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Exports, capabilities, and industrial policy in India

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  • Felipe, Jesus
  • Kumar, Utsav
  • Abdon, Arnelyn
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    Abstract

    An extensive literature argues that India’s manufacturing sector has underperformed, and that the country has failed to industrialize; in particular, it has failed to take advantage of its labor–abundant comparative advantage. India’s manufacturing sector is smaller as a share of GDP than that of East Asian countries, even after controlling for GDP per capita. Hence, its contribution to overall GDP growth is modest. Without greater participation of the secondary sector, the argument goes, the country will not be able to develop and become a modern economy. Standard arguments blame the “license-permit raj”, the small-scale industrial policy, and the labor laws. All these were part of the industrial policy regime instituted after independence. This regime favored the heavy-machinery subsector. We argue that despite its shortcomings and misallocations, the bias towards machinery, metals, chemicals, and other capital- and skilled labor-intensive products allowed Indian manufacturing to accumulate a wide range of capabilities. We show that India’s manufacturing sector is more diversified and sophisticated than one would expect given the country’s income per capita. This positions India well to continue expanding its exports of other sophisticated products. India’s failure, however, lies in not being able to diversify into labor-intensive sectors and generate the type of structural transformation seen in China.

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    Bibliographic Info

    Article provided by Elsevier in its journal Journal of Comparative Economics.

    Volume (Year): 41 (2013)
    Issue (Month): 3 ()
    Pages: 939-956

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    Handle: RePEc:eee:jcecon:v:41:y:2013:i:3:p:939-956

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    Web page: http://www.elsevier.com/locate/inca/622864

    Related research

    Keywords: Sophistication; Diversification; India; Industrial policy; Revealed comparative advantage;

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    References

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    1. Timothy Besley & Robin Burgess, 2002. "Can Labour Regulation Hinder Economic Performance? Evidence from India," STICERD - Development Economics Papers - From 2008 this series has been superseded by Economic Organisation and Public Policy Discussion Papers 33, Suntory and Toyota International Centres for Economics and Related Disciplines, LSE.
    2. Philippe Aghion & Robin Burgess & Stephen Redding & Fabrizio Zilibotti, 2006. "The Unequal Effects of Liberalization: Evidence from Dismantling the License Raj in India," CEP Discussion Papers dp0728, Centre for Economic Performance, LSE.
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    6. Mohan, Rakesh & Aggarwal, Vandana, 1990. "Commands and controls: Planning for indian industrial development, 1951-1990," Journal of Comparative Economics, Elsevier, vol. 14(4), pages 681-712, December.
    7. Panagariya, Arvind, 2008. "India: The Emerging Giant," OUP Catalogue, Oxford University Press, number 9780195315035.
    8. Tibor Scitovsky, 1954. "Two Concepts of External Economies," Journal of Political Economy, University of Chicago Press, vol. 62, pages 143.
    9. C. A. Hidalgo & B. Klinger & A. -L. Barabasi & R. Hausmann, 2007. "The Product Space Conditions the Development of Nations," Papers 0708.2090, arXiv.org.
    10. Jagdish N. Bhagwati & T. N. Srinivasan, 1975. "Foreign Trade Regimes and Economic Development: India," NBER Books, National Bureau of Economic Research, Inc, number bhag75-1.
    11. Ajit Singh & Sukti Dasgupta, 2005. "Will services be the new engine of economic growth in India?," ESRC Centre for Business Research - Working Papers wp310, ESRC Centre for Business Research.
    12. Barry Eichengreen & Poonam Gupta, 2010. "The Service Sector as India’s Road to Economic Growth?," Working Papers id:2604, eSocialSciences.
    13. Jesus Felipe & Gemma Estrada, 2008. "Benchmarking developing Asia's manufacturing sector," International Journal of Development Issues, Emerald Group Publishing, vol. 7(2), pages 97-119, October.
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