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PRODUCTIVITY AND RESOURCE – USE EFFICIENCY

IN FOOD PROCESSING INDUSTRY IN INDIA

5.1 Introduction :

This Chapter provides a detailed study of the productivity and resource-use


efficiency of the Food Processing Industry in India. This includes Study using
time-series data of the various Sub-segments of the food processing industry
from 1973-2008 which is presented in Section 5.2. The study comprises of the
Structural Composition of Sub-segments of Food Processing Industry in the
Pre-liberalisation (1973-1978), Liberalisation (1988-1993) and Post-
liberalisation (2003-2008) periods in Section 5.2.1. The estimation of Technical
Efficiency (TE) using Stochastic Frontier Production Function is presented in
Section 5.2.2. The Study using panel data of the various States / Union
Territories of the food processing industry from 1998-2008 is given in Section
5.3. Section 5.3.1 gives the estimation of TE using the Stochastic Frontier
Production Function. The estimation of TE using Malmquist Productivity
Index- Data Envelopment Analysis (DEA) is presented in Section 5.3.2.

The ASI time-series data on Manufacturing used in this study has been
categorized into two-digit classification and three-digit classification. The two-
digit classification with the serial number 15 comprises of data on Manufacture
of Food Products and Beverages.

Further, the three-digit classification gives the Principal Characteristics by


Industry Group as follows :
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Table - 5.1

Three – digit Classification of Sub-segments of Food Processing


Industry in India

Food Sector Food Product


Production, processing and preservation of Meat, Fish,
151
Fruits, Vegetables, Oils and Fats.
152 Manufacture of Dairy Products
Manufacture of Grain Mill Products, Starches and Starch
153
Products and Prepared Animal Feeds.
154 Manufacture of Other Food Products.
155 Beverages

Source : Annual Survey of Industries (ASI)

Thus, time-series data on the above mentioned five commodity group, for a
three-and-a-half decadal time period has been used to study the structural
composition of the food processing industry in India. This has facilitated a
comparison of the various sub-segments of the food processing industry in
India in the Pre-liberalisation (1973-1978), Liberalisation (1988-1993) and
Post-liberalisation periods, in this study.

The study also comprises of the analysis of the food processing industry in
India using panel data of various States / Union Territories for the period 1998-
2008. This includes the computation of the Annual Growth Rates (AGR) and
the Compound Annual Growth Rates (CAGR), Descriptive statistics such as
mean and standard deviation values, Trends in Technical Efficiencies by States
/ Union Territories, Distribution of States / Union Territories by Mean
Technical Efficiencies and also the Estimates of the Stochastic Frontier
Production Function, for the various output and input variables used in the
study.

 
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This part of the study also includes the application of the output-oriented
Malmquist DEA method to panel data of the food processing industry of 31
States / Union Territories of India in the ten year period 1998-2008 for
estimating the Total Factor Productivity (TFP) change in the food processing
industry in India. It further decomposes the TFP change in the disaggregated
food processing sector into technical and efficiency changes, in order to
identify the States / Union Territories which have expanded the production
frontier between time periods.

5.2 Study Using Time-series Data :

This part of the study uses time-series data on the various Sub-segments of the
food processing industry in India for the period 1973-2008 which includes the
study of structural composition of Sub-segments of Food Processing Industry
as well as the estimation of TE using Stochastic Frontier Production Function.

5.2.1 Structural Composition of Sub-segments of Food Processing


Industry in Pre-liberalisation (1973-1978), Liberalisation (1988-
1993) and Post – liberalisation (2003-2008) Periods :

A comparison of the various sub-segments of the food processing industry in


India in the Pre-liberalisation (1973-1978), Liberalisation (1988-1993) and
Post-liberalisation (2003-2008) periods with respect to the distribution of
factories and the quantum of inputs used and output generated is made in order
to understand the growth of these sub-segments during the study period.

Table 5.2 analyzes the structural composition of the food processing industry in
India. The distribution of factories (in per cent) in the various sub-segments of
the food sector during the pre-liberalisation, liberalisation and post-
liberalisation periods are taken into consideration for this purpose. Results
indicate that during the three time periods mentioned above the Grain mill
products segment held approximately 40 per cent and more of the share of

 
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processing units in the food sector in India. It is to be noted that the top
position in the three time periods, in terms of distribution of factories is held by
the Grain mill products.

In terms of a comparison among the various Sub-segments, the Grain mill


products has the top position followed by Other food products in the second.
The high-value segment of Meat, Fish, Fruit & Vegetables, Oils & Fats takes
the third position followed by Beverages, whereas the least share is accounted
for by the Dairy products segment.

This suggests that in terms of the number of units, the change in composition is
significantly visible in the case of Grain mill products. The Dairy products and
the Beverages segments’share is found to be below 5 per cent in all the three
time periods. But it is found that the distribution of units in the Dairy segment
and Beverages segment show a continuous increase in the post-liberalisation
period over the pre-liberalisation period though at a comparatively low
position, when compared with the top Grain mill products sub-segment.

Table - 5.2
Structural Composition of Indian Food Processing Industry in the
Pre-liberalisation (1973-1978), Liberalisation (1988-1993) and
Post – liberalisation (2003-2008) Periods
Distribution of Factories in Sub-segment of Food Sector (in %)

Meat, Fish, Dairy Grain Other Beverages


Time period Fruit & products mill food
Vegetables, products products Total
Oils & Fats
(151) (152) (153) (154) (155)

Pre-liberalisation Period
21.81 1.18 39.59 33.91 3.51 100.00
(1973-1978)

Liberalisation Period
18.17 2.22 49.25 26.29 4.07 100.00
(1988-1993)

Post-liberalisation Period
13.80 3.94 53.55 23.96 4.75 100.00
(2003-2008)
Source : Calculated using ASI time-series data on manufacturing (1973-2008).

 
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In the case of the high-value segment that is the Meat, Fish, Fruit &
Vegetables, Oils & Fats and also the Other food products category a continuous
decline after the pre-liberalisation period is observed.

The slow take-off of the food processing industries, particularly during the
post-liberalisation period (2003-2008), may be attributed to the less number of
units being operational, particularly during the Tenth Five Year Plan.

Fig. 5.1 shows the distribution of factories in the food sector in India, for the
period from 1973-2008. The five food sub-segments in India are shown in the
X-axis and the per cent of factories in each of these sub-segments are indicated
in the Y-axis. Each set of bars represents the pre-liberalisation, liberalization
and the post-liberalisation periods respectively. As is indicated in the Fig., the
top position in the three time periods, in terms of distribution of factories is
held by the Grain mill products. In terms of a comparison among the various
Sub-segments, the Grain mill products has the top position followed by Other
food products in the second and Meat, fish, fruits & vegetable, oils & fats Sub-
segment in the third position.

The composition of gross value of output, fuel consumed, material consumed,


cost of capital and cost of labor are also included in the study. These indicate
the growth performance of the food processing industry in the country, in terms
of its value addition, in the pre and post liberalisation periods.

Table 5.3 indicate that in terms of gross value of output processed the share of
sub-segments such as Dairy products, Grain mill products and Beverages show
an increase of 4 to 8 per cent during the post-liberalisation period as compared
to the pre-liberalisation period. The Gross value of output in the case of the
high-value segment has increased in the post-liberalisation period. These sub-
segments may become potential investment avenues for food processors. In the

 
 
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Fig. 5.1 Distribution of factories in Sub-segment of Food Sector in India (1973-2008) 


 

60
Pre-liberalisation period (1973-1978)
Liberalisation period (1988-1993)
50
Post-liberalisation period (2003-2008)

40
Percentage

30

20

10

0
151 152 153 154 155
Sub-segment Food Sector

Source : ASI time-series data on manufacturing 1973-2008.

