Impact of economic reforms on productivity performance of manufacturing sector in South India.
Manonmani, M.
Introduction
Industrialization has been viewed as a pre-requisite to economic
transformation of the society. It has been recognized that
industrialization is the surest solution to the problem of raising the
standard of living of the people. The progress of industrialization
since 1951 has been a striking feature of Indian economic development.
The process of industrialization launched as a conscious and deliberate
policy under Industrial Policy Resolution of 1956 and vigorously
implemented under the Five Year Plans, involved heavy investments in
building up of capacity over the last 56 years, making India the 10th
most industrialized country in the world. The industrial structure has
been widely diversified covering broadly the entire range of consumer,
intermediate and capital goods. The progress which India has made in the
field of industrialization is clearly reflected in the commodity
composition of India's foreign trade, in which the share of imports
of manufactured goods has steadily declined. On the other hand,
industrial products particularly small engineering goods have become a
growing component of India's export. Finally the rapid stride in
industrialization has been accompanied by corresponding growth in
technological and managerial skills for efficient operation of the most
sophisticated industries and also for planning, designing and
construction of such industries.
Estimating productivity level and growth rate as well as analyzing
productivity determinants gained a renewed interest both among growth
economists and trade economists.
With the introduction of economic reforms in 1991, Indian
industries have been witnessing profound changes in the basic parameters
governing its structure and functioning. Relaxing of licensing rule,
reduction in tariff rates, removal of restriction on import of raw
materials and technology, price decontrol, rationalization of customs
and excise duty, enhancement of the limit of foreign equity
participation etc. are among those which have been introduced at early
90's. One major objective of trade liberalization in India has been
to enhance industrial productivity and input-use efficiency. This has
been made possible with the greater and cheaper access to imported
know-how, capital goods, intermediate goods and global capital, relaxing
constraints on various input use and technology choices, increased
domestic and international competitive pressures by bringing in
technological dynamism in industries and permitting more efficient firms
to grow and competing out inefficient ones. With the introduction of
economic policy reforms, Indian industries have been undergoing
structural reforms and facing hard competition from external markets.
Growth of a firm depends on the efficient and rational use of the scarce
resources available to it. In other words, it is the level of
productivity of the factors of production that determines the
sustainability of the firm. It was recognized that output growth could
not be enhanced by continuous input growth in the long-run due to the
nature of diminishing returns for input use. For sustained output
growth, TFP (Total Factor Productivity) growth is essential (Sarbapriya
Ray et. al, 2010).
Sandeep Kumar and Kavita (2012) in their study also stressed that
productivity is a key and major factor in the success of any
socio-economic system because of its direct relationship with economic
welfare. The concept of productivity has come into greater prominence
during recent years in the context of industrial development. If some
production units can be used more efficiently, the net addition to the
total national product will be much higher which will result in the
process of industrial growth. Productivity increase is, thus, an
indispensable and powerful stimulus to and the end result of a complex
socio-economic process of economic development. Since the objective of
productivity increment and economic growth is to satisfy the material
needs of individual members as well as of society to the fullest
possible extent, economic growth is positively correlated with
productivity increase. The degree of general welfare, in its ultimate
analysis, is therefore, the real barometer of a nation's
progressive prosperity.
The liberalization, privatization and globalization (LPG) policies
that started in early 1980s in India, and strengthened in the 1990s,
opened the Indian manufacturing sector to greater competition from
within as well as from outside. One of the major components of the
economic reforms package has been the deregulation and delicensing in
the manufacturing sector. The justification provided for this often
centers on the reason of encouraging competition, which, in turn, is
expected to enhance the efficiency and productivity performance of the
manufacturing sector. Given that the main objective of reforming the
manufacturing sector was to improve industrial productivity, it would be
appropriate to probe how far the reforms have contributed to the
productivity performance of the Indian manufacturing sector.
