A STUDY ON PAPER INDUSTRY IN INDIA

WITH SPECIAL REFERENCE TO

GROWTH, PRODUCTIVITY AND PRODUCTION FUNCTION

THESIS SUBMITTED TO THE BHARATHIAR UNIVERSITY,

COIMBATORE FOR THE AWARD OF THE DEGREE OF
DOCTOR OF PHILOSOPHY
IN
ECONOMICS

BY

K. LAKSHMI

RESEARCH SUPERVISOR

DEPARTMENT OF ECONOMICS
ERODE ARTS COLLEGE (AUTONOMOUS)
(AFFILIATED TO BHARATHIAR UNIVERSITY,COIMBATORE-46)
ERODE - 638 009

FEBRUARY 2007
 CHAPTER-I

INTRODUCTION

1.1.IMPORTANCE OF THE STUDY

Concept of Productivity has been examined in various dimensions by various

researchers. It has been visualized to represent production function. Some others have

seen it as labour effectiveness. There is a recent trend to interpret productivity in its

broader perspective as representing the performance in totality of an organization

considered to work as a system. Industrial revolution made a major departure for

society from total dependence on agricultural economy. Man and machine formed the

other balancing pivot. Productivity of a plant virtually meant production and

productivity from labour. Measurement of production in terms of standard hours

produced with reference to hours of labour put in became the landmark and yardsticks

of efforts, effectiveness, performance and efficiency came to be referred to as

productivity.

Productivity enters in one way or other, virtually every broad economic

problem; it affects costs, prices, profits, output, employment and investment and thus

assumes a crucial role in economic development. Productivity indices have been

accepted not only as a measure of performance but also as an important means of

motivating improvements in productive efficiency. Their use in the analysis of the

factors that promote productivity and the dynamic economic relationships as a basis

1
for forecasting trends and making policy decisions, are well recognised and being

increasingly used at the level of the firm, the industry and the economy.1 In order to

monitor the progress of an industry or an enterprise, it is essential to make scientific

appraisal of the trends in productivity.

The twentieth century and the world war years brought in technological

advances in rapid succession. Machine tools with higher work parameters brought an

increase in production and rate of production. Measuring production and identifying

the sources of growth in terms of production function is a fascinating and rewarding

area of study. The aggregate production function is implied to represent input-output

relation to an individual industry or even in the economy as a whole. Economists

think of productivity in tenns of production function that specify the possibilities for

making substitution between capital and labour or in other words, a tool which helps

in arriving at decisions relating to the choice of techniques of production.

In recent times, an increasing number of interesting studies has been

undertaken which examine the relative contribution of labour, capital and technical

change in Paper Industry based on both cross-section and time series data. Though

there are a large number of studies at micro level in India, studies at macro level are

scanty. Further, in recent year’s studies on production function in India indicate the

need for detailed studies.

A study of growth, measurement of productivity and estimation of production

function in paper industry is desirable because it occupies a unique place in the

2
industrial structure of India, being the third largest industry next to Sugar and Cotton

textiles3. It is one of the largest and traditional industries in India.

One of the major outcomes of the liberalization and globalization of the

economy is the rapid upgrade of manufacturing capabilities with the end users such as

Printing and Publishing industry and Packaging industry. These developments in turn

have led to a significance shift in the pattern of demand of paper and paper boards and

this shift is likely to be accentuated in the future.

1.2. SCOPE OF THE STUDY

Considering the importance of Paper Industry this study is focused to analyze

the pattern and growth of Paper Industry in All India, taking into account input,

output, and»other related variables. In the present study an attempt has been made to

estimate the relative efficiency of different inputs by using partial factor productivity

of labour, capital and raw material as well as total factor productivity for the Paper

Industry in India for the period from 1979-80 to 1997-98. Further an attempt has been

made to estimate the influence of output and technology on factor productivity with

the help of multiple regressing frame work. The study also aims to examine and

analyze production function in Paper industry in India during 1979-80 to 1997-98. It

includes the estimation of partial elasticity of output with respect to labour and

capital, returns to scale, technological progress and the sources of output growth at the

national level.

3
1.3. OBJECTIVES OF THE STUDY

The main objectives of the study are:

a) To characterize the trends in output, inputs and other related variables in Paper

Industry in India in order to bring out growth in the industry.

b) To measure the efficiency in Paper industry using partial and total factor

productivity indices.

c) To find out a suitable model for production function in paper industry among

VES, CES and COBB-DOUGLAS production functions.

d) To estimate the returns to scale and technological progress in Paper Industry

using Cobb-Douglas production function.

e) To examine the relative contributions of labour and capital in output growths

at All India level.

1.4. PLAN OF THE THESIS

The thesis is organised as follows:

Following the introductory chapter, Chapter II presents a brief review of

literature on the studies of productivity and production function. The first section of

4
this chapter mainly accounts for studies on productivity and second section provides

studies on production function. A summary review of studies on productivity and

production function is given at the end of the respective sections.

In Chapter III, theoretical aspects of partial productivity and total factor

productivity and different types of production functions (C.D, CES AND VES) and

methods for the analysis of the present study are presented.

Chapter IV deals with the sources of data, definitions and measurement of

variables. A review of “Indian Paper Industry” in relation to its historical retrospect,

importance, growth of paper industry during plan periods, supply and demand

position and the general features of the industry during 1979-80 to 1997-98 are

presented in Chapter V. Chapter VI deals with measurement of partial and total factor

productivity indices. Chapter VII is devoted to determine the relevant form of the

production function for the paper industry and on the basis of which partial elasticity

of output with respect to capital and labour, return to scale, neutral technical progress,

marginal productivity of labour and capital and sources of output growth are

determined. Chapter VIII contains a summary of the findings and some concluding

remarks.

5
 V

FOOTNOTES

1. Kendrick J.W. productivity Trends in United States, NBER, 1961.

2. Goel V.K. and Nair N.K. (1978).

3. Reserve Bank Of India Bulletin (1999)

6
 CHAPTER-II

REVIEW OF LITERATURE

II.l. PARTIAL AND TOTAL FACTOR PRODUCTIVITY

Literature on productivity concept and causes and consequences of

productivity change is readily available. The measurement of productivity is pre­

eminently a quantitative and technical problem. The concept of factor productivity

gives the contribution which one or all used factors make to production. This concept

is reflected in a ratio between product (output) and the factor or factors used (input).

The simplest productivity analysis can be conducted in terms of partial productivity

ratios. These ratios are labour productivity (LP), capital productivity (CP) and

material productivity (MP).

Total factor productivity (TFP) ratios based on the comparison of output with

the input of man hour and tangible capital are better measure of efficiency than those

based on labour or capital input alone.

There have been many studies on this important consumer industry of India.

To have a comprehensive idea of studies on productivity and production function, a

brief review of them is desirable and an attempt is made in this chapter.

7
 Balakrishna (1953)1 is one of the forerunners in productivity measurement in

India. In his study the measurement of productivity is done in terms of unit labour

requirements. He has employed another criterion, physical output per man-hour in the

case of individual industries. They are useful in making inter-regional comparisons,

but when two periods of time are taken into account they do not lend themselves to

easy computations.

In the overall comparisons that are made in his study, a ratio of the unit labour

requirements between the current and the base periods is calculated. A rise or fall in

the index will indicate the position on the current year, the base year having always

taken as the period of comparison.

For his study he has taken 12 industries for the years 1948, 1951 and 1953.

Throughout his productivity measurement each year labour requirement is compared

with that of the base year 1938, to find the changes in productivity.

The 12 industries taken for productivity measurement contribute roughly 75

percent of output, input and in other aspects. As such generalization being made on

the basis of 12 industries will not have any serious error in the productivity indices.

A pioneering study by Beri (1962)2 estimates partial and total factor

productivity indices for cement, cotton textile, iron and steel and sugar for the period

1948 to 1955. His study reveals an evidence of increasing returns to scale, high

relative efficiency, increased capital intensity, presence of technological change and

low elasticity of substitution in sugar industry.

8
 Mukeiji’s (1963)3 study covers six industries viz., Jute, Cotton, Iron and Steel,

Sugar, Cement and Paper. In his study an attempt is made to find the effect of

localization’ on ‘productivity’ has no specific effect on ‘productivity indices’.

Diaz Alejandro (1965)4 examines a simplified version of the Hirschman

hypothesis, analyzing labour productivity differentials between industries in the

United States and the Argentine Republic. Professor Hirschman’s hypothesis is based

on his belief that the modem technology embodied in capital equipment helps

management in these countries perform unfamiliar and uncongenial tasks and

coordinate the internal activity of the firm, while it is precisely these management

skills which are most scarce in underdeveloped countries. For this reason labour

productivity differentials between underdeveloped and fully industrialized countries

should be much larger in labour intensive industries than in capital intensive

industries. The general tendency verified in his paper does not significantly hamper

the likelihood of substantial industrial exports from semi-industrialized countries.

Mukerji (1966)5 examines productivity movements in the Jute textile industry

from 1900 to 1958 and finds that productivity and real wages are almost completely

unrelated except for a brief period.

Sastry (1966)6 attempts a similar exercise for sugar industry for the period

1951-1961 and finds that the growth in labour productivity in that industry is entirely

attributed to the capital available per worker.

9
 Shivamaggi, Rajagopalan and Venkatachalam (1968)7 examined trends in

wages in seven important industries during 1951 to 1961 and compared them with

trends in labour productivity and costs of production during the same period by

making use of time series data provided by CMI and ASI. The seven industries

covered were cotton textiles, Jute textiles, Iron and steel, Cement, Paper and Paper

Boards, Chemicals and Chemical products and Sugar. The index of labour

productivity was constructed from the figures obtained by dividing value added in

constant prices of man-hours. The relatively greater rise in labour productivity may be

partly associated with the increase in fixed capital per unit of labour and improvement

in management techniques.

Rajkrishna and Mehta (1968)8 have tried to identify the implications of major

change in the productivity of large scale Indian Industries covered by CMI and ASI

during 1946-1963. They have examined the capital intensity and the productivity of

labour and capital for large-scale industries.

They have observed that capital intensity had increased by nearly 100 percent

between the 6 year period 1948-53 and the period 1958-63. Productivity of labour as

measured by value added (in constant prices) per employee, V/L, had also registered

an increase of about 42 percent. The productivity of capital as measured by value

added per unit of capital, V/K, had declined by about 18 per cent. Total productivity

declined steadily over the period and most of the gains in labour productivity were

due to capital deepening.

10
 Raghavachari’s (1969)9 study is to investigate how technological advance has

been reflected in productivity in the sugar industry. He used the data regarding sugar

inputs from CMI for the period 1947-1958 and ASI data cover the subsequent period

1959-63. The main findings are:

(i) Introduction or new production techniques, which have contributed to

the appreciable improvement in the industry’s manufacturing

efficiency. As a consequence of this, the productivity of major inputs

has increased.

(ii) During 1947-63, labour productivity showed an upward trend at All

India as well as Uttar Pradesh and Bombay.

(iii) Some improvement was noticed in the productivity of energy.

Sinha and Sawhney (1970)10 examine wage productivity relationships in

cotton textiles, cement, sugar, jute, paper and paper products for the year 1950-63 on

the basis of the data available form CMI and ASI.

All the five industries studied indicate increase in productivity - ranging from

4.7 per cent in cement and sugar 1.9 per cent per annum in cotton textiles. Total factor

productivity also increased over a period of time in these industries.

Banerjee (1971)11 calculated partial productivity for both labour and capital

for the years 1946 to 1964 for Indian manufacturing industries. Labour productivity

11
was measured by gross value-added per person and capital productivity by dividing

gross value added by capital. The former was found to increase, while the latter

showed a decrease during the study period. He also came to the conclusion that

increase in labour productivity was achieved mostly through capital deepening . He

further calculated the fuel and material cost per unit of gross output. While the raw

materials per unit of output cost declined, the fuel unit costs increased slightly over

the period.

He also calculated the total factor productivity using Solow and Kendrick

methods and estimated the efficiency parameter using CES production function. He

observed a steady decline in the total factor productivity for the study period.

/ Annamalai (1978)12 deals with changes in productivity in Indian cotton textile

Industry and Tamil Nadu Cotton Textiles Industry between 1959 and 1970 excluding

the year 1967. In his study both partial productivity and total factor productivity ratios

were computed by using Kendrick method. From his study he concludes that total

factor productivity increased by about 1.3 per cent per annum for the whole period in

the case of Tamil Nadu cotton textiles industry.

Mehta (1980)13 in his study on total and partial productivity for the period

1953-1965 computed partial productivity of capital and labour and total factor

productivity by Solow and Kendrick methods. The total factor productivity indices

measured by both methods showed a downward trend. The movements in labour

productivity increased significantly in industries like vegetable oil, chemicals,

tanning, glass and glassware and insignificantly in matches, iron and steel and cement

12
industries. However, capital productivity did not increase but decreased in many

industries. Labour and capital showed an inverse relationship.

In his study capital intensity was able to explain the growth in labour

productivity in sugar, tanning , ceramics, cotton textiles, confectionary and sewing

machines, while in the case of other industries, despite a rise in capital per person, it

had not led to gain in labour productivity, implying that growth in labour productivity

in many industries was not due to capital intensity. Accordingly, Mehta concludes that

capital intensity need not increase labour productivity.

Sastry (1981) 14 measured total factor productivity indices for the cotton

textiles industry for the period 1949-70. Three alternative measures of total factor

productivity of Kendrick, Solow and Domar were analysed for All India. In the

period up to 1961, the index was found to rise whereas after 1961, a declining trend

was observed. A close correspondence was observed in the three indices calculated

over the period. Sastry used energy consumption as a proxy for capital.

Jaishankar (1982)15 attempts to find the inter relationships between

productivity, output, employment and cost. Using labour productivity as the criterion

and median as the statistical tool he selected 23 industries and divided them into ‘high

productivity industries’ (HPI) group and ‘low productivity industries (LPI) group.

Each group consists of 11 industries. The HPI group indicates high output and high

employment; on the other hand LPI group is showing an increase; whereas in the case

of HPI group, some are decreasing while few others have registered an increase. The

13
study indicated that Indian industries have on the whole become more capital

intensive during the period under review.

Mukheiji’s (1983)16 study aims to measure productivity and its growth in the

factory sector of Bihar and makes comparisons with All India trends during 1950-67.

His study reveals that the index of labour productivity of Bihar just about doubled

while at the All India level the increase was more than double.

A significant increase in labour productivity had occurred both at the state and

All India levels at a compound annual rate of 4.06 and 5.10 per cent respectively.

Over the study period, the capital productivity index at the state level and All India

level declined by as much as 71 and 67 per cent respectively. The index of total factor

productivity declined significantly both at the state level and All India level. The rate

of decline was marginally higher at the state level.

Arun Ghose's (1984)17 paper examines some efficiency parameters of the

steel, cement and sugar industries in order to focus attention on the problem of

efficiency in Indian manufacturing industry. His study is useful in two ways; first, in

highlighting the reasons for the low productivity observed in a few important

industries and secondly, in bringing out the absence of any direct link between

investment and efficiency. With regard to Sugar industry he pointed out that the

sugar industry, predominantly in the private sector, is by and large highly inefficient

today ; that the totality of policies affecting the Sugar industry is not calculated to

promote efficiency and higher productivity ; and that government intervention in the

14
affairs of the sugar industry, ostensibly in the interest of the consumer and of the cane

grower, has in fact made for the growth of a highly inefficient sugar industry.

' Alam Khan’s (1984)18 study is concerned with the production function

analysis and partial and total factor productivity indices for selected manufacturing

industries of Bihar using CMI and ASI data for the period from 1946-47 to 1965-66.

In his study he observed labour productivity and capital-labour ratio had increased

during the study period. Capital productivity had declined as a result of capital

deepening and substitution of capital for labour. Total productivity measured from

Solow’s method declined steadily in most of the selected industries as well as the

manufacturing sector in the case of Bihar and India.

Annamalai (1986)19 deals with relationship between productivity and price in

his study on price formation in Indian manufacturing sector and four industries i.e.,

cement, sugar, cotton textiles and fertilizers for the period from 1959 to 1980.

In his study the method of price fixation and changes in the price policy

measures and its impact on production, prices and profitability have been analysed

elaborately at the individual industry level. For this he uses unit factor cost and

partial factor productivity. Using these he computers the overall unit cost and total

factor productivity. Relationships between these measures and price index have been

analysed. He finds a declining tendency in total factor productivity which caused the

cost of production to increase. Increase in labour productivity was equally matched by

increase in wage rate. Invariably capital productivity declined in all manufacturing

and in the four individual industries. Among four industries, negative trend in material

15
productivity was noticed in three industries except fertilizer. The observation

regarding productivity reveals the fact that technical efficiency had not improved over

the period.

Dabir-Alai’s (1987)20 study estimates total factor productivity (TFPG) rates

for the large scale manufacturing industries using Solow and Kendrick methods for

the period 1973-74 to 1978-79. His study concludes that the manufacturing sector is

dominated by industries whose TFPG had remained positive over the period 1973-74

to 1978-79.

An attempt is made in Bhatia's (1990)21 paper to study changes in productivity

during 1965-85 in India in relation to that in the U.K and the U.S. For this he

estimates productivity indices for each country and the growth rates in the total factor

productivity for the three countries for a) 1965-1975, b) 1975-1985 and iii) 1965-1985

are worked out. Further cross country comparisons of total factor productivity are

calculated.

A comparison of the productivity indices amongst the three countries reveals

that in the UK, the productivity index rose during 1965-1973. It was stable during

1973-82 and increased between 1983 and 1985. In the US, the productivity index had

increased steadily over the entire period 1965-85. The index increased from 92 in

1965 to 125 in 1985. In India total factor productivity declined during 1965-75. The

index rose during the period 1975-85. The rise in productivity index in India after

1975 was higher than that in the U.K. It was higher than even that in the U.S. after

1980.

16
 Ahuluwalia (1991)22 attempts to analyse the long-term trends in total factor

productivity and partial productivities in the organised manufacturing sector in India

over the period from 1959-60 to 1985-86. The role of factor input growth and total

factor productivity growth in accounting for the growth in value added is also

explored.

The analysis is conducted at a detailed level of disaggregation for 63

constituent industry groups at the three-digit level as well as for the four use-based

sectors of manufacturing,i.e intermediate goods, consumer non-durables, consumer

durables and capital goods. For as many as 36 industries accounting for over 50 per

cent of the total value added in manufacturing in 1970-71, however, the contribution

of total factor productivity growth was negative. The more important among these

industries were food manufacturing except sugar, iron and steel and non-ferrous

metals. For almost all of the 63 industries, capital intensity showed a strong and

significant upward trend.

Labour productivity showed significant positive growth for fewer industries

accounting for 64 per cent of the value added in manufacturing. There were a few

industries which even experienced a decline in labour productivity. The trend in

capital productivity was dominantly downward.

Chandrasekaran and Sridharan (1993)23 estimated total and partial factor

productivity indices to analyse the operating performance of cotton industry in India

from 1973-74 to 1986-87. The total factor productivity has been arrived at by using

Kendrick’s index. For the purpose of finding out the estimates of input elasticities,

17
neutral technical progress and returns to scale, cobb-douglas production function,

CES and VES functions are used. They conclude that labour productivity in the cotton

industry had increased at a higher rate than capital productivity and contributed to the

growth of output and efficiency achieved. Low capital productivity observed in their

study could be due to managerial factors.

Palaniappan.A (1995)24 has conducted an inter regional study on sugar

industry with special reference to growth, productivity and production function. In his

study he estimated total factor productivity with the help of Kendrick’s measure. He

has analysed the partial productivity of labour, capital- and raw material and pointed

out that a striking paradox is visible regarding the changes in the partial productivity

ratios of the industry. The technical efficiency of sugar industry is measured through

total factor productivity. The share of the real wages to real value added had declined

at All India level and it moderately increased for other selected regions during the

study period is one of the major findings of the study.

Rathinam.D (1996) has conducted a study on selected manufacturing

industries of private corporate sector in India. In this study he has analyzed the costs

of production, capital structure, liquidity and profitability of sugar industry, cotton

textiles industry, engineering industry,chemical industry,cement industry, rubber and

rubber products manufacturing industry and paper and paper products manufacturing

industry.One of his major findings was constant return to scale with respect to

material cost was found valid for the industries like engineering, chemical, cement

and paper and paper products industries.

18
 Pari C.A (2006) has conducted a study on Paper Industry. He has taken the data

of Tamil Nadu New Print Ltd, Pugalur ,Karur District, Tamil Nadu and analyzed the

performance of the industry during the study period. Regarding the aspects of

production he has analyzed the trend in production, factors responsible for the growth

in production and partial and total factor productivity.

19
 A SUMMARY OF STUDIES ON PRODUCTIVITY

Industry Form of the Main findings

s. Author Year Data Used
covered function
No.
CMI 19481951 & 1953 Partial The twelve industries considered
1. Balakrishnan.R. 1953 12 Indian
Industries productivity for productivity measurement
ratios contribute roughly 75 per cent of
output, input and in other aspects.

CM I 1948 to 1955 Partial and Increasing returns to scale , high

2. Beri G.C. 1962 Cement,Cotton
total factor relative efficiency, increased
textiles, Iron
productivity capital intensity and low elasticity
and Steel and
Sugar. of substitution

CMI 1956 Partial and Localization seems to haveNo

3. Mukerji G.P 1963 Six industries
total factor specific effect on productivity
productivity indices.

Argentine Industries In Multiple Labour productivity differentials

4. Diaz Alejandro 1965 63 industries
1953 and 1957 has been regression between underdeveloped and fully
compared with that for industrialized countries, larger in
equivalent united states labour intensive industries than in
industries in 1958 capital intensive industries.

Jute textile Time series 1900 to Partial Productivity and real wages are
5. Mukerji K. 1966
Industry 1958 Productivity almost unrelated.
ratios

Time series 1951-61 Partial Growth in labour productivity in

6. Sastry V.S.R.K. 1966 Sugar Industry
Productivity sugar industry is entirely attributed
ratios to capital available per worker.

CMI and ASI 1951 to Partial Rise in labour productivity may be

7. Shivamaggi H.B. 1968 Seven
1961 Productivity partly associated with increase in
industries
ratios K/L and improvement in
management techniques.

CMI and ASI 1946 to Partial and Labour productivity V/L had
8. Rajkrishna and 1968 Large scale
1963 totalFactorPro increased about 42 per cent. Capital
Mehta S.S. industries
ductivity productivity, V/K had declined by
indices 18 per cent. Total factor
productivity declined steadily over
the period of study.

CMI and ASI 1947 to Partial During 1947-63 labour productivity

9. Raghavachari 1969 Sugar industry
1963 productivity showed an upward trend at All
ratios India as well as Uttar Pradesh and
Bomb

CMI and ASI 1950 to Partial and Productivity increased ranging

10. Sinha J.N and 1970 5 industries
1963 total factor from 4.7 per cent in cement and
Sawhney P.K
productivity sugar to 1.9 per cent in cotton
textiles. Total factor productivity
also increased over time in these
industries.

CMI and ASI 1946 to Partial and Labour productivity V/L was found
II. Banerjee A. 1971 Indian
1964 total factor to increase while capital
manufacturing
Industries productivity productivity, V/K showed a
decrease for the period. TFP
steadily declined during 1946 to
1964.

Indian cotton ASI 1959 to 1970 Partial and TFP increased by 1.3 per cent per
12 Annamalai S. 1978
total annum in the case of Indian Cotton
textiles
productivity Textile Industry and 0.5 per cent in
Tamil Nadu Cotton Textile
Industry.
.

20
 Industry Form of the
s. Data Used Main findings
Author Year function
No. covered

CMIandASI 1953 Partial and TFP showed downward trend. LP

13 Mehta S.S and 1980 Indian
Manufacturing to 1965 total factor increased significantly. However,
Venkatachalam T.R.
Industries productivity CP did not increase in many
industries.

CMIandASI 1949- Total factor TFP was found to rise up to 1961,

14 Sastry D.U 1981 Cotton
1970 productivity after 1961, a declining trend was
Textilelndustry
observed..

CM1 and AS1 Labour Indian Industries have on the whole

15 Jaishankar V. 1982 23 Industries
Productivity become more capital intensive.

CMIandASI 1950 to Partial and LP increased both at state and All

16 Mukherji, Indranath 1983 Factory sector
1967 total factor India levels. CP and TFP decline.
of Bihar
Productivity

1980-81 to 1982-83 Partial and The Sugar Industry, predominantly

17 Arun Ghose 1984 Steel,Cement
total factor in the private sector, is by and large
and Sugar
Industry Productivity highly inefficient.

CM1 and ASI 1946 to Partial and LP and K7L had increased and CP
18 Alam Khan, Shams 1984 Selected
Manufacturing 1967 total factor declined as a result ot capital
industries Productivity deepening. TFP declined steadily.

ASI 1959 to 1980 Partial and A decling tendency in TFP caused

19 Annamalai. S. 1986 Indian
Manufacturing totalFactorPro the cost of production to increase.
and 4 ductivity
industries

ASI 1973-74 to 1978- Total factor The manufacturing sector is

20 Dabir-Alai, Parvz 1987 Large Scale
Manufacturing 79 productivity dominated by industries whose
Industries TFPG has remained positive over
the period of study.

Industries in ASI 1965 to 1985 Growth rate The rise in productivity index in
21 Bhatia D.P 1990
India,UK and andtotal factor India after 1975 was higher than
US productivity that in UK and US

ASI 1959-60 to 1985- Partial and The trend in CP was downward in

22 Ahuluwalia IJ 1991 Organized
Manufacturing 86 total factor sugar industry.
sector in India productivity

ASI 1973-74 to 1986- Partial and LP in cotton industry has increased

23 Chandrasekaran.M .a 1993 Cotton
Industry 87 total factor at a higher rate than CP.
nd Bhavani
Sridharan productivity

ASU973-74 tol990-91 Partial and Capital labour ratio had increased

24 Palaniappan.A 1995 Sugar Industry
total factor remarkably in sugar industry..
productivity

21
 H.2. PRODUCTION FUNCTION

The total factor productivity approach is theoretically derived from production

function. The total factor productivity approach, however, assumes constant returns to

scale. Also the technical change cannot be measured through the total factor

productivity index. Returns to scale and technological change can be estimated

through production function approach. A production function is a relation between the

maximum quantity of output and inputs required to produce it and the relation

between the inputs themselves. The standard forms of production function are

unconstrained Cobb- Douglas production function and Constant Elasticity of

Substitution production function. A brief review of production function is made in

this section.

Murti and Sastri (1957)25 have fitted a cobb-douglas production function for

the cross section data of the Indian Industrial sector as a whole, as well as for some of

the selected product groups like cotton, jute, sugar, coal , paper, basic industrial

chemicals and electricity industries for the years 1951 and 1952. The results indicate

that the sum of the co-efficients of labour and capital have differed significantly from

ensuring constant returns to scale.

Sarkar (1965)26 has estimated cobb-douglas production function in modified

regression equation in the form of Pi = aLi k Cij Ri m Where Pi is output Li, Ci, Ri

are labour , capital, raw materials, fuels, etc., respectively in ith year and a,kj and m

are statistically determined parameters for the Indian Steel Industry. He has studied

22
the production function of the aggregate of firms of different regions, of different

size- classes from the period from 1946 to 1958. He has also tested the regional

homogeneity for different regions- West Bengal, U.P, Delhi, Punjab and Bombay by

using Cobb-Douglas production function by dividing the period into two components,

viz 1946-52 and 1953-58. He finds that the steel industry in West Bengal experiences

a fairly high degrees of increasing returns to scale. The industry is almost under

constant returns to scale in Uttar Pradesh and Punjab and to some extent in Bombay.

In Delhi alone the industry is under decreasing returns to scale.

In his study on “ An Empirical Estimate of Elasticity of Substitution

Production Function” Diwan (1965)27Tests the heroic assumption of constant return to

scale. For this purpose the time series data for the manufacturing sector of the United

States Economy referring to the period 1919-1958 is used. He concludes that the true

value of a lies somewhere in between 0 and 1. This would suggest that the underlying

production function in the manufacturing sector of the United States economy is

neither cobb-douglas nor Leontief. He also states that the united states manufacturing

sector over the period 1919-1958 showed a tendency to follow the law of increasing

returns to scale”. The price elasticity of demand for labour and capital has also been

calculated. The value of price elasticity of labour comes to 0.46 and capital comes to

0.48.

Sastry (1966)28 has estimated three different forms of production function for

the Indian Sugar Industry at the regional and national levels. His study is confined to

the period 1951-61. CMI and ASI are the main sources of data for the study. The

forms of the production function used in the study are:

23
 i) P = A (t) L“ K B

ii) P = A (t) [a L + BK]

iii) P = ect La K B

He presents the partial elasticity of output with respect to labour (a) and

capital (B) and total factor productivity through the functional forms (i)and (iii) at the

regional and national levels. The main findings are: i) Total factor productivity has

been falling at the regional and national levels; ii) increase in labour productivity is

attributed to capital intensities and iii) labour is found to be marginally more efficient

than capital in the tropical region while the reverse holds in sub-tropical region.

Yeh (1966)29 uses two different techniques to test the economies of scale for

thirty Indian industries on the basis of time-series study for the period from 1946 to

1958. He uses the following form to estimate the returns to scale.

Log Y = Log a + b| log L + Ci log K + u

Where Y denotes value added, L denotes the number of workers and K

denotes the amount of capital. He concludes that the evidence of economies of scale

which relies on the estimates of the sum of the exponents (bi + o) in cobb-douglas

function. With regard to the measurement of efficiency, Yeh uses labour productivity

. This is calculated by dividing value added by the number of workers. He finds that

the average productivity of labour increases as the plant size increases.

24
 Diwan and Gujarati (1968)30 studying 28 Indian industries for the period

1946-58 estimate elasticity of substitution for individual manufacturing industries

from CES production function using time series data. Only two industries, namely

starch and cement had an elasticity of substitution equal to or greater than one. The

remaining 26 industries had values less than one. Of these 26, four industries, namely

fruits and vegetables, wheat flour, paper and paper boards and electric fans had an

elasticity greater than 0.5 but less than one. All the others had values less than 0.5.

They concluded that elasticity of substitution in Indian industries is quite low. Most of

their estimates were not statistically significant due to high standard errors.

Sankar (1970)31 has estimated the elasticity of substitution and returns to scale

for 15 manufacturing industries in India by using CES production function with non­

constant returns to scale. The main source of data for this study was the census of

manufacturers available from 1946 to 1958.

Due to variation in coverage in early years and also because of the effects of

partition in 1947 and boom conditions in 1950-52, he has used only 1953-58 data for

the study. Further regional differences in production conditions due to differences in

composition of capital and labour inputs, utilization and social overhead capital are

also taken into account in the study.

He has obtained estimates of the parameters directly from the production

function using maximum likelihood and Bayesian techniques. On the basis of his

findings, he rejects the fixed factor proportion hypothesis for 11 out of 25 industries.

He finds increasing returns to scale in a number of industries. Further, he prefers CES

25
model over fixed proportion and C-D models, as the estimates of a exhibit

considerable variation among industries. Among the industries analysed, he finds that

elasticity of substitution between capital and labour is 1,000 (modal Value) for the

Indian sugar industry.

Desai (1971)32 estimates the CES production function for the sugar industry of

India. In his study the regional efficiency of the sugar industry is measured on the

basis of the results of the production function. CES production function has been

estimated by making use of cross-section data on output, capital, labour, wage rate

and rate of return to capital provided by ASI for the year 1960 and 1965.

He studies the regional efficiency of sugar by attributing the residuals not

accounted for by the contribution of capital and labour to regional efficiency. He

concludes that CES type of production function is found to be a good fit for the Indian

sugar industry. Regional efficiency coefficients indicate that for the both periods, the

sugar industry in Uttar Pradesh and Bihar was more efficient than that in the

remaining states of India.

Pathak (1972)33has estimated cobb-douglas production function for nine

individual industry groups in Gujarat on the basis of time-series data for the period

1960-66. Since the variables are not deflated due to lack of reliable price data, he

introduced dummy variables to account for changes in price. In order to avoid the

problem of multicolinearity and high inter correlation between capital (K) and Labour

(L), production function of the following type has been estimated for such industry

groups.
26
Log Q/L = a + ai D) + a2 D2 + &3 D3 + a4 D4 + as D5 + a$ D6 + ct Log K/L

His important findings are: higher elasticity of output (Q) with respect to K

relative ton L. (a +fi ) is around unity in most of the industry groups, showing an

evidence of constant return to scale.

Mehta (1974)34 has estimated cobb-douglas production function and CES

production function for Indian Sugar industry on the basis of time series data from

1953 to 1965. Data of CMI and ASI have been adjusted to make them consistent so

that magnitudes derived from CMI and ASI are comparable.

He finds that the Indian sugar industry shows that the total factor productivity

is declining. Further, the elasticity of substitution between capital and labour is

signigficantly different from unity as well as zero. In fact it is 0.54. This shows that

there is an evidence of CES production function for the industry.

Barthwal (1975)35 has fitted various forms of production function viz, VES,

CES and Cobb-Douglas for Indian paper industry by using the time-series data. His

study covers the period from 1949-1964. The main results obtained from his study are

: 1) constant elasticity of substitution of unitary magnitude 2) almost no technological

progress in the industry during the period 1949-64.3) Partial elasticities of capital and

labour inputs were found to be of the order of 0.64 and 0.36 respectively.

27
 Banerjee (1975)36 estimates elasticity of substitution for Indian industries

together for the period 1946 to 1958 using the following five models of CES

production function:

1. Log [ V/L] t= A + a log wt + u t

2. Log [ V/L] t = A + a log wt +a, + u t

3. Log [ V/L] t = A + a log wt+ (1-a) log [V/L] + E,

4. Log [ V/L] t = A + a log wt + plog [ V/L] t_i + p a log wt.t + Et

5. Log [ V/L] t - A + a log wt.+ B log Lt + ut

The equation (1) is the familiar SMAC formulation relating the Log of V/L

with the log of the wage rate. Relation (3) is the partial adjustment distributed log

model. Equation (4) is the serial correlation model corresponding to (l)Relation (5) is

the modified SMAC form with the labour variable which allows for non-constant

returns to scale.

The same relations are also used in the study of five Indian industries , namely

cotton textiles and Jute textiles for the period 1946 to 1963, sugar 1946 to 1962, paper

and bicycles for the period 1946 to 1958.

In both studies, model (4) does not seem to hold well, since the estimates of a

by the above method was not statistically significant. Equations (1), (3) and (5)

28
yielded statistically significant estimates for a in both cases. In none of the cases was

the estimate significantly different from unity. By including the time trend, the

estimate of coefficient of time trend was statistically significant only in one case

(sugar).

