Estimation and Decomposition of Total Factor Productivity Growth of the 2-Digit Manufacturing Industries in India: An Interstate Analysis

Abstract

The study estimates and decomposes the sources of total factor productivity growth (TFPG) of the 2-digit manufacturing industries as well as total manufacturing industry in 15 major industrialized states in India as well as in All-India during the period from 1981-82 to 2010-11 (total study period), pre-reform period (1981-82 to 1990-91), post-reform period (1991-92 to 2010-11) and for two decades of the post-reform period (i.e., 1990-91 to 2000-01 and 2001-02 to 2010-11), using stochastic frontier production function. The methodology necessitates decomposition of the sources of TFPG into technological change, technical efficiency change, allocation efficiency change and scale change. The main findings of our decomposition are that the growth rates of TFP in most of the 2-digit industries in the major industrialized states in India as well as in All-India have declined during the post-reform period. Also, this decline in TFPG is mainly accounted for by the decline in technical efficiency change and allocation efficiency effect that happened during that period. With respect to scale effect, its contribution to TFPG in the 2-digit industries in the major industrialized states has become very negligible although the manufacturing industries of different states under study and India as a whole have benefitted from economies of scale. The behaviour of the allocation efficiency component clearly indicates inefficient resource allocation in almost all the 2-digit industries under study during the post-reform period. This implies that liberalization of the economy during the post-reform period has increased the price distortion measured by the gap between price and marginal cost of the product of 2-digit manufacturing industries in the major industrialized states in India and in All-India as well. However, the rates of technological progress of almost all the 2-digit industries in most of the states under study have increased. Notwithstanding, as the combined effect of technical efficiency change and allocation efficiency change of these industries outweigh the joint effect of scale change and technological change of the same, TFPG of these industries has declined during the post-reform period.

Keywords: 2-Digit Manufacturing Industries, Stochastic Frontier Production Function, Total Factor Productivity Growth, Technological Progress, Technical Efficiency Change, Scale Change and Allocation Efficiency

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