J-Curve Hypothesis of Productivity and Output Growth A Case Study of Indian Manufacturing in the Post Reforms Period

Majority of the studies estimating productivity in the Indian organized manufacturing sector have reported a slowdown in productivity growth in the 1990s, baffling the analysts as this came in backdrop of major economic reforms that were initiated in 1991. Some felt that productivity could respond to reforms with a time lag but could not explain theoretically as to why it plummeted. Tracing the phenomena to the J-curve hypothesis, the present paper attempts to provide a theoretical explanation for the dip in productivity and output growth in early phases of reforms and estimate if the reforms displayed a positive impact in later period. The underlying reasons for J-curve hypothesis are provided mainly in terms of technological gap (compared to the global benchmark) and relatively weak mobility of factors of production (like labour, capital, industrial/urban land etc) including those that arise from the rigidity in labour laws and difficulty associated with acquisition of land for industrial development. The study analyses both aggregate and two-digit ASI industries over a period 1992/93-2007/08 and observes the trends in the following three sub-periods: (i) 1992/93-1997/98, (ii) 1998/99 to 2001/02, and (iii) 2002/03-2007/08. Empirical results obtained in the study, in general, support the hypothesis of J-curve pattern of productivity and output growth in the Indian organized manufacturing sector. The J-curve effect is found to be relatively weak in globally competitive sectors (like textiles) and strong in the sectors with relatively large technological deficit (like Automobiles). In view of continuing technological gap in many sectors and weak mobility in factors of production, the paper concludes that productivity and output growth could respond to earlier economic reforms even better, if these issues were addressed adequately.