Linkages and changing factor use in Indian economy: Implications of emerging trade pattern

Globally, a greater component of trade in intermediates—parts and components—is a characteristic of the changing paradigm of international trade. Consequently, alongside the increasing trade openness of the Indian economy, the access to international factors of production has increased through their embodied use during the production of intermediates that are imported. Thus, the emerging trade pattern has the potential to impact the use of factors of production of domestic origin through linkages in the internal economy. This paper makes an assessment of the changing intensity of use of the two factors of production, viz., labor (L) and capital (K), in the economy. The analysis aims to provide an estimate of the impact of import utilization on the use of labor and capital. In the backdrop of a generally declining employment intensity, the employment foregone effect from the use of imported intermediate inputs is observed to have worsened over the period of study. Ironically, this has contributed to lower domestic employment, even in the traditionally labor-intensive sectors. The employment effect of import utilizations is also reflected in the declining share of labor income. The use of capital embodied in imported intermediates has contributed to increasing the capital intensity of the economy despite the low domestic capital investment. This underscores a greater dependency on capital-intensive imports. While import reliance has increased for both employment and the capital goods through their embodied use in the imported inputs, the dependency on imported capital has been stronger. A higher relative use of capital (K-to-L) indicates that the production method is relatively capital-intensive, thus requiring more capital goods and investment. The findings resolve the puzzle of India’s increasing relative use of capital alongside a slowdown of domestic investments in productive capital. The deficit on domestic investment has been compensated through import utilizations of capital goods.