The present study estimates the changes in Total Factor Productivity (TFP) of the Indian chemical sector during the period 1980-81 to 2001-02. The Malmquist indices of TFP growth are computed and decomposed into technical change and efficiency change. The obtained estimates of TFP change at the aggregate and sectoral levels indicate that the net impact of economic reforms on the productivity growth of chemical sector was negative. It is evident from the study that the negative TFP change in the chemical sector at the aggregate level aggravated (from 0.4% to 4.1%) in the post-reform period. It is seen that technical change is the factor that leads to deterioration in the overall productivity of the Indian chemical sector. Similar trends are also observed at the sub-sectoral level.

The issue of free trade and protection has been in debate for a long time. Adam Smith, David Ricardo and Richard Lipsey advocated free trade to promote economic growth. Their arguments for free trade include unrestricted import of raw materials and capital goods, easy transfer of technical know-how, and large-scale movement of international capital, to improve efficiency and productivity. But the supporters of protectionism, Alexander Hamilton, Fredrick List and H C Carey argued that free exchange of goods may be harmful to economically backward countries, a country may enjoy very great national advantage but may not be able to exploit them due to lack of skill and insufficient infrastructure. The policy of protection has been well expressed in the following words, "Nurse the baby, protect the child and free the adult".

Over the past decades, several studies have attempted to estimate the productivity performance of the Indian manufacturing sector (Brahmananda, 1982; Ahluwalia, 1991; Balakrishnan and Puspangadan, 1994; Srivastava, 1996; Unel, 2003; and Goldar, 2004). Some of these studies also examined the impact of economic reforms on the growth of industrial productivity. Few studies found that the Total Factor Productivity (TFP) growth improved in the reform period (Majumdar, 1996; Sharma, 1999; and Unel, 2003), whereas Balakrishanan et al. (2000) and Goldar and Kumari (2003) found that economic reform adversely affected industrial productivity in India. The change in the productivity growth has thus been an important subject matter for researchers.

Studies on productivity growth are on the increase due to the underlying importance of this concept. Productivity is defined as the efficiency with which inputs are transformed into output in the production process (Van den Berg, 2001). While there are large number of studies on productivity growth, studies on the sources of productivity growth are very much limited in Indian literature. TFP measures by how much productivity grows or declines over time. When the output is more (less) in relation to the given inputs, then TFP is said to have increased (decreased). There may be various reasons for this productivity change. For example, the Tornqvist index can be applied to calculate the TFP growth. It is based on discrete information and applies shares as weight to aggregate input/output. However, one cannot obtain and decompose the productivity change into movements along and changes in frontier, because Tornqvist index assumes that the observed output is the same as the best practice frontier. Many of the earlier studies in India have not considered the sources of changes in the productivity growth. Now new techniques are available to decompose the total productivity into `technical efficiency' and `technical progress'. TFP can grow when the industry uses its existing technology and factor inputs more efficiently; the industry can produce more while using the same labor, capital and technology, or more generally by increase in `technical efficiency'.

Managerial Economics Journal, Indian Chemical Industry, Total Factor Productivity, Indian Manufacturing Sectors, Economic Reforms, Liberalization Process, Process Innovation, Chemical Sectors, Intellectual Property Rights, Domestic Firms, Policy Implications.