Productivity Growth in Indian Cement Industry: A Panel Estimation of Stochastic Production Frontier

The economic policy reform in respect of Indian cement industry, during the early 80's, resulted in a phenomenal growth of this sector. Cement industry being highly energy intensive in nature, further development of this industry, without increasing pressure on energy demand, would require growth in productivity. Thus, aim of this paper is to estimate Total Factor Productivity (TFP) growth in Indian cement industry as growth in TFP could ensure growth of this sector which is less dependent on energy and other inputs. Applying Stochastic Frontier Approach, the study first estimates TFP growth and then decomposes it into its components for the period 1989-90 to 2006-07. Empirical results show that the industry has experienced TFP growth during the study period and this growth is driven mainly by scale component and technical progress and not by technical efficiency change as technical efficiency has come out to be time invariant in this context. In the light of empirical results, the policy implication is that an industrial policy of exploiting the existing economies of scale is required to be implemented; and to boost the growth of this sector, priority should be given to enhance firms' capability of catching-up by adopting efficiency oriented action plans.