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

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 90’s, 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.