Productivity in Indian Chemical Sector: An Intra-Sectoral Analysis

Author(s): T. Sampath Kumar

Source: Economic and Political Weekly, Vol. 41, No. 39 (Sep. 30 - Oct. 6, 2006), pp. 4148-
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 Productivity in Indian Chemical Sector
An Intra-Sectoral Analysis
The present study attempts to test the assumption of homogeneity of the sub-sectors in an
industry with particular reference to the Indian chemical industry. The impact of economic
reforms on the productivity levels of an industry at the aggregate and sub-sectors level do
vary significantly. While the net impact of the reform process on total factor productivity
growth was found to be poor at the aggregate level, the sub-sectors - drugs and
pharmaceuticals and paints and varnishes, basic chemicals and dyes and dye stuff industries -
greatly benefited from the liberalisation process. Within the sub-sectors, the worst affected was
the fertiliser industry as the TFPG declined significantly in the post-reform period. In the same
way, the productivity differentials are found at the firm level as well. While small firms
experienced a fall in productivity levels during the post-reform period, the large firms could
raise productivity. The differences in the productivity levels of small and large firms and
among the sub-sectors within an industry reveal the heterogeneity of the industry.

T SAMPATH KUMAR

here are increasing number of studies on factor produc- competition and force them to introduce new methods of pro-
tivity growth in both developed and developing countries.duction, import quality inputs, capital equipment or technology
It was Abramovitz (1956) who first observed the growth and compel them to improve their efficiency.
of output occurring due to factors other than an increase in Indian firms experienced the reform process since 1991 and
inputs. Solow (1957) measured total factor productivity (TFP)we now have enough data to estimate the impact of globalisation
as a shift in the production function. Since then there hasand liberalisation policies on Indian industry. There are mixed
been increasing number of studies on TFP. Productivityresults revealed by earlier studies. Majumdar (1996) and Sharma
growth is a crucial factor in determining growth of an economy. (1999) estimated positive impact of liberalisation policies on the
The study of productivity becomes imperative in view of thefactor productivity. But Balakrishnan et al (2000) and Das (2004)
limited availability of factors of production, particularly capital.
found that trade liberalisation did not yield to the productivity
Productivity is the marginal contribution of a factor to thegrowth in the Indian manufacturing sector. The earlier studies
output growth of a product. The proportion of factors of inputs were conducted for the aggregates of an industry with an
will be different in different industries. In the labour-intensive assumption that all the firms in an industry behave alike and
industries, the emphasis is on the capital productivity. On the therefore industry level characteristics could be attributed to all
other hand, for the capital-intensive industries, the concern is tothe firms operating in that industry. But Siddharthan (2004)
increase labour productivity. If productivity is increasing argues that during the period of liberalisation, new firms with
in an economy it means that its factors of production andmore advanced technologies are likely to enter into industry and
commodity inputs are manifesting an increase in their output the existing firms are expected to develop a strategy to meet the
efficiency. The productivity improvements along with the in- challenges from the new entrants, in particular multinational
crease in the quantities of factors will also be contributing anenterprises (MNEs). Under such a situation, the assumption of
additional source of output increase [Brahmananda 1982].homogeneity becomes invalid.
Productivity growth is necessary not only to increase output, but It is found from the earlier studies that all the firms belonging
also to enhance the competitiveness of an industry both in the to one industry do not behave in a similar pattern. In an industry
domestic and international markets. Besides, productivity growth consisting of a variety of firms with significant differences in
enhances the export competitiveness of a country. The estimation their size, ownership, knowledge and access to technology, the
of factor productivity will be very useful to evaluate the variationsliberalisation process would result in gainers and losers and there
in the performance of an industry over a period of time. Thewill be a productivity gap among firms in an industry. It is in
prosperity of new developed nations has been attributed this context that the present study attempts to estimate the trends
mainly to the sustained growth of their total factor productivity in the growth of total factor productivity of Indian chemical
[Prescott 1997]. industries at the sub-sectoral level. The Indian chemical
The process of liberalisation can be linked to the manufacturing industry consists of five major sectors, namely, (a) fert
productivity. The Indian government started to implement a wide (b) drugs and pharmaceuticals, (c) basic chemicals. (d) p
range of economic reforms on various fronts to make domesticand varnishes, and (e) dyes and dyestuffs. The study pro
industries more efficient and internationally competitive. Indianto estimate the productivity variations in these sub-se
firms were expected to respond positively to these measures. Theat the sectoral and firm level caused by the liberalisat
liberalisation process was to expose firms to international process. This paper is divided into the following sections: Sect

