Big Reforms but Small Payoffs: Explaining the Weak Record of Growth and Employment in Indian Manufacturing

Abstract

India has undertaken extensive reforms in its manufacturing sector over the last two decades.\nHowever, an acceleration of growth in manufacturing, and a corresponding increase in\nemployment, has eluded India. Why have the reforms not produced the intended results? Using\nAnnual Survey of Industries data at the three digit level for major Indian states, for 1980-2004,\nwe analyze the effects of the reforms that liberalized India’s industrial licensing regime on the\nperformance of registered manufacturing. We find that the performance of the manufacturing\nsector is heterogeneous across states, as well as across industries. In particular, labor intensive\nindustries and industries dependent on infrastructure have not benefited much from reforms.\nIndustrial performance appears to be contingent on the state specific policy and economic\nenvironment. States with relatively inflexible labor regulations have experienced slower growth\nof labor-intensive industries and slower employment growth overall. Additionally, states with\nrelatively competitive product market regulations and with better infrastructure have experienced\nlarger benefits from reforms.