India’s Pattern of Development

I had mentioned about this super paper by Arvind Panagriya on Transforming India. His solution is that India needs to move to unskilled labor intensive manufacturing to absorb the surplus labour from agriculture.

The paper was really good but provided little empirical evidence to the fact that India has so far focused only on capital intensive manufacturing.

Taking a cue from this paper, we have some evidence from a team of economists (led by Raghuram Rajan) that provides empirical evidence (more or less agreeing with what Mr. Panagriya had to offer; they however do not mention this in their paper).

The paper is available here and its abstract is:

India seems to have followed an idiosyncratic pattern of development, certainly compared to other fast-growing Asian economies. While the emphasis on services rather than manufacturing has been widely noted, within manufacturing India has emphasized skill-intensive rather than labor-intensive manufacturing, and industries with typically higher average scale. We show that some of these distinctive patterns existed even prior to the beginning of economic reforms in the 1980s, and argue they stem from the idiosyncratic policies adopted soon after India’s independence. We then look to the future, using the growth of fast-moving Indian states as a guide. Despite recent reforms that have removed some of the policy impediments that might have sent India down its distinctive path, it appears unlikely that India will revert to the pattern followed by other countries.

The paper present evidence with respect to two periods -pre 1980 & post 1980. The pre 1980 summary is:

• …compared with countries at a similar level of development and size, in 1981 India had approximately the normal share of output and employment in manufacturing.

• Output in services was below the norm, as was employment in services.

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

• Average establishment size was substantially smaller than in comparable countries.

• And finally, Indian manufacturing was significantly more diversified both in terms of output and employment than countries of comparable income and size.

This brilliant line sums it up:

The paradox of Indian manufacturing in the early 1980s is thus that of a labor-rich, capital poor economy using too little of the former, and using the latter very inefficiently.

What happened post 1980s? One would assume post reforms, the above anomalies to be corrected. But the evidence conveys the pre-1980 story continues. Some selected striking findings are:

• Manufacturing sector does worse than other countries and seems to be slowing down

• India posted an increase in the size of the services sector that was 10 percentage points of GDP greater than for the average country, after controlling for the level of income and growth.

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

• India’s share in skill-intensive manufacturing, which was already high in 1980 despite its lower level of per capita income, has been increasing and is at levels reached by Malaysia or Korea at much higher levels of per capita income.

An analysis of states also conveys the same story.

….either the fast-growing states have seen constancy or decline in their share of manufacturing, or where they has been an increase—Andhra Pradesh, Gujarat, and Haryana—it has occurred in capital- and skill-intensive industries (in the case of Gujarat, there has been a huge decline in the textiles industry with a corresponding increase in the petrochemical industry; similarly, Andhra Pradesh saw a decline in the share of food, beverages, tobacco, textiles, and paper related industries and a large increase in the basic metals and alloys industries).

So more or less the trends have continued barring for growth in services sector. Why didn’t reforms alter the development process. The authors suggest perhaps reforms have not been fully completed or perhaps it is because specialisations, which have been acquired in distortions, have accentuated the process not reversed it.

Their final take is that despite changes and reforms, India looks like carrying on with its current model of development.

However, even if the needed reforms were to occur, there is a possibility that powerful forces emanating from the common market for resources could slow convergence. If they were to do so, India will have to brace itself for a lot of social churning as people move not just in search of jobs but also in search of acquiring the human capital to become employable. How India reacts to, and shapes, these forces may well be the biggest economic question India faces over the next few decade.

The is full of empirical stuff and statistics. Unlike Panagriya’s paper this one hits hard with numbers and loads of regression equations. They could have simplified it and the paper is missing the Zingales factor. (Rajan’s longtime co-author – Luigi Zingales’s inputs and clarity of thought could have been helpful.) I raised this point earlier as well.

A nice paper to read but has to be read with utmost concentration.