Efficiency of Indian Organized Manufacturing in Liberalized Regime: A Stochastic Frontier Approach.

AuthorJana, Sajal


Manufacturing is an important sector in the Indian economy comprising about 31% of the non-agricultural sector, which makes up 75% of the total GDP in India (Kaliranjan & Bhide,2004). India's post-Independence development plans have emphasized industrialization as a very important instrument for sustained growth. Its sustained growth is crucial for generating employment opportunities required to absorb the rapidly expanding workforce. Industrialization plays a crucial role in the process of economic development of developing economies. At present, the share of industry in total employment increased from 16.2 per cent in 1999-2000 to 21.9 percent in 2009-10. A significant development in the Indian economy in the post 1990s period is the acceleration of the reform process initiated in the 1980s.

The reforms were initiated to improve the efficiency, productivity and international competitiveness of Indian industry. The reform process was more aggressively pursued during the 1990s. The sole objective of these highly liberalized policies was to augment productivity and efficiency in Indian industries by creating a competitive environment. Economic performance of a unit is generally supposed to be reflected in its productivity which is measured by the ratio of its output to the inputs. The efficiency term implies the maximum output obtained from utilizing the available inputs. Efficiency can be increased by minimizing inputs while holding output constant or by maximizing output while holding inputs constant or a combination of both. Productive efficiency can be determined by estimating the best practice production frontier and individual states' aggregate manufacturing industries.

Review of Literature

A vast number of empirical applications have contributed to estimate technical efficiency of aggregate manufacturing sector as well as across of the states in India. Raj and Natrajan (2008) examined the technical efficiency in the unorganized manufacturing sector of Kerala and depicted the existence of a high level of technical inefficiency due to which their potential level has reduced significantly. Kumar (2005) endeavored to analyze regional variations in technical efficiency of Indian manufacturing sector using the method of stochastic frontier analysis. The results revealed wide variations in the technical efficiency of manufacturing sectors of different states. Mukherjee and Ray (2004) analyzed the state level data of the manufacturing sector of India for the period 1985-86 to 1999-00 in order to study the efficiency dynamics of manufacturing sector during pre and post reforms years. Bhandari and Maiti (2007) has fitted translog stochastic frontier production function to firm level cross-sectional data on India's textile firms for selected five years to estimate technical efficiency of firms. They conclude that public sector firms are found to be relatively less efficient. Bhandari and Maiti (2012) attempt to estimate technical efficiency of individual leather producing firms for some years by applying two conventional methods viz. Data Envelopment Analysis and Stochastic Frontier Analysis. The findings of the study imply significant variation in technical efficiency across firms in different groups of states as well as under different organized structure.

At the very outset, the present study estimates efficiency scores achieved by the states during the period 1994-95 to 2010-11 using the balanced panel database. The study is an improvement over the earlier studies in that it considers very recent time series data which is not done in the previous studies and there is a dearth of literature that focuses on the interstate variation in respect of estimated efficiency scores for different years.

Selection of Sample States

The study encompasses 18 major states of India, three of which were bifurcated in November 2000. The bifurcated states are: Bihar, Madhya Pradesh and Uttar Pradesh. Three new states, viz, Jharkhand, Chattisgarh and Uttarakhand were carved out of Bihar, Madhya Pradesh and Uttar Pradesh, respectively. To ensure the comparability of pre-bifurcation period with the post-bifurcation period, the data for the newly created state has been merged into the respective state from which it was created. Thus, the states included in this study, arranged in alphabetical order are: Andhra Pradesh (AP), Bihar (BIH), Delhi (DEL), Gujarat (GUJ), Haryana (HAR), Karnataka (KAR), Kerala (KER), Maharashtra (MAH), Madhya Pradesh (MP), Orissa (ORI), Punjab (PUN), Rajasthan (RAJ), Tamil Nadu (TN), Uttar Pradesh (UP) and West Bengal...

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