Trade Policy, Trade Policy, Inequality and Inequality and Performance in Performance in

Indian Indian ManufacturingManufacturingKunal SenKunal Sen

IDPM, University of IDPM, University of ManchesterManchester

DOES TRADE REFORMS LEAD TO DOES TRADE REFORMS LEAD TO BETTER EFFICIENCY BETTER EFFICIENCY

OUTCOMES?OUTCOMES? The relationship between trade policy and economic The relationship between trade policy and economic

performance is one of the oldest controversies in performance is one of the oldest controversies in economic development. economic development.

Do trade reforms lead to clear benefits in terms of Do trade reforms lead to clear benefits in terms of higher economic growth and better economic higher economic growth and better economic performance. performance.

An influential view has concluded that countries with An influential view has concluded that countries with a more open trade orientation have tended to growth a more open trade orientation have tended to growth faster through time. faster through time.

This view has been contested by others who have This view has been contested by others who have argued that there is little systematic evidence linking argued that there is little systematic evidence linking inward orientation and growth, and that the evidence inward orientation and growth, and that the evidence linking outward orientation and growth has linking outward orientation and growth has overstated the relationship between the two. overstated the relationship between the two.

DOES TRADE REFORMS LEAD TO DOES TRADE REFORMS LEAD TO BETTER EQUITY OUTCOMES?BETTER EQUITY OUTCOMES?

Considerable debate on whether international Considerable debate on whether international trade can be a powerful positive force in the trade can be a powerful positive force in the reduction of poverty and inequality in reduction of poverty and inequality in developing countries by creating jobs, developing countries by creating jobs, especially for unskilled workers, and by especially for unskilled workers, and by reducing the inequality between workers of reducing the inequality between workers of different skills and educational levels, and different skills and educational levels, and between different regions in the same country. between different regions in the same country.

There have been concerns that trade reforms There have been concerns that trade reforms can, on the contrary, lead to job destruction can, on the contrary, lead to job destruction and higher wage inequality in developing and higher wage inequality in developing countries and that greater open-ness can countries and that greater open-ness can exacerbate the inequality between regions in a exacerbate the inequality between regions in a country. country.

THE INDIAN THE INDIAN EXPERIENCEEXPERIENCE

In the middle of the 1970s, the trade regime In the middle of the 1970s, the trade regime pertaining to the Indian manufacturing sector was pertaining to the Indian manufacturing sector was one of the most restrictive in the world. one of the most restrictive in the world.

It is widely recognised that the policy regime was a It is widely recognised that the policy regime was a key contributing factor to the industrial stagnation key contributing factor to the industrial stagnation observed in the Indian economy, especially from observed in the Indian economy, especially from 1966 to 1980, though the policies towards self-1966 to 1980, though the policies towards self-reliance led to a diversified industrial base.reliance led to a diversified industrial base.

A process of gradual reform was initiated in the A process of gradual reform was initiated in the late 1970s, quickened in pace in the 1980s, late 1970s, quickened in pace in the 1980s, culminating in 1991 in a radical set of reforms that culminating in 1991 in a radical set of reforms that dismantled much of the import licensing system. dismantled much of the import licensing system.

STRUCTURE OF BOOKSTRUCTURE OF BOOK 1. Trade Policy, Inequality and Performance – 1. Trade Policy, Inequality and Performance –

The Key Analytical Issues The Key Analytical Issues 2. Trade Policy in India2. Trade Policy in India 3. Growth and Structural Change in Indian 3. Growth and Structural Change in Indian

Manufacturing, 1975-1999 Manufacturing, 1975-1999 4. Trade Policy and Economic Growth4. Trade Policy and Economic Growth 5. Trade Policy, Productivity and Prices5. Trade Policy, Productivity and Prices 6. International Trade and Employment6. International Trade and Employment 7. Trade Policy and Wage Inequality 7. Trade Policy and Wage Inequality 8. Trade Policy and Regional Inequality 8. Trade Policy and Regional Inequality 9. Conclusion 9. Conclusion

Some features of the Some features of the analysisanalysis

In the book, I study the effect of trade reforms on the In the book, I study the effect of trade reforms on the Indian Indian organised manufacturing sectororganised manufacturing sector from the from the mid 1970s to the late 1990s using mid 1970s to the late 1990s using industriesindustries as as units of analysisunits of analysis andand usingusing quantitativequantitative economic economic methods. methods.

