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2020 | Book

# Accelerators of India's Growth—Industry, Trade and Employment

## Festschrift in Honor of Bishwanath Goldar

Editors: Prof. Suresh Chand Aggarwal, Dr. Deb Kusum Das, Dr. Rashmi Banga

Publisher: Springer Singapore

Book Series : India Studies in Business and Economics

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This book offers a collection of distinguished contributions that identify current growth accelerators in India, and suggest policies and strategies to make India’s growth more sustainable and inclusive. The papers are divided into three sections, the first of which focuses on issues related to industrial growth in India. The discussions include India’s industrial development (manufacturing, construction and mining); role of manufacturing; global value chains; and of environment in industrial development. In turn, section II deals with issues related to trade and FDI as accelerators of India’s growth. The respective chapters explore the changing patterns of trade, impacts of technology, and spill-over effects of FDI, to name but a few. Lastly, the third section discusses employment-related issues like measurement of labour input, the dichotomy of the Indian labour market, the nature of firms and employment generation, and impacts of technology on employment. Given its scope and focus, the book offers an invaluable resource for researchers and policymakers alike.

#### India’s Industrial Growth: Opportunities and Challenges

##### Paradigm Changes in Technology and Employment
Abstract
N. S. Siddharthan
##### India’s Manufacturing Story: Productivity and Employment
Abstract
Services have been the driver of India’s overall growth since the onset of economic reforms in India and particularly beginning the 2000s. However, India’s manufacturing sector continues to draw attention despite several decades of reforms covering industrial policies and trade liberalization. The government through its several initiatives—National Manufacturing Policy as well as ‘Make in India’ program—continues to drive the sectors role in the overall growth and development. The sector is targeted to contribute around 25% of GDP by 2025 as against its current 16% share. In the recent past, Indian manufacturing has attained a sharp rise in growth and this augurs well for a sector that has seen stagnancy in its share of GDP in the last several decades. The lack of jobs in organized manufacturing has so far failed India’s industrial objectives and add to that is the large number of people employed in informal manufacturing activities as well has remained a perennial challenge to development needs. The productivity performance of manufacturing industries has been well documented and continues to exhibit low productivity growth. A recent study by Das et al. (The World Economy: Growth or Stagnation? Cambridge University Press, Cambridge, pp. 199–233, 2016) however finds labour-intensive manufacturing outperforming non-labour-intensive goods during the period 2000–15 and this is important when we have evidence of declining labour intensity even in labour-intensive manufacturing (Sen and Das in Economic and Political Weekly 50(23):108–115, 2015). Several challenges remain if productivity is to be improved. Most critics would point to the labour market rigidities for the inefficiency in the manufacturing sector, but there remains several issues beyond simple labour market reforms that need to be addressed—particularly those related to skill formation and its impact of labour quality. The present study would cover the manufacturing industries for the period 2000–2015 in an attempt to understand the productivity dynamics in manufacturing sector and its relation to employment. Using a neoclassical growth accounting technique and the India KLEMS dataset, we would examine the manufacturing performance both at the aggregate-level as well as 13 disaggregated industries and present an industry-level perspective on manufacturing performance. The period of study would also take into account the several phases of the Indian economy including pre-global slowdown, slowdown and recovery phase. The study would address some of the possible determinants of manufacturing performance which need attention if the stagnancy of manufacturing share in overall GDP is to be reversed.
Pilu Chandra Das, Deb Kusum Das
##### An Analysis of Global Value Chain Incomes in Indian Industries
Abstract
The importance of using measures of global value chains to understand the participation of countries in global trade has increased in recent years, as the fragmentation of production accelerated globally. This paper provides estimates of foreign content in domestic production in Indian industries, Indian content in the production of global industries, and the reliance of income generated in Indian industries on foreign demand. In general, India’s participation in GVC is relatively lower than in many other countries, yet it is improving. We find that the expansion of India’s manufacturing, and to some extent, market services sectors increase demand for output from upstream sectors in foreign countries that produce intermediate inputs used in the downstream sectors in India. We also see that Indian content is relatively the highest in global textile production, but its contribution to India’s GDP by means of value chain income is not the highest and has declined over the years. We also provide some initial evidence that the relationship between India’s participation in the GVC and sectoral productivity level is positive, which suggests the importance of intensifying India’s participation in the GVC.
Abdul A. Erumban
##### The Political Economy of the Allocation of State Government Expenditures for the Industrial Sector
Abstract
We investigate why some governments do not institute public policy conducive to industrialization from the viewpoint of the balance of political power between the agricultural and industrial sectors. More specifically, we examine whether a higher rural Gini coefficient—a proxy for the degree of political power of rural elites—tends to reduce the allocation of development expenditures favorable to the industrial sector at the state level in India. Our estimation results suggest that both the rural Gini coefficient and the rural population share have significant negative coefficients. These results imply that the political influence of the agricultural sector can limit the allocation of expenditures conducive to industrialization, resulting in the stagnation of regional state economies.
Atsushi Kato, Atsushi Fukumi
##### Environment and Economic Development: An Analysis of Electricity Demand Projections for India
Abstract
Increase in electricity use widens economic opportunity to the population, improves social infrastructure, and increases productivity. In this study, we examine the relationship between economic growth and electricity consumption, and make projections of electricity demand based on evidence from international experience. Electricity consumption for high-income countries is 8834.3 Kwh per capita in 2014, while low- and middle-income countries on an average consume 1922.1 Kwh per capita electricity. India’s total (and per capita) electricity consumption is very low as compared to many high-income and transition economies. The study estimates the year in which India is expected to shift from lower middle-income economy category to upper middle-income economy category, and subsequently to high-income economy category, under three scenarios: pessimistic, BAU, and optimistic scenario. Results show that even under an optimistic scenario, India’s per capita electricity consumption is likely to be lower than the current average electricity consumption of high-income countries (7980 Kwh) when it crosses its high-income level, i.e., in 2038 under optimistic scenario. The study further discusses the policy reforms that have been initiated to enable a significant shift in the overall operations of the electricity sector and promoted energy efficiency, leading to an expansion in the infrastructure sector at a relatively lower environmental cost in the recent past and the way forward.
Purnamita Dasgupta, Chetana Chaudhuri