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provides the data and methodology, Section II estimates factor
productivity growth at the sectoral level, Section III deals with
productivity differentials at firm level and Section IV presents
summary and conclusion.
Data and Methodology
This paper covers a period of 22 years from 1980-81 to
2001-02. The entire period is divided into two phases as pre-
reform period (1980-81 to 1990-91) and post-reform period
(1991-92 to 2001-02). Such a classification of the study period
is essential to find the impact of economic reforms on the
improvements of factor productivity. This paper attempts to
estimate the total factor productivity of chemical industries in
India at the sub-sectoral level. The estimation of productivity
at the aggregate, sub-sectoral and firm level will reveal the
performance of this industry and the homogeneity of the sub-
sectors in relation to the liberalisation process.
The total factor productivity growth (TFPG) is estimated using
Translog model with three inputs, viz, labour (L), capital (K)
and the intermediate inputs (R) (raw materials consumed).
The Translog model of productivity used in the estimation of
TFPG is obtained as below;
TFPG = AP(t)/P(t) - [(1/2 * (SL (t-l) + SL (t)) * (AL(t)/L(t)) +
(1/2 *(SK (t-1) + SK (t)) *(AK(t)/K(t)) +
(1/2 * (SR (t-1) + SR (t)) *(AR(t)/R(t)) ]
where,
AP (t)/P (t), AL (t)/L (t), AK (t)/K (t) and AR (t)/R (t) are
approximated by corresponding logarithms of ratios of variables
over successive year.
AP(t)/P(t) ~ LN [AP(t)/P(t-1)] = LN P(t) - LN P(t-l) = ALNP(t)
AL(t)/L(t) - LN [AL(t)/L(t- 1)] = LN L(t) - LN L(t- 1) = ALNL(t)
AK(t)/K(t) - LN [AK(t)/K(t- 1)] = LN K(t) - LNK (t-1) = ALNK(t)
AR(t)/R(t) ~ LN [AR(t)/R(t-1)] = LN R(t) - LNR (t-1) = ALNR(t)
Description of Data and Variables
The present study is based on the unpublished firm level data
on the public limited chemical industries obtained from the
Company Finances Division of the Reserve Bank of India (RBI).
Various studies have used RBI firm level data in their analysis
[Srivastava 1996; Feinberg and Majumdar 2001]. The study is
made for the five major sub-sectors of the Indian chemical sector,
viz, fertiliser, drugs and pharmaceuticals, basic chemicals, paints
and varnishes and dyes and dyestuffs. These sub-sectors together
constitute nearly 71 per cent of the total chemical sector in India
(as per the RBI data in 2001-02). According to the industry codes
given by the RBI, the value of each variable was summed up
for each sub-sector for the period under consideration. The gross
value of production has been taken as a measure of output.
Generally, the TFP growth estimates based on value added terms
are overestimated as they ignore the contribution of intermediate
inputs on productivity growth [Sharma 1999], hence a third
variable of intermediate inputs (consumption of raw materials)
has been included in the function. Pradhan and Barik (1999)
argued that the output, instead of value added, appears to be the
appropriate choice of TFPG estimation in India. To offset the
Economic and Political Weekly September 30, 2006 4149
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influence of price changes, output was deflated by the wholesale
price index (1980-81=100) of the corresponding sub-sectors and
the raw materials by the WPI of intermediate goods with the same
base. The total number of workers and the gross fixed assest are
considered measures of labour and capital inputs. Gross fixed
capital was deflated by the WPI of machinery and machine
products (base 1980-81 =100), thus the real gross fixed capital
was included in the function. Since the RBI does not publish
the employment details, the average wage rate of the industry
was calculated from the Annual Survey of Industries (ASI) data
