Information Technology and Productivity in Indian Manufacturing

Abstract

India’s manufacturing sector is receiving renewed attention as an underperformer in contributing to the nation’s GDP and employment growth, with a new National Manufacturing Policy stating ambitious goals for increasing the share of manufacturing in GDP. In this context, the role of information technology (IT) as a contributor to manufacturing productivity also needs to be carefully examined. This paper uses five years of panel data for Indian manufacturing plants to examine the relationship of investment in IT to productivity, as measured by gross value added. We find some evidence that plants with higher levels of IT capital stock have higher gross value added, controlling for other inputs. However, this effect is attenuated when plant level fixed effects are included. One possible interpretation of this result is that unobserved managerial quality is an important factor in the impact of IT capital on productivity. We also explore the impacts of skill composition, the use of imported intermediate inputs, ownership and organizational form on the productivity of IT capital. Furthermore, we examine the demand for IT investment, controlling for possible selectivity biases associated with plants that have positive IT investment. We find some evidence that access to financial capital, electric power from the grid, and skilled workers all matter for the decision to invest in IT capital, but these variables are less important for the level of investment in IT, conditional on it being positive. This is a significantly revised version of the paper presented at the Brookings-NCAER India Policy Forum, 2012. We are grateful to Jennifer Poole, Carlos Dobkin and Justin Marion for helpful discussions on this research, to Shubhashis Gangopadhyay and B.N. Goldar for very helpful comments as discussants at the IPF, and Barry Bosworth for a large number of very specific and helpful comments and suggestions. Alireza Kharazi provided excellent research assistance. We also received many helpful comments from the audience at IPF. Remaining errors and omissions are our responsibility. IT Investment and Productivity in Indian Manufacturing 1.