For the industry-level analysis, we use panel data For the industry-level analysis, we use panel data methods for a large number of industries for 25 years methods for a large number of industries for 25 years – typically we work with over 3500 observations. – typically we work with over 3500 observations.

Why manufacturing?Why manufacturing? Why the organised/formal segment of the Why the organised/formal segment of the

manufacturing sector?manufacturing sector? The Choice of the Time PeriodThe Choice of the Time Period Why Industries as Units of Analysis?Why Industries as Units of Analysis?

The Trade Policy RegimeThe Trade Policy Regime The import and exchange rate regime followed since The import and exchange rate regime followed since

independence was aimed at the comprehensive, direct control independence was aimed at the comprehensive, direct control over foreign exchange utilisation, with an overwhelming over foreign exchange utilisation, with an overwhelming reliance on quotas rather than tariffs.reliance on quotas rather than tariffs.

Beginning with the export-import policy of 1977-78, there was Beginning with the export-import policy of 1977-78, there was a slow but sustained relaxation of import controls. Several a slow but sustained relaxation of import controls. Several capital goods that were not allowed to be imported without an capital goods that were not allowed to be imported without an import license were steadily shifted to the Open General import license were steadily shifted to the Open General License category. License category.

The shift from quantitative import controls to a protective The shift from quantitative import controls to a protective system based on tariffs considerably quickened by the Rajiv system based on tariffs considerably quickened by the Rajiv Gandhi government in 1985.Gandhi government in 1985.

In 1991, as a part of the comprehensive economic reform In 1991, as a part of the comprehensive economic reform programme initiated that year, there was a significant programme initiated that year, there was a significant liberalization of the trade regime with respect to capital and liberalization of the trade regime with respect to capital and intermediate goods. Import licensing was virtually abolished intermediate goods. Import licensing was virtually abolished with respect to the imports of most machinery and equipment with respect to the imports of most machinery and equipment and manufactured intermediate good. There was also a and manufactured intermediate good. There was also a significant cut in tariff rates.significant cut in tariff rates.

EFFECTIVE RATES OF PROTECTION BY SECTOR

1980-851986-90

1991-951996-00

Capital Goods

Intermediate Goods

Consumer Goods

0

20

40

60

80

100

120

140

160

ERP (per cent)

Year

Capital Goods

Intermediate Goods

Consumer Goods

IMPORT COVERAGE RATIO BY SECTOR

1980-851986-90

1991-951996-00

Capital Goods

Intermediate Goods

Consumer Goods

0

10

20

30

40

50

60

70

80

90

100

ICR (per cent)

Years

Capital Goods

Intermediate Goods

Consumer Goods

ASSESSING TRADE FLOWS

0

5

10

15

20

25

30

35

40

45

Year

Per

cen

t o

f G

DP

Exports + Imports of Goods & Services

Exports + Imports of Goods

MANUFACTURING EXPORTS + IMPORTS SHARE

0

10

20

30

40

50

60

70

80

90

1970

1971

1972

1973

1974

1975

1976

1977

1978

1979

1980

1981

1982

1983

1984

1985

1986

1987

1988

1989

1990

1991

1992

1993

1994

1995

1997

1998

1999

2000

2001

2002

2003

2004

Year

As

Pe

rce

nta

ge

of

To

tal

Me

rch

an

dis

e E

xp

ort

s/I

mp

ort

s

Mfg Exports

Mfg Imports

Manufacturing Trade Balance, India

-100

-50

0

50

100

150

200

Year

Millio

n R

up

ees

Trade Balance

GROWTH AND GROWTH AND TRANSFORMATION IN TRANSFORMATION IN

INDIAN INDUSTRYINDIAN INDUSTRY

High growth rates of real value added High growth rates of real value added at around 9 per cent per annum since at around 9 per cent per annum since the early 1980s.the early 1980s.

Accompanied by a shift in production Accompanied by a shift in production and employment structure from and employment structure from labour-intensive to capital-intensive labour-intensive to capital-intensive industries in the period 1975-1999.industries in the period 1975-1999.

