The main objective of this article is to see whether the production and employment in the Indian small scale industries have been drifting apart from each other in the long run. The empirical evidence based on the Augmented Dickey Fuller (ADF) test, cointegration analysis and error correction modeling, illustrates that production and employment in the Indian small scale industries are cointegrated, proving thereby, that the two have not been drifting apart from each other in the long run. The constant production elasticity of employment, based on log level series, is significantly positive but is less than unity, thus showing that economic growth is found to be less labor-intensive. More specifically, 1% increase in production is associated with an increase in employment by 0.3284% per annum in the small scale industries in India. The results, based on error correction modeling, demonstrate that the equilibrium error term in the short run is zero.
The small scale industries (SSI) sector occupies a prominent place in the Indian economy.
It has contributed significantly to the growth of the Gross Domestic Product (GDP),
employment generation and exports (Economic Survey, 2004-2005, p.166). There are two
vital issues which need to be empirically examined as far as the value of production and
employment in India is concerned. The first is concerned with the presence of a long run
equilibrium relationship between production and employment. The second issue deals with
short run dynamics. The effectiveness of the industrial policy of the government of India can
be reviewed from the empirical information available from these two issues, in order to
constrain the arbitrary movements of production and employment in the Indian small scale
industries. The present study is an endeavor in this direction. The outline of the study is as
follows: Section II succinctly elucidates the importance of long run equilibrium relationships
between production and employment in the Indian small scale industries. Section III states
the focal objective of the study: Section IV explains the time series data that has been used
in the present study. Section V discusses the empirical methodology, Section VI reports the
empirical results and Section VII concludes the study.
Most of the empirical studies on the relationship between production and employment in the
Indian small scale industries used macro time series data without testing the stationary of time
series. As the consistent statistical inference from macro time series depends generally on the
assumption of stationary, it is rational to determine whether time series macro variables are
individually stationary or non-stationary. The present study is justified on the grounds that
not even a single study has been carried out to examine the long run equilibrium relationship
between the production and employment and short run dynamics in the Indian small scale
industries, using a longer time period data in India. |
