Total Factor Productivity and its Determinants of the Indian Toy Industry: Evidence from Principal Component Regression (PCR)-Auto Regressive Distributed Lag (ARDL) Framework
This study analyzes the Indian Toy Industry's performance from 2005 to 2024 using a DEA-Malmquist and PCR-ARDL framework, revealing stagnant Total Factor Productivity growth while identifying domestic industrial capability and export orientation as key positive drivers, thereby recommending investments in innovation, human capital, and stability to boost global competitiveness.
Original paper licensed under CC BY 4.0 (https://creativecommons.org/licenses/by/4.0/). This is an AI-generated explanation of the paper below. It is not written or endorsed by the authors. For technical accuracy, refer to the original paper. Read full disclaimer
The Indian toy industry sits at a fascinating intersection of deep cultural tradition and modern economic ambition. For generations, these objects have been more than mere playthings; they are vessels of local stories, crafted from wood, clay, and cloth by artisans who have passed down skills for centuries. Today, however, the sector is also a critical engine for jobs and economic growth, facing a new reality where it must compete on a global stage. To understand whether this industry is truly becoming stronger, economists look beyond simple counts of how many toys are made or how many people are employed. Instead, they measure something called total factor productivity. This concept captures the efficiency of the entire production process: it asks how much output is generated for every unit of labor and capital used. If a factory produces more toys without using more workers or machines, its productivity has risen. This rise usually comes from better technology, smarter organization, or improved skills, rather than just adding more resources. Understanding these efficiency gains is vital because they determine whether an industry can sustain long-term growth and compete internationally, rather than just expanding temporarily through policy support.
A recent study by researchers Nitya Gupta and Dinesh Gehlot takes a close, data-driven look at the Indian toy industry over the last two decades to see if this efficiency is actually improving. The researchers gathered annual data from 2005 to 2024, a period that saw the industry transform from a heavy reliance on imported toys to a growing net exporter. They first measured the industry's productivity using a method that compares how well different years perform against the best possible performance achievable with the available resources. Their findings reveal a surprising stagnation. Despite the visible boom in the number of factories, the total volume of toys produced, and the number of workers employed, the underlying efficiency of the industry has remained almost completely flat. Over the twenty-year period, the average growth in productivity was effectively zero. The industry did not get significantly better at turning inputs into outputs; it simply got bigger.
When the researchers broke down the numbers to see what was driving these changes, they found that the industry's performance was entirely dependent on shifts in technology, while the efficiency of management and the scale of operations remained unchanged. In some years, new technologies or modernization efforts pushed productivity up, but in other years, a lack of progress or even a step backward pulled it down. The result was a rollercoaster of temporary gains and losses that canceled each other out over time. The study suggests that while government policies like "Make in India" and stricter quality controls have successfully encouraged more factories to open and reduced the need for imports, these measures have not yet translated into a sustained, deep improvement in how efficiently the industry works. The sector is producing more, but it is not necessarily producing better or more efficiently than it did twenty years ago.
To understand what drives these productivity trends, the researchers analyzed several key factors, including how much money firms make, how much they invest, the skill level of their workers, and how much they export. They combined these complex, interrelated factors into two main groups to see which mattered most. The first group represented the strength of the domestic industrial base, including profitability and investment growth. The second group represented the industry's export orientation and the skill level of its workforce. The analysis showed that both groups are essential for long-term productivity growth. A strong, profitable domestic base provides a stable foundation, while focusing on exports and hiring skilled workers pushes the industry toward higher standards. However, the study also found that the path to these gains is not smooth. In the short term, trying to upgrade skills or target global markets can create temporary friction and slow down productivity before the benefits are fully realized.
The researchers concluded that the Indian toy industry is at a critical juncture. The recent surge in production and employment is a positive sign, but it is not enough on its own to ensure the industry's future competitiveness. The data indicates that simply building more factories or making more toys will not lead to lasting success. Instead, the industry needs to focus on continuous technical innovation, consistent investment in human capital, and strategies to smooth out the volatile cycles of investment. Without these deeper structural changes, the industry risks remaining efficient only in the short term, unable to sustain the global competitiveness required to thrive in the modern economy. The path forward requires moving beyond just increasing the volume of production to fundamentally improving the quality and efficiency of how that production happens.
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