The production function estimates of the unrestricted Cobb-Douglas form for

the aggregate manufacturing sector as well as for the five industries selected are

presented. The growth of the manufacturing sector is by and large accountable in

terms of the increase in inputs and there has been no evidence of any ‘residual factor

in it. The hypothesis of constant returns to scale is not rejected conclusively. Sugar,

paper and Bicycle industries showed significant growth during the period under study.

The unrestricted Cobb-Douglas production function in sugar Industry yielded

significant and positive coefficients of both labour and capital. The returns to scale

estimate was not significantly different from unity.

\ Gupta and Kirit (1976)37 have estimated different forms of production

functions for Indian sugar industry for the period 1946-66 and for its sub-periods

1946-58 and 1959-66. The study reveals that the industry is found to have zero neutral

technical progress, unit elasticity of substitution between labour and capital, evidence

of increasing returns to scale and labour seems to be a more important factor than

capital in terms of factor elasticity of output, marginal factor productivity and relative

contribution to mean value added by sugar industry.

29
 Dholakia (1977)38 has presented the various possible alternative estimates of

the widely used Cobb-Douglas production function for the Indian Iron and Steel

industry. These estimates of the production function have been derived from the time-

series data on the iron and steel industry for the period 1946 to 1966 obtained from

the various reports of CMI (1946 to 1958) and ASI (1959-66).

His paper is devoted to a detailed examination of measurement of factor input,

particularly the capital input . The following variant of the Cobb-Douglas production

function is estimated on the basis of time- series data for the period 1946-66.

Y = A La Kb ect

Which can also be written in its logarithmic form as

Log Y = Log A + a Log L + b Log K + CT + U

Where Y,L,K and T represents the variables output, labour, capital and time

respectively. While A, a,b and c are the parameters representing the constant

term,elaticities of output with respect to labour, capital and the rate of technical

progress respectively.

He concludes that the elimination of errors in the measurement of capital input

alters significantly the estimates of the relative contributions made by various factors

to the growth of output and reduces the intensity of the problem of multicollinearity

arising frequently in the estimation of time series production function.

30
 Subramaniyan (1982)'*9has estimated different forms of production function

for sugar industry. In his study he estimates regional efficiency, partial elasticities of

output with respect to capital and labour, marginal productivities, returns to scale,

technological progress and the sources of output growth at the regional level as well

as national level. The basic data for this study are extracted from CMI and ASI for the

period from 1953 to 1969.

The elasticity of substitution between capital and labour is unity which implies

that relevant form of production function is Cobb-Douglas production function. The

study concludes that as Cobb-Douglas production function is not very well suited to

analyse the economies of scale, CES production function is used even though o

appears to be unity for the industry. Regarding regional efficiency, the Cobb-Douglas

production function with state dummy variables based on time-series data for the

period 1953-1969 and for the two time components 1953-60 and 1961-69 reveal that

Maharashtra is relatively most efficient region compared to all the other states under

investigation.

Babu and Vani (1983)40have estimated the CES function for the Indian

manufacturing sector at constant prices for inputs and output for the two periods

1949-58 and 1959-66. They have concluded that there is a shift in the production

function over the period 1949-66 and the substitution has also varied. Substitution

possibilities differed in the two periods and hence the assumption of unitary

substitution that is same for both periods is not valid. Further, during the process of

development different industries may experience different types of technical progress

and this might affect the elasticities of substitution differently. Arya (1983)41 estimates

31
 production function for Associated Cement Co.Ltd for the period 1956 and 1974. The

data have been taken from the annual report of Associated Cement Co.Ltd., He has

fitted Cobb-Douglas production function to the data pertaining to the Associated

Cement Company Ltd., Bombay. His study shows that constant returns to scale exists

in cement industry.

The elasticity of output with respect to labour is greater than that of capital.

Further his study indicates that the industry experiences technical change which is of

neutral type and there is a shift in the production.

Sandhu and Sodhi (1985) 42 have analyzed the production function analysis of

small- scale engineering goods industry in Punjab with the specific objectives of

estimating a) output elasticities with respect to labour and capital, b) returns to scale

and c) substitution elasticity between labour and capital. Data on various variables of

interest, namely, value added, capital and labour were obtained from the entrepreneurs

by the personal interview method through pre-tested schedules. The information was

collected for two points of time, viz., 1972-73 and 1977-78.

In their case study there are two alternative forms of the production function -

Cobb and Douglas and CES have been used. It is evident from their study that capital

elasticity (0.697) was higher than labour elasticity (0.425) in the small-scale

engineering goods industry during 1972-73 and it was estimated as 0.718 and 0.335

respectively during 1977-78. Further their study indicates that the engineering goods

industry was experiencing slightly increasing returns to scale during both the periods

under study, viz., 1972-73 and 1977-78. They have concluded that there no substantial

32
capital -labour substitution possibilities, especially in machine tools and printing

machinery industries.

Rajalakshmi (1985)43 analyses the growth and productivity of the Transport

Equipment Industry at aggregate level for the period between 1971 and 1981 by

carrying out econometric studies utilizing standard production function such as Cobb-

Douglas ,CES and VES and Solow’s total factor productivity indices. Her study of

transport equipment industry at aggregate level comprises of nine individual

industries which include Road transport, Rail transport, Ocean transport and Air

transport equipments.

The basic data for the Transport Equipment Industry have been mainly taken

from the Annual Survey Reports published by the Bureau of Public Sector Enterprises

(BPE). An exponential time trend has been incorporated in the Cobb-Douglas

production function to account for and measure neutral technological change of the

form:

V = a e Blt L02 K83 (or)

Log V = Log oc + 6]t + ^2 Log L + B3 Log K + U

The model derived from CES function of the following type has been

attempted for this industry to estimate technical progress and elasticity of substitution.

Log w L/V = ao + att + a2 Log w

33
Where ai = - X (1-c ) &2 = ( 1-cr)

So X = sl\ /a-\= - ai /a2 and c = 1- a2

The VES production function with the inclusion of a term for time is used in

this study as follows: -

LogV/L=Loga+b|t+b2logw+b3logK/L+e

a,b(b2andb3 are constants and e is the random error term.

She finds that estimates of Cobb-Douglas production function indicate the

non-occurrence of neutral technological progress in it between 1971 and 1981. The

marginal productivity of capital exhibits is very low though it shows a slight upward

trend. The fitted CES function shows that the elasticity of substitution (3) between

capital and labour is 0.944 (almost unity) and the industry experienced negative

technological change.

Agarwal (1986)44 applies cobb-douglas production function to estimate the

coefficient of inputs, their marginal productivities and shares in total output and

degree of returns to scale in 20 industries. For the seven industries data cover the

period form 1967-71 and the remaining thirteen industries cover the period from

1975-80. The data for output and inputs have been collected from the ASI. From his

study it is observed that the estimated co-efficient of capital and labour are negative

34
 in some industries. The estimated co-efficient of raw material is positive in all the

seven industries for the period 1967-71.

The estimated coefficients of capital are found negative in chemical and

chemical products, non-metallic products, jewellery and watches, and water works

and supply. The estimated coefficient of labour is found negative only in machine

tools and parts.

Mani and Sathyanarayana (1991)45 in their paper make an attempt to study

production function in sugar industry in a backward region with special reference to

chittoor co-operative sugars Ltd, chittoor, Andhra Pradesh. The CES, VES and the

cobb-douglas production functions are fitted to the data under study to examine their

relative importance. The data were collected directly from the office records of

chittoor co-operative Limited, for the period 1964-65 to 1984-85. The data were also

used to estimate the elasticities of output and the returns to scale in addition to

computing the marginal productivities of the factors. Their analysis reveals that the

cobb-douglas production function is more suitable for the study. Chittoor Co­

operative Sugars limited is found to have zero neutral technical progress and it is

operating under constant returns to scale. Labour is relatively a more important

factor than capital in terms of factor elasticities of output and marginal factor

productivity.

Singh and Ahmed khan (1991 )46 have attempted to examine I) the production

and sales performance and iijproduction efficiency of automobile industry in India

35
between 1965 and 1985. The main sources of data are Automobiles manufactures

Association of India and Annual Survey of Industries.

They found that the performance of the Indian automobile industry in terms

of production and sales has been reasonable. Further the labour productivity in case

of industry as a whole and motor vehicles and parts has observed an increasing trend

with decline in 1979-80. Moreover, capital productivity in case of industry as a

whole declined over the period.

Chandrasekaran and Sridharan (1993)47 have fitted cobb-douglas ,CES and

VES production function for the time series data obtained from ASI from 1973-74

and 1986-87 for cotton industry in India. Cobb - Douglas production function in log

linear form is used:-

Log V = Log a + pit + P2 Log L + P3 Log K + U

Where V is value added,a is efficiency parameter, P2 and P3 are elasticities

of output with reference to labour and capital. For empirical estimation of CES can

be transformed with linear focus and log form

Log V/L = po+Pi Log w + U

36
Where w is wage rate.

The variance or otherwise of elasticity of substitution to capital -labour ratio

is tested by fitting variable elasticity of substitution (VES) function. It is expressed

as follows:

Log V/L = a +b| Log w + b2 Log K/L + U

Where a, b| and b2 are constants.

In their study, returns to scale is found to be 1.22 which means that cotton

industry was operating under increasing returns. CES production function assumes a

relationship between value added per labour and wage rate independent of capital -

labour ratio. VES function fitted in this study has low explanatory power but still

significant.

Anita Kumari (1993)48 measures total factor productivities as well as partial

productivities for various public sector groups. The period chosen for her study is

1971-72 to 1987-88. For estimating the growth rate of TFP, cobb-douglas and CES

production function are used. She finds that the estimates of TFP for steel group and

consumer group show a falling trend in all three direct measures of TFP. The

estimates of growth rate of TFP given by the two production function methods are

different from those given by direct methods.

37
 A SUMMARY OF STUDIES ON PRODUCTION FUNCTION

Industry Form of the

s. Author Year
covered
Data Used
function
Main findings
No.

Indian Cross section Cobb-Douglas The sum of the coefficient of

25. Murti V.N.S and 1957
industrial firm wise data labour and capital have differed
Sastry V.K
sector as whole (1951 and 1952) significantly from constant
and cotton, returns to scale.
jute, sugar,
coal, paper
chemicals and
electricity
industries

1965 Indian Steel CM I 1946 to Cobb-Douglas Increasing returns to scale in

26. Sarkar A.K
Industry 1958 West Bengal constant returns to
scale in UP and Punjab and
decreasing returns to scale in
Delhi Increase in LP is attributed
due to capital intensity.

1965 Manufacturing Time seriesl919- Cobb-Douglas Increasing returns to scale in

27 Diwan R.K
sector of 58 United States manufacturing
United States industries.

Sastry V.S.R.K 1966 Indian Sugar CMI and ASI Cobb-Douglas Labour is found to be more
28.
Industry 1951-61 efficient than capital in the
tropical region while the reverse
holds good in subtropical.

1966 30 Indian CMI 1946 to Cobb-Douglas The average productivity of

29. Yeh Y.H.
Industries 1958 labour increases as the plant size
increases.

Diwan R.K and 1968 28 Indian CMI 1946-1958 CES production Elasticity of substitution in
30.
Gujarati.D Industries function Indian Industries is quite low.

Sankar U 1970 15 Indian CMI and ASI CES Production The elasticity of substitution
31.
Manufacturing 1946 to 1958 unction between capital and labour as 1
Industries for the Indian Sugar Industry.

Dcsai. Rohit D, 1971 Sugar Industry ASI Cross CES production The Sugar Industry in UP and
32.
Section 1960 and function Bihar was more efficient than
1965 that in the remaining States of
India.

Pathak.Pravin G. 1972 Nine ASI 1960-1966 Cobb-douglas Most of the industry groups show
33.
Individual roduction an evidence of constant returns to
industry group function scale.
in Gujarat

Mehta S.S 1974 Indian Sugar CMI and ASI Cobb-douglas Elasticity of substitution between
34.
Industry 1953-6 Production capital and labour lies in between
Function zero and unit.

1975 Indian Paper CMI and ASI VES,CES and Cobb-Douglas is consistent for
35.. Barthwal R.R.
Industry 1949 to 1964 paper industry. No technological
progress in the industry during
the study period.

Baneijee A. 1975 5 Indian CMI 1946-58 Cobb-douglas Elasticity of substitution is unity

36.
Industries Different forms in most of the cases.
of CES

Gupta G.S. and 1976 Sugar Industry CMI and ASI C D, CES, YES Evidence of increasing returns to
37.
Kirit Patel 1946-66 scale and labour seems to be
more important factor than
capital in terms of factor
elasticity of output.

38
 Industry Form of the
s. Author Year
covered
Data Used
function
Main findings
No.

Dholaki B.H 1977 Iron and Steel CM1 and AS1 Cobb-Douglas Elimination of errors in the
38
Industry 1946-66 measurement of capital input
alters significantly the estimates
of the relative factors.

Subramaniyan.G. 1982 Sugar Industry CM I and ASI VES,CES and Elasticity of substitution between
39
1953-69 CD capital and labour is unity.
Maharashtra is relatively the
most efficient region.

40 Babu V.G and 1983 Indian CM1 and ASI CES Different industries may
Vani K.V Manufacturing 1949-66 experience different types of
sector technical progress.

Arya I.C 1983 Associated Annual reports Cobb-douglas Constant return to scale exists in
41
Cement Co 1956-74 cement Industry.
Ltd., Bombay

42 Sandhu H.S and 1985 Small scale Cross -Section Cobb-douglas Capital elasticities were higher
Sodhi T.S engineering 1972-73 & 1977- and CES than labour elasticities.
goods 78
industries in
Punjab.

43 Rajalakshmi K. 1985 Transport ASI 1971-81 CD,CES and CES function shows that
equipment VES elasticity of substitution is almost
industry unity.

44 Agarwal .A.L 1986 20 Industries ASI 1967-71(7 Cobb-Douglas Estimated coefficient of capital
industries) arc negative in some industries

45 Mani.C and 1991 Chitoor co­ 1975-80 (13 CES.VES and Cobb-Douglas production
Sathyanarayana E operative industries (Office CD function is more suitable for the
sugars Ltd. records of study.
chitoor co-
ooperative sugars
Ltd.,

46 Singh,Suijet and 1991 Automobile ASI 1965to 1985 Cobb-Douglas LP has an increasing trend and
Ahmed Khan, Industry CP as a whole declined over the
Irshad study period.

47 Chandra sekaran 1993 Cotton ASI 1973-74 to CD,CES,VES Cotton industry was operating
M.Sridharan, and Industry 1986-87 under increasing returns to scale.
Bhavani

48 Anitha Kumari 1993 Various public ASI 1971-72 to C D and CES Growth rate of TFP given by
sector groups 1987-88 production function is different
form that given by direct
methods.

49 Rathinam.D 1996 Selected ASI 1975-76 to Costs of Growth of corporate sector is an

Manufacturing 1988- Production,Capi important facet of industrial
industries tal development of India.
structure.liquidi
ty and
profitability.

50 Hailin Liao,Mark 2002 28 89Company Total factor TFP growth rate estimates by this
Homes,Tom Manufactuimg records of the productivity study are growth greater than that
Weyman.Jones.Da industries in industries from estimated by previour studies.
vid Llewellyn selected Asian 1963-to 1998.
countries

51 Seema Sharma & 2003 Fertilizer ASI 1973-74 to Total factor Output can be produced beyond
Upadhyay industry 1997-98. productivity the installed capacity without
adding to the capacity by using
more material and energy.

39
Summary of Reviews

Most of the studies of Indian Industries attempted to measure the technical

change for the respective periods of study. This has been done both through simple

ratios or productivity indices of capital and labour and of capital per labour and

through simple ratios or productivity indices of capital and labour and of capital per

labour and through production function approach.

%

The study by Balakrishna (1962) of 12 industries for the period 1948,1951 and

1953 shows that the 12 industries considered for productivity measurement contribute

roughly 75 percent of output, input and in other aspects. Mukerji (1966), Sastry

(1966) and Shivamaggi and his colleagues (1968) conclude that increase in fixed

capital per worker. The study by Raj Krishna and Mehta (1968) of 28 industries for

the period 1946-1963 confirms the conclusions arrived at in some of the earlier

studies. The study by Banerjee (1971) and Mehta (1980) shows that labour

productivity was found to increase while capital productivity showed a decrease in

many industries and total factor productivity showed a downward trend. Alam Khan

(1984) attempts a similar exercise for selected manufacturing industries for the period

1946-1967 and finds that labour productivity and capital -labour ratio had increased

and capital productivity declined as a result of capital deepening. Annamalai (1986)

examines partial and total factor productivity for Indian Manufacturing and four

industries for the period 1959-1980 and finds a declining tendency in total factor

productivity caused the cost of production to increase.

40
 Ahluwalia (1991) and Chandrasekaran and Bhavani Sridharan’s (1993) studies

are strictly comparable with other studies as labour productivity had increased at a

higher rate than capital productivity.

It appears that the most of the empirical work has been based on the published

sources, namely the CMI and /or the ASI. The quantity of research effort that has

gone into the areas covered by this section is no doubt impressive. The review reveals

that considerable work has been done on productivity analysis for Indian

Manufacturing Industries. Studies at individual industry, inter-industry , inter-regional

and inter-country productivity differences etc., are limited.

Productivity studies have only labour productivity and capital productivity

measured in terms of value added per worker and capital. This measure suffers from

many obvious limitations. It is suggested that studies designed to measure a)

Productivity of all factors, including labour, capital, raw materials , etc., and b)

Productivity in real terms should be encouraged.

Sandesara, in his survey article, suggested that further research efforts on these

problems, to be more meaningful, will have a) to tap other published material as may

be available b) to collect detailed data from the field and c) to probe beyond the

statistical conclusions derived from the census and the survey data.

Considerable work has been done on the theoretical and empirical problems of

estimating the production function of the Indian Industries. The studies are mainly

aimed at analyzing the contributory factors of output growth, returns to scale,

41
elasticity of factor substitution etc., These studies using the CMI and ASI data, both

cross-section and time series, estimating cobb-douglas, constant elasticity of

substitution and variable elasticity of substitution production function for Indian

manufacturing industries.

Many studies are based on both CMI and ASI data. These include those by

Sastry (1966), Mehta (1974), Birthwal (1975), Gupta and Kirit Patel (1976), Dholakia

(1977), Subramaniyan (1982) and Babu and Vani (1983). Many studies are restricted

only to the CMI period up to 1958, in order to avoid the differences. These include

those by Sarkar (1965) ,Diwan (1965),Yeh (1966), Diwan and Gujarati (1968),

Sankar (1970) and Baneijee (1975). Very few studies have tried to adjust the capital

for capacity utilization like those of Dholakia (1977) and Subramaniyan (1982).

Anitha kumari (1993) conducted a study on various public sector groups

based on ASI data from 1971-72 to 1987-88 has applied both Cobb-douglas

production function and CES production function. The major finding of her study was

that the growth rate of TFP given by production function is different from that given

by direct methods.

Palaniappan (1995) conducted an inter regional study on sugar industry with

special reference to growth, productivity and production function based on ASI data

from 1973-74 to 1990-91 has applied Cobb-douglas production function , VES and

CES production function. Some of the major findings of his study are, the elasticity of

substitution between capital and labour is either zero or constant and the his findings

clearly ruled out the possibility of variable elasticity of factor substitution in the

42
 Indian Sugar industry both at the regional level and national level. Further, there is no

evidence for neutral technological progress over the study period.

The estimates of the elasticity of substitution between capital and labour based

on logarithmic regressions of value added per labour on the wage rate and time for

sugar industry corresponding to All India and six selected regions covering the period

1973-74 to 1990-91 show that the elasticity of substitution between capital and labour

is unity. Thus from the findings one may infer that there is an evidence of cobb-

douglas production function for the sugar industry in the selected regions an All India.

These results are comparable with Asit Banerjee (1975) and Subramaniyam (1986).

Rathinam ( 1996) conductd a study on Selected Manufactuing industries based

on ASI data from 1975-76 to 1988-89 with reference to Cost of Production,Liquidity

and capital structure. Among the selected industries he studied about the paper and

paper products manufacturing industries also. Main finding of his study is Paper and

Paper products industries are taking more risk in order to earn more returns.

Hailin Liao, Mark Holmes, Tom Weyman, Jones and David Llewellyn (2002)

had conducted one study on the Productivity growth of East Asia Economies

Manufacturing: A Decomposition analysis. The major analysis of the study is

connected with Total factor productivity in 28 manufacturing industries in East Asian

economies. The objective of the study is to apply a stochastic frontier production

model to identify the sources of economic growth in eight Asian Economies from

1963-1998. This study also enables us to examine industry level Total factor

productivity performance by using sector-level data available with the industries.

43
 Seema Sharma and Upadhyay (2003) conducted a study on Econometric

analysis of Total Factor Productivity in Indian Fertilizer Industry by making use of

ASI data over a period of 25 years from 1973-74 to 1997-98. The analysis found that

industry exhibited decreasing returns to scale during the entire study period. Technical

progress has taken place at an increasing rate. The study reveals that technical bias

has been in favour of material input. At the same time analysis showed that scale bias

has been against the input. Energy and material came out to be substitutes of capital

leading to a major implication that output can be produced beyond the installed

capacity ( i.e. without adding to the capacity) by using more energy and material.,

specially when these two inputs emerge as complementary to each other.

Roger Wright and Hawkins Wright (2004) conducted one study on the world

scenario of paper industry. In that study both of them have compared the Productivity

of the paper industries all over the world. In that study they analyzed the factors

responsible for the growth and productivity trend prevailing in China and India. The

cheap labour supply in both the countries are responsible for the increase in labour

productivity in these countries of the world.

Don Roberts, Jonathan Lethbridge and Herve Carreau (2005) conducted one

study to analyze the factors responsible for the changes in the paper industries. In that

study they identified five major factors responsible for the growth of paper industries

in Asian countries comparing with British Columbia. They are availability of labour,

availability of wood, low cost energy , increase in industry consolidation and decrease

in the raw materials prices.

44
 Pari C.A.,(2006) conducted a study on the performance evaluation of Tamil

Nadu News Print Ltd., Pugalur, Karur District, Tamil Nadu, from 1990-91 to 2004-

2005. In this study he has analyzed the Production, Productivity, Production function,

Cost of Production, Capital structure, Liquidity and Profitability of Tamila News Print

Ltd., Some of the major findings of his study are that among the Paper mills of the

southern region the company enjoys high operating leverage being fully integrated. Its

usage of bagasse as raw material and its cogeneration facilities helps it enjoy the

highest EBITA margins in the industry.

45
 REFERENCES

1 Balakrishnan .R “Productivity Measurement in Indian Industry”

2nd ed. Madras university Press, 1958, P.2.

2 Beri G.C “Measurements of production and productivity in

Indian Industry”, Asia Publishing House, 1962.

3 Mukeiji.G.P “On some indices for measuring “Localization”

And Estimating its effect on “Productivity” The
Indian Economic Journal Oct-Dec. I Vol.10 1962-
63 p. 143.

4 Diaz Alejandro, “Industrialization and labour productivity

Carlos.F. differentials, “Review of Economics and Statistics”,
Vol. XLVII No.2 May 1965 p.207.

5 Mukerji K. “Long -term Trends in productivity in Jute Industry

in India”, Indian Journal of Industrial relations
Jan. 1966, New Delhi Vol.2 No.l P.70

6 Sastry V.S.R.K “Measurement of productivity and production

function in sugar industry in India, 1951-61”, Indian
Journal of Industrial Relations, July 1966, New
Delhi Vol.2 No.l P.70.

7 Shivamaggi H.B, “Wages, Labour Productivity and costs of production

1951-61” The Economic and Political weekly, May,
1968 Vol.3 No. 18 P.710.

8 Rajkrishna “Productivity Trends in large scale industries”

and Economic and Political weekly, Oct, 1968
Mehta S.S Vol.No.43 P. 1655.

9 Raghavachari “Technological progress in the sugar industry”

Economic and Political weekly Jan. 1969 vol. No.25
P.1003-1009

46
10 SinhaJ.N. “Wages and productivity in selected Indian
and Industries” Vikas Publication, 1970.
Sawhney P.K

11 Somayajulu, V.V.N “Production function studies of Indian Industries - A

and George Artha Vijnana, Dec. 1983, Vol.25 No.4
Jacob survey”, P.402.

12 Annamalai .S. “Productivity in Indian Cotton Textile Industry”

Madras University unpublished M.Phil dissertation,
June 1978.

13 Mehta, S.S. “Productivity, Production function and Technical

Change: A survey of Indian Industries” Concept
Publishing Company New Delhi 1980.

14 SastryD.U. “Productivity in the Indian Cotton Mill Industry

(MIMEO), Institute of Economic Growth, University
Enclave,Delhi.

15 JaishankarV. “Productivity And Technical change in Indian

Industries”, Indian Dissertation Abstracts Jan -June
1982 p.43.

16 Mukherji, “Productivity Growth and Structural Change in

Indranath Indian Industries” - Productivity trends in the
Manufacturing sector of Bihar”, Seema Publication,
New Delhi, 1983.

17 ArunGhose “Efficiency and Productivity of Indian Manufacturing

Industry-A Few case studies, Economic and Political
Weekly Vol.XIX No. 31,32 Aug. 1984 P. 1397.

18 Alam Khan, “An Econometric Study of Technological

Shama Relationships in some manufacturing industries of
Bihar” Indian Dissertation Abstracts, A Quarterly
Journal Oct-Dec 1984 Vol. XVII No.4 P.424.

47
 19 Annamalai. S. “Price formation in Indian Manufacturing sector”
Madras University unpublished Ph.D Thesis, Jan
1986.

20 Dabir-Alai, “Trends in Productivity growth across large scale

Parviz., Manufacturing Industries of India 1973-74 to 1978-79
Indian Economic Review July-Dee 1987 Vol.XXII
No.2 p.151.

21 BhatiaD.P. “Productivity in the Manufacturing sector of India,

the UK and The US-estimates and comparisons
“Indian Economic Journal Oct-Dec.1990 Vol.38
No.2 p. 100

22 Ahluwalia, “Productivity and Growth in Indian Manufacturing”

Isher Judge - Trends in Productivity and Growth. Oxford
University press, New York -1991.

23 Chandrasekaran.M “Productivity Trends in Cotton Industry in India"

and The Indian Economic Journal Vol 41 Oct-Dec 1993
Bhavani No.2 P.61.

24 Palaniappan.A “An inter-regional study on sugar industry with

special reference to Growth, Productivity and
Production Function” Bharathiyar
University,Ph.D.,Thesis,December 1995.

25 Kendrick ,J. “Productivity Trends in United States” NBER,

Princeton 1961.

26 Brown M. “On the Theory and Measurement of Technological

Change” Cambridge University Press, 1966.

4. 27 Murti V.N.S “Production Function for Indian Steel

and Industry”Econometrica Vol. 25 No: P.205.
Sastry V.K.

28 Sarlcar A.K. “Production Function for Indian Steel Industry” The

Indian Economic Journal, 1965 Vol.12. No.3 P.263.

48
29 Diwan R.K “ An Empirical Estimate of the Elasticity of
Substitution Production function” The Indian
Economic Journal, 1965 Vol 12. No.4 P.364.

30 Sastry V.S.R.K “ Measurement of Productivity and Production

Functions in Sugar Industry in India : 1951-61”,
Indian Journal of Industrial Relations, 1966 vol.2
p.70

31 YehY.H “ Economies of Scale for the Indian Manufacturing

Industrie” Indian Economic Journal, 1966 Vol. 14
P.275.

32 Diwan R.K “Employment and Productivity in Indian Industries”

and Artha Vijnana 1968 Vol. 10 P.29.
Gujarati D.

33 Sankar U. “Elasticities of Substitution and Returns to Scale in

Indian Manufacturing Industries” International
Economic Review,1970 Vol. II No.3 P.399.

34 Desai, Rohit .D “CES Production Function for Indian Sugar Industry

and Regional Efficiency” Anvesak, 1971 Vol.I No: 2
P.265.

35 Pathak, Pravin G. “Production Function for Gujarat Industries”

Anvesak Vol. II No. 1 P. 11.

36 Mehta S.S. “Analysis of Sugar Industry”- A Production Function

Approach” Anvesak 1974 Vol.IV No.2 P.197.

37 Barthwal R.R. “The Economics of Production Function: Some

empirical Tests for Indian Paper Industry”. Southern
Economic Review 1975,Vol.IV, No.3, P.173.

38 Gupta G.S. “Production Function in Indian Sugar Industry”

and Indian Journal of Industrial Relations, 1976 Vol.2
Kirit Patel No.3 P.315.

49
39 Dholakia B.H. “Measurement of Capital Input and Estimation of
Time SeriesProduction Function in Indian
Manufacturing”, Indian Economic Journal, 1977,
Vol.24No.3 P.333.

40 Subramaniyan. G “ Regional Efficiency in Indian Sugar Industry”

Madurai Kamaraj university, Madurai, 1986.

41 Babu.V.G “Linear Estimation of the CES Function-Indian

and Manufacturing sector 1949-58 and 1959-66”, Indian
Vani K.V Economic Journal, 1983-84 Vol.31 P.91.

42 Aryal.C “Production Function Estimates for Associated

Cement Company Ltd” Anvesak 1983, Vol XIII No.l
P.103.

43 Sandhu H.S “Production function analysis for Engineering Goods

and Industry in Punjab- A Case Study” Margin, 1985,
Sodhi T.S Vol. 17 No.3 P.66

44 Rajalakshmi K. “Production Function Analysis of Public Sector

Transport Equipment Industry in India” The Indian Economic
Journal 1985 Vol.33 No.2 P.17.

45 Agarwal A.L “On Estimation of Cobb-Douglas Production

Function in selected Indian Industries”Artha Vijnana
1986 Vol.28No.2 P.152.

46 Mani C. and “Production Function in Sugar Industry- A Case

Sathayanarayana .E Study “Margin” 1991 Vol.23 No.3 P.263.

47 Singh, Suiject “Automobile Industry in India: Growth Performance

and and Productive Efficiency” Indian Economic Journal
Ahmed Khan, Irshad 1991-92 Vol.39 P.93.

48 Chandrasekaran M. Opcit. P.61

50
49 Anita kumari “Productivity in Public Sector Analysis at Industrial
Group Level” Economic Political weekly, 1993 Vol.
XXVIII No.48 P.145.

50 Rathinam .D “Costs of Production,Capital Structure , Liquidity and

Profitability: A study of selected manufacturing
industries of private corporate sector in India”.,
Bharathiyar University,unpublished Thesis, April
1996.

51 Hailin Liao, “Productivity growth of 28 Manufacturing industries

Mark Holmes, in selected countries of Asia” LougbroughUniversity,
Tom Weyman, ones, unpublished thesis, December 2002.
avid

52 Seema Sharma and “Econometric Analysis of Total Factor Productivity

Upadhyay in Indian Fertilizer industry”, IIT., New Delhi, Dec
2003.

53 Roger Wright and “World Scenario of Paper Industry” an article,

Hawkins Wright London September 2004.

54 Don Roberts,Jonathan “Change in the Global Forest Product Industry”British

Lethbridge and Herve Columbia, March 2005
Carreau

55 PariC.A “A study on the performance evaluation of Tamil

Nadu News Print Ltd., Pugalur, Karur District, Tamil
Nadu”, unpublished thesis, February 2006.

51
 CHAPTER III

PRODUCTIVITY AND PRODUCTION FUNCTION:

THEORETICAL ASPECT

Industrial technology can be broadly defined as the knowledge regarding the

industrial arts existing at a point of time. The ruling technology sets the conditions for

the optimum use of resources, i.e., it sets the limit on how much can be produced with

a given amount of input. Given the levels of technology, there are various techniques

of producing goods and services. Technical progress is the improvement in the

knowledge about the industrial arts and implies that either greater output can be got

with the same volume of inputs or the same output with lesser inputs.

Technological changes can be measured through the simple ratios and through

production approach1. The ratio analysis can be in terms of i. Simple traditional

partial productivity indices of labour and capital.ii. total or multi factor productivity

indices which can be measured a) arithmetically2 and b) geometrically3 and iii.

Decomposition of technical change into components, where changes in productivity

and technology are analysed in terms of prices and costs4. By these methods, some of

the parameters of the production function can be inferred.

In the production function approach, the various components of technological

change can be estimated directly. A production function shows the relationship

between the maximum output obtainable from a given set of inputs and the relation

52
between the inputs themselves, in the existing state of technological knowledge. The

technology is inbuilt here.The efficiency of technology, the degree of economies of

scale, the degree of capital intensity of technology and ease with which factors can be

substituted for each other, all can be measured by estimating the parameters of the

underlying production function. Two specification of production functions are the

Cobb-Douglas and Constant Elasticity of Substitution.

The said methodology assumes that the objective of each industrial unit

operating in a competitive market is to maximize its profit. The production factors are

paid equal to their marginal product. This implies that the basic frame work is

neoclassical, in which the demand of a specific factor is determined by the production

function, the prices of output it produces and of the various factor services it uses. The

equilibrium of the system determines the quantities and prices of the various factors

used and products hired out.

III.1. Productivity Concepts

Productivity deserves the attention that it has received, for it is a measure of

efficiency with which resources are converted into commodities and services that man

want5.

The term ‘productivity’ is used to denote the ratio of output to any or all

associated inputs in real terms. Ratios of output to particular inputs may be termed

partial productivity measures. Output per man-hour or output per unit of capital can

be termed as partial productivity ratios. These ratios are useful for measuring the

53
saving, in particular, achieved over time. But they don’t measure over-all changes in

productive efficiency. They are affected by the changes in the composition of input

i.e., by factor substitution6.

Generally, measurement of productivity is reckoned in labour. Economists and

businessman have used the term productivity in relation to the output secured for a

given amount of labour. Productivity therefore means physical volume of output

attained per worker or per man-hour. Change in output-labour ratio represents a

change in the efficiency of labour as a factor input only in combination with changes

in the magnitude and direction of other inputs like capital and technology. Output-

labour ratio would be influenced by among others, the skill and dexterity ot the work

force, capital labour substitution, technical improvements, managerial efficiency, etc.

Changes in this ratio signify only whether labour as a factor input has been utilized

better or otherwise in conjunctions with other factors of production.

According to Prof.R.Balakrishna, the indices thus derived are based on labour,

they measure the industrial efficiency in general reckoned in terms of a specific

factor. Any factor affecting output or labour may have an influence on labour

productivity.

