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Big Reforms but Small Payoffs: Explaining the Weak Record of Growth and Employment in Indian Manufacturing

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  • Gupta, Poonam
  • Hasan, Rana
  • Kumar, Utsav

Abstract

India has undertaken extensive reforms in its manufacturing sector over the last two decades. However, an acceleration of growth in manufacturing, and a corresponding increase in employment, has eluded India. Why have the reforms not produced the intended results? Using Annual Survey of Industries data at the three digit level for major Indian states, for 1980-2004, we analyze the effects of the reforms that liberalized India’s industrial licensing regime on the performance of registered manufacturing. We find that the performance of the manufacturing sector is heterogeneous across states, as well as across industries. In particular, labor intensive industries and industries dependent on infrastructure have not benefited much from reforms. Industrial performance appears to be contingent on the state specific policy and economic environment. States with relatively inflexible labor regulations have experienced slower growth of labor-intensive industries and slower employment growth overall. Additionally, states with relatively competitive product market regulations and with better infrastructure have experienced larger benefits from reforms.

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Bibliographic Info

Paper provided by University Library of Munich, Germany in its series MPRA Paper with number 13496.

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Date of creation: 18 Feb 2009
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Handle: RePEc:pra:mprapa:13496

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Keywords: India; Manufacturing; Product Market Deregulation; Labor Laws; Infrastructure;

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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 Evidence from India," STICERD - Development Economics Papers - From 2008 this series has been superseded by Economic Organisation and Public Policy Discussion Papers 33, Suntory and Toyota International Centres for Economics and Related Disciplines, LSE.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. Paul Conway & Richard Herd & Thomas Chalaux, 2008. "Product Market Regulation and Economic Performance across Indian States," OECD Economics Department Working Papers 600, OECD Publishing.
  3. Panagariya, Arvind, 2008. "India: The Emerging Giant," OUP Catalogue, Oxford University Press, number 9780195315035, September.
  4. Poonam Gupta & Rana Hasan & Utsav Kumar, 2008. "What Constrains Indian Manufacturing?," Macroeconomics Working Papers 22162, East Asian Bureau of Economic Research.
  5. Ratna Sahay & Deepak Mishra & Poonam Gupta, 2003. "Output Response to Currency Crises," IMF Working Papers 03/230, International Monetary Fund.
  6. Petia Topalova, 2005. "Trade Liberalization, Poverty, and Inequality: Evidence from Indian Districts," NBER Working Papers 11614, National Bureau of Economic Research, Inc.
  7. T. Ravi Kumar, 2002. "The Impact of Regional Infrastructure Investment in India," Regional Studies, Taylor & Francis Journals, vol. 36(2), pages 194-200.
  8. Philippe Aghion & Robin Burgess & Stephen J. Redding & Fabrizio Zilibotti, 2008. "The Unequal Effects of Liberalization: Evidence from Dismantling the License Raj in India," American Economic Review, American Economic Association, vol. 98(4), pages 1397-1412, September.
  9. Robin Burgess & Rohini Pande, 2004. "Do Rural Banks Matter? Evidence from the Indian Social Banking Experiment," The Centre for Market and Public Organisation 04/104, Department of Economics, University of Bristol, UK.
  10. Aditya Bhattacharjea, 2006. "Labour Market Regulation and Industrial Performance in India--A Critical Review of the Empirical Evidence," Working papers 141, Centre for Development Economics, Delhi School of Economics.
  11. Marianne Bertrand & Esther Duflo & Sendhil Mullainathan, 2004. "How Much Should We Trust Differences-in-Differences Estimates?," The Quarterly Journal of Economics, MIT Press, vol. 119(1), pages 249-275, February.
  12. Paul Conway & Richard Herd, 2008. "Improving Product Market Regulation in India: An International and Cross-State comparison," OECD Economics Department Working Papers 599, OECD Publishing.
  13. Arvind Subramanian & Raghuram Rajan & Ioannis Tokatlidis & Kalpana Kochhar & Utsav Kumar, 2006. "India's Pattern of Development," IMF Working Papers 06/22, International Monetary Fund.
  14. Ahsan, Ahmad & Pages, Carmen, 2007. "Are all labor regulations equal ? Assessing the effects of job security, labor dispute, and contract labor laws in India," Policy Research Working Paper Series 4259, The World Bank.
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Cited by:
  1. Hasan, Rana & Mitra, Devashish & Ranjan, Priya & Ahsan, Reshad N., 2012. "Trade liberalization and unemployment: Theory and evidence from India," Journal of Development Economics, Elsevier, vol. 97(2), pages 269-280.
  2. Felipe, Jesus & Kumar, Utsav & Abdon, Arnelyn, 2013. "Exports, capabilities, and industrial policy in India," Journal of Comparative Economics, Elsevier, vol. 41(3), pages 939-956.
  3. Hasan, Rana & Mitra, Devashish & Sundaram, Asha, 2013. "The Determinants of Capital Intensity in Manufacturing: The Role of Factor Market Imperfections," World Development, Elsevier, vol. 51(C), pages 91-103.

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