Bishwanath Goldar
Institute of Economic Growth, New Delhi, India
Third World KLEMS Conference,
Tokyo, May 19-20, 2014

A Methodological Issue in TFP/MFP Measurement
 Need for separating domestic and imported intermediate
inputs in TFP/MFP studies

Objective of the Present Study and Methodology
 Analyze TFP growth in Indian manufacturing, with and
without separation of domestic and imported materials input

Background Information for the Study
 Trends in production and trade, Indian manufacturing, 1980-
2011
Data Sources and Measurement of Output and Inputs
for TFP Estimation
 Estimates of TFP Growth in Indian Manufacturing
Industries, 1999-2011
 Conclusions

TFP=Total Factor Productivity; MFP=Multifactor Productivity

Several studies have found that the use of imported
intermediate input favorably impacts productivity of
industrial firms:
 Topalova and Khandelwal (2011) for India; Schor (2004)
for Brazil; Amiti and Konings (2007) and Blalock and
Veloso (2007) for Indonesia; Kasahara and Lapham (2008)
for Chile, , Vogel and Wagner (2010) for Germany,
Halpern, Koren and Szeidl (2011) for Hungary, and
Altomontem, Barattieri and Rungi (2014) for Italy.

This raises the following Issue:
 Should domestically sourced and imported intermediate
inputs be treated as separate inputs in TFP/MFP Studies?

There have been a number TFP studies for Indian
manufacturing using the KLEM or KLEMS
(captial-labour-energy-materials-services)
framework:
 Rao (1996); Trivedi, Prakash and Sinate (2000); Goldar
and Kumari (2003); Das (2004); Trivedi (2004);
Veeramani and Goldar (2005); Banga and Goldar
(2007); Das and Kalita (2011); Virmani, and Hashim
(2011).

None of these studies has made a distinction
between imported and domestically sourced
intermediate inputs.

In some productivity studies for the US, domestically
sourced and imported intermediate inputs have been
separated into different inputs:
 Gollop and Roberts (1981) - cost function estimation for
the US manufacturing industries.
 Kruz and Lengermann (2008) - MFP in various industry
groups or sub-sectors within the US private business
sector.
 Eldridge and Harper (2010) - MFP in the private business
sector and the manufacturing sector of the US.
 Houseman et al. (2011) - MFP in the US manufacturing
and sub-sectors - distinction made between domestically
sourced and imported materials input.
Joregenson, et al. (2005) separate non-comparable imports from
competitive imports.

Kruz and Lengermann (2008), Eldridge and
Harper (2010) and Houseman et al. (2011) have
drawn attention to the offshoring bias in the
productivity estimates for the US.
 Other studies: Howells et al. (2013) for the US and
Fukao and Arai (2013) for Japanese manufacturing.
Houseman et al. (2011) conclude that because of
the offshoring bias, the average annual growth
rate in MFP in the US manufacturing is
overstated by 0.1 to 0.2 percentage points .
 This issue is probably relevant also for Indian
manufacturing, but not studied in the paper.

The aim is to analyze TFP growth in Indian
manufacturing industries at two-digit industry level
and at the aggregate level for the period 1999-00 to
2011-12.
 The KLEMS framework is used. Tornqvist index of TFP
is computed.
 Domestically sourced and Imported materials input
are separated using domestic flow and import flows
input-output tables.
 Aggregate level TFP estimates are made by the
production possibility frontier (PPF) approach
(Tornqvist index of real value added growth is used) .

