India’s Industrial Sector: Faltering Growth?

Barry Bosworth

Composition of India’s GDP, 1990-2011 % GDP

0

10

20

30

40

50

60

0

10

20

30

40

50

60

1990 1995 2000 2005 2010

Services

Agriculture

Industry

Composition of China’s GDP, 1990-2011, %GDP

0

10

20

30

40

50

60

0

10

20

30

40

50

60

1990 1995 2000 2005 2010

Services

Agriculture

Industry

Merchandize Trade Share of GDP, 1990-2011

0

5

10

15

20

25

30

1990 1995 2000 2005 2010

Perc

ent

Imports

Exports

Multilateral Exchange Rates for India

0

50

100

150

200

250

300

1970 1975 1980 1985 1990 1995 2000 2005 2010

India Real India nominal

China Growth Model A typical East Asian developmental process. A

growth-oriented autocratic pro-business regime targets Investment & export-driven growth Suppress labor regime financial repression, and industrial policies.

Added feature of control over land acquisition and utilization.

India Cannot Just Mimic China

The opposite of an authoritarian regime Chaotic democracy Much greater focus on social equity Promotion of labor-proletariat Private ownership of land

Comparable in ability to increase rates of saving and investment.

Will need to develop and refine its own India model

Suppression of Industrial Sector The weak performance of the industrial

sector has long been associated with the restrictive regulatory regime of industrial licensing, labor regulations, and limitations on India’s economic relations with the rest of world.

Past shortage of research on the economic effects of regulatory reform has been offset by a flood of recent research.

Evaluating Economic Reforms In the Industrial Sector. Major Reforms

Industrial licensing Labor regulation Trade and FDI Analyses largely based on ASI panel data

Aghion & others (2008) State specific panel data for manufacturing 1980-97 De-licensing had strong differential effects shifting

production toward states with less employment protection.

Effects of Economic Reform(2)

Harrison, Martin, and Nataraj (2011) Emphasize role of trade and FDI liberalization Small role for de-licensing Distinguish between within and among firm

productivity gains. Bollard, Klenow, and Sharma (2012) Large acceleration of TFP growth in 1990s Unrelated to trade, FDI or de-licensing Concentrated in within-firm gains

Effects of Economic Reform (3)

AV Chari (2011) Reductions in barriers to entry and size restrictions in

mid-1980s both had significant positive effects on total factor productivity in 1985-1991.

Overall gain in TFP of 22 percent

Laura Alfaro and Anusha Chari (2012) Use Prowess database (publically-listed companies) 1991 reforms led to substantial new entry of small

firms, and continuing domination by large firms.

Effects of Economic Reform (4)

Dougherty, Robles, and Krishna (2011) Focused on labor market rigidities New measure of Employment Protection (EPL) Evidence that lower state values of EPL promoted

output and productivity gains in labor-intensive volatile industries.

Addresses some criticisms of Besley & Burgess

Effects of Economic Reform (5) Topalova and Khandelwa (2011) Positive effects of trade liberalization on

manufacturing productivity. Traced to gains from increased competition and better quality purchased inputs.

The effect was strongest in import-competing industries and industries not subject to excessive domestic regulation.

Research based on Prowess database.

Overview of Effects of Economic Reform

Most studies find statistically-significant effects of regulation Exception of Bollard, Klenow, and Sharma

But magnitudes of effects are too small to account for lack of growth.

Perhaps, the problem can be traced to cumulative effects of the various parts of the regulator regime.

Answers seem unsatisfactory.

Overview of Effects of Economic Reform (2)

Significant differences in construction of data. Bollard, Klenow, and Sharma show much larger

acceleration of output and thus productivity after 1992–2-3 times the acceleration in the national accounts–due to different price indexes.

Alfaro and Chari appear not to adjust for prices. Macroeconomic evidence of benefits of de-

regulation more evident after revisions of national account Virmani&Hashim (2011) argues for lags in response to

reforms.

Growth Potential India faces no population constraint on growth Huge reserve of under-employed persons Low female participation rate Demographic acceleration in proportion of young

adults Limits arise from shortage of capital, skill levels,

and development of markets. Saving rate of 30-35 percent of GDP would

enable a growth rate near 10 percent.

Saving and Investment Balance of India, 1970-2008

1970-79 1980-89 1990-99 2000-04 2005-09

Gross national saving 17.2 19.1 23.3 27.5 34.3

Household sector 11.5 13.6 17.9 23.2 23.0

Private corporate sector 1.5 1.8 3.8 4.4 8.2

Public sector 4.2 3.7 1.6 -0.2 3.1

External Investment (S-I) -0.1 -1.4 -1.4 0.5 -1.5

Total capital formation 17.4 20.9 24.7 27.0 35.8

Public sector 8.6 10.6 8.5 7.0 8.7

Private corporate sector 2.6 4.5 7.5 6.6 14.3

Household sector 6.9 6.8 7.8 12.7 11.9

Growth Potential (2)

Virmani (2012) suggests a potential growth rate of 9-10%

Barriers Weak global economy Economic growth is not a priority of Indian

leadership Most policy and the attention of researchers is

focused on problems of poverty and inequity, not growth.

Large contrast with China. Land