#### Role of Trade and FDI as India’s Growth Accelerators: Opportunities and Challenges

##### India’s Merchandise Exports in a Comparative Asian Perspective
Abstract
As part of a major economic reform program aimed at improving external competitiveness, India’s trade and exchange rate policies were liberalized and restructured since the early 1990s. The major reforms included (i) exchange rate reforms to remove anti-export bias, (ii) trade liberalization to induce resource allocation along the lines of comparative advantage, and (iii) liberalization of inward foreign direct investment (FDI). How did Indian exports respond to changes in the incentive structure engendered by the reforms and what are the emerging issues? This paper highlights some key empirical results and stylized facts pertaining to India’s merchandise (goods) exports. While India’s merchandise exports in dollar terms grew moderately at about 8.1% per year during the first decade of economic reforms (1993-2001), the second decade of reforms (2002-2011) stands apart for its strong growth rate of 21.3% per annum. Data for the more recent years, however, indicate that the value of exports plummeted from a peak of US$323 billion in 2014 to US$299 billion in 2017 with a negative annual growth rate of 1.9% per annum. Further, throughout the post-reform period, India’s imports have grown faster than exports resulting in increasing trade deficits in the merchandise account. Needless to say, the long-term solution to the problem of unsustainable current account deficit lies in ensuring that export growth keeps pace with import growth. The crucial question is: what type of policy interventions would help achieve faster export growth?. The answer, taking a cue from some recent studies, hinges on whether export performance is primarily driven by growth at the extensive margin (new trading relationships) or at the intensive margin (increase in trade of existing relationships). The intensive margin of a country’s export growth is attributable to its persistent export relationships—that is, exports of already exported products (old products) to already existing market destination for those products (old markets). Note that intensive margin growth can arise as a result of price growth, quantity growth, or both. The extensive margin refers to changes in the value of exports due to diversification of old products to new market destinations and/or due to the exports of new products. What has been the relative contribution of extensive and intensive margins to India’s export growth during the recent past? How does India’s performance compare with that of China? We argue that China’s high degree of specilisation in labour-intensive industries/product lines and its high export market penetration in traditional richer partner countries (particularly high income OECD countries) hold the key in understanding its superior export performance. India, by contrast, due to an idiosyncratic pattern of specialization in capital- and skill-intensive activities, has failed to exploit its export potential in high-income countries. The composition of Indian exports shows an anomaly in that, despite being a labor-abundant country, the fast growing exports from India are either skilled labor-intensive or capital-intensive. While the share of capital-intensive products increased consistently from about 32% in 2000 to nearly 53% in 2015, the share of unskilled labor-intensive products declined from about 30% to 17%. This type of specialization is an anomaly in a country like India with large pools of unskilled labor. Due to its idiosyncratic specialization, India has been locked out of the vertically integrated global supply chains in several manufacturing industries. It is almost tautological to state that export growth that is driven by capital- and skill-intensive industries cannot be sustained in a capital scarce but labor-abundant economy. The disproportionate bias of its export composition toward capital-and skill-intensive products has provided India with a comparative advantage in relatively poorer regions (such as Africa) but at the cost of losing market shares in the richer countries. Products from India with high technology and skill content are unlikely to make inroads into the quality conscious richer country markets. These products, however, enjoy a competitive advantage in the relatively poorer countries. At the same time, rich country markets provide a huge potential for labor-intensive exports from developing countries such as India. Thus, specialization out of traditional labor-intensive products implies a general loss of India’s export potential in advanced country markets. In the past, high-income OECD countries accounted for a major share of India’s export basket. However, their