[Dec 2007, Volume 4 Quarterly Issue] Pdf File size - The IIPM Think ...

MORE MARKETS, LESS GOVERNMENT
diversification. Imbs and Wacziarg (2003)
show that in the course of development,
countries first diversify within manufacturing,
producing many things, and then
after a certain level of income, start specializing,
producing fewer things. Technically,
the relationship between the concentration
of value added across
industries (the Gini coefficient or the
Herfindahl index), and income is U-
shaped, with the turning point occurring
at about US$10,000 per capita. Given that
India has more of a presence in skill-intensive
industries, the presumption would
be that it has specialized in more areas
than the typical developing country, and
hence it should exhibit a more diverse
pattern of production. When we examine
the concentration of Indian industry compared
to the average country pattern, we
indeed find that India is significantly
more diversified (less concentrated) in
terms of the distribution of value-added
across industries.
To summarize, compared with countries
at a similar level of development and
size, in 1981 India had approximately the
normal share of output and employment
in manufacturing. Output in services was
below the norm, as was employment in
services. Output and employment were
about average in labor intensive manufacturing
industries and above the norm in
skill intensive industries. And finally, Indian
manufacturing was significantly
more diversified both in terms of output
and employment than countries of comparable
income and size. The paradox of
Indian manufacturing in the early 1980s
is thus that of a labor-rich, capital-poor
economy using too little of the former. 5
The reason, most likely, was policy. The
large investment in tertiary education for
a country of its per capita income resulted
in the plentiful availability of highly
skilled, cheap labor. In addition, labor
laws afforded much less protection to
skilled labor. These factors are likely to
have contributed to India generating
relatively greater value added and employment
in skill-intensive industries as
compared to the typical poor country.
Reforms Of The 1980s And 1990s
The key features of reforms in the
1980s—characterized as “pro business”
in orientation were (i) the liberalization
of capital goods and intermediate input
imports; (ii) the extension of export incentives
through the tax system, and more
liberal access to credit and foreign exchange;
(iii) the significant relaxation of
industrial licensing requirements through
direct “delicensing” of some industries
and through “broad banding”, which permitted
firms in some industries to switch
production between similar product lines;
(iv) the decontrol of administered prices
of key intermediate inputs.
The reforms of the 1990s—characterized
as “pro-market” in orientation—included
(i) the abolition of industrial licensing
and the narrowing of the scope
of public sector monopolies to a much
smaller number of industries; (ii) the liberalization
of inward foreign direct and
portfolio investment; (iii) the sweeping
liberalization of trade which included the
elimination of import licensing and the
progressive reduction of non-tariff barriers;
(iv) financial sector liberalization,
including the removal of controls on capital
issues, freer entry for domestic, and
foreign, private banks and the opening up
Between 1980 and 2002, India’s share of services in
value added exploded from 37 percent to 49 percent. Its
share of manufacturing in value-added remained
broadly unchanged at 16 percent
of the insurance sector; (v) and the liberalization
of investment in important services,
such as telecommunications. Areas
that remained largely untouched by reforms
in the 1990s were the labor market;
small-scale reservations (where there has
been some movement only in the last 4-5
years); privatization both of non-financial
enterprises and of banks; and further agricultural
sector reforms.
Economic Development After
Reforms
How have these twenty years of slow but
steady reforms affected the pattern of
development, if at all? Let us look again
at the variables discussed above—sectoral
shares, factor intensities, and diversification,
between the early 1980s and
early 2000s. The traditional perspective
of Kuznets or Chenery would predict a
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