Small Firms in the Unorganized Manufacturing in India : Is Firm-Size Based Industrial Policy the Panacea?

India stands apart when compared with many others developing countries in terms of its long standing history of supporting the small scale industries (SSI) through reservation of product items for the SSI. Despite all these, the performance of the MSME sector in India remained subdued. In the present article, we analyse the key reason for the failure of various policies to support the MSME sector by analytically examining the behaviour of total and partial factor productivities of the sector. We find that though that firm size (measured by employment) and labour intensity of production are positively related, it perhaps indicates the hysteresis of the reservation policy pursued for a long time rather than the fact that small firms use factors of production more efficiently. We conclude that a balanced growth of the MSME sector depend crucially on enhancement of labour productivity through formation of appropriate skill sets