Category Archives: indian economy

A Tale of Two States


In this paper Lahiri and Yi study the decline of West Bengal relative to Maharashtra, historically two of the most important states of India. In 1960, West Bengal’s per capita income exceeded that of Maharashtra, the third richest state at the time. By 1993, it had fallen to just 69 percent of Maharashtra’s per capita income. They employ a “wedge” methodology based on the first order conditions of a multi-sector neoclassical growth model to ascertain the output and factor market sources of the divergent economic performances.

Their diagnostic analysis reveals that a large part of West Bengal’s development woes can be attributed to: (a) low sectoral productivity, especially in manufacturing and services; and (b) sectoral misallocation in labor markets between the manufacturing sector and the other sectors of the economy. They also present evidence on the labor market, the manufacturing sector, and public infrastructure that suggest a systematic worsening of the business environment in West Bengal during this period.

Lahiri A and K Yi (2008), ” A Tale of Two States: Maharashtra and West Bengal“, Federal Reserve Bank of Philadelphia, April.

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A Tale of Twenty Cities!

The National Council of Applied Economic Research (NCAER) has recently published a report titled, “The Next Urban Frontier: Twenty Cities to Watch”. NCAER definitely expects the report to be a cash cow given that its priced at Rs.100,000 (approximately $2200)!

But that does not mean that you have to go without reading it. Here is a PowerPoint presentation based on the report. Relax, the numbers do all the talking!

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Caste Discrimination in Urban India

Does caste discrimination express itself in terms of difference in salaries and wages in urban India? I am afraid the answer is a qualified yes; qualification being it seems to depend on the level of aggregation we are addressing the issue. There seems to be some evidence for discrmination in the overall urban sector but little or no evidence in software and call industry in particular.

Madheswaran and Attewell use National Sample Survey (NSS) data and find that employees from SC/STs in urban salaried jobs in 1999-2000 received wages that were about 30 per cent lower on average than those of other castes. About 15 per cent of this differential could not be explained by the measures of education and work experience available in the NSS data. Of course, how much of this unexplained differential acutally can serve as an evidence of discrimination will depend on how finer the measures of education and work experience are in the NSS data.

In yet another paper Banerjee and his coauthors find less dicrimination in the call center industry and no discrimination in the software industry. So now the interesting question is why does discrimination persisit in some industries and not in others. It would be intersting to see a model where employers choose to discrminate in equilibrium conditional on some factors.

Banerjee, A, M Bertrand, S Dutta and S Mullainathan(2007): ‘Caste and Religion in India’s ‘New Economy’:Evidence from a Field Experiment on Labour Market Discrimination in Delhi’, Mimeo.

S Madheswaran & Paul Attewell (2007), Caste Discrimination in the Indian Urban Labour Market: Evidence from the National Sample Survey, Economic and Political Weekly, VOL 42 No. 41 October 13 – October 19.

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India and Globalization

This is a very interesting discussion by Martin Wolf and Quentin Peel on India and Globalization.

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Pollution Concerns

Well, people say there is always some environmental cost of development. But in case of India these costs turn catastrophic becasue of tragedy of commons, corruption and citizens, who dont give a damn. If you are not convinced, this article should be an eye opener.

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Dismantling the License Raj

What was the effect of dismantling the license raj? A very pertinent question in which the proponents of liberalization as well as the critiques would be equally interested in!

Aghion, try to answer this question in a very interesting difference in difference estimation framework. The main argument of the paper is that the response to the ending of the license raj would be different in different states as they differ in terms of their institutional set up.

One of the institutional dimension on which states differ is the labor market regulation. There are some states which have more pro- labor regulations, some which have pro-employer regulations and a few which can be categorized as neutral. The main finding of the paper is that output rose more in pro-employer states than it did in pro-worker states in response to same delicensing reform. This result stands up to several robustness checks and the delicense-labor regulation interaction coefficient is similar in size and significance across a range of specifications.

This paper could not have come out at a more appropriate time when the debates about the effect of labor regulation on industrial performance abound and have important implications for understanding India’s trade competitiveness vis-a-vis China. Similarly it also sheds light on what may be one of the important factors driving the differences in regional growth rates.


Aghion P, Burgess R, Redding S, & Zilibotti F (forthcoming), “The Unequal Effects of Liberalization: Evidence from Dismantling License Raj in India”, American Economic Review.

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Land Reforms

If any body has been even near CESP, JNU, he or she cannot miss one simple prognosis for almost all of India’s economic ills- lack of land reforms! I think Tim Besley & Robin Burgess definitely did not miss it. In a very interesting article, they undertake the task of econometrically investigating the relationship between land reforms, poverty and growth in India. They find a robust link between land reform and poverty reduction. However, they argue that a closer scrutiny reveals that, in an Indian context, this is due primarily to land reforms that change the terms of land contracts rather than actually redistributing land.
Some points worth noting:

  1. In an IV regression, they find that Congress and soft left decrease the probability of enacting land reform legislation, while hard left exerts a positive influence and Hindu parties are insignificant. If you think this is a cudos for left governments, note that the overall positive influence of hard left parties seems to originate principally through strong positive effect on the passage of land ceiling legislation and the authors do not find any evidence that such land reforms reduce poverty.
  2. Land reforms have a positive significant effect on agricultural wages, though this effect primarily comes from abolition of intermediaries.
  3. Tenancy reform has negative impact on agricultural output while land consolidation has the opposite effect.

Thus, according to the authors, although the effects on poverty are likely to have been greater if large scale redistribution of land had been achieved, the results are interesting as they suggest that partial, second best reforms which mainly affect production relations in agriculture can play a significant role in reducing rural poverty. Comparing the effect of land reforms on poverty with effect of changes in per capita income, the authors find that implementing a land reform has a similar effect on poverty reduction to a 10 percent increase in per capita income, or around four to five years growth at all-India average growth rate over period (1958-1992).

The article also has a good summary of the kind of land reforms undertaken by various states till now.

Besley Timothy & Burgess Robin (2000), Land Reform, Poverty Reduction, and Growth: Evidence from India, The Quarterly Journal of Economics, May.

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Walmart in India-Some more thoughts

I need to qualify my conclusions in the earlier post. There is a possibility that Walmart may not be just another supermarket, where India’s new rich shop,but will also be a recourse of cheap shopping for the lower income groups who currently shop at the smaller grocery stores.

Why do I change my stance? The answer lies in the shopping behavior of an average middle class family in India. The reason they shop in the small grocery stores (kirana dukan as called in Maharashtra) is not only because it is cheap but also because most of these stores provide a credit line to their customers. You shop for a month and clear your dues at the end of the month. At least that’s how the kirana stores do business in most of the parts of my home state.

So it seems if Walmart is able to provide customers a credit line in some form or other, then it could potentially win over the customers who shop at kirana stores. There is still one problem though. Because of proximity to the customers and a personal relationship, it is easier for the kirana store to verify and monitor the credit standing of their customers. Therefore, a kirana store is able to provide credit to a customer who otherwise may find himself without any access to formal credit markets because of his income level. Walmart will have to rely on formal credit markets and still find a way to compete with the kirana stores in offering credit.

Thus, the key issue is whether Walmart will be ready to assume the credit risk to entice the common Indian consumer and change the retail market in India as it did in North America or be happy with a large market share in a still niche market. This indeed will be one of the key determinants of its success in India apart from the supply chain issues.

PS: So now you know why the supermarket on Sinhagad road in Pune closed down. It did not study its customers well. They were not only price sensitive but also credit constrained. Hence, reduction in price or other bundling strategies only worked to a certain extent. The business still remained with the kirana stores.


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