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case of raw material inputs such as Material consumed and Fuel consumed the
three sub-segments such as Dairy products, Grain mill products and Beverages
show a continuous increase from the pre-liberalisation to the post-
liberalization period. In the Other food products category there is a decline of
around 10 per cent in the case of Materials consumed and 8 per cent in Fuel
consumed. It is noted that in the case of Cost of capital the high value segment
as well as the Dairy products and Other food products categories show a slight
decrease in the post-liberalisation period as against the liberalisation period.
There is an indication that economic liberalisation has increased the capital
intensity, as the share of Cost of capital has increased during the post-
liberalisation period in the Grain mill products and Beverages segments. The
only segment which indicates a decline in the Cost of labor in the post-
liberalisation period is the Other food products, whereas the high value
segment remains more or less the same in its share during this period.

Thus, the results indicate that except the Grain mill products Sub-segment, all
the other sectors require better focus in the post-liberalisation period. The High
Value segment, Dairy and Beverages, particularly are to be given high priority.

 
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Table - 5.3

Structural Composition of Indian Food Processing Industry in the


Pre-liberalisation (1973-1978), Liberalisation (1988-1993) and
Post – liberalization (2003-2008) Periods - Output / Input Variables

Sub-segment of Food Sector


Meat, Fish, Dairy Grain Other Beverages
Output /
Time Fruit & products mill food
Input Total
Period Vegetables, products products
Variables
Oils & Fats
(151) (152) (153) (154) (155)
Gross Value 1973-1978 33.40 7.18 18.45 37.80 3.17 100.00
of Output 1988-1993 28.91 9.97 21.09 35.07 4.96 100.00
Processed
2003-2008 30.36 11.20 24.14 26.28 8.02 100.00
(in %)
Materials 1973-1978 35.17 7.61 19.58 35.85 1.79 100.00
Consumed 1988-1993 31.68 10.43 23.20 31.13 3.56 100.00
(in %) 2003-2008 30.82 12.42 25.46 25.40 5.90 100.00
Fuel 1973-1978 22.68 8.19 11.83 49.31 7.99 100.00
Consumed 1988-1993 27.74 10.24 15.56 35.73 10.73 100.00
(in %) 2003-2008 23.68 11.14 21.61 31.66 11.91 100.00
Cost of 1973-1978 - - - - - -
Capital 1988-1993 18.75 6.55 14.40 50.96 9.34 100.00
Consumed 2003-2008 16.48 5.94 16.78 48.07 12.73 100.00
(in %)
Cost of labour 1973-1978 - - - - - -
Incurred 1988-1993 11.53 8.58 12.12 60.15 7.62 100.00
(in %) 2003-2008 11.74 11.46 15.11 50.88 10.81 100.00

Source : Calculated using ASI time-series data on manufacturing 1973-2008.

 
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Table 5.4 shows the growth rates indicating the performance of the various
sub-segments of the food processing industry in India during 1973-2008. The
growth rate in the gross value of output for all the sub-segments is quite high
and exceeds a level of 12 per cent. Similar trend is also observed in the case of
other inputs such as Materials consumed and Fuel consumed. In the case of
Dairy products a growth rate of 15.3 is found to be the highest in the case of
fuel consumed whereas a low of 12.0 in the category of Other food products is
observed. The highest growth rate for the period 1973-2008 is observed in the
Beverages segment in the case of Materials consumed which is an indicator of
the high potential in this category.

Table - 5.4

Growth Rates of Gross Value of Output, Materials Consumed, Fuel Consumed,


Cost of Capital and Cost of Labour for various Sub-sectors of the Food
Processing Industry in India, 1973-2008.

Sub-segments of Food Sector


Dairy Grain Other Beverages
Meat, Fish, Fruit Products mill food
Variables Total
& Vegetables, Products Products
Oils & Fats (151)
(152) (153) (154) (155)
Gross Value of
12.9 15.0 14.1 12.2 16.4 70.6
Output (in %)
Materials Consumed
12.4 14.7 13.8 12.0 16.7 69.6
(in %)
Fuel Consumed
14.4 15.3 16.4 12.7 15.2 74.0
(in %)
Cost of Capital
13.2 14.3 14.0 12.9 16.4 70.8
Consumed (in %)
Cost of Labour
11.2 13.7 12.5 10.8 13.6 61.8
Incurred (in %)

Source : Calculated using ASI time-series data on manufacturing 1973-2008.

 
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Thus the growth rates, in comparison among the various sub-segments of the
food processing industry in India indicate that the Beverages segment is the
highest at 16.4 per cent in terms of Gross value of output, at 16.7 per cent in the
case of Materials consumed, and 16.4 per cent in the case of Cost of capital.
This is followed by 16.4 per cent in the Grain mill products category in terms
of Fuel consumed. In the case of high –value segments such as Meat, fish, fruit
& vegetables, oils & fats and Dairy products there is more scope for
improvement. High-value segments may require appropriate policy measures
for each segment at the disaggregated level. The most vulnerable sub-segment
is the Other food products category which comprises of most units in the
unorganized sector most of which are small and tiny units.

Table 5.5 shows the mean and standard deviation values of the output variable
Gross Value of Output and input variables such as Materials Consumed, Fuel
Consumed, Cost of Capital and Cost of Labor for various Sub-segments of the
Food Processing Industry in India.

 
 
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Table - 5.5
Mean and Standard Deviation of Gross Value of Output, Materials Consumed, Fuel Consumed, Cost of Capital and Cost
of Labour for various Sub-sectors of the Food Processing Industry in India, 1973-2008.

Sub-segments of Food Sector


Meat, Fish, Fruit & Dairy Grain mill Other food Beverages
Variables
Vegetables, Oils & Fats Products Products Products
(151) (152) (153) (154) (155)
Gross Value of Output (Rs.lakh) 2758034.93 1.0560E6 2.2381E6 2.7829E6 653136.21
(2725024.06) (1.01592E6) (2.20483E6) (2.34136E6) (7.51073E5)
Materials Consumed (Rs.lakh) 2069103.24 829464.59 1.7365E6 1.9073E6 340645.48
(1936192.90) (7.90145E5) (1.62877E6) (1.60371E6) (3.77322E5)
Fuel Consumed (Rs.lakh) 73079.62 32574.69 60597.0 95006.34 32375.66
(64701.09) (30764.66) (61036.44) (84258.62) (32525.34)
Cost of Capital Consumed (Rs.lakh) 80321.21 30599.79 70568.07 240650.66 54120.66
(68079.82) (26314.67) (68531.14) (2.03156E5) (52187.66)
Cost of Labour Incurred (Rs.lakh) 27158.79 25317.76 33604.86 132933.10 22125.62
(21257.46) (21700.45) (28520.11) (95456.41) (20170.73)

Source : Calculated using ASI time-series data on manufacturing 1973-2008.

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5.2.2 Estimation of Technical Efficiency using Stochastic Frontier
Production Function (Time-series data) :

The study proposes a model for technical efficiency effects using a Stochastic
frontier production function for time-series data. Provided the efficiency effects
are stochastic, the model permits the estimation of both technical change in the
stochastic frontier and time-varying technical efficiencies. In the case of time-
series data Gross value of output is used as the output variable and variable
inputs such as Material consumed, Fuel consumed, Cost of capital and Cost of
labor are used as input variables.

