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  • Industrial Sickness in Indian Manufacturing

    Doctoral Dissertation

    Department of Economics

    Ruprecht-Karls Universitt


    Rahel Falk

    Vienna, August 17, 2005

  • i

    Widmung und Danksagung

    Diese Arbeit ist meinen Eltern gewidmet.

    Meinem Vater, weil er sich seit dem ersten Schulzeugnis fr meine akademischen Leistungen interessiert und meiner Mutter, die diese zugunsten tausend wichtigerer Dinge im Leben in aller Regel ignoriert. Aus dem einen kommt der Ansporn, aus den anderen die Kraft.

    ber die Autorin Hausi Mams-Harel lebt in Wien in einer fast echten Ritterburg und ist heute 2 Jahre lter als die Schuhgre ihrer Tochter Noomi. Ihr Sohn Jossi begann sein Leben auf ihrem Scho liegend am Schreibtisch. Wenn er mal gro ist, will er aber was Richtiges werden: Panzer-Polizist. Ihr Mann Martin ist gut aussehend, kann inzwischen kochen und macht sie mit seiner leichten Lebensart meistens sehr glcklich. Euch Dreien gilt mein tiefster Dank.

  • ii


    I would like to express my gratitude to the following people for their support and

    assistance in writing this thesis:

    To the staff and the students of the Indira Gandhi Insitute at Mumbai for providing

    advice and hospitality when I came to compile my first data set; to Evelin Hust for

    walking over to the CMIEs headquarter in Delhi with enough cash in her purse to get

    me an update of the data two years later; to my former colleagues at the South Asia

    Institute in Heidelberg for making this place such a hospitable environment; to Ansgar

    Wohlschlegel for lively discussions on the merits of lemma economics; to my current

    colleagues at WIFO for valuable suggestions on how to deal with numerous problems in

    empirical research; to Elisabeth Neppl-Oswald for providing diligent and efficient help

    with the layout of around 70 tables.

    I wish to thank Bertrand Koebel for joining the doctoral committee last-minute and Clive

    Bell for not declining to supervise my thesis when I told him on the second day that my

    research plans were different from the ones that he suggested. The disagreements

    between applied microeconomic theory and applied micro-econometrics can be

    deep and the disagreements between a distinguished scholar and an academic

    entrant can be deep, too. In this context I thank Stefan Klonner and Ansgar for

    occasional advice on how to deal with the boss. And I thank the boss for carefully

    reading this study, including the footnotes, and for providing very instructive comments.

    After I had thought them over, I was often amazed that you were right again.

  • iii

    Industrial Sickness in Indian Manufacturing i Acknowledgements ii 1 Introduction 1 1.1 Motivation 4 1.2 Previous Research 6 1.3 The Contribution of the Thesis 8 1.4 The Firm-Level Dataset 13

    1.4.1 Sampling Design, Reliability and Content 13 1.4.2 Basic Features of the Sample 16

    1.5 Appendix to chapter 1 25 2 The Policy Background 26 2.1 Industrial Licensing 26 2.2 Promotion of Priority Sectors: Small-Scale and Backward Industries 28 2.3 Foreign Trade and Foreign Collaboration 30

    Evidence on the Effects of Trade Liberalization 33 2.3.1 FDI Provisions 34

    2.4 Labor Market Rigidities 35 2.5 Development Finance Institutions 37 2.6 The Sick Industrial Companies (Special Provisions) Act, 1985 (SICA) 40

    2.6.1 Timing and Sequencing under SICA 40 2.6.2 Provisions for Weak Companies 43 2.6.3 Malfeasance Provisions 43

    2.7 Summary and Conclusion 44 2.8 Appendix to chapter 2 45 3 Concepts, Dimensions and Characteristics of Industrial Sickness 46 3.1 Alternative Concepts of Sickness and their Suitability for Applied Work 47

    3.1.1 Problems with the SICA Definition 47 3.1.2 Alternative Definitions of Sickness 48

    3.2 Dimension of Sickness 54 3.3 Characteristics of Distress 62

    3.3.1 Profitability 63 3.3.2 Single Factor Productivity Measures 63 3.3.3 Measures of Financial Distress 65

    3.4 Summary and Conclusion 67 3.5 Appendix to Chapter 3 68

  • iv

    4 Manufacturing Productivity and Efficiency in the 1990s 79 4.1 Review of the Empirical Literature 80 4.2 The Growth Accounting Approach to Productivity Measurement 81

    4.2.1 Growth Accounting: Results 84 4.2.2 Limitations of Growth Accounting 85

    4.3 Econometric Approaches to Productivity and Productive Efficiency 86 4.3.1 Inference from the Error Component Model 87 4.3.2 Inference from the Covariance Model 89 4.3.3 Results 91 4.3.4 Has Firm Performance Become More Heterogenous within the

    1990s? 94 4.4 Conclusion 97 4.5 Appendix to chapter 4 98 5 Impact of the New Economic Policy Reforms on Sickness 100 5.1 Pre-Reform Distress, Pre-Reform Relief and Past-Reform Health Status 101

