An Inter-State Analysis of Total Factor Productivity Growth in Selected Two-Digit Manufacturing Industries in India

The rationale for Economic reforms of 1991 was to increase efficiency and productivity in manufacturing sector. However, the actual impact of economic reforms of 1991 on the productivity of the Indian organized manufacturing sector has been a subject of intense debate among empirical analysts. A large body of literature, evaluating manufacturing industries at the aggregate level in terms of total factor productivity change, provides mixed evidence on how Indian manufacturing has actually performed after the reforms. An analysis at an aggregated level provides a broad overview but it does not reveal whether all the constituent industry groups are changing their performance simultaneously or if certain favorably affected industry groups are driving the aggregate results. Reforms may have been mostly conducive to certain industries, causing them to prosper during the post reform years. Naturally it is expected that the states in which these industries dominate would benefit most. In this paper we apply the non-parametric method Data Envelopment Analysis to measure rates of productivity changes of Indian manufacturing sector at the two-digit industry level. Using state level input-output data from Annual Survey of Industries over the period 1979-80 through 1997-98 we construct the Malmquist index of total factor productivity to study how productivity growth rates in the selected industry groups vary across major Indian states and over time. This paper differs from the prior studies in several ways. First, unlike most other studies the non-parametric method Data Envelopment Analysis (DEA) has been used instead of a conventional growth accounting or econometric technique. Second, instead of pooling data for all the selected industry groups, we use industry specific state level input-output data to construct the Malmquist index for each industry. This avoids the assumption that all industries have access to the same production technology. Finally, using a revised procedure as suggested in the literature, we report the decomposition of the Malmquist Productivity index into its components, technical change, change in technical efficiency, and change in scale efficiency.Our empirical findings suggest that Cotton Textiles and Chemical and Chemical Products experienced considerable deterioration in productivity change. In the remaining industries there was acceleration in total factor productivity change at the national level over the post-reform years. Relative to entire manufacturing sector, lower rate of productivity change in Cotton Textiles and Chemical and Chemical Products indicates that improvement in productivity growth of Indian manufacturing was not dependent on these industries. At the state level we do not find any single industry in which productivity increased in all states. However, not only in the leading states like Maharsahtra and Gujarat but also in laggard industrial states like Odisha and West Bengal the selected industries experienced improvement in productivity. Low inter-state variation in productivity growth rates for most of the industries after the reforms imply that there was a tendency of these states to converge in terms of productivity change. Decomposition of the Malmquist productivity index shows that both at the state as well as at the national level, in most cases technical progress was the prime force behind the productivity growth. Following the relaxation of licensing and investment restrictions, the capital investment in Indian manufacturing by domestic firms and foreign multinationals increased rapidly after the reforms. Moreover, liberalized import policy on capital goods brought into the country the new technology embodied in new capital and thus possibly explains the accelerated productivity growth through technological progress. However, in the Textile Products industry we find productivity growth in the presence of technical regress at the All-India level. As a matter of fact, in this industry improved technical efficiency and improved scale efficiency led to productivity growth. These results justify the importance of identifying the sources of productivity change other than technical change.