Globalization and Structural Changes in the Indian Industrial Sector: An Analysis of Production Functions

In 1991 India chose to open her economy and formulated the New Economic Policy (NEP). Under the structural adjustment and reform programmes, the NEP aimed at promoting growth by eliminating supply bottlenecks that hinder competitiveness, efficiency and dynamism in the economic system This study investigates into the structural changes in the manufacturing sector of India brought about by liberalization and globalization of the economy. Structural changes in terms of employment of labour and capital, indicated by replacement of the former by the latter, and changes in returns-to-scale have been examined by estimating CES, Zellner-Revankar, Transcendental and Diewert production functions. State-wise data for 1990-91 and 2003-04 have been analyzed. The findings have indicated that the rise in industrial output during the reference period is accountable to substitution of capital for labour in almost all states. In the pre-globalization period the industries experienced increasing returns to scale. Globalization has given way to diminishing returns to scale. Along with a rise in industrial output, globalization has led to a decline in regional disparities in terms of population-deflated indices of employment of manpower and capital, and the resultant output.