KALPANA KOCHHAR, UTSAV KUMAR, RAGHURAM RAJAN, ARVIND SUBRAMANIAN, IOANNIS TOKATLIDIS

DONE BY

APOORV AGARWAL PGP14004VISHAL PGP14017PRANAV AGARWAL PGP14030YASH DUBEY PGP14055SOMAL KANT PGP14043

India’s pattern of development: What happened, what follows?

Introduction

More importance is given to service sector than Manufacturing Sector

Within Manufacturing sector, more emphasis is on skill than on labour

But these patterns have not changed even after changes in reforms

Uneven distribution of opportunities across states is a cause of concern

Nature of policies after independence

Concentrated on skill rather than on labourUntil 1980, India had a lower than normal presence in the

service sector due to policy distortionRecent trends indicate the same patternThe fast growing peninsular states have overtaken the slow

growing states of the hinterland

India Circa 1980

Emphasis on self sufficiencyThis resulted in rapid industrializationReduction of dependence on foreign exchange which resulted

in trade restrictionHeavy public sector involvement in productionHigh degree of control by the government on the private

sector

India Circa 1980

Emphasis given to geographically balanced developmentSignificant benefits to encourage small scale firmsSignificant protection for labourHigh spending on higher education than on primary

education

Value added shares in 1981: Sectoral Shares in Value-Added and Employment

India in the Cross Section: Share of Manufacturing and Services, Early 1980s

In Manufacturing, India is a positive outlier among countries in its share of value added in manufacturing in 1981

After adjustment of country size, the percentage point reduces to 2.3

In Services, India is a negative outlier in 1981

Employment shares in 1981 and productivity

In case of industrial sector employment, India is not an outlier

In case of service sector, India’s share is 7.5 % lower than other countries after factoring in income and size of the country

Use of Factors: labor intensity, skill intensity

Industry Characterisation1. Labour Intensity.2. Skill Intensity.3. Relative Size.

Labour Intensity: share of wages in value added for the industry in a country, averaged across a broad group of developing countries.Skill Intensity: Skill is measured by the ratio of the remuneration of highly skilled and skilled labor over the total value added of the industry.Relative Size: ratio of value added per establishment within the industry over the value added per establishment within the country, averaged across countries for each industry.

We calculate the ratio of value added in above-median-labor-intensity industries to the value added in below-median-labor-intensity industries

If Indian manufacturing generated relatively more value added in labor intensive industries India indicator should be positive and significant .

The coefficient on the India indicator is moderately negative when the dependent variable is the ratio of employment.

For skill intensity industry ratio of the total value added by above-median-skill-intensity manufacturing industries to the total value added by below-median-skill-intensity industries. It is striking that even by 1981, India specialized in skill-intensive industries.

Industry Scale and Firm Scale

Two facts about the “scale” of Indian enterprise.1. First, manufacturing was unusually concentrated in industries that typically require large scale.2.  Second, within industries however, the array of policies that discouraged large firms appear to have had their intended effect.  Coverage of manufacturing data varies across countries, therefore we cannot take

value added per establishment in industry.

Instead, we focus on relative size, that is, we find the relative size of establishments in an industry in a country by dividing the value added (or employment) per establishment in the industry by the value added (or employment) per establishment in the country.

We find that the ratio of value added in above-median-scale industries to below-median-scale industries is significantly higher in India. (Table 4, Panel A, column 3).

Interestingly, relative employment shares in above-median scale industries is also significantly higher in India relative to other countries (see Panel B, column 3).

As a result relative productivity is somewhat lower for above-median-scale industries in India, but not significantly so (Panel C, column 3).

Indian planners laid emphasis on building capital-intensive, large-scale, heavy industries because of their belief that “machines that made machines” would boost savings and hence long-run growth.

The impact of the discriminatory policy regime against private sector scale (industrial licensing, forced geographic distribution of production, reservation and other incentives for small-scale sectors, and the anti-monopoly MRTP Act) was felt within industry rather than between industries.

 we compare the average firm size in India with the average firm size in 10 emerging market countries for manufacturing as a whole and for the nine largest industries in India.

The pattern of size across industries in India matches the pattern in comparator countries (with, for example, iron and steel or industrial chemicals being large and food products small), albeit at a much lower level, verifying that relative size is a distinctive characteristic of an industry that holds across countries.

 Ratio of value added in above-median labor-intensive industries to that in below-median labor-intensive industries in unregistered manufacturing is significantly higher (by about 2 times in 1980)

Diversification

We examine the concentration of Indian industry compared to the average country pattern, we find that India is significantly less concentrated (or more diversified).

India has broader array of skills in labor force.

 China is not unusually diversified in the cross-section whereas India is.

Effect of pre-1980 policies: Summary

1. In 1981 India had approximately the normal share of output and employment in manufacturing.

2. Manufacturing output and employment appeared to be above the norm in industries that typically are skill intensive or have larger scale.

3. Average establishment size within industries, though, was substantially smaller than in comparable countries.

4. Indian manufacturing was significantly more diversified both in terms of output and employment than countries of comparable income and size.

