India's industrial sector growth has faltered in recent decades. While services have grown to become over 50% of GDP, industry growth has lagged behind. Several economic reforms in the 1990s aimed to liberalize industry by reducing licensing, opening trade and FDI, but research finds mixed effects. Fully realizing India's growth potential of 9-10% annually may require further reforms to remove barriers to capital investment and land acquisition for industry. However, Indian leadership priorities social equity over growth unlike the more autocratic pro-business model in China.

1. India’s Industrial Sector:
Faltering Growth?
Barry Bosworth

2. Composition of India’s GDP, 1990-2011
% GDP
60 60
50 Services 50
40 40
Agriculture
30 30
20 20
Industry
10 10
0 0
1990 1995 2000 2005 2010

3. Composition of China’s GDP, 1990-2011,
%GDP
60 60
Industry
50 50
40 40
Services
30 30
20 20
Agriculture
10 10
0 0
1990 1995 2000 2005 2010

4. Merchandize Trade Share of GDP,
1990-2011
30
25
20 Imports
Percent
15
10
Exports
5
0
1990 1995 2000 2005 2010

5. Multilateral Exchange Rates for India
300
250
200
150
100
50
0
1970 1975 1980 1985 1990 1995 2000 2005 2010
India Real India nominal

6. China Growth Model
 A typical East Asian developmental process. A
growth-oriented autocratic pro-business
regime targets
 Investment & export-driven growth
 Suppress labor regime
 financial repression, and
 industrial policies.
 Added feature of control over land acquisition
and utilization.

7. India Cannot Just Mimic China
 The opposite of an authoritarian regime
 Chaotic democracy
 Much greater focus on social equity
 Promotion of labor-proletariat
 Private ownership of land
 Comparable in ability to increase rates of
saving and investment.
 Will need to develop and refine its own
India model

8. Suppression of Industrial Sector
 The weak performance of the industrial
sector has long been associated with the
restrictive regulatory regime of industrial
licensing, labor regulations, and limitations on
India’s economic relations with the rest of
world.
 Past shortage of research on the economic
effects of regulatory reform has been offset
by a flood of recent research.

9. Evaluating Economic Reforms In the
Industrial Sector.
 Major Reforms
 Industrial licensing
 Labor regulation
 Trade and FDI
 Analyses largely based on ASI panel data
 Aghion & others (2008)
 State specific panel data for manufacturing 1980-97
 De-licensing had strong differential effects shifting
production toward states with less employment
protection.

10. Effects of Economic Reform(2)
 Harrison, Martin, and Nataraj (2011)
 Emphasize role of trade and FDI liberalization
 Small role for de-licensing
 Distinguish between within and among firm
productivity gains.
 Bollard, Klenow, and Sharma (2012)
 Large acceleration of TFP growth in 1990s
 Unrelated to trade, FDI or de-licensing
 Concentrated in within-firm gains

11. Effects of Economic Reform (3)
 AV Chari (2011)
 Reductions in barriers to entry and size restrictions in
mid-1980s both had significant positive effects on total
factor productivity in 1985-1991.
 Overall gain in TFP of 22 percent
 Laura Alfaro and Anusha Chari (2012)
 Use Prowess database (publically-listed companies)
 1991 reforms led to substantial new entry of small
firms, and continuing domination by large firms.

12. Effects of Economic Reform (4)
 Dougherty, Robles, and Krishna (2011)
 Focused on labor market rigidities
 New measure of Employment Protection (EPL)
 Evidence that lower state values of EPL promoted
output and productivity gains in labor-intensive
volatile industries.
 Addresses some criticisms of Besley & Burgess

13. Effects of Economic Reform (5)
 Topalova and Khandelwa (2011)
 Positive effects of trade liberalization on
manufacturing productivity.
 Traced to gains from increased competition and
 better quality purchased inputs.
 The effect was strongest in import-competing
industries and industries not subject to excessive
domestic regulation.
 Research based on Prowess database.

14. Overview of Effects of
Economic Reform
 Most studies find statistically-significant
effects of regulation
 Exception of Bollard, Klenow, and Sharma
 But magnitudes of effects are too small to
account for lack of growth.
 Perhaps, the problem can be traced to
cumulative effects of the various parts of the
regulator regime.
 Answers seem unsatisfactory.

15. Overview of Effects of
Economic Reform (2)
 Significant differences in construction of data.
 Bollard, Klenow, and Sharma show much larger
acceleration of output and thus productivity after
1992–2-3 times the acceleration in the national
accounts–due to different price indexes.
 Alfaro and Chari appear not to adjust for prices.
 Macroeconomic evidence of benefits of de-
regulation more evident after revisions of
national account
 Virmani&Hashim (2011) argues for lags in response to
reforms.

16. Growth Potential
 India faces no population constraint on growth
 Huge reserve of under-employed persons
 Low female participation rate
 Demographic acceleration in proportion of young
adults
 Limits arise from shortage of capital, skill levels,
and development of markets.
 Saving rate of 30-35 percent of GDP would
enable a growth rate near 10 percent.

17. Saving and Investment Balance of India,
1970-2008
1970-79 1980-89 1990-99 2000-04 2005-09
Gross national saving 17.2 19.1 23.3 27.5 34.3
Household sector 11.5 13.6 17.9 23.2 23.0
Private corporate sector 1.5 1.8 3.8 4.4 8.2
Public sector 4.2 3.7 1.6 -0.2 3.1
External Investment (S-I) -0.1 -1.4 -1.4 0.5 -1.5
Total capital formation 17.4 20.9 24.7 27.0 35.8
Public sector 8.6 10.6 8.5 7.0 8.7
Private corporate sector 2.6 4.5 7.5 6.6 14.3
Household sector 6.9 6.8 7.8 12.7 11.9

18. Growth Potential (2)
 Virmani (2012) suggests a potential growth
rate of 9-10%
 Barriers
 Weak global economy
 Economic growth is not a priority of Indian
leadership
 Most policy and the attention of researchers is
focused on problems of poverty and inequity, not
growth.
 Large contrast with China.
 Land