In order to measure Technical Efficiency of food processing industry in various


States/UT’s using panel data a parametric study is made using Stochastic
Frontier Production Function model.

Model Specification (Time-series data):

The model specification for the time-series data is as follows :

ln Yt = βo + β1 ln (M) + β2 ln (F) + β3 ln (C) + β4 ln (L) + Vt - Ut

where :

ln Yt denotes Natural Logarithm of Gross value of Output

βo constant

βi ‘s unknown parameters to be estimated, i=1,2,3 and 4

M Expenditure on Materials

F Expenditure on Fuel

C Cost of Capital

L Cost of Labour

Vt symmetric component of the error term

 
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Ut non-negative random variable which is under the control of the
DMU

t time period

The estimation of this model results in the study of the influence of each of the
input variables on the output variable over the time period from 1973-2008.

The results of the estimation of the Stochastic Frontier normal / half-normal


model pertaining to time-series data is presented in table 5.6.

There is wide and erratic fluctuation in the data between the years 1973 – 2008.
There is no trend or pattern in the Grain Mill Products Sub-segments of Food
Processing Industry. The highest peak that is observed in fig. 5.1 is a sporadic
case. Therefore the fitting of Stochastic Frontier Production Function is not
feasible due this Sub-segment’s behavior.

The indication in the time-series data pertaining to Food Processing Sector as


given by Stochastic Frontier Production Function differs from what has been
observed under the Stochastic Frontier Production Function fit for panel data.
The Stochastic Frontier Production Function applied to time–series data for
other Sub-segment in the Food Processing Industry indicate the following
results which are presented in Table 5.6.

 
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Table - 5.6
Estimates of Stochastic Frontier Production Function
(Panel Data : 1973-2008)

Sub-segments of Food Sector

Independent Variables /
151 152 153 154 155
Inputs

OLS MLE OLS MLE OLS MLE OLS MLE OLS MLE

Constant -0.447 -0.4460 0.296 -0.1263 -0.319 0.758 0.7157 1.038 1.0385

(-0.919) (-0.98) (1.243) (-0.470) (4.795) (3.728) (3.68)

Ln (Material) 1.060 1.0599 0.901 1.030 1.111 0.818 0.8299 0.874 0.8738

(8.295) (9.12) (12.172) (6.297) (10.346) (4.442) (4.88)

Ln (Fuel) 0.210 0.2104 0.221 -0.011 0.078 0.122 0.1203 0.333 0.3330

(1.034) (1.14) (3.051) (0.958) (2.473) (1.448) (1.59)

Ln(Cost of Capital) -0.135 -0.1345 0.098 0.012 0.011 -0.006 0.0032 0.326 0.3257

(-1.093) (-1.20) (2.769) (0.071) (-0.147) (2.273) (2.50)

Ln (Cost of Labour) -0.098 -0.0980 -0.2000 0.002 -0.194 0.079 0.0621 -0.578 -0.5784

(-0.347) (-0.38) (-2.597) (-0.948) (1.002) (-1.643) (-1.81)

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Table – 5.6 (Contd.)

Sub-segments of Food Sector

Independent Variables /
151 152 153 154 155
Inputs

OLS MLE OLS MLE OLS MLE OLS MLE OLS MLE

σu / σv (=λ) 0.018 1.16 0.0095

√σu2 + σv2 (= σ) 0.0632 0.054

Ln σu2 -13.5472 - -5.8440 -6.6641 -14.2634

Ln σv2 -5.5281 -38.3819 -38.7699 -4.9694

γ (= σu2 / σν2) 2.4506 0.1523 0.1719 2.8702

Log-Likelihood / R2 (F) 0.997 1.000 0.998 1.000 0.996


(1862.13) (12442.24) (3524.81) (14139.05) (1618.27)

Mean TE (%)

Source : Calculated from ASI data on Manufacturing : 1973-2008.


Figures in parantheses are the absolute t values (in OLS) and asymptotic t values (in MLE)

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Table 5.6 contains the Stochastic Frontier Production Function estimation


results for Half-normal model applied to the various Sub-segments of the Food
Processing Industry in India. Estimates of the average contribution of
different input factors to output through the Cobb-Douglas Production
Function using Ordinary Least Squares (OLS) Technique is presented. The
OLS can be interpreted as a measure of average performance of the sample
observations evaluated at the mean input levels. Columns 2,4,6,8 and 10 report
the OLS estimates of the average production function as specified in the model
for time-series data. The estimated parameters of the input variables such as
Materials consumed and Fuel Consumed are positive (column2) in the high-
value segment. In the case of Gross value of output and the other input
variables Cost of Capital and Cost of Labour, the estimated parameters are
negative.

In the Dairy Products Segment (column 4) the estimated parameters of all the
input variables and output variable are positive except for the input variable,
Cost of Labour.

The Grain Mill Products Segment (column6) experiences positive values for
the estimated parameters of the input variables such as Materials Consumed,
Fuel Consumed and cost of Capital. Similar comparison of the Other Food
Products Category (column 8) yields positive value for Gross value of output,
Materials Consumed, Fuel Consumed and Cost of Labour. In the Beverages
Segment (column 10), except Cost of Labour all other variables yield positive
values for the estimated parameters.

The Maximum Likelihood Estimation MLE method provides the estimates of


the stochastic Frontier Production Function. The MIE results are presented in
columns 3,5,7,9 and 11. The coefficients of the input variables are more or less
similar to those estimated by OLS except in few cases.

 
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In the High-value segment the elasticity of materials and fuel are 1.06 and 0.21
respectively. Similarly, few of the elasticity coefficients are positive and others
negative in other Sub-segments of the food processing industry. While few
positive  and  coefficients are observed and are statistically significant at
5% level,  >1 indicates a good fit for the model. The values of u2 and v2
indicate that the differences between the observed (actual) and Frontier
(potential) output are due to chance and not due to inefficiency . It is to be
noted that the estimate of  indicates the ratio of the variance of sector-specific
TE to the total variance of output. A value of  = 1 would indicate that all
deviations are purely due to differences in TE across various Sub-segments of
the Food Processing Industry.

Thus, the results of the Stochastic Frontier Production Function applied to


time-series data of Food Processing Industry yield widely varying results. This
indicates that the disaggregated Sub-segments need to be addressed differently,
according to their sector- specific requirements.

5.3 Study Using Panel Data :

5.3.1 Estimation of Technical Efficiency using Stochastic Frontier


Production Function (Panel Data) :

In this study, we attempt to measure the TE of food processing in various


States / Union Territories in India. We also proceed to identify the determinants
of the TE levels in various States / Union Territories. Such information can be
useful to locate the States with low efficiency and suggest measures to improve
the efficiency of those States.

The computation of Annual Rate of Growth (AGR) and Compound Rate of


Growth (CAGR) of Gross Value of Output, Materials Consumed, Fuel
Consumed, Cost of Capital and Cost of Labour using panel data of States /
UT’s of India for the period 1998 – 2008 is presented in Table 5.7. States such
as Andhra Pradesh, Gujarat, Haryana, Jharkhand, Karnataka, Madhya Pradesh,

 
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Manipur, Meghalaya, Tamilnadu, Tripura, Uttar Pradesh, Uttarakhand and
West Bengal indicate above 10 per cent level CAGR for the variable Gross
value of output. The State of Meghalaya has the highest and Nagaland the
lowest CAGR in terms of Materials consumed. Jammu Kashmir ranks the
highest whereas Nagaland has the lowest in the case of Fuel consumed. With
reference to Cost of Capital, the State of Manipur ranks the highest while Bihar
is the lowest. Both the States of Himachal Pradesh and Meghalaya indicate the
highest level whereas the State of Maharashtra is the lowest in terms of Cost of
Labour High and low levels of deviation is observed in UT’s such as Dadra
and Nagar Haveli. In the case of the State of Nagaland and the Union Territory
of Chandigarh, negative values of AGR and CAGR are observed in the case of
the variables Cost of Capital and Cost of Labour.