Trend growth rate,
real GVA,% p.a.
10
8
6
Figure 1: Five-yearly moving average of growth rates in
real gross value added in manufacturing (plotted against
mid-point)
4
2
0
1980-81 to 1990-91 to 1999-00 to
1990-91
1999-00
2011-12
12
percent per year
10
8
6
4
2
Early economic
reforms
Major economic
reforms
2009-10
2008-09
2007-08
2006-07
2005-06
2004-05
2003-04
2002-03
2001-02
2000-01
1999-00
1998-99
1997-98
1996-97
1995-96
1994-95
1993-94
1992-93
1991-92
1990-91
1989-90
1988-89
1987-88
1986-87
1985-86
1984-85
1983-84
1982-83
0
Consolidation of reforms
Industrial growth rate in the 2000s was higher than that in the 1980s
as well as that in the 1990s.
Accelerated growth in manufacturing sector output in India in the 2000s was
accompanied by accelerated growth in exports and imports of manufactured
products.
Figure 2: Exports and Imports of Manufactured Products,
India, 1987-88 to 2011-12
200
180
160
US$ billion
140
120
100
Exports
80
Imports
60
40
20
2011-12
2010-11
2009-10
2008-09
2007-08
2006-07
2005-06
2004-05
2003-04
2002-03
2001-02
2000-01
1999-00
1998-99
1997-98
1996-97
1995-96
1994-95
1993-94
1992-93
1991-92
1990-91
1989-90
1988-89
1987-88
0
The trend growth rates in imports: about 5% per annum during 1987-88 to
1999-00 and about 20 % per annum during 1999-00 to 2011-12.
The materials import intensity of Indian manufacturing almost
doubled between 1998 and 2007. The upward trend in materials
import intensity got halted or became sluggish after 2007.
Figure 3: Imported materials % total materials
consumed, Indian manufacturing
35
30
percent
25
20
15
10
5
0
1995
1998
Source: Based on WIOD
2003
2007
2009
2011
At the aggregate level, the share of imported raw materials increased from 44% in
2007-08 to 49% in 2011-12. In several industries, import intensity fell.
Figure 4: Imported raw materials % total raw material used,
manufacturing companies, by groups
Food and agro based products
Textiles
Fertilizers
Drugs and Pharmaceuticals
Polymers
Plastic products
Petroluem products
2011-12
Domestic appliances
2007-08
Metals and metal products
Non-elecrtrical machinery
Electrical machinery
Electronics
Transport equipment
All manufacturing
0
10
20
30
40
50
60
percent
Based on CMIE, Corporate Sector, April 2013
70
80
90
Import
intensity fell
in metals,
metal
products,
and
machinerey

Annual Survey of Industries (Central Statistical
Office)
 It covers only the organized or registered sector (units
with 10+ workers with power or 20+ workers without
power)



Input-output tables, 1998-99, 2003-04 and 200708 – domestic and import flows matrices have
been constructed
Wholesale price index series, implicit deflator for
GDP of services sectors, implicit deflator for
fixed capital formation in manufacturing
Unit value indices for imports (disaggregated)





Gross output: Deflated value of output
Labour: No. of persons engaged
Capital : Net fixed capital stock at constant
prices
Energy: Deflated value of fuel and power
used
Services: Total input minus value of materials,
fuel and power; the series is then deflated by
services input price index constructed on the
basis of implicit deflators and I/O tables.


Materials input: Two variants
Variant - A
 Value of materials used by each industry is
deflated by a price index constructed on the basis
of domestic wholesale price indices and weights
taken from input-output matrices.
 For this purpose, the two-digit industries are
mapped into the sectoral classification of inputoutput tables.

Materials input: Variant - B
 Value of materials for each industry split into
domestic and imported parts on the basis of domestic
and import flow input-output matrices.
 Domestically sourced and imported materials are
deflated, respectively by a price index based on
domestic wholesale price indices and a price index
formed on the basis of unit value indices of imports.
 The weights are based on domestic flows inputoutput matrix and import flows input-output matrix.


Variant-B measure of materials input – which
builds in the split into domestic and imported
– is the preferred method. TFP estimate
based on this method is referred to as
Estimate-1
Variant-A measure of materials is the
conventional method. TFP estimate based on
this method is referred to as Estimate-2.
Estimate-1 (preferred estimate) is relatively higher
than Estimate-2 in most cases.
 The gap is about 0.2 percentage points per annum or
more in:

 wood and wood products; chemicals and chemical
products; rubber and plastic products; fabricated metal
products; electrical machinery; electronic and optical
goods, including computers; and transport equipment
other than motor vehicles.

