Review: India's Patter of Development: What Happened, What Follows - K Kochar, U Kumar, R Rajan, A Subramanian, I Tokatlidis

Here is an extremely interesting paper by Kalpana Kochhar, Utsav Kumar, Raghuram Rajan, Arvind Subramanian and Ioannis Tokatlidis on India's development pattern:

www.imf.org/external/pubs/wp/2006/wp0622.pdf

Section II of the paper introduces the key features of the Indian economy before 1980. Most of the statistics quoted here would be quite surprising to the average reader such as me:

• Value added shares by sector: Indian manufacturing, contrary to belief, was contributing a far greater percentage (~5% more) than the average for countries at India's income level. Even after correcting for India's geographic size, the gap reduces to only ~2% (though the latter is not statistically significant). Services was a negative outlier; India's services sector contributed ~4% less than it should given India's income level.

• Employment share: Employment share in manufacturing was in keeping with India's income level. However, services employed lesser people  (by ~ 8%) than a country of India's income should.

• Labour and Skill Intensity: It was noted, surprisingly, that both value added ratio and employment  share in labour intensive industries in India is negative (though not statistically significant). Productivity in labour intensive industries, however, was found to be higher given size and income. Similarly, both value added ratio and employment share in skill-intensive industries is high; and so is productivity - all of these corrected for income and size.

• Scale: It was found that while within India, the larger industries contributed a greater share of value added and employment share than similar nations; Indian industries on an average are smaller than their counterparts elsewhere.

• Diversification: In terms of both employment share and value added ratio, India was found to be more diversified than other similar nations.

Section III of the paper presents the post-1980s period. It first briefly enlists the changes that were introduced in the 1980s and 1990s. However, the interest part of this section is when they talk about certain key indicators of the economy.

• Sectoral Composition: Manufacturing was seen to perform badly after reforms, both in the level of value add ratio, and the change in value add ration (though both coefficients are not statistically significant). It is services which grew immensely in the period. India outperformed the average in similarly placed economies by ~ 4% in the level of services value add ratio, and ~10% in the change in services value add ratio. However, employment in services continued to be lower (by ~17%) than similarly placed economies.

• Labour and Skill Intensity: Ratio of value added in labour-intensive industries continued to fall in India. At the same time, skill-intensive industries continued to increase their ratio of value added. Moreover, both the level and change in diversification in India has been higher than other countries.

Section IV of the paper deals with the performance of the states post-reforms. In sub-section A, the authors talk about sectoral composition of the states' economies - they note that change in share of manufacturing in GDP and change in ratio of value added in labour-intensive units are uncorrelated with the growth in per capita GDP over the year 1980-2000. They also note that either of the two - decline in share of manufacturing or decline in share of labour intensive units - has happened in every fast growing state. As is common belief, the share of services in GDP increased in all states (except Nagaland). Moreover, this share was positively correlated with growth of per capita GDP. However, an interesting point is that growth in per capita GDP was negatively correlated with growth in share of public services - thus implying that in the laggard states (J&K, Bihar, Orissa, Assam, MP, UP), the role of Government in the provision of services grew. The authors then point out that diversification is still correlated, albeit midly, with growth in per capita GDP. Some states, they note, have already started becoming more concentrated, thus behaving like advanced nations in the Imbs and Wacziarg (2003) relationship.

Subsequently in Section V, the authors attempt to explain what caused growth to accelerate by looking at what determined the success of the individual states. 

• Pre-existing capability: The authors take the Herfindahl index as a proxy for this. The relation between annual growth of per capita GDP and the Herfindahl index is strongly negative, implying that states that were more diversified grew more after the 1980s. To test whether such a relationship was observed in previous decades, a similar exercise was done for previous decades and it was observed that the negative relationship was significant (despite correcting for quality of institutions and literacy level) only in the 1990s, and not in the 1980s or before. Finally, the correlation of value added by an industry in 1980 and 1997 was found to be least for the fast-growing economies, thus implying that the faster growing states did not simply do more of what they were doing better anyway.

• Decentralisation: If decentralisation after the 1980s caused growth to accelerate, then one would expect state-level institutions to determine growth. When per capita income growth was regressed on transmission and distribution (T&D) losses in electricity transmissions (a proxy for the quality of institutions), it was seen that the coefficient was negative. This implies that states that had managed to cut down T&D losses, or had better institutions as is implied, saw better growth.

Review: State Level Performance under Economic Reforms in India - M.S. Ahluwalia

Here is a short paper written by Montek Singh Ahluwalia (2000), which has come to be very important in the field of inter-state inequality in India:

http://planningcommission.nic.in/hindi/aboutus/speech/spemsa/msa007.pdf

The purpose of the paper is to analyse whether growth became more unequal in the post-reform period, and if yes, what the causes of this inequality are. The first part of the paper reviews the growth performance of states in both the pre-reform and post-reform period through a number of summary statistics such as coefficient of variance. I have mentioned a few of these in the last two posts. There is a brief section of what this means for poverty.

The second part of this paper, which deals with the determinants of growth in the states, is the section I find most insightful. The author picks up possible culprits behind the divergence in growth between states and then tests their validity at a very basic level. It would be worthwhile to mention a few of his results here:

• Investment Ratios: After recognising the inadequacy of investment data at the state level, the author runs regressions of the growth rate on (1) public investment (2) private investment (3) sum of both. He finds, not so surprisingly, that the only statistically significant coefficient in the post-reform period was found for the model containing only private investment. This could support the hypothesis that after reforms, public investments had to be reined in due to aggressive fiscal targets, and this increased the importance of private investment. Private investment, however, is not as equally distributed as public investment and hence would tend to go to states that are more efficient at using their resources, and hence are richer. This would be a worthy topic of future research.

• Plan Expenditure: Using only the available data of state-level plans, the author runs regressions of growth rate on the planned expenditure as a percentage of state GDP. Expectedly, he finds that the coefficient was significant in neither the pre-reform or the post-reform period. This would support the assertion made earlier that planned or public expenditure has begun to matter less.

• Human Resources: Taking the literacy rate as a proxy for the quality of human resources, the author runs regressions of the growth rate on the literacy rate. In the pre-reform period, the sign of the literacy rate comes out to be negative, which is counter-intuitive. In the post-reform period, it comes out positive as would be expected; however, in neither period is the coefficient statistically significant. When combined with the investment ratio to create an interactive dummy, however, the coefficients turn out to be statistically significant. Hence, it could be concluded that investment yields high growth only in the presence of good human resources.

• Infrastructure: The independent variable used here is the CIME composite index of the relative infrastructure capacity of different states. When a regression is run, both the coefficients and the R-square are not statistically significant. The author notes that three components of this index - percentage of villages electrified, per capita energy consumption and teledensity - have a statistically significant relation with growth rate; he however cautions that no major implication should be drawn from this.