Exports, Capabilities, and Industrial Policy in India

Bard College Levy Economics Institute Working Paper No. 638

34 Pages Posted: 23 Nov 2010

See all articles by Jesus Felipe

Jesus Felipe

Asian Development Bank

Utsav Kumar

Asian Development Bank

Arnelyn Abdon

Asian Development Bank

Date Written: November 23, 2010

Abstract

An extensive literature argues that India’s manufacturing sector has underperformed, and that the country has failed to industrialize; in particular, it has failed to take advantage of its labor-abundant comparative advantage. India’s manufacturing sector is smaller as a share of GDP than that of East Asian countries, even after controlling for GDP per capita. Hence, its contribution to overall GDP growth is modest. Without greater participation of the secondary sector, the argument goes, the country will not be able to develop and become a modern economy. Standard arguments blame the “license-permit raj,” the small-scale industrial policy, and the supposedly stringent laws. All these were part of the industrial policy regime instituted after independence, which favored the heavy-machinery subsector. We show that this policy bias negatively affected the development of India’s labor-intensive sector, as the country should export with comparative advantage a larger number of these products, given its income per capita. However, India’s manufacturing sector is relatively well diversified and sophisticated, given also the country’s income per capita. In particular, India’s inroads into machinery, metals, chemicals, and other capital- and skilled labor–intensive products has allowed the country to accumulate a large number of capabilities. This positions India well to expand its exports of other sophisticated products.

Keywords: Capabilities, Diversification, India, Industrial Policy, Revealed Comparative Advantage, Sophistication

JEL Classification: O20, O25, O53

Suggested Citation

Felipe, Jesus and Kumar, Utsav and Abdon, Arnelyn May, Exports, Capabilities, and Industrial Policy in India (November 23, 2010). Bard College Levy Economics Institute Working Paper No. 638. Available at SSRN: https://ssrn.com/abstract=1713848 or http://dx.doi.org/10.2139/ssrn.1713848

Jesus Felipe (Contact Author)

Asian Development Bank ( email )

6 ADB Avenue, Mandaluyong City 1550
Metro Manila
Philippines

Utsav Kumar

Asian Development Bank ( email )

6 ADB Avenue
Central and West Asia Department
Mandaluyong City
Philippines

HOME PAGE: http://works.bepress.com/kumarutsav/

Arnelyn May Abdon

Asian Development Bank ( email )

6 ADB Avenue, Mandaluyong City 1550
Metro Manila
Philippines

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