Policy reforms and productivity growth in India's energy intensive industries

Abstract

India had a highly restrictive industrial and trade policy regime until the end of the1960s. This regime while succeeding to some extent in creating a diversified industrial base introduced gross inefficiencies in many sectors of the economy. Beginning in the early 1970s, Indian economic policies have been marked by deregulation, decontrol and progressive liberalization. In this paper, we assess the impact of policy reforms on total productivity growth in India's energy intensive sectors: aluminum, cement, fertilizer, iron and steel and paper. Assuming a translog specification of a four input (KLEM) production function, we use growth accounting to decompose the growth of output into growth of inputs and a residual representing total productivity growth. We relate changes in productivity indices to changes in technologies, processes and production conditions, which policy reforms helped bring about. A major finding of this paper is that overall productivity growth in these industries was quite low during 1973–1994. However, there were significant differences in productivity growth across industries during this time period. These differences can to a large extent be explained by the nature and timing of policy changes in individual sectors.