Therefore, changes in the output of labour are measurement of general

efficiency. So what is measured is the combined effect of the diverse influence at

work in a productive function.7

54
 Solomon Fabricant argues that change in output per man hour shows the

combined effect on the product obtained from an hour of labour of two groups of

factor. First, those causing changes in the volume of tangible and intangible capital

available per man hour. If the relationship between value added (V) and labour (L)

and capital (K) inputs are given by

V(t) = A(t)f[K(t).L(t)]

Then

V(t) A(t)f [ K(t). L (t)]

L(t) L(t)

Output per worker depends on A(t), an index of technical change, amount of

labour and capital8. Therefore a better measure is one that compare output with

combined use of all resources.

The ratio of output to an input is known as partial productivity ratio. There are

as many partial productivity indices as there are factors of production. The most

important and most often used are the partial productivity indices of labour, capital

and raw materials.

These productivity ratios can be represented by

V Output
APL = -— =-------------
L Labour input

Which is the average product of labour or labour productivity;

by
V Output
APL = -— =------------
K Capital input

55
Which is the average product of capital or capital productivity;
by

V Output
APL = -— =------------
M Material input

Which is the average product of capital or capital productivity.

These ratios show the amount of output per unit of labour, capital and material

and if they rise, then there is an increase in the productivity of that factor. The inverse

ot these productivity ratios implies unit factor requirements per unit of output.

Increase in any of the above partial productivity ratios means that over a period of

time more output is possible with decreasing amount of inputs and there is saving in

the use of a particular input over time.

If the underlying production function is CES then the changes in labour

productivity index can be broken into

i. Neutral technological changes;

ii. Changes in inputs and economies resulting from changes in the scale

of operation; and

iii. Non-neutral technological changes9.

Changes in average productivity of labour and capital could be due to changes

in any one or several of the forces mentioned above and just the observation of the

movements in labour productivity index or capital productivity does not tell which

force or set of forces generated that movement. These partial productivity ratios just

denote the resources foregone in the production of an additional unit of output.

56
Therefore, the average product of any single factor cannot be used as a index of

overall efficiency.

Sometimes different partial productivity indices have opposite trends and in

that case no judgment is possible about overall industrial efficiency. However, if all

the partial productivity indices have similar trends, then it will be possible to draw

inferences about the overall efficiency10.

In spite of the fact that the partial productivity indices of labour and capital

assume a one factor world, they are important and in a particular context the average

productivity of labour alone or capital alone may be important depending on the

question in mind. The partial productivity indices have been used to find out implied

production with a view to approaching the question of the sources of growth of

output.

Ill .2. Total Factor Productivity

The total factor productivity ratio is the most comprehensive one. This index

measures the output per unit of labour and capital combined. This can be calculated

arithmetically and geometrically.

Kendrick’s arithmetic measure is based on a linear production function of the

form

V = aL + bK

57
Where V is output, L and K denote labour and capital inputs and ‘a’ and ‘b’ are

coefficients of labour and capital. Measured arithmetically, total factor productivity is

given by

V
P =............................. -
ao L + bo K

Where V is an index of output; K and L are index of capital and labour

respectively; ao and b0 are the base year weights. The weights are either prices of

labour and capital services or the percentage shares of labour and capital in a base

year.

The weighted inputs of labour and capital in each year are added to get the

total input. Then an index of output as also of total input is prepared. The ratio of

output index to that of total input will yield the arithmetical total factor productivity

index.

Solow’s geometric measure is based on the following forms of production

function with constant returns to scale and neutral technological change. The

functional form is

V K
------ =A(t) ----- b
L L

Where V/L is output per person, K/L is capital per person and A and b are

constants, expressing the above relation on logarithmic form it becomes,

58
 V
Log----------- = Log A (t) + b log
L

Putting this relation in incremental form

V
d------
L = d A (t) d (K/L)
-........................ +b ----------- (or)
V A (t) (K/L)

dA (t) d (V/L) d(K/L)

------ = -------------- b ----------- (or)
A (t) (V/L) (K/L)

d (V/L) / (V/L)

is the rate of change of output and d(K/L)/K/L is the rate of change of capital per

person and b is the capital’s share of output. Therefore, the rate of change of total

factor productivity is the difference between the rate of change of output and the rate

of change of capital per person multiplied by capital’s share of output. This yields

dA(t) / A(t) series, from which A(t) series can be derived by assuming the initial

value of A (t) as one. Thus, the rate of change of total factor productivity is the

difference between the rate of change of labour and capital. The weights are the

percentage shares of labour and capital.

In these models, the effects of technical progress (as represented by a time

term) and capital accumulation are separated. The basic procedure is to estimate the

contributions made to the growth in output by the increases in inputs of labour and

59
 capital over a period by multiplying the observed increases in inputs by the observed

factor prices (taken as a measure of marginal products) and deducting the results form

the overall growth in output, the residual is attributed technical progress.

Both these measures of total factor productivity implicitly assume a

homogeneous production. Under a competitive equilibrium the Kendrick and Solow

measures are equivalent11. The magnitude of technological change or the residual

derived through the total factor productivity approach will depend upon the form of

production function. If the latter is “misspecified”, then errors will spill over into the

residual . This error can be eliminated by estimating the parameters of a correctly

specified production function.

III.3.Production Function

The components of technological change can be estimated directly by finding

out empirically the magnitude of the parameters of the underlying production

function. A production function is the relationship between the quantities of inputs

and outputs for efficient production by all possible processes set up as a functional

form. A production function may then be specified as follows:

V = f (K,L ) for K>= 0 and L> = 0.........(1)

Where V is output, K and L are the capital and labour inputs respectively. The

production function is assumed to be twice differentiable and for which K and L are

specified to take on non-negative magnitudes. The production function portrays the

60
level of output, the marginal and average productivities of factors, and marginal rate

of substitution between pairs of factors, for all relevant patterns of factor inputs.

The production function can be represented by iso-quants each representing

various combinations of inputs which produce a given output. A well- behaved

production function must possess certain basic properties i.e., a minimum set of neo­

classical criteria.

The various partial derivatives of (1) will be as follows:

fL = 8f/8L (la)

fK = Sf / 8K (lb)

fLL =82f/8L2 (lc)

fKK=82f/8K2 (Id)

f KL = 82f/8K8L = 82f/8L8K (le)

(la) and (lb) are the marginal productivity of labour and capital, respectively,

(lc) and (Id) are variation of marginal productivity of labour and capital with respect

to labour and capital itself, (le) is the variation of marginal productivity of capital (or

labour) with respect to labour (or capital).

The first neo-classical criterion of a well-behaved production is that any

increase in inputs should have a positive effect on output-marginal product of labour

and capital should be positive,i.e.,(la) and (lb) should be positive.

8f/8L > 0 and 8f / 8K > 0

61
 This implies that the iso-quants generated by a well- behaved production

function should be downward sloping or dL = -g(dk), where g is positive function of

labour and capital. If both labour and capital inputs add a positive amount to the

output and in order to maintain the same level of output if one factor is increased, the

other factor can be reduced.

The second criterion for a well-behaved production function is that the rate of

change of each marginal product should be negative. Symbolically it means:

82f/8L2 < 0 and S2f/SK2<0

This criterion will ensure equilibrium and this implies that iso-quants

generated by a well-behaved production function are not merely downward sloping

but also convex to the origin. This implies that if only one factor is increased ,keeping

other factors constant then the total product increases but at a decreasing rate. This is

the familiar law of diminishing returns. Each iso-quant, which is convex downwards,

expresses the law of diminishing marginal rate of technical substitution (MRTS)

between factors.

MRTS = -dL/dK = (df/dK) / (df/dL)

i.e., means that the marginal product of one factor will increase when more of

the second factor is added. The marginal product of labour should increase when the

capital increases.

62
 A third criterion is that a well-behaved production function should be able to

show any degree of economies or diseconomies of scale. Usually, a production

function specifies a priori constant returns to scale. But it should be permitted to

assume any degree of homogeneity that is dictated empirically. Non-constant returns

to scale have important implication for growth and therefore, the basis of degree of

economies of scale should be empirical rather than a priori, symbolically this means:

>
f(^.K,XL) = X f ( K,L) where X = 1
<

The production function is the relation between the quantities of factors and

the quantity of product and is naturally given by technical consideration. Therefore,

the technology is embedded in the production function and can be expressed in terms

of it. Therefore, a production function can be represented through its parameters the

efficiency of technology, technologically determined economies of scale, the capital

intensity of technology and ease with which factors can be substituted for each other.

All these four components of technological change can be expressed in terms of a

production function.

The specific form of production function may be cobb-douglas and /or

constant elasticity of substitution. The essential difference between the two is that

cobb-douglas assumes that elasticity of substitution is always equal to one. In constant

elasticity of substitution can take any value from zero to infinity.

63
Cobb-Douglas Production Function:

The unrestricted cobb-douglas production function for two factors may be

specified as follows:

V = ALaKb forA>0 and

0>a< 1

0<b< 1

where V is output and L and K are labour and capital inputs and A, a and b are

constants to be determined empirically. The marginal products of labour and capital

can be found by differentiating partially with respect to labour and capital.

5V V
Marginal product of labour =-----= a A La l K b = a —
5L L

8V V
Marginal product of labour =-----= a A LaKb l = b-------
8K L

Since V,L,K, a and b are all positive, the marginal products of labour and

capital are positive , which fulfils the first neo-classical criterion of a well-behaved

production function. Differentiating the marginal products of labour and capital

respectively, we get

52V V
------------ = a (a-1) A La 2 K56 = a(a-1)-------
8L2 L2

64
 52V V
----------- = b (b-1) A LaKb'2 = b (b-1)
5 K2 K2

These expressions will be negative only when the value of a and b are less

than one. Therefore, Cobb-Douglas production function will satisfy the second

criterion only when a and b are less than one. Normally a and b are less than unity; a

and b are equal to partial elasticity of output with respect to labour and capital

respectively:

L 5V
a =---- x....... -
V 5L

K 5V
a =---- x------
V 8L

Therefore a and b represent individually the percentage change in output for

percentages in labour and capital. The two co-efficients taken together measure the

total percentage change in output for a given percentage change in labour and capital.

This implies that (a+b) show the degree of homogeneity in the Cobb-Douglas

Production Function. Doubling the labour and capital, the right-hand side becomes

A (2L)a (2K)b = 2a+b A La Kb

The output increase by 2a+b. If a+b< 1, the output increase would be less than

double; if a+b>l, it would be more than double; if a+b=l, the output would just

double. Therefore, there will be diseconomies of scale, constant returns to scale and

increasing returns to scale. Economies of scale depend on whether a+b is less than

65
one, equal to one or greater than one. This implies that as a Cobb-Douglas production

function can represent any degree of returns to scale it satisfies the third criterion

also.13

In the Cobb-Douglas Production Function V,L and K represent output, labour

and capital variables and A, a and b are constants to be determined empirically. A

here is the efficiency parameter. For every input combination, the greater is A, the

greater is the output level.

8V V
Since......... =-------- , a proportional change in A produces a proportional
5A A
change in output,Ceteris paribus. The sum of the partial elasticities ot Cobb-Douglas

production function, a+b, indicates the degree of returns to scale. The returns to scale

can change according to change in the scale of operations as well as in technology.

The two cannot be separated. However, assuming that if the variations in the degree

of returns to scale are due to technological change only, then the sum of the

elasticities will change but the ratio of the elasticities will remain unaltered14.

The changes in the capital- intensity of a technology will lead to a change in

‘a’ relative to ‘b’. In the Cobb-Douglas production function, the elasticity of

substitution is unity and thus unchanging. Therefore, the changes in the elasticity of

substitution can’t be represented in the Cobb-Douglas production function. Thus of

the four measurable properties of technological change, only three can be measured

by Cobb-Douglas. Actually in the Cobb-Douglas frame work only a neutral technical

change can be measured.

66
 The Cobb-Douglas production function can be used to find out proximate

causes of the sources of output growth. The output growth may be due to increase in

the labour force, capital stock and technical change. The intensity of these sources of

growth may vary across industries. For measuring the technical change through Cobb-

Douglas, an exponential time trend is incorporated. Then the Cobb-Douglas

production function may be specified as

V = ALaKbert

Where an exponential ert has been introduced to take care of technical progress.

Cobb-Douglas assumes a priori that elasticity of substitution between labour

and capital is equal, which may not be empirically true. Hence such an assumption

may lead to some specification error15. Also the elasticity of substitution is a crucial

economic parameter having important policy implications for economic growth,

international trade, and relative distribution of income and resource allocation.

An industry which has relatively high elasticity of substitution will usually

have a higher output rate as compared to an industry which has low elasticity of

substitution16.

Constant Elasticity of Substitution

Constant Elasticity of Substitution (CES) production function permits

elasticity of substitution to take on any value from zero to infinity. The form of this

function is as follows:

V = A [ 8 K'p + ( 1 - 8) L _p ] ~1/p (CESI)

67
 Where V,K and L refers to output, capital and labour input and A, 8 and p are

efficiency distribution and substitution parameters respectively and the elasticity of

substitution is

1
5= -------
1+p

In this function elasticity of substitution can take any constant value from zero

to infinity. This function will generate iso-quants which will be downward sloping

and convex to the origin. However, in this formulation, only constant returns to scale

can be represented. This implies that this formulation is incapable of characterising

any degree of returns to scale. Technical progress may be introduced into the ACMS

production function in the following three ways17.

Hicks neutral technical change can be introduced by putting A = Ao e'1 and

hence the function will be as follows:

V = Ao ert [ 5 K "p + (l- 5) L -p]-,/p (CES II)

This means that in Hicks neutral case the efficiency of both factors changes

equally. In Harrod neutral case only labour is gaining in efficiency, thus the functional

form will be

V = A [5 K -p + ( l - 5) (Lert P) ]',/P (CES III)

The Solow type of neutrality is that of capital gaining in efficiency and may be

expressed as

V = A [6 (e rt K)'p + ( l - 5) L “p ] l/p (CES IV)

68
 These formulation only test whether there is any neutral technical change.

Therefore, the CES production function has also been modified to study the rate of

factor augmentation and the extent to which the technical progress is biased towards

uneven factor saving18.

V - [ (E, L)'p + (Ek K)‘p]'1/p (CES V)

Where Ei L and Ek K are labour and capital inputs, respectively in efficiency

units, L and K being measured unconventionally.

These formulations of CES production function assumes constant returns to

scale. For giving up the assumption of constant returns to scale, Brown and De Cani19

introduce one more parameter, m, which can characterize any degree of returns to

scale. This has the same general form.

But can exhibit any degree of returns to scale. This is as follows:

V= A [ 8 K‘p + (1- 8) L p]( m/p) (CES VI)

In this a new parameter m has been introduced: m will be greater, equal or less

than one for increasing, constant and decreasing returns to scale, respectively.

In these formulation the neutral technological changes are represented by

efficiency and scale parameters, A and m and non-neutral technical changes by

capital- intensity and substitution parameters 8 and p.

The more general form of CES function fulfils all three neo-classical criteria

of a well-behaved production function.

69
 All these CES production function are non-linear in the parameters and

therefore, difficult to estimate.The parameters or CES production function can be

estimated either directly or indirectly by using marginal productivity conditions.

V.E.S.production function

Recently some attempts have been made to get a new production function to

meet the criticism leveled against both Cobb-Douglas and CES production functions.

The general approach of these studies have been the assumption that the elasticity of

substitution is a linear function of the ratio of two inputs and then to integrate the

resulting differential equation to arrive at the implied production function. The

resulting production function is the generalisation of the CES which possesses the

desirable properties of variable elasticity of substitution.

III.4.Methodology for the Present Study

In order to test the objective of the study, the important statistical and

mathematical tools such as mean, co-efficient of variation, regression models, etc are

used. Growth of paper industry in India and the selected regions is analysed by

computing percentage rate of changes and trend rate of growth. This study also

examines whether the growth rate was accelerating or decelerating. The percentage

rates of change in paper production related variable have been measured by taking

year to year changes which would reveal the period of higher rate of increase in

production and factors responsible for the same. It is measured as follows:

70
 p, -p,-l
------------ x 100
Pt-1

Where Pt refers to current year value and Pt - 1 refers to previous year value.

The trend rates of growth have been estimated in semi-log form. That is

Y = aebt

(OR) In Y = ai + bit + ui (1)

Y = aebt + c'2

(OR) In Y = a2 + b21 + b312 + u2 (2)

where Y is the variable for which trend rate of growth is to be estimated at t is

the time, with 1973-74 =1. The co-efficient of t2 in equation (2) will exhibit

accelerating or decelerating trend in the dependent variable. Ui and U2 are error

terms.

Fluctuation in paper production in India is studied by estimating the

coefficient of variations. (C.V) Co-efficient of variation is calculated by using the

following formula:-

a
C.V = ------ x 100
X

Where a = Standard deviation and X = arithmetic mean.

71
 The various partial productivity ratios and total factor productivity index are

measured as under:

\/iuat
abour Productivity

Here the labour productivity for All India is measured in the following ways.

RGVO
i) a) LP = -—......
L

RGVO
b) LP =.............
MH

RVA
ii) a) LP =-------
L

RVA
b) LP =-------
MH

Q
iii) a) LP =-----
L

Q
b) LP =-------
MH

2. Capital Productivity

In this study the researcher measure the capital productivity in real terms. For

capital productivity measurement of All India the researcher used the following

methods.

72
 RGVO
a) CP =----------
RCS

RVA
b) CP =----------
RCS

Q
c) CP =----------
RCS

3. Raw materials productivity

In this study the researcher also measure the raw materials productivity. For

productivity calculations the real value of raw material is used. The real value of raw

material is obtained by dividing the gross value of raw material by price of woodpulp.

Since woodpulp occupies the major portion of gross value of rawmaterials the

woodpulp price is used to calculate the real value of raw materials. Price index of

woodpulp is calculated by taking 1979-80 as the base year. Material productivity is

measured as,

RGVO
MP =----------
RRM

4. Total factor productivity

The total factor productivity index represents the ratio between the actual

output in constant prices and the output which the particular combination of labour,

material, fuel and capital would have produced working at their base year efficiency.

73
The Kendrick measure of total factor productivity is estimated. That is,

Q.
TFPQ, ----------------------
ISj° ( X,1 /Xi° )

Where Qt is the physical quantity of output in current year, Si is the share of

each year cost in the base year and ( X/ /Xj° ) is the ith real factor input ratio between

tth and base year periods.

Alternatively the total factor productivity is measured by considering real

gross value added as output assuming material and fuel productivities are constant.

Thus

RVA*
TFPk = --------- -------- -

wL'+rK'

where RVA1 is the real value added in current year, L1 and K* are current

labour and real capital stock and w and r are wage rate and rate of return on capital in

the base year.

The influence of output and technology on total factor productivities have

20
been estimated by fitting the following multiple regression function

Log TFPk and LP are the total factor productivity index and labour

productivity index respectively, V is the real value added, t is the time, with 1973-

74=1 and u is the error term.

74
Production Function

In order to determine the relevant form of production function, the following

functions have been estimated at the regional and national levels for the sugar

industry during the period 1979-80 to 1997-98.

1. Variable Elasticity of Substitution Production Function

The variance or otherwise of elasticity of substitution to capital-labour ratio is

tested by fitting variable elasticity substitution function. It is expressed as follows:-

Log V/L = a+bi log w +b2 log K/L +u

Where V is value added, L is labour ,K is capital, w is wage rate and a, b| and

b2 are constants, u is the error term.

The VES production function with inclusion of time trend is also considered

for the analysis. The following log function has been used for fitting VES production

function.

Log V/L = a+bi log w +b2 log K/L +b31 + u

Where a, b|, b2 and b3 are constants.

75
2. Constant Elasticity of Substitution Production Function

The Elasticity of Substitution and the rate of technical change are estimated by

using the models derived form the constant elasticity of substitution production

function. The well known statistical models obtained from CES function for

estimating elasticity of substitution and technical change are as follows:-

Log V/L = a+b| log w + u (1)

Log V/L = a+bi log w +b2 t + u (2)

Where V is value added, L is labour, w is wage rate and t is time. a,bi and b2

are constants. U is the error term.

3. Cobb-Douglas Production Function

Cobb-Douglas Production Function is used to estimate the input elasticities,

neutral technical progress and returns to scale.

V= ALaKb

When transformed into log form, we have

Log V = Log A + a log L + b log K +u (1)

Where V is the real value added at constant prices, L is labour and K is adjusted fixed

capital stock. A, a and b are constants, u is the error term.

76
 a and b are determined by the method of least squares. The equation (1) does

not measure the technical progress. Hence an exponential trend has been incorporated

in the equation (1) in order to account for and measure neutral technological change.

Log V = Log A + a log L + b log K+ct +u (2)

Where A, a, b and c are constants.

Marginal Productivity of Labour and Capital

Marginal Productivity of Labour and Capital have been computed for each

individual year for the period from 1979-80 to 1997-98 for All India by the following

formulae.

M.P.L = a (V/L)

M.P.K= b (V/K)

On the otherhand if the Cobb-douglas Production function is of the form

V= A L a Kl a,

Then the marginal productivities of labour and capital are:-

M.P.L = a (V/L)

M.P.K= (1-a) (V/K)

77
 REFERENCES

1. Brown, M and De cani, “Technological changes in the United States,

1950- 1960”, Productivity Measurement
Review, May 1962.

2. Kendrick, J.W “Productivity Trends in the United States”,

National Bureau of Economic Research,
Princeton University Press, 1961 p.10

3. Solow R.M. Production “Technical change and the Aggregate Function”

1957 Vol.36p.312. Review of Economics and Statistics,

4. Salter W.R.G Productivity and Technical Change,

Cambridge University Press, 1969 P. 1

5. Sardesara J.C. “Industrial Economics” in ICSSR Vol.5 Survey

of Research in Economics - Industry, Allied
Publishers, 1975p.28

6. Kendrick J.W. “Productivity Trends in the United States”,

Princeton University Press, 1961 p.20

7. Balakrishna R. Productivity Measurement in Indian Industry,

second ed., Madras university Press 1958 p.2

8. Fabricant, S. “Economic Progress and Economic Change” 34,h

Annual Report of the National Bureau of
Economic Research, New York, 1954.

9. Brown, M. On the Theory and Measurement of

Technical change, Cambridge University Press,
1966.

10. Salter, W.R.G Opp. Cit 1969.

11. Levhari,E.,Kleiman,E.and “The Relationship Between two measures of

Halen,N., Total productivity” Review of Economic and
Statistics, Aug. 1966

78
12. Nadiri, M.I., “Some Approaches to the Theory and
Measurement of Total Factor Productivity: A
Survey” The Journal of Economic Literature,
Dec. 1970.

13. Brown, M., Op.cit P.12

14. Brown, M., Op.cit P.12

15. Brown, M., Op.cit P.12

16. Brown, M., Op.cit P.12

17. Heath field , D.F Production Functions,Macmillan 1971.

18. David P.A “Biased Efficiency Growth and Capital - Labour

Substitution in the United States, 1899-1960,
American Economic Review, 1965.

19. Brown ,M. and De cani., “Technological Change and

Distributionoflncome’Tnternational Economic
Review, Sep 1963.

20. Variables without subscript refers current year values otherwise specified.

79
 CHAPTER-V

GROWTH OF PAPER INDUSTRY IN INDIA

V. 1 .INTRODU CTION

Paper has become the part and parcel of human life. It is inseparably

interwoven with the life of the people of all nations. Paper is the gift of the early

Chinese to the human race. It is used for a variety of purposes. The major application

include writing, wrapping, packaging, printing, education, stationary etc., To all

intents and purposes it is unimaginable to think of a mundane life without the usage of

paper. In short one cannot unfold the manifold uses of paper in the life of people from

dawn to dusk. The mighty minds of the old hare left their ideals only on paper. The

past history of mankind has been passed on to the present and of that of the present

will be offered to the posterity only through paper. Paper is a bulk-moving product as

it finds its large number of usages with consumers as well as with industries.

Paper is the Sine Qua non of human civilization and culture. One cannot

imagine a modem human life without use of Paper. With the inventions of Paper

about 2000 years back; Paper has been playing a pivotal role in spreading knowledge,

know-how and new ideas all over the world. It has brought a great revolution in the

art of Communication thought and ideas that are the basic structure of human

civilization.

88
 The first paper mill in India was established in 1867 and the raw materials

utilized were rags and wastepaper. Commercial scale of production was started in

1882 and the raw materials were again non-wood fibers that are Eulaiopsis binata and

Sacharum bengalense. The development of the fractional process of pulping bamboo

at the Forest Research Institute, Dehra Dun during 1922-24 provided an impetus to

the pulp and paper industry in India and bamboo became the main raw material for

making various grades of paper. Paper has also enjoyed a relatively strong demand on

account of the The life cycle of a paper product from manufacture to consumption and

disposal is short (paper is used more in the nature of a consumption good and not as a

durablej.lt is widely used, right from an individual to a company.There is no real low-

cost substitute for paper.

In India, much like in other countries in Asia, most mills are small and only

few mills have integrated manufacturing operations, that is, the facility for

manufacturing paper from pulp. Also, players operate either in the paper and

paperboard or newsprint business. This, along with governmental policies, has

resulted in the industry becoming highly fragmented, with a large number of

companies having small capacities.

While India accounts for nearly 15 percent of the world population, it

consumes only 1 percent of the world paper production. India’s per capita

consumption of paper at about 6 kgs is very low as compared to the world average of

over 50 kgs1.

89
 The Indian Paper industry is broadly categorized into “writing & printing”

(W&P), “industrial” and “newsprint” segments. Demand for industrial paper accounts

for around 50 percent of the total demand with W&P and newsprint accounting for 33

percent and 17 percent, respectively. At present in India there are 406 paper mills with

an installed capacity of 4.3 million tones per annum. Only 34 mills are having

installed capacity of more than 100 tonnes per day (tpd). These mills use forest based

(hard woods and bamboo) as feedstock. About 120 mills have installed capacity in the

range of 30 to 100 tpd and utilize agricultural residues, waste paper and purchased

pulp. A wide spectrum of technologies are employed in the sector. Moreover pulp and

paper industry is one of the key industrial sectors of the country. This sector is

country’s sixth largest consumer of energy2

V.2.IMPORTANCE TO NATIONAL ECONOMY

In fact Economic Development of a country now a day is judged by per capita

consumption of paper. Along with the paper industry, paper trade has also assumed

critical importance in the economic development. The use of paper today is no longer

confined to writing and printing, as its end uses have become unique and diverse.

People engaged in trade must have clear perception of the developments and

diverse aspects of paper manufacturing process, its properties, end uses etc., so that

they can play a meaningful role as a link between manufacturers and consumers. It is

therefore, imperative for people connected with the industry and trade to have

functional literacy of the entire gamut of the industry.

90
 The world is witnessing sweeping trends towards liberalized market oriented

economic system, which is characterized by fierce competition and relentless efforts

for cost effectiveness. The mankind is at the threshold of the 21st century, which will

be dominated by knowledge based industries. The paper industry and trade will

continue to act as a conduit in dissemination of knowledge and know-how and new

business opportunities through innovative uses of paper. One of the major outcomes

of the liberalization and globalization of the economy is the rapid upgrade of the

manufacturing capabilities with the end users such as Printing and Publishing industry

and Packaging industry.These developments in turn have led to a significance shift in

the pattern of demand of paper and Paper boards and this shift is likely to be

accentuated in the future.

The demand for cultural and industrial paper was 9, 80, 000 tonnes by 1977-

78. In 1987-88 it has increased to 12, 25,000 tonnes. In 1997-98 it has further

increased to 34, 45,000 tonnes. On the basis of forecasting the estimated demand for

cultural and industrial paper around 2007-08 will be 56,78,000 tonnes. Development

of computer applications and information technology has no impact on the

consumption of paper and paper products. It is shown in the Table 5.1 and in Figure

5.1.

V.3 HISTORY OF PAPER

Etymologically the word ‘paper’ owes its origin to ‘papyrus’ an aquatic plant

which grew in abundance in the delta of the Nile in Egypt. The barks and leaves of the

plant were woven and pressed into a sheet to be used as writing material by the

ancient Egyptians.

91
 TABLE 5.1

DEMAND FOR PAPER IN INDIA

YEAR DEMAND (in thousand tonnes)

1977-78 9.80

1987-88 12.25

1997-98 34.45

2007-08 56.78

Source: Annual report of All India Paper makers association-2005

FIGURE 5.1 DEMAND FOR PAPER IN INDIA

oCD
cn
o
o•sr oco o
DEMAND

Series 1
CM

91.a
 The evidence of papyrus having been used as a writing material can be found

even today in some of the European libraries which preserve old

manuscripts.Historians, however differ as to when this first papyrus was used and

found. Alexander the Great is said to have possessed it but this is disputed. Taking all

different views into consideration, it can safely be said that the use of papyrus as

writing material dates back to even 500 B.C.

Paper consumption is a measure of civilization. Initially writings and carvings

were made on stones, clay, copper, brass and palm trees, etc., The art of paper making

was first developed in China where it was made from the bark and leaves of the

mulberry tree. In 751A.D. the Arabs took the Chinese as prisoners and from them the

art of papermaking reached the Middle East and Europe.

In Japan the paper industry grew due to the efforts of the Buddhist Monks.

Dokyo was instrumental. The mulberry bark was the common raw material used, it

was cut, washed, boiled in lye and beaten in an indigenous manner. Rice, flour and

aids were added as size and hand sheets were made. Air drying was done.

In 1336 the first paper mill was erected in Germany. In 1586 factories came up

in Switzerland and Holland. In 1789 chlorine was used for bleaching for the first time.

Robert Nicholas of France invented the paper machine in 1799. This was later

improved by Leger, Didot and Brian Doukin and financed by Fourdrinier and the

modem machine called the Fourdrinier machine came into use.

92
 Soda Pulping started in 1852 in England. The ground wood pulp mill was first

started by Charles Fenerty in 1840. In 1900 rosin and alum sizing was started. Thus

the paper industry has been getting more and more sophisticated day by day.

Aryans, who had settled in Northern India, were known as aryavarts.In course

of time they started the use of Tamrapatra (copper plates), Tadapatra (Palm leaves),

Lohapatra (Iron sheets), Bhuajpatra (Beech palm), etc., for preserving the Vedas and

other philosophical literacy orations. The old carvings, by the Hrishis in the caves

were also an ancient natural recording media. Similarly flat surfaces made out of

trunks of big trees had mantras carved on them and so the concept was created that

something having a flat and a hard surface could preserve memoranda. With the

advance of civilization and acquisition of the knowledge of metals, lead, copper and

bronze plates were used for writing.

The art of paper making reached India through the Arabs who, as stated

earlier, initially learnt it from the Chinese prisoners when they raided parts of China.

It is believed some Indian Muslims might have also learnt it from the Chinese when

they visited Mongolia. But this art was kept a closely guarded secret by a few

families. These paper making families were known as Kagzis, who settled mainly in

the Punjab and Kashmir and flourished under the patronage of the Moghul Empire.

The adoption of the art of paper making, however, could not flourish for some time as

initially the raw material used was rags and the Hindus did not like handling this

material.

93
 In India, paper was initially made from the birch tree bark. The bark was

soaked in an alkaline solution, defibred in Dhenki and then the sheets were made on

wire nets and dried. Indians first started making pulp from rags, jute etc., using

sajjikhar. Muslims were mainly engaged in this work. China introduced paper making

using flour sizing. The Tamarapatras and wedding cards were replaced by paper in

course of time.

It is not very certain when paper mills were established in India. The

expression “Serampore paper” is used all over India for a particular type of

indigenously made white paper. Some years ago D.M.Traill wrote an interesting

account of paper making, in which he briefly reviewed some of the historic facts,

especially the chief grades of paper and the Anns concerned in production. In it he

tells us that the capital engaged in the paper money in the 14th century.

The records suggest that before the advent of machine-made paper, a sizeable

hand-made paper industry flourished in India. Paper was in common use almost all

over India at the close of Akbar’s regime. Hand-made paper at that time was

considered to be of a very high quality and was most resistant. Hand-made paper is a

speciality paper because, as normal paper, it cannot compete economically with

machine -made paper. Gandhiji, the Village Khadi Boards and liberal grants from the

Government are responsible for sustaining the hand-made paper industry.

As far as history shows, efforts to mechanize the Indian paper industry were

first made by William Carey in the beginning of the nineteenth century. He started a

paper mill in 1812 with the help of local kagzis. The mill was located at Serampore.

94
In 1820 a steam engine was introduced for operating beaters. By 1832 the first

Fourdrinier machines were introduced. But it spite of efforts, the venture did not

succeed due to lack of demand for paper and the Government’s apathy.

The first paper-machine was introduced in India, at Tanjora. It failed.

Production started in 1870 at Bally Paper Mills, Hoogly and this was followed by the

mills a Titaghur and Lucknow, Punalur and the Indian Paper and Pulp Co.Ltd. were

also first in their respective ventures.

V.4.WORLD PAPER INDUSTRY

Major producers of Paper and Boards in the World are United States of

America, , Canada, Mexico, South Africa, Brazil, Argentina, Chile, Germany,

Finland, France, Sweden, United Kingdom, , Colombia, Venezuela, China, Japan,

Korea, Indonesia, India, Vietnam, Taiwan, Thailand, Russia and Australia.

The world consumption of paper and board grew from 169 million tonnes in

1980 to 253 million tonnes in 1990, which corresponds to an average growth of 3.4%

per annum. In 1994 a new record in world paper consumption was reached (263

million tonnes). The average growth rate is expected to settle at 2.8% per annum in

1990-2010 and the total expected paper demand will reach 402 million tonnes in

2010.

In the world level, current production of Paper and Boards is 330 million

tonnes per annum. Percapita consumption of paper in the world wide is 45.0 kg per

95
annum. In developing countries it is 15.0kg per annum. In developed countries it is

152.0kg per annum. But in India it is only 6.0kg per annum. Growth of Paper Industry

in the world level is 2% to 3% per annum. Comparing with other regions of the world

it is higher in the Asian region. World wide 3.50 million people are getting

employment through the Paper Industry. Paper Production accounts for 3.5% of

World Industrial production and 2% of World’s Trade. The Table 5.2 shows the

current and expected demand for paper at the world level by taking into consideration

all the major paper and boards manufacturing countries. It is based on the analysis of

Jaakko Poyry.

96
 TABLE 5. 2

CURRENT AND EXPECTED DEMAND FOR PAPER AT THE

WORLD LEVEL

SL.NO Year Demand in million tonnes

1. 1990 252.8

2. 2000 313.1

3. 2005 356.4

4. 2010 402.0

Source: World paper market upto 2010 A.D-Jaakko poyry

96.a
 The consumption of printing and writing paper is closely related to office

technology. Demand for printing and writing paper is expected to grow fast especially

in China and other Asian countries. An increase in consumption by one kg per capita

will lead to an increase in demand of 1 million tonnes. Excluding Newsprint the Per

capita consumption of Paper and boards among the Asian countries is given in the

Table.5.3.

