Technical efficiency and its determinants in the Indian garment industry

Abstract

One of the recommendations of the Textile Expert Committee, India, was to set a Technology Demonstration Centre to address the issues related to improvement in productivity and efficiency of the Indian garment industry. The committee identified the key factors responsible for the low level of production efficiency, which were low labour and capital productivities, high capital cost, outdated technology and low-skilled workers. In the light of subsequent recommendations made by the committee, the researchers examined the technical efficiency of the Indian garment industry. For this, a two-stage analytical process using cross-sectional data from 275 Indian garment firms spread across various states in India for the year 2004–2005 was adopted. In the first stage, data envelopment analysis was used to measure technical efficiency scores. Subsequently, in the second stage, Tobit regression was used to study the factors affecting the technical efficiency of the firms. The results of the study show that on an average, a garment firm could increase its output by 32.1% with the existing level of inputs by way of improving its input-use efficiency and adjusting plant size to the optimum level. Further, the overall technical efficiency scores were found to be more sensitive to the variation in the pure technical efficiency (PTE) scores than that in the scale efficiency scores. Lower PTE scores in all the states indicated the poor performance of the industry in converting inputs into output. The results of the study also showed that the micro-sized firms were more efficient in utilizing resources than the small and medium ones. The Tobit regression results confirmed that investment in plant and machinery and outstanding loans did have a negative impact on a firm’s efficiency. By way of contrast, efficiency was found to be positively associated with labour productivity, wages per employee and labour–staff ratio.

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