A Study of the Formal Manufacturing Sector in India: Performance of Significant Industries and Spatial Influence

Abstract

This chapter looks into the performance of the organised manufacturing sector by analysing technical efficiency (TE) at the firm level, in particular to test the impact of locational concentration of firms. A key objective of the study is to determine if such spatial concentration of firms within a state has any influence on the performance of those firms. The microeconometric analysis is duly controlled using expected determinants of TE including a wide array of state-specific infrastructure parameters. It covers all significant manufacturing industries that together contribute over 80% of the total value added of the formal manufacturing sector. The study observes, quite expectedly, that the size of firms has a significant positive contribution to TE for all of the major industries analysed. Government-owned firms are seen to be less efficient compared to their privately owned counterparts. The interesting aspect of the findings is in the variance observed in the impact of spatial concentration on efficiency. In general, firms located in the urban districts are more efficient. Locational concentration of firms is found to have a positive contribution on performance for sectors like automobiles, coke oven products and machinery and equipment. However, surprisingly, a high degree of spatial concentration is seen to have a negative effect on efficiency for some key sectors like basic metals, food products and beverages, the chemical sector and pharmaceuticals. We attribute this finding to the diseconomies emanating from congestion, higher prices and higher wages as undesirable effects of high industrial concentration, which practically outweigh the positive economies expected from greater access to infrastructure, technology, skill base and knowledge spillovers in the industrialised states.