for all the years of the study. The average wage rate was estimated
by dividing the total emolument of the industry by the number
of workers in that industry [Goldar and others 2004]. This average
wage rate obtained from the ASI data was then used to divide
the total wages and salary of each sub-sector to estimate the
number of workers at the sub-sectoral level. Further the size of
the firm is determined on the basis of number of workers.
From the data set of RBI, the firms which were present durin
the entire period of study were separated and grouped as smal
and large firms. Since there are some differences in size distr
bution across sectors, the firms are defined "small" ("large") when
the level of employment is less (more) than the geometric mea
level of employment of the sector in which the firm operat
[Sak and Taymaz 2004].
II
Estimates of Factor Productivity Growth
Factor productivity growth rates are computed for the five
major sub-sectors of Indian chemical industries. Theoretically
there appears to be a relationship between policy measures and
productivity growth, although the empirical findings for some
developing countries are ambivated. Ahluwalia (1985, 1991) and
Parades (1994) found a significant improvement in the produc-
tivity growth while Kajiwara (1994) for Philippines and Urata
and Yokota for Thailand (1994) estimated a fall in the manu-
facturing productivity following liberalisation. The estimated
annual and mean growth rates of TFP are presented in Tables 1
and 2. Wide variations in the magnitude of TFPG are found in
the estimation. The estimated TFPG of the Indian chemical
sector at the aggregate and sub-sectoral level reveals contradi
tory rates of productivity growth. The fertiliser industry record
positive rates of TFP throughout the study period except dur
1991-92 (-1.327) and 1997-98 (-0-022). As against this, the dru
and pharmaceutical industry recorded negative productivity grow
rates except in 1999-2000, 2000-01 and 2001-02. During the
periods there were positive growth rates of total factor produ
tivity. The basic chemical industry registered positive and neg
tive productivity growth rates both in the pre- and post-refo
periods. Paints and varnishes industry have positive TFPG
1986-87 (1.084), 1997-98 (0.156) and in 2001-02 (0.005). But
the dyes and dye stuff industries have experienced positive TF
mostly in the post-reform period. At the aggregate level also
negative trend in the TFPG is observed during the period of stu
Pradhan and Barik (1999) are of the view that the low and negat
trend in the TFPG is a common feature in most of the developin
countries. They also estimated a negative TFPG for the Ind
chemical sector in their study. From this analysis, it could
observed that the impact of the reform process is mixed ev
within a particular sector.
 In order to understand the influence of economic reforms there exist productivity differentials between small and large
on TFPG, the mean growth rates of TFP were estimated for the scale enterprises independent of the sector and economy.
pre- and post-reform period and are presented in Tables 1 andGulbiten
2. and Taymaz (2000) in their study found that there
The estimated mean TFPG for the aggregate and the sub-sectors are substantial productivity differentials between small-sized
of the Indian chemical industry reveal a contradictory pictureenterprises and large corporations independent of sector and
economy, and the productivity differentials decrease by
with the positive and negative rates. For the period 1980-81 to
2001-02, the mean TFPG was positive for fertilisers (0.847) and
economic development but do not vanish even in the developed
dyes and dye stuff (0.016) while it was negative for drugs andcountries.
