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

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 empirical result suggests that the TFP growth in a large number of industries have improved during 1997-98 compared to 1980-81. TFP growth is mainly driven by TP not by TEC in case of Indian economy since the coefficient of TEC is 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 sectors is required to be implemented for removing the fiscal and financial constraints faced by the enterprises which are located in industrially backward areas.JEL Classifications: D24, L60, O30, O53, O47

Components of Total Factor Productivity Growth of the 2-Digit Manufacturing Industries in Karnataka: A Stochastic Frontier Approach

“…The above translog parameterization of the stochastic frontier model allows for non-neutral technological progress (TP). Technological progress will be neutral if all βtj's are equal to zero (Madheswaran et al, 2007).…”

“…Here the unknown parameter 'ƞ' represents the rate of change in technical inefficiency, and the non-negative random variable ui , is the technical inefficiency effect for the i th production unit in the last year of the data set. That is, the technical inefficiency effects in earlier periods are a deterministic exponential function of the inefficiency effects for the corresponding forms in the final period (i.e., uit=ut), given the data for the i th production unit are available in the final period (Madheswaran et al, 2007). So the production unit with a positive 'ƞ' is likely to improve its level of efficiency over time and vice-versa.…”

“…where βt and βtt are 'Hicksian' parameters and βLt and βkt are 'factor augmented' parameters (Madheswaran et al, 2007). It is noted that when technological progress is non-neutral, the change in TP will vary for different input vectors.…”

“…The estimate of 'γ' which is the ratio of the variance of firm-specific performance of technical efficiency to the total variance of output is statistically significant at the 1 percent probability level. This implies that the variation in productivity performances among the industries is not due to the statistical chance factor but principally to individual technical efficiency differences (Madheswaran et al, 2007).…”

Productivity growth and policy changes: A decomposition analysis of Indian metallic mining

“…As a result, it is more valuable in respect of policy formulation for metallic mining. All the estimations in this study have been undertaken using the programme tivity is well evident of the estimation of these models for validation of modelling (Battese & Coelli, 1992;Kumar, 2002;Madheswaran, Liao, & Rath, 2007;Mandal & Madheswaran, 2012). The details on the specification of all the estimated models are presented in Table 1.…”