The Output Oriented Technical Efficiency of Indian Manufacturing Firms in The Post-Reform Era

De, S. (2023). The output oriented technical efficiency of Indian manufacturing firms in the post-reform Era. Ecofunomics, 6(1), 99-116. DOI 10.5281/zenodo.11216871.

Abstract

The study evaluates the Output Oriented Technical Efficiency (OTE) of Indian manufacturing firms across industries using Non-parametric DEA on the CMIE Prowess Database from March 1995 to March 2016. The result indicates a rise in OTE from 0.852 to 0.874 over the study period. Sample firms have the potential of a 10.3% increase in output with efficient input utilization. Leather achieved the highest mean OTE of 0.954, while chemicals had the lowest at 0.835. Around 31% of firms demonstrated output efficiency with a score of one. A simultaneous panel regression analysed OTE alongside advertising intensity (ADV), marketing intensity (MKT), R&D intensity (RD), and net exports intensity (NX), revealing these factors significantly impact firms’ OTE. Notably, OTE also influenced these strategic variables significantly across industries. Recommendations for enhancing OTE involve strategic enhancements in advertising, marketing, R&D, and net exports, aimed at improving firms’ overall performance.

Keywords: Total factor productivity growth, Manufacturing Sector, Indian Economy

JEL Classifications: D24, L60, O530

Output-Oriented Technical Efficiency: Introduction

The manufacturing industry is the backbone of a country’s economic development. The expansion of this industry is used to measure the economic strength of the country. This industry helps in modernizing the agricultural sector (Elizabethrani, 2019). The manufacturing sector is capable of reducing the heavy dependence of people on agriculture by generating huge employment in the secondary sector. There is a growing emphasis put on the service sector globally. But there exists an established inter-sectoral linkage between the service and the manufacturing sectors (Park, 1994). Thus, the service sector growth also depends upon the growth of the manufacturing sector. The development of the manufacturing sector in proper channels can strengthen the base of the economy as a whole. The increase in efficiency of the manufacturing sector can also absorb different economic shocks (Kendrick (1956), Solow (1957), Denison (1967), Jorgenson and Grilliches (1967)).

In the early 1990s, economic reform was initiated in India which acted as a shock to the economy because previously the Indian manufacturing industry was protected from tough foreign competition through various restrictive government regulations. But, after 1991, the government policies gradually became less friendly for inefficient firms (Bhandari & Maiti, 2007). Thus, the efficiency of a manufacturing firm became a prerequisite for growth as well as for the survival of the firms during the post-reform era.

This change in the economic policy has raised some very interesting questions. One issue is related to the extent of efficiency of Indian manufacturing firms in the post-reform era. Additional query may be: which determinants are held responsible for significantly influencing the output oriented technical efficiency (OTE) of Indian manufacturing firms during this period?

These issues are very much relevant in the changed economic scenario in India. The major objective of the present paper is to examine these stated aspects of Indian manufacturing firms in the post-reform period. For this purpose, the present study has considered the following nine Indian manufacturing industry groups: the chemical industry, food products industry, leather industry, machinery industry, metal industry, non-metallic mineral products industry, paper industry, textile industry, and transport industry. All the industry groups under the Indian manufacturing sector have been initially incorporated but subject to the availability of data, the above-mentioned nine industry groups have finally been selected.

It is well-known that there are two alternative concepts of efficiency. One is allocative efficiency and the other one is technical efficiency. The present study focuses on technical efficiency. Technical efficiency can be measured either input-oriented (the ratio of minimum level of input required to produce a given level of output to the actual input used to produce that given level of output) or output-oriented approach (the ratio of actual output produced to the maximum level of output that can be produced given the input usage). The present study will consider only output oriented approach.

In this connection, the existing studies have been briefly reviewed. Driffield and Kambhampati (2003) showed that the overall efficiency in the post-reform period increased in five out of their considered six manufacturing sectors. The analysis of Mazumdar and Rajeev (2009) indicated that increased export earnings did not necessarily lead to higher efficiency of Indian Pharmaceutical firms. Bhandari and Maiti (2012) presented a direct association between the size of the firm and the technical efficiency of Indian leather firms. Kumar and Arora (2012) showed a steep fall in the level of technical efficiency in the post-reform period as compared to the post-reform period. Saravanakumar and Kim (2012) revealed that the reform improved the efficiency of heavy industries but failed to improve the efficiency in light industries. Parameswaran (2004) estimated technical change and technical efficiency change using a stochastic frontier production function for Indian capital goods industries during 1990s. This study showed that these industries experienced a significant improvement in the rate of technological progress but decline in level of technical efficiency during the post-reform period.  Mazumdar, Rajeev and Ray (2012) used non-parametric approach of DEA to examine the sources of heterogeneity in the efficiency of Indian pharmaceutical firms for the period 1991-2005. They found that these firms could make efficient use of their inputs but output efficiency was declining during this period. Bhandari and Ray (2011) used data from the Annual Survey of Industries (ASI) for a number of years 1985–86, 1990–91, 1996–97, 1998–99, 1999–00, and 2001–02 to measure the technical efficiency in the Indian textile industry at the firm level. Their analysis suggested that the size of the firm would have a direct effect on technical efficiency, implying that small firms must get consolidated to build large entities which might enhance efficiency.

There exists a nexus relationship between the Indian manufacturing firms’ performances and different strategic variables in the post-reform era (Chen & Ibhagui (2019), Pyper et al. (2022), Gakii & Maina (2019) etc.). Different strategic variables may be endogenous in nature. For example, Advertising Intensity (ADV), Marketing Intensity (MKT), R&D Intensity (RD) and Net Export Intensity (NX) may not only affect the firms’ performance indicators like OTE but in turn they may get affected by this performance indicator. Thus, there may be inter-connection between these variables. There is dearth in the studies highlighting these simultaneous relationships. The present study fills up this gap and contributes to the literature in this direction. The study finds out the determinants of OTE in a simultaneous panel set up. For determinant analysis, a simultaneous panel model as developed by Baltagi (EC2SLS random-effects Instrumental Variable regression) has been performed for OTE Block considering the endogenous variables OTE, ADV, MKT, RD and NX. This type study is very important for framing appropriate policies to boost up the performance level of Indian manufacturing firms.

The paper unfolds as follows: Section 2 reports data sources. Section 3 presents the estimated results of output oriented technical efficiency of firms. Section 4 represents the determinant analysis and Section 5 concludes the study.