Table 5.8 provides the means and standard deviation values of the variables
used in the study. These results indicate that the mean values of all the input
variables such as Materials Consumed, Fuel Consumed, Cost of Capital and
Cost of Labor, in the case of all the States / UT’s considered for the study, are
less than the output variable Gross Value of Output.

 
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Table - 5.7

Annual Rate of Growth & Compound Rate of Growth of Gross Value of Output,
Materials Consumed, Fuel Consumed, Cost of Capital and Cost of Labour,
States / Union Territories of India, 1998-2008.

Gross
Materials Fuel Cost of Cost of
Name of Value
Consumed Consumed Capital Labour
of Output
S. No.

State /
Union

CAGR

CAGR

CAGR

CAGR

CAGR
AGR

AGR

AGR

AGR

AGR
Territory

1 Andaman &
Nicobar 8.1 8.44 15.5 16.77 8.4 8.76 15.7 17.0 16.5 17.94
Island
2 Andhra
11.2 11.85 10.7 11.29 10.3 10.85 7.2 7.47 7.6 7.90
Pradesh
3 Assam 2.3 2.33 2.7 2.74 7.5 7.79 4.7 4.81 4.6 4.71
4 Bihar 5.4 5.55 6.0 6.18 7.9 8.22 1.8 1.82 6.7 6.93
5 Chandigarh 5.5 5.65 6.4 6.61 4.1 4.19 - 0.9 - 0.90 5.9 6.08
6 Chattisgarh 6.3 6.50 5.8 5.97 9.7 10.19 6.2 6.40 7.9 8.22
7 Dadra &
39.6 48.59 39.6 48.59 32.0 37.71 14.5 15.60 26.8 30.73
Nagar Haveli
8 Daman&Diu 13.7 14.68 15.2 16.42 11.2 11.85 8.9 9.31 6.6 6.82
9 Delhi 7.7 8.00 7.3 7.57 8.3 8.65 0.2 0.20 5.1 5.23
10 Goa 8.9 9.31 9.0 9.42 10.7 11.29 6.1 6.29 7.4 7.68
11 Gujarat 12.1 12.86 11.8 12.52 7.7 8.00 3.3 3.36 6.2 6.40
12 Haryana 10.1 10.63 8.6 8.98 10.1 10.63 9.7 10.19 7.7 8.00
13 Himachal
6.7 6.93 5.2 5.34 13.4 14.34 4.5 4.60 12.8 13.66
Pradesh
14 Jammu
7.7 8.00 7.2 7.47 14.1 15.14 8.1 8.44 8.4 8.76
Kashmir
15 Jharkhand 14.2 15.26 13.2 14.11 10.6 11.18 14.3 15.37 8.3 8.65
16 Karnataka 11.5 12.19 10.8 11.40 13.0 13.88 8.2 8.55 7.2 7.47
17 Kerala 5.6 5.76 5.8 5.97 7.0 7.25 4.0 4.08 7.6 7.90
18 Madhya
11.1 11.74 10.3 10.85 9.3 9.75 6.5 6.72 7.9 8.22
Pradesh
19 Maharashtra 6.7 6.93 8.1 8.44 9.1 9.53 3.3 3.36 4.5 4.60
20 Manipur 13.7 14.68 11.8 12.52 19.6 21.65 22.6 25.36 12.7 13.54
21 Meghalaya 15.2 16.42 14.1 15.14 14.3 15.37 21.2 23.61 12.8 13.66
22 Nagaland 1.3 1.31 1.1 1.11 0.3 0.30 - 10.4 - 9.88 - 1.9 - 1.91
23 Orissa 7.4 7.68 6.9 7.14 12.0 12.75 6.4 6.61 8.8 9.20
24 Puducherry 9.5 9.97 9.1 9.53 17.1 18.65 6.1 6.29 8.2 8.55
25 Punjab 7.8 8.11 6.2 6.40 7.8 8.11 4.6 4.71 6.2 6.40
26 Rajasthan 9.1 9.53 8.4 8.76 7.7 8.00 3.0 3.05 7.5 7.79
27 Tamilnadu 9.7 10.19 10.9 11.52 8.9 9.31 4.6 4.71 4.8 4.92
28 Tripura 10.9 11.52 11.1 11.74 7.1 7.36 12.5 13.31 5.9 6.08
29 Uttar
11.8 12.52 12.2 12.98 12.5 13.31 4.9 5.02 5.6 5.76
Pradesh
30 Uttarakhand 10.4 10.96 9.6 10.08 12.2 12.98 9.6 10.08 6.6 6.82
31 West
10.6 11.18 10.6 11.18 8.9 9.31 9.8 10.30 5.5 5.65
Bengal
Source : Calculated from ASI data on Manufacturing : 1998-2008.

