Economic Reforms, Capacity Utilization and Productivity Growth in Indian Manufacturing

Abstract

In this study, we attempt to identify the channels through which economic reforms enhanced the productivity growth in total manufacturing sector in India. Because one possible channel is better utilization of plant capacity, we estimate the capacity utilization rate in Indian manufacturing. Empirical estimates show that the annual average capacity utilization rate in Indian manufacturing was lower over the post-reform years. However, after the reforms, the capacity utilization rate grew faster at the all-India level as well as for most of the major industrial states. Subsequent regression analysis confirms that there was evidence of a favourable impact of economic reforms on productivity growth in total manufacturing, beyond the positive impact of improved capacity utilization.