Working Paper

465

STRUCTURAL CHANGE IN THE

INDIAN ECONOMY

Manmohan Agarwal
and
Sunandan Ghosh

November 2015
 The Centre's Working Papers can be downloaded from the
website (www.cds.edu). Every Working Paper is subjected to an
external refereeing process before being published.
 STRUCTURAL CHANGE IN THE INDIAN ECONOMY

Manmohan Agarwal
and
Sunandan Ghosh

November 2015

The authors deeply acknowledge the suggestions and help by Dr. Srikanta
Kundu of the Centre for Development Studies. Comments by
Dr. M Parameswaran, Prof. Sunil Mani, Dr. PL Beena and other participants
of seminar at the Centre for Development Studies and an anonymous
referee on an earlier draft of the paper are also acknowledged. The usual
disclaimer, however, applies.
4

ABSTRACT

We analyse the evolution of the Indian economy over the past six
decades, particularly identifying structural breaks. We find that usually
there has been a gradual change in the indicators of the economy .The
growth rate of per capita GDP after falling in the decade mid 60s to mid
70s has been accelerating gradually since then. Since 1991 exports
have played an important role in this growth. The various crises and the
measures taken to tackle them have not disturbed this evolution, except
the policy changes ushered from 1991. The structural breaks we identify
do not usually coincide with these crises. The structural breaks suggest
certain patterns which are investigated using VAR estimations.

Key Words: Indian Economy, Structural Break, VAR Estimation

JEL Classifications: N15, O21, O24

 5

1. Introduction

Indian policy makers embarked on their journey to raise living

standards and reduce poverty and inequality soon after independence,
and they employed the mechanism of Five Year Plans to bring coherence
to their attempts. The process of designing explicit five plans went on
for nigh sixty years. But the process of growth and planning did not
proceed smoothly. It was interrupted by a number of crises and sometimes
these crises led to the suspension of plan implementation for a few years
while new policies were adopted to tackle the problems identified by
the crisis or caused by the crisis. This paper seeks to analyse whether the
different crises were caused by exogenous factors or because of faulty
domestic policies. Exogenous factors themselves could be of two kinds
one those emanating from the world economy and those emanating in
the domestic sphere. We next analyse what the effect of these crises
reveal about the interrelationships between different aspects of the Indian
economy.

Our analysis proceeds in section 2 by first noting the various

crises that have struck the Indian economy over the past six decades and
their effects on growth and investment. We find that the effect on GDP is
ephemeral while that on investment is longer lasting. We then examine
in section 3 the evolution of the Indian economy over the past six
decades. We do this plan wise as the plans governed the government's
policies. We find that GDP growth gradually accelerates over the plan
periods except for a slowdown in the sixties and early seventies. The
6

gradual growth acceleration is accompanied by increases in investment

and savings rates. A significant change over this period is that the share
of exports of goods and services (XGS) in GDP declines till the Fourth
Plan, 1969-73, and shows rapid growth after the Eighth Plan, 1992-96,
reflecting the significant change in India's trade and industrial policies
initiated in 1991. While the improved export performance can be ascribed
to the policy changes initiated in 1991 the gradual acceleration in growth
of GDP cannot be similarly ascribed to any particular policy changes. In
section 4 we more formally identify structural breaks in the Indian
economy using the Bai-Perron technique. In section 5 we compare the
impacts of the manufacturing and services sectors on the Indian economy.
The findings suggest certain patterns which are further analysed in
section 6 to reveal interrelationships in the Indian economy using VAR
estimations. Section 7 concludes the paper.

