This paper primarily focuses on the role of economic growth and inflation in determining the growth of labor productivity in the manufacturing sector. The empirical evidence derived from a three variable Vector Autoregression model reveal that both economic growth and inflation play a significant role in influencing labor productivity as perceived by the standard theories. The results from impulse response show that inflation has a negative impact, while economic growth has positive impact on the growth of labor productivity. These evidences suggest that a better inflation and growth oriented economic policies tend to improve productivity of labor, which would strengthen the competitiveness of manufacturing sector.

Productivity, roughly speaking is a measure to show how effectively the economies’ resources are translated into the production of goods and services. Over long periods of time, productivity is the single most important determinant of a nation’s standard of living. The term “Productivity” raises many awkward problems of definition and measurement. Unless hedged in by other qualifications, it is taken to imply labor productivity, i.e., the ratio of output to the corresponding input of labor in a given time period (Sinha and Sawhney, 1970). Labor productivity, however, carries with it a strong connotation of workers’ efficiency in popular thinking. It is generally considered that an increase in output per unit of labor implies an increase in the personal efficiency of the workers. Efficiency of the workers will lead to a better standard of living and ultimately develop the welfare of the nation in the long-run.

Productivity studies gained prominence in India after late 1950s and early 1960s, when development was basically growth oriented. In the later part of 1960s, there emerged a new realism towards economic growth. More pragmatic than before, India wanted growth in distribution, with regard to social objectives. In India, the manufacturing sector’s performance has been considerable, which is 6.4% per annum for the past five decades. The share of its contribution to the overall GDP is quite low and it was 17.7% in 1997-98 (India Development Report, 2001). So it became well documented that the mutually reinforcing phenomena of low productivity in manufacturing sector is the cause for low income. Thus, low standards of living constitute the root cause for poverty and unemployment in the country.