The economy of southern region plays a significant role in
achieving higher GDP growth rate of the country. The four southern
states--Andhra Pradesh, Karnataka, Kerala and Tamil Nadu--contribute
over 24percent of the GDP of the country. They are emerging as the major
destinations for industrialization. Further the southern states are
galloping much ahead of the poorest but populous northern states with
higher economic growth rates. Attempt is made in this paper to analyze
the growth and determinants of partial and total factor productivity in
the aggregate manufacturing sector of southern states of India.
Data Base of the Study
The basic data source of the study on number of firms, fixed
capital, wages, net value added and number of workers was the Annual
Survey of Industries (ASI) published by Central Statistical Organization
(CSO), Government of India. All the referred variables were normalized
by applying Gross State Domestic Product (GSDP) deflator. The GSDP at
current and constant prices were obtained from Economic Survey,
published by Government of India, Ministry of Finance and Economic
Division New Delhi. The reference period chosen for the study covers
post-liberalization period between 1991-92 and 2011-12.
Productivity Indices
Labor productivity (PFPL) is measured as a ratio of net value added
to total number of persons employed. Capital Productivity (PFPK) is
measured as a ratio of net value added to gross fixed capital.
Total factor productivity (TFP), in a simple way, is defined as
output per unit of inputs. It is the ratio of aggregate output index to
aggregate input index and measures the efficiency of all inputs in a
production process. In other words, TFP is the portion of output not
explained by the amount of inputs used in production. This is known as a
residual (Melaku T. Abegaz, 2013) and is calculated by making use of the
formula as follows.
TFPDM = [square root of PFPK] [square root of PFPL]
Where TFPDM=Total Factor Productivity Index of Direct Method
PFPL=Partial Factor Productivity of labor
PFPK=Partial Factor Productivity of capital
To find out the annual trend rates in various factor productivity
indices, the exponential growth function of the following form was used:
Y=[AB.sup.t]
Where Y=Dependent variable
A=Constant co-efficient
B=Parameter
T=Time factor
The values of A and B were estimated by converting the exponential
equation in to linear function of the form:
LogY=LogA+ t log B.
After getting B (coefficient) the following method was being used
to estimate the growth rate= [Antilog B - 1] x 100.
Linear Regression Models
The dependent variables were Labor Productivity (LP), Capital
Productivity (CP) and Total Factor Productivity index of Direct Method
(TFPDM) and the independent variables were Capital Intensity (CI),
Growth Rate of Net Value Added (GRNVA), Size of the factories (SIZE) and
skill of the workers (SKILL). The OLS model was used to estimate the
models.
Model-1
LP=[beta]0 + [[beta].sub.1] SIZE + [[beta].sub.2] SKILL +
[[beta].sub.3] CI + [[beta].sub.4]GRNVA
Model-2
CP=bo + [b.sub.1] SIZE + [b.sub.2] LP + [b.sub.3] SKILL +
[b.sub.4]CI + [b.sub.5]GRNVA
Model-3
TFPDM=[[alpha].sub.0] + [[alpha].sub.1] SIZE + [[alpha].sub.2] LP +
[[alpha].sub.3] SKILL + [[alpha].sub.4] CI + [[alpha].sub.5] GRNVA
Where
LP=Labor Productivity indices measured as the output -labor ratio
CP=Capital Productivity indices measured as the output-capital
ratio
TFPDM=Total Factor Productivity indices computed by the direct
method.
GRNVA=Growth rate of net value added in year 't'
i.e.([Q.sub.t] - [Q.sub.t-1])/[Q.sub.t-1].
CI=Capital Intensity measured as the capital-labor ratio.
SIZE=Industry size calculated as the number of employees over the
number of firms in the industry.
SKILL=Skill of workers calculated as the real wages by the number
of workers.