2. Crises in the Indian Economy

The Indian economy has experienced a number of crises in the

past six decades. There was a balance of payments (BOP) crisis in 1957-
58 as the policy makers were implementing the Second Five Year Plan.
1956-1960, that called for much higher rates of investment and that
needed much greater imports of capital goods. Another crisis struck in
the mid-sixties because of a severe drought that resulted in very poor
harvests in 1965-66 and 1966-67. This necessitated large imports of
food from the US under the food aid programme and resulted in very
high rates of inflation. The drought was followed by cut-off of aid from
the US and the World Bank forcing adoption of severe adjustment
policies. Subsequently, a BOP crisis was precipitated by the large
increases in prices of oil and many commodities in 1973-74. The price
increases followed on the heels of the large influx of refugees from the
now Bangladesh and the subsequent war that resulted in the
independence of Bangladesh. The effects of the oil price rise in 1979
following the revolution in Iran and the subsequent Iran-Iraq war
 7

generated another BOP crisis. The invasion of Kuwait by Iraq and the
First Gulf War resulted in a severe BOP crisis as the larger trade deficit
because of higher oil prices was aggravated by the fall in remittances as
many Indian workers in the Gulf returned home.

Table 1: Crises for the Indian Economy

Date of Cause
Crisis
Endogenous Exogenous Domestic External What
1957-58 Excess Investment
1965 on Drought and Aid Cut
1973-74 Oil Price Rise
1979-80 Oil Price (Iran-Iraq War)
1990-91 Oil Price (Gulf War)

Though the immediate factor behind the 1991 crisis was the Gulf
war with the rise in oil prices and fall in remittances because of return of
workers from the Middle East, the domestic situation was fragile both
economically, high short term borrowings, and politically, weak
governments unable to take decisions.

2.1. Impact of Crises on GDP and Investment

The effect of the crises on gr111owth of GDP was usually short

lived. In 1957-58 GDP declined by 1.2 percent, but rebounded in the
next year as it grew by 7.6 percent. Similarly the GDP after growing at
merely 1.2 percent in 1974-75 grew by 9 percent the following year and
after falling by 5.2 percent in 1979-80 grew by 7.2 percent in 1980-81.
However, while GDP rebounded rapidly that was not the case with
investment.

The drop in the investment ratio after a crisis recovered only after
a considerable lag. For instance, after gross fixed capital formation
(GFCF) as a percentage of gross domestic product (GDP) reached a peak
of 15.9 per cent in 1957-58 it fell after the 1957-58 BOP crisis and did
8

not recover to the earlier ratio till 1963--64 (RBI 2012). The fall in the
GFCF ratio after the 1965-67 crisis was particularly severe - from 20.4
per cent to 16.7 per cent - and it did not recover till 1977-78.

2.2. Response to the Crises

The government responded by a mixture of financing and

adjustment. For instance, following the 1957-8 crisis the Indian
Government approached the World Bank for financial assistance. The
World Bank responded favourably and organised the Aid India
Consortium. Under the leadership of the US the Aid India Consortium
provided considerable help during the Second and Third Five Year Plans1.
This aid financed a quarter to a third of public investment in these plans.
Following the 1973-74 crisis India borrowed from the trust fund that
had been set up at the International Monetary Fund (IMF) to provide
BOP financing for countries severely affected by the oil price rise. India
also started tapping non-resident Indians. It provided various incentives,
including a higher interest rate than they could earn in the country of
residence. In the crisis following the oil price rises of 1979 and the Gulf
War India borrowed from the IMF. The only crisis when India did not tap
external financing was the 1965-67 crisis. This crisis was partly caused
by the cut-off of aid and at that time the availability of private financing
was very limited.

At the time of the first crisis in 1957-58 there was a vigorous

debate about the size of the Plan. Many analysts and policy makers
believed that the Plan was too large and beyond the capacity of the
economy. As a result of this debate the Plan was divided into two, a core
plan and the rest which would be implemented if resources permitted.
Subsequent crises also saw similar adjustments on the expenditure side.
For instance, the fiscal and monetary policy became so contractionary
after the 1973-74 oil price rise that wholesale prices which had risen by

1. The US promised to match aid given by the other countries of the Consortium.
 9

25.2 percent in 1974-75 fell by 1.1 percent in 1975-76. The reduction in

domestic absorption also resulted in the country running current account
surpluses for a few years in the mid-seventies. As we saw above
investments declined following a crisis and recovered only after a time
lag. Also in subsequent crisis a somewhat greater emphasis was given to
raising the rate of savings, as we shall see below.

