Lack of growth and dynamism in India’s manufacturing sector in relation to the services sector is often cited as one of the key reasons for the country not being able to generate adequate employment and take advantage of demographic dividend.The government has announced policies for accelerating the growth of manufacturing sector, starting with National Manufacturing Policy in 2011 to Make in India in 2014 to Production Linked Incentive (PLI) Scheme in 2020 to Atmanirbhar Bharat also in 2020.The latest data available for FY24, from the Annual Survey of Industry, has been analysed by categorising them into five periods — FY01-FY05, FY06-FY10, FY11-FY15, FY16-FY20 and FY21-FY24.Capital: Intensity vs efficiencyAutomation, artificial intelligence and lean manufacturing are driving the manufacturing landscape across the globe, and they are reducing the employment generation potential of the manufacturing sector. This would mean higher capital-labour (fixed capital/worker) and output-capital ratio (value of output/fixed capital) ratio over the years.However, ASI data show mixed results for India. While the capital-labour ratio (capital intensity) has increased on a sustained basis over the FY01-FY24 period, the output-capital ratio (output intensity) shows a decline after FY06-FY10.In fact, the turning point of the output-capital ratio nearly coincided with the global financial crisis as it fell sharply to 2.76x in FY10 from 3.37x in FY07. It could not recover to 3.0x till FY22. This is also reflected in the return on capital (capital efficiency) which rose till FY08 and then declined till FY20.The data indicate a profound structural shift in the Indian manufacturing landscape with respect to capital intensity and capital efficiency. There was co-movement in capital intensity and capital efficiency during FY01 to FY08 due to strong domestic demand, global integration, and high-capacity utilisation. However, after the global financial crisis decoupling occurred as capital intensity skyrocketed from 12.0x in FY09 to 27.9x in FY20, but capital efficiency plummeted from 19.4x in FY09 to 9.4x in FY20.This looks like a classic case of diminishing returns on capital, orchestrated by structural bottlenecks such as high land/power costs, logistics inefficiencies, leading to deployment of more capital per worker just to stay competitive.The recent years show a partial rebound in capital efficiency, stabilising around 15x, while capital intensity has reached an all-time high of 29.8x in FY24. Corporate profitability though has recovered now from its pre-pandemic lows due to aggressive cost-cutting, formalisation, and corporate tax cuts, it is still significantly lower than FY05-FY09.This persistent divergence between high capital requirements and moderate returns perhaps is the reason why a broad-based, secular private greenfield capex has remained elusive despite healthy corporate balance sheets in India.To protect return on capital, therefore, the focus has been on brownfield expansions which essentially means debottlenecking and expanding existing plants rather than building new one. The continuous rise of capital intensity is no doubt keeping Indian manufacturing globally competitive but is limiting formal employment generation. This, in turn, has dampened domestic consumption demand, creating a cyclical feedback loop where corporations have held back investment because consumer demand isn’t strong enough to absorb the production capacity.This is reflected in RBI’s capacity utilisation data for the manufacturing sector which has remained in the range of 70-75 per cent since FY16.Labour productivityLabour productivity in the manufacturing shows a quinquennial decline. It grew at an average annual rate of just 1.61 per cent during FY16-FY20 compared to 12.26 per cent and 10.01 per cent during FY01-FY05 and FY06-FY10 respectively.However, it recovered to an average annual rate of 9.93 per cent during FY20-FY24, but remained quite volatile and dropped from 25.29 per cent in FY22 to 13.09 per cent in FY23 and further to -0.35 per cent in FY24.This volatility in labour productivity though may be due to the pandemic impact, but such volatility has been observed even during normal years in the past.This shows that Indian manufacturing sector which faced serious labour productivity challenge during the second half of the previous decade, is still not out of the woods and continues to face the productivity imperative.Although the reasons for upswing/downswing in labour productivity during the five quinquennial period considered would be different, the trend suggests that once the low hanging fruits of enhancing labour productivity were over, sustaining its growth became difficult in the absence of structural reforms which (i) fosters innovation, (ii) facilitates diffusion of new technology and (iii) reduces the resource misallocation of both capital and labour.A more efficient reallocation of labour and capital from low productive to high productive sectors can improve both labour productivity growth and make it more sustainable. A study by Hsieh and Kienow (2009) shows that when capital and labour are hypothetically reallocated to equalise marginal products to the extent observed in the US, the total factor productivity (TFP) of India’s manufacturing sector increases by 40-60 per cent.On the other hand, when the reallocation mechanism stalls the aggregate Total Factor Productivity (TFP) growth tends to be lower. An RBI study for India on the resource “reallocation effects” suggests that the contribution of resource allocation to TFP growth declined to 42 per cent of the aggregate TFP during 2011-2019 from 82 per cent during 2001-2010.The productivity increases in India after 2010 have been driven mainly by within industry TFP increases and less by resource reallocation effects across industries.Longer and sustainable labour productivity growth, therefore, critically depends on how much businesses invest in innovation, knowledge and intangible capital and how committed governments are to structural reforms.The importance of labour productivity growth can be gauged from the fact that globally labour productivity growth alone had accounted for about two-third of the GDP growth during the first decade of this century, leaving only one-third to the labour/employment growth.Therefore, unless the focus of policy is on addressing market distortions, reducing skill mismatches and ensuring greater product and labour market flexibility, accelerating manufacturing sector growth and its share rise to 25 per cent of GDP will remain a distant dream.The writer is Professor of Economics at Institute of Development and Communications (IDC) Chandigarh. Views expressed are personalPublished on August 21, 2026