ABSTRACT
Indian manufacturing industry has been undergoing radical changes in its policy regime since 1991. The policy changes include, among other components, liberalization of a highly regulated and protected sector — manufacturing — with the objective of accelerating its technological progress and competitiveness. This chapter analyzes the productivity growth of Indian manufacturing industry during the post liberalization period and examines the importance of two sources of productivity growth, namely, resource reallocation and catching up. As liberalization essentially means greater role for market forces and heightened competition, these two sources of productivity growth assume significance in a liberalizing economy. Efficient resource allocation, which a free market economy is argued to bring about, implies allocation of resources to sectors or firms where they are more productive. The recent theoretical literature highlights the aggregate productivity effect of this resource allocation role of market in a liberalizing economy. Increased competition is another direct outcome of the liberalization policy and it is also expected to increase manufacturing productivity. The argument is that heightened competition compels low productive firms either to catch-up with best productivity level or to exit from the industry. In both cases aggregate productivity would increase.