pharmaceuticals (-0.175), basic chemicals (-0.126) and for paintsEarlier studies have concluded that small firms are less pro-
and varnishes, it was -0.490. At the aggregate level, the TFPGductive than the large ones. The productivity differentials be-
was also negative at -0.199 during this period. tween small and large firms seem to originate from number of
During the pre-reform period (1980-81 to 1990-91), as shown sources. You (1995) and Taymaz (2004) found that technological
in Table 1, invariably all the major sub-sectors have recordedfactors (economies of scale) are the principal determinants of
negative TFPG except the fertiliser industry with a positive such differences. Gulbiten and Taymaz (2000) explain that the
productivity rate of 0.903. The negative rates varied among the
small firms may be as efficient as large firms but operate less
other sectors, viz, drugs and pharmaceuticals (-0.234), basicproductively than the larger firms since they may not be exploiting
chemicals (-0.132), paints and varnishes (-0.819) and dyes and
economies of scale. Secondly, small firms may be maximising
dye stuff industry (-0.111). profits with existing capital, labour and technology, yet they may
It could be noticed from the mean TFPG estimated during be operating less productively than the larger firms because they
the post-reform period that the reform process yielded mixed utilise older technologies and low quality inputs. Further, the
results on the productivity levels of the sub-sectors of Indian
existence of wage differences may also result in productivity
chemical sector. The economic reforms started to yield positive
differentials between small and large firms. For example, small
results in drugs and pharmaceuticals, basic chemicals and paints
firms tend to pay lower wages than their counterparts. Although,
and varnishes industries. It is visible from the estimated mean small firms seem to be advantageous in terms of labour cost they
TFPG that there is a significant drop in the extent of negative face, lower wages are usually accompanied by less skilled
TFPG when compared to that in the pre-reform period. In thelabourers and the disadvantage of utilising cheap unskilled
case of dyes and dye stuff industries, the negative productivity
growth estimated in the pre-reform period (-0.111) has even Table 1: Trends in the TFPG of Indian Chemical Sector
turned out to be positive (0.144) in the post-reform period. As (Pre-Reform Period)
against this, the impact of economic reforms was found to beYear Fertiliser Drugs and Basic Paints Dyes and Chemical
negative in the case of the fertiliser industries. The mean growth Pharma- Chemicals and Dye Stuffs Sector
ceuticals Varnishes
rate of TFP of this sector, though positive, declined to 0.791,
when compared to the pre-reform period (0.903). But at the 1980-81 0.903 -0.070 -0.237 -0.665 -0.107 -0.219
aggregate level, the negative rate further worsened to -0.227 1981-82 0.391 -0.337 -0.332 -1.074 -0.057 -0.764
1982-83 0.667 -0.293 -0.253 -1.237 -0.064 -0.257
from -0.171 estimated in the pre-reform period. From the mean
1983-84 1.987 -0.517 -0.402 -0.792 0.447 0.140
growth rates of TFP, it can be stated that the net impact of 1984-85 0.257 -0.156 -0.123 -0.844 -0.477 -0.174
economic reforms was quite conducive to the sub-sectors of the1985-86 0.176 -0.200 0.446 -1.098 -0.030 0.076
Indian chemical industries except for the fertiliser industry. But1986-87 1.289 -0.209 0.014 1.084 0.074 0.070
1987-88 1.976 -0.119 0.014 -3.342 -0.203 0.092
the impact varied in its magnitude depending on the nature of 1988-89 0.112 -0.159 -0.217 -0.767 -0.126 -0.532
the industry. 1989-90 1.222 -0.102 -0.142 -0.056 -0.515 -0.181
1990-91 0.951 -0.408 -0.218 -0.216 -0.163 -0.137
I!1 Mean 0.903 -0.234 -0.132 -0.819 -0.111 -0.171

