Proposed Research Work

9. (i) Project Title : Total Factor Productivity Growth

and Technical Efficiency in Indian Industries:
An Interstate Analysis

1. Introduction :

Origin of the Research Problem

The industrial sector with its forward and backward linkages and its high employment
potential holds the key to the economic development of a country. India has achieved a
reasonably well level of self-sufficiency in manufacturing with a variety of basic &
capital goods. Growth in the manufacturing sector has the potential to elevate much of
the Indian population above the poverty line by diverting the majority of the work force
out of low wage agriculture. Keeping in view the importance of the sector in terms of
output and employment generation the thrust of the economic reforms has been to
provide stimulus for further growth by targeting production for the global markets. The
sector is thus expected to accelerate growth and launch the economy on a higher growth
trajectory. Two pre-requisites which are needed to fuel manufacturing growth i.e.
enhancement of productivity & competitiveness, have been the target of the recent
policies towards this sector. The so called importance of the sector provides impetus to
choose it as a pioneer research area.
Productivity is necessary not only to increase output but also to enhance competitiveness
of an industry both in domestic and international markets. Besides, productivity growth
enhances the export competitiveness of a country.
Productivity is the marginal contribution of a factor to the output growth of a product.
The proportion of factors of inputs will be different in different industries. Partial
productivity in defined as the real output per unit of any particular input. Partial
productivity is easy to compute but it has certain limitations. Output is produced by a
combination of factor input. Hence the partial productivity indices give us a partial view
of productivity. On the other hand, total factor productivity (TFP) indices use the idea of
combined contribution of factor inputs to the production process and hence total factor
productivity index is considered to be better than Partial productivity index as a measure
of productivity. TFP growth is the difference between growth of output and growth of
combination of factor inputs, usually labour & capital. In general, improvements in TFP
reflect the contribution to output as a result of the more efficient use resources or the
adoption of new production technologies. So, the proposed study concentrates on total
factor productivity growth (TFPG) in Indian industries.
Next, we have to focus on efficiency measurement. Efficiency measure provides a
description of the structure of an industry and a necessary step to identify the causes of
ineffiency. Technical efficiency (TE) is usually measured by comparing the observed
performance of an Industrial unit with some pre-specified standard performance.
Production frontier serves as one such standard in case of technical efficiency. Hence,
efficiency is a residual concept. The extent, by which a firm lies below its production
frontier, which sets the limit to the range of maximum obtainable output, can be regarded
as a measure of inefficiency. Let us take a firm that produces output Y with inputs X
which lies below the production frontier. Technical efficiency (TE) of the firm is then
provided by the ratio Y/Y*, where Y* is the frontier output associated with the level of
input X. Naturally, the values of technical efficiency lie between zero & one. The Debreu
(1951), Farell (1957) measure of technical efficiency is the beginning point of any
discussion on frontier and efficiency measurement. If the objective of a producer is to
minimize the wastage of input use the performance of production unit can be measured in
terms of technical efficiency or inefficiency. The proposed study will be able to point out
against each of 17 two-digit level industries, the state and the year in which it attained
maximum efficiency. The highly industrialized states didn’t necessarily turn out to be
most efficient performers although average efficiency of the industries in these states
could be higher than that of other states.
Two concepts commonly used to characterize a firm’s resource utilization performance
are Productivity and efficiency. These two concepts are often treated as equivalent in the
sense that if firm A is more productive than firm B, then it is generally believed that firm
A must also be more efficient. This is not always true, however. Although closely related,
they are fundamentally different concepts. Productivity is a descriptive measure of
performance. Efficiency is a normative measure.

(iii) Objectives:

Based on the panel data for 15 major states in India, the proposed study has an attempt to
estimate the time variant technical efficiency and total factor productivity growth for 17
two-digit industry groups. A value added function and a four input-output function have
to be estimated for each of the 17 two-digit industry groups using both the Cobb-Douglas
and Translog specifications. For estimating the production the standard panel data
approaches would be followed. Based on the yearly efficiency levels and TFPG
an attempt has been made to compute the average level of efficiency and the average rate
of growth of TFP across 17 two-digit industries for each major state and all India level in
two different sub periods as well as the entire time period. The study also finds out
whether the difference between the average efficiency in the first and second sub periods
is uniform across industries / across state or not. A comparison of total factor productivity
growth (TFPG) shall be considered to reveal the fact that whether it improves in the
second sub period over the first or not.

Significance of the Study:

Total factor productivity growth (TFPG) is crucial factor in determining economic

growth of an economy. The present study considers total factor productivity as a measure
of productivity. In present context, TFPG is defined to encompass technological progress
(regress) and the change in technical efficiency (TE). Technological progress may be
defined as advances in knowledge relating to the art of production, which may take the
form of new goods, processes or new modes of organization [Golder 1986]. On the other
hand, technical efficiency (TE) is the efficiency with which factors of production are
combined to generate output. Technological change can be conceptualized in terms of
shifts in the production function [ Solow 1957] whereas TE measures the distance
between the actual and the frontier or maximum level of output [Bettese 1990]. Some of
the earlier studies which estimated total factor productivity growth (TFPG) in the Indian
context did so mostly under the assumption of constant returns to scale and perfect
competition in the factor market. Without essentially considering these assumptions the
present study is based on the time series and cross section pooled data for fifteen major
states in India. A frontier production function approach has been employed to estimate
both time varying technical efficiency & total factor productivity growth (TFPG) for each
of the 17 two-digit level industry.

National Status:
Solow [1957] measured total factor productivity (TFP) as a shift in the production
function. A number of studies have been conducted in the manufacturing sector in India.
Several studies like Ahluwalia (1991), Goldar (1986) Upendaer(1996) Kumar (2002),
Aggarwal and Kumar (1991), Balakrishnan and Pushpangadan (1984), Rao (1986) have
measured the productivity trends and growth of Indian manufacturing sector during the
post Independence period. Most of them have discussed the measurement of total factor
productivity (TFP) growth rate both at aggregate and disaggregate levels and studies like
Joshi and Little ( 1996) and Srinivasan (1996) have examined the impact of the reforms
on Indian manufacturing sector at the aggregate level. Mitra (1999) has used the
methodology suggested by Cornwell et.al. ( 1990) to study the technical efficiency ( TE)
and TFP growth in Indian industries. Ray, S.C ( 2002) uses the non parametric method of
data envelopement analysis to measure Malmquist productivity indices for manufacturing
in different states in India during 1969-’84. The measured Malmquist productivity indices
have been decomposed to separate the contribution of technical change, change in
technical efficiency and change in scale efficiency. Neogi & Ghosh (1994) has made an
application of time varying frontier production function approach with both fixed &
variable ranking models in Indian industries to test the intertemporal movement of
technical efficiencies (TE) on which the current globalization programme is based.
Productivity growth is a crucial factor in determining growth of an economy. The study
of productivity growth becomes imperative in view limited availability of factors of
production, particularly capital. For the period 1960 to 1980, Goldar’s estimate of TFPG
turned out to be 1.2 per annum. Ahuwalia ( 1991), however observed a decline in total
factor productivity (TFP) at the rate of 0.3% per annum over the period 1965-’66 to
1979’80 although