Besides the Table 5.4 shows the main countries of Asia and their existing and

projected demand regarding printing and writing paper based on the study by Jaakko

Poyry.

Among the Asian countries the major competitor for Indian Paper Industry is

Chinese Paper Industry. So it is necessary to know about Paper industry structure of

China.The New China industry capacity is greater than 50,000 tonnes per year using

imported fibre(wood pulp & waste paper).Some smaller mills are producing wood

free papers and the Mills built since 1996. The Old China industry mills are using

predominantly non-wood fibres and domestic wastepaper and the mills built before

1996. The Table 5.5 will give clear cut information about Old vs. New China

production.

97
 TABLE 5.3

CURRENT PERCAPITA CONSUMPTION OF PAPER AND

PAPER BOARDS IN ASIAN COUNTRIES

COUNTRY PRODUCTION CONSUMPTION CONSUMPTION

(Million Tonnes) (Million Tonnes) Percapita (kg)

Japan 31.828 31.736 250

China 30.900 36.277 28

Korea 9.308 7.385 156

Indonesia 6.308 3.911 19

India 5.940 6.378 6

Taiwan 4.500 5.110 229

Thailand 2.466 2. 114 34

Malaysia 1.078 2.251 101

Philippines 0.750 0.828 11

Vietnam 0.389 0.570 7

Hong Kong 0.190 1.041 151

Singapore 0.052 0.577 160

Source: Indian Pulp and Paper Technical Association Manual 2005

97.a
 TABLE 5.4

PRINTING AND WRITING PAPER DEMAND BY MAIN

COUNTRIES OF ASIA

1000 TONNES
COUNTRY
1990 2000 2005 2010

JAPAN 15291 17829 19576 21247

CHINA 15241 21280 25560 30546

INDONESIA 1397 2417 3172 3967

TABLE 5. 5

OLD VS NEW CHINA PRODUCTION BETWEEN 1990-2005

(MILLS OVER 5 MILLION RMB)

Paper and Board production Imported fibres

(in ‘000 tonnes) (in ‘000 tonnes)
Years
“New”China “OId”China Total Recycled fibre Wood pulp

1990 1,050 15,600 16,650 j|s s|e jf: $ $ 4s % *

1995 1,750 20,850 22,600 906 751

2000 6,700 21,700 28,400 3,712 2,823

2005 15,750 23,700 39,450 10,612 8,659

Source: An Article by Roger Wright and Hawkins Wright in September 2004

97.b
 Among all the countries of the world China is the major Global player for the

utilization of forest products as well as the production of paper and paper boards. The

following studies clearly reveal the impact of China in Paper Industry at the Global

Level.

A Report on “Changes in the Global Forest Products Industry” Defining the

Environment for British Columbia was submitted by Don Roberts, Jonathan

Lethbridge, CFA and Herve Carreau,CFA on March 14th 2005.

• The report summarizes a presentation made at the symposium on the future ot

the British Columbia Forest sector by Don Roberts. The symposium was

sponsored by the B.C.Forum on Forest Economics and policy, and held in

Vancouver during the first quarter of 2005.

• After placing the B.C forest products companies in a global context, both in

terms of size and financial performance, they focused on the key changes in

the global industry which are shaping the environment for B.C. based

companies.

• They also focused on five key global trends: 1) increasing industry

consolidation 2) the decreasing secular trend in commodity prices 3)

increasing wood supply 4) decreasing supply of low-cost energy and 5) the

emergence of China - is it a customer or competitor for B.C forest product

companies?

98
 • If there is one external change over the next five years that could have the

biggest positive impact on the B.C forest products industry, it would arguably

be the closure of the Chinese non-wood pulp & paper sector-an issue not even

on the “radar screen” of Canadian business and government.

• The biggest “shocks” to the global forest products industry are emanating

from China and Russia - the change is explosive, in their view. At the

aggregate level, will China be a customer or a competitor?

❖ Customer pulp

❖ Competitor for solid wood and

❖ Neither for paper.

D.HE- President of China Economic Consulting, Inc, and a Ph.D Candidate in

Economics at North Carolina State University, based in Raleigh, North Carolina, USA

and C.BARR - Senior Policy Scientist with CIFOR’s Forests and Governance

program, Bogor, Indonesia conducted one study on “China’s pulp and paper sector: an

analysis of supply-demand and medium term projections".

This study summarizes recent trends in China’s paper and paper boards and

projects supply and demand for each of the major grade through 2010. Baseline

projections suggest that China’s aggregate demand will grow from 48.0 million

tonnes in 2003 to 68.5 million tonnes per year in 2010.

99
 With domestic production projected to reach 62.4 million tonnes per year,

China is expected to dominate global capacity expansion for most major grades.

China’s annual demand for fibre furnish across all the grades is projected to rise from

40.2 million tonnes in 2003 to reach 59.6 million tonnes by 2010.

Of this, approximately 58% will come from recovered paper, 25% from wood-

based pulp, and 17% from nonwood pulp. Thus in the future the major player in the

Paper Industry will be China.

Jaakko Poyry consultancy group is one of the global consulting and

engineering group has given the following points regarding Global Paper Industry.

• Over the past 23 years, global paper and paper board consumption has

grown 3.0% a year or a total of 165 million tonnes.

• Historically, electronic media has not threatened the growth of paper based

communication - in many cases the paper industry has benefited from it.

• Paper remains a very competitive packaging material. New innovations

and applications help to maintain its position against other materials and

systems.

• World demand for paper and paper board continues to grow. With an

average growth rate of 2.2% percent a year, it will reach 450 million

tonnes by the year 2015.

100
 • Most of the growth will take place in more volatile emerging markets such

as China, Japan, Eastern Europe, Latin America, Africa ,North America

and Western Europe.

• Over the next five years, China will lead the world in capacity growth.

• Global consumption of paper making fibre is forecasted to grow from 380

million tonnes in 2005 to 460 million tonnes by the year 2015, or 2.3% per

annum on an average.

• Wood pulp is still the most important paper making raw material, but

recovered paper continuously increases its share of the total - today about

48% of the total.

• North America is the great provider for recovered paper for Asia.

• World has enough wood to meet the growing demand but it is not all

located in the right places. So suitable decisions should be taken to tap the

resources.

V.5.GROWTH OF PAPER INDUSTRY DURING THE PLAN PERIODS

Traditionally in India, the paper industry has been looked at as broadly

comprising of two distinct segments. They are Paper and Paper Boards and

Newsprint.Paper and Paper boards usually comprises of Printing and writing

paper,Industrial paper and Speciality paperThe paper industry can also be classified

on the basis of:-

T961

101 . i- -
Installed capacity: Paper mills can be categorized into large, medium and small

units, based on their capacities. Mills with capacities of over 33000 tonnes per annum

are termed as large mills, while mills with capacity below 33000 tonnes per annum

are termed as small paper mills.

Raw materials consumed: Mills can be again classified into two, on the basis of

raw material consumed by them. Those using conventional raw material like bamboo

and wastepaper and unconventional raw material like bagasse,straw, jute, etc.,

Types of paper produced: The third type of categorization of paper mills, depends

on the type of paper produced, for example mills producing writing and printing,

wrapping and packaging , speciality paper , etc.,

Development of the paper industry in India:

1. Pre-protection period (before 1923)

The first Paper mill was started in the year 1870. It had initially one machine and

later added 3 more machines. This mill was making the production of paper and

boards from 1870 to 1905. In Lucknow one paper mill was started in 1882 with one

machine. In Titaghur one paper mill was started with 3 machines in 1902. In the same

year one more Paper mill was started in Raniganj with one machine. In Naihati in the

year 1922 one Paper mill was started with 2 machines. In all these Paper mills the

installed capacity is 35,000 tonnes. But the mills produced on an average 30,000

tonnes per annum.

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2. Protection period (1924-1936)

In 1924 the government initially granted protection for five years. This was

later extended by another seven years. A duty of Rs.45 on imported paper was also

imposed.

3. War and post-war period (1938-50)

The world war gave impetus to the paper industry and production doubled. All

types of paper and paper board were made during this period. The government

however, kept the prices regulated3.

4. Plan period

During the plan period India noticed fluctuating growth in the paper

manufacturing. In the following table the production of paper (variety-wise) during

the plan period is given in the Table5.6.

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 TABLE 5.6

PRODUCTION OF PAPER (VARIETY WISE) DURING THE

PLANNING PERIOD

(Production in ‘000 tonnes)

Writing and Wrapping Paper Special

Plan Duration
Printing paper Paper boards variety

I 1951-56 123.0 30.9 33. 7 5. 8

11 1956-61 229.8 59. 8 65. 5 9. 0

III 1961-66 380.5 100.7 97. 8 6.1

Annual Plan 1966-67 415.4 146.0 124.5 20. 5

Annual Plan 1967-68 465.3 207.1 136.4 23.7

Annual Plan 1968-69 510.2 278.5 167.3 30. 2

IV 1969-74 591.4 324.7 178.2 35. 3

V 1974-79 621.0 396.3 185.1 41. 3

(Extended
upto
1980)

VI 1980-85 674.8 402.2 196.1 53. 9

VII 1985-90 715.3 476.5 201.8 61.2

VIII 1992-97 780.3 501.1 226.1 75.4

IX 1997- 820.4 587.5 262.3 89.1

2002
Source: Annual Report of All India Paper makers Association-2005

103.a
 At present India is under X five year plan. Details regarding Production of

paper will be available only at the end of 2007.

During the first five year plan the total production of Paper and Paper boards

was 193.4 thousand tonnes. In that the contribution of writing and printing paper was

123.0 thousand tonnes (63.5 percent in the total production of the first five year plan

period), wrapping paper was 30.9 thousand tonnes (15.9 percent in the total

production of the first five year plan period),paper boards was 33.7 thousand tonnes

(16 percent in the total production of the first five year plan period) and special

variety was 5.8 thousand tonnes (3 percent in the total production of the first five year

plan period).

During the second five year plan the total production of Paper and Paper

boards was 364.1 thousand tonnes. In that the contribution of writing and printing

paper was 229.8 thousand tonnes (63 percent in the total production of the second five

year plan period), wrapping paper was 59.8 thousand tonnes (16 percent in the total

production of the second five year plan period),paper boards was 65.5 thousand

tonnes (18 percent in the total production of the second five year plan period) and

special variety was 9.0 thousand tonnes (3 percent in the total production of the

second five year plan period).

During the third five year plan the total production of Paper and Paper boards

was 585.1 thousand tonnes. In that the contribution of writing and printing paper was

380.5 thousand tonnes (65 percent in the total production of the third five year plan

104
period), wrapping paper was 100.7 thousand tonnes (19 percent in the total production

of the third five year plan period),paper boards was 97.8 thousand tonnes (16 percent

in the total production of the third five year plan period) and special variety was 6.1

thousand tonnes (3 percent in the total production of the third five year plan period).

During the first annual plan period the total production of Paper and Paper

boards was 706.4 thousand tonnes. In that the contribution of writing and printing

paper was 415.4 thousand tonnes (58 percent in the total production of the first annual

plan period), wrapping paper was 146.0 thousand tonnes (21 percent in the total

production of the first annual plan period),paper boards was 124.5 thousand tonnes

(18 percent in the total production of the first annual plan period) and special variety

was 20.5 thousand tonnes (3 percent in the total production of the first annual plan

period).

During the second annual plan period the total production of Paper and Paper

boards was 832.5 thousand tonnes. In that the contribution of writing and printing

paper was 465.3 thousand tonnes (56 percent in the total production of the second

annual plan period), wrapping paper was 207.1 thousand tonnes (25 percent in the

total production of the second annual plan period),paper boards was 136.4 thousand

tonnes (16 percent in the total production of the second annual plan period) and

special variety was 23.7 thousand tonnes (3 percent in the total production of the

second annual plan period).

During the third annual plan period the total production of Paper and Paper

boards was 986.2 thousand tonnes. In that the contribution of writing and printing

105
paper was 510.2 thousand tonnes (52 percent in the total production of the third

annual plan period), wrapping paper was 278.5 thousand tonnes (28 percent in the

total production of the third annual plan period),paper boards was 167.3 thousand

tonnes (17 percent in the total production of the third annual plan period) and special

variety was 30.2 thousand tonnes (3 percent in the total production of the third annual

plan period).

During the fourth five year plan the total production of Paper and Paper

boards was 1129.6 thousand tonnes. In that the contribution of writing and printing

paper was 591.4 thousand tonnes (52 percent in the total production of the fourth five

year plan period), wrapping paper was 324.7 thousand tonnes (29 percent in the total

production of the fourth five year plan period),paper boards was 178.2 thousand

tonnes (16 percent in the total production of the fourth five year plan period) and

special variety was 35.3 thousand tonnes (3 percent in the total production of the

fourth five year plan period).

During the fifth five year plan the total production of Paper and Paper boards

was 1243.7 thousand tonnes. In that the contribution of writing and printing paper

was 621.0 thousand tonnes (50 percent in the total production of the fifth five year

plan period), wrapping paper was 396.3 thousand tonnes (32 percent in the total

production of the fifth five year plan period),paper boards was 185.1 thousand tonnes

(15 percent in the total production of the fifth five year plan period) and special

variety was 41.3 thousand tonnes (3 percent in the total production of the fifth five

year plan period).

106
 During the sixth five year plan the total production of Paper and Paper boards

was 1327.0 thousand tonnes. In that the contribution of writing and printing paper

was 674.8 thousand tonnes (51 percent in the total production of the sixth five year

plan period), wrapping paper was 402.2 thousand tonnes (30 percent in the total

production of the sixth five year plan period),paper boards was 196.1 thousand tonnes

(15 percent in the total production of the sixth five year plan period) and special

variety was 53.9 thousand tonnes (4 percent in the total production of the sixth five

year plan period).

During the seventh five year plan the total production of Paper and Paper

boards was 1454.8 thousand tonnes. In that the contribution of writing and printing

paper was 715.3 thousand tonnes (49 percent in the total production of the seventh

five year plan period), wrapping paper was 476.5 thousand tonnes (33 percent in the

total production of the seventh five year plan period),paper boards was 201.8

thousand tonnes (14 percent in the total production of the seventh five year plan

period) and special variety was 61.2 thousand tonnes (4 percent in the total production

of the seventh five year plan period).

During the eighth five year plan the total production of Paper and Paper

boards was 1582.9 thousand tonnes. In that the contribution of writing and printing

paper was 780.3 thousand tonnes (49 percent in the total production of the eighth five

year plan period), wrapping paper was 501.1 thousand tonnes (32 percent in the total

production of the eighth five year plan period),paper boards was 226.1 thousand

tonnes (14 percent in the total production of the eighth five year plan period) and

107
special variety was 75.4 thousand tonnes (5 percent in the total production of the

eighth five year plan period).

During the nineth five year plan the total production of Paper and Paper

boards was 1759.3 thousand tonnes. In that the contribution of writing and printing

paper was 820.4 thousand tonnes (47 percent in the total production of the nineth five

year plan period), wrapping paper was 587.5 thousand tonnes (33 percent in the total

production of the nineth five year plan period),paper boards was 262.3 thousand

tonnes (15 percent in the total production of the nineth five year plan period) and

special variety was 89.1 thousand tonnes (5 percent in the total production of the

nineth five year plan period).

During the Planning Period Paper Industry in India underwent considerable

changes regarding Licensing Policy, Price Policy, Taxation, Investment, Cost

structure, Profitability,Maintenance of forests,Royalty,Raw materials other than forest

produce and process of production.

Licensing Policy

The Industrial Policy Resolution of 1956 (during first five year plan) had put

the paper industry in that category of industries “the further development of which

will in general, be left to the initiative and enterprise of the private sector.4 The two

main instruments to ensure the development of these industries in the private sector

were provided in the Industries (Development & Regulation) Act, viz., the licensing

108
system and the organization of development councils. Both these instruments were

used in varying degrees for securing the planned development of the paper industry.

The third plan reiterated the basic principles enunciated in the Industrial

Policy Resolution of 1956 by pointing out that “it is necessary in encouraging and

approving programmes in the private sector to guard against industrial development

being concentrated in the hands of a few entrepreneurs and leading to complete or

partial monopolies”5

However, this new emphasis did not in particular affect the development of

the industry, as the changing cost and demand structure in the face of controlled

prices had made new investments even otherwise unattractive. Obviously price

control was not the only reason for the absence of new investment activity.

Dwindling forest resources had also come in the way of establishing large

viable units. It is worth noting that barring isolated instances, the industry has had

very little control over the developments of forest resources.

More recently the shortage of investable funds in the economy and also the

foreign exchange difficulty led the Government to categorize industries into ‘key’,

'priority’ and ‘other’ industries with a view to develop the desired industries at a

faster rate. In the press note issued in November 1968, Government categorized paper

in the ‘priority’ list and newsprint and pulp for paper in the ‘key’ list. Key industries

were defined as those essential for the country’s industrial growth. These were to be

given special preferential treatment in respect of release of foreign exchange and all

109
other clearances, while priority industries would get preference only in foreign

exchange allocation for import of capital goods.

Following the publication of the report of the Industrial Licensing Policy

Inquiry Committee (ILPIC), the Government announced a new industrial licensing

policy in February 1970. Under the new policy, ‘large industrial houses’ as defined in

the ILPIC report would be expected to participate in the development of the ‘core’

and ‘heavy’ industry sectors. The list of ‘core’ industries given in the policy

resolution includes newsprint but not paper.

However, investment in a paper mill even of size of 60-tonne daily capacity

requires about Rs.120 million and paper responsibility of the large industrial houses

for the future development of paper industry is thus indirectly emphasized in the new

policy. It should be noted that about 72 percent of the installed capacity of the paper

and paper board industry is even now controlled by nine large industrial houses.

However, to what extent the private sector would discharge this responsibility would

largely depend on the prospective profitability, cost and price structure, availability

of raw materials at reasonable prices, utilization and development of modem

technology for pulping of hard woods and a host of other related technical and

economical factors.

Price Policy

The production data on writing and printing paper pertains to all varieties

ranging from white printing, cream laid, cream wove, offset, cartridge, litho, ledger,

110
bank and bond, typewriting, manifold, duplicating, imitation and real art and

M.G.poster papers. Out of these, white printing, cream laid and cream wove varieties

account for 63.8 percent of the production of writing and printing paper. In absolute

terms production of these varieties has been around 8,27,535 lakhs tonnes in the year

1997-1998.6

The paper industry’s supply of these three varieties to Central and State

Government Departments is about 7,000 tonnes a month. On an annual basis, this

account for about 12 percent of the total production. Allowing for Government

Demand for other types of printing paper (typewriting, duplicating, etc.,) and

paperboards, it is reasonable to assume Government demand at about one-fourth of

the total production. As a dominant consumer of paper, Government’s interest in

keeping paper prices down, apart from looking after the interests of the wider public,

is understandable.

Price control on paper and paper products dates back to 1942, when owing to

scarcity of paper, prices started rising. Initially, Government negotiated prices for

fixed periods for its own purchases. In 1945, it was found that there was no

correlation between the prices paid by the Government and those charged to the

public, popularly referred to as ‘civil prices’. In a meeting held with the industry in

October 1945, it was decided to fix civil prices by adding a few cost elements (freight

rate, distributors’ discount, etc.,) to the agreed Government prices. Prices so fixed

were not based on any cost investigations.

Ill
 In 1947, the question of price fixation was referred to the commodities Prices

Board. The Board recommended marginal increases in prices. The industry was not

satisfied with the prices as fixed on the basis of the recommendations of the Board

and pressed for higher prices in the face of rising costs of production. The matter was

referred to the Tariff Board.

The Tariff Board recommended a new price schedule, which was given effect

to in February 1949 in respect of non-Govemment consumers. Government purchase

prices were fixed every year on negotiation with the manufacturers.

The Paper Price Control Order, 1945, was withdrawn in 1950, following an

informal assurance by the industry that it would not revise the price upwards without

first informing the Government. However, the developing inflationary conditions in

the economy, coupled with a steady rise in cost of production, led to upward revision

of prices in five stages until 1958.

In 1958, the Government decided to remit the question of determination of fair

prices to the Tariff Commission. After an exhaustive survey of the cost structure of

the various mills and taking into account the needs of future expansion and the likely

trends in the pattern of demand, the Tariff commission fixed prices applicable to

Government purchases for 24 varieties of paper and paper products. The fair selling

prices for f.o.r destination (exclusive of excise duty, State Government or local levies)

for the public at large were also fixed by adding selling expenses, freight charges and

wholesalers’/distributors’ commission to the Government prices. The Commission’s

112
recommendations were accepted by the Government and given effect from January

1960.

Subsequent increases in cost of production compelled the industry to ask for

corresponding increases in prices. As a result of these representations, only an ad hoc

increase of Rs.60 per tonne in all the varieties was allowed in June 1962. The

continuously rising trends in the economy led to a change in Government economic

policy in favour of general de-control. The paper industry was delicensed and controls

on selling prices removed as from May 1968.

Several reasons were given by the Government for this long overdue step. It

was admitted that the low paper prices had hampered fresh investment in the industry.

The basic ex-factory controlled price at Rs. 1,320 per tonne, it was noted, was

substantially lower than the c.i.f price of the comparable variety of imported paper at

Rs. 1,680 per tonne. Second, a substantial deceleration in the rate of growth in paper

production was observed in the previous year leading to an apprehension about the

feasibility of a paper mill in Jagdalpur (M.P), wherein it was stated that the new plant,

estimated to cost Rs. 172.2 million, would not yield profits until the 9th year from the

date of commencement of production under the then existing pricing system.

Though, in principle, the industry was thus removed from the shackles of price

control, an informal price regulation continued, based on negotiation between the

industry and the Government. In the year 1972,the ruling prices were fixed by the

manufacturers along with the Tariff commission.

113
 The range of price increase on important varieties between 1960 and 1969 has

been of the order of 15 to 25 percent in the case of Government supplies. The price

increase has been of a higher order in respect of supplies to the general public. A

higher range of prices can be expected for non-Govemment supplies, as they include

selling expenses, commissions and freight. Prices applicable to Government

purchases are ex-factory prices while the civil prices are on f.o.r destination basis.

Finally, the prices quoted in these tables do not include excise and other Government

levies.

Disparate price increases by types of paper meant an approximation to a price

structure consistent with the basic trends in demand and supply of the different

varieties. It is difficult to judge whether Government gets its supplies at prices lower

than to the general public. The opinion within the industry is that the rate contract

prices are low.

The brief review of price regulation in the past implicitly brings out the basic

dilemma faced by a controlling authority in a developing economy. In deciding the

price structure, especially in a sellers’ market, the interests of consumers, existing

producers, and distributors and of potential investors must be reconciled. Further, as

developing economies are generally inflation-prone and liable to be affected by

structural changes in demand and supply over a period of time, prices must have

sufficient flexibility to adjust to the changing situation.

What is needed is a periodic assessment of demand and cost trends and

revision of prices accordingly. In fact the movement of stocks is a good indication of

114
short period demand fluctuations and is often used in a controlled market economy as

an index for making adjustments in output and supply in the face of rigid or

maintained prices.

The Paper Industry has, in the past, changed the size and composition of

output of different varieties in its bid to maximize profits in the face of a changing

demand structure and within the given controlled price structure. It needs to be

stressed that prices perform a number of distinct functions. In the short run, it is an

equilibrator between demand and supply. In the long run, it is a pointer to investment

allocation. If the price of paper is kept low, to satisfy the consumer, it may have an

adverse reaction on future suppliers, through insufficient effort towards creation of

new capacities.

The price fixing authority has also to face the problem of deciding o what

costs to base the prices. The Paper Industry consists of heterogeneous units among

which there are those whose costs are quite high due to such factors as small volume

of output, low efficiency due to the ageing of plants, high raw material costs, etc., and

others whose costs are lower and profits correspondingly larger.

All these factors were taken into account by the Tariff Commission while

evolving the price structure in 1960; in particular, they took into account the needs of

expansion and fresh investment in the industry. Also, the Commission took note of

the fact that expansions had been effected by a purposeful ploughing back of internal

resources, arising out of price fixation in 1948. They decided to allow a 12 percent

profit rate in fixing new prices. However, subsequent developments in costs of inputs

115
did not give the industry the promised return of 12 percent and yet some of the units

did plough back the available internal resources for the development of the industry.

Rising capital as well as operating costs put the industry in dilemma while looking for

additional resources.

Parenthetically, there is no economic logic why the industry should use its

internal resources for the expansion of the paper industry only. Given the size of

investment funds, allocation among different industries would depend on the expected

rates of return in individual industries.

There is also an inconsistency in the argument that the existing units should

devote their resources to expansion of paper industry arising out of another policy

goal, viz., curbing the monopoly trends. About three fourths of the capacity of the

paper industry is controlled by ‘large industrial houses’. Naturally, further

investments in paper by these houses would lead to an oligopolistic situation.

Thus, on the one hand, industry is accused of neglecting future expansion and,

on the other, a fear is created in the minds of the existing entrepreneurs about their

plans either for expansion or in setting up new units.

Taxation

The industry is subject to all corporate taxes. It also has priority treatment

under the Fifth and Sixth schedules of the Income Tax Act. Paper and paper products

are excisable and are subject to a multitude of small levies including of excise duty is

116
not uniform as certain rebates are given in different situations. In a sense, the burden

of the excise ultimately falls on the consumer. But it can be argued that the duty may

hit the producer as well, especially when the industry is subject to economies of scale.

The rationalization and simplification of the Tax Structure of excise duty is to

provide revenue to the Government. Other policy objectives like restriction on

consumption have played a relatively secondary role.7 The effect of excise duty is to

curtail internal consumption of the commodity and to mop up the extra profit that the

industry is likely to make. In effect, therefore, the burden of excise duty on paper

should fall on the consumer. However, as the duty is collected from the manufacturers

and as any benefit from rebates and exemption from the manufacturers and as any

benefit from rebates and exemption accrue only to them, it is worth examining the

existing structure of excise on paper and paper products and to see its impact on the

industry.

Under the Central Excise and Salt Tax Act of 1944, paper of all sorts

manufactured with the aid of power is subject to the following rates of duty:

a) Cigarette tissue Rs. 1.00 per kg.

b) Blotting, toilet , tissue,teleprinter, typewriting, manifold, 0.50 paise per kg.

bond, art paper, chrome paper,etc.,

c) Printing and writing paper 0.35 paise per kg.

d) All other paper and paper boards 0.50 paise per kg.

117
 In 1963, special excise duty at varying rates was imposed on many excisable

items including paper, the proceeds of which were exclusively earmarked for Union

purposes. At present, the rate on paper and paper products is 20 per cent of the basic

excise duty. The special surcharge was introduced in the context of national

emergency but has since been renewed from year to year. In their deposition before

the Fifth Finance Commission (1969), the representatives of the Government of India

held that the need for the special excise duty had not disappeared.

However, a number of situations have been defined wherein exemptions and

rebates are allowed. Important among them are as follows:

1) All Paper containing mechanical wood pulp, not less than 50 percent of the

fibre content falling under item above, is wholly exempted from excise duty

provided such paper is used for the printing of newspapers, textbooks and

books of general interest.

2) A complex system of rebates in excise duty is laid down depending upon the

grammage per sq.metre of the paper produced, the use of bagasse, just stalks

and cereal straws in the form of pulp and the age of the factory. It appears that

the system is so designed as to promote increased utilization of bagasse and

agricultural residues for pulp making; within this area, preference is further or

more but not exceeding 45 grammes per sq.metre. Older factories (i.e.,those

using the prescribed raw material before 1st April 1961) are discriminated

against in the matter of rebates.

118
3) All varieties of paper of a substance of 40 grammes or more but not exceeding

45 grammes per sq.metre under item (b) are exempt from duty in excess of 35

paise per kg.

4) Printing and writing paper of a substance not exceeding 75 grammes per sq.

metre are exempt from excise duty in excess of 15 paise per kg. if it contains

in its substance not less than 40 per cent by weight of bagasse, jute stalks or

cereal straw in the form of pulp. This variety of paper is also exempt from the

special duty of excise imposed from the year 1963.

It would be seen that barring (1), all the above exemption and rebates tend to

benefit the manufacturer. However, the industry is not very happy with the exemption

as the conditions laid down require them to maintain production data in great detail

and the benefits accruing to them, it is said, are not commensurate with the efforts put

in.

It is also doubtful whether the policy goals implied in the concession have

been really achieved. It may be noted here that the Committee on Rationalization and

Simplification of Tax structure (generally referred to as Bhoothalingam Committee)

affirms in its final report that “ it will be desirable to restrain the tendency to use

rebates/reliefs for comparatively minor policy reasons”. This observation of the

Committee is unassailable and has to be seen in the context of the amount of relief

given and the likely achievement of the policy goals through this fiscal device.

119
 In the case of paper , rebates in excise related to the use of specific raw

material are justifiable in the light of scarce supply of pulpable material in the

country. While in the coming years pulp production would have to be increasingly

based on hardwoods and agricultural residues, it is a moot point whether the present

system of rebates would really bring about the desired change. While the policy goal

is laudable, rebates offered are far too inadequate to make the desirable shift possible.

As would be shown later the profitability in this industry has been declining in

the past few years and the industry has failed to attract new investment. The

traditional source of raw material, viz., bamboo, has been now completely earmarked.

The search for new materials is apparently costly and unless profitability increases, no

fresh investment activity can be expected. The way the rebates are given shows that

any relief tends to benefit the industry and not the consumer.

Many of the complaints of the industry relating to rebates could have been met

if the Government had accepted the Bhoothalingam Committee’s suggestion for a

general excise duty at 10 per cent ad valorem. In such a situation, the duty will

automatically be transferred to the consumer and the question of rebate, etc., would

not arise. The industry also will not be put into difficulty as the base of tax would

now be shifted to the value added. However, the Government of India did not accept

the principle of general excise duty. Under these circumstances, the policy goal, viz,

increased utilization of non-traditional sources of raw materials can be achieved only

if the paper mills using these raw materials are wholly or substantially exempted from

the excise duty.

120
Import policy

The country is a net importer of paper and paper products; the imports mainly

are newsprint. The policy is to restrict import to those varieties not manufactured in

the country. Accordingly, a few special varieties such as craft liner, photo-based

paper, parchment paper etc., are imported.

As the policy is mainly governed by the foreign exchange situation, an uneven

trend in imports during the last decade is observed. In 1968-69 import of paper

(exclusive of newsprint) declined to 14,000 tonnes compared to 50,000 tonnes in

1958-59.

Paper of all types is subject to a 100 per cent ad valorem customs duty. The

standard rate of duty on wood pulp is kept at 40 per cent ad valorem5 but the effective

duty is only 15 percent ad valorem in keeping with the provisions of the General

Agreement on Tariffs and Trade.

Similarly various exemptions in customs duty on newsprint have been

announced from time to time. The current position (existing from June 1966) is that

all newsprint containing mechanical wood pulp amounting to not less than 70 per cent

of the fibre content is totally exempt from the duty.

To conclude, import is in no way a threat to indigenous manufacturers. The

customs duty is sufficiently high to protect domestic production and so also is the

121
rigour of the import licensing policy; both severe enough to remove all fear of

international competition.

Investment

The pulp and paper industry is highly capital-intensive and exhibits marked

economies of scale. Besides, investment costs vary widely from process and hence it

is difficult to arrive at any precise investment estimate, unless certain assumptions are

made as to the type of processing, the size of the mill, the proportion of imported

equipment,etc.

These factors, in their turn, are intimately related to the prospective market

conditions and sources of raw material. Judgment is thus necessary on the behaviour

of a host of factors.

For broad planning purposes, it is, however, necessary to have fair ideas of the

order of investment that would have to be earmarked for the development of the

industry so that the anticipated demand could be reasonably satisfied.

It is also necessary to know the likely sources of funds and measures to be

adopted to get them so that the envisaged allocation to paper industry would be

realized. We should also know what policy changes in respect of taxation, price of

paper and paper products and also of inputs would be necessary to ensure a steady

growth of the industry. Research on these lines would call for a number of

122
assumptions and for their explicit statement so that necessary changes can be made in

the results in case any of the assumptions go wrong, in course of time.

Commending on the capital-intensive nature of the paper industry , a UN

study has stated that the capital charges would amount to as high as 47 percent of the

total cost of production in 100-ton per day integrated paper mill based on bagasse

with sulphate process and with a chemical recovery plant.7 At the time (1962)

prevailing foreign exchange rate, the study has assumed the annual capital cost per ton

ot paper in the range of Rs.318-Rs.880, depending on the size of the mill and the raw

materials used.8

These figures are worked on the basis of 270 working days per year. Actually,

in estimating cost, 330 working days are assumed in paper industry. On this basis, the

capital cost per ton of paper would be in the range of Rs.263-Rs.727.

An analysis of the recent balance sheets of some of the major Indian paper

mills shows that the capital cost ranged from Rs.309 to Rs.617 per tonne.9 for mills in

the size range of 100 to 33 tonnes daily capacity.

However, one can expect the cost to go up in the case of new mills l0. As

pointed out earlier, the problem of estimating investment in the future is complicated

because of various technical considerations, of which size is the most important. It is a

well-known fact that in the paper industry labour and overhead cost per unit of output

fall markedly with a rising scale of operation. Thus it is estimated that the fixed

123
investment cost per tonne comes down by as much as 52.5 per cent when the size of

the mill increase from 25 tonnes per day to 200 tonnes per day.

However, it would be inappropriate to decide size on the basis of investment

cost alone. Though it is true that overhead and labour costs fall as the size increases,

the cost of raw materials at site would increase because as the size increases, the cost

of raw materials at site would increase because of the increase in the hauling distance

necessary to provide larger quantities of such materials.

Depending on the location of wood supplies, it is estimated that wood cost can

vary by anything between 46 and 77 percent of the direct manufacturing cost for

unbleached sulphate pulp." In view of this, the appropriate size will have to be

determined in relations to the source of wood supplies and the cost of bringing wood

to the mill site.

Another determinant of the scale of operation is the size of the market. Large

size is economical in the production of mass grades such as news print, writing and

printing paper, kraft liner, kraft sack etc., Because of market conditions, technology,

has been developed for setting up large mill sizes, integrating the pulping and paper

making stages to produce mass grades of paper. Apart from savings in administrative

costs, an “integrated mill- where the bulk of the fibre furnish is of a simple main pulp

grade- brings important reductions in production costs because drying, packing,

storage, transport and reslushing of the pulp are eliminated”12 It is in this context that

the tendency of establishing large-sized mills in the major paper producing countries

has to be seen. In the “fifties, a plant of 300- tonne daily capacity was considered an

124
economic unit in North America; today the economic units is 750- tonne per day, and

the trend is expected to continue.13

Leaving aside such highly industrialized countries, the minimum economic

size of paper mills even in the middle order countries like Yugoslavia is held to be

1,00,000 tonnes per year (300-tonne per day). Estimate made in the report indicate

that manufacturing cost per tonne of printing and writing paper would decrease from

Rs.2,022 in a 100-tonne per day plant to Rs. 1,766 in a 200-tonne per day plant and

further to Rs. 1,686 in a 250- tonne per day plant.