dominance has declined considerably over the last two decades. The aggregate share of these markets in India’s merchandise exports decreased from 58.2% in 1992 to 38.6% in 2015. On the other hand, India’s market share in low- and middle-income countries increased steadily from 18.4% in 1992 to 35.8% in 2015. For China, the share of high-income OECD countries increased sharply from 37.7% in 1992 to 62% in 2000 and then declined to 47.5% in 2015. China’s export market penetration in high-income OECD countries, despite some decline in the last decade, remains significantly higher than that of India. Contrary to the general perception, there exists a significant potential for India to expand and intensify its export relationships with the traditional developed country partners. However, this would necessitate greater participation in global value chains and a realignment of India’s specialization on the basis of its true comparative advantage in labor-intensive production processes and product lines.
C. Veeramani, Lakshmi Aerath
##### Digitalization and India’s Losing Export Competitiveness
Abstract
The digital revolution is rapidly transforming global manufacturing and trade, thereby altering export competitiveness of developing countries. This paper examines the impact of growing digitalization on India’s exports, using both sector- and firm-level analyses. At the sectoral level, the paper estimates the value added by digital services in India’s exports and compares it to its competitor countries, using Leontief’s decomposition and input–output data from the World Input-Output Dataset. At the firm level, the paper empirically estimates the impact of increasing digital assets on export intensity of Indian manufacturing firms in period 2000–2015, using panel data methodologies of system GMM and random effects Tobit. Results indicate that the value added by digital services in manufacturing exports of India is much lower than in other developing countries. A closer examination reveals that most of the value added by digital services is contributed to India’s exports of computer programming and telecommunication services, which together account for 88% of total value added contributed by DS to total exports. India is found to be losing competitiveness in some key traditional sectors, including tea, spices, clothing and leather, which are found to be less digitalised compared to other sectors. Firm-level empirical results confirm the important role of digitalization as driver of export competitiveness in Indian manufacturing firms. System GMM and Tobit results reveal that as the share of digital assets in overall plant and machinery increases in a firm, its export intensity rises and other things constant. There is thus a need for targeted policies and strategies for increasing digitalization of India’s exportable sectors, particularly of traditional exports like textiles and clothing and leather and leather products as these sectors generate large-scale employment for low-skilled workers.
Rashmi Banga, Karishma Banga
##### Firm-Level Productivity and Exports: The Case of Manufacturing Sector in India
Abstract
This study differentiates total factor productivity (TFP) between the exporting and non-exporting firms in manufacturing sector of India. We use data from the Centre for Monitoring Indian Economy (CMIE) from 2003 to 2015. For a better understanding of the productivity distribution, we create two subgroups of sample based on firm age and size. Moving away from parametric tests this study adopts non-parametric statistics in testing the hypothesis. Productivity levels are found to be higher for the exporting firms as compared to the non-exporting firm. Further, within the exporting firms, those with larger firm size have higher productivity compared to the smaller firms.
K. Narayanan, Santosh Kumar Sahu
##### FDI and Export Spillovers: A Case Study of India
Abstract
Using a panel dataset on Indian manufacturing firms from 1994 to 2010, the present study examines the export spillover effects from FDI on Indian manufacturing firms. FDI and its impact on Indian firms have drawn considerable attention during last two decades due to the surge of FDI in India since 2000s. Previous studies have shown that India did not seem to draw any positive benefit from FDI in terms of productivity. However, the impact of FDI spillovers on export performance is relatively less explored. Theory says that export performance of firms is highly influenced by the diffusion of information, knowledge and technology brought by the foreign firms. These above-mentioned channels are referred as information spillovers, competition spillovers, imitation spillovers and skill spillovers which are various channels of horizontal spillovers that influence export