Firm Size and Productivity Differentials

The differences in productivity growth at the firm level will
reveal the homogeneity/heterogeneity of a sector in an industry.
Industry becomes more productive when the firms operating
in the industry adopt new and better methods of production.
The assumption of homogeneity of an industry holds good when
all the firms in an industry tend to have a similar pattern of
productivity changes. But due to the differences in its size,
particularly in the changing market environment, the productivity
changes tend to vary. In an open market, some firms thrive
while others disappear. There are, within the industry, win-
ners and losers. The notion is that the inefficient firms can
perhaps survive in a protected economy but will perish in
a more competitive environment [Levinsohn and Amil 1999].
Therefore, when the economy becomes more competitive, the
Overall
productivity differentials widen depending on the size of the firms
operating in the industry. Indeed, there appears to be a fact that
Table 2: Trends in the TFPG of Indian Chemical Sector
(Post-Reform Period)
Year Fertiliser Drugs and Basic Paints Dyes and Chemical
Pharma- Chemicals and Dye Stuffs Sector
ceuticals Varnishes
1991-92 -1.327 -0.217 -0.743 -0.437 -0.787 -1.741
1992-93 0.986 -0.178 -0.295 -0.261 -0.153 -0.313
1993-94 1.037 -0.045 -0.335 -0.405 0.302 0.222
1994-95 0.526 -0.365 -0.361 -0.142 -0.112 -0.411
1995-96 0.987 -0.143 0.194 -0.292 0.231 -0.143
1996-97 1.109 -0.043 -0.046 -0.110 0.204 -0.113
1997-98 -0.022 -0.111 0.055 0.156 0.363 0.355
1998-99 0.658 -0.234 0.262 -0.183 0.103 -0.818
1999-2000 1.815 0.008 -0.190 -0.032 0.244 0.189
2000-01 1.177 0.022 -0.008 -0.078 0.156 -0.129
2001-02 1.755 0.034 0.156 0.005 1.029 0.404
Mean 0.791 -0.116 -0.119 -0.162 0.144 -0.227
mean 0.847 -0.175 -0.126 -0.490 0.019 -0.199

