اصلاحات اقتصادی و رشد بهره وری در صنایع تولیدی هند: تعامل با تغییرات فنی و مقیاس اقتصادی

This paper studies the effects of the economic reforms of 1991 on the Indian manufacturing industries. A translog cost function was used to analyze the production structure in terms of biased technical change and economies of scale. A panel consisting of 121 Indian manufacturing industries from 1981 to 1998 was used in our estimation. We have shown that key industries have experienced capital-using technical change, and the scale effects have been exploited more intensively since the 1991 economic reforms. We also observe total factor productivity (TFP) improvements for most of the industries after the 1991 reform initiatives, which support the evidence of improvements in economic efficiency in key Indian manufacturing industries.

At the time of independence in 1947, India's main industrial policy was import-substitution strategy of development. India's industrial policies were designed to protect its domestic industries through import tariffs and infant industry subsidies. The principal instruments used were an elaborate industrial licensing scheme under the Industries Development and Regulation Act (IDRA) of 1951 and a protective foreign trade regime. It controlled not only entry into an industry and capacity expansion, but also technology output mix and import content. Concentration of economic power was within the control of Monopolistic and Restrictive Trade Practices (MRTP) Act of 1970, and the foreign Exchange Regulation Act (FERA) of 1973 was used to regulate foreign investment in India. This period also witnessed considerable expansion of public sector enterprises (PSUs) either through nationalization or setting up of new enterprises. While these policies enabled India to develop a widely based industrial structure, and technical and professional manpower, they were allowed to continue for too long, that led to considerable inefficiency in the industrial sector (Bhagwati and Desai, 1970). Bhagwati and Srinivasan (1975) concluded that the Indian foreign trade regime, along with the industrial licensing policy which eliminated all forms of competition, had adversely affected incentives to reduce costs and prevented improvements in product quality, design, and technology. Wolf (1982) noted that by international standards, the industries in India were fragmented into many relatively small firms hindering exploitation of scale economies and product development. He attributed the key cause of the above inefficiencies to policies relating to industrial licensing and imports. Bhagawati (1998), Jha (1976, pp. 99–106), and Ahluwalia (1985) have also derived the similar conclusions. The above suggests that while the import substitution strategy achieved limited success in creating a self-reliant economy, it grossly underemphasized the importance of efficient use of resources, particularly of labor and capital. The performance of public sector enterprises has proved to be considerably below expectations due to the over centralization of power for decision making concerning investment, mandating formal and informal distributional channels, limited managerial and multidimensional objectives. As a result, autonomy and commercial viability of trade and commerce suffered. Because the home market was well protected, the domestic enterprises were not compelled to improve efficiency in use of factor inputs and in improving quality of their products. The New Industrial Policy (NIP) of 1991 has been a key element of India's objective of integrating with the world economy in a market consistent manner and enhancing efficiency and growth rate. Accordingly, the New Industrial Policy (NIP) of 1991 is outward-oriented and represents a major paradigm shift. The key elements of the NIP are the abolition of licensing of capital goods, reduced list of industries to be reserved for the public sector, increasing foreign equity ownerships in domestic industries, private investment in infrastructure, freer import of capital goods, reduced tariff for consumer goods, deregulation in small-scale industrial units, and allowing greater inflow as well as outflow of foreign investments. These elements aim to enhance productivity and efficiency in Indian industries by increasing competition, creating level playing field among public, private and foreign businesses, and generating an environment which is conducive for technological growth. Several recent studies have attempted to empirically estimate the differences in outcomes of post- and preliberalization policies on the Indian manufacturing industries. Ahluwalia (1991) estimated the annual TFP from 1960 to 1986 and showed that there was an increase in total factor productivity (TFP) growth in the late 1970s, the initial period of liberalization. However, Balakrishnan and Pushpangadan (1994) and Rao (1996) challenged this result. Using the “double-deflation” method, they suggested a rapidly declining TFP growth for the manufacturing industries after 1983. Study by Hulten and Srinivasan (1999) shows that there is little evidence of any positive impact from the initial economic reforms on TFP growth of the Indian manufacturing industries. They however found that there were other positive impacts on investment, labour productivity, and capital per worker from the economic reforms. Some of the studies have concentrated on examining the impact of economic reforms on the scale effects in the manufacturing industries in India. Fikkert and Hasan (1998) analyzed the returns to scale for a panel of selected Indian manufacturing industries for the preliberalization period from 1976 to 1985 using a restricted cost function. Although they found large number of firms operating with increasing returns to scale, the results suggested that most of them were operating close to constant returns to scale. They suggest that there might not be significant gains in scale efficiency from the tentative steps in economic liberalization in the 1980s. In a similar panel study using a production function from 1986 to 1993, Krishna and Mitra (1998) show that there are increasing returns to scale in electronics, transport equipment, and nonelectrical industries; and, that there was an increase exploitation of the scale economies after the economic liberalization. In a related study using selected industry level data with translog cost function, Jha et al. (1993) shows that there exists biased technological change and economies of scale in two of the four industries analyzed for the initial economic reform periods. In this paper, we study the effects of liberalization on the economic efficiency of the Indian manufacturing industries in terms of economies of scale and biased technical changes using a cost function framework. The paper aims to make several new contributions to the existing literature. Most of the above papers only studied the initial liberalization period of the 1980s and early 1990s. They were hence only able to capture the short-term effects of the economic reforms. While economic reforms are expected to have initial impacts, the significant effects are only felt several years later. In this paper, we capture the long-term effects of the economic reform using a three-digit panel industry level data spanning from 1981 to 1998. We estimate the scale economies, biased technological change, and dual TFP growth in a unifying framework of the flexible cost function. This allows us to compare the economic effects of the economic reforms in the semiliberalized period of the 1980s with the key reforms initiatives of the NIP. Third, the above model is estimated in a panel framework by pooling the three-digit industries from 1980 to 1998. The larger panel consisting of 121 industries allowed us to improve the efficiency of our estimation and hence the results. While our study using the cost function is very similar to the study of Jha et al. (1993), we improved their results in two aspects. The panel data study improves on their estimation. Also, we extended the study to the key reform initiative period of the 1990s, which was not included in their study. The results of our paper support the evidence that there are economies of scale (only moderately) in the Indian manufacturing industries, and these were exploited after the key economic reforms in 1991. Most of the industries in our study reveal biased technological change, and majority of the industries have experience capital using technological change. This suggests that the NIP, which has led to greater capacity utilization and investment in capital goods, will in turn have a positive impact on the productive performance of the industries, provided the price of capital does not increase substantially.1 The results also suggest the TFP improvements for most of the industries after the NIP, which supports the evidence that there have been improvements in economic efficiency. The methodology and data are discussed in Section 2. In Section 3, we provide the empirical results. Section 4 provides concluding remarks.