[[beta].sub.0] [[alpha].sub.0] bo, = Constant coefficients of
different models
[beta]1, [beta]2, [beta]3, [beta]4 = Coefficients of SIZE, SKILL,
CI, GRNVA respectively in model 1
b1, b2, b3, b4, b5 = Coefficients of SIZE, LP, SKILL, CI, GRNVA
respectively in model 2
[[alpha].sub.1], [[alpha].sub.2], [[alpha].sub.3], [[alpha].sub.4],
[[alpha].sub.5] = Coefficients of SIZE, LP, SKILL, CI, GRNVA
respectively in model 3
Partial & Total Factor Productivity Indices
Details regarding state-wise growth of labor productivity are
presented in Table 1
Growth of Labor Productivity indices in the aggregate manufacturing
sector of southern states shows that from the beginning to the end of
the period it was maximum in Andhra Pradesh (18.53 fold) followed by
Karnataka (9.54 fold) Kerala (6.39 fold) and Tamilnadu (9.32 fold). The
annual trend rates calculated revealed that Labor Productivity growth
rate was maximum in the state of Andhra Pradesh (9.50 percent) followed
by Tamil Nadu (9.15 percent) Kerala (8.91 percent) and Karnataka (6.52
percent) which were statistically significant at 5 percent level. The
co-efficient of determination ([R.sup.2]) ranged between 0.425 and 0.903
across the states. The maximum [R.sup.2] was recorded by the state of
Andhra Pradesh implying that more than ninety per cent( 90.3 %) of the
variation in the growth of Labor Productivity in this state was due to
the influence institutional factors and the remaining 0.7 percent was
incidental. The significant growth rate of Labor Productivity in all the
states might be due to reduction in working time, high minimum wage
which stimulates laborers to work more in less time, keeping less
productive persons out of employment and advancement in technology.
In Table 2 growth of Capital Productivity across the southern
states is presented.
The indices of Capital Productivity had shown increasing trend in
case of all states except Karnataka where it had declined at the end of
the period. Excepting Andhra Pradesh all the other states had recorded
insignificant Capital Productivity annual trend rate. Andhra Pradesh
recorded 8.96 percent growth rate which was statistically significant.
The probable reason for the decline in Capital Productivity in Karnataka
may be the differences in technology, differences in the efficiency in
the production process and the differences in the environment in which
the production units operate.
Details on growth of total factor productivity are presented in
Table 3.
The Total Factor Productivity indices were found to be increasing
from the beginning of the post-reform period in all the southern states.
But the estimated growth rate of Karnataka was statistically
insignificant. Statistically insignificant growth rate of 2.82 percent
observed in the case of Karnataka might be due to the specific reason
that increase of factor inputs without corresponding increase in the
output and heavy dependence on IT based enterprises. The varying levels
of magnitude of Total Factor Productivity explained the fact that across
the states the significant growth rate of 9.46 percent was recorded by
Andhra Pradesh followed by Tamilnadu (8.98 percent) and Kerala (8.72
percent) which were statistically significant at 5 percent level. It
might be due to the provision of better infrastructural facilities
developed in these states in the post-reform period.
Determinants of Partial and Total Factor Productivity Growth
The regression coefficients of Labor Productivity (Model 1) are
presented in Table 4
In Andhra Pradesh skill of the workers (LnSKILL), capital intensity
(LnCI) and growth rate of net value added (LnGRNVA) have positively
affected labor productivity while size of its sector (LnSIZE) had shown
negative relationship with labor productivity (LnLP). Verdoorn's
law was proved with the positive and statistically significant
coefficient of net value added (LnGRNVA) with the dependent variable
labor productivity (LnLP). In Karnataka, skill of the workers (LnSKILL)
and growth rate of net value added (LnGRNVA) had contributed positively
to labor productivity (LnLP). In this state also the Verdoorn's law
was re-visited. In the state of Kerala all the factors such as size of
the manufacturing sector (LnSIZE), skill of the labor force (LnSKILL),
Capital Intensity (LnCI), growth rate of net value added (LnGRNVA) had
shown positive influence over the labor productivity (LnLP). The results
of regression analysis of Tamilnadu explained the fact that all the
independent variables were able to contribute positively to the growth
of labor productivity (LnLP). But the co-efficient of growth of net
value added (LnGRNVA) was statistically significant at 10 percent level.
