Indian Manufacturing : A Slow Sector in a Rapidly Growing Economy

This paper investigates the determinants of productivity in Indian manufacturing industries during the period 1988-2000. Using two-digit industry level data for the Indian states, we find evidence of imperfect interindustry and interstate labor mobility as well as misallocation of resources across industries and states. Trade liberalization increases productivity in all industries across all states, and productivity is higher in the less protected industries. These effects of protection and trade liberalization are more pronounced in states that have relatively more flexible labor markets. Similar effects are also found in the case of employment, capital stock and investment. Furthermore, labor market flexibility, independent of other policies, has a positive effect on productivity. Importantly, per capita state development expenditure seems to be the strongest and the most robust predictor of productivity, employment, capital stock and investment. Industrial delicensing increases both labor productivity and employment but only in the states with flexible labor market institutions. Even after controlling for delicensing, the analysis shows that trade liberalization has a productivity-enhancing effect. Finally, trade liberalization benefits most the export-oriented industries located in states with flexible labor-market institutions.

Bibliographic Details

Main Authors:	Mitra, Devashish, Ural, Beyza P.
Language:	English
Published:	World Bank, Washington, DC 2007-05
Subjects:	ADVERSE IMPACT, AGGREGATE LEVEL, BILATERAL TRADE, BOOK VALUE, BUREAUCRATIC QUALITY, CAPITAL ACCUMULATION, CAPITAL GOODS, CAPITAL STOCK, CENTRAL PLANNING, COMPARATIVE ADVANTAGE, COMPETITIVENESS, CONSUMERS, CONTRACT LABOR, CURRENCY, DEBT, DEFLATORS, DEMAND CURVE, DEMOCRATIC PROCESSES, DEREGULATION, DEVALUATION, DISMISSAL, DIVISION OF LABOR, ECONOMIC AGENTS, ECONOMIC ENVIRONMENT, ECONOMIC GROWTH, ECONOMIC INSTITUTIONS, ECONOMIC PERFORMANCE, ECONOMIES OF SCALE, ELASTICITY, EMPLOYEE, EMPLOYMENT, EMPLOYMENT PERFORMANCE, ENTRY BARRIER, EXPENDITURE, EXPENDITURES, EXPORT INCENTIVES, EXPORT MARKETS, EXPORT-ORIENTED INDUSTRIES, EXPORTS, FACTOR RETURNS, FAIR, FINAL GOODS, FOREIGN DIRECT INVESTMENT, FOREIGN EXCHANGE, GDP, GOVERNMENT EXPENDITURE, GROSS OUTPUT, GROWTH LITERATURE, GROWTH MODELS, GROWTH RATE, GROWTH REGRESSIONS, HUMAN CAPITAL, IMPACT OF TRADE, IMPACT OF TRADE REFORMS, IMPORT PENETRATION, INCOME, INCOME LEVELS, INCREASE IN LABOR, INDUSTRIAL POLICY, INFLATION, INTERMEDIATE INPUTS, INTERNATIONAL TRADE, JOB SECURITY, LABOR CONTRACTS, LABOR DEMAND, LABOR DEMAND ELASTICITY, LABOR LAWS, LABOR MARKET, LABOR MARKET INSTITUTIONS, LABOR MARKETS, LABOR MOBILITY, LABOR PRODUCTIVITY, LABOR REALLOCATION, LABOR REGULATIONS, LAYOFF, LEVELS OF OUTPUT, LICENSING RESTRICTIONS, MACROECONOMIC CRISIS, MANUFACTURING INDUSTRIES, MARKET CONDITIONS, MARKET IMPERFECTIONS, MARKET RESTRICTIONS, MARKET SIZE, MONOPOLIES, MONOPOLY, MORAL HAZARD, ON-THE-JOB TRAINING, OPENNESS, PER CAPITA INCOME, PERMANENT WORKERS, POSITIVE EFFECTS, PRICES OF OUTPUT, PRIMARY SOURCE, PRIVATE FIRMS, PRIVATE SECTOR, PRODUCTION FUNCTION, PRODUCTION WORKERS, PRODUCTIVE FIRMS, PRODUCTIVITY, PRODUCTIVITY GROWTH, PRODUCTIVITY GROWTH RATES, PRODUCTIVITY LEVEL, PRODUCTIVITY LEVELS, PROPERTY RIGHTS, PROTECTED INDUSTRIES, QUANTITATIVE RESTRICTIONS, RATES OF PROTECTION, REAL EXCHANGE RATE, REDUCTION IN TARIFFS, RELATIVE PRICES, RIGID LABOR MARKET, RIGID LABOR MARKETS, SEVERANCE PAYMENTS, SKILLED WORKERS, SPECIALIZATION, STOCKS, SUBSTITUTES, TARIFF BARRIERS, TARIFF LEVELS, TARIFF RATE, TARIFF RATES, TECHNOLOGY TRANSFER, TOTAL CAPITAL STOCK, TOTAL FACTOR PRODUCTIVITY, TOTAL WAGE, TRADE BARRIERS, TRADE FLOWS, TRADE LIBERALIZATION, TRADE LIBERALIZATION INCREASES, TRADE OPENNESS, TRADE POLICIES, TRADE POLICY, TRADE PROTECTION, TRADE REFORM, TRADE REFORMS, TRADE REGIME, VALUE ADDED, VOLATILITY, WAGE BILL, WAGE RATE, WAGES, WEALTH, WHOLESALE PRICE, WHOLESALE PRICE INDEX, WORKER,
Online Access:	http://documents.worldbank.org/curated/en/2007/05/7611962/indian-manufacturing-slow-sector-rapidly-growing-economy https://hdl.handle.net/10986/7112
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