Manufacturing Employment

0

1000

2000

3000

4000

5000

6000

7000

8000

9000

10000

1975 1976 1977 1978 1979 1980 1981 1982 1983 1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999

Year

In T

ho

usa

nd

s

Real Wages

0

20

40

60

80

100

120

140

160

180

1975 1976 1977 1978 1979 1980 1981 1982 1983 1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999

Year

Rea

l Wag

e (I

nd

ex)

Labour Productivity

0

50

100

150

200

250

300

350

1975 1976 1977 1978 1979 1980 1981 1982 1983 1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999

Year

Rea

l Val

ue

Ad

ded

per

Wo

rker

(In

dex

)

Number of Factories

Manufacturing Exports

Trade Policy and Economic Trade Policy and Economic GrowthGrowth

Estimating growth regressions, I find that trade Estimating growth regressions, I find that trade reforms that led to a lowering of the relative reforms that led to a lowering of the relative price of equipment investment (via the cuts in price of equipment investment (via the cuts in tariffs and NTBs of capital and intermediate tariffs and NTBs of capital and intermediate goods) had an unambiguous positive effect on goods) had an unambiguous positive effect on economic growth.economic growth.

The growth mechanism was: trade reforms => The growth mechanism was: trade reforms => lower price of equipment => higher private lower price of equipment => higher private investment in equipment => higher economic investment in equipment => higher economic growth.growth.

The reforms of the mid 1980s seem to have a The reforms of the mid 1980s seem to have a stronger growth effect that the reforms of the stronger growth effect that the reforms of the 1990s.1990s.

The Investment Rate and its Components

Total Private Fixed Investment and its Components

The Relative Price of Equipment

Trade Policy and Trade Policy and Productivity GrowthProductivity Growth

Trade reforms have had a positive effect Trade reforms have had a positive effect on total factor productivity growth by a on total factor productivity growth by a Paul Romer type ‘endogenous growth’ Paul Romer type ‘endogenous growth’ mechanisms where TFPG is positively mechanisms where TFPG is positively impacted by an increasing variety of impacted by an increasing variety of capital goods (the intuition comes from capital goods (the intuition comes from the Dixit-Stiglitz ‘love for variety’ utility the Dixit-Stiglitz ‘love for variety’ utility functions’). functions’).

Trade reforms of the 1980s and 1990s Trade reforms of the 1980s and 1990s allowed firms access to capital and allowed firms access to capital and intermediate goods from abroad.intermediate goods from abroad.

Increasing ‘varieties of capital goods’

Figure 3.9: Index of Intra-Industry Trade for Capital and Intermediate Goods, India

0

10

20

30

40

50

60

70

1975 1976 1977 1978 1979 1980 1981 1982 1983 1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997

Year

Ind

ex

Trade Policy and Domestic Trade Policy and Domestic Market PowerMarket Power

An increase in quantity competition An increase in quantity competition from abroad had a statistically from abroad had a statistically significant and negative impact on significant and negative impact on domestic market power, and in domestic market power, and in domestic prices. domestic prices.

However, the exchange rate However, the exchange rate depreciation of the mid 1980s to 1990s depreciation of the mid 1980s to 1990s may have had a countervailing effect on may have had a countervailing effect on domestic prices by providing more domestic prices by providing more protection for import-competing protection for import-competing sectors.sectors.

TRADE AND TRADE AND EMPLOYMENTEMPLOYMENT

FACTOR CONTENT APPROACHFACTOR CONTENT APPROACH GROWTH DECOMPOSITION GROWTH DECOMPOSITION

APPROACHAPPROACH LABOUR DEMAND MODELLINGLABOUR DEMAND MODELLING

TRADE – EMPLOYMENT: THE TRADE – EMPLOYMENT: THE LINKAGESLINKAGES

The overall level of manufacturing employment in an economy is by The overall level of manufacturing employment in an economy is by definition equal to the level of manufacturing output times the definition equal to the level of manufacturing output times the weighted average employment coefficient for the manufacturing weighted average employment coefficient for the manufacturing sector.sector.

