Online Appendix to India s Mysterious Manufacturing Miracle

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1 Online Appendix to India s Mysterious Manufacturing Miracle Albert Bollard McKinsey and Company Gunjan Sharma University of Missouri December 4, 2012 Peter J. Klenow Stanford University 1 Productivity and Growth 1

2 Figure 1: R 2 of single breaks in aggregate productivity growth, by first post-break year A. L 200 panel B. Census panel Graphing R 2 s from regressions of annual aggregate productivity growth on dummy for year x and a constant. 2

3 Table 1: Estimates of the pick-up in productivity growth since 2002, L 200 panel (1) (2) (3) (4) Noise weighting: None Plant noise Sector noise Both A. Aggregate productivity Annual data (3.76)** (3.76)** B. Plant efficiency Annual data (4.12)* (4.18) Sectoral data (4.04)* (4.08) (2.58)** (2.66)* Plant data (4.04)* (4.08) (3.21)* (3.15)* C. Between-sector reallocation Annual data (0.14) (0.12) Sectoral data (0.17) (0.17) (0.07)** (0.06)** Plant data (0.17) (0.17) (0.07)** (0.06)** D. Within-sector reallocation Annual data (0.25) (0.26) Sectoral data (0.29) (0.29) (0.28) (0.25) Plant data (0.29) (0.29) (0.31) (0.31) E. Aggregate markup Annual data (1.08) (1.07) Sectoral data (1.04) (1.03) (0.80)** (0.74)** Plant data (1.04) (1.03) (0.82) (0.82) * p < 10%, ** p < 5%. The dependent variable is 100 (logtfp jt logtfp jt 1 ). Heteroskedasticity-robust standard errors, clustered by year and sector in sectoral data, and by year, sector and plant in plant data. (In the annual data, conventional standard errors are substantially smaller.) All p-values evaluated from t-distribution with 19 degrees of freedom. Sectoral and plant data regressions weighted by Basu-Fernald aggregation weights. 3

4 Table 2: Estimates of the pick-up in productivity growth since 2002, Census panel (1) (2) (3) (4) Noise weighting: None Plant noise Sector noise Both A. Aggregate productivity Annual data (3.14)** (3.07)** B. Plant efficiency Annual data (3.45) (3.40) Sectoral data (3.26)* (3.30) (2.30)** (2.41)* Plant data (3.26)* (3.30) (2.79)* (2.70)* C. Between-sector reallocation Annual data (0.12) (0.12) Sectoral data (0.15) (0.15) (0.08)** (0.07)** Plant data (0.15) (0.15) (0.07)** (0.07)** D. Within-sector reallocation Annual data (0.21) (0.22) Sectoral data (0.23) (0.24) (0.23) (0.28) Plant data (0.23) (0.24) (0.27) (0.29) E. Aggregate markup Annual data (1.11) (1.12) Sectoral data (1.09) (1.09) (0.88)** (0.68)** Plant data (1.09) (1.09) (0.92) (0.93) * p < 10%, ** p < 5%. The dependent variable is 100 (logtfp jt logtfp jt 1 ). Heteroskedasticity-robust standard errors, clustered by year and sector in sectoral data, and by year, sector and plant in plant data. (In the annual data, conventional standard errors are substantially smaller.) All p-values evaluated from t-distribution with 19 degrees of freedom. Sectoral and plant data regressions weighted by Basu-Fernald aggregation weights. 4

5 Table 3: Growth in Labor Productivity Annual Average Growth Rates (%) Agriculture Manufacturing Services Author calculations from Hnatskovska and Lahiri (2011). Data covers both formal and informal activity in each sector. Table 4: Previous estimates of productivity growth (%) A. Hulten and Srinivasan (1999, Table 6) Real Value Added Labor Capital Total Factor Input Total Factor Productivity B. Bosworth and Collins (2008, Table 3. Industry series) Output Employment Output per worker Contribution to output per worker: Physical capital Education Factor productivity B. Bosworth and Collins (2008, Unpublished Estimates: Industry) Output Employment Output per worker Contribution to output per worker: Physical capital Education Factor productivity In the World Development Indicators, the share of manufacturing in industry value added averaged only 61% from 1980 to

