Infrastructural Development and Firm Efficiency in India (1999-2007)

Hui N, Kailthya S, Kambhampati U

Abstract

We examine the impact of macroeconomic conditions on firm-level efficiency and output in Indian manufacturing. Using firm-level data during 1999-2007, we estimate stochastic frontier production functions for six different industries. We find that: first, although the frontier output shifts outwards, the efficiency levels remain largely stagnant. Secondly, we find no positive impact of infrastructural improvements on firm efficiency. The results are robust to using a synthetic index of macroeconomic variables. Specifically, we find that while infrastructural improvements relating to power generation capacity, electrification of railways, bank expansion or road construction are associated with a rise in a firm’s production potential or its frontier output, it is associated with a decline in actual firm-level efficiency. The underlying reason for this puzzle might be a shifting out of the production frontiers over time at a pace faster than the rate of increase in output, which is consistent with uneven utilisation of improvements in infrastructure amongst firms.