Chapter 5
Chapter 5
Chapter 5
5.1 Introduction
As Paul Krugman (1994, p.13) has famously put it: “Productivity isn’t
output, enhance the competitiveness of the industry in the domestic market as well as
over a period of time. The prosperity of new developed nations have been attributed
employment opportunities other than the land, a stage may be reached that the land
cannot support the growing population further so the existing workers hours of work
productivity faster than the population the above phenomenon would be eliminated.
structural transformation of the developed economies was the fast growth in industrial
productivity.
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Productivity is defined as the relationship (usually a ratio or an index) between
output produced by a production unit and quantities of input utilised by the unit to
produce that output (OECD 2001). When single input is used to measure productivity,
it is called as ‘factor productivity’ and when all factors are combined together for the
3. Multifactor Productivity
improvement of not only the single factor labour rather than the combined factors.
Therefore, the right measure of the productivity is the consideration of the average
product of all the inputs. This has been called as total factor productivity or
Q
TFP =
X
Where ‘Q’ is output and ‘X’ is the weighted sum of the inputs.
Partial factor measures of productivity are the most commonly used measures.
In output based productivity analysis the partial factor productivity is calculated as the
ratio of the gross or net output to the amount of the one of the factors of production,
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keeping all other inputs constant (OECD, 2001). Hannula (2002) classified partial
1. Labour Productivity
2. Capital Productivity
4. Energy Productivity
In value added productivity analysis where the value added is the output in the
production function, labour and capital are the two factors of production and the
1. Labour Productivity
2. Capital Productivity
that during the period 1869-1878 and 1944-1953, a major portion of output growth in
the United States could not be explained by the growth in factor inputs. He called this
residual is the productivity growth of the combined inputs. Solow (1957) also
presented very similar results to those of Abramovitz. Diewert (2000) defined the
Total Factor Productivity (TFP) of a firm, industry or group of industries is the real
output produced by the firm or industry over a period of time divided by the real input
used by the same set of production units over the same time period.
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5.2 Description of Variables
5.2.1 Output: As a measure of output there is a choice between gross output and
gross value added. Generally value added is preferred because it is believed that there
would be variations in the gross output with changes in the stages of productive
process of an industry. After the selection of the value added, the common question is
whether one must select the gross value added or net value added. For productivity
analysis theoretically more appealing measure of output might be value added with
accounting methods vary between industries and the depreciation figures reported in
the data hardly ever represents the true depreciation. So this study used Gross Value
Added as a measure of output for productivity analysis. To deflate gross value added
the wholesale price index at 1993-94 price was used which is issued by the Office of
5.2.2 Capital: Capital stock estimation is a controversial issue both in theory and in
practice. There is no unique method of estimating capital series. This study followed
the standard practice of the perpetual inventory method for the generation of capital
stock. Real capital stock was computed by deflating the capital series by the
wholesale price index of machinery and machine tools (at 1993-94 prices). The
T
Kt = K0 + Σ It
t=1
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Where It is investment in year t and K0 is capital stock for benchmark year, i.e.
( Bt − B t −1 + Dt )
It =
Rt
5.2.3 Labour: There are three choices of labour input i) man hours worked, ii)
number of workers and iii) number of employees which includes both workers and
persons other than workers such as supervisors, technicians, managers, clerks etc.
Total number of persons engaged is taken as the measure of labour input. As both
5.2.4 Factor Shares: The translog divisia index method of total factor productivity
growth requires the estimation of each factor inputs to the value added. For single
deflation method the share of emoluments to the value added is taken as labour share.
Assuming constant returns to scale the capital share is calculated as one minus the
labour share.
