The Role of Technological Conditions of Production in Explaining India's Manufacturing Growth, 1998-00 to 2007-08: Some Policy Perspectives

Alokesh Barua (), Bishwanath Goldar () and Himani Sharma
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Alokesh Barua: Centre for International Trade and Development,Jawaharlal Nehru University
Bishwanath Goldar: Institute of Economic Growth, Delhi
Himani Sharma: Madras School of Economics, Chennai

Centre for International Trade and Development, Jawaharlal Nehru University, New Delhi Discussion Papers from Centre for International Trade and Development, Jawaharlal Nehru University, New Delhi, India

Abstract: In this paper we try to explain India’s manufacturing growth performance in terms of the technological conditions of production, namely, the returns to scale (RTS) and the elasticity of substitution (ES) between capital and labour at two – digit level of industrial classification. We use for this purpose the unit (plant) - level data as provided by the Annual Survey of Industries for the years 1998-99 to 2007 - 08. Most of the earlier estimates on RTS and ES were based on studies using aggregate time series or state-wise data. Since the unit-level data are now available, it allows us to verify the robustness of the earlier estimates. Insofar as the technological parameters of production function are defined at the level of firm, this gives a justification of conducting the present study. Three alternate specification of production function (Cobb-Douglas, CES and the translog) were used in our study. Our findings generally confirm the findings of earlier studies. Interestingly, we find relatively high elasticity of substitution in the labour-intensive industries (textiles, tobacco products and leather and leather products etc.) and relatively low elasticity of substitution in capital – intensive industries (machinery and equipment, telecommunication equipment etc.). The results suggest that there are scope for policy interventions to increase employment and growth. For instance, lowering the hiring cost of labour via labour market reforms may help increasing employment in the labour – intensive industries. Similarly, reallocating new capital investment from the capital – intensive industries to labour – intensive ones may improve the profitability of new investment. Finally, a multiple regression analysis has been undertaken by using industry-level panel data for the years 1998 to 2007 to explain if the variations in the growth rate in real value added across industries and over time are related to the technological parameters like RTS and ES. The results reveal that the returns to scale have positive impact on growth. Similarly, high elasticity of substitution has a positive effect on growth, but only for the capital intensive industries. Thus, resource reallocation may be oriented to take advantage of the variations in the technological parameters to maximize manufacturing growth. Length: 49 pages

Date: 2015
New Economics Papers: this item is included in nep-cse
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