Paper: India has opportunity for ‘big bang’ economic reform

David Ruth
713-348-6327
david@rice.edu

Jeff Falk
713-348-6775
jfalk@rice.edu

Paper: India has opportunity for ‘big bang’ economic reform
Barriers to labor-intensive manufacturing must be removed, Rice U expert says

HOUSTON – (July 22, 2015) – “Big bang” economic reforms could generate a significant dividend for India, according to a working paper by Russell Green, an India expert and economist at Rice University’s Baker Institute for Public Policy. The study should motivate the political leadership in India’s state and central governments to pursue reforms ambitiously and remove barriers to labor-intensive manufacturing, Green said.

Credit: thinkstockphotos.com/Rice University

The paper, “Structural Change Forecasts for India: How Big of a Bang Can a Big Bang Have?”, applies a rigorous approach to developing a simple 20-year projection of growth and employment in India. It asks, “What could happen if India’s government implemented big-bang reforms sufficient to achieve East-Asia-style manufacturing growth?” Green’s projection exercise assumes a structural break in the manufacturing sector due to major policy changes that would promote labor-intensive and higher-productivity sectors.

The question of structural change in India has returned to the forefront of policy debates with Prime Minister Narendra Modi’s high-profile “Make in India” campaign to “transform India into a global manufacturing hub,” said Green, the Baker Institute’s Will Clayton Fellow in International Economics and adjunct assistant professor of economics at Rice. He served as the U.S. Treasury Department’s first financial attaché to India from 2008 to 2011.

“Structural change involves shifting (India’s) economic activity — including its labor force — toward higher-productivity activities,” Green said. “Almost half of India’s labor force works in extremely low-productivity agriculture, and most of the rest works in low-productivity informal activities. The potential for welfare improvements from successful structural change strategies has always been massive, and the political environment exhibits a new determination to take the necessary steps.”

According to Green’s simulation, India’s formal manufacturing sector could grow to attain 27 percent of gross domestic product from the current 11 percent. “Two implications of these results are worth noting,” Green said. “First, the policy-change scenario forecasts that 15 percent of the workforce could be employed in high-productivity industries in the formal manufacturing sectors and modern services. As a comparison point, I have previously estimated that almost half the Indian workforce will have finished high school by 2035, double the share today. This would represent a dramatic improvement over the current workforce.

“The potential rise in education levels above current industry need raises the question of where these workers will find work that will take advantage of their improving education,” Green said. “Another way to look at the potential mismatch is via Say’s Law, which states that supply creates its own demand. It would suggest that businesses that can effectively utilize a better-educated workforce will grow faster on the back of a growing skilled labor supply. Expectations of much better educational attainment would suggest that the projections presented here may be too pessimistic.”

Green did find that Modi’s “Make In India” goals of manufacturing reaching 25 percent of gross domestic product and creating 100 million new jobs by 2022 are worthwhile for inspirational purposes but do not appear to be realistic. “The latter does not even appear realistic in a 20-year time frame,” Green said. “But nobody would be upset about achieving 75 million new manufacturing jobs, which might be realistic with the right basket of reforms.”

“‘Big bang’ reforms could generate a significant dividend for India under plausible assumptions,” Green said. “This study should provide motivation to the political leadership in state and central governments in India to pursue reforms ambitiously to remove barriers to labor-intensive manufacturing.”

The Baker Institute has a radio and television studio available for media who want to schedule an interview with Green. For more information, contact Jeff Falk, associate director of national media relations at Rice, at jfalk@rice.edu or 713-348-6775.

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Related materials:

Paper: http://bakerinstitute.org/media/files/files/4cb705f2/BI-WorkingPaper-StructuralChangeIndia-072115.pdf

Green biography: http://bakerinstitute.org/experts/russell-green

Founded in 1993, Rice University’s Baker Institute ranks among the top 10 university-affiliated think tanks in the world. As a premier nonpartisan think tank, the institute conducts research on domestic and foreign policy issues with the goal of bridging the gap between the theory and practice of public policy. The institute’s strong track record of achievement reflects the work of its endowed fellows, Rice University faculty scholars and staff, coupled with its outreach to the Rice student body through fellow-taught classes — including a public policy course — and student leadership and internship programs. Learn more about the institute at www.bakerinstitute.org or on the institute’s blog, http://blogs.chron.com/bakerblog.