Category Archives: indian economy

Factor shares in India’s National Income

The business cycle properties of data in the US says that consumption is much less volatile than the GDP. This suggests that households do engage into consumption smoothing and hence looking at consumption distribution is not a good gauge for what is happening to income distribution. A similar argument can also be made for India and hence the debate on effects of liberalization policies would do better if based on income distribution than just on consumption distribution. C.P. Chandrashekhar and Jayati Ghosh make this point quite well in their recent column in The Hindu Business Line.

According to their analysis the share of wages and salaries in the national income of India has shown a decline since 1991. This decline is evident both as a share of total NDP as well as of Organized sector NDP. It was roughly around 70% for a decade preceding the economic reforms and has declined since to 50% in the year 2009. This might seem surprising given that in the US (and probably most of the developed world ) the share of compensation of employees in national income has remained between 60-70% for last 50 years or so.

The authors suggest this as an evidence for rising income inequality after the economic reforms and I don’t necessarily disagree with that interpretation.This issue is certainly important to look into and might suggests a role for policy intervention.

However, the contrast with the US suggests that there might be some other factors at play causing the shares to settle at different values in both these countries. One reason for this contrast is that the factor shares could reflect the relative factor scarcity. Capital being relatively scarce in developing countries compared to the developed ones, higher overall returns for it might be expected. The other reason might be the declining importance and presence of unions in the Indian organized sector after reforms than before. If one admits that most of the growth of the organized sector has been because of the rising service sector, then this does makes sense. In addition, the continuing rigidity of labor laws might also mean a lower opportunity cost for ones time further reducing the bargaining power of the workers.

Overall, these empirical regularities and differences in factor shares across countries are definitely worth investigating more.

Update- January 24, 2014: The recent issue of QJE has a paper on this issue. Looks like declining labor share is not just an Indian phenomenon. The authors surmise that the relative decline in price of investment goods explains this trend. You can read it here.


Leave a comment

Filed under current economic issues, India-US: Some Conundrums, indian economy, macroeconomics

Economic Oportunities and Fertility Behavior

While Indian policy makers attack the population growth problem using variety of incentives, it looks like the economic incentive trumps all others. In a recently published paper in the Quarterly Journal of Economics, Robert Jensen finds that increased awareness of prospects of gainful employment made the women in the treatment village to be less likely to marry and have kids than those who were not aware of such opportunities (control village). Those married were also more likely to limit the number of kids in order to pursue a steady career.

The economic reasoning behind the behavior displayed by these women is simple. An increase in the economic opportunities increased the opportunity cost of getting married and having kids leading to a substitution away from them. A good example of rational behavior from rural India. You can find the paper here.


Robert Jensen, Do Labor Market Opportunities Affect Young Women’s Work and Family Decisions? Experimental Evidence from India The Quarterly Journal of Economics (2012) 127(2): 753-792

Leave a comment

Filed under indian economy, social perspectives

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.

Leave a comment

Filed under indian economy

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!

Leave a comment

Filed under indian economy

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.

Leave a comment

Filed under indian economy, social perspectives

India and Globalization

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

Leave a comment

Filed under indian economy

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.

Leave a comment

Filed under current economic issues, indian economy