Measurement of Productivity Growth, Efficiency Change and Technical Progress of Selected Capital-Intensive and Labour-Intensive Industries during Reform Period in India

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Abstract

This study examines the total factor productivity growth (TFPG) and its components TE (technological progress) and TEC (technical efficiency change) in ten manufacturing industries, classified them into capital-intensive and labour-intensive industries (five in each segment) using annual time series data for the period 1994 to 2004. The TFP growth is estimated by applying Malmquist Productivity Index (MPI) on the panel data of aforesaid segments separately. The study finds that the average TFP growth in the capital-intensive industry segment grew at a moderate rate of 1.7 per cent per annum during the entire study period, whereas, its counterpart, selected labour-intensive industries have shown a productivity regress, it is -0.9per cent. The decomposition of TFP improvement into technical efficiency change (catching-up effect) and technological progress (frontier shift) reveals that the TFP growth is primarily contributed by technological progress rather than by technical efficiency change in capital-intensive industries whereas in labour-intensive industries low growth of technical efficiency (0.5 per cent) has been offset by a higher rate of decline in technological progress. The results are, by and large, useful for policy makers in designing industrial policies.

I. INTRODUCTION

Industrial performance has been a subject of debate in India since the early 1950s. The Assessment of industrial performance after, adoption of new liberalized policies since 1991, in view of linkages between trade liberalization and productivity growth has gained important among academicians and policy makers. Theoretically, trade liberalization could have both a positive as well as negative impact on productivity (Tybout, 2000) (1), but recent surveys by Tybout (2000) and Epifani (2003) enlighten that the empirical literature generally support a positive effect of trade liberalization on productivity. Thus the effect of trade liberalization on productivity is an empirical question. Therefore, the present paper explores the impact of trade liberalization on Total Factor Productivity (TFP) and it sources in selected Indian manufacturing industries.

The extent of impact of liberalization may vary across different industries. In fact, different forms of industries could demonstrate different reactions to environmental changes. Hence, the impact of trade liberalization could vary across industries. Therefore, whether all industries benefited or suffered equally from the new economic environment is an important issue to be investigated. In this study we made an attempt to find out sources of productivity growth by using Data Envelop Analysis (DEA) based Malmquist Productivity Index (MPI) to estimate TFP growth and its decomposition into technical efficiency change and technological progress.

The productivity growth is considered as an indicator of sustained economic growth and improvement in standard of living. A reasonable standard of living, typically, defined as real GDP per capita, can be influenced by a number of factors including; changes in employment/population ratio, changes in terms of trade and or changes in productivity. While improvement in either of these factors result in a higher standard of living, employment/population ratio and, to a lesser extent, terms of trade have upper limits and therefore can impact living standard only in the short run. In the long run, the only sustained manner to increase per capita GDP is by increasing the amount of output produced by a given quantity of inputs, that is raising Total Factor Productivity (TFP). Higher levels of output relative to given inputs generally translate into higher returns to factors of production. An improvement in living standard is the most well-kwon benefit of productivity gain and productivity growth that can also provide to an economy as well. More competitive business and higher employment level can result from increasing productivity. …