IDEAS home Printed from https://ideas.repec.org/p/pra/mprapa/14481.html
   My bibliography  Save this paper

Pre-reform Conditions, Intermediate Inputs and Distortions: Solving the Indian Growth Puzzle

Author

Listed:
  • Gupta, Abhay

Abstract

This paper answers the puzzling questions that why under the similar set of economic conditions service sector in India grew while manufacturing could not and how economic reforms in 1990s accelerated the productivity growth. The paper provides a very innovative and convincing explanation. Two subtle but important distortion-inefficiency mechanisms, which work through distorting the intermediate input allocation, are identified in the paper. Interaction of policies of quantitative restrictions and inflexible labor laws resulted in lower than optimal materials per worker usage.Combination of high inflation and unavailability of credit exacerbated this factor distortion and lowered the productivity growth further. Using panel data on Indian industries, I find underutilization of materials compared to labor until recently. This sub-optimal materials per worker usage lowers productivity growth. Productivity estimates are negatively related to labor growth and positively related to materials growth. Real wages and labor productivity are negatively related to materials inflation and this relationship breaks down after the capital market reforms in 1990s. Since these mechanisms work through intermediate inputs, service sector productivity is not affected as adversely. Estimates show that after 1990s firms have started oversubstituting materials and capital relative to labor, which can explain the jobless growth in Indian manufacturing.

Suggested Citation

  • Gupta, Abhay, 2009. "Pre-reform Conditions, Intermediate Inputs and Distortions: Solving the Indian Growth Puzzle," MPRA Paper 14481, University Library of Munich, Germany.
    • Handle: RePEc:pra:mprapa:14481
    as

    Download full text from publisher

    File URL: https://mpra.ub.uni-muenchen.de/14481/1/MPRA_paper_14481.pdf
    File Function: original version
    Download Restriction: no
    ---><---

    References listed on IDEAS

    as
    1. Robert J. Barro, 2013. "Inflation and Economic Growth," Annals of Economics and Finance, Society for AEF, vol. 14(1), pages 121-144, May.
    2. Sonia R. Bhalotra, 1998. "The Puzzle of Jobless Growth in Indian Manufacturing," Oxford Bulletin of Economics and Statistics, Department of Economics, University of Oxford, vol. 60(1), pages 5-32, February.
    3. Krueger, Anne O, 1997. "Trade Policy and Economic Development: How We Learn," American Economic Review, American Economic Association, vol. 87(1), pages 1-22, March.
    4. Chang-Tai Hsieh & Peter J. Klenow, 2009. "Misallocation and Manufacturing TFP in China and India," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 124(4), pages 1403-1448.
    5. Robert G. King & Ross Levine, 1993. "Finance and Growth: Schumpeter Might Be Right," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 108(3), pages 717-737.
    6. Deb Kusum Das, 2003. "Quantifing trade barriers: Has protection declined substantially in Indian manufacturing?," Indian Council for Research on International Economic Relations, New Delhi Working Papers 105, Indian Council for Research on International Economic Relations, New Delhi, India.
    7. Timothy Besley & Robin Burgess, 2004. "Can Labor Regulation Hinder Economic Performance? Evidence from India," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 119(1), pages 91-134.
    8. Satish Chand & Kunal Sen, 2002. "Trade Liberalization and Productivity Growth: Evidence from Indian Manufacturing," Review of Development Economics, Wiley Blackwell, vol. 6(1), pages 120-132, February.
    9. Kochhar, Kalpana & Kumar, Utsav & Rajan, Raghuram & Subramanian, Arvind & Tokatlidis, Ioannis, 2006. "India's pattern of development: What happened, what follows?," Journal of Monetary Economics, Elsevier, vol. 53(5), pages 981-1019, July.
    10. Charles R. Hulten & Sylaja Srinivasan, 1999. "Indian Manufacturing Industry: Elephant or Tiger? New Evidence on the Asian Miracle," NBER Working Papers 7441, National Bureau of Economic Research, Inc.
    11. S Madheswaran & Hailin Liao & Badri Narayan RathAuthor-Email: smadhes@yahoo.co.uk, 2007. "Productivity growth of Indian manufacturing sector: panel estimation of stochastic production frontier and technical inefficiency," Journal of Developing Areas, Tennessee State University, College of Business, vol. 40(2), pages 35-50, January-M.
    12. Barry Bosworth & Susan M. Collins, 2008. "Accounting for Growth: Comparing China and India," Journal of Economic Perspectives, American Economic Association, vol. 22(1), pages 45-66, Winter.
    13. Sharif Mohammad & John Whalley, 1984. "Rent Seeking in India: Its Costs and Policy Significance," Kyklos, Wiley Blackwell, vol. 37(3), pages 387-413, August.
    14. Jagdish N. Bhagwati, 1978. "Anatomy of Exchange Control Regimes," NBER Chapters, in: Foreign Trade Regimes and Economic Development: Anatomy and Consequences of Exchange Control Regimes, pages 7-52, National Bureau of Economic Research, Inc.
    15. 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.
    16. Gupta, Abhay, 2009. "Looking beyond the methods: Productivity Estimates and Growth Trends in Indian Manufacturing," MPRA Paper 14482, University Library of Munich, Germany.
    17. Ana M. Fernandes & Ariel Pakes, 2008. "Factor Utilization in Indian Manufacturing: A Look at the World Bank Investment Climate Surveys Data," NBER Working Papers 14178, National Bureau of Economic Research, Inc.
    18. repec:bla:obuest:v:60:y:1998:i:1:p:5-32:a is not listed on IDEAS
    19. Jagdish N. Bhagwati, 1978. "Foreign Trade Regimes and Economic Development: Anatomy and Consequences of Exchange Control Regimes," NBER Books, National Bureau of Economic Research, Inc, number bhag78-1.
    Full references (including those not matched with items on IDEAS)

