An excellent literature survey on Indian Manufacturing Sector and its drivers

Arvind Virmani and Danish A. Hashim have put up an excellent paper on India’s Manufacturing Sector. Though large paprt of the paper is technical it has some nice findings explained in English as well. The abstract is pretty comprehensive and explains the main findings:

The manufacturing sector in India is crucial for two main reasons employment to a growing labour force, especially that of less skilled type and second by its own healthy growth, stimulate and provide a foundation for, organic growth in other sectors of the economy. On both these counts, however, the manufacturing sector has so far not performed to its potential. In an attempt to identify the factors responsible for this phenomenon, the present study examines in detail the main determinants of factor employment, their shares, and output growth.

The framework used is a CES production function estimated using ASI time-series data for the organised manufacturing industry spanning a period from 1973/74 to 2001/02. The study also dwells on the subject of sustainability of high growth in output on the back of raising capital labour ratio.

The findings on the determinants of employment of labour indicate that wages have started playing an equally important role as that of technology. As the wage rate is found to be smaller than the marginal product of labour, increasing employment is possible through making technology more labour inductive, which in turn, among other important measures, call for making labour laws simplerbeenpaid lower than the marginal product. Job security regulations apparently had less to do with jobless growth of the 1980s; rather, it was due to sharp rise in wages For capital, the deviation between marginal product and its price was statistically significant only during the third sub-period, which would mean that capital in post-reforms period till the beginning of the 2000s has been slightly underemployed.

With (82%), followed by labour (12%), and productivity (6%) The low contribution of productivity can be attributed mainly to the heavy decline in capacity utilization following the 1990s reforms as a result of a time lag between investment and output growth. But pure productivity, devoid of the effects of capacity utilization, must have improved post-reforms. This is consistent the” J curve of liberalisation and productivity” hypothesis proposed by one of the authors.

The findings on sustainability of output growth with rising capital–labour ratio indicate that the growth in capital– labour ratio may be constrained because both elasticity of substitution and degree of biased technical change were found to be declining. Output growth then is not sustainable with suppression of labour demand. But if stringent labour laws did force firms to do so, firms may continue to suppress demand for labour and  sacrifice the growth in output. Hence adequate reforms in labour laws are necessary to ensure sustainability of output growth which in turn would also unshackle the employment potential.

I am still trying to understand their paper in more details. In nut shell it says capital has contributed maximum in India’s industrial growth. This is not surprising as an earlier paper by IMF economists also said the same. Simialr views are shared by Arvind Panagriya in his excellent paper. It has important implications as in India’s case we clearly need manufacturing to absorb surplus labour from agriculture (see my paper on this aspect here).  

However, apart from these findings, it has an excellent literature survey on research on Indian manufacturing. Here is a quick summary: 

Although considerable debate has taken place on issues related to factor employment (especially labour) and sources of output growth, the discussion on the sustainability of output growth in Indian organised manufacturing industry is quite meagre. Further the issue of employment has been mostly addressed with reference to jobless growth during the 1980s. Similarly, discussion on sources of output growth in recent years has mostly revolved around the productivity growth in post-reforms period. On both these issues, two different views exist.

Explaining the jobless growth of the 1980s, one school blames it on the tightening of job security regulations, the other group blames it on the sharp increase in real wages. Similarly, on the direction of productivity growth in the post-reforms era, one school believes that it has  increased whereas the other believes that it has  declined.

 Further, while explaining the jobless growth as well as productivity growth, majority of the studies have assumed Cobb-Douglas structure of production function, entailing elasticity of substitution between labour and capital to be one. In order to emphasise on the main objectives of the present study, it would be necessary to review the relevant existing literature on each of these issues.

It is always welcome to read more and more on the nuances of Indian economy. Unfortunately, either the available lirerature is too few or hardly accessible on the internet.

What is good is that this paper is placed on Finance Ministry’s Working Paper section (I had pointed the start of this section in my previous post). Inside the above mentioned paper there is a para on the objective of FinMin working paper series:

The Economic Division in the Department of Economic Affairs has initiated a Working Paper series with the objective of improving economic analysis and promoting evidence based policy formulation in its mandated areas of work. The themes to be covered in the series include macroeconomic and sectoral issues of relevance for national policy, strategy for addressing emerging global and national development concerns and the agenda for economic policy reforms.

While the issues identified for the Working Papers have relevance as inputs for the flagship publication of the Department, namely Economic Survey and the Mid-Year Review, issues that are related to the larger work responsibility of the Department of Economic Affairs, including the economic aspects of financial services, revenues and expenditure are also the subject matter of this initiative. Papers prepared by the staff or commissioned by the Economic Division as well as other Divisions in the DEA will be included in the Working Paper series on suitable peer review.

I hope we get more such papers to read from DEA. I wrote first about this WP series in January 2008 and since then only 5 papers have been added. I wish it could become more regular and active.

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One Response to “An excellent literature survey on Indian Manufacturing Sector and its drivers”

  1. anam sachdev Says:

    good and usefull

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