TFP growth is an age old concept dates back to the work of Tinbergen (1942),
Abramotivz (1956), Solow (1957) and Giriliches and Jorgenson (1967). These studies
focused on the non-frontier approach to calculate TFP growth. Farrell (1957) initiated
the frontier approach to TFP growth. However, it was in the late 1970s that this
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5.4 The Non-Frontier Non-Parametric Approach: Index Approach
schemes. Each measure of total factor productivity differs from one another on the
basis of certain assumptions and with respect to the weighting schemes. In the recent
5.4.1 Kendrik Index: Kendrik adopted this method of measuring total factor
productivity growth to study the American industries. His measure is based on linear
output denoted by ‘Y’ and two factors of production Labour ‘L’ and capital ‘K’. ‘w0’
and ‘r0’ are assumed to be the factor rewards of labour and capital in the base year of
the study. Then the Kendrik index of TFP for the year‘t’ is written as
Yt
At =
w0Lt + r0Kt
At constant prices there exist equality between the value of output and the
value of input in any year. When the improvement in the productivity results more
output from a given quantity of inputs the equality assumption cannot hold good. At
this juncture there is a requirement of a scaling factor St, which has a value 1 at time 0
and varies over time as productivity of the input factors change. The equation was
Yt
St = w = wage rate, r = rent
w0Lt +r0 Kt
Here T=0 denotes base period while T=t denotes the current period.
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The basic assumptions are: constant returns to scale, perfect competition,
payment to factors according to marginal product and St is unity ie, payment to labour
and capital equals the total output. Though the Kendrik index is easy to calculate, it
suffers from the assumption of linear production and does not allow the diminishing
5.4.2 Solow Index: Solow’s method is the special form of productivity analysis. The
progress and the factor payments being equal. With these assumptions the growth in
A˙ Y˙ L˙ K˙
= - (1-β) +β
A Y L K
Where β, 1 – β are the elasticities of capital and labour in the C-D production
function. TFPG is estimated from the above equation. This estimation is called as
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growth of the residual productivity. Solow’s index is derived from using the following
A
A (t + 1) = A (t) 1+
A
5.4.3 Translog – Divisia Index: Data over time come in discrete units. Girilliches
et.al. (1967) introduced the discrete approximation to the Divisia derived from the
efficiency parameter, it can be done using econometric techniques. This led to the
development of estimating the translog relation between the output, inputs and the
technology index. Solow et.al (1957) explained the use of Divisia index. On the basis
of the strength that the rates of growth of the Divisia indexes of prices and quantities
add up to the rate of growth of the value added (factor reversal test) and that such
The merit of this methodology is that this method does not require marginal
change. Nevertheless, the methodology has limitations with respect to the assumption
about the shape of the production function and the robustness of the parameters
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The production function is differentiated with respect to time variable t to
In discrete form,
logY = VK ( log K) + VL ( log L) + VT
Where,
log Y = log Y (T) - log Y (T – 1)
log K = log K (T) - log K (T – 1)
log L = log L (T) - log L (T – 1)
&
VK = ½ VK (T) + VK (T – 1)
VL = ½ VL (T) + VL (T – 1)
The well known studies (Goldar B.N (2004), Unel. B (2003), TSL (2003),
translog index method for the estimation of total factor productivity growth. So the
present study also followed the methodology adopted in Goldar’s (2004) study.
Goldar (2004) adopted two input frame work model and three input framework
model.
Under two input model gross value added is taken as the measure of output,
labour and capital inputs are taken as inputs, while in the three input framework gross
output is taken as the measure of output, labour, capital and material inputs are taken
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as inputs. Translog production function of two input framework has been used in this
For the two-input framework, the translog index of TFP growth is given by the
following equation:
income share of labour (in value added) and SK denotes the income share of capital.
SL and SK add up to unity. ln TFP is the rate of technological change or the rate of
Using the above equation, the growth rates of TFP have been computed for
each year. These have then been used to obtain an index of TFP in the following way.
Let A denote the index of TFP. The index for the base year, A(0), is taken as 100.
Then, the index for subsequent years is computed using the following equation:
A(t )
= exp
A(t − 1)
After obtaining the TFP index for different years, estimates as TFP growth
rate have been made for three sub-periods, 1980-81 to 1989-90, 1990-91 to 1999-00,
2000-01 to 2010-11 and for the entire period 1980-81 to 2010-11. The estimation of
TFP growth rate for the entire period and for three sub periods has been calculated by
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5.5 Analysis of Partial Factor Productivity
Partial factor productivity measures the ratio of output to one of the inputs
V
setting aside interdependence of use of other input. Labour productivity is
L
relationship between wages and productivity when the labour distribution rate is
constant.
improvements in the quality of labour and capital deepening would increase the
training are considered as important factors that can affect labour productivity (Asian
V
productivity is measured as a ratio of value added to gross fixed capital. Detailed
K
sections.
