No easy balancing act: reducing the balance-of-payments constraint, improving export competitiveness and productivity, and absorbing surplus labor – the Indian experience

As per the balance-of-payments constraint hypothesis, in an open economy, achieving a higher long-run rate of growth requires a country to reduce its balance-of-payments constraint through an improved export performance, and the production of import substitutes, which would lower the income elasticity of demand for imports. In developing countries, a sustainable and inclusive process of development also requires the generation of high productivity activities and quality employment. By focusing on the Indian case, this paper shows that even if a developing country manages to reduce its balance-of-payments constraint, concentrated improvements in productivity and employment may remain at the industrial level. Furthermore, a reduction of the balance-of-payments constraint may be more the result of an improvement in the net exports of services than an improvement in the external competitiveness of merchandise exports. Such a services-led reduction of the balance-of-payments constraint may not address the problem of generating large-scale quality employment and making the growth process more inclusive.