Indian Economy - TFP or Factor Accumulation: A Comprehensive Growth Accounting Exercise

Abstract

Constructing data series from various sources, I do comprehensive growth accounting for the Indian Economy. Without accounting for human capital, total factor productivity differences over time accounts for 48% to 69% of output variation. TFP growth accounts for 35% to 70% of the total GDP growth between 1960 and 2004 depending on measure of human capital. Even after using the Mincer wage regression coefficients, TFP growth still remains significant in explaining the output growth.

Starting from a modest rate in 60s Productivity growth dipped and became negative in 70s. This productivity growth rate started accelerating in 80s (much before the reform-period of early 90s) and is estimated between 3% and 4.5% in 2000s. Variance decomposition of growth rates show negative relation because input and output growth accelerated in different periods. Capital-Output ratio seems to transition from one-steady state to another. Capital-per-Worker has reached a constant rate of growth.

Accounting estimates, decompositions and period-wise trends point toward Indian growth being triggered by overall efficiency improvement (TFP) rather than input accumulation growth.

Keywords: Growth Accounting, Indian Economy, Mincer Regression, Variance Decomposition, TFP, Factor Accumulation

JEL Classification: O4, O47, O53, D24