L = Q.Σ w i (L/Q)iL = Q.Σ w i (L/Q)i (1)(1)where where L is total manufacturing employmentL is total manufacturing employment

Q is total manufacturing outputQ is total manufacturing outputw i = Qi/Qw i = Qi/Qi refers to branches of manufacturing.i refers to branches of manufacturing.The impact of trade on manufacturing employment can therefore be The impact of trade on manufacturing employment can therefore be

decomposed into three elements represented in Equation (1). decomposed into three elements represented in Equation (1). First, it may have an impact on the total output of the manufacturing First, it may have an impact on the total output of the manufacturing

sector (Q). sector (Q). Second, trade influences the shares of different industries in overall Second, trade influences the shares of different industries in overall

manufacturing output (w i), increasing the output of exportables and manufacturing output (w i), increasing the output of exportables and reducing output of import competing industries. reducing output of import competing industries.

Finally, trade can have an impact on employment by changing labour Finally, trade can have an impact on employment by changing labour coefficients within industries (L/Q)i. coefficients within industries (L/Q)i.

These three impacts can be referred to as the These three impacts can be referred to as the scalescale effect, effect, the the composition composition effect, and the effect, and the processprocess effect of trade. effect of trade.

Factor Content of India’s Manufacturing Exports

Factor Content of India's Exports

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

1975-80 1981-85 1986-90 1991-95 1996-99

Yea

rs

Percentage Share

Human Capital Intensive

Technology Intensive

Unskilled Labour Intensive

Mineral Resource Intensive

Agricultural Resource Intensive

Factor Content of India's Imports

0%

20%

40%

60%

80%

100%

1975-80 1981-85 1986-90 1991-95 1996-99

Years

Per

cen

tag

e sh

are

Human Capital Intensive

Technology Intensive

Unskilled Labour Intensive

Mineral Resource Intensive

Agricultural Resource Intensive

Employment Coefficients, Exports and Import-Competing Production, India

0

2

4

6

8

10

12

14

16

1975 1980 1985 1990 1995 1999

Year

Per

Mill

ion

Ru

pee

s

Exports

Import Competing

Contribution of Wearing Apparel to change in Employment Coefficient

19751980

19851990

19951999

Labour Coeff

Export Share

0

50

100

150

200

250

300

350

Index

Year

Labour Coeff

Export Share

Decomposition of Employment Changes

Total

Employment Effect

Domestic Demand

Productivity Growth

Export Growth

Import penetration

Net Employment Growth from

Trade Absolute Numbers (in thousands)

1975-1980 1122 1444 -263 5 -63 -59 1980-1985 -333 1898 -2227 76 -80 -4 1985-1990 639 1981 -1883 388 152 541 1990-1995 848 2034 -1687 655 -154 501 1995-1999 870 1935 -1154 15 75 90

Percentage Contribution 1975-1980 128.69 -23.47 0.43 -5.64 -5.22 1980-1985 -569.45 668.22 -22.83 24.06 1.23 1985-1990 310.08 -294.73 60.80 23.85 84.65 1990-1995 239.77 -198.87 77.23 -18.14 59.10 1995-1999 222.35 -132.65 1.69 8.60 10.30

Labour Demand Labour Demand ModellingModelling

We estimate dynamic labour demand We estimate dynamic labour demand functions using GMM methods using panel functions using GMM methods using panel data of 27 industries for 25 years. data of 27 industries for 25 years.

We augment the labour demand equation with We augment the labour demand equation with import penetration and export orientation import penetration and export orientation variables.variables.

We would expect that trade should lead to We would expect that trade should lead to employment reduction via increases in labour employment reduction via increases in labour productivity.productivity.

We do not find any support for this We do not find any support for this hypothesis.hypothesis.

Main findings on Main findings on employmentemployment

The three approaches show negligible The three approaches show negligible effects of trade on manufacturing effects of trade on manufacturing employment for India, whether directly or employment for India, whether directly or indirectly.indirectly.

Surprisingly, we find that the impact of Surprisingly, we find that the impact of international trade on manufacturing international trade on manufacturing employment in India mirrors the two African employment in India mirrors the two African countries for which we can undertake countries for which we can undertake comparisions rather than the two Asian countries comparisions rather than the two Asian countries (also see Sen, Is India following the footsteps of (also see Sen, Is India following the footsteps of Africa or Asia?, Review of Development Africa or Asia?, Review of Development Economics 2009 forthcoming).Economics 2009 forthcoming).