 
168
 
Table - 5.8
Descriptive Statistics – Mean and Standard Deviation Values of Gross Value of Output,
Materials Consumed, Fuel Consumed, Cost of Capital and Cost of Labour, States / Union
Territories of India, 1998-2008
S. Name of State / Ln Gross Value Ln Materials Ln Fuel Ln Cost Ln Cost
No. Union Territory of Output Consumed Consumed of Capital of Labour
1 Andaman & 6.2162 5.6825 2.9415 4.6313 3.9207
Nicobar Island (0.29923) (0.54056) (0.32439) (0.48929) (0.54170)
2 Andhra Pradesh 14.6746 14.3870 11.0614 11.5166 10.8422
(0.37169) (0.36850) (0.32340) (0.23804) (0.24401)
3 Assam 12.9279 12.5218 10.4515 9.9841 9.4879
(0.12642) (0.11875) (0.23720) (0.15865) (0.15010)
4 Bihar 11.8575 11.5544 8.3001 9.1085 8.5562
(0.21808) (0.24164) (0.25700) (0.19196) (0.23685)
5 Chandigarh 9.7589 9.3852 6.1765 6.6004 6.0411
(0.24216) (0.30376) (0.22156) (0.14426) (0.30419)
6 Chattisgarh 12.3010 11.8690 8.8996 8.9158 8.1171
(0.32462) (0.30919) (0.35711) (0.38144) (0.28556)
7 Dadra & Nagar 9.5485 8.9260 4.7797 5.9926 5.0077
Haveli (1.71429) (1.73981) (1.18869) (0.99733) (1.23913)
8 Daman & Diu 9.5731 9.0011 6.4535 6.8995 5.8254
(0.52964) (0.59390) (0.45978) (0.60690) (0.23129)
9 Delhi 12.7215 12.3147 8.9430 8.8575 8.5778
(0.24560) (0.23672) (0.28909) (0.16256) (0.19570)
10 Goa 11.3158 10.6971 7.7857 8.3194 7.8091
(0.28767) (0.28068) (0.34515) (0.24057) (0.25086)
11 Gujarat 14.4219 14.1529 10.7956 11.0002 10.2431
(0.39260) (0.37952) (0.24591) (0.14156) (0.20782)
12 Haryana 13.3648 12.9656 9.8872 10.4241 9.5416
(0.35982) (0.32046) (0.32472) (0.31394) (0.24451)
13 Himachal
Pradesh
11.1529
(0.23278)
10.7471
(0.22912)
7.8720
(0.43999)
8.4207
(0.30239)
7.4442
(0.44761)
14 Jammu Kashmir 11.0365 10.8392 7.2014 7.8255 7.0975
(0.34380) (0.33742) (0.44750) (0.25605) (0.30366)
15 Jharkhand 10.5123 10.1532 7.0721 7.4482 6.3459
(0.53571) (0.56629) (0.42088) (0.53636) (0.29959)
16 Karnataka 13.8799 13.4677 10.5417 11.2918 10.3817
(0.36575) (0.35057) (0.40407) (0.26822) (0.23410)
17 Kerala 13.3931 13.0773 9.5677 10.0352 10.2637
(0.19414) (0.20449) (0.23503) (0.16256) (0.26059)
18 Madhya Pradesh 14.0494 13.5809 10.3166 10.4951 9.1315
(0.37160) (0.35711) (0.32660) (0.27712) (0.26992)
19 Maharashtra 14.9824 14.5837 11.2555 12.2816 11.3098
(0.23558) (0.27357) (0.28838) (0.19695) (0.17353)
20 Manipur 7.2968 7.1038 2.7575 3.5665 3.0817
(0.50635) (0.45858) (0.61782) (0.83101) (0.50131)
21 Meghalaya 8.3770 8.1236 4.6446 5.2612 4.6567
(0.49091) (0.48436) (0.46775) (0.84218) (0.45059)
22 Nagaland 8.0346 7.8696 4.4171 4.8001 3.9018
(0.09215) (0.09201) (0.13082) (0.41778) (0.13218)
23 Orissa 12.2099 11.9881 8.5732 9.2044 8.2925
(0.28201) (0.30193) (0.37573) (0.23414) (0.27341)
24 Puducherry 11.1744 10.8340 6.9617 7.8592 7.3454
(0.31424) (0.30468) (0.53463) (0.27594) (0.26655)
25 Punjab 13.9245 13.5051 10.6349 10.7552 10.2503
(0.31211) (0.26083) (0.27195) (0.21421) (0.19773)
26 Rajasthan 13.2940 13.0125 9.8445 9.7009 9.0161
(0.28593) (0.26983) (0.24958) (0.15100) (0.23885)
27 Tamilnadu 14.2229 13.8552 10.8667 11.3309 10.6636
(0.33327) (0.37321) (0.28438) (0.17609) (0.17142)
28 Tripura 8.9995 8.5780 6.1334 5.9433 5.3250
(0.33659) (0.34524) (0.25367) (0.41913) (0.21701)
29 Uttar Pradesh 14.6099 14.3392 11.1539 11.8786 11.0258
(0.36971) (0.37930) (0.39511) (0.19496) (0.18639)
30 Uttarakhand 12.1467 11.8935 8.4339 9.3440 8.7840
(0.33918) (0.32404) (0.45649) (0.32994) (0.44453)
31 West Bengal 13.3569 13.0590 10.3517 10.2111 9.7836
(0.33612) (0.33674) (0.27019) (0.30252) (0.17286)
Source : Calculated from ASI data on Manufacturing : 1998-2008.

 
169
 
In order to measure TE of Food Processing Industry in various States / UT’s
using panel data a parametric study is made using Stochastic Frontier
Production Function model.

Model Specification (Panel data) :

In order to measure TE of Food Processing Industry in various States / UT’s


using panel data a States / UT’s using panel data a parametric study is made
using. Stochastic Frontier Production Function Model.

The following Cobb-Douglas varying coefficients frontier production function


model has been employed in the empirical estimation of panel data :

ln Yit = βoit + β1it ln (M) + β2it ln (F) + β3it ln (C) + β4it ln (L) + Vit - Uit

where :

ln Yit denotes Natural Logarithm of Gross value of Output in State i in period t


in India.

βot constant

βjit‘s unknown parameters to be estimated (input specific response


coefficients, j=1,2,3 and 4).

M Expenditure on Materials

F Expenditure on Fuel

C Cost of Capital

L Cost of Labour

Vit symmetric component of the error term

Uit non-negative random variable which is under the control of the DMU

i = 1,2,3,…………….,31 (State / Union Territory)

t = 1998,1999,………….2008 (time period)

 
170
 
In the model used for panel data on States / Union Territories of India for the
period from 1998-2008, Gross value of output is used as the output variable
and variable inputs such as Material consumed, Fuel consumed, Cost of capital
and Cost of labor are used as input variables. The results of the estimation of
the Stochastic Frontier Production Function model pertaining to panel data is
presented in Table 5.9.

Table 5.9 contains the production function estimation results. Estimates of the
average contribution of different input factors to output through the Cobb-
Douglas production function using Ordinary Least Squares (OLS) Technique is
presented. The OLS can be interpreted as a measure of average performance of
the sample observations evaluated at the mean input levels. The second column
reports the OLS estimates of the average production function as specified in the
model for panel data. The estimated parameters of all the input variables are
positive. It is notable that all of them are significant at 5 per cent level. The
input variable Cost of labour is insignificant.

The Maximum Likelihood Estimation (MLE) method can provide the estimates
of the stochastic frontier production equation. The MLE results are presented in
the third column. The coefficients on the input variables are more or less
similar to those estimated by OLS, except for the input variable Cost of
Labour. The elasticity of material, fuel and capital are 0.84, 0.05 and 0.09
respectively.

Both λ and σ have positive coefficients and are statistically significant at 5 per
cent level. It is observed that λ > 1 indicates a good fit for the model. The
estimated values of σu2 and σν2 are 0.011 and 0.010 respectively. These values
indicate that the differences between the observed (actual) and frontier
(potential) output are due to chance and not due to inefficiency. The estimate of
γ (the ratio of the variance of State specific TE to the total variance of output)
is 0.5, indicating that 50 per cent of the difference between the observed and

 
171
 
frontier output are primarily due to factors which are under the control of the
industry in States / Union Territories. It is to be noted that a value of one would
indicate that all deviations are purely due to differences in TE across States /
Union Territories.

The results indicate that what specifically contributes to TE in the States / UT’s
depends on various characteristics such as availability of sufficient raw
materials, adequate and appropriate infrastructure, role of the Government, and
so on.

 
172
 
Table - 5.9

Estimates of Stochastic Frontier Production Function


(Panel Data : 1998-2008)

Independent Variables / Inputs OLS MLE


Constant 0.8368 1.3782
(12.25) (1.39)

Ln (Material) 0.8487 0.8109


(49.41) (38.84)

Ln (Fuel) 0.0542 0.0425


(2.92) (1.83)

Ln(Cost of Capital) 0.0928 0.0553


(3.95) (2.36)

Ln (Cost of Labour) 0.0001 0.0961


(0.00) (3.21)

σu / σν (=λ) - 1.06

√σu2 + σν2 (= σ) 0.15

σu2 - 0.0113

σν2 - 0.0101

γ (= σu2 / σν2) - 0.5271

Log-Likelihood / R2 (F) 0.9965 233.3811


(21458.15)
Mean TE (%) 74.00
Source : Calculated from ASI data on Manufacturing : 1998-2008.

Figures in parentheses are the absolute t values (in OLS) and asymptotic
t values (MLE).

