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Revisiting Factor Proportions in the Indian Economy
The underestimation of factor intensities when only direct factor contents are used is addressed in this paper. It expands the scope of measurement to include the indirect effects of factor use, which remain unaccounted for otherwise. It examines the structural coherence of factor proportions with output, exports, and foreign direct investment separately for each tradable sector. Using Semi-Input–Output modelling, factor proportions show a significant underestimation of capital intensity for the economy when compared with direct proportions. The analysis thus reveals that output and export distributions are largely aligned with factor endowments, whileFDI distribution is skewed towards sectors with high capital proportions.
The author is indebted to Atul Sarma for suggesting an approach to focus on the tradable sectors, while also taking into account, their interactions with non-tradable sectors. His continued and deep involvement at various stages of work through guidance, inputs, and suggestions was instrumental in shaping the research in its present form. The author is also grateful for the helpful comments provided by the anonymous reviewer.
The research contributes to a larger study supported under the Impactful Policy Research in Social Science scheme of the Indian Council of Social Science Research, Ministry of Human Resource Development.
The opening up of the Indian economy offered an opportunity for domestic industries to access modern and more sophisticated technologies at one level and foreign direct investment (FDI) flows at another. At the same time, the existing domestic capital-intensive industries also picked up on their technology upgradation drive to stay competitive against the imports, further strengthening their proportion of capital relative to labour. Therefore, it is highly likely to expect a general increase in the number of capital-intensive sectors when compared with a national benchmark figure. The traditional labour-intensive sectors, such as textiles, also witnessed a gradual technology upgradation through the use of modern spinning machinery, which had a labour-displacing effect. All this suggests a general increase in capital proportion even in the not so capital-intensive sectors (ILO 2018; Rathee 2016). Capital incentives through one time capital subsidises and reduced credit rates contributed to higher capital proportions in specific industries (Gulhane and Turukmane 2017).
It is in this context that it is useful to assess India’s factor proportion for a most recent time period. However, measurement of factor requirements is prima facie based on the direct factor proportion, which makes the assessment partial in nature due to exclusion of the interactive effects. It is required to take into account the interactions of different linkages into the production process. This article makes a novel attempt by expanding the scope of measurement to include the indirect effects of factor use, which remain unaccounted for otherwise. With the common expectation of FDI to be market-seeking—both domestic as well as global market through the host countries’ export partners—the focus is on tradable sectors of the economy, which are more probable to capital expansion in both new and existing firms, through either of the two channels of investment, domestic and foreign. However, the method used here does take into account the interactions of the producing sectors with the non-trading sectors. This provides total factor proportion of the production process, which is more meaningful.
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