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. Manisha Goel & Paulina Restrepo-Echavarria, 2015. "India’s Atypical Structural Transformation," Economic Synopses, Federal Reserve Bank of St. Louis, issue 23.

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Das, Abhiman & Ghani, Ejaz & Grover, Arti & Kerr, William & Nanda, Ramana, 2024. "JUE insight: Infrastructure and Finance: Evidence from India’s GQ highway network," Journal of Urban Economics, Elsevier, vol. 142(C).
    2. Ejaz Ghani & Arti Grover Goswami & William R. Kerr, 2016. "Highway to Success: The Impact of the Golden Quadrilateral Project for the Location and Performance of Indian Manufacturing," Economic Journal, Royal Economic Society, vol. 126(591), pages 317-357, March.
    3. Ghani, Ejaz & Goswami, Arti Grover & Kerr, William R., 2013. "Highway to success in India : the impact of the golden quadrilateral project for the location and performance of manufacturing," Policy Research Working Paper Series 6320, The World Bank.
    4. Ghani, Ejaz & Goswami, Arti Grover & Kerr, William R., 2013. "The golden quadrilateral highway project and urban/rural manufacturing in India," Policy Research Working Paper Series 6620, The World Bank.
    5. Kang, Jung Mo, 2006. "An estimation of growth model for South Korea using human capital," Journal of Asian Economics, Elsevier, vol. 17(5), pages 852-866, November.
    6. Ghosh, Saibal, 2013. "Do economic reforms matter for manufacturing productivity? Evidence from the Indian experience," Economic Modelling, Elsevier, vol. 31(C), pages 723-733.
    7. Castelló-Climent, Amparo & Mukhopadhyay, Abhiroop, 2013. "Mass education or a minority well educated elite in the process of growth: The case of India," Journal of Development Economics, Elsevier, vol. 105(C), pages 303-320.
    8. Dani Rodrik & Arvind Subramanian, 2005. "From "Hindu Growth" to Productivity Surge: The Mystery of the Indian Growth Transition," IMF Staff Papers, Palgrave Macmillan, vol. 52(2), pages 193-228, September.
    9. Dani Rodrik, 2010. "Diagnostics before Prescription," Journal of Economic Perspectives, American Economic Association, vol. 24(3), pages 33-44, Summer.
    10. Robert E. Baldwin, 2004. "Openness and Growth: What's the Empirical Relationship?," NBER Chapters, in: Challenges to Globalization: Analyzing the Economics, pages 499-521, National Bureau of Economic Research, Inc.
    11. Richard Grabowski & Michael P. Shields, 2000. "A Dynamic, Keynesian Model of Development," Journal of Economic Development, Chung-Ang Unviersity, Department of Economics, vol. 25(1), pages 1-15, June.
    12. de Vries, Gaaitzen J. & Erumban, Abdul A. & Timmer, Marcel P. & Voskoboynikov, Ilya & Wu, Harry X., 2012. "Deconstructing the BRICs: Structural transformation and aggregate productivity growth," Journal of Comparative Economics, Elsevier, vol. 40(2), pages 211-227.
