Research

Evolution of the distribution of plant level productivity (with Shweta Jain)

This paper studies the evolution of the distribution of plant level productivity in Indian manufacturing units over a long period of time, starting from 1983-84 and ending in 2012-13 using ASI data. While there are several papers that look at how the mean or the standard deviation of productivity has changed over time, we study how the whole distribution has changed over time. We find that much of the change happens at the middle of the distribution. Significantly large number of entries and exits happen at the middle of the distribution. Moreover, there is no significant difference in productivity of plants that enter or exit or continue operations. This is contrary to standard theory which suggests that plants with productivity below some threshold should exit while entering plants are expected to have productivity above a threshold. Further, using dynamic Olley-Pakes decomposition, we find that the contributions to the change in aggregate productivity from entry, exit and surviving plants are indistinguishable. What explains these observations? One possibility is the skill distribution of labor force – we find that the share of high skilled workers (some college or more) is low compared to those who have some schooling, but not college education. This could lead to more imitation than innovation, which in turn can explain the observations mentioned above. We build a dynamic model of entry, exit, imitation, innovation and obsolescence to demonstrate this. We also find education level data from NSSO reflects that high skilled labor, required for innovation, is much lower compared to lower skilled labor. This results in lower innovation compared to imitation.   #productivity #innovation #imitation #entry #exit #skill #india

Did Economic Reforms Affect Manufacturing Productivity in India? (with Shweta Jain)

India has witnessed a series of policy reforms since 1991, which aimed to increase the productivity of the manufacturing sector.  Did these reforms increase productivity in manufacturing plants? We address this question using  rich data from the Annual Survey of Industries in India spanning three decades from 1983-84 to 2012-13. We focus on three reforms: delicensing, allowing foreign direct investments, and tariff reduction. We find no systematic or significant impact of the reforms on plant-level productivity in manufacturing. This result holds whether we look at the reforms individually using a difference-in-difference technique or simultaneously using fixed effects. Productivity is correlated with plant size, industry concentration, and misallocation, but we find that the reforms had no significant effect on any of these channels. This sheds light on why the economic reforms in India may have failed to impact productivity. #prodcutivity #policy #economicliberalization #reforms #india

Optimal Taxation in a Federation and GST in India (with Trishita Ray Barman)

Optimal tax models, starting from Ramsey (1927), are often studied using a single government. However, there are several countries which are federations and multiple level of governments have fiscal authority. In this paper we study a federation with several states and a central government. We ask what the optimal design of taxation is and find that optimally either states, or the center should impose a consumption tax, but not both. We then characterize two equilibria, one where both the central government and state governments impose tax and two, where only the center imposes tax rates. We find that in the first equilibrium, though states can potentially impose different tax rates, consumption across states are the same, as is the case in the second equilibrium. However, aggregate consumption in the country is greater in the second equilibrium, when only the center imposes tax. We then calibrate the model to Indian data and find the revenue neutral tax rates. We find that the highest revenue neutral tax rate is 20.1% and the median rate is 11.4%. Using the calibrated indirect tax rates in a regression analysis, we find that tax rates at the state level is negatively related to the growth rate of the state. So, after the implementation of GST in India, some states may see a higher level of consumption tax rate in the state and hence, a fall in growth rate. #optimaltaxation #GST #india #federalism