Also the Verdoorn's law was found applicable in this state.
Details on determinants of capital productivity based on regression
Model 2 in the post-reform period in the southern states of India are
presented in Table 5.
Out of the 5 independent variables, 3 [skill of the labor force
(LnSKILL), labor productivity (LnLP) and growth rate of net value added
(LnGRNVA)] were positively related with the dependent variable capital
productivity in Andhra Pradesh. The contribution of labor productivity
(LnLP) and size of the firm (LnSIZE) were statistically significant at 5
percent level in determining the capital productivity in the case of
Karnataka. The other independent variables such as skill of the labor
force (LnSKILL), capital intensity (LnCI) and growth rate of net value
added (LnGRNVA) had negative relationships. The co-efficients of
regression equation for the state of Kerala brought out the fact that
skill of the labor force (LnSKILL) and labor productivity (LnLNLP) were
positively related to capital productivity (LnCP) while size of the firm
(LnSIZE) capital intensity (LnCI) and growth of net value added
(LnGRNVA) had contributed negatively towards the growth of capital
productivity (LnCP) of the state. The statistically significant factor
determining capital productivity (LnCP) was found to be labor
productivity (LnLP).
Regression results relating to Tamilnadu showed that labor
productivity (LnLP) and capital intensity (LnCI) had influenced
positively the growth of the dependent variable capital productivity
(LnCP) but the co-efficient of labor productivity (LnLP) was
statistically significant at 10% level.
The determinants of total factor productivity in the post-reform
period based on the regression Model 3 are shown in Table 6.
In Andhra Pradesh excepting labor productivity ( LnLP) and skill of
workers (LnSKILL) the other variables such as industry size (LnSIZE),
capital intensity (LnCI) and growth of net value added (Ln GRNVA) had
negatively contributed to the growth in TFP. In Karnataka the
co-efficient of labor productivity (LnLP) and growth rate of net value
added (Ln GRNVA) were positive implying the fact that their
contributions were always positive across the reference period. Factors
like size of the industry (LnSIZE), skill of the workers (LnSKILL) and
capital intensity (LnCI) were negatively affecting TFP growth. In
Kerala, excepting labor productivity (LnLP) and skill of the workers
expressed in terms of real wage rate (LnSKILL) all the other factors
affected the total factor productivity (LnTFP) negatively. In the case
of Tamilnadu the TFP growth performance was mixed (positive/negative)
due to the influence of the independent variables. The impact due to the
changes in the independent variables was positive excepting capital
intensity (LnCI).
Conclusion
The above analysis clearly explains the fact that labor
productivity is an indicator of the efficiency with which labor is used
in the production process. Differences in labor productivity arise from
differences in the scale of production (LnGRNVA), the amount of capital
available per worker (LnCI), the skills possessed by wokers (LnSKILL),
and other organizational characteristics including technology (LnCI)
possessed by firms in the southern states of India. Efficiency of
capital productivity and total factor productivity is always associated
with labor productivity.
M. Manonmani is Professor in Economics, Avinashilingam Institute
for Home Science & Higher Education for Women, Coimbatore-641043.