Trade Policy and Wage Trade Policy and Wage InequalityInequality

The main theoretical framework that guides research The main theoretical framework that guides research on the link between international trade and the labour on the link between international trade and the labour market is the one cone Heckscher-Ohlin (H-O) model. market is the one cone Heckscher-Ohlin (H-O) model.

This model predicts that increased trade between This model predicts that increased trade between developed and developing countries will lead to developed and developing countries will lead to decreasing decreasing wage inequality between these two groups wage inequality between these two groups of workers in developing countries. of workers in developing countries.

An alternate theoretical perspective has been An alternate theoretical perspective has been proposed by Adrian Wood who argues that proposed by Adrian Wood who argues that international trade may have adverse effects on the international trade may have adverse effects on the wages and employment of unskilled workers relative wages and employment of unskilled workers relative to skilled workers by bringing about skill biased to skilled workers by bringing about skill biased technological change that leads to a displacement of technological change that leads to a displacement of unskilled workersunskilled workers

Wage Inequality – Ratio of wage rate of non-production workers to the wage rate of production workers

Relative Employment of Non-production Workers in Indian

Manufacturing

Relationship between Unskilled Employment Growth and Skill

Intensity

Reduction in Effective Rates of Protection (ERP) between 1999 to 1980 and the Share

of Unskilled Workers in 1980

Main findings on wage Main findings on wage inequalityinequality

We find evidence of the validity of both theoretical We find evidence of the validity of both theoretical perspectives - Heckscher-Ohlin theory and trade induced perspectives - Heckscher-Ohlin theory and trade induced skilled biased technological progress - to explain the co-skilled biased technological progress - to explain the co-movement in wage inequality and relative skill intensity in movement in wage inequality and relative skill intensity in Indian manufacturing, with both variables increasing in Indian manufacturing, with both variables increasing in the 1990s. the 1990s.

Trade-induced technological progress has led to an Trade-induced technological progress has led to an increase in relative skill intensity and wage inequality increase in relative skill intensity and wage inequality withinwithin industries. industries.

At the same time, the decline in protection that seems to At the same time, the decline in protection that seems to have occurred more in unskilled labour intensive have occurred more in unskilled labour intensive industries has led to a relative fall in the economy-wide industries has led to a relative fall in the economy-wide return to unskilled labour relative to skilled labour, as return to unskilled labour relative to skilled labour, as predicted by H-O theory. predicted by H-O theory.

Trade reforms have led to a widening of wage gap Trade reforms have led to a widening of wage gap between skilled and unskilled workers, and an increase in between skilled and unskilled workers, and an increase in relative skill intensity in Indian manufacturing. relative skill intensity in Indian manufacturing.

Regional InequalityRegional Inequality We find that states in the Southern and Northern We find that states in the Southern and Northern

regions of the country have seen an expansion in regions of the country have seen an expansion in manufacturing employment and production while manufacturing employment and production while states in the Eastern and Western regions of the states in the Eastern and Western regions of the country have seen a decline in manufacturing country have seen a decline in manufacturing employment and production over the period 1979-employment and production over the period 1979-1997. 1997.

There does not appear to be a clear correlation There does not appear to be a clear correlation between geographical and agglomeration factors between geographical and agglomeration factors and spatial economic development – coastal states and spatial economic development – coastal states and states with large cities have not observed either and states with large cities have not observed either a significant increase or decrease in their shares of a significant increase or decrease in their shares of industrial employment and production over the industrial employment and production over the period under consideration.period under consideration.

Regional Inequality - 2Regional Inequality - 2 When examining the patterns of industrialisation by When examining the patterns of industrialisation by

individual states, we see a marked heterogeneity in individual states, we see a marked heterogeneity in industrial performance. industrial performance.

States like Andhra Pradesh and Tamil Nadu have seen States like Andhra Pradesh and Tamil Nadu have seen significant increases in manufacturing employment and significant increases in manufacturing employment and production. production.

