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Indian Manufacturing Productivity: What Caused the Growth Stagnation before the 1990s?

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  • Abhay Gupta

Abstract

This article addresses the question of why productivity growth in Indian manufacturing was slow in the pre-reform period and analyzes how economic reforms in the 1990s accelerated productivity growth. The answer lies in two subtle but important distortion-inefficiency mechanisms, which affected productivity growth by distorting intermediate input allocation. The interaction of quantitative restriction policies and inflexible labour laws resulted in lower than optimal materials per worker usage. The combination of high inflation and unavailability of credit exacerbated this factor distortion and lowered productivity growth further. Using a panel dataset on Indian industries, this article finds widespread underutilization of materials compared to labour until recently, and this sub-optimal materials per worker usage lowered productivity growth.

Suggested Citation

  • Abhay Gupta, 2010. "Indian Manufacturing Productivity: What Caused the Growth Stagnation before the 1990s?," International Productivity Monitor, Centre for the Study of Living Standards, vol. 20, pages 85-102, Fall.
    • Handle: RePEc:sls:ipmsls:v:20:y:2010:5
    as

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    File URL: http://www.csls.ca/ipm/20/IPM-20-Gupta.pdf
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    References listed on IDEAS

    as
    1. Chang-Tai Hsieh & Peter J. Klenow, 2009. "Misallocation and Manufacturing TFP in China and India," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 124(4), pages 1403-1448.
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    More about this item

    Keywords

    productivity; growth; materials; labour; quotas; labour laws; public policy; India;
    All these keywords.

    JEL classification:

    • D24 - Microeconomics - - Production and Organizations - - - Production; Cost; Capital; Capital, Total Factor, and Multifactor Productivity; Capacity
    • J24 - Labor and Demographic Economics - - Demand and Supply of Labor - - - Human Capital; Skills; Occupational Choice; Labor Productivity
    • O47 - Economic Development, Innovation, Technological Change, and Growth - - Economic Growth and Aggregate Productivity - - - Empirical Studies of Economic Growth; Aggregate Productivity; Cross-Country Output Convergence
    • E65 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Studies of Particular Policy Episodes
    • J58 - Labor and Demographic Economics - - Labor-Management Relations, Trade Unions, and Collective Bargaining - - - Public Policy
    • F16 - International Economics - - Trade - - - Trade and Labor Market Interactions

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