E-mail: manomyil@yahoo.com
References
Melaku. T. Abegaz (2013), "Total Factor Productivity and
Technical Efficiency in the Ethiopian Manufacturing Sector", The
Ethiopian Development Research Institute (EDRI) working papers, 10 April
Sandeep Kumar & Kavita (2012), Productivity and Growth in
Indian Manufacturing Sector Since 1984-85 to 2004-05: an Analysis of
Southern States, Zenith International Journal of Business Economics
& Management Research, 2(4), April:146-61
Sarbapriya Ray, Siddheswari & Mihir Kumar Pal (2010),
"Trends in Total Factor Productivity Growth in Indian Iron and
Steel Industries Under a Liberalized Trade Regime: An Empirical Analysis
with Adjustment for Capacity Utilization", Journal of Applied
Business and Economics, 11(3): 1-10
Table 1 State-wise Growth of Labor Productivity (1991-92=100)
Year Andhra Karnataka Kerala Tamilnadu
Pradesh
1991-92 100 100 100 100
1992-93 107 102 76 97
1993-94 120 91 79 114
1994-95 136 115 81 116
1995-96 351 363 279 356
1996-97 325 323 244 335
1997-98 381 278 226 282
1998-99 336 320 345 291
1999-00 321 313 196 325
2000-01 317 320 238 334
2001-02 360 357 229 294
2002-03 348 407 267 283
2003-04 453 439 251 329
2004-05 1017 981 504 600
2005-06 1038 816 523 705
2006-07 1465 1047 378 755
2007-08 1534 1066 590 775
2008-09 1493 1158 619 632
2009-10 1227 650 494 672
2010-11 1789 780 567 778
2011-12 1853 954 639 932
Constant(A) 92.046 ** 118.828 *** 87.139 ** 106.536 **
(7.145) (3.032) (6.660) (7.314)
Parameter(B) 9.50 ** 6.52 *** 8.91 ** 9.15 **
(12.946) (3.648) (8.331) (9.619)
[R.sup.2] 0.903 0.425 0.794 0.837
F-value 167.600 13.307 69.402 92.530
D-W statistic 0.734 1.996 1.849 0.991
Source: Calculations are based on ASI data
Note: ** significant at 5% level
*** significant at 10% level
Figures in parentheses indicate 't' values
Table 2 State-wise Growth of Capital Productivity
(1991-92 = 100)
Year Andhra Karnataka Kerala Tamilnadu
Pradesh
1991-92 100 100 100 100
1992-93 116 86 97 98
1993-94 119 77 89 105
1994-95 164 82 100 88
1995-96 216 75 90 99
1996-97 173 71 110 90
1997-98 197 49 74 81
1998-99 167 36 128 81
1999-00 181 43 80 83
2000-01 182 44 98 93
2001-02 185 43 88 85
2002-03 191 49 100 73
2003-04 210 55 111 86
2004-05 243 75 103 89
2005-06 242 67 109 97
2006-07 285 88 78 106
2007-08 263 81 122 104
2008-09 256 69 122 85
2009-10 255 55 108 94
2010-11 267 65 105 99
2011-12 288 53 108 102
Constant(A) 1.206 ** .854 * 914 ** .911
(15.837) (3.680) (14.868) (.219)
Parameter(B) 8.96 ** -0.041 0.008 0.000
(8.575) (-1.801) (1.498) 0.119
[R.sup.2] 0.803 0.153 0.111 0.001
F-value 7.353 3.245 2.244 0.014
D-W statistic 1.248 1.042 3.071 1.066
Source: calculations are based on ASI data
Note: Figures in parentheses indicate 't' values
* significant at 1% level
** significant at 5% level
Table 3 State-wise Growth of Total Factor Productivity
(1991-92 = 100)
Year Andhra Karnataka Kerala Tamilnadu
Pradesh
1991-92 100 100 100 100
1992-93 112 94 86 98
1993-94 119 84 84 110
1994-95 150 97 90 101
1995-96 275 165 158 188
1996-97 237 152 163 173
1997-98 274 117 129 152
1998-99 237 107 210 154
1999-00 241 116 126 164
2000-01 240 119 153 176
