Total Factor Productivity and Technical Efficiency of Indian Manufacturing: The Role of Infrastructure and Information & Communication Technology

Abstract

Drawing on a recent dataset of the Indian manufacturing industry for 1994 to 2008, this paper shows for eight sectors that core infrastructure and Information & Communication Technology (ICT) matter for Total Factor Productivity (TFP) and Technical Efficiency (TE).In the analysis, we use a range of advanced estimation techniques to overcome problems of non-stationary, omitted variables, endogeneity and reverse causality (such as System-GMM, panel cointegration and FMOLS). Estimation results suggest that the impact of core infrastructure is rather strong on TFP and TE (elasticity of 0.32 and 0.17 respectively), while the effect of ICT appears slightly smaller (0.12 and 0.08, respectively). This finding is of particular importance in the Indian context of infrastructure bottlenecks. It strongly supports the idea that a lack of infrastructure can hamper growth in developing countries. Our results also reveal that the impact of infrastructure and ICT varies among the industries. Interestingly, Transport Equipments, Metal & Metal Products and Textile, which are sectors relatively more exposed to foreign competition, are also found to be more sensitive to infrastructure endowment. This result can be extended to the Chemical industry for TE. This finding implies that improving core and ICT infrastructure would proportionally benefit more to these sectors, which could play a leading role in the competitiveness and the industrial growth of the Indian economy.