Industrial Structure, Productivity, Growth and Inflation: A Study on Interrelationships, Causality and Effects

Abstract

India is one of the largest and fastest-growing economies in the world. Its growth is supported by the vibrant manufacturing sector which has strong linkages with other sectors. The manufacturing sector plays a pivotal role in a nation’s investments, trade, employment, income and exports. Given its importance, the Indian manufacturing industry is consistently promoted through policy stimuli and reforms. But historically, it exhibited no significant improvement in terms of productivity, growth and share in national output and employment. This necessitates the study of the Indian manufacturing industry at a granular level. Manufacturing industry exhibits heterogeneity, stemming from the varying compositions of factor inputs across different industries, as characterised by the industrial structure. Industrial structure influences the nature of production, productivity, output, and thereby growth of industries. Price changes, captured by inflation, also alter the industrial structure, resource allocation, and outcomes in the form of productivity, output and growth. This necessitates a due consideration for inflation while exploring industrial structure, productivity and growth. Against this backdrop, the present study explores the registered Indian manufacturing industry along with price influence on it. Specifically, we analyse: 1) industrial structure, 2) growth, 3) productivity, 4) inflation, and 5) their interrelationships, as our research objectives. To this end, we use secondary panel data on industry (input, output and employment) and inflation. The period of study is from 1981-82 to 2016-17, covering major policy developments in the Indian industry. We employ statistical methods including descriptive, predictive and time-series modelling to analyse the research objectives empirically. We find that industries exhibit a steady capital intensification that raises the demand for capital as well as energy. Given an increasing dependence on capital and energy, industries are turning more sensitive to capital and fuel prices that deter industrial growth. Fuel inflation hampers capital productivity as well, which is a major driver of industrial growth. Further, such an effect of inflation hampering growth and productivity is contingent upon the industrial structure. Based on the results, we derive certain industry-specific policy recommendation. We recommend the promotion of the capital goods industry to generate productive employment, promote capital intensification and contain capital inflation. Energy efficiency is the key to make the industries resilient to fuel inflation. To increase energy efficiency, we recommend technological upgradation and efficient capital utilization in industries. Our study’s results and recommendations can contribute to judicious policy making to achieve robust (inflation resilient) and sustainable (efficient, productive and stable) industrial growth in the country.