Industrial Sector Growth Accounting of Some Indian States and Union Territories

Abstract

We work out technical efficiency levels of the Indian States and Union Territories using Data Envelopment Analysis from 1980-81 to 1997-98. We decompose net value added per worker growth into components attributable to technological changes (shifts in the overall production frontier), technological catch up (movement towards or away from the frontier) and capital accumulation (movement along the frontier). The overall production frontier is constructed using data envelopment analysis, requiring no specification of functional form for the technology nor any assumption about market structure or the absence of market imperfections. We analyze the evolution of cross states net value added distribution for the 22 Indian states and union territories from 1980-81 to 1997-98 using Kernel densities. The efficiency factor accounted for 5.07 per cent only, technological change accounted for 11.66 per cent while the contribution of capital deepening is relatively higher at 17.82 per cent while the point to point productivity change is of 11.66 per cent. The overall averages provide evidence of productivity improvements of 173.29 over 1980-81 (base) to 1997-98 (current year) period. The efficiency factor accounted for -10.63 per cent only, technological change accounted for 173.20 while the contribution of capital deepening is 42.52 per cent to account for 173.20 per cent overall productivity change (not point to point). The results seems to suggest that there are other factors suggested in the literature like barriers to exit, a maze of rules and regulations, government import policies, high concentration, among others, rather than the ones that are included below for the growth accounting exercise which can totally account for point to point and overall productivity changes from 1980-81 to 1997-98. Also, we do find that the efficiency levels for the Indian states have gone down from what it was in 1980s to what it were in 1997-98. However, the smaller states have outperformed the larger states in terms of their efficiency levels. Also, states which had relatively lower efficiency levels and net value added per worker in 1980-81 is the ones which have grown faster than other states. We see tendency of catching up among the Indian states in terms of net value added per worker.