5. High relative labor productivity observed in the labor-intensive sectors in India.6. The one area where Indian manufacturing appears to have thrived is in the

industries using highly skilled labor.7. India was a significant negative outlier in services in 1981,because the slow-

moving public sector again dominated areas like telecommunications and business services where India's advantage in skills

Key Features of Reforms in 1980’s

The liberalization of imports—especially of capital goods and intermediate inputs

The extension of export incentives through the tax system, and more liberal access to credit and foreign exchange

The significant relaxation of industrial licensing requirements through direct ‘‘delicensing’’ of some industries and through ‘‘broad banding’’, which permitted firms in some industries to switch production between similar product lines

The decontrol of administered prices of key intermediate inputs

Reforms of the 1990s

The abolition of industrial licensing and the narrowing of the scope of public sector monopolies to a much smaller number of industries

The liberalization of inward foreign direct and portfolio investmentThe sweeping liberalization of trade which included the elimination of

import licensing and the progressive reduction of non-tariff barriersFinancial sector liberalization, including the removal of controls on

capital issues, freer entry for domestic, and foreign, private banks and the opening up of the insurance sector

The liberalization of investment in important services, such as telecommunications

Manufacturing Vs Services

Predicted a rapid increase in the share of manufacturing, a decline in agriculture and an uncertain or modest effect on services

But between 1980 and 2002, India’s share of services in value added exploded from 37% to 49%

Its share of manufacturing in value added remained broadly unchanged at 16%, while the decline in agriculture mirrored the performance of services

*The coeff. of theIndia indicator is still positive but smaller than in the corresponding specification for1981*data suggest a relative slowing in manufacturing growth

*India’s share in services is a significant 3.8 percent higher than inother countries in 2000* India records an increase in the size of the servicessector that is 10 percentage points of GDP greater than that of the average country

India is again a negative outlier interms of the employment share in services, falling below other countries by a huge 17percentage points in 2000

Labor and skill intensity

India’s share is decreasing, when that of many of the other countries is eitherincreasing, or decreasing but at much higher levels of income

relative share of output generated in large scale (typically,capital-intensive) industries has been rising sharply in India

India’s share in skill-intensive manufacturing, which was already high in 1980 despite itslower level of per capita income, has been increasing; it is at levels reached by Malaysia orKorea at much higher levels of per capita income

evolution of labor- and skill-intensive products in theinformal sector, we see the same pattern

Conclusion

Unique features of India’s development that were apparent in 1981 have not changed, despite the reform

continuity of trends may be explained partly by the fact that the reforms have not been completed

For example, labor markets remain untouched and education expenditure is still skewed

Manufacturing Vs Services at the level of the States

Occurred in capital- and skill-intensive industries.

Neither are the fast growing states uniformly increasing their share, nor are the slow growing states–on average there seems to be a slight decline in share

Nearly all states in India have seen a uniform shift toward services

Diversification

There is little relationship between a state’s growth in the period 1980–2000 and the increase in its concentration is mildly positive.

Looking Ahead

It would appear that fast growing peninsular states are starting to resemble more developed countries in their specialization.

Hinterland states is falling behind in educationIn this states like Madhya Pradesh , Rajasthan and Utter

Pradesh 60% of the fertility rate will increase. So they are expected to increase to 620 million.

Liberalization post-1980 has allowed states to have a decentralized system which allowed states to differentiate themselves economically.

Post-1980 performance has resulted in creation of two types of states: Fastest moving states Slow growing states

This demarcation was driven by specific capabilities and some general capabilities of the fastest moving states during the control era.

General capabilities

Decentralization, states were able to differentiate themselves economically.

Dismantling of the industrial license system which helped to do away with regional equity policy.

Rising trend in private investment and falling trend in public investment. The private investment is more sensitive towards differences in policies between states.

State Capabilities

The form of capability Specialized human or organizational capital : Trained personnel in specific

industries present in the state during the period of controls. General human capital and entrepreneurial spirit or environment : Skilled

personnel ready to move in new industries or past entrepreneurial communities.

Fast growing states had larger number of high growth manufacturing industries with net growth in the number of firms.

1990s and Beyond:India

End to licensing in capital and intermediate goods in 1991: in consumer goods

Highest industrial tariff down from 350% in 1991 to 12.5% currently

Agriculture: very high tariff equivalents(bound at 100 to 300%)

Services: On balance more open now than ChinaDFI negative list approach; only handful of sectors with

sectorial caps below 51%.

Walk on two legsTraditional Labor-intensive Industry End to SSI Reservation :necessary but not sufficient Labor market reforms fiscal deficitModern IT Industry Higher Education Urban Infrastructure

Liberalization in the 1980

Scope of canalized import reducedOpen General licensing (OGL) expanded:30% imports freed

up by 1990East-Asain style export incentives in the second half of 1980sMore than 30% real depreciation of the rupee in the second

half of the 1980sTariffs raised to mop up the quota rents.

Conclusion

The change since 1980 the move toward pro-business and pro-market economic policies

Centralized politically and uniformly medicore in economic performance has given way to multiple India's with performance more related to the capabilities of individual states and the opportunities they create

The East Asian economies would play within IndiaIndia should reform in Labor incentive rather capital

incentive