    5.1.1 Measures of Budget Softness at the Firm Level 102 5.1.2 Econometric Model and Issues 105 Marginal Effects of Continuous Covariates and their Standard Errors 108 Marginal Effects of Discrete Covariates and their Standard Errors 109

    5.1.3 Empirical Specification and Hypotheses 110 5.1.4 The Results 112

    5.2 Links Between Market Structure, Efficiency and Re-Emerging Sickness 116 5.2.1 A Quick Inquiry into the Determinants of Efficiency 117 5.2.2 Why do at-Risk Firms Ultimately Fall Sick or Sick Ones Recover? 120 The Econometric Model 121 Estimation Results 124

    5.3 Conclusions 126 5.4 Appendix to Chapter 5 128 6 Sickness as a Strategic Device 130 6.1 Execution of the Sickness Law 131

    6.1.1 Performance of the BFIR 131 6.1.2 The Role of Employment, Unionization and Indebtedness: Sectoral

    Evidence 133 6.2 A Micro-Theoretical Approach to the Economics of Sickness 138 6.3 Econometric Approach 140

    6.3.1 Empirical Specification 144 6.3.2 Discussion of the Results 146

    6.4 Conclusion 154 6.5 Appendix to chapter 6 156 7 What Has Been Learned and what Directions Should Future Work

    Take? 158

  • v

    8 Appendix 161 A Concepts & Definitions 161 B Construction of variables from PROWESS database 168 B-1 Qualitative Variables 168 B.2 Quantitative Variables 172

    B.2.1 Construction of the Output Measure 172 B.2.2 Construction of Labor Input 175 B.2.3 Construction of Firm-Specific Capital Stocks 176

    B.2.3.1 Construction of the Revaluation Factors 180 B.2.3.2 Revaluation Factors by Form of Ownership and Capital Component (1981-1998) 183

    9 References 190

  • vi

    List of Tables Table 1-1: Industrial sickness in India: number of sick/weak units 4 Table 1-2: Industrial sickness in India: outstanding bank credit locked up in sick/weak

    units 5 Table1-3: Distribution of firms by industry (1988-1999) 17 Table 1-4: Distribution of firms by state and industry (on entering the sample) 18 Table 1-5: Industrywise distribution of firms by ownership form 22 Table 1-6: Distribution of firms by size class (1988 1999) 23 Table 1-7: Industrywise distribution of firms by size class (1988 1999) 25 Table 2-1: Indicators of trade barriers in Indian manufacturing 31 Table 2-2: Effects of foreign trade liberalization: Bivariate correlation coefficients 33 Table 2-3: List of industries reserved for the public sector 45 Table 2-4: List of industries in respect of which industrial licensing is compulsory 45 Table 3- 1: Evolution of profits and net worth for the sample firms that satisfy the SICA

    definition 49 Table 3- 2: Share of sick firms: various definitions of sickness 53 Table 3- 3: Patterns of sickness (by firms that ever fell sick) 55 Table 3-4: Sample characteristics by health status 55 Table3-5: Gap-analysis for firms that ever fell sick 56 Table 3-6: Incidence of sickness by industry: 1988 1999 (number of firms) 57 Table 3-7: Incidence of sickness by state: 1988-1999 (number of firms) 58 Table 3-8: Hazard rates for sickness by age class 59 Table 3-9: Industrywise incidence of sickness by form of ownership 60 Table 3-10: Industrywise incidence of sickness by size class 61 Table 3-11: Incidence of sickness by size class: 1988 1999 (number of firms) 62 Table 3- 12: Characteristics of distress: profitability and single factor productivity

    measures 64 Table 3- 13: Characteristics of distress: debt ratios 66 Table 3-14: Detailed pattern of sickness (by firm) 68 Table 3-15: Number of cases registered with the BFIR: by year and industry 78

  • vii


    Table 4-1: Average annual sectoral TFP growth for selected subperiods 84 Table 4- 2: Productivity estimates for various subperiods 91 Table 4- 3: Productivity and annual rate of change in mean sec. efficiency ('89-'99) 93 Table 4-4: Incidence of sickness, mean technical efficiency and firm heterogeneity 95 Table 4-5: Production function estimates 98 Table 5-1: Hardening budgets: (combined) evidence from cash-flow and expenditure

    statements 104 Table 5-2: Percentile distribution of no. of prod. groups and no. of plants 111 Table 5-3: Pre-reform firm characteristics and past-reform health status: Panel probit

    estimates for the probability of sickness (1997-1999) 113 Table 5-4: Determinants of Firm Efficiency (1992-1999) 118 Table 5-5: Re-emergence of industrial sickness: competitive pressure vs. budget

    hardening (Panel logit estimates (1992-1999)) 124 Table 5-6: Pre-reform firm characteristics and past-reform health status: Pooled probit

    estimates for the probability of sickness (1997-1999) 128 Table 5-7: Robustness Checks on the Determinants of Firm Efficiency Level

    Specification 129 Table 6-1: Status of companies registered with the BIFR 132 Table 6-2: Employment data for BIFR-registered firms: cumulative position in 2000 134 Table 6-3: