Technological Progress, Scale Effect and Total Factor Productivity Growth in Indian Cement Industry: Panel Estimation of Stochastic Production Frontier

The economic policy reform in respect of Indian cement industry, during the early 80's, resulted in a phenomenal growth of this sector and the industry has, in fact, become the second largest in the world. However, this growth has been associated with a greater use of energy and other resources, resulting in severe environmental degradation. Further development of this industry, without increasing energy demand and thereby reducing emission and waste, would require increased productivity. This paper estimates Total Factor Productivity (TFP) growth in Indian cement industry during the period 1989-90 to 2006-07 using company level data and applying Stochastic Frontier Approach. TFP growth is decomposed into technical progress (TP), technical efficiency change (TEC) and changes in scale component (SC) with a view to gaining some insights into the sources of productivity growth of this industry in the post reform era. Empirical results show that TFP growth is mainly driven by SC and TP and not by TEC since TE is time invariant in nature. In the light of empirical results, the policy implication is that an industrial policy of exploiting the existing economies of scale is required to be implemented; and to boost the growth of this sector; priority should be given to enhance firms' capability of catching-up by adopting efficiency oriented action plan.