India's industrial sector growth has faltered in recent decades. While services have grown to become over 50% of GDP, industry growth has lagged behind. Several economic reforms in the 1990s aimed to liberalize industry by reducing licensing, opening trade and FDI, but research finds mixed effects. Fully realizing India's growth potential of 9-10% annually may require further reforms to remove barriers to capital investment and land acquisition for industry. However, Indian leadership priorities social equity over growth unlike the more autocratic pro-business model in China.
5. Multilateral Exchange Rates for India
300
250
200
150
100
50
0
1970 1975 1980 1985 1990 1995 2000 2005 2010
India Real India nominal
6. 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.
7. 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
8. 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.
9. 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.
10. 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
11. 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.
12. 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
13. 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.
14. 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.
15. 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.
16. 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.
18. 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