In contrast, states like Maharashtra and West Bengal have In contrast, states like Maharashtra and West Bengal have seen a decline in industrial performance over time. seen a decline in industrial performance over time.

We also do not seem to see evidence of the manufacturing We also do not seem to see evidence of the manufacturing sector expanding in states with export-oriented industries sector expanding in states with export-oriented industries and declining in states with import-competing industries. and declining in states with import-competing industries.

We conclude that the institutional and business We conclude that the institutional and business environment rather than trade policy per se may have environment rather than trade policy per se may have played a crucial role in determining which states have played a crucial role in determining which states have done better in manufacturing performance relative to done better in manufacturing performance relative to other states.other states.

CONCLUSIONSCONCLUSIONS Trade reforms have had a significant positive impact on Trade reforms have had a significant positive impact on

efficiency in Indian manufacturing, following the reforms of the efficiency in Indian manufacturing, following the reforms of the 1980s and 1990s. 1980s and 1990s.

Economic reforms have had the desired positive effect on Indian Economic reforms have had the desired positive effect on Indian manufacturing performance, enabling the manufacturing sector manufacturing performance, enabling the manufacturing sector to break out of the stagnation witnessed in the pre-reform to break out of the stagnation witnessed in the pre-reform period. period.

At the same time, trade reforms have not had led to a At the same time, trade reforms have not had led to a significant change in the pattern of industrial growth towards significant change in the pattern of industrial growth towards labour-intensive commodities in which India had a comparative labour-intensive commodities in which India had a comparative advantage, given its favourable labour-land ratio. advantage, given its favourable labour-land ratio.

There has been weak employment effects, especially of the There has been weak employment effects, especially of the labour-intensive sector.labour-intensive sector.

The increase in wage inequality in the 1990s may have been due The increase in wage inequality in the 1990s may have been due to trade reforms.to trade reforms.

Thus, from the viewpoint of equity, India’s post-reform Thus, from the viewpoint of equity, India’s post-reform manufacturing performance has been disappointing. manufacturing performance has been disappointing.

POLICY IMPLICATIONS POLICY IMPLICATIONS – JOBLESS GROWTH– JOBLESS GROWTH International trade may have played an important International trade may have played an important

contributing role in explaining the phenomenon of contributing role in explaining the phenomenon of ‘‘jobless growthjobless growth’’ in Indian manufacturing observed in in Indian manufacturing observed in the 1980s and 1990s. the 1980s and 1990s.

Trade reforms have unambiguously increased Trade reforms have unambiguously increased economic growth since the early 1980s, but have not economic growth since the early 1980s, but have not similar positive effects on employment growth. similar positive effects on employment growth.

Why has this Why has this happened?happened? In contrast to the other labour-surplus economies in South Asia, In contrast to the other labour-surplus economies in South Asia,

India has built up India has built up ‘‘dynamic comparative advantagedynamic comparative advantage’’ in technology in technology intensive manufacturing commodities such as drugs and intensive manufacturing commodities such as drugs and pharmaceuticals.pharmaceuticals.

The capabilities that India has acquired in the technology-The capabilities that India has acquired in the technology-intensive sectors have been due in part to the large public intensive sectors have been due in part to the large public investment in science and technology institutions of higher investment in science and technology institutions of higher learning, and due in part to the learning, and due in part to the ‘‘infant industryinfant industry’’ protection protection that was provided to these industries at the early stages of that was provided to these industries at the early stages of development development

in spite of favourable unskilled labour to land ratios, India has not in spite of favourable unskilled labour to land ratios, India has not been able to export labour-intensive commodities to the same been able to export labour-intensive commodities to the same extent as China due to strong policy impediments still in place that extent as China due to strong policy impediments still in place that has constrained the growth of the labour-intensive manufacturing has constrained the growth of the labour-intensive manufacturing sector.sector.

Chief among these has been the presence of restrictive labour laws Chief among these has been the presence of restrictive labour laws (and small scale sector reservations in the early phase) that create a (and small scale sector reservations in the early phase) that create a strong disincentive for firms in the organised sector to expand in the strong disincentive for firms in the organised sector to expand in the face of a more volatile macroeconomic environment. face of a more volatile macroeconomic environment.

