Productivity Growth in Indian Manufacturing Industries: The Role of Imported Materials Input

Bishwanath GoldarInstitute of Economic Growth, New Delhi, India

Third World KLEMS Conference, Tokyo, May 19-20, 2014

Outline A Methodological Issue in TFP/MFP Measurement

Need for separating domestic and imported intermediate inputs in TFP/MFP studies

Objective of the Present Study and Methodology Analyze TFP growth in Indian manufacturing, with and

without separation of domestic and imported materials input

Background Information for the Study Trends in production and trade, Indian manufacturing,

1980-2011 Data Sources and Measurement of Output and Inputs

for TFP Estimation Estimates of TFP Growth in Indian Manufacturing

Industries, 1999-2011 Conclusions

TFP=Total Factor Productivity; MFP=Multifactor Productivity

A Methodological Issue in TFP/MFP Measurement

A Methodological Issue Several studies have found that the use of imported

intermediate input favorably impacts productivity of industrial firms: Topalova and Khandelwal (2011) for India; Schor

(2004) for Brazil; Amiti and Konings (2007) and Blalock and Veloso (2007) for Indonesia; Kasahara and Lapham (2008) for Chile, , Vogel and Wagner (2010) for Germany, Halpern, Koren and Szeidl (2011) for Hungary, and Altomontem, Barattieri and Rungi (2014) for Italy.

This raises the following Issue: Should domestically sourced and imported intermediate

inputs be treated as separate inputs in TFP/MFP Studies?

TFP Studies for Indian Manufacturing There have been a number TFP studies for

Indian manufacturing using the KLEM or KLEMS (captial-labour-energy-materials-services) framework: Rao (1996); Trivedi, Prakash and Sinate (2000);

Goldar and Kumari (2003); Das (2004); Trivedi (2004); Veeramani and Goldar (2005); Banga and Goldar (2007); Das and Kalita (2011); Virmani, and Hashim (2011).

None of these studies has made a distinction between imported and domestically sourced intermediate inputs.

MFP Studies that separated imported and domestic intermediate inputs In some productivity studies for the US,

domestically sourced and imported intermediate inputs have been separated into different inputs: Gollop and Roberts (1981) - cost function estimation

for the US manufacturing industries. Kruz and Lengermann (2008) - MFP in various industry

groups or sub-sectors within the US private business sector.

Eldridge and Harper (2010) - MFP in the private business sector and the manufacturing sector of the US.

Houseman et al. (2011) - MFP in the US manufacturing and sub-sectors - distinction made between domestically sourced and imported materials input.Joregenson, et al. (2005) separate non-comparable imports

from competitive imports.

A Relate Issue - offshoring bias in TFP/MFP estimates Kruz and Lengermann (2008), Eldridge and

Harper (2010) and Houseman et al. (2011) have drawn attention to the offshoring bias in the productivity estimates for the US. Other studies: Howells et al. (2013) for the US and

Fukao and Arai (2013) for Japanese manufacturing. Houseman et al. (2011) conclude that because of

the offshoring bias, the average annual growth rate in MFP in the US manufacturing is overstated by 0.1 to 0.2 percentage points .

This issue is probably relevant also for Indian manufacturing, but not studied in the paper.

Study Objective & Methodology

Study Objective & Methodology The aim is to analyze TFP growth in Indian

manufacturing industries at two-digit industry level and at the aggregate level for the period 1999-00 to 2011-12.

The KLEMS framework is used. Tornqvist index of TFP is computed.

Domestically sourced and Imported materials input are separated using domestic flow and import flows input-output tables.

Aggregate level TFP estimates are made by the production possibility frontier (PPF) approach (Tornqvist index of real value added growth is used) .

Background Information

1982-8

3

1984-8

5

1986-8

7

1988-8

9

1990-9

1

1992-9

3

1994

-95

1996-9

7

1998-9

9

2000-0

1

2002-0

3

2004-0

5

2006-0

7

2008-0

90

2

4

6

8

10

12

Figure 1: Five-yearly moving average of growth rates in real gross value added in

manufacturing (plotted against mid-point)

perc

ent

per

year

Early economic reforms

Major economic reforms

Consolidation of reforms

Industrial growth rate in the 2000s was higher than that in the 1980s as well as that in the 1990s.

1980-81 to 1990-91

1990-91 to 1999-00

1999-00 to 2011-12

0

4

8

Trend growth rate, real GVA,

% p.a.