3. Progress of the Indian Economy

We first look at the evolution of the Indian economy to identify

major interruptions to the growth process. Since the intended overall
macro and development policy changes were made in the plans we
analyse the performance plan wise.

The growth rate of the economy plummeted to a relatively low

level for almost a decade from the mid sixties to the mid seventies as the
economy struggled to cope with the cutback in aid during 1966-682.
The savings rate had to be raised before investment and growth could
recover. In the short run the higher rate of savings had a deflationary
effect on the economy.3 Furthermore, as noted below lack of demand
for capital goods created by the aid cutback created substantial excess
capacity. Since this was a period when the world economy was growing
rapidly as were also other developing countries, India missed the
opportunity to take advantage of favourable international conditions4.

2. The slowdown in the economy was similar to that experienced by many

Latin American countries in the eighties as they struggled to cope with their
debt crisis.

3. There was considerable analysis at that time about the demand constraint to
investment and growth (Chakravarty, 1979).

4. The period till 1973 is called the “Golden Age of Capitalism” (Marglin and
Schor, 1990). The growth rates of the different regions are analysed in
Agarwal (2008).
10

Table 2: Growth Rate of GDP and Major Sectors in India

GDP Agricul- Manufact- Services
ture uring
First Plan (1951-55) 3.9 3.2 5.8 5.2
Second Plan (1956-60) 4.1 3.3 6.3 4.9
Third Plan (1961-65) 3.5 -0.3 6.6 5.4
Annual Plans (1966-68) 3.7 4.4 2.2 4.3
Fourth Plan (1969-73) 3.2 2.8 4.9 3.2
Fifth Plan (74-78) 5.0 3.6 6.5 5.4
Sixth Plan (80-84) 5.5 6.3 5.2 5.5
Seventh Plan (85-89) 5.7 3.1 6.3 7.2
Eighth Plan (92-96) 6.5 4.9 9.5 6.8
Ninth Plan (97-01) 5.7 2.5 3.6 8.0
Tenth Plan (02-06) 7.6 2.5 9.0 9.2
Eleventh Plan (07-11) 8.0 3.8 7.7 9.9
2012-13 4.5 1.7 1.1 6.8
Source: Reserve Bank of India (2012).

Since the mid seventies there has been a steady acceleration of

the growth rate, except for a slight deceleration during the Ninth Plan,
which is difficult to prima facie ascribe to any policy measures (Table
2). The effects of poor harvests in the mid sixties can be seen in the
negative average rate of growth of value added in agriculture during the
Third Plan.

The effect of the subsequent cutback in aid can be seen in the

sharp drop in the growth of the manufacturing sector during the periods
of the annual plans and the Fourth Plan. The cutback in aid, the
investment needs accompanying the green revolution in agriculture
and priority accorded petroleum exploration and refining following the
oil price rises in 1973-74 forced a changed allocation of the government's
investments and a smaller allocation for manufacturing (Lele and
Agarwal, 1991). The poor performance of the manufacturing sector was
 11

because the Government's industrialisation strategy stressed investment

in heavy industries in the public sector. The output of these basic
industries would be used for further investment in heavy industries in
the public sector. Such a strategy was growth maximizing and a higher
rate of growth would lead to a greater reduction of poverty in the long
run (Mahalanobis 1953 and 1955; Bhagwati and Chakravarty, 1969;
Chakravarty, 1969). A large part of this public sector investment was
financed by aid and the aid cut-off had very serious consequences.
Without the aid investment fell. So there was no demand for the output
of the public sector units that had been set up resulting in considerable
excess capacity and very high capital output ratios. Also, as noted above,
other sectors claimed a larger share of the government's investment
budget.

It has been contended that the rapid growth of the economy since
the nineties has been based on services growth rather than growth of
manufacturing.5 This is not borne out by the data. The average growth
rate for services during the period 1980-1996 is 6.4 percent, not
statistically different from the 6.3 percent growth rate for manufacturing
during that period. Again the average growth rates for the two sectors are
not statistically significantly different for the period 2002-10. The
significant difference is during the Ninth Plan (Table 2). The large
reduction in tariff rates for imports of manufactures could have resulted
in a shrinking of the sector as happened in many Latin American countries
where the share of manufactures in GDP has fallen considerably since
the debt crisis (Agarwal and Chakravarty, 2016).