 
173
 
State-wise values of technical efficiencies is presented in Table 5.10 for the ten
year period from 1997-1998 to 2007-2008. In the last column of the Table 5.10
the State-wise mean values of technical efficiencies is also presented. It is
noted that the technical efficiency of all the States / Union Territories showed
an increasing trend during the ten year period from 1997-1998 to 2007-2008.
An assessment of the TE values of the various States / UT’s horizontally over
time from Table 5.10 also indicates that Andhra Pradesh, Assam, Chattisgarh,
Delhi, Gujarat, Haryana, Karnataka, Kerala, Madhya Pradesh, Maharashtra,
Punjab, Rajasthan, Tamilnadu, Uttar Pradesh and West Bengal have an
increasing trend which is above the all India level of 74 per cent. These amount
to almost 50 per cent of the States / UT’s considered for this study.

It is also observed that the mean technical efficiency for the States / Union
Territories for the period from 1997-1998 to 2007-2008 is roughly 74 per cent,
which means that the States / Union Territories on an average, could increase
their output by 26 per cent without additional resources, through more efficient
use of existing inputs and technology. In other words, on an average, roughly
26 per cent of technical potential of States / Union Territories was not realized
during 1998 – 2008, so as to contribute to the growth of the food processing
industry in India. Wide variation in the mean TE is observed among States /
Union Territories. Across the entire States / Union Territories, mean TE ranges
from a low value of 39 per cent (Andaman & Nicobar Island) to 94 per cent
(Maharashtra). The number of States / Union Territories whose mean technical
efficiencies are above the All India level are 18 out of a total of 31 (roughly 51
per cent).

It is also noted that the TEs of the States / Union Territories at all India level
steadily increase over the study period from 1997-1998 to 2007-2008 showing
an increasing trend from 71 to 77 per cent.

 
174
 
Table - 5.10

Trends in Technical Efficiencies by States / Union Territories


(1998 – 2008)

Name of
S. No.

Mean
1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

TE
State / Union
Territory
Andaman &
1 Nicobar 0.38 0.38 0.36 0.38 0.39 0.41 0.39 0.39 0.41 0.42 39
Island
Andhra
2 0.89 0.90 0.89 0.90 0.94 0.92 0.93 0.93 0.95 0.95 92
Pradesh
3 Assam 0.81 0.81 0.81 0.80 0.80 0.81 0.81 0.82 0.82 0.82 81
4 Bihar 0.74 0.72 0.74 0.75 0.74 0.74 0.73 0.75 0.76 0.76 74
5 Chandigarh 0.60 0.60 0.59 0.59 0.62 0.62 0.61 0.63 0.63 0.62 61
6 Chattisgarh 0.78 0.76 0.75 0.77 0.76 0.77 0.80 0.76 0.78 0.82 77
Dadra &
7 0.32 0.52 0.64 0.64 0.64 0.63 0.63 0.66 0.66 0.66 60
Nagar Haveli
8 Daman & Diu 0.60 0.58 0.56 0.56 0.57 0.63 0.61 0.62 0.63 0.66 60
9 Delhi 0.78 0.78 0.79 0.80 0.79 0.80 0.80 0.81 0.81 0.83 80
10 Goa 0.69 0.69 0.70 0.70 0.71 0.71 0.71 0.72 0.73 0.74 71
11 Gujarat 0.88 0.89 0.88 0.88 0.90 0.90 0.93 0.92 0.94 0.94 91
12 Haryana 0.81 0.84 0.82 0.82 0.83 0.84 0.84 0.85 0.86 0.89 84
Himachal
13 0.69 0.69 0.70 0.69 0.69 0.70 0.70 0.71 0.71 0.73 70
Pradesh
Jammu
14 0.69 0.69 0.67 0.67 0.68 0.68 0.68 0.71 0.73 0.73 69
Kashmir
15 Jharkhand 0.65 0.63 0.62 0.65 0.64 0.65 0.65 0.69 0.68 0.74 66
16 Karnataka 0.85 0.85 0.85 0.86 0.86 0.87 0.88 0.90 0.90 0.90 87
17 Kerala 0.83 0.83 0.84 0.83 0.83 0.84 0.84 0.86 0.85 0.86 84
Madhya
18 0.85 0.87 0.86 0.88 0.87 0.89 0.89 0.88 0.91 0.93 88
Pradesh
19 Maharashtra 0.92 0.93 0.94 0.93 0.94 0.93 0.93 0.95 0.96 0.97 94
20 Manipur 0.41 0.43 0.46 0.44 0.45 0.43 0.49 0.50 0.46 0.51 46
21 Meghalaya 0.48 0.48 0.51 0.51 0.54 0.54 0.55 0.55 0.55 0.56 53
22 Nagaland 0.50 0.51 0.50 0.50 0.50 0.50 0.50 0.51 0.51 0.51 50
23 Orissa 0.73 0.74 0.76 0.78 0.77 0.77 0.77 0.79 0.79 0.77 77
24 Puducherry 0.67 0.68 0.69 0.68 0.69 0.71 0.72 0.73 0.71 0.72 70
25 Punjab 0.87 0.87 0.86 0.86 0.86 0.87 0.88 0.87 0.90 0.92 87
26 Rajasthan 0.81 0.82 0.82 0.82 0.84 0.84 0.84 0.86 0.86 0.86 83
27 Tamilnadu 0.87 0.88 0.88 0.88 0.88 0.89 0.89 0.90 0.92 0.94 89
28 Tripura 0.54 0.54 0.55 0.55 0.56 0.57 0.57 0.58 0.59 0.60 57
29 Uttar Pradesh 0.89 0.90 0.90 0.90 0.91 0.92 0.92 0.93 0.94 0.96 92
30 Uttarakhand 0.75 0.73 0.74 0.75 0.76 0.77 0.78 0.77 0.78 0.80 76
31 West Bengal 0.82 0.82 0.82 0.82 0.83 0.83 0.85 0.85 0.86 0.88 84
32 All India 0.71 0.72 0.73 0.73 0.74 0.74 0.75 0.75 0.76 0.77 74
Source : Calculated from ASI data on Manufacturing : 1998-2008.

 
175
 

Table 5.11 shows the distribution of States / Union Territories by their mean
technical efficiencies. Here, the States / Union Territories are grouped by their
mean technical efficiency levels. It is observed that 24 out of the 31 States /
Union Territories (77 per cent) are above the level of 60 per cent of TE. The
most efficient States are Andhra Pradesh, Gujarat, Maharashtra and Uttar
Pradesh whose mean TE level exceeds 90 per cent, which may be attributed to
the performance of the Dairy sector in the State. It is noted that the
manufacturing of milk products is high in these milk surplus States. The role of
the Government in promoting Food-Streets in States with cities of tourist
attraction is also reflected in the high mean TE level of the most efficient States
such as Andhra Pradesh, Gujarat, Maharashtra and Uttar Pradesh. Other States /
Union Territories such as Karnataka, Kerala, Punjab, Rajasthan, Tamilnadu and
Delhi may also be listed next in the above category.

Table - 5.11

Distribution of States / Union Territories by Mean Technical Efficiencies


(1998 – 2008)

Technical
Number of States /
Name of States / Union Territories Efficiency
Union Territories
(TE)
Andaman & Nicobar Island, Dadra &
Nagar Haveli, Daman & Diu, Manipur, 7 < or = 60 %
Meghalaya, Nagaland and Tripura.
Chandigarh, Jammu Kashmir, Jharkhand
4 61 – 70 %
and Puducherry
Bihar, Chattisgarh, Delhi, Goa, Himachal
7 71 – 80 %
Pradesh, Orissa and Uttarakhand.
Assam, Haryana, Karnataka, Kerala,
Madhya Pradesh, Punjab, Rajasthan, 9 81 – 90 %
Tamilnadu and West Bengal.
Andhra Pradesh, Gujarat, Maharashtra
4 91 – 100 %
and Uttar Pradesh.
Source : Calculated from ASI data on Manufacturing : 1998-2008.

