Institute for Development Policy and Management (IDPM) Development Economics and Public Policy Working Paper Series WP No. 31/2011 Published by: Development Economics and Public Policy Cluster, Institute of Development Policy and Management, School of Environment and Development, University of Manchester, Manchester M13 9PL, UK; email:
[email protected]. PRODUCTIVITY MEASUREMENT IN INDIAN MANUFACTURING: A COMPARISON OF ALTERNATIVE METHODS Vinish Kathuria SJMSOM, Indian Institute of Technology Bombay
[email protected] Rajesh S N Raj * Centre for Multi-Disciplinary Development Research, Dharwad
[email protected] Kunal Sen IDPM, University of Manchester
[email protected] Abstract Very few other issues in explaining economic growth has generated so much debate than the measurement of total factor productivity (TFP) growth. The concept of TFP and its measurement and interpretation have offered a fertile ground for researchers for more than half a century. This paper attempts to provide a review of different issues in the measurement of TFP including the choice of inputs and outputs. The paper then gives a brief review of different techniques used to compute TFP growth. Using three different techniques – growth accounting (non-parametric), production function accounting for endogeniety (semi-parametric) and stochastic production frontier (parametric) – the paper computes the TFP growth of Indian manufacturing for both formal and informal sectors from 1989-90 to 2005-06. The results indicate that the TFP growth of formal and informal sector has differed greatly during this 16-year period but that the estimates are sensitive to the technique used. This suggests that any inference on productivity growth in India since the economic reforms of 1991 is conditional on the method of measurement used, and that there is no unambiguous picture emerging on the direction of change in TFP growth in post-reform India.