    13. Singh, Nirvikar, 2008. "India’s Development Strategy: Accidents, Design and Replicability," MPRA Paper 12453, University Library of Munich, Germany.
    14. Amartya Lahiri & Kei-Mu Yi, 2009. "A Tale of Two States: Maharashtra and West Bengal," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 12(3), pages 523-542, July.
    15. Dibyendu Maiti & Sugata Marjit, 2009. "Regional Openness, Income Growth And Disparity Across Major Indian States During 1980-2004," Development Economics Working Papers 22927, East Asian Bureau of Economic Research.
    16. Wei Li & Taye Mengistae & Lixin Colin Xu, 2011. "Diagnosing Development Bottlenecks: China and India," Oxford Bulletin of Economics and Statistics, Department of Economics, University of Oxford, vol. 73, pages 722-752, December.
    17. repec:dgr:rugggd:gd-121 is not listed on IDEAS
    18. Mukherjee, Subhadip & Chanda, Rupa, 2017. "Differential effects of trade openness on Indian manufacturing firms," Economic Modelling, Elsevier, vol. 61(C), pages 273-292.
    19. Aida Caldera Sánchez & Filippo Gori, 2016. "Can Reforms Promoting Growth Increase Financial Fragility?: An Empirical Assessment," OECD Economics Department Working Papers 1340, OECD Publishing.
    20. Shahbaz, Muhammad, 2012. "Does trade openness affect long run growth? Cointegration, causality and forecast error variance decomposition tests for Pakistan," Economic Modelling, Elsevier, vol. 29(6), pages 2325-2339.
    21. Peter Blair Henry, 2007. "Capital Account Liberalization: Theory, Evidence, and Speculation," Journal of Economic Literature, American Economic Association, vol. 45(4), pages 887-935, December.

    More about this item

    Keywords

    License Quota. Labor Laws. Price Change and Factor Substitution. Credit Constraints. Intermediate Inputs. Distortions and Productivity Growth;

    JEL classification:

    • J08 - Labor and Demographic Economics - - General - - - Labor Economics Policies
    • C43 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods: Special Topics - - - Index Numbers and Aggregation
    • L6 - Industrial Organization - - Industry Studies: Manufacturing
    • D45 - Microeconomics - - Market Structure, Pricing, and Design - - - Rationing; Licensing
    • D24 - Microeconomics - - Production and Organizations - - - Production; Cost; Capital; Capital, Total Factor, and Multifactor Productivity; Capacity
    • O4 - Economic Development, Innovation, Technological Change, and Growth - - Economic Growth and Aggregate Productivity
    • B41 - Schools of Economic Thought and Methodology - - Economic Methodology - - - Economic Methodology

    NEP fields

    This paper has been announced in the following NEP Reports:

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:pra:mprapa:14481. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Joachim Winter (email available below). General contact details of provider: https://edirc.repec.org/data/vfmunde.html .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.