 
176
 

It is also notable that the seven States / Union Territories identified below or
equal to 60 per cent of technical efficiency comprise all industrial units
belonging to the five less industrially developed States / Union Territories such
as Andaman & Nicobar Islands, Manipur, Meghalaya, Nagaland and Tripura.

Fig.5.2 Distribution of States / Union Territories by Mean Technical


Efficiencies (1998-2008)

Distribution of STATEs/ UTs my Mean Technical Efficiencies

<60
61-70
71-80
81-90
91-100

Source : Calculated from ASI data on manufacturing : 1998-2008.

 
177
 

5.3.2 Estimation of Technical Efficiency Using Malmquist Productivity


Index – Data Envelopment Analysis (DEA) :

The Data Envelopment Analysis (DEA) is a special mathematical linear


programming model and test to assess efficiency and productivity. The DEA
allows the use of panel data to estimate changes in Total Factor Productivity.
The output-oriented approach of DEA-Malmquist was adopted to put greater
weight on the expansion of output from a given amount of inputs. Total Factor
Productivity (TFP) index is thus a ratio of the weighted aggregate output to
weighted aggregate input.

TFP growth measures how much productivity grows or declines over time.
When there are more outputs relative to the quantity of given inputs, then TFP
has grown or increased. TFP can grow when there is improvement in
innovations such as product design, and this is referred to technical change
(TECHCH). TFP can also grow when the existing technology and economic
inputs are utilized more efficiently. This subsequently will lead to higher
production and is referred to technical efficiency change (EFFCH).

For estimating the TFP change in the Indian food processing industry, the
Malmquist Productivity Index is calculated for panel data of States / Union
Territories for the period from 1998-2008. The TFP change is comprised of the
product of the Technical Efficiency Change (EFFCH) and the Technical
Change (TECHCH). The Efficiency Change (EFFCH) which is the catch-up
effect is a ratio of two distance functions which measures the change in the
output-oriented measure of technical efficiency between period t and t+1. The
Technical Change (TECHCH) or frontier shift (innovation) effect is taken into
account in order to fully evaluate the productivity change since the catch-up
effect is determined by the efficiencies being measured by the distances from
the respective frontiers.

 
178
 
The catch-up effect is comprised of pure and scale efficiency changes. Pure
efficiency change (PECH) represents core efficiency due to improved
operations and management while scale efficiency change (SECH) is
associated with returns to scale effects. On the one hand, the pure efficiency
change is relative to the variable returns to scale (VRS) frontier. On the other
hand, the scale efficiency change is the geometric mean of two scale efficiency
measures, the first relative to the period t+1 technology and the second is
relative to period t technology.

The frontier-shift effect greater than one indicates progress in the frontier
technology around the DMU from period t to t+1, whereas an effect equal to
one and less than one indicate the status quo and regress in the frontier
technology, respectively.

From Table 5.12 it is observed that EFFCH (column 3) is greater than one for
Dadra and Nagar Haveli, indicating progress in the relative efficiency from
period t to t+1, whereas it is exactly equal to one for Haryana and Madhya
Pradesh, denoting no change in the relative efficiency. In the case of all the
other States / Union Territories the EFFCH is less than one which shows
regress in efficiency. The EFFCH or the catch-up effect is further decomposed
into its pure efficiency change (PECH) and scale efficiency change (SECH)
components. The PECH is relative to the variable returns to scale (VRS)
frontier, whereas the SECH component is actually the geometric mean of two
scale efficiency measures where the first is relative to the period t+1
technology and the second is relative to period t technology.

It is to be noted that a higher level of EFFCH is more desirable than a higher


level of TECHCH since, an increase in TECHCH would mean an increase in
additional cost of production.

 
179
 
Results of column 4 indicate that except the Union Territory of Goa showing
regress in frontier technology all other States / Union Territories have shown
frontier-shift effect (TECHCH) greater than one for the period from 1998-2008
indicating progress in the frontier technology.

It is observed that the highest frontier-shift effect is recorded at 5.6 per cent in
the State of Jammu Kashmir which indicates progress in the State and also it is
much above the all India level of 2.1 per cent for the study period. This hilly
State has a conducive environment in terms of innovation effect. The other
States indicating progress in the frontier technology are the States of Gujarat,
Jharkhand, Kerala, Madhya Pradesh, Manipur, Meghalaya, Orissa and
Rajasthan and the Union / Territories of Chandigarh, Chattisgarh, Dadra &
Nagar Haveli and Puducherry which are also above the all India level. The
State of Andhra Pradesh is equal to the all India level at 2.1 per cent which also
shows progress. States below the all India level such as Assam, Bihar, Haryana,
Himachal Pradesh, Karnataka, Maharashtra, Nagaland, Punjab, Tamilnadu,
Tripura, Uttar Pradesh, Uttarakhand and West Bengal and the Union Territories
of Andaman & Nicobar Island, Daman & Diu and Delhi also indicate progress
but below the 2.1 per cent level. It is noted that the Union Territory of Goa
showed frontier-shift effect less than one indicating regress in the frontier
technology.

In terms of the TFP index for the study period, which indicates the productivity
of the States from period t to t+1 there is an increase at all India level at 0.30
per cent which is still very low. Whereas Andhra Pradesh and Daman & Diu
remain status quo at a TFP level equal to one, indicating no productivity
change, Chandigarh, Chattisgarh, Dadra & Nagar Haveli, Delhi, Gujarat,
Haryana, Jammu Kashmir, Jharkhand, Madhya Pradesh, Manipur, Meghalaya,

 
180
 
Table - 5.12

Malmquist Index Summary of Means of States / Union Territories


(1998 – 2008)

Name of State / Pure Scale


S. TFP Technical Efficiency
Union Efficiency Efficiency
No. Change change Change
Territory Change Change
Andaman &
1 0.943 1.001 0.942 1.000 0.942
Nicobar Island
2 Andhra Pradesh 1.000 1.021 0.979 1.009 0.971
3 Assam 0.988 1.008 0.980 0.983 0.996
4 Bihar 0.985 1.010 0.975 0.990 0.985
5 Chandigarh 1.009 1.023 0.986 0.986 1.000
6 Chattisgarh 1.006 1.029 0.978 0.998 0.981
Dadra & Nagar
7 1.084 1.039 1.044 1.000 1.044
Haveli
8 Daman & Diu 1.000 1.011 0.990 0.990 0.999
9 Delhi 1.014 1.016 0.998 1.000 0.998
10 Goa 0.992 0.999 0.994 1.000 0.994
11 Gujarat 1.001 1.024 0.978 1.000 0.978
12 Haryana 1.015 1.016 1.000 1.010 0.989
13 Himachal Pradesh 0.993 1.011 0.983 0.990 0.993
14 Jammu Kashmir 1.004 1.056 0.950 0.975 0.975
15 Jharkhand 1.024 1.026 0.998 1.008 0.990
16 Karnataka 0.998 1.004 0.994 0.993 1.001
17 Kerala 0.998 1.029 0.969 1.000 0.969
18 Madhya Pradesh 1.028 1.028 1.000 1.000 1.000
19 Maharashtra 0.980 1.016 0.965 1.000 0.965
20 Manipur 1.046 1.049 0.997 1.000 0.997
21 Meghalaya 1.020 1.028 0.992 1.000 0.992
22 Nagaland 1.002 1.020 0.982 1.028 0.955
23 Orissa 1.019 1.031 0.988 0.999 0.989
24 Puducherry 0.974 1.030 0.946 0.971 0.974
25 Punjab 1.012 1.015 0.996 1.000 0.996
26 Rajasthan 0.996 1.037 0.960 0.986 0.974
27 Tamilnadu 0.984 1.009 0.975 0.996 0.979
28 Tripura 0.985 1.013 0.972 0.971 1.002
29 Uttar Pradesh 0.993 1.013 0.980 1.013 0.968
30 Uttarakhand 1.017 1.019 0.998 1.022 0.977
31 West Bengal 0.996 1.017 0.979 0.986 0.993
32 All India 1.003 1.021 0.983 0.997 0.986
Source : Calculated from ASI data on Manufacturing : 1998-2008.

