Sources of TFP Growth in Indian Manufacturing Sector: A Frontier Approach

Abstract: Traditionally, Total Factor Productivity (TFP) growth, interpreted as growth due to technological advancement, is considered as the main source of long-term economic growth as other factors of input i.e. labor and capital are subjected to diminishing returns. However, conventional methods of measuring TFP did not distinguish between technological change and efficiency change. Recent developments in the TFP growth analysis acknowledges these shortcomings and have extended estimation techniques to separate these components. With a focus on Indian manufacturing sector, this study decomposes TFP growth into Technical Progress (TP) and Technical Efficiency change (TEC). The main objective of the study is to understand which component contributes to the overall productivity growth during the period 1980-2011. Specifically, 15 organized manufacturing sectors are considered for the analysis. The study further analyzes if the economic reforms adopted in 1991 had an impact on the productivity growth. The study adopts an advanced parametric estimation method specified by stochastic production frontier for the decomposition analysis. The results indicate that TP contributed positively to the growth of TFP, while TEC contributed negatively for the entire time period of study. The results also show a negative trend in TFP growth across the aggregate manufacturing sector for the entire period of study.