4150 Economic and Political Weekly September 30, 2006

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labourers might outstrip its cost advantage, reducing the small conditions, the small firms failed to compete while large firms
firms' productiveness. could manage with the adoption of advanced technologies of
The underlying facts of the extent of productivity differentials production. Tybout (2000) points out a fact that there exists a
of small and large firms in an industry have become a measure discrimination of small and large firms in the financial market
of homogeneity of the industry concerned. Within this purview, also. Especially in a country where private sector credit is scarce
the study has made an attempt to estimate the TFP growth of and rationed, financial institutions discriminate against small and
the different sub-sectors of the Indian chemical industry at the large firms thereby increasing the cost conditions of small firms
firm level during the period of study. and thus decreased their productivity levels.
Table 3 presents the estimated mean TFP growth rates of
small and large firms in each sub-sector of the Indian chemical IV
industry. The obtained mean TFPG estimates show that the Findings and Conclusion
small firms have lower productivity growth than the large
firms. Further, small firms in all the sub-sectors are found to The simple analysis made to estimate the intra-industry
have a lower productivity level than their sectoral mean levels productivity variations in the Indian chemical sector during
of productivity estimated for the entire period of study (shown the period 1980-81 to 2001-02 reveals contradictory results at
in Table 2) except the paints and varnishes sector in which the the aggregate, sectoral and firm level. On the whole the
TFPG of small firms is marginally higher at -0.111 than its impact of economic reforms on total factor productivity at
sectoral mean rate of -0.490. On the contrary, the large firms the aggregate level was poor as the negative mean rate of TFPG
in each sub-sector have higher rates of TFP except in the fertiliser estimated in the pre-reform period further increased in the
sector where there is a marginal fall in the mean rate of TFPG post-reform period. But this declining trend is not applicable
of large firms at 0.775, when compared to the sectoral mean rate to all the sub-sectors. The estimated measures of TFPG at the
of 0.847. sectoral level show that the TFPG of drugs and pharmaceuticals,
From Tables 1 and 2, it can be noticed that when thepaints and varnishes, basic chemical and dyes and dye stuff
industries are better in the post-reform period as there is a
chemical sector as a whole witnessed a decline in the pro-
change in the sign or a decline in the extent of negative
ductivity level during the post-reform period, the sub-sectors,
productivity growth. But in the case of the fertiliser industry,
other than fertilisers, marked an improvement. But the picture
was different at the firm level. Invariably, the small firmsthe
in liberalisation
all process is found to have its adverse impact
as there is a fall in the total factor productivity growth during
the sub-sectors experienced a significant decline in productivity
growth rates during the post-reform period except in thethe post-reform period. At the firm level, though the small firms
drugs
and pharmaceutical sector in which they recorded a marginal are less productive than the large firms, the small firms in the
drugs and pharmaceutical and paints and varnishes sector ex-
improvement to -0.399 from -0.432 estimated for the pre-reform
period. Urata and Kawai (2001) found that larger firms
perienced a marginal increase in the productivity growth while
normally have higher total factor productivity levels large
and firms in the fertiliser sector marked a decline during the
post-reform period.
growth than smaller firms. There are, however, some exceptions
Thus,
to this pattern where small firms tend to have an edge due to the pattern of total productivity growth showed mixed
two distinctive features of small firms, viz, the practicetrends
of in the Indian chemical sector at the intra-sectoral level.
sub-contracting and the use of external patents. Whereas in up, TFPG itself witnessed a better performance in the
To sum
post-reform
the case of large firms, there was a significant improvement in period at the sub-sectoral level which is different
from
the TFPG of all the sub-sectors except fertilisers in which boththe industry average. When firm size is considered, in both
the periods, the small firms have lower levels of productivity
small and large firms experienced a decline in the productivity
growth during the post-reform period. It is perhaps due growth
to the than the larger firms. Irrespective of the sectors, the large
increase in the factorinputs. Schumachar and Jayant (1999)firms,
noted due to the better exploitation of economies of scale and
theand
that following liberalisation, output declined considerably ability to adopt new methods of production, are more
productive
thereby decreased the productivity of the fertiliser industry in than the small ones. Tybout (2000) suggested that
the country. They also found that increase in the materialsmall
inputfirms should adopt more innovative measures to make them
more efficient and productive. That is, the innovation initiated
was the driving factor for productivity losses in the Indian
fertiliser sector. either to survive or to create their own market niches appears
to be effective in increasing efficiency. With the present
A simple comparison of the productivity differentials between
small and large firms at the sub-sectoral level reveals thateconomic
both environment, these results cannot be finalised. There
in the pre- and post-reform period, the small firms are found to
Table 3: Firm Size and Productivity Differentials
have lower productivity levels than the larger ones. The higher in the Indian Chemical Sector
productivity levels of large firms compared to the small firms
may be due to the better exploitation of economies of scale Firms
by Period Fertiliser Drugs and Basic Paints Dyes and
Pharma- Chemicals and Dye Stuffs
them. Further, the large firms are able to use high quality inputs, ceuticals Varnishes
better technologies and make huge investment on R&D activities.
Small Pre-reform 0.340 -0.432 -0.168 -0.286 -0.058
As a result, they could get greater returns from their increased
firms Post-reform 0.266 -0.399 -0.204 0.065 -0.112
innovative measures. Similarly, one more argument can be putOverall 0.303 -0.416 -0.186 -0.111 -0.085
Large
forth for the comparatively better productivity performance of Pre-reform 0.986 0.133 0.29 -0.102 0.093
firms Post-reform 0.563 0.545 0.486 0.39 0.645
large firms. The liberalisation measures have made the market
Overall 0.775 0.339 0.388 0.144 0.369
environment more competitive. Under highly competitive market

Economic and Political Weekly September 30, 2006 4151

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International Economics, Financial Economics, edited by Shri Bhagwan
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to the anonymous referee for his comments and suggestions on an earlier
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4152 Economic and Political Weekly September 30, 2006

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