Productivity growth and efficiency change: Comparing manufacturing- and service-based firms in India

Abstract

This paper compares total factor productivity (TFP) growth and its components for both manufacturing- and service-based firms in India for the period 2008 to 2014. TFP growth based on data envelopment analysis shows higher productivity for the service sector as compared to the manufacturing sector. Further, decomposition of TFP growth results indicates that both the manufacturing and services sectors are driven mainly by technical change. Comparing TFP growth at the sub-sectoral level shows that mean TFP growth is highest in the case of IT firms as compared to the chemical, textile and trade industries. Further, the determinants of TFP growth using a feasible generalised least squares model indicate that capital intensity, capital turnover ratio and debt significantly affect productivity growth in the case of manufacturing. However, none of the determinants except capital intensity affect productivity growth in the services sector. From a policy standpoint, this paper suggests greater emphasis on both the service and manufacturing sectors despite some variability among firms.