This paper has analyzed the effects of liberalization on the Indian manufacturing industries initiated by the 1991 economic reforms. The results suggest that the key industries have experienced capital-using technical change and increase in total factor productivity growth. The study also suggests that the industries in our sample have experienced economies of scale, and the scale effects have been exploited more intensively since the 1991 economic reforms. Capital-using technical change in the Indian manufacturing industries has policy implications in terms of capital accumulation and increasing total factor productivity in the manufacturing industries. Because the results suggest that the technical change is increasing capital share relative to labour share, the income of owners of capital has increased since the 1991 economic reforms. This has increased the returns for investing in capital goods and hence capital accumulation. The likely impact of these changes is an increase in the prices of capital goods and, in the case of capital-using technical change, dampening of the growth of total factor productivity. The results so far suggest that the total factor productivity growth has improved after the 1991 economic reform for most of the industries in our sample. However, we do not expect this result to hold in the future if the demand for capital investment increases substantially. To mitigate this outcome, the government may consider keeping the interest rate and hence cost of capital low. The other option might be to provide more effective and targeted tax incentives and subsidies for selected capital investment and thus keeping the cost of capital in key sectors low. This could by stimulating the investment in capital, increase total factor productivity growth in the manufacturing sector. As the economy liberalizes and permits greater inflow of capital into the economy, the usage of foreign capital could make important productive contribution to the industrial structure.