is to recognize the relative significance of labour and capital

productivity. At the same time this sector has also been facing some problems which

relate to appropriate choice of technology, poor and inadequate infrastructure, low

level of technology, limited exportability, wage and labour welfare issues, labour skill

building, etc. All these factors hinder the progress of Indian MSMEs. In order to

enable this sector to avail the opportunities and play its role as an engine of growth, it

is essential to address these issues effectively and urgently. Further, these enterprises

need to be supported through appropriate programmes/schemes with focus on skill

development and technology up gradation for improving the factor productivity and

quality of their product and exports.

References:

1. Ahluwalia, Isher J (1992): Productivity and Growth in Indian Manufacturing,

Oxford University Press, Delhi.

2. Balasubramanyam, V.N., V. Mahambre, (2001), “India’s Economic Reforms

and the Manufacturing Sector”, Lancaster University Working Paper

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