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Big Reforms but Small Payoffs: Explaining the Weak Record of Growth in Indian Manufacturing Poonam Gupta, Rana Hasan and Utsav Kumar India Policy Forum 2008 Brookings and NCAER. Issue. India undertook major reforms starting mid to late 1980s Reforms mostly focused on the manufacturing sector

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Big Reforms but Small Payoffs: Explaining the Weak Record of Growth in Indian ManufacturingPoonam Gupta, Rana Hasan and Utsav KumarIndia Policy Forum 2008Brookings and NCAER

  • India undertook major reforms starting mid to late 1980s
  • Reforms mostly focused on the manufacturing sector
  • Yet growth and hence employment generation in manufacturing did not accelerate.
  • On the contrary services sector has picked up impressively.
what could be the potential factors
What could be the potential factors?
  • Several eminent observers have pointed out the importance of the following constraints.
  • Labor laws: Krueger 2007; Panagariya 2006; Panagariya 2008
  • Financing Constraints: Banerjee and Duflo 2004; Nagaraj 2005
  • Infrastructural deficiencies: Krueger 2007, Kumar and Sen Gupta 2007
  • Implementation lags at the state level
empirical literature and existing evidence
Empirical literature and existing evidence
  • Papers have looked at the impact of labor laws but not other constraints: Besley and Burgess; Aghion, Burgess, Redding, and Zilibotti (BB, ABRZ)
  • BB and ABRZ use ASI data till 1998; find that the labor regulations affect industrial performance, determine gains from reforms (delicensing)
  • Their labor regulation variable has been criticized (Bhattacharjea).
what do we do
What do we do?
  • Exploit variation at state level to see whether differences in LMR, PMR, Infrastructure and financial sector are associated with differential performance of the industrial sector post delicensing.
  • Look at the performance across industries: does poor performance of certain industries imply anything about the lack of a particular input?

3. Finally address the labor market issue by considering an alternative coding of LMR across states and by looking at the interaction of LMR and labor intensive industries


yist = αis dis + βst dst+ θi trendi

+ γ (delicensingit )

+ δ (industry characteristici * delicensingit) + π (state characteristics * delicensingit)

+ τ (state characteristics * industry characteristic i * delicensingit)

+ μ other controls + εist

key data series
Key data series

Three digit ASI data from 1980-2004 at state level

Industry level: Labor Intensity, Infrastructure Dependence of Industries

Used different data sources; data for an earlier period; as indices and as dummies- results are robust

key data series contd
Key data series contd.

State Level

Labor Market Regulation

Product Market Regulation


Financial sector

key data series concluded
Key data series concluded

Labor market regulation:

Take various measures: BB, Ahsan and Pages, OECD, Bhattacharjea (2008)

Since many different measures, look for common trends across studies—where conflict we use what the majority of the papers say

robustness tests
Robustness tests

Potential Outliers: tobacco, petroleum

Alternative LMR indices

Alternative series for industry characteristics

Omitted variables

Limiting the data to 1998 (when the sampling frame used in ASI changed)

summary of results
Summary of results….
  • Post-delicensing:industries dependent on infrastructure, dependent on the financial sector and the labor intensive industries have grown less--infrastructure, financial sector imperfections, labor regulations are emerging as bottlenecks on growth?
  • Post-delicensing: states with more developed infrastructure, and financial sector have grown faster.
  • States with business friendly regulatory environment have grown faster.
summary of results1
Summary of results….

Labor Intensive Industries have grown slowly, particularly in states with pro labor regulations.

Employment generation has been slower in states with pro labor regulations

Going back to the title of the paperwhat explains the weak record of growth and employment in Indian manufacturing?
  • Labor Laws, Product market regulations, Infrastructural deficiencies, Financial sector weaknesses
  • It seems that everything matters! Does it dilute the message?
  • Unfortunately we cannot prioritize or compare quantitatively the effect of each of these factors
caveats and limitations
Caveats and Limitations
  • We only look at registered manufacturing (formal sector) in the paper
  • We do not consider the dismantling of the policy of reserving particular industries for production by the small-scale sector
  • regulations can affect firms and industries in many different ways: operate in the informal sector, size, or adopt particular types of techniques
summarizing the results that we could not include in the paper
Summarizing the results that we could not include in the paper
  • Size of the Indian Firms is smaller as compared to China
  • Labor intensity of Indian industries is less than that of Chinese Industries and the gap is increasing overtime—