1987-8

8

1989-9

0

1991-9

2

1993-9

4

1995-9

6

1997-9

8

1999-0

0

2001-0

2

2003-0

4

2005-0

6

2007-0

8

2009-1

0

2011-1

2 0

20

40

60

80

100

120

140

160

180

200

Figure 2: Exports and Imports of Manufactured Products, India, 1987-88 to 2011-12

ExportsImports

US$

bill

ion

Accelerated growth in manufacturing sector output in India in the 2000s was accompanied by accelerated growth in exports and imports of manufactured products.

The trend growth rates in imports: about 5% per annum during 1987-88 to 1999-00 and about 20 % per annum during 1999-00 to 2011-12.

1995 1998 2003 2007 2009 20110

5

10

15

20

25

30

35

Figure 3: Imported materials % total materials consumed, Indian manu-

facturing

perc

ent

The materials import intensity of Indian manufacturing almost doubled between 1998 and 2007. The upward trend in materials import intensity got halted or became sluggish after 2007.

Source: Based on WIOD

All manufacturing

Electronics

Non-elecrtrical machinery

Domestic appliances

Plastic products

Drugs and Pharmaceuticals

Textiles

0 10 20 30 40 50 60 70 80 90

Figure 4: Imported raw materials % total raw ma-terial used, manufacturing companies, by groups

2011-122007-08

percent

At the aggregate level, the share of imported raw materials increased from 44% in 2007-08 to 49% in 2011-12. In several industries, import intensity fell.

Based on CMIE, Corporate Sector, April 2013

Import intensity fell in metals, metal products, and machinerey

Data sources and Measurement of Output and

Inputs

Data sources Annual Survey of Industries (Central Statistical

Office) It covers only the organized or registered sector (units

with 10+ workers with power or 20+ workers without power)

Input-output tables, 1998-99, 2003-04 and 2007-08 – domestic and import flows matrices have been constructed

Wholesale price index series, implicit deflator for GDP of services sectors, implicit deflator for fixed capital formation in manufacturing

Unit value indices for imports (disaggregated)

Measurement of Output and Inputs Gross output: Deflated value of output Labour: No. of persons engaged Capital : Net fixed capital stock at constant

prices Energy: Deflated value of fuel and power

used Services: Total input minus value of

materials, fuel and power; the series is then deflated by services input price index constructed on the basis of implicit deflators and I/O tables.

Measurement of Output and Inputs Materials input: Two variants Variant - A

Value of materials used by each industry is deflated by a price index constructed on the basis of domestic wholesale price indices and weights taken from input-output matrices.

For this purpose, the two-digit industries are mapped into the sectoral classification of input-output tables.

Measurement of Output and Inputs Materials input: Variant - B

Value of materials for each industry split into domestic and imported parts on the basis of domestic and import flow input-output matrices.

Domestically sourced and imported materials are deflated, respectively by a price index based on domestic wholesale price indices and a price index formed on the basis of unit value indices of imports.

The weights are based on domestic flows input-output matrix and import flows input-output matrix.

Measurement of Output and Inputs Variant-B measure of materials input –

which builds in the split into domestic and imported – is the preferred method. TFP estimate based on this method is referred to as Estimate-1

Variant-A measure of materials is the conventional method. TFP estimate based on this method is referred to as Estimate-2.

Estimates of TFP Growth

Estimates for Two-digit Industries Estimate-1 (preferred estimate) is relatively higher

than Estimate-2 in most cases. The gap is about 0.2 percentage points per annum

or more in: wood and wood products; chemicals and chemical

products; rubber and plastic products; fabricated metal products; electrical machinery; electronic and optical goods, including computers; and transport equipment other than motor vehicles.

There is possibly a downward bias in the second set of TFP growth estimates for the reason that it does not separate out imported materials input from domestically procured materials input.

Industry Code (2-

digit)

Description of Industries TFP growth rate (% per annum)

Share of imported

materials in total materials consumed (%),

2007-08

Estimate-1 Estimate-2

15 Manufacture of food products and beverages 1.14 1.08 3.316 Manufacture of tobacco products -2.87 -2.90 4.217 Manufacture of textiles 1.41 1.35 10.618 Manufacture of wearing apparel; dressing and dyeing of fur 0.10 0.09 10.519 Tanning and dressing of leather; manufacture of luggage,

handbags, saddler, harness and footwear 1.69 1.57 7.220 Manufacture of wood and of products of wood and cork, except

furniture; manufacture of articles of straw and plating materials 0.95 0.67 8.321 Manufacture of paper and paper products 1.98 1.84 14.122 Publishing, printing and reproduction of recorded media -0.76 -0.81 15.523 Manufacture of coke, refined petroleum products and

nuclear fuel -0.17 2.21 79.324 Manufacture of chemicals and chemical products 1.67 1.42 28.025 Manufacture of rubber and plastics products 2.05 1.85 22.226 Manufacture of other non-metallic mineral products 0.54 0.61 23.127 Manufacture of basic metals 1.40 1.44 32.128 Manufacture of fabricated metal products, except

machinery and equipment 0.00 -0.26 30.629 Manufacture of machinery and equipment not elsewhere

classified 1.27 1.11 25.931 Manufacture of electrical machinery and apparatus not

elsewhere classified 2.54 2.02 29.630+32+33 Manufacture of office, accounting and computing machinery;