and Indian manufacturing sectors. The productivity growth rate of labour is higher for
Karnataka manufacturing (8.7 per cent) during pre-reform period. Capital deepening
in the manufacturing sector increased the growth rate of labour productivity during
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the pre-reform period, since there was a tendency to adopt capital intensive industries
During I-Phase of liberalisation the growth rate has been sharply declined. The
deceleration in the growth rate (3.5 per cent) during this period is due to lack of
S.Madheswaran 2005). At the national level lobour productivity growth remains firm
in the three sub-periods around 7 per cent. The labour productivity growth is probably
linked to the use of new types of capital goods and embodied technology that is more
energy efficient and capital intensive. The rigidity in labour laws adds to the incentive
for using capital intensive technology and the hiring of additional workers ( Virmani
(2004), (2005a); Virmani and Hashim 2009).What is to be noted is that during the II-
Table 5.1
34
Karnataka Development Report (2007)
121
On an average the labour productivity growth rate of Karnataka manufacturing
sector for the entire period is 6.5 percent showing good growth trend, more or less
capital productivity during the pre-reform period. That is the growth rate is -0.3 per
cent during this period. Indian manufacturing sector also registered negative growth
rate of -1.6 per cent in this period. Though the government of Karnataka provided
many incentives for the industrial development, may be acute shortage of power
supply during the 80s retarded the growth rate of capital productivity35.
The growth rate of capital productivity was -5.9 per cent during this period. The
Indian manufacturing sector recorded negative growth rate of -2.1 per cent during this
period. This may have been partly due to replacement of obsolescent capital stock by
necessitated building ahead of demand. This would have meant that capacity
utilisation of new equipment was not initially very high and gradually increased.
Much of the improvement in productivity of capital came from the third sub-
2012).
35
Karnataka Development Report (2007)
122
Table 5.2
Growth Rate of Capital Productivity in Manufacturing Sector of Karnataka at
Aggregate Level (1980-81 to 2010-11)
PERIOD KARNATAKA INDIA
sector shows that during pre-reform period the manufacturing sector registered a
growth rate of 4.0 per cent which is approximately 2 per cent higher than the all-India
growth rate.
reforms witnessed a negative growth rate of total factor productivity. That is the
growth rate was 4.0 per cent during pre-reform period decreased to -2.6 during Phase-
I. Suresh M Babu and Rajesh Raj S Natarajan (2013) found that greater access to
major impediment for the total factor productivity growth of Karnataka manufacturing
sector during the post-reform period. At the national level two important factors (a)
decline in the growth rate of agriculture and (b) deterioration in capacity utilisation
seem to have retarded the growth rate of total factor productivity during the post-
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especially in manufacturing industries. The performance of the organised
satisfactory during pre-reform period, with an average annual rate of 1 per cent at the
national level and 1.8 per cent at the Karnataka level. While in the 1990s it was -2.1
per cent for the state and -1.4 per cent for the country (Mukherjee, D and Rajarshi
Majumder 2007).The Balance of Payment (BOP) crisis that started in 1990 impacted
on the economy severely and in 1991 had its greatest impact on the manufacturing
sector. The manufacturing sector was also most directly affected by the trade and
foreign exchange reforms of the 1990s [Virmani (2006b)].36 TFPG was slow in the
second sub-period mainly because of the combined effects of the BOP shock and
and intermediates and tariff reduction) and exchange rate reforms of the early 1990s
(from fixed rate to managed float). The slowdown of economy during late nineties to
Table 5.3
Growth Rate of Total Factor Productivity in Manufacturing Sector of
Karnataka at Aggregate Level (1980-81 to 2010-11)
36
Note however, that reduction of import protection for tradable goods like manufacturing and minerals, will also affect relative
prices of non-tradable services.
