Assessing Factor Proportions in Tradable Sectors of the Indian Economy

The basic motivation of this work is to find how the sector-wise factor proportions are placed in an open and market driven economy. Literature emphasises a greater relevance of factor proportions in resource allocations for economic activity as compared to intersectoral linkages. However, the measurement of factor requirements is, prima facie, based on direct factor proportions, and can be misleading due to the its partial nature of assessment. Working with the Semi-Input-Output Model provides an advantage to distinguish between tradable and non-tradable sectors while also including the indirect factor use. The analysis confirms an underestimation of factor proportions, if only the direct factor usage is taken into consideration. It also provides a benchmark for comparison of the sector-wise factor proportions. It is insightful to note that most tradable sectors have higher capital coefficients than the corresponding labour coefficients, underscoring stronger than expected capital requirements

Assessing Factor Proportions in Tradable Sectors of the Indian Economy

The basic motivation of this work is to find how the sector-wise factor proportions are placed in an open and market driven economy. Literature emphasises a greater relevance of factor proportions in resource allocations for economic activity as compared to intersectoral linkages. However, the measurement of factor requirements is, prima facie, based on direct factor proportions, and can be misleading due to the its partial nature of assessment. Working with the Semi-Input-Output Model provides an advantage to distinguish between tradable and non-tradable sectors while also including the indirect factor use. The analysis confirms an underestimation of factor proportions, if only the direct factor usage is taken into consideration. It also provides a benchmark for comparison of the sector-wise factor proportions. It is insightful to note that most tradable sectors have higher capital coefficients than the corresponding labour coefficients, underscoring stronger than expected capital requirements

Making FTAs more inclusive – A case for promoting SMEs in India

A dedicated support for SMEs through imparting information as well as addressing their concerns will not only improve prospects for SMEs, but will also contribute to greater utilization of the FTAs. While integrating into GVCs, standard compliance does not come easy due to lack of information and the additional costs imposed. The participation of SMEs in trade needs to be improved and strengthened through focussed interventions. With this view, a detailed review of the related provisions in the existing agreements provides useful leads through the mechanisms used. Although some FTAs with India as partner have SME related provisions, most others are silent on SMEs. In some cases, this is in sharp contrast to the presence of thorough provisions in the FTAs negotiated between (India’s) partner country and a third country. With forethought for bringing domestic SMEs in close contact with partner governments and business, recommendations are made for consideration while negotiating future FTAs

Assessing structural coherence with factor proportions of tradable sectors in Indian economy

Structural transformation supports higher output growth if it reflects the endowment fundamentals of the economy. Since the industrial structure is expected to align with factor-intensive sectors, structural coherence with factor proportions becomes an important consideration for industrial policy design. In the past, measurement of factor proportion (intensity) has been restricted to direct use within the sector ignoring the crucial fact that factors are also embedded in upstream supplies. Therefore, an underestimation of the factor proportions across sectors of the economy cannot be ruled out if evaluated using direct factor contents only. It is important to account for the indirect requirement for factors of production. Capital, in particular, is expected to be used intensely in the tradable sectors due to their relative importance in output, exports and investment. However, tradables are often studied in isolation of their interaction with the non-tradables. The use of Semi Input-Output (SIO) model permits to address both the above mentioned shortcomings. This paper has two objectives for studying the tradables using an SIO approach using the KLEMS data from the RBI. First, to provide an improved estimate of factor proportions from the additional accounting for interlinkages with the non-tradables. Second, to study the structural coherence with factor proportions. The absence of a clear pattern between the structure of output and factor proportions points to market failures preventing movement of labour and capital to the most desirable sectors, thus constraining growth. Major exporting tradables are not the most labour-intensive sectors, indicating a mis-match vis-a-vis the proportions. The output and exports are not concentrated among the most capital-intensive tradables. The concentration of FDI into sectors with high relative use of capital, in a labour rich economy, leaves not a very encouraging situation for employment generation. From a policy perspective, the results suggest that under the present orientation of factor proportions, FDI is unlikely to be the solution to employment generation problems with the existing skill set. With increased capital proportion of even the labour-intensive sectors, a different type of labour supply is needed which is better trained and also mobile across sectors

Inter-industry Wage Differentials in Indian Manufacturing: Convergence or Persistence?

From a labour perspective, wage rates are reflective of the market demand for different skills and the institutional structures. Also, wage rate is a better measure of the well-being of workers solely dependent on wage income. This paper notes persistent regularity in industry-level wage rates confirming the absence of a convergence behaviour. The stability of industry-level wage rates brings industrial reforms under scanner for their implications on worker welfare. Wage convergence could be inhibited by the inter-industry movement of workers. One way to counter the proliferation of low-wage employment can be improved inter-industry worker movement through better adaptability of workers

Is Domestic Value Addition a Source of Export Sophistication? A Case Study India

An implication of a globally fragmented production system is that countries which assemble and export high-tech products could reflect a sophisticated export structure while generating low domestic value-added component. Therefore, understanding the relationship between domestic value- added component in export, and the export sophistication of a country would be helpful in assessing if the country indeed achieved a quality improvement through indigenous attempts. However, for countries with export competitiveness essentially on grounds of cheap and abundant labour, rather than technological advantage, there is a significant disincentive to invest in innovation and R&D. This could possibly the case for India, motivating the investigation. Results show that exports of sophisticated products, which also belong to the high- technology segment, are paired with low indigenous contribution in the product manufacture. The subscription to imports for exporting high-tech products reflects upon the deficient domestic R&D needed to bolster innovative practices such as product design and engineering. There needs to be a conscious effort to indulge in production stages characterized by high domestic value addition content