 
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Nagaland, Orissa, Punjab and Uttarakhand show TFP level greater than one
indicating productivity growth or progress. Of these States / Union Territories
mentioned above, except Gujarat and Nagaland all others show TFP above the
all India level. Andaman & Nicobar Island, Assam, Bihar, Goa, Himachal
Pradesh, Karnataka, Kerala, Maharashtra, Puducherry, Rajasthan, Tamilnadu,
Tripura, Uttar Pradesh and West Bengal are below the all India level and show
a TFP level below one indicating decay in factor productivity.

Since the catch-up effect measures the change in the output-oriented measure
of technical efficiency as against the frontier-shift or innovation effect, it is
more desirable an indicator of productivity change. This is because innovation
in the production process would mean increase in the cost of production. Thus
the contribution to an overall TFP growth of 0.30 per cent at all India level for
the period from 1998-2008 is attributed to the effect of progress in frontier-shift
and the parallel effect of regress in efficiency. This clearly highlights the
challenge in the realization of potential through efficient use of resources in the
food processing industry in India.

The results indicate that efficiency scores of most of the states / Union
territories were considerably low. This implies that there is significant scope to
increase efficiency levels in food processing industry in India.

Table 5.13 shows the Malmquist index summary of Annual Means for the
panel data on food processing industry in India pertaining to the period from
1998-2008. It shows the productivity scores for the period from 1998-2008, in
other words, the evolution of the Malmquist TFP Index, as well as its technical
efficiency change and technological change components. Results indicate that
the Malmquist Total factor productivity index for the 10 year period improved
with an annual average growth of 0.3 per cent (geometric mean). This positive
change can be dichotomized into its catch-up and frontier-shift components.

 
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The catch-up or recovery component (efficiency change) registered 0.983
between 1998 and 2008, or below 1.00 indicating regress or negative efficiency
change. The average technical efficiency change, is negative at 1.7 per cent per
year. On a year-by-year score, efficiency change registered above the 1.00
mark only for the 1999-2000, 2005-2006 and 2007-2008 time periods, or three-
year horizon.

The catch-up effect is comprised of pure and scale efficiency changes. Pure
efficiency change represents core efficiency due to improved operations and
management while scale efficiency change is associated with returns to scale
effects. Both elements registered below 1.00 on average for the 10 year period
indicating regress in terms of operations and management, and negative scale
economies effects.

Table - 5.13
Malmquist Index Summary of Annual Means, (1998 – 2008)

TFP Technical Efficiency Pure Scale


Change Change Change Efficiency Efficiency
Year (TECHCH) (EFFCH) Change Change
(PECH) (SECH)
(1)=(2)×(3) (2) (3)=(4)×(5) (4) (5)
1999 1.034 1.014 1.020 0.990 1.031
2000 0.991 1.041 0.952 0.990 0.962
2001 0.989 1.024 0.966 0.980 0.986
2002 1.003 1.012 0.991 1.008 0.983
2003 1.013 1.030 0.983 1.007 0.976
2004 1.008 1.019 0.989 0.966 1.024
2005 0.967 0.924 1.047 1.048 0.999
2006 1.001 1.212 0.826 0.932 0.886
2007 1.025 0.938 1.093 1.056 1.035
Mean 1.003 1.021 0.983 0.997 0.986
Source : Calculated from ASI data on Manufacturing : 1998-2008.

 
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The frontier-shift effect is defined by the geometric mean of two components
evaluated as the ratio of efficiency with respect to two time periods.
Technological change or frontier-shift represents the innovation in the food
processing sector that has been developed, adapted or absorbed by the
processors. Technological change is 2.10 per cent per year, a level above 1.00,
which indicates that the technological best practice had improved between
1998 and 2008. The average productivity growth (MI) of 0.3 per cent annually
is mainly due to the frontier shift or technological change brought about by
innovations which occurred in that period, most notably the 21.2 per cent
improvement in technological change in the year 2006-2007. It is interesting to
note that an increase in technical efficiency is desirable rather than an increase
in technological change. This is mainly because an increase in technological
change would imply additional cost of production. Thus, a higher contribution
from efficiency change is desirable.

It is also observed that the TFP growth is positive still very low, that is at 0.3
per cent. However, a mixed trend is observed in overall technical, scale and
pure technical efficiencies.

Fig.5.3 Malmquist Index Summary of Annual Means, (1998 – 2008)


1.4

1.2

0.8

0.6

0.4

0.2

0
1999 2000 2001 2002 2003 2004 2005 2006 2007

TFP change Technical change (TECHCH) Efficiency change (EFFCH)


 
Source : Calculated from ASI data on Manufacturing : 1998-2008

 
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The performance of the Indian food processing industry is measured in terms of
technical and scale efficiency as is shown in Table 5.14. The technical
efficiency is the product of its scale efficiency and pure technical efficiency
estimated under the assumption of constant returns to scale. The values of
efficiency indices equal to unity implies that the industry is on the best-practice
frontier, while values below unity show that the industry is below the frontier
or technically inefficient.

Table - 5.14

Average Technical and Scale Efficiency in Indian Food Processing


Industry for States / Union Territories, (1998 – 2008)

CRSTE
YEAR VRSTE
t-1 t t+1
1998 0.000 0.892 0.912 0.945
1999 0.986 0.908 0.923 0.935
2000 0.974 0.865 0.862 0.925
2001 0.874 0.838 0.848 0.909
2002 0.852 0.830 0.823 0.915
2003 0.874 0.815 0.813 0.922
2004 0.832 0.807 0.920 0.892
2005 0.798 0.846 0.722 0.932
2006 0.869 0.707 0.757 0.877
2007 0.727 0.768 0.000 0.919

Source : Calculated from ASI data on Manufacturing : 1998-2008

Analysis of this study shows that the highest average technical efficiency score
is estimated during the year 1999 at 0.908 under the CRS model and during the
year 1998 at 0.945 under the VRS model.

It is to be noted that despite the level of aggregation of data, the approach


adopted in the study provides important complementary information to

 
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traditional approaches to productivity measurement. It also provides a natural
way to measure the phenomenon of catching up. The technical change
component of productivity growth captures shifts in the frontier of technology,
providing a natural measure of innovation. This decomposition of total factor
productivity growth into catching up and technical change is therefore useful in
distinguishing diffusion of technology and innovation, respectively.

The next chapter on findings and conclusions, gives a consolidated account of


the entire study, highlighting the important findings of the study and listing out
conclusions and suggestions for policy-making.