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Indias pattern of development: What

happened, what follows?



More importance is given to service sector than Manufacturing

Within Manufacturing sector, more emphasis is on skill than on
But these patterns have not changed even after changes in reforms
Uneven distribution of opportunities across states is a cause of

Nature of policies after independence

Concentrated on skill rather than on labour
Until 1980, India had a lower than normal presence in the service

sector due to policy distortion

Recent trends indicate the same pattern
The fast growing peninsular states have overtaken the slow growing
states of the hinterland

India Circa 1980

Emphasis on self sufficiency
This resulted in rapid industrialization
Reduction of dependence on foreign exchange which resulted in trade

Heavy public sector involvement in production
High degree of control by the government on the private sector

India Circa 1980

Emphasis given to geographically balanced development

Significant benefits to encourage small scale firms
Significant protection for labour
High 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
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, Indias 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 Characterisation
Labour Intensity.
Skill Intensity.
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
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 laborintensive industries in unregistered manufacturing is significantly higher (by about 2 times
in 1980)

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


In 1981 India had approximately the normal share of output and employment in
Manufacturing output and employment appeared to be above the norm in industries that
typically are skill intensive or have larger scale.
Average establishment size within industries, though, was substantially smaller than in
comparable countries.
Indian manufacturing was significantly more diversified both in terms of output and
employment than countries of comparable income and size.
High relative labor productivity observed in the labor-intensive sectors in India.
The one area where Indian manufacturing appears to have thrived is in the industries
using highly skilled labor.
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 1980s

The liberalization of importsespecially 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 investment
The sweeping liberalization of trade which included the elimination of
import licensing and the progressive reduction of non-tariff barriers
Financial 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

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, Indias 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

*The coeff. of the

India indicator is still
positive but smaller than in
the corresponding
specification for
*data suggest a relative
slowing in manufacturing

*Indias share in services is a

significant 3.8 percent higher
than in
other countries in 2000
* India records an increase in
the size of the services
sector that is 10 percentage
points of GDP greater than
that of the average country

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

Labor and skill intensity

Indias share is decreasing, when that of many
of the other countries is either
increasing, 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

Indias share in skill-intensive

manufacturing, which was already high in
1980 despite its
lower level of per capita income, has been
increasing; it is at levels reached by Malaysia
Korea at much higher levels of per capita

evolution of labor- and skillintensive products in the

informal sector, we see the
same pattern

Unique features of Indias 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 skillintensive 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

There is little relationship between a states growth in the period 19802000 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 education
In this states like Madhya Pradesh , Rajasthan and Utter Pradesh 60%

of the fertility rate will increase. So they are expected to increase to 620

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

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

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 China
DFI negative list approach; only handful of sectors with sectorial caps
below 51%.

Walk on two legs

Traditional Labor-intensive Industry

End to SSI Reservation :necessary but not sufficient

Labor market reforms
fiscal deficit
Modern IT Industry
Higher Education
Urban Infrastructure

Liberalization in the 1980

Scope of canalized import reduced
Open General licensing (OGL) expanded:30% imports freed up by 1990
East-Asain style export incentives in the second half of 1980s
More than 30% real depreciation of the rupee in the second half of the

Tariffs raised to mop up the quota rents.

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