Measuring and decomposing productivity change using Hicks-Moorsteen index numbers: evidence from Indian banks

Abstract

Bank productivity improvement is a vital instrument for economic development, and effective policy making in this area requires information regarding main drivers of productivity growth. Hicks-Moorsteen (H-M) index numbers as given by O’Donnell is a powerful method for measuring and decomposing total factor productivity (TFP) changes. This paper examines year-to-year TFP changes experienced by Indian banks (public and private) in the post liberalisation era (1991–1992 to 2007–2008) using H-M index numbers. The main finding of the study is that productivity (TFP) in Indian banks has remained stagnant since 1991 to 1992 with no significant differences observed in the three sub-periods studied and type of ownership has a significant effect on scale efficiency in Indian banks. Stagnation in productivity in Indian banks, resulting from technological regress, is a cause of concern and policy setting should be reshaped and re-oriented towards productivity enhancement.