Regulation, Technical Efficiency and its Determinants: Evidence from Indian Cement Industry

The main objective of the paper is to analyse the impact of environmental regulation on technical efficiencies of Indian cement producing firms. It derives the technical efficiency scores of firms in the presence and absence of regulation and brings out the differences in their magnitudes in two scenarios: one in which the firms take initiatives to comply with the set standards by investing additional resources for pollution abatement and the other in which the firms do not take the necessary initiatives. The paper uses establishment level data from Annual Survey of Industries on cement for two years, the most recent data published for 03-04 and a previous year for 99-00 when the environmental regulations were in the initial phases of implementation. A non-parametric deterministic method of Data Envelopment Analysis (DEA) is used to derive the technical efficiency scores of firms. The traditional DEA framework is modified by introducing weak disposability of bad outputs to characterize 'effective environmental regulation', which ensures that reducing pollution is not costless. For both the years it has been found that the technical efficiency scores of firms under 'effective regulation' scenario are either higher than or equal to those derived under 'ineffective regulation' scenario resulting in a higher average technical efficiency at the industry level in the 'effective regulation' scenario.