In with the Big, Out with the Small: Removing Small-Scale Reservations in India

Abstract

For the past 60 years, India has promoted small-scale industries (SSI). Industrial promotion took the form of reserving certain products for manufacture by small and medium firms. The stated goal of Indian policy makers was to promote employment growth and income redistribution. In this paper, the authors use a new version of the Annual Survey of Industries (ASI) that allows them to follow plants over time, and to examine whether small factories in India exhibit faster employment growth than larger factories. They find that, as in the United States, larger, younger factories grow more quickly, and create more jobs than smaller, older factories. They then exploit the fact that India eliminated SSI reservations for more than half of all reserved products between 1997 and 2007 to identify the consequences of removing these policies. They find that districts more exposed to the de-reservation experienced higher employment and wage growth than those that were less exposed. These effects are driven by the growth of factories that moved into the de-reserved product space, whose expansion more than compensated for the shrinking of smaller, incumbent firms.

JEL Classification: O12, O25, O38