Economic Reforms and the Evolution of Productivity in Indian Manufacturing Firms
Lead Research Organisation:
University of Manchester
Department Name: Environment and Development
Abstract
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Organisations
Publications
Kathuria V
(2011)
The Effects of Economic Reforms on Manufacturing Dualism: Evidence from India
in SSRN Electronic Journal
| Description | This project produced three research papers. The first paper (Are formal firms more efficient than informal firms? Evidence from Indian Manufacturing) looked at the differences in efficiency levels between informal and formal firms. It found that formal firms are more efficient than informal firms, both for absolute and relative efficiency. This study suggests there are clear benefits of easing the transition of informal firms to the formal sector and provides empirical support for the proposition that policymakers should relax regulations that may allow more informal sector firms to relocate to the formal sector. The second paper (The effects of economic reforms on manufacturing dualism: evidence from India) studies the effect of economic reforms - tariff reforms, industrial delicensing and withdrawal of reservation of products for the small scale sector - enacted in Indian manufacturing sector since 1980s. This paper also examines whether dualism as captured in differences in efficiency levels between informal and formal firms has widened as a consequence of reforms. We find that reforms have had an unambiguous positive effect on absolute levels of technical efficiency in the manufacturing sector. While average efficiency levels in both the informal and the formal manufacturing sectors have increased, reforms have increased the efficiency differentials between the more efficient formal firms and the less efficient informal firms. At the same time, reforms have led to a decline in relative efficiency levels across the entire manufacturing sector, suggesting that it has brought about a greater efficiency gap between the average firm and the most efficient firm in a given industry. However, the widening of the efficiency gap has been more significant for formal firms as compared to informal firms, suggesting that the within industry effects of reforms on efficiency have been more unequalising for formal manufacturing as compared to informal manufacturing. Overall, our results suggest increasing dualism in Indian manufacturing following reforms. The third paper (Productivity measurement in Indian manufacturing: A comparison of alternative methods) finds that estimates of TFPG in India are sensitive to the methods used in the computations. GA and LP methods both show a decline in TFPG in informal sector. These methods give different results for the formal sector - while GA show a continuous TFPG decline, LP shows a decline only in the second period. Comparing efficiency at the firm level by location, ownership type and firm size, the paper finds higher efficiency among urban firms and public limited companies as compared to rural, privately held and public sector firms. The paper also finds that there is a U shaped relationship between efficiency and firm size, with mid-sized firms the least efficient compared to small and large-sized firms. Future research plans include further analysis of the mechanisms that have led to increasing manufacturing dualism following reforms, the reasons behind why some informal firms move to the formal sector and others do not, and the effects of firm productivity growth on workers' wages. |
| Exploitation Route | This research could be used to strengthen the design of econonomic policies towards the informal sector. The research can be put to use in the design of industrial and trade policies for developing countries, and in improving the productivity performance of manufacturing firms in these countries. |
| Sectors | Education |
| URL | http://www.sed.man.ac.uk/idpm/research/projects/esrcpathfinderproject/ |