Input Elasticity of Output & Returns to Scale of Indian Manufacturing During Pre & Post Financial Crisis.

AuthorMandi, Surendranath


India's organized manufacturing sector was indeed a bright spot in country's economic growth during a good part of the 2000s. Rapid growth was registered in this sector, particularly in the manufacture of metal products, machinery equipment and automobiles. But the global financial crisis (world economic crisis) of the 2007-08 hit the industrial sector of the countrydrastically. However, India's organized manufacturing sector re bounded impressively after it slowed down during 2007-2008 at the height of the global economic crisis. The recovery was led in particular by the automobile industry, with the domestic production of passenger cars rising from 1.5 million in 2008-09 to 1.9 million in 2009-10. But the employment and unemployment surveys conducted by the National Sample Survey Organization (NSSO) shows that the total manufacturing employment in the country declined absolutely dur ing the last decade although the level of output has grown significantly. In this scenario of the organized manufacturing sector in India we seek to investigate the conditions of the input elasticities of output and the returns to scale parameter operating in this sector in India during the last few decades.

Review of Literature

Narayana (2010) attempts to study input elasticity of output and nature of returns to scale in the manufacturing sector of Andhra Pradesh. In his study, he tries to find out the elasticity of substitution between the two factor inputs, if it is unity or not by using unrestricted Cobb-Douglas, restricted log-linear and CES production functions between the periods of 1985-86 and 2005-06. His study found that the output elasticity of that particular state manufacturing sector is greater than unity with respect to capital and returns to scale were increasing which indicates the operation of increasing returns to scale in that state. The elasticity of output per labor with respect to capital per labor also found to be more than unity which states about the higher productivity of accumulation of capital per labor in the manufacturing sector of the state.

Liu Anguo, Gao Ge, and Yang Kaizhong (2011) gave a brief introduction to the theoretical background and conceptualization of returns to scale and differences in theoretical and policy implications due to different assumptions of returns to scale. We know the importance of the assumption of increasing returns to scale in the manufacturing sectors, which was the basis to adopt the New Economic Policy. The study used the data of 17 selected sectors within manufacturing industry in China for the purpose of empirical investigation and they found increasing returns to scale in each of the 17 selected manufacturing sectors, which lend empirical support for the assumption of increasing returns to scale within the New Economic Policy framework. On the contrary, they have found zero or very low or even negative technological change, experienced by most of the selected 17 manufacturing sectors. They came to the tentative conclusion that the economic growth in Chinese manufacturing sector over the recent two decades has largely been driven by increasing returns to scale rather than technological progress.

Muniyandi and Vadivel (2016) found various changes in the industrial sector due to the new industrial policy in India and stressed on the need of increasing industrial productivity for achieving higher efficiency in the use of resources in the coming years. They have studied the returns to scale of the manufacturing industries in Tamil Nadu. Their study is fully based on the secondary data sources taken from Annual Survey of Industry (ASI) between 1980-81 and 2007-08. Their study has found the operation of increasing returns to scale in the manufacturing industries of Tamil Nadu and have also found the contribution of the manufacturing industries in the total state income of Tamil Nadu in a sizeable percentage. Authors suggested the essentiality to induce manufacturing industrial growth of the state, proper execution, efficient administration and optimum use of scarce resources for attaining sustainable growth of the country.

Wei Gao and Matthias Kehrig (2017) have built a model on the entry and exit of firms and have shown how returns to scale shape firm survival, the equilibrium productivity, size distribution, and firm concentration. In their model, they found, "High productivity dispersion and high concentration ratios need not reflect inefficiencies when returns to scale are strongly decreasing". They used U.S. Census of Construction and Manufacturing, for applying a broad set of structural and reduced form of estimation techniques to establish data and to assess returns to scale and productivity dispersion across establishments. Industries with lower returns to scale are characterized by higher productivity dispersion and lower concentration ratios are predicted in the model. They have concluded from their research that the returns to scale are 0.96 on an average, but range from 0.86 in non-metallic minerals to 1.3 in semiconductors. It tends to be the highest in the case of the durable manufacturing, medium in non-durable manufacturing and lowest in the production of housing. According to them "an economy characterized by such differences in its sectoral production structure will exhibit long-run structural change away from construction and non-durable manufacturing, as in the data, and endogenously replicate the cyclical behavior of relative prices in the U.S. relative durable prices are countercyclical while relative housing prices are procyclical".

Abraham and Sasikumar (2017) show the continuous fall in labor share due to various factors like income equality, contraction of demand, and slowdown of economic growth in many developed and developing economies in the world since the 1980s. Their study mainly focuses on to understand the reasons of such declining labor shares in India. They used Annual Survey of Industries data which determines the patterns, trends and the determinants of declining labor shares in the organized manufacturing industries in India from 1980-81 to 2012-13. Three major issues have been raised from their study. They are:(1) 'It undertakes a comprehensive analysis of the trends and patterns in factor payments in the organized manufacturing sector. Long term trends are explored across dimensions such as states, size classification and industrial classification'. (2) 'The various...

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