Cobb Douglas Production Function Analysis of Total Factor Productivity in Indian Textile Industry in the Post Multi-fiber Agreement (MFA) Period

Greeshma Manoj, S. Muraleedharan


International trade in textiles and clothing was governed by the system of bilateral quotas under the Multi Fibre Agreement (MFA) since 1973 and this agreement has been replaced by the Agreement on Textiles and Clothing (ATC) from January 1, 2005. The dismantling of quota restrictions had brought about a significant change in the structure of worldwide trade in textiles as there are no quota barriers for the export of textiles and apparel and the hitherto protected textile industry would be exposed to international competition. It was widely believed and highlighted in most of the studies that developing economies, especially India and China would be the major gainers in the new policy regime. In view of the changing trading environment for the textile trade, it was considered important to analyze the impact of quota removal on the Indian textile industry, especially with respect to the productivity of this sector. The study has considered four sub-sectors of the Indian textile industry as given in the Annual Survey of Industries, viz, Spinning, Weaving and Finishing of Textiles, Manufacture of Other Textiles, Manufacture of Wearing Apparels and Manufacture of Crocheted and Knitted Fabrics. Estimates of the Cobb Douglas production function shows that the removal of textile quota had impacted all the four sub-sectors considered in the study. The impact of quota removal on productivity is positive and significant in the case of spinning, weaving, and finishing of textiles as well as in the manufacture of wearing apparel. In the case of the manufacture of other textiles and the manufacture of knitted and crocheted fabrics, the quota dummy coefficient is negative and significant at one percent level. This shows that the removal of quota restrictions have adversely impacted the output of these sectors.

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