performance. Competition, imitation and skill spillovers are called induced export spillover effects as they promote export performance of the domestic firms by improving productivity. A study by Antras and Helpman (2004) argues that the highest productive firms are firms which serve the international market, while the lowest productive firms stay in the domestic market. On the other hand, information spillover induces export performance by reducing the sunk cost associated export activities keeping productivity intact. In this paper, we specifically focus on the horizontal export spillover channels. A very early study by Kumar and Siddharthan (1994) did not find any significant difference in export activities of domestic and foreign firms during the restrictive policy regime. However, recent studies, for example, Joseph and Reddy (2009), Franco and Sasidharan (2010) have shown a significant positive impact of FDI on export performance of the Indian firms. While Joseph and Reddy (2009) took into account both horizontal and vertical export spillover channels, Franco and Sasidharan (2010) is a detailed study of horizontal export spillover channels and their impact on export performance of Indian manufacturing firms. The study showed that the firms with higher R&D capability are in general more benefitted from FDI spillovers as compared to non-R&D firms. The present study is divided into two parts: in the first part, we focus on the FDI spillover effects on the export performance of the domestic firms. While we mention “export performance” of the firms, we refer to two activities: first, whether the decision of the non-exporter firms change and second, how export propensity of the self-selected exporting firms gets influenced by foreign activities. Thus, for the econometric analysis, we use Heckman selection (2 Step) method where the firms self-select themselves as exporters. Our study brings out interesting results. The study does not find any significant positive impact from foreign firms’ domestic activities or export activities unlike previous studies (Franco and Sasidharan 2010). The “export-platform” theory mentioned in Ruane and Sutherland (2005) seems to be prevalent in the case of Indian manufacturing sector. Export activity of the foreign firms not only reduces the export propensity of the domestic firms, it also hinders the decision of the non-export domestic firms to become exporters. Competition spillovers from foreign firms, measured in terms of their domestic sales, show a significant negative impact on the export propensity of the domestic firms. In fact, we find negative impact of skill spillovers on the domestic export activities. Domestic R&D activities by foreign firms remain insignificant throughout. With these results one question followed, is this outcome mainly driven by the initial periods of liberalisation? As spillover theory says, domestic firms take few years to adjust to the new environment and during that period, domestic firms evolve themselves to take advantages from foreign activities. Therefore, the study looked into FDI spillover effects during these sub-periods. Thus, in the second part of the study, we separate the period into two sub-periods: 1994–2001 and 2002–2010 since, in the second period, the Indian manufacturing sector showed huge FDI inflows. We find that export performances of the domestic firms are significantly hurt by the foreign activities during 2002–2010. The FDI spillover results in the first half of the study period mostly remain insignificant due to low foreign presence. Except R&D spillovers, all other spillover variables show significant negative effect on export propensity of the domestic firms during 2002–2010. It seems that exporting foreign firms were reluctant to share their knowledge about international markets with their domestic competitors. Along with the spillover variables, we have taken into consideration various firm-specific characteristics, for example, capital–labour ratio, R&D activity, import of technology, import of raw material and size of the firms as major indicators which influence export performance of the domestic firms. Among the firm variables, import of raw materials and internal R&D activities showed a significant influence on domestic export performance. It is interesting to mention that internal R&D activities influence export decisions of the domestic firms but not their export propensity. Export performance of the Indian manufacturing firms is significantly hindered by use of imported technology or higher capital–labour ratio. It can be argued that domestic export basket is dominated by the low-technology-intensive products, and therefore use of technology does not help these firms.
Sanghita Mondal, Manoj Pant
Abstract
Isha Chawla

