Do Technological Conditions of Production Explain Industrial Growth? The Indian Manufacturing, 1998–1999 to 2007–2008

The paper tries to assess whether the technological conditions of production can explain the sluggishness in growth in Indian manufacturing industries reflected in a stagnant share in aggregate GDP. For this purpose, the returns to scale and elasticity of factor substitution are estimated for various two-digit manufacturing industries of India for the years 1998–1999 to 2007–2008 using the translog production function specification. Most of the previous research of this kind was undertaken by using either aggregate level time-series or state-wise aggregate cross-section data. The recent availability of factory (plant) level panel data has motivated us to re-estimate the parameters of the production function for the Indian manufacturing using factory-level data. Our results clearly indicate presence of significant scale economies. We observe that the capital-labour elasticity of substitution varies across industries, being a little above one or less than one in nearly half of the cases. A multiple regression analysis has been undertaken with the help of industry-level panel data for the years 1998–1999 to 2007–2008 to find out if the manufacturing growth rate is conditioned by the parameters of the production function. Our results indicate that production function parameters do exert an important influence on the rate of growth.