Total factor productivity of Indian corporate manufacturing sector.
| Author | Manonmani, M. |
| Position | By Contribution |
Introduction
As a reaction to the colonial past, India's development strategy focused on self- reliance. In pursuit of the same, it placed a heavy emphasis on the creation of a well- diversified industrial base to realize the dream of industry-led development. Though this strategy assigned the prime responsibility of developing heavy industries to the public sector, private sector was also allowed to play a supplementary role. Almost until the beginning of the eighties, a myriad of measures to control the private sector, such as, licensing requirement for installation of capacities, quantitative and tariff restrictions on imported inputs, regulation of monopolies and restrictive trade practices, foreign exchange regulation, nationalization of commercial banks and price controls, constituted an integral part of India's industrial policy. The socialistic fervor in the minds of policy makers got reflected in the policy measure, such as, reservation of labor-intensive manufacturing products for the small scale industries (SSIs), preferential treatment to the SSIs and stringent labor laws against firing of labor in large firms. The industrial policy was primarily designed to protect the 'infant' industries from external competition. Unfortunately, the policy inhibited internal competition as well. By the end of seventies, Indian manufacturing suffered from high costs of production, sub-standard quality of products and lack of competitiveness of its exports. It is no surprise that the regulatory framework of the pre-1980s, inter alia, has been held responsible for the low growth rate of output and productivity of India's manufacturing sector (Pushpa Trivedi et. al, 2011).
The first bout of industrial policy reforms that were initiated in the eighties attempted to lift the economy from industrial stagnation through measures, such as removal of hurdles on capacity expansion, enabling availability of imported inputs and liberalization from price controls. The primary intent of these reforms was to unleash the growth potential of India's industrial sector. The second bout of reform process was initiated in 1990-91 in the wake of macroeconomic crisis. Economic and institutional reforms are being fine-tuned since then, depending on the unfolding of situations both at the external and domestic fronts. It may also be worth noting that the reforms of the eighties were centered primarily on industrial and fiscal sectors, whereas, the macro- economic reforms initiated in the early nineties were more comprehensive. Stabilization and structural adjustment process constituted the core of reforms in the nineties and these were deemed to be pre-requisites for the pursuit of growth and viable balance of payment. In brief, the reforms in the nineties differed in their characteristics from those of the eighties. The reforms in the eighties have been branded as 'pro-business', whereas, the latter as 'pro-market'. It has been argued by Ahluwalia (1991) that the reforms of the eighties resulted in an upward shift in growth rate and productivity of theIndian economy and in particular that of the industrial/manufacturing sector. The comprehensive reforms of the nineties gained wide publicity as these pulled the economy from a crisis situation and succeeded in alleviating foreign exchange constraint and controlling inflation. As substantial liberalization in terms of tariff reductions and removal of quantity restrictions on imported inputs (needed for growth of manufacturing sector) took place during the nineties, it was expected that these reforms would also enable the economy to follow growth and productivity paths higher than those witnessed during the eighties. However, no such structural break in either growth or productivity is evident after the initiation of reform process of the nineties. Perhaps, the reforms of nineties targeted primarily the external and financial sectors, which have impacted the real sector indirectly.
The Emphasis
The emphasis that needs to be placed on productivity has been well articulated in the literature. A higher growth path on account of higher productivity is considered to be a preferable alternative as compared to that due to increased application of inputs. The latter is deemed to be unsustainable due to supply constraints and also due to the phenomenon of diminishing returns. However, this can be a contentious issue, if it pertains to application of labor input, especially so in the context of a labor abundant economy like India. If increased productivity is attained by downsizing employment, it may not bode well for the social fabric and it ought to be a cause of concern to the policy makers. As the basic objective underlying the argument for increasing productivity is to increase social welfare, a situation of rising productivity coupled with shrinking employment may be neither socially desirable nor politically sustainable. A higher growth path, enabled by productivity growth and combined with 'employment generation' ought to be considered as an ideal trajectory from the point of view of sustainable growth of an economy. The link between productivity and social welfare (poverty alleviation) can best operate through employment generation. The importance of productivity in poverty reduction via employment generation has been duly emphasized in the World Employment Report 2004-05 (International Labor Office, 2005), by an apt choice of theme for the report, viz., 'Employment, Productivity and Poverty Reduction'. In other words, increase in productivity needs to be conceived merely as a means to an end (i.e., social welfare) and certainly not as an end in itself.
Though the concepts of productivity, efficiency and competitiveness are indicators of performance, these need not necessarily move in tandem with each other. These terms have rather different conceptual underpinnings and hence, the policy makers need to focus on the movement of each of these in accordance with the socio-economic objectives. As regards the two concepts of productivity viz., labor productivity and total factor productivity (TFP), these are pertinent for policy makers, since the former has a direct link to standard of living and the latter indicates the economical use of resources in the process of production. 'Productivity' per se is a descriptive measure of performance and it can be estimated independently for a decision making unit.
The share of manufacturing sector in India's real GDP has risen over the years...
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