Examining the Productivity and Technical Efficiency of Industrial Sector using Stochastic Frontier Analysis in India

Abstract

The purpose of this study is to measure the total factor productivity (TFP) of industrial sector in India at an aggregate level and find the impact of technical inefficiency and other input variables on TFP using stochastic frontier analysis approach. Based on the aggregated data for a period of 29 years, the output productivity is measured as net sales revenue of an industry in a particular year, whereas input is measured as the raw material cost, labor cost, capital employed and research and development (R&D) investment of an industry in a particular year. The TFP is measured based on the functional form of Cobb-Douglas model. The results of the study indicate that material, labor and R&D are the prime drivers of TFP for industrial sector and the industrial sector is suffering from poor productivity due to technical efficiency that is decreasing over time.