Manufacture of radio, television and communication equipment and apparatus; Manufacture of medical, precision and optical instruments, etc. 12.20 11.89 35.1

34 Manufacture of motor vehicles, trailers and semi-trailers 2.53 2.35 16.635 Manufacture of other transport equipment 2.11 1.87 40.436 Manufacture of furniture; manufacturing not elsewhere classified -0.60 -1.40 29.7

TFP Growth in Petroleum Refining Estimate-1 is negative while that given by

Estimate-2 is positive and more than two percent per annum.

The problem is that the domestic price index for crude oil has increase by about 190% between 2004-05 and 2011-12, whereas the unit value index of crude oil imports has increase only by about 90% in this period.

Crude oil is the main material used in petroleum refining, and 80% of crude oil used is imported.

Inference: Estimate-2 is flawed, Estimate-1 is reliable.

Aggregate level estimate The estimates are obtained by the PPF approach

and Tornqvist index of real value added growth. Estimate-1 shows a fall in the annual growth rate

in TFP after 2007 from 10% to 3%, but Estimate-2 shows an acceleration in TFP growth during 2007-11.

Estimate-2 does not seem right because it indicates a hike in TFP growth after 2007, whereas Indian manufacturing was adversely affected by the recent global slowdown.

The problem with Estimate-2 is traceable in part to the treatment of crude oil (noted above).

Table 2: Growth Rates in TFP, Indian Manufacturing, 1999-00 to 2011-12

Approach Growth rate in TFP (% per annum)

  1999-00 to 2007-08

2007-08 to 2011-12

1999-00 to 2011-12

Aggregate production function approach (simple aggregation across industries)

3.04 -0.98 1.70

Production possibility frontier approach (Estimate-1)

10.23 3.15 7.87

Production possibility frontier approach (Estimate-2)

7.78 12.21 9.26TFP growth estimate for Indian manufacturing using Tornqvist index of value added by Bollard, Klenow and Sharma (2013) for 1992-2004 is 8.4% per annum

Estimates based on gross output function In earlier TFP studies for Indian manufacturing, the

gross output function was applied to aggregate manufacturing sector data on output and inputs.

This can be objected to on methodological grounds. Yet, for the sake of comparison, a set of estimates

taking the same approach has been made. The comparison shows:

acceleration in TFP growth in the 2000s compared to 1990s;

estimates of this study are in agreement with the estimates of earlier studies.

Table 3: TFP Growth Rate Estimates for Indian Manufacturing Obtained By Applying the Gross Output Function to Aggregate Manufacturing Sector Data

Author (s) Period TFP growth rate (% per annum)

Goldar and Kumari (2003)

1990-91 to 1997-98 0.69

Trivedi (2004) 1992-93 to 2000-01 0.70Banga and Goldar (2007)

1989-90 to 1999-00 0.26

Virmani and Hashim (2011)

1991-92 to 1997-98 0.25

  1998-99 to 2001-02 -0.09  2002-03 to 2007-08 1.41This study (Estimate-1; imported and domestically sourced materials taken as separate inputs)

1999-00 to 2007-08 1.73

  2007-08 to 2011-12 1.48  1999-00 to 2011-12 1.65

Conclusions

Conclusions

Two weaknesses of the previous studies on TFP growth in Indian manufacturing are highlighted: TFP growth estimates for the 1990s and 2000s

are probably biased because the imported materials input has not been separated from the domestically sourced materials input;

The gross output function and the associated Tornqvist index of TFP has been applied to the aggregate manufacturing sector data which can be objected to on methodological grounds.

Conclusions The PPF approach based estimate of TFP growth

rate in India’s organized manufacturing in the period 1999-00 to 2011-12 is found to be about 8% per annum.

From data on organized manufacturing sector GDP reported in the National Accounts Statistics, the growth rate in output is found to be about 9.5% per annum for the same period.

It seems growth in manufacturing GDP is possibly getting understated, because real GDP growth in manufacturing is derived by using single deflation.

Thank You