Salient Features of Growth, Efficiency and Technical Change in Indian Economy

 

 

Panchanan Das

 

Growth and structural change

This section looks at the pattern of growth of agriculture, manufacturing and services in India over the period 1950 to 2003 (Figure 1). The time series plot of first differences of the logarithmic series shown in Figure 1 gives a rough idea about the pattern of growth and appearance of structural break in the growth path of the respective sectors. India’s economic growth rate has been rising dramatically since the 1980s, but this happened without any matching growth in employment. There has also been a substantial structural change in the composition of output and employment in the major sectors of domestic output.

 

 

Fig 1: Annual Growth Rates (National Series)

 

Fig 2: Sequence of Test Statistics for Structural Break: All India

 

The estimated results shown in Figure 2 suggest that the Indian economy experienced a structural break in the year 1979, a long period before the initiation of economic reforms in the country. The structural break in the series of annual growth for manufacturing and services has also been observed at 1979, the year of break in overall growth of the economy. For the agricultural sector, the break occurred long back, in 1965. This structural break in Indian agriculture took place largely due to the expansion of irrigation and the application of Green Revolution technology.

 

Fig 3: Sectoral Changes in NDP

 

Figure 3 shows the temporal movement of percentage shares of agriculture, manufacturing and services to net domestic product in India. The share of NDP originated in agriculture declines substantially from more than 50 percent in 1950-51 to around 20 percent in 2003-04. As is clear from Figure 3, in manufacturing, income share has been rising at a slower rate from less than 10 percent in 1950-51 to around 15 percent in 2003-04. The services sector, in terms of its income share, grew at a relatively faster rate.

 

Regional dimension of industrial development in India

In India, different regions have been growing at uneven rates. The western region states have continued to dominate the other parts of the country in terms of industrial growth. Maharashtra and Gujarat together account for a share of almost 34 per cent in the total value of gross output by the country’s factory sector. Maharashtra has been continuing to occupy the top position despite its share declining from 24.7 percent in 1971-72 to 19.3 percent in 2001-02. Gujarat gained second position by raising its share significantly from 10 percent to 15 percent during the same period. The eastern region states, on the other hand, have been continually losing their prominence. West Bengal’s share in value added by India’s factory sector declined drastically from 13.4 per cent in 1971-72 to 4.4 per cent in 2001-02. Rajasthan and Uttar Pradesh in the north-west and Madhya Pradesh in the central region experienced a marginal increase in their shares, as did the three southern states of Andhra Pradesh, Tamil Nadu and Karnataka (Table 1).

 

Table 1: Some measured levels of expenditure on health in India (1997-2003)

State

1971-72

1975-76

1981-82

1985-86

1991-92

1995-96

2001-02

Andhra Pradesh

4.9

5.6

5.2

6.0

6.5

6.9

6.8

Assam

1.5

1.6

0.9

1.4

1.1

0.8

1.0

Bihar

5.6

6.1

5.9

5.4

4.6

3.5

2.8

Gujarat

10.1

10.4

11.6

11.3

10.6

11.8

15.1

Haryana

2.5

2.5

3.2

3.3

3.6

4.2

4.7

Himachal Pradesh

0.3

0.2

0.3

0.4

0.4

0.5

0.6

Jammu & Kashmir

0.1

0.1

0.2

0.3

0.2

0.1

0.2

Karnataka

4.2

4.0

4.2

4.1

4.8

4.9

5.5

Kerala

2.7

3.0

3.2

2.5

2.5

2.2

2.6

Madhya Pradesh

4.3

4.3

4.1

4.9

5.4

5.9

5.1

Maharashtra

24.7

24.5

22.9

22.4

21.2

21.4

19.3

Orissa

1.6

1.6

1.6

1.7

2.0

1.8

1.4

Punjab

2.9

3.4

4.1

4.1

4.6

4.2

3.8

Rajasthan

2.0

2.2

2.6

2.9

3.3

3.4

3.2

Tamil Nadu

9.9

9.9

10.7

10.7

10.4

11.0

10.2

Uttar Pradesh

7.1

6.8

7.4

8.0

9.5

8.9

7.6

West Bengal

13.4

11.1

9.2

7.8

5.9

4.9

4.4

Note: Figures shown in the Table are in percentage to all India total.