One cannot neglect economics of this order and therefore integrated paper

plants of 200 to 300 tonnes per day should be set up. This may be attained either by

setting up new plants of such capacity or by allowing some of the existing plants to

expand to this capacity. Incidentally this would pennit greater profits to the industry

and a lower price to the consumer.

The total installed capacity in India was around 7,68, 000 tonnes a year for

paper and paper boards in 1970s from 57 units. Out of these only 12 units had a

capacity of 100 tonnes per day or more (the largest single unit being of 200-tonne of

capacity per day.) These 12 units made up nearly 72 percent of the total installed

capacity. Another 6 units are in the range of 30 to 100 tonnes per day capacity and

together made up 12 percent of the total installed capacity. The remaining 39 units

together made up 16 per cent of the capacity.

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 The total installed capacity in India was around 15, 36,000 tonnes a year for

paper and paper boards in 1980s from 200 units. Out of these only 80 units had a

capacity of 250 tonnes per day or more. These 80 units made up nearly 60 percent of

the total installed capacity. Another 12 units are in the range of 300 to 400 tonnes per

day capacity and together made up 18 percent of the total installed capacity. The

remaining 8 units together made up 22 percent of the capacity.

The total installed capacity in India was around 30,72,000 tonnes a year for

paper and paper boards in 1990s from 900 units. Out of these only 200 units had a

capacity of 500 tonnes per day or more. These 200 units made up nearly 56 percent of

the total installed capacity. Another 450 units are in the range of 300 to 400 tonnes

per day capacity together made up 31 percent of the total installed capacity. The

remaining 350 units together made up 13 percent of the capacity.

At present the total installed capacity in India is double the tones produced in

1990s. In the present market circumstances almost all the units are facing increasing

demand for their paper and paper products. Development of service sector also

contributing to certain extent for the growth of paper industry.

Discussion with industry indicate that new paper plants, especially of the

integrated type, should not be planned on less than 200-tonne daily capacity, which is

considered as the minimum economic capacity in the present context. This is also

confirmed by the investment cost analysis.

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 An alternative approach to the size problem would be to set up large pulp mills

at the source of raw materials and then sell pulp to the paper making units. In such a

case, the minimum size of the pulp mill must be at least 500 tonnes per day and based

on only one type of raw material-bamboo, hardwood or softwood. The experiment of

setting up pulp mills alone to cater to the needs of the paper industry has met with

only limited success in this country. The failure could be attributed to their small size

and /or their early teething troubles or to the defective price structure within the

industry.

Whatever the reason, the fact that the only existing pulp mill is now seriously

considering the addition of a paper making wing also, can be deemed as sufficient

proof of its uneconomic character. Economics of pulp mills would, therefore, have to

be considered carefully. May be, another approach would be to set up large pulp mills

with unbalanced paper making at the site and the rest for supply to other paper mills.14

This would perhaps lead to better economy, as small non-integrated paper mills

cannot entirely be eliminated.

Large size is economical only in respect of production of mass grades of

paper; it is of no special advantage in specialized grades (demand for which is rather

limited) nor in paper and paper boards made from a mix of different fibre raw

materials. Additionally, there are man-made difficulties. The very large capital cost

associated with big sized mills is beyond the capacity of entrepreneurs other than

established producers.

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 On the other hand , even in developed countries such as USA and Canada

there are favourable cost and market conditions, which small scale production

becomes profitable.15 In our country too such situation do exist. In any case, from a

technical and economic viewpoint, it would be advisable to go in for ‘large’ size mills

for the manufacture of mass grades and for ‘small’ size plants for specialized grades

for paper.

As paper making involves a series of processes (beginning from the

preparation of raw material for feeding the pulp mills to the final finishing of the

paper products ready for the market) and, further, as some of the process can be

isolated and set up independently, it is useless to give investment estimate without

specifying what is included in such an estimate. As far as possible, the estimates given

below indicate the items covered. It needs to be emphasized that these estimates here

are solely for the purpose of evaluating investment need in the near future and are

likely to be conservative. They are not to be taken as firm figures for a paper mill at

any given site, for which detailed feasibility study would be needed. The estimates,

nevertheless, provide guidance for working out financial results of expansion of new

units.

As a first step, it would be of advantage to review the work done in this

respect by the various expert groups appointed by the UN and FAO agencies. A

detailed study investment needed in paper industry was made by the ECAFE

Secretariat in connection with the Conference on Pulp and Paper Development in Asia

and the Far East held in 1960.

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 Subsequently studies made by other UN and FAO agencies to-date have

drawn heavily on this study and even now the Investment estimates made in 1960 are

quoted authoritatively. The ECAFE estimates do not include investment on offsite

facilities, etc., This latter terms includes process, organization, forest, housing and

community, transport, power and other developments.

The estimates also do not include the investment required for pulping

unconventional fibre material. Hardwood pulping may require additional facilities for

chipping and pulping depending on the chemical properties of the wood; bagasse may

require additional investment for baling, depithing etc., Organizational development

costs refer to those costs which would have to be incurred by enterprise other than the

established ones.

Sometimes, the new mills have to invest large sums for using untapped forest

resources if new plantations are contemplated. Though in the ultimate analysis, these

costs would be reflected in the costs of raw materials delivered at factory site, initially

the investment load would be heavy if the mills have to bear the expenditure.

Naturally, it is difficult to estimate these investments, as they are likely to vary from

situation to situation.

In some countries, the pulp mills invest on the manufacture of caustic soda,

chlorine and lime and this investment is included in the total. Normally, in plants

exceeding 150 tonnes of pulp per day, a lime kiln is included in the investment, but in

case of smaller pulp mills it is more advantageous to purchase the chemicals from the

129
market. The ECAFE estimates do not include investment required for the

development of allied chemical products.

In 1967, the ECAFE appointed a survey mission to study the pulp and paper

industry in South-East Asia. The mission made investment estimates for setting up

new mills in the region. As the estimates are based on recent price data, it would be

interesting to compare these with the earlier estimates. The mission’s report does not

give details on equipment cost. Nevertheless, it is observed that there is no marked

deviation from the earlier estimates when the size of the mills, the products to be

manufactured and the raw materials to be used are taken into consideration.

With a view to get as accurate an estimate as possible, the NCAER requested

the members of the Technical Panel and some eminent paper technologists to give

information on capital costs for establishing pulp and paper mills of different

capacities. For the purpose of estimating future investment the cost of offsite facilities

such as townships, railway siding, water treatment, effluent disposal, etc., are taken

into consideration.

Further, the raw materials to be used such as bamboo and hardwood are also

taken in to consideration. By considering the above elements in 1970s during the

fourth five year plan the following investment estimates were derived as shown in the

Table 5.7.

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 TABLE-5.7

INVESTMENT ESTIMATES OF PAPER INDUSTRY AT ALL

INDIA BY UN SURVEY MISSION

Annual Total Fixed investment Fixed

Particulars Capacity cost per annual investment
(Tonnes) tonnes (Rs) (Rs. Million)

Expansion of existing 2,90,000 3,770 1,093

mills

Two mills of 200-tonne 1,32,000 4,070 537

per day capacity to be set
up either in private sector
or joint sector

Proposed Paper 1,65,000 5,945 651

Corporation

Total 5,87,000 ***** 2,281

Source: Secondary data

130.a
 Based on the above estimates the investment activities were taken place in the

paper industry in the later years. To conclude, it should be remembered, that the profit

rate is only one facet of the investment problem. The other equally important problem

is whether the requisite additional raw materials would be available to the industry at

reasonable prices. But note should be taken of the fact that even if the raw materials

are available, their cost at the factory site would be crucial factor affecting the profit

rate.

Cost Structure

It is very difficult to envisage a representative unit in the paper industry for

getting even an approximate idea of the cost structure. Cost inevitably varies

according to the size of the mill, the process employed, raw materials used and the

product-mix of the final output.

A wide diversity obtains currently almost all the factors mentioned above.

Thus, the size of the mills varies from 5-tonne a day to 200-tonne a day. Though a

majority of the mills produce chemical pulp, there are certain mills manufacturing

paper from a small quantity of mechanical pulp. The chemical pulp in large sized

mills is based on the sulphate process and the smaller mills use the soda process.

Raw materials range from bamboo, hardwoods, sabai grass, Conifers, grass,

jute sticks, agricultural residues, bagasse, hemp ropes, rags, hessian cuttings to waste

paper. In terms of tonnage, bamboo predominates, accounting for about 69 percent of

the total raw materials used. Similar diversity is obtained in the final product. Though
131
for statistical purposes, a broad categorization of paper into cultural , industrial and

special varieties like white printing , cream laid, cream wove, offset, cartridge,

litho,ledger, bank and bond, typewriting, manifold , duplicating, limitation and real art

and machine glazed (MG) poster paper. Within each category, a further distinction is

made depending upon grammage per square metre (gsm).

Categorization of industrial (packing and wrapping) is also quite wide,

depending on weight and tearing, folding and bursting strengths. Naturally the cost of

production would vary from quality to quality.

In this connection, it may be observed that in discussing the growth of the

industry, the usual practice is to measure paper products in terms of weight and fix the

targets in tonnage terms. However, weight is only one aspect, the other equally

important being the surface area of paper.

Currently the industry is producing writing and printing paper of substances

varying from 42 grammes per square metre (gsm) to 85 gsm. The lower the gsm, the

greater the surface area available. In principle, therefore, one can get more paper with

the same tonnage, if gsm is lower. Thus, the surface area would increase by 15 to 20

percent, if instead of manufacturing 56gsm substance paper; 44/48gsm substance

paper is produced.

Currently the industry is reluctant to produce lower grammage paper for two

reasons. Given the existing design and layout of the paper machines, many mills are

132
likely to show a fall in production in terms of tonnage if the grammage is reduced.

This is because the machines will have to be run at lower speeds.

The wastage on producing low grammage paper is also high. Second, the

existing price differential between the prices of paper of different gsm’s weighs

against lower grammages.These are partly technical matters and must be looked into

for an optimum production schedule for conserving the pulp resources.

As the financial accounting practices differ from one mill to another, cost of

production estimate have been done by using a uniform method for allowing

depreciation and by assuming alternate rates of return on investment. Changes made

in arriving at the alternate estimate are repeated below for ready reference16.

i) Operating expenses as given by the mills for different years have been

accepted. However remuneration to managing agents, donations to charitable

institutions, political parties,etc., have been excluded. Care is taken to see that

only those items which are directly related to paper production are included.

ii) Depreciation was estimated on the basis of sinking fund method. In calculating

depreciation allowance for a year, the gross block as shown in the companies

balance sheet for that year has been taken as the base. This way of valuation of

the assets has some inherent demerits. In principle, one should have

information on the real depreciated value of the assets and on the remaining

period of life of the assets, for calculating depreciation. But these details were

133
 not available with the selected mills. The other alternative is to take the net

block a basis. However,

iii) many mills did not provide for depreciation in the earlier years. Moreover

whenever depreciation was provided, it was on the rates as allowed in

calculating income -tax on the companies. These rates, as is well-known, do

not reflect the true written down value of the assets. In view of these

complexities, it was decided to use gross block as a base. As no information

was available on the scrap value of the machinery after its useful life,

adjustment for this factor could not be made.

iv) There is a lively debate over what is a reasonable rate of return on investment.

Normally, the capacity market, if reasonably free, is capable of reflecting this

rate. But in a developing economy where price controls are generally imposed,

a base is needed to determine the control price. Therefore, it is necessary to

adopt some rate of return and include it in the control price. The adopted rate

must be adequate to guarantee the maintenance of the existing facilities and to

provide incentive for expansion through further investment.

v) In the Fourth Plan, the Planning Commission has observed that public

industrial and commercial undertakings should direct their effort to raise the

rate of return on capital employed to 15 percent17.

However, when the investor has a choice between the purchase of equity and

debt, one consideration of this is in opting for equity is his expectation of capital

134
appreciation and his assessment of the particular unit’s capability to reduce cost and

raise profitability in the face of controlled prices.

That is one of the reasons why he is satisfied with a rate of return lower than

that allowed on long-term debt instruments. In theory, therefore, there is no need to

guarantee an equal rate of return. At the same time, it is impossible to fix a number

for the rate of return for equity in the light of the uncertainty and risk that the investor

is called upon to bear. Alternatively, it can as well be argued that capital appreciation

ultimately has to come from the retention of profits over a period of time. During this

period, the equity-holder will not get any interest (compared to the debenture-holder).

Hence, when the level at which prices are to be controlled is to be determined,

account has to be taken of the short period loss that the shareholder has to bear (which

incidentally is reflected in capital appreciation). Therefore, in fixing the price, rate of

return equal to the interest rate that the debenture - holder is getting should be

guaranteed. Cost structure is determined by profitability, royalty, maintenance of

forest,other raw materials and processes of production.

Profitability

A reasonable level of paper price to make the working of existing units

economic was indicated in the cost structure. But the new price level must also be

such as to attract new investment to the industry. One must therefore, study the trends

in future costs and relate them to the expected prices to compute future profitability.

135
 On the basis of current production of paper, it is estimated that raw materials

of varying grades are used by the industry. The important raw materials are bamboo,

soft woods and grasses which account for 90 percent of the total current use.

Indian Paper Industry started by using rags, waste paper and agricultural

wastes as raw materials. This raw material base was sufficient so long as the industry

was on a cottage-scale. The first mill-scale production was based on Sabai grass

which was found suitable for pulp making till 1938.

The introduction of bamboo as a pulping material revolutionized the industry

and almost all subsequent developments (excepting mills located in North India) were

based on bamboo. Now bamboo is in short supply. Limited bamboo supplies and also

the need to diversify the range of fibre characteristics available to the industry have

made the search for other pulpable raw materials - a matter of urgent importance. The

forest policy evolved in the last 15 to 20 years has laid emphasis on increasing the

supplies of industrial wood.

However, the diffused efforts of the various State Governments have not

yielded the desired results. Information on the availability of wood and other raw

materials and also on their suitability for industrial processing was insufficient to

permit any systematic evaluation for the development of forest-based industries.

The urgency of the problem led the Government of India to request UN

assistance in initiating investigation into these crucial aspects.In 1965 a Pre-

Investment Survey of Forest Resources was initiated by FAO with UNDP funds. A

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terminal report on the project results was released by FAO in April, 1970. In view of

this study in assessing the potential pulping materials in the country, a brief review of

the report is given below.

Forests cover an area of about 73 million hectares (23 percent) of the

country’s land area. Out of this, 3 million hectares are coniferous forests. Total

growing stock in use is reported to be about 1,440 million cubic metres. Three zones

were selected for intensive survey. The project surveyed an approximate area of 3

million hectares with an estimated growing stock of 318 million cubic metres.

The results show that pulping material to the extent of 1.05 million cubic

metres is available in the central zone. About 2,77,000 cubic metres of conifers and

81.000 cubic metres of hardwoods are available in the northern zone. In the southern

zone, the wood supply calculations were confined to eucalyptus plantations.

It is estimated that the yield from Government plantations is likely to reach

3.50.000 cubic metres of pulpwood a year. It is likely to double by 1980s and treble

by 1990s. Investigation carried in the central zone show that the growing stock

amounted to 132 million cubic metres. Out of this it is estimated that an annual cut of

about 1.05 million cubic metres of pulpwood would be available. In addition to these

hardwood resources, sizable concentration of bamboos were also located. The annual

cut of bamboos that could be available is estimated at 4,66,000 tonnes on dry weight

basis.

137
 In the northern zone, the survey results show growing stock to the extent of 83

million cubic metres. About one-fourth of the stock is over matured and another 22

percent middle aged. On the basis of their investigation, the FAO expert group

estimated a potential of pulpwood to the extent of 3,58,000 cubic metres. The Pre-

Investment Survey, thus, presents a clear picture of the forest raw material in the

surveyed zones. The estimates of standing volume and annual cut are reported to be

reliable within (plus or minus) 10 percent and 95 percent productivity limits

respectively.

The cost estimates are likely to be conservative, as they would change with the

changing pattern of exploitation and wage rates. It is hazardous to estimate the

pulpwood potential of the country on the basis of the Pre-Investment Survey of only

three zones.

However, on the basis of their experience, forestry experts believe that even

with the low intensity management of forests currently practised, a total annual

surplus of about 1.8 million cubic metres of softwood and 32 million cubic metres of
1 o

hardwood can be expected on a sustained basis .

Maintenance of Forest

Mere existence of a raw material does not make it an economic resource for

development of the paper industry. Equally important is its costs at mill site. Cost in

turn depends on management, efficiency of cutting and logging, transportation

distances, royalties etc.

138
 The Indian paper industry has developed historically independent of forests.

As a consequence, most of the mills treat raw material as a purchase problem. Barring

exceptions, the industry as such has shown little interest in forestry developments.

State forest departments, the ultimate purveyor of forestry wealth of the country, have

so far paid inadequate attention to the requirements of pulping material.

The obvious solution that can be thought of is to separate the areas and

activities of the two sectors. Industry should be assigned areas where they can grow

their own pulp material and the forest departments should manage the rest of the area

to meet the larger national policy goals.

Such a solution -physical separation of forest areas by functional needs- is

considered impossible by the forestry experts on the ground that "productive’ forest

suitable for plantations and ‘protective’ forests are so intricately mixed that the two

cannot be separated for different functions19.

In principle, the views of forestry experts may be correct. But the dimension

of the problem still admit of such a solution. Thus, it is known that to sustain a 400-

tonne daily capacity mill, an area of 70,000 hectares, suitably planted only for

pulpwood material is needed. This estimate is based on a yield as low as 10 cubic

metres per hectares.

On this basis, about 5,30,000 hectares, would be needed to sustain a capacity

of one million tonnes of paper per annum. This area forms a mere 0.73 percent of the

total forest area and hence management of this land area by the industry for growing

139
its own pulpwood would not materially affect the other national policy objectives laid

down for the exploitation of forestry wealth. When it is remembered that such blocks

of compact area would be scattered over the country, scientific objection does not

hold good20.

It is, therefore, clear that with scientific management of forests by the

Government or industry (whichever agency undertakes the job), not only the costs of

raw material can be reduced but also the area required to sustain a given size of mill

can be considerably reduced.

This should not lead us to believe that all units in the industry would be

willing to take to plantation. But the Government policy should be to encourage new

as well as old units to develop their own plantations. In the important paper producing

countries the industry plays an active role in regenerating the raw material source.

There is no reason why Indian Paper mills should not follow the same practice.

The World Bank Mission which visited India to investigate the prospects of

plantation programme has suggested that mills with capacities over 100 tonnes per

day may be in a position to run plantation programmes economically, though they

expressed preference for still larger units of 300 tonnes per day capacity, so as to

achieve pronounced economies of scale21 .

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Royalty

All paper mills have to pay royalty on the raw materials procured by them

from forest. There is no uniform policy on royalty rates. They are fixed by State

Governments taking into account local conditions. Industry has been pleading for a

uniform national policy (not to be confused with uniform rates) so as to determine

future locations of paper units rationally. In any case, a scientific approach to the

royalty problem is needed. The present wide diversity is inimical to a rational growth

of the industry22.

Raw materials other than forest produce

Apart from forest produce, the industry utilizes raw materials like bagasse and

agricultural residues such as wheat and rice stalks, jute sticks, etc., However the

collection and cost problems connected with this type of raw material are so

stupendous as to be insurmountable. Hence, not much reliance can be had on these

resources for the future growth of the industry.

Bagasse attracted a lot of attention in the recent past and many studies were

conducted to find the technical suitability and availability of bagasse for paper

manufacture. The study on other raw materials apart from forest produce shows that

enough pulping material can be had in the country to meet the rising demand for

paper.

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Processes of Production

The cost of production of paper is dependent on the process used and the type

of pulp used. In our country, paper production is based mainly on chemical pulp

which is among the costliest available. However, the selection of a process cannot be

done only on the basis of cost; the pulping process depends on the raw materials

available and the varieties of paper to be manufactured. For purposes of this study, the

pulping process can be narrowed down to a few major groupings - mechanical,

chemical (soda, sulphite and sulphate) and semi- chemical. Mechanical pulp,

sometimes referred to as ground wood, is cheaper to make than any other paper pulp.

The yield is as high as 93 percent, compared to 50 percent or less in the

chemical process. No Chemicals are needed and, lastly, the equipment costs (capital

and maintenance) are low. However, the quality of the pulp is inferior and it cannot be

used in the production of high quality paper.

In contrast, chemical pulp is costly owing to low yield and the application of

chemicals. But this type of pulp is in wide demand as it is a necessary input for a

variety of papers. About two- thirds of the world’s wood pulp is produced by various

chemical processes.

In between the above two processes is the relatively new semi-chemical

(neutral sulphite) pulping process. This process is steadily gaining ground owing to its

flexibility in terms of raw material requirements, the high pulp yield (up to 75 percent

142
or better) and the relatively low capital investment per tonne in comparison with

chemical pulp.

In our country, there is scope and need to introduce mechanical pulp process

(for the manufacture of newsprint, magazine papers and certain types of bag and

wrapping papers) and semi-chemical process for increasing the pulp availability at

lower costs. However, it is for the industry to examine the suitability and availability

of these processes in the context of India’s raw material base.

It is not possible to speculate on the future composition of pulp by variety. But

it is certain that the average cost of production can be brought down by introducing

mechanical and semi-chemical pulping processes.

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V.6.TAMIL NADU PAPER INDUSTRY

Among the various manufacturing industries, Paper Industry play a vital role

in Tamilnadu. There are many small, medium and large scale units in the Paper

Industry of Tamilnadu. Among them Tamilnadu newsprint & Paper Ltd., and

Seshasayee Paper and Boards Ltd occupy predominant positions. Therefore it is

necessary to know about those industries in brief.

Tamilnadu Newsprint & Paper Ltd

This Company was promoted by the Government of Tamilnadu in 1979 with a

loan assistance extended by World Bank. It is the largest producer of Bagasse based

paper in the world. The company produces 2,30,000 tonnes of Printing and writing

paper and newsprint. The company has is based in Chennai and its paper plant is in

the Karur district of Tamilnadu.

TNPL is acknowledged as the world leader in technology for the manufacture

of newsprint from bagasse. It has the most modem paper mill in the country with

unique bagasse procurement, storing, preserving, handling, processing and pulping

system. The key areas of operation have been innovatively designed and developed by

its in-house technical team.

TNPL has two high speed paper machines from Beliet Walmsley and Voith

Paper. They have the unique flexibility to switch between newsprint as well as

printing writing paper. This gives the company a lot of freedom to decide its products

144
depending on the prices. The Tamilnadu Government owns 35% of the company and

has no plans to divest from its most profitable state enterprise in the near future.

The company has expanded its capacity for the second time in its history last

year from 1,80,000 tonnes to 2,30,000 tonnes. The entire 50,000 tonnes addition was

funded internally. The company had earlier expanded its capacity from 90,000 tonnes

to 1,80,000 tonnes. In the near future, the company plans to increase its capacity

further to 3,30,000 tonnes.

The company have unique raw material arrangement with the sugar mills for

whom bagasse is a residual product. The sugar companies use bagasse for heating

purposes. TNPL buys bagasse from these sugar mills and in return provides tern steam

to the extent of the heat equivalent of the bagasse. This is a win-win arrangement for

both as the sugar company get good quality heating at no expense and TNPL is

assured of its supply of its most important raw material.

TNPL is basically in to the business of newsprint and Printing and Writing

Paper. The company produces around 95% Printing and Writing Paper and 5%

Newsprint in its product mix. The company is able to sell all that it produces. The

share of the newsprint in the overall product mix has gradually declined. In the

financial year 2001, the mix was 33.67, in financial year 2002, the mix was 18.82, in

financial year 2003, the mix was 12.88, in financial year 2004, the mix was 5.95 and

in the financial year 2005,the mix was 3.29. In Printing and Writing Paper, the

company has three kinds of offerings -copiers, surface sized (map litho) and printing

paper. The company’s products are renowned in the markets for their quality. TNPL

145
is continuously introducing new products in the market and is also a major player in

the branded segment.

The company is planning to increase product range and making value added

paper products. The share of exports is gradually rising in the company’s overall sales

mix. Thus, TNPL occupies No. 1 position in Tamilnadu.

Seshasayee Paper and Board Ltd

The second major Paper Industry next to TNPL is SPB Ltd., in Tamilnadu. It

is situated near the bank of river Cauvery in Namakkal district, Tamil Nadu. It was

established in the year 1960.

SPB produces high quality papers which are highly demanded in National and

International Market. The Motto of the company is “Zero defect and zero complaint”.

The company has a well developed marketing, sales, and research & development

section. The main markets are India, china, Dubai, Sudan, and Srilanka.

It regard nationally as a clean paper mill and has to it credit to several

achievement in productivity; Capacity; Utilization; Energy conservation, Environment

at preservation and safety. Several national and international safety awards are got by

this mill.

146
 Around 1500 employees are working in SPB. The company provides better

working conditions, safety and welfare to the employees.Five paper machines are

erected in SPB. They are MF-1 (Black Clawson USA), YANKEE (KMW, SWEDEN), MG

(BLACK CLAWSON USA), MF-III (GERMANY). Total production of paper per day is

450T. The main raw materials are bagasse and wood,mainly eucalyptus, casuarinas,

wattle and globuler are the wood species used here.

It is equipped with two lines of evaporation and two recovery boiler.

Gotaverkan boiler, Babcock & Will Cox boiler Electrostatic precipitators are used to

control the air pollution. The company provides a power plant having 25MW

capacity. Effluent treatment plant is provided to treat the waste water from various

stages.

SPB, the flagship company belonging to 'ESVIN GROUP', operates an

integrated pulp, paper and paper board Mill at Pallipalayam, Erode-638 007, and

namakkal district in Tamilnadu, India.

SPB, incorporated in June 1960, was promoted by Seshasayee Brothers (Pvt)

Limited in association with a foreign collaborator M/s Parsons & Whittemore, South

East Asia Inc., USA. After commencement of commercial production, having fulfilled

their performance guarantee obligations, the foreign collaborators withdrew in 1969.

Main promoters of the Company as on date are a group of companies belonging to the

ESWIN group headed by Mr.N.Gopalrathnam.

147
 SPB commenced commercial production in December 1962, on

commissioning a 20000TPA integrated facility, comprising a Pulp Mill and two Paper

Machines (PM-1 and PM-2), capable of producing, writing, printing, Kraft and poster

varieties of paper.

The Plant capacity was expanded to 35000TPA in 1967-68, by modification of

PM-2 and addition of a third Paper Machine (PM-3). The cost of the expansion

scheme, at Rs 34 Millions, was part financed by All India Financial Institutions (Rs

31 Millions).

In the second stage of expansion, undertaken in 1976, capacity was enhanced

to 55000TPA, through addition of a 60tpd new Paper Machine (PM-4). Cost of the

project, including cost of a Chemical Recovery Boiler and other facilities for

enhanced requirement of utilities, was estimated at Rs. 176 Millions. The same was

part financed by term loans from Institutions and Banks to the extent of Rs. 145

Millions and the balance out of internal generation.

It undertook various equipment balancing and modernization programmes,

since then, for improving its operating efficiency, captive power generation capacity,

etc., up to 1992-93.

SPB is in receipt of various Awards awarded by Government of India,

Government of Tamilnadu, Industry Associations, etc. Some of the Awards received

by SPB in the past include Certificate of merit for energy conservation (pulp and

paper category) by Dr. Man Mohan Singh dec-14, 2004, New Delhi,Capacity

148
Utilization Award, Energy Conservation Award,Environmental Protection

Award,Safety Award,Export Performance Award,Good Industrial Relations Award

and TERI - Corporate Environmental Award.

The Company attaches paramount importance to the conservation and

improvement of the environment. In its efforts to improve the environmental

protection measures, the Company has installed an Anaerobic lagoon for high BOD

liquid effluents, a Secondary Treatment System for liquid effluents and an Electro

Static Precipitator and Cascade Evaporator to the Recovery Boiler. These facilities

will ensure sustained compliance by the Company of the pollution control norms

prescribed by the Pollution Control Authorities.

ISO 9001/ ISO 14001 Certification

The Company's quality systems continue to be covered by the "ISO 9001"

accreditation awarded by Det Norske Veritas, the Netherlands. The Company has also

been accredited with "ISO 14001" certification by Det Norske Veritas, the

Netherlands, for its Environmental Quality Systems.

The day to day affairs of the Company are looked after by the Chairman and

Managing Director and supported by Director (Operations), and Director (Finance) &

Company Secretary. They are ably assisted by a team of qualified and experienced

professionals in operations, personnel, finance and marketing disciplines.

149
Expansion and Modernization of Plant

The Company embarked on an Expansion / Modernization Project to enhance

its production capacity from 60000 tonnes per annum, to 1, 15,000 tonnes per annum

and to upgrade some of the existing facilities, at an estimated cost of Rs 1890

millions. The said Expansion / Modernization Project was completed in December

2000.0n July 1, 2000 the Commercial Production of the new Paper Machine

commenced after successful trials. The current installed capacity of the Company

stands at 1, 15,000 tonnes per annum.

V.7.PROCESS AND MANUFACTURING OF PAPER

A variety of processes are in use in the paper industry, depending on the type

of raw material used and the end product desired. Among these, Kraft sulphate

process, semi mechanical process and sulphite process are the most popular ones. The

kraft technology alone accounts for nearly 80% of the pulping in the Indian Industry.

Paper making essentially consists of four major stages. They are Preparation of

pulp,Stock preparation, Sheet formation and water removal andSheet finishing

Preparation of pulp

Wood preparation:Debarking of hard woods normally is carried out in forests

after the wood is cut. The first operation in the plant is chipping. Here the wood is cut

into small pieces in chippers and the screened pieces are fed to the pulp mill.

150
 Pulp making:Predominantly, pulp making is done either by chemical or

mechanical means. In mechanical process, the wood is reduced to small particles by

rubbing against huge grindstones revolving at high speeds. Ground wood primary

mechanical process is the most commonly used and most of the newsprint production

is undertaken through ground wood pulp process.

In the chemical process, the cellulose fibers of the wood are separated from

the non cellulose components by chemical action. Three primary chemical processes

are in use, viz., kraft or sulphate (alkaline), sulphite (acidic) and neutral sulphite semi

chemical (NSSC).

Nearly 80% of Indian paper mills use the kraft sulphate and soda chemical

process for pulping. In this process, the raw material (almost any kind of wood soft or

hard) is cut and chipped to produce chips of 0.5-1 inch size.

These chips are fed into digesters, reacted with white liquor (80:20 NaOH and

Na2S) and steamed for two hours at 170°c. Digesters may be batch or continuous type,

the latter offering advantages such as increased throughput, reduced labor and better

energy utilization.

The wood contains approximately 27% lignin. At the cooking state, the lignin

content is reduced to about 5%. However, as it is lignin which causes pulp to darken,

more lignin has to be removed and this is done in bleaching state. The pulp is washed

to free soluble impurities and removal of black liquor through usual 3 or 4 stages of

counter current washing using rotary drum filters.

151
 The washed pulp is sent for bleaching to increase the brightness of the pulp

and the dilute black liquor is sent to evaporators. The treated pulp then goes for stock

preparation. The “black liquor” after concentration is fired in recovery boilers. The

residue “green liquor” is treated with chemicals to get “white liquor” for reuse.

The energy requirement in this process is about 1-2. 2 x 106 kCal/t of pulp.

The primary energy consumption operations are digestion of wood chips, evaporation

of water from the cooking liquor and calcining of wet CaCCb to lime.

In agricultural residues, the lignin content of the raw materials is

comparatively lower than that of bamboo and wood. Besides the lignin in agro

residues is easily accessible to the chemical pulping agents. Hence, cooking and

bleaching of agro residues is a little milder than that for wood and bamboo. The

washing, screening and cleaning of the raw materials by dry and wet method before

they are charged into the digestors.

The processing of waste paper consists of slashing of waste paper in pulpers,

cleaning the foreign ingredients such as metal and plastics, followed by coarse and

fine screening, and backward and forward centricleaning. The pulp is now ready for

refining and sheet forming. In some cases de-inking (removal of ink from old paper)

is essential.

152
Stock preparation

Stock preparation is undertaken to give the paper various desired qualities

through refining. It is mostly accomplished in either double disk or conical refiners. A

more vigorous and special type of refiner, known as Jordon, is used in mechanical

pulp preparation method, in which a conical plug rotates in the conical shell. The

stock is then subjected to sizing, filling and colouring.

Sheet formation and water removal

The feed to the paper machine consists of combination of refined pulp together

with additives, such as fillers & whiteners, having requisite stock consistency. The

above feed is formed into a sheet by either Fourdrinier or cylindrical machines.The

agro residue pulp fibers do not need elaborate refining and hence the power

consumption in the stock preparation plant is lower.

Sheet finishing

Sheet finishing is achieved in steam heated dryers, which are sometimes

enclosed.Thus the paper mills, which are in existence today in India, practice

technologies falling in a wide spectrum from oldest to the very modem. A

comparative chart on technological status of a typical US pulp and paper plant is

given in the Table 5.8.

153
 TABLE 5.8

COMPARATIVE CHART ON TECHNOLOGICAL STATUS OF A

TYPICAL US PULP AND PAPER PLANT AND INDIAN PULP
AND PAPER PLANT

s. Typical Indian
Section Typical US Paper Plant
No. Paper Plant

1. Chippers Conventional High capacity

2. Pulping Vertical stationary Continuous digestors and rapid

batch digestors displacement

Heating (RDH) digestors

3. Washing Rotary vacuum Pressurized double drum rotary washer

drum washer

4. Bleaching Multistage with Multistage for Elemental

chlorine compounds
Chlorine Free (ECF) and totally Chlorine
Free (TCF) bleaching using oxygen,
ozone and peroxide

5. Stock Conical/Disc refines Disc refines

preparation

6. Paper Convectional High Speed machines with sophisticated

making machines instrumental and control
Source: Annual Report of Indian Paper ma cers association-2005

153.a
V.8.PRODUCT PROFILE

Paper Industry in India is broadly classified into two segments.They are Paper

and Paper Boards & Newsprint.Further paper and paper boards comprises of Cultural

papers,Industrial papers and Specialty papers.

Cultural Paper

Major varieties of paper included in this segment and their major applications

area are given in the table 5.9.