There is possibly a downward bias in the second set of
TFP growth estimates for the reason that it does not
separate out imported materials input from
domestically procured materials input.
Industry Code
(2-digit)
Description of Industries
15
Manufacture of food products and beverages
16
Manufacture of tobacco products
17
Manufacture of textiles
18
Manufacture of wearing apparel; dressing and dyeing of fur
19
21
Tanning and dressing of leather; manufacture of luggage, handbags, saddler,
harness and footwear
Manufacture of wood and of products of wood and cork, except furniture;
manufacture of articles of straw and plating materials
Manufacture of paper and paper products
22
Publishing, printing and reproduction of recorded media
23
Manufacture of coke, refined petroleum products and nuclear fuel
24
Manufacture of chemicals and chemical products
25
Manufacture of rubber and plastics products
26
Manufacture of other non-metallic mineral products
27
Manufacture of basic metals
28
29
Manufacture of fabricated metal products, except machinery and
equipment
Manufacture of machinery and equipment not elsewhere classified
31
Manufacture of electrical machinery and apparatus not elsewhere classified
30+32+33
Manufacture of office, accounting and computing machinery; Manufacture of
radio, television and communication equipment and apparatus; Manufacture of
medical, precision and optical instruments, etc.
20
34
Manufacture of motor vehicles, trailers and semi-trailers
35
Manufacture of other transport equipment
36
Manufacture of furniture; manufacturing not elsewhere classified
TFP growth rate (% per annum)
Share of imported
materials in total
materials consumed
(%), 2007-08
Estimate-1
Estimate-2
1.14
-2.87
1.41
0.10
1.08
-2.90
1.35
0.09
1.69
1.57
7.2
0.95
1.98
-0.76
0.67
1.84
-0.81
8.3
-0.17
1.67
2.05
0.54
1.40
2.21
1.42
1.85
0.61
1.44
0.00
-0.26
30.6
1.27
1.11
25.9
2.54
2.02
29.6
12.20
2.53
2.11
11.89
2.35
1.87
35.1
40.4
-0.60
-1.40
29.7
3.3
4.2
10.6
10.5
14.1
15.5
79.3
28.0
22.2
23.1
32.1
16.6
Estimate-1 is negative while that given by
Estimate-2 is positive and more than two
percent per annum.
 The problem is that the domestic price index for
crude oil has increase by about 190% between
2004-05 and 2011-12, whereas the unit value
index of crude oil imports has increase only by
about 90% in this period.
 Crude oil is the main material used in petroleum
refining, and 80% of crude oil used is imported.
 Inference: Estimate-2 is flawed, Estimate-1 is
reliable.

The estimates are obtained by the PPF approach
and Tornqvist index of real value added growth.
 Estimate-1 shows a fall in the annual growth rate
in TFP after 2007 from 10% to 3%, but Estimate2 shows an acceleration in TFP growth during
2007-11.
 Estimate-2 does not seem right because it
indicates a hike in TFP growth after 2007,
whereas Indian manufacturing was adversely
affected by the recent global slowdown.
 The problem with Estimate-2 is traceable in part
to the treatment of crude oil (noted above).

Approach
Aggregate production
function approach (simple
aggregation across
industries)
Production possibility
frontier approach
(Estimate-1)
Production possibility
frontier approach
(Estimate-2)
Growth rate in TFP (% per annum)
1999-00 to
2007-08
2007-08 to
2011-12
1999-00 to
2011-12
3.04
-0.98
1.70
10.23
3.15
7.87
7.78
12.21
9.26
TFP growth estimate for Indian manufacturing using Tornqvist index of value
added by Bollard, Klenow and Sharma (2013) for 1992-2004 is 8.4% per annum
In earlier TFP studies for Indian manufacturing, the
gross output function was applied to aggregate
manufacturing sector data on output and inputs.
 This can be objected to on methodological grounds.
 Yet, for the sake of comparison, a set of estimates
taking the same approach has been made.
 The comparison shows:

 acceleration in TFP growth in the 2000s compared to
1990s;
 estimates of this study are in agreement with the
estimates of earlier studies.
Author (s)
Goldar and Kumari (2003)
Trivedi (2004)
Banga and Goldar (2007)
Virmani and Hashim (2011)
This
study
(Estimate-1;
imported and domestically
sourced materials taken as
separate inputs)
Period
1990-91 to 1997-98
1992-93 to 2000-01
1989-90 to 1999-00
1991-92 to 1997-98
1998-99 to 2001-02
2002-03 to 2007-08
1999-00 to 2007-08
TFP growth rate (% per
annum)
0.69
0.70
0.26
0.25
-0.09
1.41
1.73
2007-08 to 2011-12
1999-00 to 2011-12
1.48
1.65

Two weaknesses of the previous studies on TFP
growth in Indian manufacturing are highlighted:
 TFP growth estimates for the 1990s and 2000s are
probably biased because the imported materials input
has not been separated from the domestically
sourced materials input;
 The gross output function and the associated
Tornqvist index of TFP has been applied to the
aggregate manufacturing sector data which can be
objected to on methodological grounds.



The PPF approach based estimate of TFP growth
rate in India’s organized manufacturing in the
period 1999-00 to 2011-12 is found to be about
8% per annum.
From data on organized manufacturing sector
GDP reported in the National Accounts Statistics,
the growth rate in output is found to be about
9.5% per annum for the same period.
It seems growth in manufacturing GDP is
possibly getting understated, because real GDP
growth in manufacturing is derived by using
single deflation.