Stagnant Manufacturing In India: The Role Of TFP And Trade

Meenakshi Shekhar

Working Papers from Centre for Advanced Financial Research and Learning (CAFRAL)

Abstract: Manufacturing is crucial for economic development, yet it faces stagnation or decline in many developing and underdeveloped countries today. India, in particular, has experienced stagnant manufacturing compared to other recently industrialized Asian nations like South Korea and China, while its services sector has thrived. Using a three-country, three-sector open economy general equilibrium model, the paper attempts to understand the role of various channels of structural change in India. The model builds in the income effects, asymmetric TFP growth, and trade effects as significant channels for analysis and is calibrated using the relevant data for India, China, and the Rest of the World. Then, some counterfactual experiments are done to analyze the structural change. Counterfactual experiments reveal that while trade has provided some compensation, sloppy TFP growth in Indian manufacturing rather than services explains the sectoral growth bias towards the services. The direct comparison with China suggests little structural divergence, even if TFP would have grown to the Chinese equivalent. Moreover, TFP growth and trade liberalization alone cannot fully account for the prolonged stagnation of India’s manufacturing sector in this model.

Pages: 38
Date: 2025-09
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Persistent link: https://EconPapers.repec.org/RePEc:ris:cafral:022256

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