Manufacturing productivity in India: The role of foreign sourcing of inputs and domestic capacity building

Economic reforms initiated in India since the 1990s have not led to a strongly performing manufacturing sector yet. The recent “Make-in-India” program aims to transform the manufacturing sector by increasing participation in global value chains (GVCs) and building domestic capacity. Using the India KLEMS data set for the period 1993 to 2015, this chapter documents the trends in total factor productivity (TFP) in the manufacturing sector in postreform India. Moreover, we examine the role of GVC participation and the changes in capital stock composition towards equipment investment in driving TFP growth. We find that manufacturing TFP growth improved in the postreform period, but with a significant lag—TFP growth accelerated during 2003–15 compared to 1993–2002. Econometric analysis reveals that increases in foreign value-added content in domestic production, in particular, backward linkages in GVCs with advanced economies, have helped manufacturing sector improve its TFP performance. We also find that a shift toward more equipment investment and increases in information and communication technology intensity has enhanced productivity growth.