Productivity curve in India is j-shaped

Danish A. Hashim, Ajay Kumar and Arvind Virmani have written a nice paper looking at growth of productivity in Indian economy. It is part of Finance Ministry Working paper series.

The paper says productivity in Indian economy has followed a J-shaped curve. The reforms in 1990s led first to a decline in productivity because of initial adjustments and surplus capacities. The productivity then picks up in 2000s.

Majority of the studies on the impact the economic reforms on productivity growth in Indian manufacturing have found that productivity growth in the post reform period of 1990s declined as compared to its level during 1980s. Poor capacity utilization during the 1990s was attributed as one of the main reasons. However, even after correction for capacity utilization, Goldar and Kumari, 2003 did not find trace of productivity acceleration in the 1990s. They argued for a case of time lag between reforms and its impact on productivity growth and hence felt that productivity could improve in later years. The present study endeavors to see if productivity growth indeed improved in later years when the issue of capacity utilization also eased.

 

The authors analyse productivity using both partial (output divided by imput) and total factor productivity (uses growth accounting which subtracts input growth from output growth and econometric techniques). 

The findings are very interesting. Here are a few highlights:

The BOP crisis that started in 1990 and impacted the economy severely in 1991 had its greatest impact on the manufactured sector. The manufacturing sector was also the one most directly affected by the trade and exchange reforms of the 1990s. Thus the J curve hypothesis (Virmani (2005), (2009)) is most relevant for the path of TFPG in this sector.

TFPG growth decelerated in the first sub-period because of the combined effects of the BOP shock and the J curve effect arising from the dramatic import liberalization (removal of QRs on capital goods and intermediates and tariff reduction) and exchange rate reforms of the early 1990s (from fixed rate to managed float).

With the completion of the liberalization in the late nineties-early 2000s (removal of QRs on consumer goods and further reduction in import duties), rendered certain types of capital obsolescent, measured TFPG growth therefore became negative 0.14 % during the second sub-period. As the dissemination of new technologies and products progressed from early adopters to others, TFPG accelerated sharply during the third sub-period to 1.9% per annum, almost 50% higher than the TFPG during the 1980s.

Further,

At a sub sector level one would expect the weakest J curve effect in globally competitive industries/sub-sectors and the strongest in those in which the technology productivity  gap with global best practice was the largest. At the end of the 1980s, textiles and Gems and Jewlery had the highest share among manufactured exports. A substantial part of the Textile industry, with the possible exception of the segments based on man-made fibres and synthetic material, were globally competitive.’

 The minimal effect of liberalization on TFPG in this sub-sector (1.3% 1.2%, 1.5%) is therefore consistent with the J curve hypothesis. The machinery and equipment sector shows a continuing high level of TFPG growth with a slight dip in the second sub-period (2.1%, 1%, 2.2%) that is similar to that of the textiles sector. This is slightly surprising, as this sub-sector was, at the start of reforms, neither prominent in the export basket nor was it reputed to be particularly advanced in technology. We hypothesise that capital goods production in India reflects the duality of the Indian economy in terms of modern formal, organized sector and unorganized, informal small scale sector.

In contrast to these two sub-sectors, the maximum technological gap with the global frontier was in the Automobile sector. Not surprisingly therefore the sharpest J curve effect is found in the Motor vehicles sub-sector, with TFPG at a low 0.7% in the first sub-period, collapsing to -2.3% in the second sub-period and then rising sharply to 8.1% in the third subperiod.

Wow. Read the paper for details. Very simply written as well. It is nice to read papers on such basic issues.

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