The behaviour of investment mirrors that of the growth rate of the

economy. The investment to GDP ratio was stable during the Third to
Fourth Plan periods and then there was a sharp increase from the Fifth
Plan to the Sixth Plan with further increases in the Tenth and Eleventh

5. For a discussion of this aspect of Indian growth see Kotwal, Ramaswami

and Wadhwa (2011).
12

Plans. The increase in the investment ratio is usually preceded by

increases in the share of gross domestic savings in GDP so that the
financing of the higher investment would not depend on foreign aid. We
see a very sharp increase in the savings rate after the cut-off in aid in the
mid sixties to the Fifth Plan. The increase in the savings ratio predates
the increase in the investment ratio. Again the savings ratio starts to
increase in the Ninth Plan before the investment ratio shot up in the
Tenth Plan.

Table 3: Economic Performance Some Indicators (% of GDP)

Plans Gross Gross Current Exports
Fixed Domestic Account of Goods
Capital Savings Balance and
Formation Services
First Plan (1951-55) 9.5 9.8 0.2
Second Plan (1956-60) 13.0 11.0 -2.8
Third Plan (1961-65) 14.3 12.7 -1.8 3.9
Annual Plans (1966-68) 14.3 12.7 -0.2 4.0
Fourth Plan (1969-73) 14.3 14.9 -0.7 3.8
Fifth Plan (74-78) 16.3 18.6 0.5 5.9
Sixth Plan (80-84) 20.5 17.6 -1.5 6.6
Seventh Plan (85-89) 21.4 19.6 -2.2 6.0
Eighth Plan (92-96) 22.4 22.5 -1.2 8.8
Ninth Plan (97-01) 24.3 24.3 -0.6 11.2
Tenth Plan (02-06) 28.1 31.0 0.2 17.9
Eleventh Plan (07-11) 33.7 33.5 -2.6 22.6
2012-13 33.2 30.1 -4.7 24.4

We now discuss the state of India's external sector by examining

both export performance and the balance between exports and imports.
It has been contended that India's growth has been driven by domestic
demand and not exports unlike China's growth.
 13

The importance of exports both of goods and non factor services

(NFS) declined through the first three plans.6 They then stabilized
before experiencing a sharp increase in the Fifth Plan.7 Exports of
goods, NFS and transfers, mainly remittances started growing very rapidly
from the Eighth Plan onwards, namely since the liberalization process
started. A number of policies were changed following the BOP crisis of
1991 all of which contributed to this rapid expansion of exports. The
rupee was devalued and later was made market determined so it tended
to devalue. Imports were liberalized.

Table 4: India's Export Performance (% of GDP)

Plans Goods Non-Factor Income Transfers
Services
First Plan (1951-55) 5.5 1.0 0.2 0.6
Second Plan (1956-60) 4.1 0.9 0.1 0.6
Third Plan (1961-65) 3.2 0.7 0.0 0.6
Annual Plans (1966-68) 3.3 0.7 0.1 0.5
Fourth Plan (1969-73) 3.2 0.5 0.1 0.9
Fifth Plan (74-78) 4.9 0.9 0.2 1.1
Sixth Plan (80-84) 4.5 1.5 0.3 1.5
Seventh Plan (85-89) 4.6 1.3 0.2 1.1
Eighth Plan (92-96) 8.1 1.9 0.2 2.4
Ninth Plan (97-01) 8.6 3.1 0.5 2.8
Tenth Plan (02-06) 11.8 5.8 0.7 3.3
Eleventh Plan (07-11) 14.7 7.6 0.9 3.7

6. Indian exports at the time of independence consisted mainly of agricultural

products such as tea, jute and cotton in all of which India had a large market
share. Improved export performance had to wait for development of the
manufacturing sector (Government of India, 1952). Actually the export target
for the Third Plan had been achieved by the third year. The droughts of
1965-67 and the subsequent aid cutback required an entirely different strategy.