6 Table 5: Estimates of changes in aggregate productivity growth, L 200 panel Automatic break-points Mean Trend Constant (1.72)** (2.42) (1.94)* (1.71)** (1.95)** (1.90)** (1.86)** Year (0.21) 1993 onwards 6.23 (3.38)* 2002 onwards (2.50)** 1999 to (2.49)** 2001 onwards 8.94 (3.14)** 1994 to (2.02)** 1999 to (2.48)** 2001 onwards (3.16)** 1992 to (1.86)** 1993 to (3.66)* 1999 to (2.48)** 2001 onwards 9.52 (3.21)** R BIC * p < 10%, ** p < 5%. Heteroscedasticity-robust standard errors in parentheses. 22 observations. Each regression has 22 observations. BIC is Bayesian Information Criterion smaller numbers are better. 6

7 Table 6: Estimates of changes in aggregate productivity growth, Census panel Automatic break-points Mean Trend Constant (1.54)** (2.28) (1.86)** (1.58)** (1.78)** (1.97)* (1.81)** Year (0.19) 1993 onwards 5.18 (2.99)* 2002 onwards 9.63 (2.34)** 1999 to (2.07)** 2001 onwards 7.08 (2.78)** 1993 to (2.07)** 1999 to (2.25)** 2001 onwards 8.69 (2.95)** 1992 to (1.81)** 1993 to (1.92)** 1999 to (2.13)** 2001 onwards 7.63 (2.90)** R BIC * p < 10%, ** p < 5%. Heteroscedasticity-robust standard errors in parentheses. 22 observations. Each regression has 22 observations. BIC is Bayesian Information Criterion smaller numbers are better. 7

8 2 Robustness Check: Various Rental Rates of Capital Table 7: Rental = 10%: Growth rates of annual aggregates, (%) ASI totals Census panel L 200 panel Output Value added Fixed assets Unskilled labor Skilled labor Total factor inputs Aggregate productivity Source: ASI see Appendix A for sample construction details. Table 8: Rental = 10%: Growth rates of annual aggregates over two periods (%) ASI totals Census panel L 200 panel ASI totals Census panel L 200 panel Output Value added Fixed assets Unskilled labor Skilled labor Total factor inputs Aggregate productivity Source: ASI see Appendix A for sample construction details. 8

9 Table 9: Rental = 10%: Aggregated averages of plant-level growth rates, (%) Census panel L 200 panel Value added Total factor inputs Aggregate productivity Plant efficiency Within-sector reallocation Between-sector reallocation Aggregate markup Source: ASI see Appendix A for sample construction details. Table 10: Rental = 10%: Aggregated averages of plant-level growth rates over two periods (%) Census panel L 200 panel Census panel L 200 panel Value added Total factor inputs Aggregate productivity Plant efficiency Within-sector reallocation Between-sector reallocation Aggregate markup Source: ASI see Appendix A for sample construction details. Table 11: Rental = 20%: Growth rates of annual aggregates, (%) ASI totals Census panel L 200 panel Output Value added Fixed assets Unskilled labor Skilled labor Total factor inputs Aggregate productivity Source: ASI see Appendix A for sample construction details. 9

10 Table 12: Rental = 20%:Growth rates of annual aggregates over two periods (%) ASI totals Census panel L 200 panel ASI totals Census panel L 200 panel Output Value added Fixed assets Unskilled labor Skilled labor Total factor inputs Aggregate productivity Source: ASI see Appendix A for sample construction details. Table 13: Rental = 20%:Aggregated averages of plant-level growth rates, (%) Census panel L 200 panel Value added Total factor inputs Aggregate productivity Plant efficiency Within-sector reallocation Between-sector reallocation Aggregate markup Source: ASI see Appendix A for sample construction details. Table 14: Rental = 20%:Aggregated averages of plant-level growth rates over two periods (%) Census panel L 200 panel Census panel L 200 panel Value added Total factor inputs Aggregate productivity Plant efficiency Within-sector reallocation Between-sector reallocation Aggregate markup Source: ASI see Appendix A for sample construction details. 10