Policy Implication – Widening Policy Implication – Widening Disparities between regions Disparities between regions

With respect to the increase in regional disparities in With respect to the increase in regional disparities in manufacturing production and employment, it is clear manufacturing production and employment, it is clear that simplistic accounts of why such disparities have that simplistic accounts of why such disparities have occurred are not valid in the Indian context. occurred are not valid in the Indian context.

Unlike what we have observed in China, coastal regions Unlike what we have observed in China, coastal regions have not necessarily benefited since the reforms, nor have not necessarily benefited since the reforms, nor have regions with initial capabilities in manufacturing. have regions with initial capabilities in manufacturing.

What is perhaps been more significant in the evolution What is perhaps been more significant in the evolution of regional disparities has been the ability of some of regional disparities has been the ability of some state governments to provide a conducive environment state governments to provide a conducive environment for the manufacturing sector to expand. for the manufacturing sector to expand.

Thus, the relationship of the governments of these Thus, the relationship of the governments of these states with the business sector has been more critical states with the business sector has been more critical in explaining manufacturing performance in the states in explaining manufacturing performance in the states in question, rather than innate advantages borne out of in question, rather than innate advantages borne out of geography or history. geography or history.

Policy Implication – Policy Implication – Widening Wage Widening Wage InequalityInequality The solution to this problem lies in the The solution to this problem lies in the

increased supply of skilled workers to increased supply of skilled workers to IndiaIndia’’s manufacturing industries, so s manufacturing industries, so that the skill premium is driven down. that the skill premium is driven down.

Given the stateGiven the state’’s fiscal constraint in s fiscal constraint in expanding places in publicly funded expanding places in publicly funded universities and institutions, this can universities and institutions, this can come about with a more liberal come about with a more liberal attitude towards the involvement of attitude towards the involvement of the private sector in the provision of the private sector in the provision of vocational skills and in higher vocational skills and in higher education.education.

Finally, the role of Finally, the role of manufacturing in India’s manufacturing in India’s future economic growthfuture economic growth One surprising feature of IndiaOne surprising feature of India’’s recent growth s recent growth

experience has been that the manufacturing sector experience has been that the manufacturing sector has played less of a role in Indiahas played less of a role in India’’s economic growth as s economic growth as compared to the services sector. compared to the services sector.

It has been conjectured that India may leapfrog from It has been conjectured that India may leapfrog from an agriculture based economy to a service based an agriculture based economy to a service based economy, and that Indiaeconomy, and that India’’s future economic growth will s future economic growth will be fuelled by service sector growth. be fuelled by service sector growth.

While this may be true, there are reasons to be While this may be true, there are reasons to be cautious about such an optimistic scenario. cautious about such an optimistic scenario.

The component of the service sector that is growth The component of the service sector that is growth oriented is the export-oriented information technology oriented is the export-oriented information technology sector, which is significantly skilled labour intensive. sector, which is significantly skilled labour intensive.

Dualism in services is no Dualism in services is no different than dualism in different than dualism in manufacturingmanufacturing If the technology-enabled service If the technology-enabled service

sector is to be the engine of Indiasector is to be the engine of India’’s s future economic growth, the pattern of future economic growth, the pattern of such growth may not be different than such growth may not be different than the the ‘‘jobless growthjobless growth’’ phenomenon that phenomenon that has been observed in Indian has been observed in Indian manufacturing. manufacturing.

Therefore, it seems unavoidable that Therefore, it seems unavoidable that the unskilled labour intensive the unskilled labour intensive component of the manufacturing component of the manufacturing sector may still provide the best route sector may still provide the best route out of poverty for Indiaout of poverty for India’’s rural masses. s rural masses.

The preferred strategy for Indian policy-The preferred strategy for Indian policy-makers should be to encourage the makers should be to encourage the growth of Indiagrowth of India’’s manufacturing sector, s manufacturing sector, both in its skilled and unskilled both in its skilled and unskilled intensive componentsintensive components

Leapfrogging into a service sector Leapfrogging into a service sector economy may not be in Indiaeconomy may not be in India’’s interests, s interests, either from the viewpoints of efficiency either from the viewpoints of efficiency or equity.or equity.