SME Related Provisions in Free Trade Agreements – An Analysis of India’s Strategic Focus

In the backdrop of the increasing government emphasis on strengthening the domestic and international participation of the small and medium enterprises (SMEs), this paper presents a review of the SME related provisions that have been incorporated into the free trade agreements (FTAs) signed by countries, including India. A comparative approach has been used to bring out the difference in strategic focus adopted by India vis-à-vis other countries. The review of the trade agreements informs that the SME related provisions are not very prevalent, more so in the Indian context. Only about half of the 60 plus trade agreements reviewed are observed to include SME specific arrangements. These provisions are mostly non-binding and of an endeavouring nature, putting the onus on the host country to initiate and benefit from the stated activities of cooperation and similar mechanisms for better opportunities for the SMEs. By comparison with other countries, most FTAs signed by India are either silent on SMEs or lack aggression. India’s emphasis on transparency is minimal in comparison to the inclusion of a cooperation clause in the text of the agreements. The absence of an SME focus in trade agreements indicates that smaller enterprises have been considered at par with other businesses, thus ignoring their exceptional needs and the handholding that might be required for their greater and faster internationalisation. Although it can be argued that the mere existence of an SME related provision may not necessarily result in better opportunities, it is important to highlight the emphasis on SMEs in the text of the agreements, as pursued by other countries

Revisiting Factor Proportions in the Indian Economy – A Study with Focus on Tradable Sectors

Factor productivity is traditionally studied through the measurement of factor intensity for sectors of the economy. However, this measurement is restricted to their direct use within the sector ignoring their embeddedness in upstream sectors. Therefore, an underestimation of the factor intensities across economic sectors cannot be ruled out if evaluated using direct factor contents alone. An a priori external influence on demand (through exports) and investment (through FDI), is expected to shape the allocation of production and subsequent factor demand. Thus, this article examines the structural coherence of factor proportions with output, exports and FDI, separately for each tradable sector. Likewise for factor intensities, tradables are often studied in isolation from their interaction with the non-tradables. Using of Semi Input-Output (SIO) modelling, the factor proportions (K-to-L) show a significant underestimation of the capital intensity for the economy when compared with direct proportions. Although the output and export distributions are largely aligned with factor endowments, the distribution of FDI is skewed towards sectors with high capital proportions. Thus, FDI is unlikely to be solution to employment generation without re-orienting and enhancing the existing skills

The Union Budget 2020-21: A mixed bag of cheers and tears

The Budget 2020-21 can be considered as transitional in nature as it seems to direct money flows to business through reforms on corporate tax. Apparently, the government is commanding a model of investment driven economic growth for long-term sustainability. However, under current crisis with regard to jobs, unemployment, demand depression and low consumption, the economy requires immediate stimulus package, which is absent in the budget. There seems to be an attempt to energise consumption through tax benefits on dis-saving. This however dis-regards the link between savings and consumption, as the former are used to finance consumer durables such as cars, electronics and real estate purchase. The importance of savings cannot be overstated in an economy where there are no provisions for universal healthcare, social security, and unemployment allowances

Employment implications of India’s international trade – A macro view based on Input-Output analysis

Often trade policy of a country is evaluated for its employment effect and a liberal import policy is criticised for its adverse impact on domestic employment in a more explicit manner. However, for reasons such as low worker reallocations due to trade and employment creation from a concomitant export expansion, what bears relevance for employment outcomes is the aggregate effect, and not the sector-level effects of trade. In this paper, we focus on the aggregate employment effects of trade by accounting for the interdependencies among sectors of the economy. We make use of the Input-Output model and integrate the Reidel’s method to account for differential employment intensity of exports and imports and also the import-sourcing countries; to improve precision of the estimated employment effect of trade in Indian economy. Computations show that employment intensity of exports continues to remain higher than of the imports; suggesting the employment potential of the aggregate exports in the economy. At an aggregate level, the proportion of export supported employment has more than doubled over a period of two decades. On the import front, the proportion of employment forgone has more than trebled. While the net trade generated an employment surplus during 1993-94, an employment deficit is observed during 2013-14. The employment foregone due to imports has increased faster than the employment supported by exports. The analysis in the paper registers increasing employment opportunities foregone at an aggregate level as a net effect of trade. Under an aggressive liberalisation, two opposing forces have been in place. Greater exports support more employment, while higher imports have costed employment in the domestic economy. The relative employment intensity of exports underscores their role in employment generation and hence the continued impetus. On the import front, the increasing employment forgone noted from the analysis, as also through its stronger indirect impact should not be interpreted to advocate for (continued or higher) import protection in the long run. Past experiences have shown that import protection through a trade policy, without an industrial policy in place, can be only a temporary guard for employment. Although raising tariffs can be a source of interim employment relief, an industrial policy must be used in parallel to strengthen the domestic industry. Also, not only are the indirect employment effects stronger, they can also be more complicated to address due to their embodied effects (which are manifested through inter-sector linkages) which are generally difficult to track explicitly. This highlights that any shocks in the external sector would have employment affects on the upstream supplier and downstream buyer sectors. And, that such effects are relatively stronger on the import side. It must be made explicit here that the present paper does not related the trade deficit as the cause of a corresponding employment deficit. However, few suggestions have been brought forward to strengthen employment opportunities from trade