For decades Industrialisation has been considered to be a vital driver of economic growth.

The special status conferred to the sector can be construes in multiple ways – changes in
technology, economies of scale and painless integration into the world production grid
(Lavopa and Szirmai, 2014). Scholars have time and again affirmed economic development
to be the progression of nations from agriculture to manufacturing, and then from
manufacturing to service sector (Fuchs, 1980). Hence, the notion that all major economies
once were industrial powers was once accepted as a general fact (Acharya, 2007).

Manufacturing is still believed to be the key driver of economic growth in developing or

middle income nations. It attracts services, that is growth or decline of the manufacturing
sector is not only a prerequisite but also impacts the growth of the service sector, both in the
short-term as well as the long-term. Further, not only does the growth of manufacturing
sector in an economy incentivizes savings but also expedites technological advancement. In
fact, human resources and institutions make substantially more contribution to the economies
of those middle income countries in which the share of manufacturing sector is greater. This
highlights that the manufacturing sector improves human resource and capital utilisation
domestically. Therefore, manufacturing sector plays a signification role in the middle income
countries (Su and Yao, 2016)

Su and Yao (2016) also advanced that the key sources of growth for developed and middle
income economies are vary greatly. In case of the developed economies, growth is mainly led
by knowledge-based innovation. Further, the sector demands intensive capital and
technological investment, thereby enables knowledge flows to other sectors in the economy,
which makes the sector absolutely imperative for all middle income countries. Barro (2001)
put forth that when a country is equipped with better human resource or capital and
institutions, domestic firms benefit from the ease with which investors can introduce new and
advanced technology. Therefore, as evident from the above discussion, the manufacturing
sector can better employ human capital resources and institutions in the economy.

Despite the previously discussed importance of manufacturing sector, human capital therein
and a strong growth of Indian manufacturing output, the performance of post economic
reform India in labour intensive manufacturing has been dismal (Joshi, 2010). Considering
that Indian agriculture was suffering the related problems of surplus labour and low
productivity, the economic reforms of 1991 were expected to reduce if not eradicate the
prevailing distortions in the factor as well as the capital markets. In addition, it was expected
that the structure of production for the nation would then move towards labour intensive
manufacturing sector, with the labour intensity increasing throughout the manufacturing
board. However, multiple studies have shown that instead India moved towards capital
intensive techniques unlike other countries in a comparable stage of development (Hasan et.
al., 2013). In fact, despite United States of America being a significantly more capital
abundant nation, India is known to be more dedicated to capital intensive production varieties
in groups of broad industries.

Additional reasons for the slow employment growth in the sector being puzzling were – The
neoclassical trade theory predicts that as and when an economy that has abundance of labour
opens up to international trade, the nature of commodities it exports is likely to be labour
intensive while that of its imports is likely to be capital intensive. Thereby, producing goods
that are highly labour intensive. Assuming that in this case the supply of labour is fairly
elastic, the overall employment should register an increase and the curve indicating the
national demand for labour must shift to the right. Furthermore, a commonly acknowledged
fact in economic development is that labour surplus nations undergo high levels of growth in
the labour intensive manufacturing sector in the initial years as they move from import
substituting economic development strategy to an export oriented one. Asian examples in
point are Japan, Singapore, and China amongst others. In all of the aforementioned major
Asian economies, with increasing global integration, the economy witnessed higher growth
and structural transformation from the primary to the secondary sector. In fact, documented
literature shows that surplus labour was often pulled out from the relatively less productive
agricultural activities and employed in the more productive manufacturing of commodities,
most of which were supposed to be exported to other countries (Krueger, 1997). However,
the story for India is not the same. Labour intensive industries like textile, clothing and
footwear witnessed a decline in their respective share from mid 1970s to the late 1990s, in
spite of having a comparative advantage over other labour intensive industries (Sen, 2008). In
addition, the low growth in the formal or organised segment of the labour intensive industries
did not coincide with a substantial growth in the share of the informal or unorganised
segment, neither in terms of output nor employment (Raj and Sen, 2012). The atypical pattern
of change was also evinced in the growth deficiency observed in manufacturing operations
oriented to export and the surfacing of a highly skill dependent segment of services oriented
to exports. Hence, as evident the pattern of structural change observed in India was not
exactly like that observed in other Asian countries which were successful in industrialising by
gradually moving from labour intensive to technology intensive manufacturing.

However, it cannot be said that India has never experienced labour intensive industrialisation.
As briefly mentioned, industrialisation in India in the period before independence was
notably labour intensive. As a matter of fact, factories embodied a high elasticity of
employment. In addition, the generally labour intensive trades contributed positively towards
growth of income. Further, despite the bane that it was, employment in factories registered a
drastic growth in the colonial period with capital accumulation and strong growth of
traditionally labour intensive sectors like clothing and textiles. Post-independence focus on
heavy industries and shift to autarky elucidate as to why the labour intensive manufacturing
did not demonstrate the same dynamism as in the colonial period and why it is difficult to
understand the reasons behind the absence of labour intensive manufacturing in the post-
reform period. Literature and documentation has highlighted the strict and inflexible nature of
labour laws in India and the employment protection legislation were responsible for firms not
hiring labourers on permanent basis and forced them to adopt more capital intensive
techniques of production than necessitated by the relative cost of labour to capital. In an
example, Gupta et al. (2009) suggested that the states in India with more stringent labour
laws and legislations had demonstrated relatively slower growth in the labour intensive
industries as well as in overall employment. Similarly, Saha et. al (2013) proposed that in
states that had labour legislations in favour of permanent contracts had witnessed higher rates
of growth than others. His proposition sheds light on the range of supply side factors that
could be the reasons for firms replacing capital for labour (Panagariya, 2008; Sen, 2008).
These factors included poor skills, level of literacy, infrastructural bottlenecks amongst
others.

This report shall thus be exploring……..

Das, Deb & Sen, K. & Das, P.C.. (2015). Labour intensity in Indian manufacturing:
Measurement, patterns and determinants. 10.1017/CBO9781316156476.007.
Purna Chandra Parida Kailash Chandra Pradhan , (2016),"Productivity and efficiency of
labour intensive manufacturing industries in India: an empirical analysis", International
Journal of Development Issues, Vol. 15 Iss 2 pp. -

Sen, K., & Das, D. K. (2015). Where have all the workers gone? Puzzle of declining labour
intensity in organised Indian manufacturing. Economic and Political Weekly, 50(23), 108-
115.