Industrial Paper

The major varieties of Industrial Paper and their major applications are given

in the table 5.10.

Speciality Paper

The major varieties of Speciality Paper and their major applications are given

in the table 5.11.

154
 TABLE 5.9

CULTURAL PAPER VARIETIES

Types of Paper Major End Major applications

user
1. Writing & Printing
a. Map litho High quality books, Cookery books,
etc., dairies, good quality computer
i. Surface sized Printers &
stationary.
Publishers
ii. Non-surface sized

b. Cream wove Publishers Note books, Examination material,

Academic books, Computer
stationary, Share applications, low
priced stationeries etc.,

2. Business
Communication
a. Copier Copiers & Photocopying, Cyclostyling
i. Branded Printers
ii. Unbranded
iii. Duplicating/Cyclosty
ling

b. Airmail paper
i. Parchment paper Printers Security printing, share certificates,
Cheque books
ii. MICR paper

c. COATED PAPER
i. Art paper Printers Calendars, Publishing materials,
annual reports.
ii. Chromo paper

Source: Annual Report of Indian Paper makers association-2005

154.a
 TABLE 5.10

INDUSTRIAL PAPER VARIETIES

Types of Paper Major End user Industry Major application areas

Kraft Corrugating Industry Corrugated boxes used for

packaging

Paper boards Folding cartons manufacturers, Primary packing mainly

Packaging folding cartons.
Source: Annual Report of Indian Paper makers association-2005

TABLE 5.11

SPECIALITY PAPER VARIETES

Types of Paper Major End user Industry Major application areas

Tissue Cigarette industry, Toiletries Cigarette wrapping

Glassine Grease Packaging industry Packing

Proof
Source: Annual Report of Indian Paper makers association-2005

TABLE 5.12
MAP LITHO PRODUCTION IN 2004-2005

S.No Company Percentage

1. Ballapur Industries Ltd (25%)

2. JK Paper Ltd (20%)

3. Andhra Pradesh Paper Mills Ltd (8%)

4. ITC Ltd (7%)

5. TNPL,CENTURY, HPC,SPB etc., (40%)

Source: Annual Report of Indian Paper Makers Association-2005

154.b
BRIEF NOTE ON PAPER VARIETIES

Writing and Printing Paper

There are broadly two varieties that are classifies as Writing and Printing

Paper. They are coated and uncoated. Uncoated papers comprises creamwove,

maplitho and copier paper. Creamwove is the lowest value segment and maplitho,

copier and coated paper are higher value segments. Creamwove accounts for nearly

54 percent of the Writing and Printing demand, maplitho (including unbranded

copier) for 26 percent and branded copier and coated paper together account for

around 19 percent of the demand.

Map Litho

Map litho is surface sized writing and printing paper. The general GSM used

are 58 GSM - 64 GSM for regular printing. The higher grammage of around 70-80

GSM is used for special books. There is another type of map litho paper used at

present namely non surfaced sized map litho. This is a superior quality of cream wove

paper.The estimated supply of map litho variety (including SS and unsized) in the

country was around 3,50,000 metric tonnes in 2004-2005. Contribution made by each

company in the Map litho production are given in the Table 5.12.

155
Cream Wove

Cream wove is unsized writing and printing paper. The general GSM used is

40-60 GSM. Cream wove paper being unsized has more fluff. The estimated supply

of Cream wove variety (including SS and unsized) in the country was around 8,

50,000 metric tonnes in 2004-2005. Contribution made by each company in the

Cream wove production are given in the Table 5.13.

156
 TABLE 5.13

CREAM WOVE PRODUCTION IN 2004-2005

S.No Company Percentage

1. Hindustan Paper Corporation Ltd (20%)

2. Tamil Nadu Newsprint & Papers Ltd (15%)

3. Orient Paper and Industries Ltd (12%)

4. Century Pulp and Paper (8%)

5. Andhra Pradesh Paper Mills Ltd (5%)

6. The West Coast Paper Mills Ltd (5%)

7. Seshasayee Paper & Boards Ltd (3%)

8. Others (30%)

Source: Report of Indian Paper Makers Association-2005

156.a
Bond Paper

These are high quality surface size papers used mainly for office stationary

such as letterheads. The market for bond paper is dominated by BILT, which was

estimated to produce 20000-25000 metric tonnes by 2004-2005, there by

commanding over (40%) of market, followed by JK with the share of approximately

(30%). The total domestic production is 55000- 60000 metric tonnes.

Duplicating

The total domestic market for duplicating was estimated around 30000 metric

tonnes in 2004-2005. BILT is the sole prominent player in this segment that is

dominated by several small suppliers. Duplicating paper comes mainly in three

different GSM 63, 64 & 70.

Azure Laid

Azure laid is mainly used in ledger and accounts books available in a

substance range of 60 GSM and above. The estimated market is around 3000-35000

metric tonnes in 2004-2005. Key players in this segment are Sirpur, Westcoast, SPB

& BILT.SPB is producing around 7000 metric tonnes of azure laid annually.

157
High Brightness Paper

This type of paper has brightness more than 80 degree. Chlorine dioxide or

hydrogen peroxide bleaching achieves this level of brightness. These paper are used

for high quality printing. The brands available today are sunshine super printing of

BILT and super printing paper of TNPL.

Copier

This is also a high brightness paper. Copier papers are surfaced sized map

litho papers. It has non curling tendency with heat and needs even drying of the

surface.The total domestic production was estimated to be around 60000 metric

tonnes in 2004-2005. JK & BILT account for predominant shares of this, accounting

for 25 percent and 15 percent respectively. ITC Bhadrachalam account for about 8

percent and APPM 5 percent.

Parchment

Parchment paper is generally used for printing share certificates. Only few

mills are presently manufacturing parchment paper. BILT, Pudumji Pulp and Paper

Ltd., with the growth in the corporate sector with more and more company being

listed, the demand of the parchment is likely to increase.

158
MICR

It is used for making MICR cheques.

Coated Paper

Coated paper is of two types, Art paper and Chromo paper.Art paper is coated

on the both the sides, whereas coated paper is coated only on one side. Coated paper

is ids generally available in the range of 80-100 GSM. Internationally a new variety

of coated paper ha been developed. This is called LWC paper (Light Weight Coated

paper). These are also called as pigmented papers. LWC paper gives better surface

properties such as opacity, smoothness, etc., at a lower grammage. These are free of

fluff.

The total market for coated paper is estimated to be around 100000 metric

tonnes.Among the big manufacturers who supply coated papers are BILT, JK Papers,

ITC Bhadrachalam, Sri Krishna Papers, Rohit Papers etc.,

V.9.CHALLENGES FACING THE INDUSTRY

The Paper Industry is facing problems regarding Raw material, Technology,

Cost competitiveness, Environment and Capital investment.

159
Raw Material

Sustainability and competitiveness of the industry depends on robust raw

material base.Over 15% of Raw material needs of the global paper industry met by

plantations.In absence of a proactive industrial plantation policy, many mills have

embarked on social forestry.

Industrial Demand Scenario In India

The paper industry’s wood demand is expected to grow from 5.8 million

tonnes to 9 million tonnes by 2010, and to over 13 million tonnes by 2020 which had

been shown in the Figure 5.2.

160
 FIGURE 5.2

INDUSTRIAL WOOD DEMAND SCENARIO FOR INDIA

million tons of wood

2000 2010 2020

Source: JP consulting report 2005

160.a
Fibre Scenario in India

It has been identified that annual availability of agro residues is large.This

may not be able to sustain the future growth of the industry,taking due account of

quality of paper required, environmental issues involved, etc. Bagasse is increasingly

used by Sugar Mills for co-generating of power. According to the reports of Jakko

Payry 2005, that agro residues consist of wheat raw, rice raw, bagasse and

jute/mesta/kenaf. Total available wheat straw was around June 2005 was 22 million

tonnes, rice raw was around 15 million tonnes, bagasse was around 10 million tonnes

and jute/mesta/kenaf were around 2 million tonnes. For making one tonne of pulp,

wheat raw required was 2.5 to 3.5 tonnes. Similarly rice raw. Baggsse comes around 5

to 6 tonnes for making one tonne of pulp and jute/mesta/kenaf may come around 8

tonnes for making one tonne of pulp. Potential of pulp with regard to 22 million

tonnes of wheat raw was 7.0 million tonnes, with regard to 15 million tonnes of rice

raw was 6.0 million tonnes, with regard to 10 million tonnes of bagasse was 2.0

million tonnes and with regard to 2 million tonnes of jute/mesta/kenaf was around 0.5

million tonnes. Thus there was the availability of 49 million tonnes of agro residues in

India around 2005.

Technology

LARGE MILLS:Large size mills (50,000 tpa and above) are reasonably modem

and operate efficiently.Tamil Nadu Newsprint , BILT Graphic , Pulp Plant of JK

paper use advanced technologies.However, the size of paper machines is small

161
resulting in higher energy consumption besides quality constraints. Jaakko Poyry

consulting has recommended that future machines should be at least 50% of

international size.This will help in affording better like QCS and DCS. High speed

machines of more than 1000 mpm are not many in India. More mills should go in for

high speed machines as part of Technology Upgradation. Mills should also focus on

fewer grades to be more efficient.Mills should enhance use of filters and coating

pigments as well as synthetic sizes.Mills should be in the export market which will

improve the quality of paper and services.lt should move towards ECF

Bleaching.ECF Light bleaching using chlorine dioxide followed by peroxide is

recommended for Indian big mills.Use of Enzymes is recommended.Near 100% self-

generation of power desirable in view of high cost of power from grid.Cleaner

production techniques are to be followed.

SMALL MlLLS:Small mills use old machinery and out-dated technology.Their

modernization and incorporation of Chemical Recovery Systems-extremely

difficult.They are exposed to penal action under environmental laws.

Cost Competitiveness

In general be it a large mill or small mill the paper mill consist of high cost of

raw material, low calorific value of fuel (Coal),expensive purchased power,high cost

of waste paper,high transportation cost and personnel cost.

162
Environment

In general be it a large mill or small mill the paper mill consist of environment

compliance to achieve:- AOX - < 1 kg /t of product,Water consumption - < 100 m3 /t

of product,Lime Re-buming Kiln - to be installed soon,Odour Abatement- systems to

be installed and CTP- to be installed by small paper mills or to shift to waste paper

usage.

Capital Investments

No major Greenfield, integrated pulp & paper mill since 1984 (TNPL : 90,000

tpa bagasse based newsprint and fine paper mill) in India. Inhibiting factors are

absence of sustainable raw material base.Funding constraints- A Greenfield integrated

pulp and paper mill involves a financial outlay of Rs.750 to 800 Crores (US $ 170

millions).Higher priority modernization needs of existing industry players. The mid

90’s saw the emergence of mill modernization and capacity expansion initiative on a

comprehensive scale,directed towards upgrading of technology in pulping, paper

making, chemical recovery and co-generation operation.

Cleaner production and readiness to meet emerging environmental

legislations.Enhancing quality of pulp and paper production and reducing variable

costs of production as a measure to be more globally competitive.Capacity expansion

to enable meaningful use of state-of-art-technologies and attain better economies of

scale.Future investments- Investment required to sustain the creation of additional

capacity of about 5 million tonnes would be US $ 8 billions in the next 10 years.This

163
would open host of opportunities for international players to participate in India’s

growth. Hopefully Government of India would have permitted FDI in paper industry

and created a favourable forest policy, by then.

Strategic Road Map

Indian Economy has been growing at over 5% per annum. This growth is

expected to be maintained and improved upon during the next 5-10 years. Exports out

of India are expected to go up significantly.India is the 10th largest industrialized

sector in the world.India has the largest technically skilled and English speaking

workforce.India has the most technically skilled software professionals in the world.

Annual revenue projections for India’s I.T.Industry in 2008 are US $ 87

billion.Software & Services contribute to 7.5% of the overall GDP growth of

India.Competitiveness for the Indian Paper Industry can increase sharply with

availability of wood through industry -raised plantations as well as by improving the

size and technology of operation. In the next 10 years, India is set to become a key-

player in the region of pulp and paper industry.The best of India is yet to come. This

may happen in the coming decade.The Figure 5.3 shows the “STRATEGIC ROAD

MAP”.

164
 FIGURE 5.3

STRATEGIC ROAD MAP

164.a
 To conclude, it can be pointed out that the paper manufacturing cycle is highly

sustainable. Besides, it should also give priority to quality. Moreover, quality

production should be regarded as the continuous process for improvement. The Indian

Paper industry now is at cross roads and facing a demand recession, coupled with

competition from imported paper. Prices are falling. The market is furiously

competitive. The industry has to enhance the quality of its products and achieve

considerable economies in the cost of manufacture. This should be concentrated

immediately in order to face global competition. Such a demanding situation is to be

regarded as a blessing in disguise for industry to plunge itself whole heartedly for

adoption of suitable techniques23.

V.IO.GROWTH OF PAPER INDUSTRY DURING THE STUDY

PERIOD (FROM 1979-80 TO 1997-98)

The Paper industry in India is highly fragmented with the capacity of mills

ranging from less than 10 tonnes to 600 tonnes a day. The total number of unit

exceeds 1000 at present. The industry has been growing at the rate of five percent per

annum. The installed Capacity is about 44 lakh tonnes while the production is 32.5

lakh tonnes comprising 29 lakh tonnes of paper and boards and 3.5 tonnes of

newsprint. The major raw materials used for paper production in India are wood,

bamboo bagasse and wastepaper. The share of forest based raw materials is 37

percent, agro residues 31 percent and waste paper 32 percent.

165
 All India Paper makers association in its annual report 2000 pointed out that

the percapita paper consumption at present is 3kg and it will move to 8 kg by the year

2010. The demand at present is 49 lakh tonnes consisting 40 lakh tonnes of paper

and boards and nine lakh tonnes of newsprint. The demand by 2010 is estimated as

65.75 lakh tonnes consisting 54.8 lakh tonnes of paper and boards and 10.9 lakh

tonnes of newsprint. All these will indicate that more fibrous raw materials and

chemicals will be used24.

Raw Materials Consumption

By referring the annual survey of industries data it has been noticed that over

the study period from 1979-80 to 1997-98 the raw materials consumption in paper

industry showed an increasing trend. Raw materials consumption over the study

period and the average annual percentage rate of growth of raw materials

consumption in paper industry has been shown in the Table 5.14.

From the Table, one can understand that the raw materials consumption had

varied from the low of 49. 95 thousand tonnes in 1979-80 to 757.43 thousand tonnes

in 1996-97. The average consumption of raw materials during the study period for

1979-80 to 1997-98 was 289.50 thousand tonnes. It is also clear from the table that

raw materials consumption of paper industry had registered at an annual compound

rate of growth of 12.4 percent. The raw materials consumption had registered at an

annual compound rate of growth of 12.4 percent during the study period from 1979-

80 to 1997-98. The average annual percentage rate of growth of raw materials

consumption is 15.7 percent. Growth of raw materials consumption in paper industry

has been depicted in the Figure 5.4.

166
 TABLE 5.14

RAW MATERIALS CONSUMPTION IN PAPER INDUSTRY IN

INDIA AND PERCENTAGE RATE OF GROWTH OF RAW
MATERIALS CONSUMPTION
(in thousand tonnes)

Annual percentage rate of

Years Raw materials consumption change in raw materials
consumption
1979-80 49. 95
1980-81 60.25 21

1981-82 75. 10 24
1982-83 81. 60 7
1983-84 94. 16 15
1984-85 121.37 29
1985-86 132. 16 9
1986-87 149. 64 13
1987-88 166. 88 12
1988-89 190.61 14
1989-90 252. 83 32
1990-91 304. 14 20
1991-92 354. 38 16
1992-93 388.06 10
1993-94 436. 26 12
1994-95 540. 59 24
1995-96 681. 23 26
1996-97 757. 43 11
1997-98 664.09 -12
Mean Consumptions of raw materials 289. 50 Average annual percentage rate of
change : 15. 7%
Standard deviation 229. 43
Co-efficient of Variation 79. 25%
Compound rate of Growth 12.4(0.153)

Source: ASI DATA from 1979-80 to 1997-98

166.a
 FIGURE 5.4

GROWTH OF RAW MATERIALS CONSUMPTION

IN PAPER INDUSTRY

166.b
Production of Paper and Demand for Paper

Production of paper and demand for paper based on the reports of All India

Paper makers association has been shown in the Table 5.15. The production and

demand for paper over the study period from 1979-80 to 1997-98 is given in the

Table. The production of paper in India had varied from the low of 5.1 lakh tonne in

1979-80 to 35 lakhs tonnes in 1993-94. Likewise the demand for paper had varied

from 4.2 lakhs tonnes in 1979-80 to 34.7 lakhs tonnes in 1993-94.

The average production and demand for paper in India during the study period

for 1979-80 to 1997-98 were 21.3 lakhs tonnes and 20.1 lakhs tonnes respectively. It

is clear from the table 5.15 that the paper production and demand for paper had

registered at an annual compound rate of growth of 7.62 and 7.74 percent

respectively during the study period from 1979-80 to 1997-98.

The growth rate is slightly higher in demand for paper compared to the

production of paper. The average production (Mean) of paper was higher than the

demand for paper in India. It is interesting to note that the production of paper was

higher than the demand for paper comparing each year during the study period from

1979-80 to 1997-98. The co-efficient of variation (CV) shows that fluctuation with

regard to paper production and the demand for paper is bearing more or less similar

trend during the study period.

167
 TABLE 5.15

PAPER PRODUCTION AND DEMAND FOR PAPER IN INDIA

(in lakh tonnes)

Years Production Demand

1979-80 5. 1 4.2
1980-81 7. 5 6. 3
1981-82 9. 3 8.2
1982-83 10. 8 9. 7
1983-84 13. 1 11. 3
1984-85 14. 9 13.6
1985-86 16. 5 15. 3
1986-87 17. 1 16. 7
1987-88 21. 9 19. 0
1988-89 23. 2 21. 1
1989-90 25. 6 24. 7
1990-91 28. 6 27. 3
1991-92 31. 8 30. 2
1992-93 32. 1 31. 6
1993-94 35. 0 34. 7
1994-95 25. 9 25. 5
1995-96 27. 0 26. 5
1996-97 28.0 27. 5
1997-98 30. 1 29. 0
Mean Production 21. 3 Mean Demand 20.1

Standard deviation 9.2 Standard deviation 9.4

Co-efficient of Variation 43.19% Co-efficient of Variation 45.77%

Compounde rate of growth 7.62(0.09) Compounde rate of growth 7.74(0.09)

Source: Annual reports of Indian Paper Makers Association

167.a
 The average annual percentage rate of growth of paper production and demand

for paper in India is given in Table 5.16. Over the study period the average annual

percentage rate of increase in paper production and demand for paper had registered

an higher rate i.e.,11.2 and 12.2 respectively.

Clear rising trend is noticed both in the paper production and demand for

paper over the study period except during 1994-95. It could be seen that the

production of paper in India fluctuate widely reflecting distinct cyclical trend from 1

percent to 47 percent. Such fluctuation may be common in paper industry. Growth of

production and demand for paper in India during the study period had been shown in

the Figure 5.5.

168
 TABLE 5.16

PERCENTAGE RATE OF GROWTH OF PAPER PRODUCTION

AND DEMAND FOR PAPER

YEAR Annual percentage rate of Annual percentage rate of

change in production change in demand
1979-80 - -

1980-81 47 50
1981-82 24 30
1982-83 16 18
1983-84 21 16
1984-85 14 20
1985-86 11 12
1986-87 3 9
1987-88 28 14
1988-89 6 11
1989-90 10 17
1990-91 12 11
1991-92 11 11
1992-93 1 5
1993-94 9 10
1994-95 -26 -27
1995-96 4 4
1996-97 4 4
1997-98 8 5
Annual Average Percentage Annual Average Percentage
Rate of Change : 11.2 Rate of Change: 12. 2
Source: Computed

168.a
 PERCENTAGE RATE
OF GROWTH CD
CO

>-
LU
<c LU

168.b
CO
o= 5
FIGURE 5.5

m
Real Value Added In Paper Industry

Real value added in paper industry and percentage rate of growth of real value

added based on ASI data has been shown in the Table 5.17. From the Table, it is clear

that the real value added had varied from the low of 4.54 thousand tonnes in 1989-90

to 1730.58 thousand tonnes in 1994-95. The average real value added during the study

period for 1979-80 to 1997-98 was 89.32 thousand tonnes. It is clear from the table

that the real value added of Paper Industry had registered at an annual compound rate

of growth of 5.05 percent. The co-efficient of variation with regard to real value

added during the study period is 71.12 percent. It is also clear that average annual

percentage rate of change in the real value added is 6 percent. Growth of real value

added in paper industry in India is illustrated in the Figure 5.6.

169
 >-
on
i—
CO
o
an
LU
CL
<
Q_
o
m
FIGURE 5.6

YEARS
o> >og
_Z m

169.a
><
<
LU
a:
oU-
o
occ
PERCENTAGE RATE OF
 TABLE 5.17

REAL VALUE ADDED IN PAPER INDUSTRY IN INDIA AND

PERCENTAGE RATE OF GROWTH OF REAP VALUE ADDED

(in lakhs)

Years Real value added Annual percentage rate of change in

real value added
1979-80 22.71
1980-81 25.25 1
1981-82 28.43 4
1982-83 21 . 16 -30
1983-84 28.88 24
1984-85 43.52 36
1985-86 36.20 -20
1986-87 49.36 31
1987-88 48 . 19 -14
1988-89 59.67 16
1989-90 94.71 38
1990-91 116.42 15
1991-92 118.75 -13
1992-93 125 .38 -12
1993-94 135 . 10 3
1994-95 188. 27 38
1995-96 192.44 0.4
1996-97 199 . 12 2.2
1997-98 163.44 -19
Mean real value added 89.32 Average annual percentage rate of
change: 6. 0%
Standard deviation 63.52
Co-efficient of Variation 71 . 12%
Compound rate of Growth 5. 005 (0. 055)

Source: Source: ASI Data from 1979-80 to 1997-98

169.b
Employment

Employment of Paper Industry based on the reports of All India Paper makers

association has been shown in the Table 5.18. Paper industry is today the third largest

industry in India. About 6 percent of the total factory labourers are employed in this

industry showing a slight increasing trend. Growth of employment and percentage

rate of growth of employment in paper industry in India during 1979-80 to 1990-91 is

given in the Table 5.18.

It is clear from the Table 5.18 that the employment in paper industry in India

had registered an increasing trend at an annual compound rate of 4.9 percent during

the period between 1979-80 and 1997-98. From the table 5.18 it is clear that the

average growth of employment in paper industry was 0.9 percent during the study

period. The co-efficient of variation shows that the fluctuation in the growth of

employment wa 11.11 percent during the study period.

A clear mixed trend is noticed in respect of growth of employment in paper

industry during the period from 1979-80 to 1997-98. After registering an increasing

trend in 1980-81,1981-82 and 1982-83, it declined continuously in the next three

years. Again employment in paper industry declined in 1988-89 after registering a

increase in 1986-87 and 1987-88. It would be observed that mostly in every

alternative three years there was a change in the growth of employment.

Employment in paper industry increased continuously since 1993-94 during

the study period. Over the study period the average annual percentage rate of increase

170
 TABLE 5.18

EMPLOYMENT IN PAPER INDUSTRY IN INDIA AND

PERCENTAGE RATE OF GROWTH OF EMPLOYMENT

(in lakhs)

Years Employment Annual percentage rate of change in

employment
1979-80 0. 80 -
1980-81 0. 82 3
1981-82 0. 85 4
1982-83 0. 92 9
1983-84 0. 84 -8
1984-85 0. 83 -. 009
1985-86 0. 79 -6.5
1986-87 0. 80 2
1987-88 0. 82 3
1988-89 0. 77 -7
1989-90 0. 81 5
1990-91 0. 88 8
1991-92 0. 91 4
1992-93 0. 94 4
1993-94 0. 92 -2
1994-95 0.94 3
1995-96 0. 98 4
1996-97 1.03 5
1997-98 0. 99 -5
Mean employment 0. 9 Average annual percentage rate of
change: 1.42
Standard deviation 0. 1
Co-efficient of Variation 11.11%
Compound rate of Growth 4. 9 (0. 01)
Source: Indian Paper Makers Association

170.a
in employment in paper industry was 1.42 percent.The slight increasing trend of

employment will give the capital-labour ratio. The capital-labour ratio showed an

upward trend in paper industry in India during the period from 1979-80 to 1997-98.

This woud rise the labour productivity. Growth of employment in paper industry in

India had been shown in the Figure 5.7.

171
 FIGURE 5.7
pj
o
£ E-H
w
o
o

EMPLOYMENT IN PAPER INDUSTRY IN INDIA

=

oo
P E R C E N T A G E R A T E OF

CD
GROW TH

ro
■<%
cn
oo

171.a
Real Capital Stock In Paper Industry

By referring the annual survey of industries data it has been noticed that over

the study period from 1979-80 to 1997-98 the real capital stock in paper industry in

India showed an increasing trend. Real capital stock over the study period and the

average annual percentage rate of growth of real capital stock in paper industry in

India during the study period has been shown in the Table 5.19.

From the Table it is clear that the real capital stock had varied from the low of

21.16 thousand tonnes in 1982-83 to 199.12 thousand tonnes in 1996-97. The average

real capital stock during the study period from 1997-80 to 1997-98 was 230.25

thousand tonnes. It is clear from the table that the real capital stock of paper industry

had registered at an annual compound rate of growth of 5.35 thousand tonnes. The co­

efficient of variation shows that fluctuations with regard to real capital stock during

the study period is 151.5 percent . It is also clear from the table that average annual

percentage rate of change in real capital stock is 179.6 percent.

172
 TABLE 5.19

REAL CAPITAL STOCK IN PAPER INDUSTRY IN INDIA AND

PERCENTAGE RATE OF GROWTH OF REAL CAPITAL
STOCK

(in lakhs)

Years Real capital stock Annual percentage rate of change in real

capital stock
1979-80 55.43 -
1980-81 82.44 49
1981-82 105.03 28
1982-83 136.23 29
1983-84 226.33 66
1984-85 169.84 -25
1985-86 111.46 -34
1986-87 24. 75 -78
1987-88 43.80 76
1988-89 62 . 10 42
1989-90 4.54 -93
1990-91 102.03 2200
1991-92 19.43 -81
1992-93 106. 18 449
1993-94 258.55 142
1994-95 1730.58 570
1995-96 408.49 -76. 4
1996-97 461.75 13. 0
1997-98 265.81 -42.4
Mean real capital stock 230. 25 Average annual percentage rate of change:
179. 6%
Standard deviation 348. 82
Co-efficient of Variation 151. 5 %
Compound rate of Growth 5. 35 (0. 08)
Source: Source: ASI Data from 1979-80 to 1997-98.

172.a
Imports and Exports of Paper In India

By referring the All India Paper makers association annual reports data it has

been noticed that over the study period from 1979-80 to 1997-98 the imports and

exports in paper industry in India showed an increasing trend. Paper exports and

imports in India over the study period is given in Table 5.20. Paper imports and

exports had increased at an annual compound rate of growth of 8.28 percent and 7.56

percent respectively. The annual average (Mean) exports of paper exceed imports

during the study period from 1979-80 to 1997-98. Comparing exports and imports of

paper in India, exports exceeds the imports over the study period. This was achieved

mainly due to increase in paper production than local demand for paper (See table

5.15). Clear rising trend is noticed both in exports and imports. Exports of paper had

increased from 1.2 lakh tonnes to 8.0 lakh tonnes and imports had increased from 0.5

lakh tonnes to 7.9 lakh tonnes over the study period. Imports and exports of paper

fluctuating in varying degrees are clear from the co-efficient of variation i.e., 76.9 and

57.5 percent respectively.

173
 TABLE 5.20

IMPORTS AND EXPORTS OF PAPER

(in lakh tonnes)

Years Imports Exports

1979-80 0.5 1.2
1980-81 0.7 1.4
1981-82 0. 9 1. 6
1982-83 1. 1 1. 9
1983-84 1.2 2.1
1984-85 1.3 2. 3
1985-86 1.4 2. 7
1986-87 1. 7 3. 5
1987-88 2.1 3. 7
1988-89 2. 3 3. 9
1989-90 2.4 4. 3
1990-91 2. 5 4. 7
1991-92 2. 6 4. 9
1992-93 2. 8 5. 0
1993-94 3. 0 5.0
1994-95 3. 2 5. 1
1995-96 3. 8 5. 1
1996-97 7. 2 10.0
1997-98 7. 9 8. 0
Mean imports 2. 6 Mean exports 4. 0
Standard deviation 2.0 Standard deviation 2. 3
Co-efficient of variation 76. 9% Co-efficient of variation 57. 5%
Compound rate of growth 8.28% (0.12) Compound rate of growth 7.56% (0.10)

Source: Annual Reports of Indian Paper Makers Association

173.a
 The annual percentage rate of growth of imports and exports in India from

1979-80 to 1997-98 is given in the table 5.21. Over the study period the average

annual percentage rate of increase in imports of paper and exports of paper were

17.86 and 12.9 respectively.

The average annual percentage rate of increase in imports was higher than

exports. The annual percentage rate of change in imports was ranging between 3.8

percent in 1991-92 and 89 percent in 1996-97 over the study period. Likewise exports

was ranging from 4.1 percent in 1991-92 and 96 percent in 1996-97.

Gross Value of Output

Gross value of output is arrived at by adding the value of products and by

product manufactured by sale, work done for customers and sale value of goods sold

in the same condition as purchased and is adjusted for the difference in stock of semi

finished goods at the beginning and at the end of the survey year. Ex factory value

(exclusion of taxes, duties etc,on sale and inclusion of subsidies, etc, if any) of output

is not of transportation charges from factory and selling agents commission.

The gross value of output and percentage rate of growth of gross value of

output during 1979-80 to 1997-98 and presented in the Table. Gross value of output

in paper industry in India had increased at an annual compound rate of growth of 8.79

percent during the study period. The average growth of gross value of output was 2.9

percent over the period of study.

174
 Gross value of output of paper industry in India had varied from the low of 0.7

percent in 1982-83 to 35 percent in 1989-90. Co-efficient of variation in the case of

gross value of output shows that there is much variation during the study period. This

might be attributed to change in the price of paper and price policy of the government

of India.

Over the study period the average annual percentage rate of change in gross

value of output was 15.0 percent as shown in the Table 5.22.

175
 TABLE 5.21

PERCENTAGE RATE OF GROWTH OF IMPORTS AND

EXPORTS OF PAPER IN INDIA(1979-80 - 1997-98)

YEAR Annual percentage rate of Annual percentage rate of change in

change in imports Exports
1979-80 -
1980-81 40 17

1981-82 29 14

1982-83 22 18.8

1983-84 9 10.8

1984-85 8 9.7

1985-86 7.7 17.2

1986-87 21 29.8

1987-88 24 5.5

1988-89 9.5 5.5

1989-90 4.3 10.2

1990-91 4.2 9.5

1991-92 3.8 4.1

1992-93 7.7 2.2

1993-94 7.1 -
1994-95 6.7 1.9

1995-96 18.8 -
1996-97 89 96

1997-98 9.7 -20

Annual Average Percentage Rate Annual Average Percentage Rate of

of Change : 17. 86 Change: 12. 9
Source: Computed

175.a
 TABLE 5.22

GROSS VALUE OF OUTPUT IN PAPER INDUSTRY IN INDIA

AND PERCENTAGE RATE OF GROWTH OF GROSS VALUE OF
OUTPUT
(in lakh tonnes)

Years Gross value of output Annual percentage rate of change in gross

value of output
1979-80 0.72 -
1980-81 0. 85 18
1981-82 1. 03 20
1982-83 1.04 -0.7
1983-84 1.23 20
1984-85 1. 65 34
1985-86 1. 68 2
1986-87 1. 99 19
1987-88 2. 15 8
1988-89 2. 50 16
1989-90 3.48 39
1990-91 4. 21 21
1991-92 4. 73 12
1992-93 5.13 7
1993-94 5. 71 11
1994-95 7. 28 28
1995-96 8. 74 20
1996-97 9. 57 9
1997-98 8. 28 -13
Mean Gross value of output 2.9 Average annual percentage rate of
change: 15.0
Standard deviation 3. 1
Co-efficient of Variation 106.9%
Compound rate of Growth 8.79 (0.15)

Source: Indian Paper Makers Association

175.b
 FOOT NOTES

1. Crisil Research & Information Services Limited, Annual Review, July

2005,P.39.

2. Report on Pulp and Paper Industry, Survey of Industrial Environment, P. 1

3. Global competitiveness of the Indian Paper Industry-A Report Prepared for

Central Pulp & Paper Research Institute, September 9, 2002, P.23.

4. Government of India: Second Five year Plan, 1956,P.20

5. Government of India : Third Five year Plan, 1961, P.458

6. Unpublished papers relating to the Meeting of Development Council for Pulp,

Paper and Allied Industries.

7. Government of India: Find Report on Rationalization and Simplification of the

Tax structure, 1968, P.5

8. Pulp and Paper Products in Asia and the Far East, Vol.I,1962,PP.147-148

9. Ibid., P.l 10

10. Boothalingam.S, “Paper Industry Problems and Prospects”, Published by

National Council of Applied Economic Research, New Delhi, April 1972,

P.25.

11. FAO: Wood: World Trends and Prospects, Rome, 1967, P.86.

176
12. Ibid.,

13. Speech of Mr. Paul Baldwin, Chairman of the American Paper Institute before

the 7th Session of the Special Committee of Pulp and Paper, OECD, Paris,

December 1968.

14. Financial Express, April 19, 1970.

15. Ibid.,

16. Loc cit ,,P.43

17. Planning Commission: Fourth Five year Plan - 1969, P.16.

18. Mahalaha: Pulping Materials for Tomorrow, Dec 1969, P. 16.

19. Ibid.,P.22

20. Loc cit.,P.51

21. West Coast Paper Mills Ltd., A New Forest Development Strategy, P.4.

22. Loc.cit.,P.23

23. Gopalratnam.N, Chairman and Managing Director SPB Ltd., “Clean

Production, a major issue “an article Published by The Hindu Survey of Indian

Industry, 1997,P.41.

24. Ibid.,P.42.

177
 CHAPTER-VI

PARTIAL PRODUCTIVITY RATIOS AND TOTAL

FACTOR PRODUCTIVITY

In this chapter the phenomenon of technical efficiency is measured and its

trend is examined in terms of simple ratios. The ratio of output to an input is known as

Partial Productivity ratio. There are as many Partial Productivity indices as there are

factors of production. The most important and most often used are the partial

productivity indices of labour, capital and raw material.

