Do economic reforms matter for manufacturing productivity? Evidence from the Indian experience

a r t i c l e i n f o Using data on 3-digit industry for 1981–2004, the study examines the association between total factor productivity and economic reforms. We first obtain the industry-level productivity numbers using advanced econometric techniques and thereafter ascertain the time frame over which economic reforms impact productivity. The evidence suggests that productivity growth is not reliably higher after reforms than prior to reforms. At the sectoral level, the interest rate channel and also the financial accelerator and labor market variables play an important role in explaining productivity improvements. At the macroeconomic level, trade policy, foreign direct investment and credit availability are found to be important in accounting for productivity growth. A major focus of any structural reforms program is to put the country on a higher growth trajectory on a sustainable basis. A key component of achieving sustainable growth is to register consistent improvements in productivity. In fact, a significant body of literature has confirmed that the gap in income per capita between rich and poor countries is associated with large crosscountry differences in total and to what extent such productivity differences can be traced to differences in manufacturing productivity remains an area of ongoing debate. Evidence on this score is far from unambiguous; some studies report manufacturing productivity as an important factor for differential economic growth across nations We employ the natural experiment of the economic reforms to examine the interface between economic reforms and total factor productivity (TFP) of industries at the 3-digit level, using India as a case study. The production function is estimated following the methodology suggested by Levinsohn and Petrin (2003) so as to control for endogeneity problems that emanate from the simultaneous choice of inputs and output by the industry. Studies on this aspect for India report changes in productivity (either improvement or declines) in the post-reform period, but do not quantify the period over which such productivity gains occur. Following from Aghion et al. (2005), since the pre-reform productivity (and consequently, the technological capability) of industries is expected to differ significantly, it seems likely that economic reforms would further magnify the productivity differentials. Accordingly, we explore the time period over which changes in productivity accrue to industries. In addition, we also introduce a set of industry-level variables to ascertain which set of factors plays an important role in influencing productivity. The choice of India as a case …