Inter-state analysis of manufacturing performance in India: 2001-02 to 2013-14.

AuthorSharma, Anand
PositionReport - Abstract


Achieving balanced regional growth and development forms a policy objective of all countries in the world. Policymakers attempt to achieve a balanced economic growth of all regions by reducing the extent of inter-regional disparities. The problem of regional disparities is pervasive, and its extent differs in various economies (Dholakia, 1985). These disparities are significantly greater in the case of less-developed countries, and hence the need to balance growth with equity is more important in these countries. Moreover, the serious social and political implications of regional disparities in growth and development have forced governments to intervene and formulate economic policies (Dholakia, 1985; Papola, Maurya& Jena, 2011).

In the case of India, several studies have documented the existence of wide inter-state disparities in economic growth and development (e.g., Sachs, Bajpai& Ramiah, 2002; Cherodian & Thirlwall, 2015; Lolayekar & Mukhopadhyay, 2016). The regional disparities in industrial development may further widen the overall regional disparities in economic growth and development. This widening may happen as there exists a high correlation between the economic growth of regions and industries (Rosenbloom & Sundstorm, 1997; Lall & Chakravorty, 2005). Therefore, it becomes imperative to examine the disparities in industrial growth and development at the regional level.

Economic theory does not provide clear-cut answers to the question of convergence or divergence in regional disparities in industrial growth and development. On the one hand, some scholars argue that regional disparities in industrial development may widen due to agglomeration externalities as some regions grow faster than the others (Papola et al., 2011). This may happen because of a close link between regional industrial growth and agglomeration of economic activities (Baldwin & Martin, 2004). Studies have established that agglomeration of industries in a region has a favorable effect on the growth of employment and productivity (e.g. Sveikauskas, 1975; Ciccone & Hall, 1996; Martin, Mayer & Mayneris, 2011). As a result, the regions with such industrial concentration of activities experience faster growth. On the other hand, regions, where such industrial agglomeration does not exist, may experience slower growth. Thus, regional divergence in industrial growth may result. Additionally, in the post-reform period, the decisions on industrial location are not guided by concerns of equity but rather by considerations of profit (Lall & Chakravorty, 2005; Gao, 2004). Regions with relatively better transport, infrastructure, and market access gain more than other regions (Lall & Chakravorty, 2005). Thus, regional industrial disparities may widen overtime.

The process of convergence in regional industrial and economic growth may result when industrial activities shift to less developed regions (Papola et al., 2011). This shift may occur because the concentration of industrial activities in a region may give rise to agglomeration diseconomies in the form of high rents, congestion and pollution costs. These diseconomies may cause the industries to move to other regions which then experience faster growth. This movement of industries leads to convergence in industrial growth among regions. Several economists like Kuznets (1958), Williamson (1965) and Barro and Sala-i-Martin (1992) also provide support for regional convergence hypothesis in their empirical studies.

The examination of regional disparities in industrial development in India is relevant in the phase of high industrial growth witnessed in post-2000 period. This paper examines the growth of manufacturing employment, value-added and labor productivity across 20 major states during 2001-02 to 2013-14. The paper also attempts to explain the reasons for the inter-state variations in the manufacturing performance.

Related Studies

Empirical analysis of inter-state manufacturing growth performance has been the subject of great interest among scholars. These empirical studies differ with respect to the level of industrial disaggregation, methodologies, and time-period. Trivedi (2004) analyzes the growth of output, employment, and total factor productivity in the organized manufacturing sector for ten major states from 1980-81 to 2000-01. This study examines the performance of five industry groups and the whole manufacturing sector among the major states. The study finds a slowdown in the growth of TFP for majority of the industries in the post-reform period. The study also finds that the inter-state disparities in manufacturing performance have persisted during the study period. Trivedi (2004) finds that Bihar and West Bengal exhibit a dismal manufacturing performance whereas Andhra Pradesh, Madhya Pradesh, Rajasthan, and Karnataka show relatively better manufacturing performance. Mukherjee and Ray (2005) also arrive at a similar conclusion and argue that the economic reforms have not led to significant improvements in productivity growth at the regional level. They find that inter-state disparities continue to prevail in the post-reform period. On the other hand, Kumar (2006) finds a tendency for convergence in the TFP growth rates in the post-reform period. He argues that reforms have had a productivity-augmenting effect on the manufacturing sector. Using data envelopment analysis, Deb and Ray (2014) analyze the TFP growth of selected two-digit industries at the state level during 1979-80 to 1997-98. They find improvement in productivity growth for most industries at the state level in post-reform period. Decomposition of TFP shows that technical progress was the driving factor for improvement in productivity. Thus, it is difficult to arrive at any unambiguous conclusion on the effects of economic reforms on the growth of manufacturing productivity. One of the important reasons for this conflicting evidence is the application of different methodologies used for estimating TFP growth (Trivedi et al., 2011; Kathuria, Raj & Sen, 2013).

Several studies in recent years have also examined the manufacturing performance using different approaches (e.g. Sharma & Khosla, 2013; Burange & Ranadive, 2014; Padhi, 2014; Jain, 2015). Sharma and Khosla (2013) explain the regional industrial performance from 1980-81 to 2009-10. Using the discriminant function approach, they find significant disparities in industrial performance. Papola et al. (2011) examine the impact of economic reforms on regional manufacturing performance from 1980-81 to 2008-09. The study finds declining inter-state disparities in the extent of industrialization from 1980-81 to 2008-09. However, the study also suggests wide-spread interstate differences in labor productivity in the organized sector. According to Papola et al. (2011) differences in aggregate labor productivity are due to the industrial composition in a state. Another recent study by Babu and Natarajan (2013) analyzes the growth of labor productivity and TFP for 15 states from 1980-81 to 2007-08. They find that productivity improvements have...

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