This study examines the underlying role of financial misallocation in driving productivity dispersion, in India’s brick industry.
The pursuit of understanding the underlying causes of low productivity and growth have led to theories of financial misallocation gaining increasing attention, as demonstrated by the growing literature on the topic in development economics. These studies imply that incorrect allocation of resources to entrepreneurs, who would have otherwise made productive use of them, is a major cause to perpetuating poverty in developing countries. This project takes an Approach new to the development literature by studying a single industry (bricks) across a wide variety of markets with different conditions. It will be carried out in the context of a broader study on the Indian clay brick industry, a sector ideally suited to this line of enquiry. The study seeks to explore the underlying causes of productivity dispersion in the sector by explicitly quantifying how much product quality explains differences in revenue productivity.
Two rounds of surveys were conducted as part of this project in three Indian states – Uttar Pradesh, Madhya Pradesh and Karnataka. The first round carried out a census of 6,794 brick firms across 11 districts in 3 states of India. It aimed to measure the market-level outcomes by obtaining information on their output, price and employment among other measures. The second round took a more detailed Approach, surveying firm managers and owners from a random sample of 600 firms, of which 400 were drawn from 100 dense brick clusters, and 200 from more isolated locations. Data was collected on the inputs, prices, wages, other costs of the firm and the financial status of the firm owner in terms of his access to credit and savings.
The detailed survey of the Indian brick industry shows substantial productivity dispersion, attributable to both technology differences as well as within-technology efficiency variation. In contrast to results from developing countries, the study finds no increase in productivity in larger (potentially more competitive) markets, nor do entrants have significantly higher productivity than exiting firms.
Findings from the study can inform policy on how best to channel the powers of market competition and selection to enhance productivity and improve livelihoods, opening up dialogues on a broader context on issues such as subsidies to cottage sector producers, allocation of credit from state-owned banks, and environmental regulation of MSMEs. The results also provide insights on unresolved theoretical and policy debates, as well as a new and unique dataset for examining a wide range of industrial development issues.