7. This increase reflected the analysis of the effects of a permanent increase in

the price of imported oil and the subsequent terms of trade loss (Persson and
Svensson, 1985).
14

This helped exports in two ways. One, if fewer import competing

goods are produced following the trade liberalization then resources
would be freed to move to export production and the devaluation of the
exchange rate would provide an incentive for such a shift.8 Two, better
quality imports could be acquired to improve the competitiveness of
exports. The import content of Indian exports increased following the
liberalization. The elimination of industrial licensing also allowed entry
of more firms and some of them would export.9 So removal of entry
restrictions resulted in a large increase in exports.

We now examine whether China's growth was more export driven

and India's growth more dependent on domestic demand.

Figure 1: Exports (% of GDP), 1979-2013

8 This analysis reflects the absorption approach to the balance of payments

(Johnson, 1962).
9 For the effect of entry on exports see Agarwal and Barua (2004). They
show that if a monopolist in the domestic market is a perfect competitor in
the export market and exports say 5 percent of his output, then entry of a
second firm leads to a fourteen fold increase in exports. While the extent of
the increase depends on the elasticity of domestic demand because that
determines the extent of price decline after entry and so the incentive to
export, the increase is quite robust to variations in the parameters.
 15

The share of exports of goods and services (XGS) is much higher

in China than in India (Figure 1). However the behaviour of the share
shows a very striking similarity. This is borne out if we if we compare the
evolution since the respective reforms. So we form an index number of
the share with the value of 100 for China's share in 1979, the beginning
of China's reform, and for India's share in 1992, the beginning of India's
reform. So the year 10 represents 10 years after the reform and so
corresponds to 1989 for China and 2001 for India.

The increase in share of exports of goods and services was 239

percent for China, but 283 percent for India and this is not merely because
of the spurt in the last three or four years. The shares track well throughout
the 20 year period since the respective reforms (Figure 2).10 There is no
evidence that India has depended more on domestic demand for growth
while China has depended more on exports for growth.

Figure 2: Index of Share of Goods and Services in

GDP since the Reforms

(Index =100 for China's share in 1979 and for India's share in 1992)

10. There is considerable similarity between the Chinese and Indian

performances when seen from the perspective of change since their respective
reforms (Agarwal and Whalley, 2015a)
16

Exports can provide a fillip to the economy because of the

backward linkages, though of course in strict national accounting terms
it is net exports which contribute to GDP. But export performance has
another effect on economic growth. Export performance influences the
current account deficit and its sustainability. A large current account
deficit can usually not be sustained and it is usually corrected by a
period of slower growth. So we now examine the state of India's current
account over the years.

The current account has usually been negative except in the Fifth
Plan when for a few years in the mid-seventies it was positive and again
for some years during the Ninth Plan (Table 4). The 1991 reforms led to
an improvement in the current account balance as the deficit fell from
2.5 percent of GDP in the 7th Plan to 1.3 percent in the 8th Plan and only
0.1 percent in the 9th Plan, before ballooning again in the 11th Plan.

Table 5: The Current Account Balance and its Components

(% of GDP)
Plans Current Goods NFS Income Transfers
Account
First Plan (1951-55) -0.3 -1.4 0.4 0.0 0.6
Second Plan (1956-60) -2.2 -2.8 0.4 -0.2 0.5
Third Plan (1961-65) -2.1 -2.5 0.3 -0.5 0.6
Annual Plans (1966-68) -1.4 -1.3 0.2 -0.6 0.4
Fourth Plan (1969-73) -0.4 -1.0 0.1 -0.5 1.0
Fifth Plan (74-78) 0.3 -1.5 0.4 -0.2 1.5
Sixth Plan (80-84) -1.8 -3.7 0.6 -0.2 1.5
Seventh Plan (85-89) -2.5 -3.2 0.3 -0.9 1.1
Eighth Plan (92-96) -1.3 -3.4 0.2 -1.1 3.0
Ninth Plan (97-01) -0.1 -3.1 0.7 -0.9 3.2
Tenth Plan (02-06) -0.4 -6.2 2.9 -0.8 3.7
Eleventh Plan (07-11) -3.9 -10.7 3.8 -1.0 4.0
 17