11 3 Policy Regression Results 11

12 Noise weighting: Table 15: Log Productivity on De-licensing Independent variable: Fraction of sectoral output de-licensed (1) (2) (3) (4) (5) Plant Sector Censored None Both noise noise [-100, 100] A. L 200 balanced panel Sectoral productivity (10.79) (10.92) (7.06)** (8.90) (10.31) Plant efficiency (10.37) (11.02) (6.62)** (7.83) (10.03) Between-sector reallocation (0.79) (0.98) (0.40) (0.36)* (0.79) Within-sector reallocation (1.68) (2.01) (1.17) (1.50) (1.68) Aggregate markup (2.02) (2.11) (1.42) (1.38) (2.02) Sector FEs Year FEs Observations B. Census balanced panel Sectoral productivity (8.08) (7.93) (4.92)** (5.44)** (7.38) Plant efficiency (8.58) (8.64) (4.55)** (4.86)** (8.04) Between-sector reallocation (0.65) (0.70) (0.38) (0.29) (0.65) Within-sector reallocation (1.45) (1.54) (0.76)** (0.81)** (1.45) Aggregate markup (1.56) (1.52) (1.14)* (1.19) (1.56) Sector FEs Year FEs Observations * p < 10%, ** p < 5%. Standard errors clustered by sector in parentheses. Six regressions per column each row is a new dependent variable. Dependent variables are cumulative growth rates, in percentage points, from 0 in All regressions weighted by sectoral value-added share (1980 observations weighted by shares and plant growth variances) and include industry and year fixed effects. Independent variable is output-weighted sectoral average of 4-digit NIC1987 de-licensing indicator from Sharma (2008). 12

13 Noise weighting: Table 16: Log productivity on Tariffs, Independent variable: Average nominal tariff fraction (1) (2) (3) (4) (5) Plant Sector Censored None Both noise noise [-100, 100] A. L 200 balanced panel Sectoral productivity (17.89) (19.54) (10.18) (11.04) (17.78) Plant efficiency (17.97) (19.47) (8.55) (9.35) (17.85) Between-sector reallocation (1.65) (1.99) (0.98) (1.02) (1.65) Within-sector reallocation (2.78) (3.01) (1.97) (1.59)* (2.78) Aggregate markup (3.12) (3.66) (2.31) (2.48) (3.12) Sector FEs Year FEs Observations B. Census balanced panel Sectoral productivity (13.28) (14.06) (7.61) (8.47) (13.17) Plant efficiency (13.46) (14.01) (5.07) (6.04) (13.36) Between-sector reallocation (1.45)** (1.70)** (0.88)** (0.97)** (1.45)** Within-sector reallocation (3.99) (4.48) (1.09) (0.97) (3.99) Aggregate markup (2.59) (2.91) (1.39) (1.41) (2.59) Sector FEs Year FEs Observations * p < 10%, ** p < 5%. Standard errors clustered by sector in parentheses. Six regressions per column each row is a new dependent variable. Dependent variables are cumulative growth rates, in percentage points, from 0 in All regressions weighted by sectoral value-added share (1980 observations weighted by shares and plant growth variances) and include industry and year fixed effects. Independent variable is negative of output-weighted sectoral average of 3-digit NIC1987 average nominal tariff from Harrison et al. (2011). 13

14 Noise weighting: Table 17: Log productivity on FDI liberalization Independent variable: Fraction of sectoral output open to FDI (1) (2) (3) (4) (5) Plant Sector Censored None Both noise noise [-100, 100] A. L 200 balanced panel Sectoral productivity (14.68) (17.60) (8.98)** (11.82)** (14.53) Plant efficiency (16.10) (19.08)* (9.09)* (12.46) (15.96) Between-sector reallocation (1.70)** (2.23)** (0.98)** (1.23)** (1.70)** Within-sector reallocation (3.08) (3.43) (1.97) (2.38) (3.08) Aggregate markup (4.45) (5.38) (2.14) (2.44) (4.45) Sector FEs Year FEs Observations B. Census balanced panel Sectoral productivity (12.56) (14.47)** (10.19)* (9.94)** (12.48) Plant efficiency (14.53) (16.54)* (7.82)* (8.86)** (14.48) Between-sector reallocation (1.48)** (1.85)** (0.89)** (0.91)** (1.48)** Within-sector reallocation (2.79) (3.16) (1.70) (2.08) (2.79) Aggregate markup (3.65) (4.22) (1.81) (2.06) (3.65) Sector FEs Year FEs Observations * p < 10%, ** p < 5%. Standard errors clustered by sector in parentheses. Six regressions per column each row is a new dependent variable. Dependent variables are cumulative growth rates, in percentage points, from 0 in All regressions weighted by sectoral value-added share (1980 observations weighted by shares and plant growth variances) and include industry and year fixed effects. Independent variable is output-weighted sectoral average of 4-digit NIC1987 indicator of being opened to FDI in 1993 from Sivadasan (2009). 14

15 Noise weighting: Table 18: Log productivity on De-reservation Independent variable: Fraction of sectoral output de-reserved (1) (2) (3) (4) (5) Plant Sector Censored None Both noise noise [-100, 100] A. L 200 balanced panel Sectoral productivity (78.10)** (87.64)** (69.32)** (80.07)** (80.47)** Plant efficiency (89.50) (101.76) (53.34) (60.13) (92.35) Between-sector reallocation (5.95)** (7.75)** (5.49)** (7.05)** (5.95)** Within-sector reallocation (12.60) (14.74) (6.67)** (5.95)** (12.60) Aggregate markup (11.23) (12.76) (5.36)** (8.17)** (11.23) Sector FEs Year FEs Observations B. Census balanced panel Sectoral productivity (38.01)** (44.18)** (33.06)** (35.48)** (38.42)** Plant efficiency (54.32) (63.47) (21.92) (30.31) (55.23) Between-sector reallocation (8.60)** (10.67)** (7.90)** (8.26)** (8.60)** Within-sector reallocation (11.25) (14.27) (8.64)** (9.71)** (11.25) Aggregate markup (13.16) (15.00) (9.86) (9.99) (13.16) Sector FEs Year FEs Observations * p < 10%, ** p < 5%. Standard errors clustered by sector in parentheses. Six regressions per column each row is a new dependent variable. Dependent variables are cumulative growth rates, in percentage points, from 0 in All regressions weighted by sectoral value-added share (1980 observations weighted by shares and plant growth variances) and include industry and year fixed effects. Independent variable is output-weighted sectoral average of 5-digit ASICC product code see Appendix A for details. 15

16 Noise weighting: Table 19: Log productivity on input tariffs, Independent variable: Average nominal tariff on sector inputs (1) (2) (3) (4) (5) Plant Sector Censored None Both noise noise [-100, 100] A. L 200 balanced panel Sectoral productivity (13.48)** (11.76)* (15.49)* (14.37)* (13.34)** Plant efficiency (13.02)** (11.19)* (15.06)** (9.32)** (12.86)** Between-sector reallocation (1.33)* (1.05)* (0.72)** (0.79)** (1.33)* Within-sector reallocation (2.02) (1.92) (1.38) (1.20) (2.02) Aggregate markup (2.66) (2.55) (0.91) (1.13) (2.66) Sector FEs Year FEs Observations B. Census balanced panel Sectoral productivity (9.78)** (8.17)* (9.53)** (6.75)** (9.67)** Plant efficiency (9.35)** (7.75)* (10.65)** (10.90)** (9.24)** Between-sector reallocation (0.71)** (0.64)** (0.46) (0.43) (0.71)** Within-sector reallocation (1.10) (0.92) (1.06) (1.55) (1.10) Aggregate markup (1.94) (1.65) (0.72) (0.85) (1.94) Sector FEs Year FEs Observations * p < 10%, ** p < 5%. Standard errors clustered by sector in parentheses. Six regressions per column each row is a new dependent variable. Dependent variables are cumulative growth rates, in percentage points, from 0 in All regressions weighted by sectoral value-added share (1980 observations weighted by shares and plant growth variances) and include industry and year fixed effects. Independent variable is an input-output table weighted average of tariffs on inputs, calculated as output-weighted sectoral averages of 3-digit NIC 1987 average nominal tariffs see Appendix A for details. 16

17 Table 20: Log productivity on all policies, L 200 balanced panel (1) (2) (3) (4) (5) Noise weighting: None Plant noise Sector noise Both Censored [-100, 100] A. Sectoral productivity Fraction de-licensed (7.73) (7.71) (4.85) (4.67) (7.33) Tariff fraction (9.88) (11.03) (5.84) (6.21) (9.77) Fraction open to FDI (14.62) (18.01) (10.60)** (13.32)** (14.53) Fraction de-reserved (80.20)** (92.25)** (67.05) (74.52) (82.26)** Input tariffs fraction (17.31)** (19.17)** (18.14)** (16.60)** (17.24)** B. Plant efficiency Fraction de-licensed (7.54) (7.91) (3.87) (4.06) (7.24) Tariff fraction (9.95) (11.12) (6.02)** (6.84)* (9.83) Fraction open to FDI (15.02) (18.14) (10.17)** (13.42)** (14.88) Fraction de-reserved (91.33) (105.93) (46.99) (58.46) (93.87) Input tariffs fraction (16.29)** (17.91)** (19.81)** (20.82)** (16.22)** C. Between-sector reallocation Fraction de-licensed (0.65) (0.77) (0.39) (0.38) (0.65) Tariff fraction (0.85) (1.00)* (0.67)* (0.63)** (0.85) Fraction open to FDI (1.56)** (2.04)** (0.94)** (1.09)** (1.56)** Fraction de-reserved (5.98)** (7.86)** (5.16)** (6.12)** (5.98)** Input tariffs fraction (1.15)** (1.19)* (1.13)** (1.00)** (1.15)** C. Within-sector reallocation Fraction de-licensed (1.60) (1.91) (0.63) (0.85) (1.60) Tariff fraction (1.83) (2.10) (0.93) (1.31) (1.83) Fraction open to FDI (2.71) (3.02) (2.22) (2.26) (2.71) Fraction de-reserved (12.53) (14.76) (6.87)** (6.05)** (12.53) Input tariffs fraction (1.96) (2.13) (2.13) (2.81) (1.96) C. Aggregate markup Fraction de-licensed (1.87) (2.11) (1.41) (1.36) (1.87) Tariff fraction (1.68) (2.00) (1.55) (1.52) (1.68) Fraction open to FDI (4.67) (5.77) (2.45) (2.74) (4.67) Fraction de-reserved (11.14) (12.86) (4.07)** (5.58)** (11.14) Input tariffs fraction (2.65) (3.01) (1.34)** (1.88) (2.65) Sector FEs Year FEs Observations * p < 10%, ** p < 5%. Standard errors clustered by sector in parentheses. Six regressions per column each row is a new dependent variable. Dependent variables are cumulative growth rates, in percentage points, from 0 in All regressions weighted by sectoral value-added share (1980 observations weighted by shares and plant growth variances) and include industry and year fixed effects. Dummy variables (not shown) are included for all missing policy values, which are replaced with zeroes. 17

18 Table 21: Log productivity on all policy measures, Census balanced panel (1) (2) (3) (4) (5) Noise weighting: None Plant noise Sector noise Both Censored [-100, 100] A. Sectoral productivity Fraction de-licensed (6.39) (6.35) (3.31) (2.88)** (5.80) Tariff fraction (7.75) (8.10) (4.84) (4.25) (7.69) Fraction open to FDI (11.54) (13.65)* (10.11)** (11.29)** (11.47) Fraction de-reserved (38.04)** (44.39)** (34.22)** (33.27)** (38.40)** Input tariffs fraction (11.89)** (13.58)** (9.15)** (10.88)** (11.84)** B. Plant efficiency Fraction de-licensed (6.90) (7.01) (2.71)** (2.34)** (6.48) Tariff fraction (8.10) (8.38) (6.29) (5.76)** (8.04) Fraction open to FDI (12.93) (15.14)* (8.64)** (9.57)** (12.87) Fraction de-reserved (54.93) (64.80) (25.86) (30.85) (55.77) Input tariffs fraction (11.19)** (12.53)** (11.19)** (13.24)** (11.15)** C. Between-sector reallocation Fraction de-licensed (0.55) (0.65) (0.43) (0.58) (0.55) Tariff fraction (0.90)** (1.02)** (0.70)** (0.74)** (0.90)** Fraction open to FDI (1.35)** (1.71)** (0.77)** (1.11)** (1.35)** Fraction de-reserved (8.44)** (10.38)** (7.33)** (7.96)** (8.44)** Input tariffs fraction (0.71)** (0.72)** (0.65)* (0.61)** (0.71)** C. Within-sector reallocation Fraction de-licensed (1.32) (1.44) (0.67)* (0.58) (1.32) Tariff fraction (2.25) (2.55) (0.83) (0.81) (2.25) Fraction open to FDI (2.48) (2.87) (1.55) (2.07) (2.48) Fraction de-reserved (11.07) (14.13) (5.97)** (7.73)** (11.07) Input tariffs fraction (1.34) (1.55) (1.34) (1.29) (1.34) C. Aggregate markup Fraction de-licensed (1.55) (1.90) (1.23) (1.22) (1.55) Tariff fraction (1.65) (1.76) (0.96) (1.00) (1.65) Fraction open to FDI (3.85) (4.64) (1.74) (2.07) (3.85) Fraction de-reserved (12.98) (14.91) (7.95) (10.95) (12.98) Input tariffs fraction (2.10) (2.35) (1.44)** (1.57)* (2.10) Sector FEs Year FEs Observations * p < 10%, ** p < 5%. Standard errors clustered by sector in parentheses. Six regressions per column each row is a new dependent variable. Dependent variables are cumulative growth rates, in percentage points, from 0 in All regressions weighted by sectoral value-added share (1980 observations weighted by shares and plant growth variances) and include industry and year fixed effects. Dummy variables are included for all missing policy values, which are replaced with zeroes. 18

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