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As the dissemination of new technologies and products progressed from early
adopters to others and capacity was also adjusted appropriately, TFPG accelerated
and social infrastructure such as health and education boosted the total factor
during Phase-II might be the state of Karnataka reaped the benefits of policy reforms
manufacturing sector for the entire period is 1.7 per cent which is more or less similar
Hitherto the study has analysed the behaviour of the regional economy in
During pre-reform period all industries registered good growth rate of labour
productivity. Food products, Beverages and Tobacco products, Leather products and
Non metallic mineral products registered growth rate above 10 per cent of labour
productivity during this period. The higher labour productivity is more due to use of
more capital per employee. Food Products sector of Karnataka depicts high growth
during the eighties. This high growth rate (16.7 per cent) was because of relatively
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higher growth in output (value added) compared to labour and also it is a function of
capital deepening.
industry; textiles. The labour productivity growth of Food Products of both Karnataka
and India shows deceleration in the second and third sub periods.
growth in gross value added (GVA). At the national level increase in labour
productivity in this sector could be due to the use of new technology and increased
capacity utilisation in the last decade.37 Over all the growth rate of labor productivity
sector.
Table 5.4
Industry-wise Growth Rate of Labour Productivity of Manufacturing Sector of
Karnataka (1980-81 to 2010-11)
Industry Group 1980-1990 1990-2000 2000-2011 1980-2011
Kar Ind Kar Ind Kar Ind Kar Ind
Food Products (20-21) 16.7 14.6 12.5 6 6.2 5.4 7.6 5.7
Beverages & Tobacco (22) 17.4 7 14.2 3.7 4.6 9.4 10.0 5.5
Textiles (23+24+25) 7.3 6.4 8.2 3.1 7.2 6.6 6.9 5.0
Wearing Apparel (26) 9.8 7.2 3.6 1.6 4.0 1.0 4.3 2.8
Wood & Wood Products (27) 4.3 4.3 -1.4 -5.6 16.1 4.4 2.3 3.1
Paper & Paper Products (28) 8.6 4.3 0.6 2.3 7.4 6.6 4.3 4.1
Leather Products (29) 11.6 3.5 0.6 4.3 7.6 3.9 5.4 3.6
Chemical Products (30) 4.9 7.3 0.1 6.2 7.1 6.0 6.2 5.8
Non-Metallic Minerals (32) 10.8 7.9 2.6 6.0 18.4 6.2 6.6 6.4
Basic Metals & Alloys (33) 7.3 3.8 7.0 10.6 8.0 5.1 12.8 6.7
Source: Author’s Computation
37
National Productivity Council New Delhi
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5.7 Industry Wise Trends in Capital Productivity
During the pre-reform period the capital productivity growth of six industries;
products and Non metallic minerals follow the basic pattern seen for the
manufacturing as whole. The reasons could be low capacity utilisation of the agro-
industries might be because of high growth of fixed capital than output during this
period.
positive growth rate of capital productivity. For the rest of the industries capital
growth was higher than the output growth during this period.
The negative growth of Food products industry may be due to the fact that the
increase in fixed capital per factory is much higher as compared to that of output per
factory. This could be due to under utilisation of capacity, which has been caused
either by lack of demand or supply factors because of the very nature of food
industry38. At the national level the fall in capital productivity in Phase-I may be
attributed to decline in the capacity utilisation which is due to the capital subsidy,
38
Harry X. Wu et al (2007)
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Table 5.5
Industry-wise Growth Rate of Capital Productivity of Manufacturing Sector of
Karnataka (1980-81 to 2010-11)
Food Products (20-21) 4.5 1.6 -1.2 -2.6 -2.5 -1.0 -0.8 -2.5
Beverages & Tobacco (22) -1.5 -5.3 2.3 -8.5 0.01 0.4 -1.5 -4.9
Textiles (23+24+25) -8.3 -5.1 -4.3 -8.8 -1.8 1.5 -4.7 -4.5
Wearing Apparel (26) -1.6 -2.2 -4.8 -6.9 0.6 -2.7 -2.4 -3.5
Wood & Wood Products (27) -6.4 -5.3 -19.7 -14.3 14.0 -1.1 -5.0 -5.2
Paper & Paper Products (28) 7.9 -4.4 -3.0 -6.7 1.1 2.3 2.0 -2.7
Leather Products (29) 4.2 -0.4 -7.9 -4.3 6.3 3.1 -2.8 -1.7
Chemical Products (30) -0.8 0.9 -0.6 -0.5 -1.7 3.5 0.7 -0.1
Non-Metallic Minerals (32) -1.6 -6.8 -8.8 -6.3 10.6 4.7 -1.5 -1.6
Basic Metals & Alloys (33) 1.0 -2.0 -13.9 2.7 2.9 0.7 -0.9 -0.5
Source: Author’s Computation
