An Application of Economic Capacity Utilization to the Measurement of Total Factor Productivity Growth: Empirical Evidence from Indian Fertilizer Industry

by Sarbapriya, Ray and Mihir, Kumar Pal
Published in Romanian Journal of Economic Forecasting
, 2011, volume 14 issue 1, 125-142

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This paper attempts to measure the productivity performance of the Indian fertilizer industry at the aggregate level, with adjustment for variations in capacity utilization during the period from 1979-80 to 2003-04. Using a translog specification, our econometric analysis reveals a decelerating trend in total factor productivity growth resulting in negative impact of economic reforms on the Indian fertilizer industry. The study also indicates a declining trend of economic capacity utilization suggesting the  adverse impact of liberalization after the mid 90ís, due to slow increases in actual output; this probably results from stagnated demand and rapid expansion of capacity as a result of the abolition of the licensing rule consequent to economic reforms. Total output growth in the Indian fertilizer industry is found to be mainly as a result of inputaccumulation rather than productivity driven. The analysis reveals that a correction for capacity utilization mitigates the variations in total factor productivity growth.

Keywords: Total Factor Productivity growth, capacity utilization, fertilizer, industry, economic reforms
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