VI.I. Labour Productivity

Briefly we have discussed the methods that can be followed for the calculation

of labour productivity in the Methodology Chapter. It is reasonable to remember here

those methods for a while to find the labour productivity in India. Labour Productivity

is measured in three ways. Viz.,

i) Real gross value of output per labour, man hour and mandays

ii) Real gross value added per labour, man hour and mandays

iii) Output per labour, man hour and mandays

On this we have calculated labour productivity for 19 years from 1979-80 to

1997-98 for Paper Industries in India. Labour Productivity indices measured from real

gross value of output per labour are given in Table 6.1.

178
 TABLE 6.1

LABOUR PRODUCTIVITY INDICES IN INDIAN PAPER

INDUSTRY DURING THE STUDY PERIOD FROM 1979-80 TO
1997-98

Year Labour productivity Index

(RGVO/L) (RGVO/MH) (RGVO/MD)
1979-80 100 100 100
1980-81 103 109 109
1981-82 112 114 113
1982-83 95 107 105
1983-84 115 120 116
1984-85 140 140 140
1985-86 146 146 143
1986-87 163 161 158
1987-88 150 146 141
1988-89 176 182 177
1989-90 202 197 190
1990-91 212 210 204
1991-92 196 192 190
1992-93 172 169 171
1993-94 185 181 178
1994-95 228 222 215
1995-96 258 238 242
1996-97 266 260 254
1997-98 238 217 207
Compound Rate of growth 6.23 (0.06) 6.04 (0.05) 5.12 (0.05)
Figure in bracket is ‘t’ value
Source: Computed

178.a
 During the study period from 1979-80 to 1997-98, Labour productivity has

registered at an annual compound rate of 6.23 percent in India. It is to be pointed out

that Labour productivity had experienced the highest rate of increase during 1983-84,

1984-85 and 1994-95 i.e. 21 percent, 22 percent and 23 percent respectively. It is

clear from the Table 6.1 that except during 1982-83, 1987-88, 1991-92, 1992-93 and

1997-98, all the other years labour productivity, RGVO/L had increased during the

study period. Decrease in labour productivity was associated with decrease in gross

value of output and increase in employment. It might be due to the fact that a faster

rate of increase in employment and decrease in gross value of output had resulted (see

Table 5.18 and Table 5.22) decline in labour productivity. Trend in labour

productivity during 1995-96 was similar to that of 1980-81.

Labour productivity is also measured as a ratio of RGVO/MH. During the

study period from 1979-80 to 1997-98 labour productivity RGVO/MH had registered

an annual compound rate of 6.04 percent in India. It is to be pointed out that labour

productivity measured in terms of RGVO/MH had experienced the higher rate of

increase during 1984-85, 1988-89, 1994-95 and 1996-97 i.e. 20percent, 36percent, 41

percent and 22 percent. It is also clear from the table that except during 1982-83,

1987-88, 1991-92, 1992-93 and 1997-98 in all the other years labour productivity

RGVO/MH had increased during the study period. Labour productivity measured in

terms of RGVO/L is also bearing the same trend. Decrease in labour productivity was

associated with increase in employment and decrease in gross value of output (See

Table 5.18 and Table 5.22).

179
 Labour productivity is also measured as a ratio of RGVO/MD. During the

study period from 1979-80 to 1997-98 labour productivity RGVO/MD had registered

at an annual compound rate of 5.12 percent in India. It has to be pointed out that the

labour productivity experienced the higher rate of increase in 1984-85, 1988-89,

1994-95 and 1995-96 i.e24 percent, 36 percent, 37 percent and 27 percent

respectively. It is also clear from the table that during the study period except 1987-

88, 1991-92, 1992-93 and 1997-98, all the other years labour productivity, RGVO/MD,

increased.

From the Table 6.2 it is clear that over the study period from 1979-80 to 1997-

98 the average annual percentage rate of change in labour productivity measured in

terms of (RGVO/L) is 5.72 percent in India,mesured in terms of (RGVO/MH) is 5.95

percent and measured in terms of (RGVO/MD) is 4.8. It is shown in the Figure 6.1.

180
 TABLE 6.2

PERCENTAGE RATE OF CHANGE IN LABOUR

PRODUCTIVITY IN INDIAN PAPER INDUSTRY DURING THE
STUDY PERIOD

Percentage rate of change

Year
(RGVO/L) (RGVO/MH) (RGVO/MD)
1979-80 - - -
1980-81 3 9 9

1981-82 11 5 3.7

1982-83 -15 -6 -7.1

1983-84 21 12.1 10.5

1984-85 22 16.7 20.7

1985-86 4 4.3 2.1

1986-87 12 10.3 10.5

1987-88 -8 -9.3 -10.8

1988-89 17 24.7 25.5

1989-90 15 8.2 7.3

1990-91 5 -8.6 7.4

1991-92 -8 6.6 -6.9

1992-93 -12 -12.0 -10.0

1993-94 8 7.1 4.1

1994-95 23 22.7 20.8

1995-96 13 7.21 12.6

1996-97 9.24 4.96

1997-98 -11 -0.17 -18.5

Average annual percentage 5.72 5.95 4.8

rate of change
Source: Computed

180.a
FIGURE 6.1

180.b
 Labour productivity is also measured from the ratio of real value added per

labour, man-hours and mandays (RVA/L, RVA/MH and RVA/MD). Labour

productivity indices measured from real value added per labour, man hour and

mandays and its percentage rate of growth are given in Table 6.3. The three measures

of labour productivity RVA/L, RVA/MH and RVA/MD had also registered increasing

trend, i.e 4.5 percent, 3.76percent and 3.3 percent respectively during the study

period.

Labour productivity measured from RVA/L, RVA/MH and RVA/MD

increased at an annual compound rate of 5.61,5.60 and 5.42 percent respectively

during the study period from 1979-80 to 1997-98. Growth of labour productivity

measured from RVA/L, RVA/MH and RVA/MD bearing more or less similar trends

over the study period. Like RGVO/L and RGVO/MH the compound growth rate

measured from RVA/MH was lesser than RVA/L (See Table 6.1 and 6.3).

181
 TABLE 6.3

LABOUR PRODUCTIVITY INDICES IN INDIAN PAPER

INDUSTRY DURING THE PERIOD FROM 1979-80 TO 1997-98

Year Labour productivity Index

(RVA/L) (RVA/MH) (RVA/MD)
1979-80 100 100 100
1980-81 97 103 103
1981-82 98 100 99
1982-83 63 71 109
1983-84 86 90 86
1984-85 117 118 119
1985-86 100 101 99
1986-87 129 128 126
1987-88 108 104 101
1988-89 134 139 135
1989-90 176 171 166
1990-91 185 186 181
1991-92 157 154 153
1992-93 135 133 134
1993-94 141 137 135
1994-95 188 184 178
1995-96 182 182 172
1996-97 176 173 169
1997-98 150 137 131
Compound Rate of growth 5.61 (0.76) 5.60 (0.4) 5.42 (0.03)
Figure in bracket is‘t’ value
Source: Computed

181.a
 From the Table 6.4 it is clear that over the study period from 1979-80 to 1997-

98 the average annual percentage growth of increase in labour productivity measured

in terms of (RVA/L) is 4.5 percent, labour productivity measured in terms of

(RVA/MH) is 3.76 percent and labour productivity measured in terms of (RVA/MD)

is 3.33 in India.

The average annual percentage rate of change of growth measured from

RVA/L, RVA/MH and RVA/MD was lesser than the measures RGVO/L, RGVO/MH

and RGVO/MD. (See table 6.2 and 6.4). Trend in labour productivity measured from

RVA/L, RVA/MH and RVA/MD for the study period from 1979-80 to 1997-98 is

shown in Figure 6.2.

182
 TABLE 6.4

PERCENTAGE RATE OF GROWTH OF LABOUR

PRODUCTIVITY IN INDIAN PAPER INDUSTRY

Year Percentage rate of change

(RVA/L) (RVA/MH) (RVA/MD)

1979-80 - - -
1980-81 -3 3 3

1981-82 1.03 -2.9 -3.9

1982-83 35.71 -29.0 10.1

1983-84 36.51 26.8 -21.1

1984-85 36. 05 31.1 38.4

1985-86 -14. 53 -14.4 -16.8

1986-87 29. 00 26.73 27.3

1987-88 -16. 28 -18.75 -19.8

1988-89 24. 07 33.65 33.7

1989-90 31.34 23.02 23.0

1990-91 5. 11 8.77 9.0

1991-92 -15.14 -17.2 -15.47

1992-93 -14.01 -13.6 -12.42

1993-94 4.44 3.0 0.75

1994-95 33. 33 34.3 31.85

1995-96 -3.19 -1.09 -3.4

1996-97 -3.30 -4.95 -1.7

1997-98 -14. 80 -20.8 -22.5

Average annual percentage 4. 5 3.76 3. 33

rate of change
Source: Computed

182.a
 FIGURE 6.2

TREND IN LABOUR PRODUCTIVITY MEASURED IN

TERMS OF RVA/L,RVA/MH AND RVA/MD IN INDIAN
PAPER INDUSTRY
CD
4^-
i k . r o PERCENTAGE
to

YEARS

182.b
 Labour productivity indices are also measured from the ratio of output per

labour, output per man-hours and output per mandays (Q/L, Q/MH and Q/MD).

Labour productivity indices measured from the physical quantity of paper and labour

(Q/L) physical quantity of paper and man hour (Q/MH) and physical quantity of paper

and mandays (Q/MD) are given in Table 6.5. The annual compound rate of growth

measured from Q/L, Q/MH and Q/MD had registered 8.5, 8.35 and 8.82 percent

respectively during the study period from 1979-80 to 1997-98.

From the beginning year of the study period 1979-80 to 1981-82, labour

productivity Q/L, Q/MH and Q/MD had registered a positive growth. After

registering a declining trend during 1982-83, labour productivity increased invariably

in all the measures up to 1996-97. It could be observed that in the year 1982-83 and

1997-98 labour productivity had declined in Indian Paper industry. This might be due

to decline in paper production which in turn depends on pulp production. (See Table

6.5) It could be observed that increase or decrease in productivity is associated with

increase or decrease in paper production and number of person employed or man-hour

worked.

183
 TABLE 6.5

LABOUR PRODUCTIVITY INDICES IN (Q/L, Q/MH AND Q/MD)

Year Labour productivity Index

(Q/L) (Q/MH) (Q/MD)
1979-80 100 100 100
1980-81 114 e 120 120
1981-82 133 135 134
1982-83 121 136 133
1983-84 158 164 159
1984-85 213 214 214
1985-86 233 233 227
1986-87 270 266 260
1987-88 284 274 265
1988-89 352 364 353
1989-90 466 453 437
1990-91 522 516 502
1991-92 568 554 549
1992-93 594 583 588
1993-94 672 656 647
1994-95 836 811 787
1995-96 967 964 905
1996-97 1004 981 958
1997-98 911 828 791
Compound Rate of growth 8.5 (0.14) 8.35 (0.13) 8. 82 (0.13)
Figure in bracket is‘t’ value
Source: Computed

183.a
 The annual percentage rate of growth of labour productivity from Q/L,Q/MH

and Q/MD is given in Table 6.6. The annual percentage rate of change of labour

productivity Q/L ranged 3.8 to 35 over the study period. The average annual

percentage rate of change in labour productivity Q/L, Q/MH and Q/MD was 12.8,

13.11 and 12.8 percent respectively during the study period from 1979-80 to 1997-98.

Trend in labour productivity measured from Q/L,Q/MH and Q/MD for the Indian

paper industries is shown in Figure 6.3.

184
 TABLE 6.6

PERCENTAGE RATE OF GROWTH OF LABOUR

PRODUCTIVITY IN INDIAN PAPER INDUSTRY

Year Percentage rate of change

(Q/L) (Q/MH) (Q/MD)
1979-80 - - -
1980-81 14 20 20
1981-82 17 13 11.7
1982-83 -9 0.7 -0.75
1983-84 31 20.6 19.55
1984-85 35 30.5 34.6
1985-86 9.4 8.9 6.07
1986-87 16 14.2 14.53
1987-88 5.2 3.0 1.92
1988-89 24 32.8 33.2
1989-90 32.4 24.5 23.8
1990-91 12 13.9 14.9
1991-92 9 7.4 9.4
1992-93 5 5.23 7.1
1993-94 13.1 12.52 10.0
1994-95 24.4 23.63 21.6
1995-96 15.7 18.9 15.0
1996-97 3.8 1.8 5.86
1997-98 -9.3 -15.6 -17.4
Average annual percentage 13. 8 13. 11 12. 8
rate of change
Source: Computed

184.a
FIGURE 6.3

184.b
 Labour productivity measured from RGVO/L, RVA/L and Q/L was greater

than RGVO/MH, RVA/MH and Q/MH over the study period. And also it could be

observed that slower rate of increase in output per man hour compared to output per

labour might be due to the fact that man-hour increased at a faster rate than labour.

Various alternative measures of labour productivity in Indian Paper Industry had

exhibited a more or less similar trend over the study period from 1979-80 to 1997-98.

VI.2. Capital Productivity:

Partial productivity ratios mainly refer to the labour and capital productivity

indices which are most often used. So far the researcher has analyzed the labour

productivity in detail, in terms of real gross value of output per labour, man hour and

man days, real value added per labour, man hour, man days and physical output per

labour, man hour and man days. Now the researcher has directed his attention to

capital productivity considering real gross value of output per unit of capital.

RGVO/RCS, real value added per unit of capital, RVA/RCS and physical output per

unit of capital Q/RCS at all India during 1979-80 to 1997-98.

Capital productivity measured in terms of RGVO/RCS, RVA/RCS and Q/RCS

is given in Table 6.7. Capital productivity has increased at an annual compound rate

of 5.47,5.24 and 8.02 percentage respectively measured from RGVO/RCS, RVA/RCS

and Q/RCS during the study period from 1979-80 to 1997-98.

185
 It could be argued that capital productivity related to capacity utilization

provided increased capacity utilization resulted in increased production. It is likely

that over utilization leads to improvement in capital productivity. It is expected that

over utilization resulted from increased paper production which in turn resulted in

improvement in capital productivity and vice versa in Indian Paper Industry. It is to be

pointed out that capacity utilization and capital productivity are positively correlated.

VI.3. Raw Material Productivity

Measurement of raw materials productivity is gaining importance now-a-days.

It is measured in terms of RGVO/RRM. Over the study period compound rate of

growth of material productivity indices is 4.42. This is shown in the Table.6.8.

186
 TABLE 6.7

CAPITAL PRODUCTIVITY INDICES IN INDIAN PAPER

INDUSTRY DURING 1979-80 TO 1997-98

Year Capital productivity indices

(RGVO/RCS) (RVA/RCS) (Q/RCS)
1979-80 100.0 100.0 100
1980-81 298.8 282.6 330
1981-82 158.0 138.6 188
1982-83 280.0 184.0 353
1983-84 1640.0 1229.0 2251
1984-85 112.0 94.2 171
1985-86 185.3 127.4 295
1986-87 227.0 180.0 375
1987-88 780.0 558.2 1465
1988-89 92.0 69.6 183
1989-90 238.4 206.5 549
1990-91 167.1 147.8 410
1991-92 158.0 126.5 455
1992-93 140.0 108.4 477
1993-94 200.1 -150.8 725
1994-95 196.2 162.4 718
1995-96 308.0 215.8 1149
1996-97 277.1 183.3 1044
1997-98 674.0 -426.9 2567
Compound Rate of Growth 5.47 (0.013) 5.24 (0.019) 8.02 (0.095)

Figure in bracket is‘t’ value

Source: Computed.

186.a
 TABLE 6.8

MATERIAL PRODUCTIVITY INDICES (RGVO/RRM) IN

INDIAN PAPER INDUSTRY DURING 1979-80 TO 1997-98

Year Material Productivity Index Annual average percentage rate of

(RGVO/RRM) change (RGVO/RRM)
1979-80 100.0 -
1980-81 99.1 -0. 9
1981-82 100.0 0. 91
1982-83 109.0 9. 0
1983-84 105.0 -3. 7
1984-85 100.0 -4. 8
1985-86 90.0 -10. 0
1986-87 111.0 23. 3
1987-88 95.0 -14.4
1988-89 100.0 5.3
1989-90 105.0 5. 0
1990-91 95.2 -9. 3
1991-92 100.0 5. 0
1992-93 100.0 0
1993-94 105.0 5. 0
1994-95 100.0 -4. 8
1995-96 95.0 -5. 0
1996-97 100.0 5. 3
1997-98 100.0 0
Compound Rate of Growth : 4.42 Annual average percentage Rate of
(0.01) Change : 0. 33
Figure in bracket is‘t’ value
Source: Computed.

186.b
 Usually raw materials productivity is assumed to be constant. But agro-based

industries are depicting a different picture. In the case of Paper Industry wood pulp is

the raw material. Besides bagasse is also used. Raw material productivity Indices are

shown in the Table 6.8. From the beginning of the study period to the end there are

ups and downs in the productivity. Raw material productivity is measured in terms of

RGVO/RRM. RGVO refers to real gross value of output and RRM refers to real value

of the raw materials. Real gross value of output was measured by dividing the value

of output by Paper Price Index.

Real value of raw materials was measured by dividing gross value of raw

materials by price index. Material Productivity or Raw Material Productivity is

calculated, by dividing the real gross value of output by real value of raw materials.

Over the study period, compound rate of growth of raw materials productivity

measured in terms of RGVO/RRM is 4.42. It is shown in the Table 6.8. Annual

average percentage rate of change in material productivity is shown in Table 6.8.

Over the study period the value is 0. 33.

VI. 4. Total Factor Productivity:

Both Labour and Capital productivities are, however, only partial indices of

productivity. Since both labour and capital jointly contributes to output, it is necessary

to derive a total productivity index that will include both labour and capital inputs.

Total factor productivity is often referred to as the “residual” or the index of

‘technical progress’ is defined as output per unit of labour and capital combined.

187
 Indices of productivity based on the comparisons of output with the input of

labour and tangible capital are sbetter measures of efficiency than those based on

labour input or capital input alone. Indeed the best currently available approximation

to a measure of efficiency is the total factor productivity.

There are many ways of measuring total factor productivity. Kendrick’s

arithmetic measure is used here to calculate the total factor productivity. According

to Kendrick’s measure the total factor productivity index is calculated as the ratio

between output and the sum of combined inputs of labour and capital, the inputs being

weighted by their base year remuneration and all inputs and outputs are being

measured in real terms.

Algebraically this may be expressed as follows:

RVAt

TFP = -—................ .......(1)

WoL, + rok(

Where

RVAt = The real value added in year t

Wo = The base year wage rate

ro = The base year return on capital

Lt = Labour in year t

kt = Capital in year t

Total factor productivity indices measured from equation (1) are presented in

Table 6. 9.

188
 TABLE 6.9

PERCENTAGE RATE OF GROWTH OF TOTAL FACTOR

PRODUCTIVITY (KENDRICK’S MEASURE) IN INDIAN PAPER
INDUSTRY (1979-80 -1997-98)

Year Total factor productivity indices

1979-80 100.0
1980-81 88.48
1981-82 92. 17
1982-83 61. 75
1983-84 59.91
1984-85 82.49
1985-86 69. 12
1986-87 70. 97
1987-88 84. 79
1988-89 79. 26
1989-90 121.20
1990-91 121.66
1991-92 103. 23
1992-93 85. 71
1993-94 90. 78
1994-95 79. 72
1995-96 67. 74
1996-97 70. 51
1997-98 65.44
Compound Rate of Growth : 4.41 (0.002)
Figure in bracket is‘t’ value
Source: Computed.

188.a
 Increase in Total factor productivity in Indian Paper Industry might be

attributed to increase in labour productivity and capital productivity. During 1979-80

to 1997-98 labour productivity RGVO/L and RGVO/RCS had increased at an annual

compound rate of 6.23 and 5.47 percent respectively in Indian Paper Industry (See

Tables 6.1 and 6.7).

Indian Paper Industry had registered a higher rate of change in total factor

productivity in 1989-90 by 52.9 percent compared with the previous year. This was

attributed to a very higher rate of increase in labour productivity and capital

productivity experienced in 1989-90 compared to 1988-89 which in turn was due to

higher rate of increase in real value added (See Table 6.9). No clear rising or falling

trend in total factor productivity was noticed. Over the study period the average

percentage rate of growth of total factor productivity was 1.32 percent which had been

shown in the Table 6.10.

189
 TABLE 6.10

PERCENTAGE RATE OF GROWTH OF TOTAL FACTOR

PRODUCTIVITY INDICES (1979-80 -1997-98)

Year Annual average Percentage rate of change in Total

factor productivity (Kendrick’s measure)
1979-80 -

1980-81 -11. 5
1981-82 4. 17
1982-83 -33. 7
1983-84 -3.0

1984-85 37.7
1985-86 -16.2

1986-87 2.7
1987-88 19. 47
1988-89 -6. 5
1989-90 52. 9
1990-91 0. 38
1991-92 -15. 5
1992-93 16. 97
1993-94 5. 92
1994-95 -12.18

1995-96 -15.03

1996-97 4.09
1997-98 -7.2

Annual average Percent rate of change of Total factor productivity : 1. 32

Source: Computed.

189.a
VI. 5. Regression Function for Total Factor Productivity and Labour
Productivity

It is postulated that factor productivity depends on the scale of production,

neutral technical progress and labour management relation etc., Growth in scale of

production permits adoption of technologies which improve productivity. Expansion

of scale also provides division of labour which in turn improves the productivity.

Labour management relations affect motivation of workers which in turn affect their

will to work.

Based on the above hypothesis function for total factor productivity is

specified below:

TFP =f(V,t) .......(1)

Where

TFP = Total factor productivity index

V = Real value added as proxy for scale of production

t = Time variable proxy for neutral technical progress, labour-

management relations etc.,

The function for partial productivity of labour is specified as under

Lp =f(V,t) .......(2)

190
Where

Lp = Labour productivity index

V = Real value added as proxy for scale of production

t = Time variable proxy for neutral technical progress, labour-

management relations etc.,

For empirical estimation the total factor productivity of Kendrick Measure, the

equation (1) can be transformed with log form.

Log TFP = a + bi log V + b21 + u ........(3)

Where

TFP = Total factor productivity index

V = Value added

t = time

u = error term

The estimation of a, bi and b2 have been obtained by the method of least

squares. The regression function of total factor productivity is presented in the Table

6. 11.

191
 TABLE 6.11

REGRESSION FUNCTION FOR TOTAL FACTOR

PRODUCTIVITY (KENDRICK) 1979-80 TO 1997-98

Log TFP = a + bi log V + b2 t + u

Regression Co-efficient and Standard Error

REGION Constant (a) LogV (b,) Time (b2 ) R2 D.W

All India 4.41 -0.0022 -0.0019 0.95 0.81

Source: Computed

191.a
 The fit for the regression equation is very good as it is evident from significant

value of R2. The value of the co-efficient of determination R2 is 0. 95. The Durbin-

Watson statistics indicates that the absence of the first degree of auto correlation for

the function corresponding to All India.

It is noted from the table that the co-efficient of real value added is negative

and the co-efficient of time is also negative. This indicates that various institutional

factors such as labour management relations and neutral technical progress etc., have

been adversely affecting total factor productivity.

For the purpose of finding out the labour productivity is generated by scale of

production the equation (2) is transformed into log form as

LogLp =a + bi log V + b21 + u ........ (4)

Log Lp = Labour productivity index

V = real value added

t = time variable

u = error term

The function for labour productivity of type (4) has been fitted to the time

series data for the Paper Industry at All India and the results are presented in Table 6.

12. The estimation of a, bi and b2 have been obtained by the method of least squares.

On the basis of R2,the fit of the regression is good.The value of the co-efficient of

determination R2 is 0.9.The Durbin-Watson statistics indicates that the absence of the

first degree of auto correlation for the function corresponding to All India.

192
 TABLE 6.12

REGRESSION FUNCTION FOR LABOUR PRODUCTIVITY

(KENDRICK) 1979-80 TO 1997-98

Regression Co-efficient and Standard Error

REGION Constant (a) LogV (b, ) Time ( b2) R2 D.W

All India 4.85 0.044 -0.0012 0.90 1.384

Source: Computed

192.a
 It is noted from the table that the co-efficient of real value added is positive

i.e. 0.044 and highly significant for the function corresponding to All India. Thus

expansion in scale of production has been generating growth in total factor

productivity.

Co-efficient of time, on the other hand is negative i.e. -0.0012. This indicates

that various institutional factors such as labour management relations and neutral

technical progress etc., have been adversely affecting total factor productivity.

VI. 6. Forces underlying the Productivity changes

The researcher has given a detailed account of trends in both Partial and Total

factor productivity movements over the periods from 1979-80 to 1997-98. The forces

which are underlying the changes in productivity are discussed in this section.

The factors determining industrial productivity are numerous. Some of the

factors are broadly explained by the researcher as follows:

Technology

Developments of Technology have contributed so much for the rapid increase

in industrial productivity. The most important factors that have contributed for the
*

advancement of industrial productivity are the application of mechanization, co­

ordination of productive processes and specialization of labour. The increase in paper

production during the study period is due to the development of technical know-how

at all India1.

193
Raw Material

Paper is made by depositing from a dilute suspension of pulp, an even layer of

fibres.The fibres needed for paper making should be plentiful. As paper requires

heavy capital investment, it must be assured of a sustained supply of raw material

needed for it. The extraction and collection of the material must be convenient and

easy to carry out. Raw material should be located close to the paper mill so as to

reduce transportation cost. The material for paper making must be cheap so that the

paper industry can afford to pay the price. The material for paper making must be

cheap so that the paper industry can afford to pay the price. The material should not

deteriorate on storage. The amount of fibre that can be isolated from the plant must be

large. The yield of pulp varies from a low level of about 30 percent for writing and

printing paper, to a high level of about 90 percent for print (newsprint), depending on

the raw material.

The fibre must be capable of being isolated from the plant by an easy and

economic process. The fibre must be a suitable size and character for making the type

of pulp desired2. Thus raw material has great influence on productivity.

Institutional factors

The attitudes of employees are still conditioned by traditional values and

consideration of caste, creed and class. The psychological attitude and behaviour of

investors, workers, employers and consumers, their resilience to accept new

194
innovations and products and the values that guide and govern their philosophies of

life and conduct influence directly or indirectly the trends in industrial productivity.

Managerial Factors

It is the energetic, enterprising and far-sighted managerial talents that

determine the part of the productivity advance. The management must possess

organizational capacity, imagination, judgment and willingness to assume risks. The

attitude of the top management towards subordinate managers is reported not to differ

greatly from its attitudes to workers. Otherwise, it may cause a decline in industrial

productivity3.

Government Policies

Government through its taxation, tariff, financial and administrative policies,

exerts considerable influence on productivity. The Industrial Development Bank of

India evolved a scheme for concessional finance for modernization and rehabilitation

of selected industries including paper industry to modernize their machinery and

equipment so as to increase their productivity and effectiveness. The government may

create favourable conditions for investment, saving and flow of capital from and

industry or sector of production to another.

195
VI.8. Conclusion

To conclude the present chapter the main features of the findings may be

summed up as follows:

Labour productivity RGVO/L had registered an annual compound rate of

6.32%. Over the study period the average percentage rate of increase in labour

productivity (RGVO/L) is 5.72 for all India. The Compound Growth rate of Labour

Productivity RGVO/MH is 6.04. The annual average percentage rate of change in

labour productivity measured from RGVO/MH is 5.95.

The Compound Growth rate of Labour Productivity RGVO/MD is 5.12. The

annual average percentage rate of change in labour productivity measured from

RGVO/MD is 4.8. From the above information it can be understood that RGVO/L

and RGVO/MH are greater than RGVO/MD.

Labour productivity measured from the ratio of real value added and labour

(RVA/L) had registered an annual compound rate of growth of 5.61. The annual

average percentage rate of change measured from RVA/L is 4.5. The compound rate

of growth of Labour Productivity measured in terms of RVA/MH is 5.6. The annual

average percentage rate of change measured from RVA/MH is 3.76.The compound

rate of growth of Labour Productivity measured in terms of RVA/MD is 5.42. The

annual average percentage rate of change measured from RVA/MD is 3.33.

196
 The compound rate of growth of labour productivity measured in terms of Q/L

is 8.5. Annual average percentage rate of change in labour productivity, Q/L, is 13.8.

The compound rate of growth measured in terms of Q/MH is 8.35. The annual

average percentage rate of change, Q/MH, is 13.11. Over the study period the

compound rate of growth measured in terms of Q/MD is 8.82.The annual average

percentage rate of change in Labour Productivity measured in terms of Q/MD is 12.8.

Compound rate of growth of capital productivity measured in terms of

RGVO/RCS is 5.47, the capital productivity measured in terms of RVA/RCS is 5.24

and the capital productivity in terms of Q/RCS is 8.02.

Over the study period compound rate of growth of material productivity

indices (RGVO/RRM) is 4.42. Annual average percentage rate of change in material

productivity is 0.33. Total factor productivity had registered an annual compound rate

of growth of 4.41. The annual average percentage rate of change in total factor

productivity is 1.32.

Regression Function for Total Factor Productivity shows the value of the co­

efficient of determination R2 is 0. 95. The Durbin-Watson statistics indicates the

absence of the first degree of auto correlation for the function corresponding to All

India. The co-efficient of real value added is negative and the co-efficient of time is

also negative. This indicates that various institutional factors such as labour

management relations and neutral technical progress etc., have been adversely

affecting total factor productivity.

197
 Regression Function for labour Productivity shows the value of the co­

efficient of determination R2 is 0. 9. The Durbin-Watson statistics indicates that the

absence of the first degree of auto correlation for the function corresponding to All

India.lt is noted from the table that the co-efficient of real value added is positive i.e.

0.044 and highly significant for the function corresponding to All India.

Thus expansion in scale of production has been generating growth in total

factor productivity. Co-efficient of time, on the other hand is negative i.e. -0.0012.

This indicates that various institutional factors such as labour management relations

and neutral technical progress etc., have been adversely affecting total factor

productivity.lt may be interesting to compare the results of this study with those of

similar studies on productivity.

Singh (1966)4 in his study observed that during the period 1951-63 even

though labour productivity rose significantly, productivity of all inputs taken together

did not show any appreciable rise. He further observed that the rate of capital

expansion over-stepped the expansion of value-added with a consequence fall in

capital productivity. Thus increase in labour productivity was closely linked with

increasing capital intensity. Similar conclusion were arrived at by Shivamaggi,

Rajagopalan and Venkatachalam (1968)5 for the period 1951-61 and by Raj Krishna

and Mehta (1968)6 for the period 1947-63.

Banerjee (1971)7calculated partial productivity for both labour and capital for

the years 1946 to 1964. Labour productivity increased to 178.5 per cent while capital

productivity declined to 40.3 percent in 1964. He observed a steady decline in total

198
factor productivity for the above period. Comparing these trends with the results of

this study, there is a similarity in the case of labour and capital productivity and

contradictory in the case of total factor productivity.

Mehta (1980)8 made a study on total and partial productivity for the period

1953 to 1965. Labour productivity increased significantly in industries like vegetable

oil, chemicals, tanning, iron and steel and cement etc., However, capital productivity

did not increase but decreased in many industries. In the study of Mehta, capital

intensity was able to explain the growth in labour productivity in sugar, tanning,

ceramics, etc.,

Shams Alam Khan (1984)9 studied partial productivity indices of labour and

capital as well as of capital-labour ratio of selected manufacturing industries of Bihar.

In Bihar labour productivity and capital-labour ratio are found increasing whereas

capital productivity is found declining. The trend in total factor productivity is found

to be decreasing in most of the selected industries in the case of Bihar and India.

Results of this study are quite comparable with those or Sham Alam Khan (1984) and

Annamalai (1986)10.

Annamalai finds a declining tendency in total factor productivity which caused

the cost of production to increase. Increase in labour productivity was equally

matched by increase in wage rate. Invariably capital productivity declined in all

manufacturing and in the four individual industries.

199
 Ahluwalia (1991)" in his study showed that the total factor productivity of

sugar and other food manufacturing declined for the period 1959-60 to 1985-86. The

results of the study of Palaniappan .A (1995)12 are contradictory to that of Ahluwalia.

Over the study period from 1973-74 to 1990-91 he found out that total factor

productivity of sugar had increased.

200
 FOOT NOTES

1. Gopalratnam.N, Chairman and Managing Director SPB Ltd., “Clean

Production, a major issue “an article Published by The Hindu Survey of Indian
Industry, 1997,P.41.

2. “Paper Industry in India” A Study by Podder .V , Published by Oxford & IBH

Publishing Co.Pvt Ltd.,New Delhi, 1979.P.43-44

3. KuchhalS.C. (1976) P.462

4. Singh,R.R. (1966) P.910

5. Shivamaggi H.P, Rajagopalan.N and Venkatachalam.T.R (1968) P.710

6. Rajkrishna and Mehta S.S. (1968) P.1655

7. Banerjee.A (1971) P.515

8. Mehta S.S. (1974) P.197

9. Shams Alam Khan (1984) P.424

10. Annamalai.S (1986) P. 196

11. Ahuliwalia (1991) P.230

12. Palaniappan .A (1995) P.181-184

201
 CHAPTER VII

PRODUCTION FUNCTION IN INDIAN PAPER INDUSTRY

Production function is an engineering relationship between inputs and outputs

which shows for a given level of technology the maximum output which can be

achieved with the application of given level of inputs. The production function

analysis of an industry provides answers to i) Whether the industry in question enjoys

the economies or diseconomies of scale; ii) Whether firms purchase and utilize factor

inputs in the most efficient way which helps in making inter-regional comparisons in

resource allocation; iii) Whether returns on a particular factor input are increasing or

decreasing so as to ascertain the desirability of subsidizing or taxing the particular

input, and/ or iv)Whether there exists any substitution possibility between inputs.

The literature on production function generally covers the following forms:

a) Linear Production function.

b) Leontief fixed co-efficient production function.

c) Cobb-Douglas production (C.D) function.

d) Constant Elasticity of substitution (CES) production function.

e) Variable Elasticity of substitution (VES) production function.

202
 The use of the first two functions is limited because of their concept or

linearity of factors and fixed proportionality as their names themselves suggest. The

Cobb- Douglas type of function makes output dependent on at least two productive

factors, with both factors variables. It depicts constant return to scale. Payment to

each factor to its marginal product will exactly exhaust total output. The property of

unitary elasticity of substitution in Cobb-Douglas production function means that

provided factors are paid at the rate corresponding to their marginal products, factor

shares will remain constant. The CES and VES production function do not assume

any specific value for the elasticity of substitution, but the CES function takes the

elasticity as a constant while the VES allows it to vary. Thus the elasticity of factor

substitution determines the form of the production function. All these functions are

characterized by a numerical value of the elasticity of factor substitution.