Source: Annual Survey of Industries, Various issues, CSO, Government of India.

 

Regional variation in industrial development is clear from the data shown in Table 1. West Bengal, for example, experienced a dramatic fall of output share over the decades and at a significantly higher rate in the period of license permit raj. It is well documented that the recessionary effect on industry in West Bengal was not only the most severe but long lasting as well (Bagchi, 1998), and this was partly attributable to industrial policies of the central government of the country. In spite of the industrial slow down, the rate of labour absorption, as shown by the country’s employment share, in registered manufacturing industries located in West Bengal was significantly higher than that in Gujarat having a much larger share of factories till the mid 1990s, but it followed a steep deterioration throughouti . The relative share of gross output was also higher in West Bengal even during the recessionary phase of the 1970s and then it started lagging behind.

The trend rates of output and employment growth over different policy regimes for major states in India are displayed in Table 2. Growth rates are estimated by using GLS in the frame of fixed effect panel regression model. In exploring the differences in the pattern of output and employment growth across major states we have taken the value of gross output at constant prices and number of workers per factory as a measure of output and employment. This is because many of the registered factories have failed to supply the relevant information to the CSO. Thus the figures displayed in the ASI Table are the total figures of the reported factories, not the real total figures of the total number of factories located in a particular state or the country as a whole.

Maharashtra and Gujarat experienced only 4.4 percent and 5.7 percent annual growth of output respectively during 1970-71 to 2002-03. West Bengal had been lagging far behind in terms of trend growth rate of real output, not only Maharashtra and Gujarat, but many other states as well. A significant rise in the rate of output growth of the total registered manufacturing sector is observed in Gujarat in the post-reform period, but no such remarkable escalation has been observed in Maharashtra during the same period. In the southern region, Andhra Pradesh had managed to revive its growth performance during the reform period compared to the earlier period. West Bengal along with many other states, on the other hand, showed a marked deceleration in the growth of manufacturing production in the registered sector after the ending of license permit raj.

The phenomenon of job less growth at least in the 1980s at the national level is well established. But, considering number of workers engaged per factory, Table 2 clearly reveals the job destroying growth in the registered industries across major states since the 1970s. Punjab is the only state displaying positive employment growth not only in the licensing period but in the period of deregulation as well although the growth rate declined drastically.

 

Table 2: Output and employment growth in total manufacturing industries in major states: 1970-71 to 2002-03

States

Output growth

Employment growth

1970-2002

1970-1985

1986-2002

1970-2002

1970-1985

1986-2002

Andhra Pradesh

4.16

-0.25**

7.28

-0.74*

-3.07

1.91

Assam

5.30

3.37

4.91

0.65

0.45**

0.91*

Bihar

3.40

3.17

-1.04**

-1.69

-2.35

-6.12

Gujarat

5.71

4.07

6.95

-1.38

-1.65*

-1.63

Haryana

4.83

1.63

5.80

-0.81

-3.03

-1.29

Himachal Pradesh

6.83

7.89

3.96

-0.28**

2.77*

-6.59

Jammu & Kashmir

6.57

7.67

2.30

-0.97*

2.77

-0.51**

Karnataka

5.96

3.90

6.71

0.01**

-0.14**

0.33**

Kerala

3.84

4.63

3.18

-1.71

-2.30

-1.69

Madhya Pradesh

6.35

4.32

5.51

-0.19**

0.33**

-2.04

Maharashtra

4.45

3.30

4.24

-1.84

-2.37

-1.99

Orissa

5.62

4.39

2.69

0.11**

0.59**

-2.63

Punjab

5.96

6.81

3.55

1.28

2.86

-1.76

Rajasthan

4.08

3.06

2.72

-2.07

-0.73**

-3.99

Tamil Nadu

3.02

2.09

3.12

-1.69

-2.86

-1.14

Uttar Pradesh

4.79

2.66

4.17

-2.36

-0.64

-3.22

West Bengal

2.93

3.30

1.80

-1.78

-0.58**

-2.96

All India

4.50

2.93

4.75

-1.31

-1.41

-1.55

Note: Growth rates are estimated by using semi-logarithmic trend equation and applying pooled regression fixed effect model.

*significant at 5% level, **insignificant, rest are significant at 1% level.

Source: Annual Survey of Industries Time Series data, CSO, Government of India.

 

Productive efficiency and technical change

This section sets out to provide some empirical estimates of productive efficiency and of technical change in the factory sector across major states in India over 1970-71 to 2002-03. Efficiency increases when firms move closer to the best practice production frontier, while technical progress shifts the frontier outward. Clearly, factor productivity of a firm goes up due to technological progress and improvement in efficiency. In a region with more efficient industries, productivity grows more rapidly and ultimately output expands at a faster rate raising its share of value added further. As the industrial sector is normally viewed as a leader of job creation and productivity growth through positive spill over, the unequal incidence of development in industrial activities is largely accounted for some regions growing relatively fast and others tending to be left behind (Kaldor, 1981).

By following Farrell (1957), technical inefficiency is measured by the ratio between actual and potential output of a firm. According to this estimate firms will have efficiency scores in the (0, 1) interval. Improvements in technical efficiency result from learning by doing, external economies of new technological knowledge and efficient management and better allocation of inputs. Estimates are made by using thirty-three year (1970-71 to 2002-03) panel of total manufacturing industries in the factory sector across 17 major states in India. The long period of the panel, covering both the pre-deregulation period (1970-1985) and the post-deregulation period (1986-2002) enables us to examine the time behaviour of productive efficiency and technical change of the factory sector in India over these periods.

In this section, stochastic production frontier model developed in Battese and Coelli (1995) has been employed in a panel data frame. In this frame, it is possible to decompose the random error into the white noise and inefficiency components (both firm and time specific). This approach also allows each cross section unit to have different levels of efficiency in different period. The inefficiency parameters along with the technical parameters of the trans-log production frontier are estimated by the MLE technique. Technology determines the type of input mix as well as the level of output at the given input and output prices. Technical progress shifts the production frontier outward through innovation.

 

Fig 4: Temporal pattern of productive efficiency in Indian industries: 1970-2002

 

The temporal pattern of mean productive efficiency (measured in left vertical axis) and its rate of change (measured in right vertical axis) for the past 33 years are displayed in Figure 4. According to our estimates, the registered sector of the Indian industries exhibits significant inefficiency, with the mean efficiency score varying from 32 percent in 1970-71 to 84 percent in 2002-03. Productive efficiency had been accelerating in the second half of 1970s followed by a decelerating phase. At the end of this decade Indian industries experienced efficiency loss and afterwards showed a rising trend, although at fluctuating rates, during the 1980s. In the early part of 1990s efficiency in the factory sector of the country, although its level grew to be higher than the level in the early 1970s, was again decelerating and indeed there had been actual fall of efficiency in 1991-92, 1992-93 and 1994-95. In the second half of the 1990s, however, productive efficiency began to rise but at highly fluctuating rates.

 

Table 3: Productive efficiency across major states

State

Mean efficiency

1971-2002

1971-1985

1986-2002

Andhra Pradesh

0.46

0.35

0.57

Assam

0.51

0.37

0.63

Bihar

0.45

0.37

0.54

Gujarat

0.68

0.54

0.81

Haryana

0.69

0.49

0.87

Himachal Pradesh

0.42

0.30

0.54

Jammu & Kashmir

0.41

0.21

0.60

Karnataka

0.52

0.37

0.66

Kerala

0.57

0.42

0.72

Madhya Pradesh

0.51

0.36

0.65

Maharashtra

0.75

0.60

0.90

Orissa

0.34

0.29

0.39

Punjab

0.60

0.45

0.74

Rajasthan

0.53

0.36

0.69

Tamil Nadu

0.59

0.46

0.70

Uttar Pradesh

0.49

0.34

0.64

West Bengal

0.49

0.44

0.53

 

Table 3, presents the mean efficiency scores of the factory sector across major states over different time period. Mean efficiencies are shown in three different columns, one for the entire estimation period (1970-71 to 2002-03), the next based on the pre-deregulation period (1970-71 to 1985-86), and finally the last based on the post-deregulation period (1986-87 to 2002-03). There has been a substantial inter state variation in efficiency score in industrial activities. The mean efficiency scores in industries of the western states over 1970-71 to 2002-03 are significantly higher than that of the other regions. Maharashtra has been at the top in mean efficiency score, as for its share of industrial output over the past three decades. Gujarat, the second most industrial state, ranked third in mean efficiency score. West Bengal, in the eastern region, experienced relatively lower efficiency compared not only to the western states but also to many other states of the country. During this period the mean efficiency has been the lowest in Orissa.

Data shown in the last two columns of Table 3, compare the relative position of productive efficiency of the factory sector across different states over two different policy regimes. Mean efficiency score for every state has increased but at different rates in the post-deregulation period compared to the period of state control. Industrially dominating states in the western part of the country experienced higher rate of improvement in efficiency compared to other parts after the initiation of deregulation in India. The eastern region states still remain in the lower strata in efficiency scale.

 

Fig 5: Contribution of technical change in industrial output

 

Figure 5 displays the evolution of technical change in the factory sector estimated as the shift of the translog production frontier under the assumption that technical efficiency is time varying. The time path of technical change follows more or less rising trend with some breaks in early 1980s and late 1990s. Although technical progress had improved roughly consistently between these periods, it started to deteriorate since 1997-98.

Accumulation of technology depends largely on the accumulation of capital as on investment in education and training and on favourable macroeconomic climate in providing of which government has a role to play. New capital investment measured by gross fixed capital formation has been very fast in western and southern region states compared to other regions. Investment as a share of country’s total investment has been significantly larger in Maharashtra and Gujarat compared to West Bengal, Bihar, Kerala and Assam.

 

Table 4: Technical change across major states in India

State

Technical change

1971-2002

1971-1985

1986-2002

Andhra Pradesh

0.019

0.016

0.021

Assam

0.021

0.020

0.022

Bihar

0.030

0.028

0.032

Gujarat

0.030

0.020

0.038

Haryana

0.036

0.031

0.040

Himachal Pradesh

0.039

0.035

0.043

Jammu & Kashmir

0.028

0.019

0.036

Karnataka

0.035

0.030

0.039

Kerala

0.018

0.013

0.023

Madhya Pradesh

0.038

0.034

0.041

Maharashtra

0.038

0.030

0.045

Orissa

0.031

0.028

0.033

Punjab

0.032

0.028

0.036

Rajasthan

0.033

0.027

0.039

Tamil Nadu

0.026

0.021

0.030

Uttar Pradesh

0.026

0.018

0.034

West Bengal

0.022

0.016

0.028

Note: Figures are computed by using estimated production frontier given in Table 2.

 

Regional disparities in technical change in registered industries over different periods are shown in Table 4. Our estimated results reveal a sharp variation in technical change across the major states. Technology contributes relatively more in industrial leading state of Maharashtra together with some other states like Himachal Pradesh and Madhya Pradesh. Gujarat, another leading industrial state in the western part, however, lags behind them and many other states in the country in terms of technical change. Andhra Pradesh and Kerala in the southern region experienced lowest contribution of technology in the factory sector. Technical progress in West Bengal has been just above these southern states. Technological advancement in industrial activities contributed more to output growth during 1986-87 to 2002-03 compared to the earlier period at relatively faster rates in some states like Gujarat, Maharashtra Uttar Pradesh and West Bengal.

 

 

 

References:

 

 

iA comparison of manufacturing growth between West Bengal and Gujarat has significance because they are prominent industrial states in the eastern and western regions respectively with distinct types of socio-political character.

 

 

 

 

 

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