2001-02 258 124 142 158
2002-03 258 142 164 144
2003-04 309 155 167 169
2004-05 497 271 228 231
2005-06 501 234 239 262
2006-07 646 304 172 283
2007-08 636 294 268 284
2008-09 619 282 275 232
2009-10 560 189 231 251
2010-11 589 209 245 288
2011-12 731 224 262 309
Constant(A) 1.054 ** 1.007 * .892 ** 0.195
(10.533) (3.483) (11.172) (.541)
Parameter(B) 9.46 ** 2.82 8.72 ** 8.98 **
(12.391) (1.245) (7.546) (8.648)
[R.sup.2] 0.895 0.079 0.760 0.806
F-value 153.547 1.550 56.941 74.781
D-W statistic 0.858 1.651 2.259 1.133
Source: Calculations are based on ASI data
Note: * significant at 1% level
** significant at 5% level
Figures in parenthesis are the 't' values
Table 4 Regression Coefficients Based on Labor Productivity Model
Coefficients Andhra Karnataka Kerala Tamilnadu
Pradesh
Intercept (a0) 62.425 *** 28.659 -74.213 -58.680
(2.302) (.094) (-.945) (-1.036)
LnSIZE (a1) -.633 *** -2.849 .434 0.013
(-3.196) (-.862) -0.467 (019)
LnSKILL (a2) .054 3.011 *** .683 0.900
-0.507 (4.113) (1.176) (981)
LnCI (a3) 1.484 ** -.230 .533 .430
-9.28 (-1.192) (1.030) (991)
LnGRNVA (a4) .838 *** 0.052 *** .288 *** 0.665 ***
(22.711) (2.320) -2.848 (2.673)
[R.sup.2] .999 .919 0.918 .966
D.F. 4.724 31.753 31.550 78.711
D-W statistic 1.916 1.1283 1.946 1.661
Source: calculations are based on ASI data
Note: ** significant at 5% level
*** significant at 10% level
Table 5 Regression Co-efficients Based on Capital Productivity Model
Co-efficients AndhraPradesh Karnataka Kerala Tamilnadu
Intercept (b0) 242.204 *** -299.181 ** 101.990 ** 98.678 **
(3.868) (-6.470) (16.438) (25.33)
LnSIZE (b1) -1.099 29.911 ** -0.002 -0.085
(-1.831) (5.989) (-.009) (-1.327)
LnLP (b2) .214 4.413 ** .478 ** .305 **
(1.918) (8.172) (18.409) (12.352)
LnSKILL(b3) .380 -3.379 .036 .113
(1.740) (-1.615) (.609) (1.364)
LnCI (b4) -.853 ** -0.919 *** -.525 ** -.353 **
(-5.415) (-2.565) (-12.805) (-8.484)
LnGRNVA (b5) .076 -.177 ** -.007 .008
(.911) (-3.191) (-.609) (1.445)
[R.sup.2] .928 .980 .978 .951
D.F. 35.821 134.649 125.461 54.743
D-W statistic 1.546 2.227 1.692 1.820
Source: Calculations are based on ASI data
Note: * significant at 1% level
** significant at 5% level
*** significant at 10% level
Figures in parentheses indicate 't' values.
Table 6 Regression Co-efficients Based on Total Factor
Productivity Model
Co-efficients Andhra Karnataka Kerala Tamilnadu
Pradesh
Intercept (a0) 122.778 * 1154.769 * 676.742 * 256.947
(4.082) (3.461) (3.804) (1.492)
LnSIZE -.341 * -4.910 ** -3.473 * .075 *
([a.sub.1]) (-3.079) (-2.076) (-4.474) (.3400)
LnLP .361 * 1.373 * 1.382 * .945
([a.sub.2]) (3.803) (1.882) (25.27) (.734)
LnSKILL .681 * -.982 * .845 .343 ***
([a.sub.3]) (3.983) (-.393) (.416) (.108)
LnLNCI -.715 * -21.779 -.527 * -1.183 *
([a.sub.4]) (-3.190) (-.914) (-15.120) (-12.543)
Ln GRNVA -.037 .089 -.613 .070
([a.sub.5]) (-1.043) (1.020) (-.402) (3.289)
[R.sup.2] 0.994 .516 .327 0.802
D.F. 428.926 2.989 1.358 .244
D-W statistic 1.968 1.460 1.293 2.611
Source: Calculations are based on ASI data
Note: * significant at 1% level
** significant at 5% level
*** significant at 10% level
Figures in parentheses indicate 't' values.
