Determinants of total factor productivity in Indian states

Abstract

Purpose This paper aims to compute total factor productivity (TFP) growth for India as well as for its 19 major states and to explore the determinants of TFP at the state level by considering the spillover effects. Design/methodology/approach TFP growth has been obtained using growth accounting equation. Further, the TFP growth estimates were used to derive TFP levels using the translog index procedure. Given the policy focus on building infrastructure and expanding financial access, we have estimated the impact of irrigation, electricity, road, health, education and financial depth on TFP using the Spatial Durbin Model to account for spillover effects. Findings Computing TFP growth for two sub periods, namely, 2001-2008 and 2009-2015, the study finds a deterioration in TFP growth for India as well as for 10 of the 19 states under study in the post global financial crisis period. The author find that TFP is positively impacted by irrigation, health and road infrastructure. While financial depth and education were statistically insignificant, installed capacity of electricity had a negative impact on state level TFP. Research limitations/implications 'The author provides rationale for the empirical findings considering the country context. The findings of this study act as pointers for shaping higher growth on a sustained basis in India. The study helps to assess the productivity growth in the new states, namely, Jharkhand, Chhattisgarh and Uttarakhand, that were carved out in 2000 vis a vis their parent states. This assessment is useful especially for the states of Jharkhand and Chhattisgarh which were created to address economic backwardness in certain pockets of the parent states. Originality/value First, it provides TFPG estimates for India as well as 19 major states during the 2000-2015 period. Second, this study helps to understand how TFPG for India as well as each of the 19 states have behaved in the post global financial crisis period. Third, the study helps to assess the productivity growth in the three newly created states in 2000 vis a vis their parent states. Fourth, this is the first attempt which considers the spatial interdependence among the states to estimate the impact of financial and infrastructural development on productivity in the Indian states.