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Effect of the Rate of Return Regulation on Optimality of Input Use, Productivity and Profitability of Firms in the Indian Automobile Industry


  • Hrushikesh Panda

    (Institute of Economic Growth)


Important conclusions of the paper are that contrary to theoretical expectation, regulation on rate of return to capital (RORC) did not result in a greater than optimal degree of capital intensity of production of firms. Firms also had an incentive in terms of an increase in profit margin (PTM) to bring about growth in total factor productivity (TFP). After deregulation, because of competitive pressures, there was a negative effect of TFP on PTM of the medium and heavy commercial vehicle producing firms. Though they operated in monopoly markets, firms, in general, did not earn monopoly rent because of the regulation on RORC. However, given lags in adjustment of prices of vehicles to changes in the average cost of production, changes in input prices had a negative effect on PTM. The regulation on RORC was on individual firm basis and was such that in the car segment, a more efficient firm earned a lower PTM.

Suggested Citation

  • Hrushikesh Panda, 1997. "Effect of the Rate of Return Regulation on Optimality of Input Use, Productivity and Profitability of Firms in the Indian Automobile Industry," Indian Economic Review, Department of Economics, Delhi School of Economics, vol. 32(1), pages 65-87, January.
  • Handle: RePEc:dse:indecr:v:32:y:1997:i:1:p:65-87

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    References listed on IDEAS

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    More about this item

    JEL classification:

    • K20 - Law and Economics - - Regulation and Business Law - - - General
    • L51 - Industrial Organization - - Regulation and Industrial Policy - - - Economics of Regulation
    • L61 - Industrial Organization - - Industry Studies: Manufacturing - - - Metals and Metal Products; Cement; Glass; Ceramics


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