Returns to scale in a highly regulated economy: evidence from Indian firms

This paper examines returns to scale for a panel of Indian manufacturing firms from 1976-1985, a period in which government regulations restricted firms' expansion. Observers have argued that these regulations led to unexploited scale economies in Indian firms, and our estimates lend limited support to this view. Although a large number of firms produce below the minimum efficient scale, average returns to scale for the various industries are not significantly different from one. Our estimates suggest that recent deregulation will not generate significant gains in scale efficiency unless expansion is heavily biased towards growth in the smaller firms. (C) 1998 Elsevier Science B.V. All rights reserved.