This chapter mainly analyses factor productivities, marginal productivities of

capital and labour, relative factor shares, returns to scale, rate of neutral technological

change and elasticity of substitution. This analysis is carried out for All India. The

Production functions have been fitted to the time series of aggregate data for the India

Paper Industry during the period from 1979-80 to 1997-98.

VES Production Function

It is worthwhile to find out by fitting the VES function derived by LU and

Flectcher (1968) to the data, whether the industry is having variable elasticity of

substitution between its factors of production (Capital and Labour) over the period

203
under study or whether the elasticity of substitution is constant throughout the period

of study or if it is having unitary elasticity of substitution.

To test the variability of the elasticity of substitution in the Paper Industry in

India, the study has fitted equation (1) with the time series data covering the period

from 1979-80 to 1997-98.

Log V/L = a + b Log w + c Log K/L+u .... (1)

Where

V = value added

L = number of persons employed

w - real wage rate

K = capital stock adjusted for capacity utilization at constant prices

u = error term

a, b and c are parameters to be estimated.

The expression for the elasticity of substitution ‘a’ derived by LU and

Flectcher from the production function is

b
CT =----------------------- ....(2)
l-c(l+wL/rK)

204
 where ‘b’ and ‘c’ are parameters of the equation (1) wL/rK is the relative

factor share which changes when K/L and wage rate vary disproportionately leading

to variable elasticity of substitution. If c = 0, ‘a’ will be equal to the coefficient ‘b\ If

b - 0, ct = 01.

The function (1) can be estimated by using the ordinary lest squares (OLS)

method. The regression result without time variable are presented in Table 7.1.

Considering the high values of R2 and F the fit of the regression is good for

paper industry in India under consideration. The total variation explained in the

function for the national level is 67 percent. The value of Durbin-Watson statistics

indicate that there is no evidence for auto correlation.

205
 TABLE 7.1

VES PRODUCTION FUNCTION (1979-80 TO 1997-98)

Log V/L = a + b Log W + c Log K/L + u

Regression Co-efficient and Standard Error

REGION Constant Wage Rate K/L R2 F D.W

(a) (b) (c)

All India 0.222 0.124

2.851 0.673 16.466 1.201
(0.261) (0.232)

Source: Computed

• Figures in brackets are standard error.

• Durbin Watson statistics indicates there is no auto correlation at 1 per cent level.

205.a
 From the Table 7.1 one can understand that ‘b’ is not significantly different

from zero at All India. This indicates that ct appears to be zero from equation (2).

Further ‘C’ is not significantly different zero for All India. This implies that a = b

from equation (2). Hence the elasticity of substitution is either zero or constant. This

finding thus clearly rules out the possibility of variable elasticity of factor substitution

in the Indian Paper Industry at All India.

VES Production function with Time in Paper Industry

Variable elasticity of substitution production function of the following type

has been fitted to the time series data for the paper industry. A trend variable^’ has

been added to the equation (1) to test for the neutral technological progress in the

Paper industry.

Log V/L = a + b Log w + c Log K/L+dt + u ....... (3)

Where,

V = value added

L = number of persons employed

w = real wage rate

K = real capital stock adjusted for capacity utilization at constant prices

t = time

u = error term

a, b, c and d are parameters to be estimated. The results are presented in Table 7.2.

206
 TABLE 7.2

VES PRODUCTION FUNCTION (1979-80 TO 1997-98)

Log V/L = a + b Log W + c Log K/L + dt + u

Regression Co-efficient and Standard Error

REGION Constant Wage Rate K/L Time R2 F D.W

(a) (b) (c)

0.404 0.164 -0.028

All India 1.589 0.676 10.415 1.116
(0.585) (0.265) (0.080)

Source: Computed

• Value of ‘b’ indicates that Co-efficient of wage rate is significantly different from
zero at five percent level.

• Durbin Watson Statistics indicates there is no auto correlation at 1 percent level.

• Figures in brackets are standard error.

206.a
 The fit of the equation is good with significant ‘F’ value. The introduction of

time variable does not change the pattern of estimates very much. The value of R2 is

0.676 (67 percent). The co-efficient of wage rate is positive. The co-efficient of time

is negative and insignificant.

It is found that the co-efficient of capital-labour ratio (c) is not statistically

different fro zero indicating the assumption that changes in capital labour may not

influence the value of elasticity of substitution and thus VES production function

model may not be quite applicable to the paper industry for the calculation of

elasticity of substitution. The rate of neutral technological progress is found to be

negative and insignificant2.

CES Production Function

The CES function of the following form is fitted to the time-series data from

1979-80 to 1997-98 for the Paper industry at the regional and national levels to

examine the value of the constant elasticity of factor substitution.

Log V/L = a + b Log w + u ......... (4)

Where,

V = value added

L = number of persons employed

w = real wage rate

u = error term

a and b are parameters to be estimated.

207
 Equation (4) is a familiar SMAC function based on the assumption of constant

returns to scale, prevalence of perfect competition both in the factor and product

markets and profit maximization. Further, it assumes that the wage rate and value

added per labour are independent of capital stock. The estimate of ‘b’ gives the

elasticity of substitution between capital and labour. The estimated results of equation

(4) are presented in Table 7.3.

208
 TABLE 7.3

CES PRODUCTION FUNCTION (1979-80 TO 1997-98)

Log V/L = a + b Log W + u

Regression Co-efficient and Standard Error

REGION Constant Wage Rate R2 F D.W

(a) (b)

0.080
All India 4.217 0.631 29.015 0.839
(0.015)

Source: Computed

• Value of ‘b’ indicates that Co-efficient of wage rate is significantly different from
unity at five percent level.

• Durbin Watson statistics indicates there is no auto correlation at 1 per cent level.

• Figures in brackets are standard error.

208.a
 The fit of the equation is quite satisfactory with R2 and F ratios. At all India 63

percent of the total variation is V/L has been explained by real wage rate. Durbin

Watson Statistics indicates that the test for auto correlation is inconclusive at 1

percent level. The co-efficient of wage rate is statistically insignificant and positive.

The estimated co-efficient of wage rate from the equation (4) is used to test the

following hypothesis.

Null hypothesis: Elasticity of substitution between the factor inputs is unity.

Alternative hypothesis: Null hypothesis is false.

* =
b-1
t ---------
A

S.E(b)

The computed value of t* is compared with the critical value of to.05 at n-k

degrees of freedom. If t*< t, we can accept the hypothesis. On the other hand,if t* >t

we can accept the alternative hypothesis. The value of t* (Computed) and t (Table

value at 5% level) are given below.

*

t to.05
All India -61.3 1.734

As t < t the null hypothesis is accepted at 5% level of significance where the

degrees of is 18. This shows that the elasticity of substitution between capital and

labour is unity at All India. In the above circumstances, a Cobb-Douglas type of

production function is applicable for Paper Industry at all India.

209
 Equation (4) does not measure the technical progress. Hence an exponential

time trend has been incorporated in the following equation to account for and measure

neutral technological change.

Log V/L = a + b Log w + ct + u .......(5)

Where

V = Value added

L = Number of persons employed

w = Real wage rate

t = time

u = error term

a,b and c are parameters.

The estimates of a,b and c have been obtained by the method of least squares.

The estimates of the production function (5) are presented in the table 7.4.

210
 TABLE 7.4

CES PRODUCTION FUNCTION WITH TIME (1979-80 TO 1997-98)

Log V/L = a + b Log W + ct + u

Regression Co-efficient

REGION Constant Wage Rate Time R2 F D.W

(a) (b) (c)

All India 0.107 -0.004

4.048 0.636 13.988 0.926
(0.057) (0.009)

Source: Computed

• Value of ‘b' indicates that the Co-efficient of wage rate is not significantly
different from unity at five percent level.

• Durbin Watson Statistics indicates that the test for auto correlation is inconclusive
at 1 percent level.

• Figures in brackets are standard error.

210.a
 The total variance explained in equation (4) and equation (5) are more or less

same i.e 63%. Wage rate elasticity of average productivity (b) is not significantly

different from unity at 5 percent level. The neutral time trend (c) shows low and

negative value at All India.The co-efficient of time trend variable are not statistically

significant. The value of Durbin Watson indicates that there is no auto correlation at

1 percent level. It is found that the elasticity of substitution between capital and labour

is unity at All India.

As the Cobb-Douglas production function is characterized by unit elasticity of

factor substitution one may infer that there is an evidence of Cobb-Douglas

production function for the Paper Industry at All India. By and large, the co-efficient

of time trend variable is statistically insignificant at 5 percent level. This clearly

shows that there is no evidence for the neutral technical progress for the industry at

national level during the period under study.

Cobb-Douglas Production Function

Consider the Cobb-Douglas production function

V = A La Kb ect .......(6)

Where

V = Value added

L = Number of persons employed

K = Adjusted fixed capital

T = Time variable

211
 C = Co-efficient of time variable

a and b are partial elasticities of output with respect to labour and capital

respectively.

The purpose of finding out the estimates of input elasticities, neutral technical

progress and returns to scale, Cobb-Douglas production function in log linear form is

used. Its log transformation is specified below.

Log V = A + a log L + b log K + ct + u ....... (7)

The estimates of A,a,b and c have been obtained by the method of ordinary

least squares. The estimates of the parameters of the production function for All India

are tabulated in Table 7.5.

212
 TABLE 7.5

UNCONSTRAINED FORM OF COBB-DOUGLAS PRODUCTION

FUNCTION WITH TIME (1979-80 TO 1997-98)

Log V = A + a Log L + b Log K + ct + u

Regression Co-efficient

REGION Constant Labour Capital Time R2 F D.YV

(A) (a) (b) (c)

All India 0.162 0.046 0.131

4.544 .917 55.567 1.118
(1.132) (0.046) (0.041)

Source: Computed

• Value of "a’ indicates that Co-efficient of wage rate is significant at five percent
level.

• Durbin Watson Statistics indicates that there is no auto correlation at 1 percent

level.

• Figures in brackets are standard error.

212.a
 The goodness of fit (R2) for the regression equation corresponding to All India

is 91%. The value of Durbin Watson Statistics indicates that there is no auto

correlation at 1 percent level. From the Table 7.5 it may be observed that the co­

efficient of capital (b) is insignificant for the regression equation at All India. The

insignificant capital Co-efficient implies that the effect of capital on output is

insignificant.

In the estimate of equation (7) the co-efficient of labour is insignificant for the

regression equation corresponding to All India. Elasticity of output with respect to

labour is found to be statistically significant at 5 percent level. From Table 7.5, it is

evident that the co-efficient of time trend is insignificant for the regression equations

corresponding to All India. It is positive but insignificant. Since the time trend which

is to measure technical progress itself is insignificant the Cobb-Douglas production

function without time trend is considered to be the best fit. It leads to the inference

that there had been no technical progress in the industry during the study period

(1979-80 to 1997-98). The insignificant values of the co-efficient of capital may be

due to multicollinearity problem, since the independent variables are highly

correlated.

In the estimates of equation (7) the co-efficient of time trend is insignificant,

hence time variable is dropped from the equation (7). Therefore the following Cobb-

Douglas Production function is fitted to know the elasticities of output with respect to

labour and capital and returns to scale.

213
 V = A La Kb (8)

When transformed into Log form

Log V = A + a Log L + b Log K + u ....... (9)

Where

V = Value added

L = Number of persons employed

K = Adjusted fixed capital stock

u = Error term.

The estimates of A, a and b have been obtained by using the method of

ordinary least squares (OLS). The estimates are given in Table 7.6.

214
 TABLE 7.6

UNCONSTRAINED FORM OF COBB-DOUGLAS PRODUCTION

FUNCTION (1979-80 TO 1997-98)

Log V = A + a Log L + b Log K + u

Regression Co-efficient

REGION Constant Labour Capital R2 F DAY

(A) (a) (b)

All India -6.880 1.771 0.670 .876 56.639 0.575

(1.296) (0.163)

Source: Computed

• Vahie of ‘a’ indicates that Co-efficient of wage rate is significant at five percent
level.

• Durbin Watson Statistics indicates that the test is inconclusive at 1 percent level.

• Figures in brackets are standard error.

214.a
 From the Table 7.6 , the elasticity of output with respect to labour is

statistically insignificant. Regarding the capital elasticity of output, the co-efficient is

statistically insignificant. The low value of co-efficient of capital in Table 7.6 may

arise due to cumulative effect of the following factors.

a) The deepening of capital has decreased the value of coefficient of

capital. During the study period the real capital stock in paper industry

had increased at an annual compound rate of 8.02 at All India.

Variations in relative prices and changes in the industrial structure

have been responsible for increasing capital deepening.

b) Entry of large number of new industrial units and the full capacity

utilization of which is yet to be achieved.

c) Existence of a large number of uneconomic units in many part of the

country which are carrying on production with worn out machineries.

This may be the cause for low value of capital coefficient.

d) The low value of capital co-efficient may be due to multicollinearity

and measurement errors in the capital input.

Returns to Scale

In the Cobb-Douglas production function the sum of factor elasticities gives a

indication of return to scale. The sum of (a+b) has been statistically tested by using

‘F’test so as to find its deviation from unity. In other words the researcher wanted to

test the hypothesis.

215
Null hypothesis : a + b = 1 against the alternative hypothesis.

Alternative hypothesis : a+b^ 1

The hypothesis may be tested with an F ratio as suggested by R.Tinter3 as follows:

Ie22-Ze,2
F* = ........................ — (n-k) ...........(10)
Xe,2
Where

F = Computed value of F

2
X ei = sum of squared residuals from the unrestricted function

X e22 = sum of squared residuals from the restricted function

F distribution with V) = 1 and V2 = n-k degrees of freedom.

The computed value of F* is compared with the theoretical (tabular) value of

F0.o5 with

V| = 1 and V2 = (n-k) degrees of freedom.

If F* > F0.05 one can reject the basic hypothesis or accepts that a+b ^ 1.

The computed value of F* and the table value of Fo.os are given below.

F Fo.os
All India 12.06 4.41

As F* > Fo.os for 18 degrees of freedom one may come to the conclusion that
there is an indication of increasing returns to scale at All India.

216
Marginal productivity of factors of production

The concept of marginal product refers to the addition to output by a unit

increment in any one input, ceteris paribus. The marginal products are useful in an

inter temporal comparison of efficiency of inputs, their comparative utilization and in

the determination of the point of factor saturation3. Marginal productivity of a factor

is variable over time. It varies directly with the corresponding variation in input-

output ratio. Marginal productivities of labour and capital have been computed for

each during the period from 1979-80 to 1997-98 and the mean of marginal

productivities of labour and capital is arrived at.

If the Cobb-Douglas production function is of the form V=A LaKb, then the

marginal productivities of labour and capital can be arrived by differentiating partially

the function V with respect to labour and capital. The marginal productivities of

labour and capital are arrived as follows.

8V V
-......= MPl = a....... ............(11)
8L L

8V V
------ = MPk = b -— ............(12)
8K K

Where MPL and MPK are the marginal productivities of labour and capital

respectively. From the estimated production function [equation (9) of Table 7.6] the

values ‘a’ and ‘b’ are substituted at each observation for All India for the period 1979-

80 to 1997-98.Then the MPL and MPK have been computed at geometric mean for All

India.From the Table 7.7 one can observe that the average marginal productivities of

labour is larger than the average marginal productivities of capital for All India.

217
 TABLE 7.7

MARGINAL PRODUCTIVITIES OF INPUT FACTORS

(1979-80 TO 1997-98)

Region M.P.L.(Average) M.P.K.(Average)

All India 1.16 0.910

Source: Computed

TABLE 7.8

SOURCES OF OUTPUT GROWTH FOR THE PAPER INDUSTRY

AT ALL INDIA (1979-80 TO 1997-98)

Region Relative Contribution of Relative Contribution of

Labour in percentage Capital in percentage

All India 53 13.5

Note : 100 - (RL + RK) represents the relative contribution of other factors.

217.a
Sources of output Growth

In the production function analysis, the coefficient of the variables are simply

the partial elasticity of output with respect to factor inputs. They will not help us

directly to find out the relative contribution of factors of production to output growth.

Nevertheless, the data on inputs and outputs together with the coefficient of laobour

and capital could be used to quantify the relative contributions. This measure is

important for policy determination. Following Subramaniyan (1986) the relative

contribution of labour and capital can be determined as below:

n
I lAlogU
A j= 1
RL = a ................................... (13)
n
X |AlogVi
i= 1

n
X | A log Kj |
A i= 1
RK = b -.......................................... (14)
n
X I Alog V; |
i= 1

Where a and b are the estimates of labour and capital coefficients. Using the

relations (13) and (14), the sources of output growth for the industry under study have

been determined for All India level and the results are given in the Table 7.8.

218
 From the Table 7.8 it will be noticed that the relative contribution of labour to

value added is higher than that of capital at All India. It is also supported by ‘factor

elasticity’ and ‘marginal productivity’ ( refer Table 7.6 and Table 7.7) at national

level. From this it follows that ceteris paribus, increase in labour productivity is

attributed to capital intensity at'national level with regard to Paper Industry. As labour

is relatively more efficient than capital, it suggests that the industry has the

potentiality of absorbing labour force for Paper Industry at national level.

Conclusion

From the foregoing analysis one may derive the following conclusions which

seem to be most relevant that could be taken as a guideline for the future expansion of

the Indian Paper Industry.

The VES production function with and without time variable is estimated by

using the ordinary least squares method. The elasticities of substitution between

capital and labour is either zero or constant. Thus the findings clearly rule out the

possibility of variable elasticity of factor substitution in the Indian Paper Industry at

national level. Further, there is no evidence for neutral technological progress under

the study period.

The estimates of the elasticity of substitution between capital and labour based

on logarithmic regressions of value added per labour on the wage rate and time for

Paper Industry corresponding to All India covering the period 1979-80 to 1997-98

elasticity of substitution between capital and labour is unity.

219
 Thus from the findings one may infer that there is an evidence of Cobb-

Douglas production function for the Paper Industry at All India. The variation in the

estimates of elasticity of substitution between capital and labour may be due to the

differences in period covered and data used. From the time trend coefficients one may

infer that Paper Industry as a whole has not benefited much from technological

change during the study period.

The elasticity of substitution between capital and labour is unity which implies

that the relevant form of production function at All India level for Paper Industry is

the Cobb-Douglas.

From other findings, the labour elasticity of output is found to be a more

important factor than capital in terms of‘factor elasticity', ‘marginal productivity’ and

‘relative cotribution’ to the output growth at All India level for Paper Industry.

Further increase in labour productivity is attributed to capital deepening.

Finally, the estimated value of the degree of returns to scale parameter, as

obtained by the sum of the coefficients of labour and capital turns out to be an

increasing return to scale at All India for Paper Industry.

220
 FOOT NOTES

1. LU,Y.C and Flectcher, L, “ A Generalisation of the CES Production

Function”, Review of Economics and Statistics, Vol .50 No.4, 1968 P.449.

2. Ferguson calls such cases as technological retrogression (Ferguson, CE.,

“Time-Series Production Function and Technological Progress in American

Manufacturing Industry”, Journal of Political Economy, April 1965, P.300.

3. Tinter.G, “Econometrics” Newyork,Wiley, 1952,P.90-91.

221
 CHAPTER-VIII

SUMMARY OF THE RESULTS AND CONCLUDING REMARKS

Having analysed the growth, productivity and production function of Paper

Industry in India for the period from 1979-80 to 1997-98 , the researcher enter into

the stage of conclusion of the study.

The growth history of Paper Industry is related with the Industrialisation of the

Indian economy. The demand for cultural and industrial paper was 9.80 thousands

tonnes by 1977-78. In 1987-88 it has increased to 12.25 thousand tonnes. In 1997-98

it has further increased to 34.45 thousand tonnes. On the basis of forecasting the

estimated demand for cultural and industrial paper around 2007-08 will be 56,78,000

tonnes. Development of computer applications and information technology has no

impact on the consumption of paper and paper products.

The Paper industry in India is highly fragmented with the capacity of mills

ranging from less than 10 tonnes to 600 tonnes a day. The total number unit exceeds

1000 at present.

The industry has been growing at the rate of five percent per annum. The

installed Capacity is about 44 lakh tonnes while the production is 32.5 lakh tonnes

comprising 29 lakh tonnes of paper and boards and 3.5 tonnes of newsprint.

222
 The major raw materials used for paper production in India are wood, bamboo

bagasse and wastepaper. The share of forest based raw materials is 37 percent, agro

residues 31 percent and waste paper 32 percent.

From 1979-80 to 1997-98 the installed capacity of the Paper Industry showed

an increasing trend. Production also showed an increasing trend from 1979-80 to

1993- 94. In 1994-95 it declined but from 1995-96 onwards it showed an increasing

trend. Similarly demand also showed an increasing trend from 1979-80 to 1993-94. In

1994- 95 it declined but from 1995-96 onwards it showed an increasing trend.

Labour productivity RGVO/L had registered an annual compound rate of 6.32

percentage. Over the study period the average percentage rate of increase in labour

productivity (RGVO/L) is 5.72 for all India. The Compound Growth rate of Labour

Productivity RGVO/MH is 6.04. The annual average percentage rate of change in

labour productivity measured from RGVO/MH is 5.95. The Compound Growth rate

of Labour Productivity RGVO/MD is 5.12. The annual average percentage rate of

change in labour productivity measured from RGVO/MD is 4.8. From the above

information it can be understood that RGVO/L and RGVO/MH are greater than

RGVO/MD.

Labour productivity measured from the ratio of real value added and labour

(RVA/L) had registered an annual compound rate of growth of 5.61. The annual

average percentage rate of change measured from RVA/L is 4.5. The compound rate

of growth of Labour Productivity measured in terms of RVA/MH is 5.6. The annual

average percentage rate of change measured from RVA/MH is 3.76.The compound

223
rate of growth of Labour Productivity measured in terms of RVA/MD is 5.42. The

annual average percentage rate of change measured from RVA/MD is 3.33.

The compound rate of growth of labour productivity measured in terms of Q/L

is 8.5. Annual average percentage rate of change in labour productivity, Q/L, is 13.8.

The compound rate of growth measured in terms of Q/MH is 8.35. The annual

average percentage rate of change, Q/MH, is 13.11. Over the study period the

compound rate of growth measured in terms of Q/MD is 8.82.The annual average

percentage rate of change in Labour Productivity measured in terms of Q/MD is 12.8.

Compound rate of growth of capital productivity measured in terms of

RGVO/RCS is 5.47, the capital productivity measured in terms of RVA/RCS is 5.24

and the capital productivity in terms of Q/RCS is 8.02.

Over the study period compound rate of growth of material productivity

indices (RGVO/RRM) is 4.42. Annual average percentage rate of change in material

productivity is 0.33.Total factor productivity has registered an annual compound rate

of growth of 4.41. The annual average percentage rate of change in total factor

productivity is 1.32.

Regression Function for Total Factor Productivity shows the value of the co­

efficient of determination R2 is 0. 95. The Durbin-Watson statistics indicates the

absence of the first degree of auto correlation for the function corresponding to All

India. The co-efficient of real value added is negative and the co-efficient of time is

also negative. This indicates that various institutional factors such as labour

224
management relations and neutral technical progress etc., have been adversely

affecting total factor productivity.

Regression Function for labour Productivity shows the value of the co­

efficient of determination R2 is 0. 9. The Durbin-Watson statistics indicates that the

absence of the first degree of auto correlation for the function corresponding to All

India. The co-efficient of real value added is positive i.e. 0.044 and highly significant

for the function corresponding to All India. Thus expansion in scale of production has

been generating growth in total factor productivity. Co-efficient of time, on the other

hand is negative i.e. -0.0012. This indicates that various institutional factors such as

labour management relations and neutral technical progress etc., have been adversely

affecting total factor productivity.

The VES production function with and without time variable is estimated by

using the ordinary least squares method. The elasticities of substitution between

capital and labour is either zero or constant. Thus the findings clearly rule out the

possibility of variable elasticity of factor substitution in the Indian Paper Industry at

national level. Further, there is no evidence for neutral technological progress under

the study period.

The estimates of the elasticity of substitution between capital and labour based

on logarithmic regressions of value added per labour on the wage rate and time for

Paper Industry corresponding to All India covering the period 1979-80 to 1997-98

elasticity of substitution between capital and labour is unity. Thus from the findings

one may infer that there is an evidence of Cobb-Douglas production function for the

225
Paper Industry at All India. The variation in the estimates of elasticity of substitution

between capital and labour may be due to the differences in period covered and data

used. From the time trend coefficients one may infer that Paper Industry as a whole

has not benefited much from technological change during the study period.

The elasticity of substitution between capital and labour is unity which implies

that the relevant form of production function for Paper Industry is the Cobb-Douglas.

From other findings, the labour elasticity of output is found to be a more important

factor than capital in terms of‘factor elasticity’, ‘marginal productivity’ and ‘relative

cotribution' to the output growth at All India level for Paper Industry. Further increase

in labour productivity is attributed to capital deepening.

Finally, the estimated value of the degree of returns to scale parameter, as

obtained by the sum of the coefficients of labour and capital turns out to be an

increasing return to scale for Paper Industry in India.

Contribution from this Study

The study provides a comprehensive empirical analysis of growth,

productivity and production function in Paper Industry in India. Considering the

importance of Paper Industry this study is focused to analyze the pattern and growth

of Paper Industry in India, taking into account input, output, and other related

variables.

226
 In the present study an attempt has been made to estimate the relative

efficiency of different inputs by using partial factor productivity of labour, capital

and raw material at All India level for the period from 1979-80 to 1997-98. Further an

attempt has been made to estimate the influence of output and technology on factor

productivity with the help of multiple regressing frame work. The study also aims to

examine and analyze production function in Paper industry at All India during 1979-

80 to 1997-98.

Limitations of the Study

This study is subject to certain limitations. This study covers the period from

1979-80 to 1997-98. The basic data source for this study ASI. The data of ASI relates

only to those units submitting returns. This study is connected with Paper Industry

only. The study has been done through production function analysis. This study may

also be done with the cost function analysis. Cost function analysis relating to

productivity could form an interesting topic for future research.

227
 APPENDICES

A. 1. Data of Paper Industry in India

A.2. Data of Paper Industry in India

A.3. Data of Paper Industry in India

A.4. Estimation of Growth Rates: Semi Log Form

In Y = a + bt + u

A.5. Estimation of Growth Rates: Semi Log Form

In Y = a + bt + u
 TABLE A.l

DATA OF PAPER INDUSTRY IN INDIA

(MANDAYS IN THOUSANDS AND OTHERS IN NUMBERS)

NUMBER NUMBER TOTAL

MANDAYS NUMBER OF MANDAYS PERSONS
YEARS OF OF
WORKERS EMPLOYEES EMPLOYEES
FACTORIES WORKERS ENGAGED

1979-80 587 78,798 26,610 99,870 33,789 1,00,234

1980-81 598 81,518 26,053 1,04,625 33,181 1,05,109

1981-82 672 84,593 28,030 1,09,288 35,956 1.10,477

1982-83 687 92,498 27,786 1,20,200 35,958 1,20,652

1983-84 734 84,851 27,444 1,12,649 36,023 1,13,130

1984-85 796 83,956 28,242 1,10,553 35,847 1,11,257

1985-86 802 78,639 26,469 1,02,210 34,385 1.02,897

1986-87 823 80,284 27,445 1,03,748 35,505 1,04,973

1987-88 842 82,530 28,773 1,08,967 37,827 1.09,703

1988-89 857 77,225 25,149 1,01,741 32,965 1,01,741

1989-90 895 81,063 28,091 1,06,953 36,940 1,06,953

1990-91 927 87,608 29,842 1,13,914 39,041 1,13,914

1991-92 953 90,511 31,270 1,16,517 40,078 1,16,517

1992-93 986 93,939 32,274 1,21,431 40,603 1,21,431

1993-94 1005 92,372 31,921 1,19,541 41,086 1,19,541

1994-95 1022 94,732 32,899 1,24,569 43,063 1,24,569

1995-96 1031 98,137 33,189 1,26,751 44,888 1.26,751

1996-97 1045 1,03,523 35,702 1,35,099 46,502 1,35,099

1997-98 1058 98,763 36,604 1,27,488 48,704 1,27,488

 TABLE A.2

DATA OF PAPER INDUSTRY IN INDIA

(VALUE FIGURES ARE IN RS.LAKHS AND OTHERS IN NUMBERS)

VALUE NET
FUEL MATERIALS TOTAL DEPRE­
YEARS PRODUCTS OF VALUE
CONSUMED CONSUMED INPUTS CIATION
OUTPUT ADDED
1979-80 10,702 33,548 49,953 70,490 72,667 3,818 18,896

1980-81 13,803 39,323 60,258 83,438 85,511 5313 19,940

1981-82 18,121 47,700 75,105 99,041 1,03,530 4,717 23.708

1982-83 27,504 51,307 81,596 99,987 1,02,751 5,535 15,619

1983-84 24,242 59,668 94,158 1,20,493 1,23.037 9,601 19.278

1984-85 30,417 78,102 1,21,371 1,60,343 1,64,893 12,147 31,375

1985-86 32,623 87,152 1,32,158 1,64,133 1,68,358 12,389 23,810

1986-87 39,131 95,854 1,49,641 1,93,366 1,99,004 14,266 35.097

1987-88 43,586 1,07,706 1,66,881 2,08,502 2,15,069 16,111 32,077

1988-89 48,210 1,24,643 1,90,612 2,44,201 2,50,277 19,574 40,091

1989-90 61,167 1,67,469 2,52,833 3,40,235 3,47,538 24,113 70,591

1990-91 68,813 2,06,537 3,04,148 4,11,877 4,20,563 30,104 86,312

1991-92 86,001 2,34,273 3,54,381 4,59,645 4,73,129 28,407 90,340

1992-93 98,624 2,54,373 3,88,061 4,97,673 5,13,441 29,246 96,133

1993-94 1,03,307 2,78,190 4,36,256 5,58,383 5,71,354 20,759 1,14,340

1994-95 1,30,716 3,49,873 5,40,591 7,06,381 7,28,859 26,551 1,61,717

1995-96 1,78,730 4,32,853 6,81,234 8,12,612 8,73,675 39,181 1,41,318

1996-97 1,93,964 4,80,651 7,57,434 9,30,817 9,56,557 47,993 1,51,130

1997-98 1,74,724 4,13,409 6,64,091 7,91,069 8,27,535 40,130 1,23,314

 TABLE A.3
DATA OF PAPER INDUSTRY IN INDIA
(VALUE FIGURES ARE IN RS.LAKHS AND OTHERS IN NUMBERS)
NET GROSS
RENT INTEREST NET NET
YEARS FIXED FIXED GROSS
PAID PAID INCOME PROFIT
CAPITAL CAPITAL

1979-80 147 3,472 15,277 5,060 8,878 14,194 5,828

1980-81 138 4,965 14,837 8,244 13,557 15,633 4,070

1981-82 212 6,376 17,120 11,532 16,249 21,104 4,655

1982-83 247 7,316 8,057 15,734 21,270 23,963 -5,248

1983-84 276 10,215 8,786 27,725 37,326 37,863 -5,806

1984-85 383 12,931 18,601 21,790 33,937 43,848 1,591

1985-86 478 11.486 11,846 15,716 28,105 34,548 -5,503

1986-87 530 16,521 18,046 3,680 17,946 24,265 -1,167

1987-88 739 17,858 13,480 6,779 22,890 24,711 -9,359

1988-89 929 21,060 18,101 9,363 28,937 45,487 -5,407

1989-90 1,561 20,128 48,902 754 24,867 33,303 18,438

1990-91 1,917 26,811 57,584 18,385 48,489 63,288 22,119

1991-92 1,941 30,729 57,670 4,048 24,360 41,705 16,412

1992-93 2,309 35,161 58,663 24,718 53,965 74,022 11,574

1993-94 3,787 33,645 76,908 63,163 83,921 68,493 25,246

1994-95 5,899 46,752 1,09,066 4,57,219 4,83,770 5,05,259 47,495

1995-96 67,696 56,986 70,618 1,11,273 3,07,813 97,876 -8,961

1996-97 8,389 75,267 67,474 1,29,336 1,77,329 1,97,889 -12,773

1997-98 9,691 46,801 66,822 75, 835 1,15,965 1,08,595 -13,586

 TABLE A.4
ESTIMATION OF GROWTH RATES:SEMI LOG FORM
In Y = a + bt + u

A A
DEPENDENT
SL.NO
VARIABLES a b R2

1. NUMBER OF 6.702884 0.031396 0.93

FACTORIES

2. FIXED CAPITAL 12.229246 0.151092 0.93

3. WORKING CAPITAL 10.588337 0.156474 0.93

4. INVESTED CAPITLA 12.511970 0.147362 0.95

5. OUTSTANDING 11.892700 0.126702 0.95

LOANS

6. NUMBER OF 11.377547 0.011544 0.554

WORKERS

7. MANDAYS 10.280361 0.204489 0.745

WORKERS

8. NUMBER OF 11.638232 0.011576 0.557

EMPLOYEES

9. MANDAYS 10.595356 0.200369 0.796

EMPLOYEES

10. TOTAL PERSONS 11.650566 0.225148 0.429

ENGAGED

11. WAGES TO 9.629515 0.122514 0.989

WORKERS

12 TOTAL 10.068721 0.121007 0.985

EMOLUMENTS

13. FUELS CONSUMED 10.861979 0.154352 0.985

14. MATERIALS 11.285236 0.222721 0.990

CONSUMED

15. TOTAL INPUTS 12.246642 0.153380 0.992

 TABLE A.5

ESTIMATION OF GROWTH RATES:SEMI LOG FORM

In Y = a + bt + u

A A
SL. R2
DEPENDENT VARIABLES
NO a b
16. PRODUCTS 12.489695 0.150993 0.982

17. VALUE OF OUTPUT 12.530079 0.149462 0.988

18. DEPRECIATION 9.687358 0.1311161 0.910

19. NET VALUE ADDED 10.830421 0.139601 0.922

20. RENT PAID 7.090500 0.276777 0.890

21. INTEREST PAID 9.833837 0.150214 0.960

22. NET INCOME 10.279063 0.131344 0.764

23. NET FIXED FORMATION 9.273674 0.010445 0.317

24. GROS FIXED FORMATION 10.120753 0.0714200 0.678

25. (i) MATERIALS,FUEL SETS 8.620194 0.098953 0.407

26. (ii) SEMI FINISHED GOODS 5.739857 0.117499 0.243

27. (iii) FINISHED GOODS 7.086116 0.039872 0.014

28. (iv) TOTAL 8.911353 0.119577 0.450

29. GROSS 10.776084 0.132440 0.702

30. PROFITS 9.048017 0.102623 0.412

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