#### Growth Accompanied with Employment Generation: Challenges and Way Forward

##### Informal Sector in National Accounts Estimation: Importance of Workforce and Productivity
Abstract
Estimating value added in the informal sector is a challenge to official statisticians. By the very nature of the sector, these are enterprises which have no regular record of activities, books of accounts, and times even place of work. The estimation of value added for such entities reflects one of the great achievements of Indian statisticians. Typically this has been done by combining data collected from NSS sample surveys of households, household enterprises, and the population census. All of these have been done at regular intervals in India. The typical perception about these entities has been that they function on the margins with little or no change in production organisation or technology. However, sample survey data in recent years has been hinting at significant changes in the way these enterprises carry out production. In this connection understanding the contribution of the different types of workers engaged in these activities is central to calculating their value added. This paper reviews the changes introduced in the methodology of calculating value added in the Informal sector in the 2011–12 base revision.
T. C. A. Anant
##### Who Creates Large Number of Good Jobs in India’s Organized Manufacturing? Small Versus Large and Start-Ups Versus Old
Abstract
Manufacturing sector is important for India to meet its growing domestic demand for non-agriculture goods and thus, it assumes top priority to overcome the trade deficit. Within manufacturing, the organized component is of special importance because of its high levels of productivity, competitiveness and the potentiality to create quality or ‘decent’ jobs. These arguments reiterate by suggesting that manufacturing sector bears the highest responsibility in reaping the demographic dividend. The present study proposes to revisit the issue of assessing the manufacturing sector’s employment potential. The criteria used are size of employment, its growth, quality (regular/contract, wages) and sustainability (diversification/concentration of jobs, and vulnerability to business cycles) of employment. Using these criteria, we prepare a scorecard of manufacturing firms by age and size class so that the deficiencies are identified in order to offer future directives for appropriate policy planning. Based on the preliminary observations from the unit-level data of the Annual Survey of Industries (pertaining to organized manufacturing sector in India.) for the years 2011 and 2012 the following remarks are made: The first observation is that the missing middle as highlighted in the literature has witnessed an increase in the employment share after liberalization. The employment shares of small and large have been more or less constant, while the share of ultra-large firms has declined. In addition, it is the young firms which employ a large proportion of the workers in the total organized manufacturing in India, and employment share declines as firms grow old. Second, it is the medium and large young plants, which create most of new jobs in organized manufacturing in India. Most of the jobs are destroyed in the plants in the age of 11–25 and the contribution of start-ups in the creation of new jobs is very low. Third, the intensity of contract workers is much higher in medium and ultra-large factories, lower in small and lowest in large factories. Among young factories, it is medium and ultra-large factories that employ contract workers even more than half of their total workers. The intensity of contract workers is found lowest in start-ups, which peaks when plant is young and declines thereafter with an increase in age of the factory up to 20 years. Further, the wages are reported to be highest in start-ups, then decline as plants grow young and they are lowest in the older plants. However, beyond 10 years of age, wage increases as the factory gets older. Fourth, the employment is most diversified in medium-sized plants followed by small and large plants. It is most concentrated in the ultra-large plants. Further, the highest concentration of employment is observed in the start-ups. The diversity tends to rise as the plant gets older. In addition, the share of export rises with the increase in the plant size which also shows vulnerability to business cycles. However, no such trend is witnessed in the share of export by age group. The vulnerability is observed to be lowest