However, in the II-Phase all industries except Food products, Textiles and
capital growth of these industries is higher than the output growth. Interestingly the
capital growth of the rest of the industries is lesser than the output growth. However,
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5.8 Industry Wise Trends in Total Factor Productivity
conforms to the total factor productivity growth found for total manufacturing. TFPG
estimates for two-digit industries are shown in Table 5.8. The estimated growth rate
of TFP for the pre-reform period is positive for nine out of the ten industries. The
technical efficiency of the industries improved TFPG during this period . After the
implementation of the first phase of liberalisation in 80s, the technical efficiency of all
the industries improved in 1990 as compared to 1980. While no industry has reached
their potential level of efficiency and all were below their production frontiers. For all
industries the technological innovation was almost absence; however this was
During the I-Phase of liberalisation TFPG has increased for only one industry;
Beverages. It is interesting to note that why TFPG was negative for the rest of the
industries in this period. This is because technical efficiency realisation growth has
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Table 5.6
Food Products (20-21) 8.6 5.8 2.4 -0.2 0.01 0.8 1.6 0.01
Beverages & Tobacco (22) 1.6 -2.0 4.7 -5.1 -0.1 1.9 0.1 -2.3
Textiles (23+24+25) 1.7 1.6 -1.1 -4.2 2.4 3.3 1.3 -0.4
Wearing Apparel (26) 3.3 1.1 -1.2 -4.8 2.7 -1.0 -0.4 -1.7
Wood & Wood Products (27) -0.2 -2.0 -7.3 -9.6 7.2 1.6 -1.5 -1.1
Paper & Paper Products (28) 7.0 -0.9 -1.6 -3.3 4.9 3.6 3.1 -0.1
Leather Products (29) 5.5 1.5 -7.7 -1.6 6.2 3.4 -1.8 0.1
Chemical Products (30) 0.6 2.7 -0.8 0.7 1.5 4.0 1.7 1.1
Non-Metallic Minerals (32) 1.0 -2.2 -5.9 -3.2 11.6 4.7 -0.8 0.5
Basic Metals & Alloys (33) 7.1 0.1 -6.1 4.6 3.4 1.7 4.2 1.5
Source: Author’s Computation
Though there was positive technological innovation in all the industries during
during Phase-II seems to have been important cause of the deceleration in total factor
productivity growth of the industries. Though the Food products industry registered
positive growth of TFPG the growth rate is relatively less in this period, but this
industry generated high employment opportunities during the same period be a cause
130
of concern for policy makers. Chemicals and Chemical sector is characterised by a
diversity of products and producers (including many small scale ones) so that the
During the II-Phase of liberalisation the growth rate of total factor productivity
improved for nine out of ten industries. Though the relative performance of
better than India, the Karnataka manufacturing industries not show any significant
improvement.
From the above analysis the study observed that the Total Factor Productivity
accepts the hypothesis that Total Factor Productivity growth decreased in the post
reform period.
5.9 Sum Up
the regional economy of Karnataka in terms of partial factor productivity and the
comprehensive method of total factor productivity for the period 1980-81 to 2010-
2011.Analysis of the growth of the manufacturing sector of the economy reveals the
following:
the aggregate level in the eighties, the manufacturing sector of Karnataka has
predominated which has largely been brought about by capital deepening in the
manufacturing sector. In the I-Phase and in the II-Phase the Karnataka manufacturing
39
(Prof. Sharma R.K and Prof. Seema Bathla (2007)
131
sector has lagged behind. Nevertheless for the entire period our analysis of labour
productivity growth depicts more or less similar trends for both Karnataka and Indian
manufacturing sector. The increase in the capital productivity growth in the last
decade can be largely attributed by the financial development and best investment
Pushpangandan.K (1994), Kaur. M and Ravikiran (2008) and Unel.B (2003) on TFP
would be right to conclude that there has been a decrease, not an increase, in the
growth rate of TFP in Indian manufacturing sector in Phase-I. This does not mean that
and Kumari, 2003; Topalova, 2003) have shown in their studies that trade
(2003) have presented econometric evidence that indicates that the slowdown in TFP
with empirical evidence that some of the components of policy reforms, such as,
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