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Productivity Growth of Indian Manufacturing Sector: Panel Estimation of Stochastic Production Frontier and Technical Inefficiency

Author

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  • Badri Narayan Rath
  • S.Madheswaran

Abstract

Abstract Applying a Stochastic Production Frontier to sector-level data within manufacturing sector in India, this paper examines Total Factor Productivity (TFP) growth during 1979-80 to 1997-98. The analysis focuses on the trend of technical progress (TP) and Technical Efficiency Change (TEC). The stochastic frontier production function approach, applied in this paper, allows us to separate out these two components, and to identify productivity growth due to either improvement in efficiency or progress in technology. The most important difference between the frontier approach and the traditional index number approach to productivity growth analysis lies on assumption: the existence of an unobservable and idealized production possibility frontier with production-unit specific one-sided deviation from the frontier, i.e. explicitly allowing for inefficiency. If a production unit operates beneath the production frontier, then its distance from the maximal measures it's technical inefficiency. Hence, the frontier approach is capable of capturing both efficiency change and technological change as components of productivity change, which introduces an additional dimension to the analysis from the policy perspectives. The empirical result suggests that the total factor productivity growth in a large number of industries have improved during 1997-98 compared to 1980-81. TFP growth is mainly driven by technological progress not by technical efficiency change in case of Indian economy since all TECs are negative. In the light of empirical results, the policy implication is that the priority to boost economic growth should be in the enhancement of productivity based catching-up capability. In this direction, an efficiency oriented action plan aimed to improve productivity efficiency of manufacturing sector is required to be implemented for removing the fiscal and financial constraints faced by the enterprises which are located in industrially backward area. JEL Classification Numbers: D24, L60, O30, O53, O47 Key words: Total Factor Productivity, Technical Efficiency change, Technological Progress, Stochastic Production Frontier, Indian Economy

Suggested Citation

  • Badri Narayan Rath & S.Madheswaran, 2004. "Productivity Growth of Indian Manufacturing Sector: Panel Estimation of Stochastic Production Frontier and Technical Inefficiency," Econometric Society 2004 Far Eastern Meetings 527, Econometric Society.
    • Handle: RePEc:ecm:feam04:527
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    Cited by:

    1. Badri Narayan Rath & Poulomi Bhattacahrya, 2022. "Does Innovation Outcomes Influence Performance Of Indian Manufacturing Firms?," Bulletin of Monetary Economics and Banking, Bank Indonesia, vol. 25(Special I), pages 85-102, March.
    2. Rawat, Pankaj S. & Sharma, Seema, 2021. "TFP growth, technical efficiency and catch-up dynamics: Evidence from Indian manufacturing," Economic Modelling, Elsevier, vol. 103(C).
    3. Ipatova, Irina, 2015. "The dynamics of total factor productivity and its components: Russian plastic production," Applied Econometrics, Russian Presidential Academy of National Economy and Public Administration (RANEPA), vol. 38(2), pages 21-40.
    4. Sabuj Kumar Mandal, 2009. "Technological Progress, Scale Effect and Total Factor Productivity Growth in Indian Cement Industry: Panel Estimation of Stochastic Production Frontier," Working Papers 216, Institute for Social and Economic Change, Bangalore.
    5. Rath, Badri Narayan, 2018. "Productivity growth and efficiency change: Comparing manufacturing- and service-based firms in India," Economic Modelling, Elsevier, vol. 70(C), pages 447-457.
    6. Gupta, Abhay, 2009. "Pre-reform Conditions, Intermediate Inputs and Distortions: Solving the Indian Growth Puzzle," MPRA Paper 14481, University Library of Munich, Germany.
    7. Ritwik Mazumder & Maniklal Adhikary, 2010. "Measuring Technical Efficiency in the Indian Automobile Industry," South Asia Economic Journal, Institute of Policy Studies of Sri Lanka, vol. 11(1), pages 53-67, March.
    8. Chirayil, Anish, 2008. "Economic reform and Productivity Growth in Indian Paper and Paper Products Industry: A Nonparametric Analysis," MPRA Paper 16919, University Library of Munich, Germany.
    9. Wang, Lan-Hsun & Liao, Shu-Yi & Huang, Mao-Lung, 2022. "The growth effects of knowledge-based technological change on Taiwan’s industry: A comparison of R&D and education level," Economic Analysis and Policy, Elsevier, vol. 73(C), pages 525-545.
    10. Ravi Kiran & Manpreet Kaur, 2007. "Is Liberalisation Associated with Higher Productivity? A Case Study of Punjab Manufacturing," Vision, , vol. 11(4), pages 53-65, October.
    11. Ipatova, Irina & Peresetsky, Аnatoly, 2013. "Technical efficiency of Russian plastic and rubber production firms," Applied Econometrics, Russian Presidential Academy of National Economy and Public Administration (RANEPA), vol. 32(4), pages 71-92.
    12. Swapnil Soni & M.H. Bala Subrahmanya, 2020. "Empirical Study of Industrial Classification, Structure, and Factor Intensity: An Enquiry into Dwindling Labor Intensity in a Labor-Surplus Economy," Emerging Economy Studies, International Management Institute, vol. 6(2), pages 201-213, November.
    13. Anthony Ilegbinosa Imoisi, 2018. "Is Trade Openness Suitable for Growth of the Nigerian Manufacturing Sector? An Autoregressive Distributed Lag Approach," Academic Journal of Economic Studies, Faculty of Finance, Banking and Accountancy Bucharest,"Dimitrie Cantemir" Christian University Bucharest, vol. 4(2), pages 71-82, June.

    More about this item

    Keywords

    Total Factor Productivity; Technical Efficiency change; Technological Progress; Stochastic Production Frontier; Indian Economy;
    All these keywords.

    JEL classification:

    • D24 - Microeconomics - - Production and Organizations - - - Production; Cost; Capital; Capital, Total Factor, and Multifactor Productivity; Capacity
    • L60 - Industrial Organization - - Industry Studies: Manufacturing - - - General
    • O30 - Economic Development, Innovation, Technological Change, and Growth - - Innovation; Research and Development; Technological Change; Intellectual Property Rights - - - General
    • O53 - Economic Development, Innovation, Technological Change, and Growth - - Economywide Country Studies - - - Asia including Middle East

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