for start-ups and the oldest plants (26 plus) while it is on the higher side for the older plants. In brief, it is the young middle and large plants which not only account for most of the existing employment in the organized manufacturing but also create most of the new jobs in the organized manufacturing sector in India. These jobs are although relatively low in quality in terms of contract intensity, wages paid by young firms are relatively better. This group is also generating sustainable jobs as the diversity of jobs in this segment is high and vulnerability to business cycle is also relatively low. In view of these observations, it is suggested that the policy for promoting employment in organized manufacturing in India should focus on the most dynamic group, i.e., middle-sized young factories, to generate largest number of new and sustainable jobs.
Jitender Singh, Arup Mitra
##### Increasing Dualism in Indian Wage Labour Market
Abstract
The patterns of globalization and changes in technology have profound impact on status of labour. The labour market in developing countries like India has been multifaceted—influenced by regional diversity, differences in rural/urban locations, status of workers, education and skill level, caste and religion, industry and institutional basis of labour regulation, etc. In India, the share of regular job holders (often considered as better jobs) has increased in this millennium. These increments in regular jobs are mostly of contractual or informal types, which share several common characteristics with casual workers. The growing trend is narrowing of differences between regular and casual jobs, which may be due to faster growth of casual wages compared to regular. This may be originating from increasing demand of casual work in non-agricultural activities particularly in the construction sector. In addition, the increasing incidence of migration for work both short-term and long-run may have also led to narrowing the wage differential between regular and casual labour. The wage labour market is becoming dichotomous—with two poles, one with high end well paid regular workers and another with low paid informal regular/contractual/casual workers. In this context, there is need to understand how and what factors are responsible for this emerging dichotomy in Indian wage labour market. This paper will unravel the factors and attempt to understand the phenomenon through the latest available data and information.
Sandip Sarkar, Balwant Singh Mehta
##### Technology, Jobs and Inequality: Evidence from India’s Manufacturing Sector
Abstract
Faced with easier access to foreign technology and imported capital goods, firms in India’s organized manufacturing sector adopted advanced techniques of production leading to increasing automation and a rise in the capital intensity of production. This has raised much concern about the ability of the manufacturing sector to create jobs for India’s rapidly rising largely low-skilled and unskilled workforce. However, what has attracted less attention in the literature is the impact of capital-augmenting technological progress on the distribution of income and wage inequality. This paper attempts to fill this gap using enterprise-level data from the Annual Survey of Industries. We find that with growing capital intensity of production, the role of labour vis-à-vis capital has declined. The share of total emoluments paid to labour fell from 28.6 to 17.4% of gross value added (GVA) between 2000–2001 and 2011–2012, while, the share of wages to workers in GVA declined from 22.2 to 14.3%. Importantly, even within the working class, inequalities have increased. The share of skilled labour (supervisory and managerial staff) in the wage pie rose from 26.1 to 35.8%, while, that of unskilled labour (production workers) fell from 57.6 to 48.8% of total wage bill. However, it is not just the growth of capital intensity but another important, though independent change in the labour market (i.e. the rising share of contract workers) that explains rising inequality. Our results also underline the existence of capital-skill complementarity: firms with higher capital intensity employed a higher share of skilled workers and the wage differential between skilled and unskilled workers was higher in these firms.
##### Skills, Productivity and Employment: An Empirical Analysis of Selected Countries
Abstract
Suresh Chand Aggarwal
Title
Accelerators of India's Growth—Industry, Trade and Employment
Editors
Prof. Suresh Chand Aggarwal
Dr. Deb Kusum Das
Dr. Rashmi Banga