Within the current account the balance on goods and on income

has been negative. However, that on non-factor services (NFS) and on
transfers has been positive. A second feature is that the imbalances have
been generally growing especially since the Fourth Plan. The reforms
initiated in 1991 temporarily halted the trend of increasing deficits in
merchandise trade. However, the reforms did not reduce the deficit on
merchandise trade to any significant extent as it jumped again almost to
4 percent in the 11th Plan. But there was a surge in exports of NFS and
of incoming remittances.

4. Structural Breaks

The above analysis has pointed to significant structural changes

in the Indian economy over the past six decades.11 We now examine
more formally whether there were structural breaks in the Indian economy
during this period by using Bai and Perron (1998, 2003) method for
estimating multiple structural breaks in linear models. We used two sets
of data to test for structural breaks. We used data from the World Bank
from 1960 to 2013 to test for breaks not only in the series for India but
also the series for low income countries, the group to which India
belonged for most of this period and also for the entire world. This was
done to isolate factors emanating from the world economy that may
account for the structural breaks in the Indian economy. We also used
data from the Reserve Bank of India from 1951-52 to 2012-13. This
longer time series allowed us to see whether there was a structural break
in the mid-sixties. Since the data from the World Bank was only from
1960 it would not identify a break in the mid-sixties.

11. An earlier analysis had concentrated on the behaviour of 12 significant

economic indicators and had found improvement in these indicators in the
1990s as compared to the 1980s and in the 2000s as compared to the 1990s
(Agarwal, Mitra and Whalley, 2015).
18

From the World Bank data we find no breaks in the growth rate for
per capita GDP in India (Table 6).12 For the world there is only one
break in 1972 whereas the low income countries (LIC) experienced two
breaks in 1993 and 2002.

In general while there are breaks in growth rates for the world and
for low income countries (LIC) there are none for India. The technique
compares growth rates before a possible break with the growth rate after
the possible break. Only if the two growth rates are significantly different
does the technique denote the point as a break point. While the growth
rate has fluctuated considerably in India there is no point at which there
is a sharp break in the later growth rate compared to the earlier growth
rate. But that does not mean that there is no point of time at which there
is a sharp interruption in the rate of growth. But what the lack of a
structural break implies is that any interruptions in the growth process
are temporary. The existence of breaks in the rate of growth of per capita
GDP for the world and LICs implies that the rate of growth varied for a
substantial period of time.

Table 6: Breaks in Grow1th Rates

India Low Income World
Countries
GDP per capita None 1993, 2002 1972
Agriculture None 2003 None
Manufacturing None 1986, 1991 No Data
Services 2003 1985, 1989 No Data

12. However, several authors have identified structural break in India’s GDP
growth rate during mid 1970’s or early 1980s [see Agarwal, Mitra and
Whalley (2015) for a detailed discussion]. Using the Bai and Perron (1998,
2003) method we do find multiple structural breaks in India’s GDP or GDP
per capita series, however, as already discussed, we find no statistically
significant structural break in the GDP growth rate for India over the period
1951-2013.
 19

For the world there is a break in 1972. During this period there
were increasing global imbalances and rising inflation that culminated
in the collapse of the fixed exchange rate regime in 1971. This break in
the growth rate of the world per capita GDP is not reflected in either the
growth rate in developing countries whether low income or middle
income or in India. There are two breaks in the growth rate of per capita
GDP in LICs. These occur in 1993 when the growth rate increased from
an average of -0.7 percent in the period 1975 to 1993 to an average of
1.2 percent in the period 1994 to 2002 and in 2002 when the average
growth rate of per capita GDP increased further to 3.6 for the period
2003 to 2013.

We analyse temporary interruptions in the growth process by

seeking breaks in the series. We take the log of the series as shifts in
slopes then represent changes in the growth rate. We find three break
points of the economy, namely the performance of the economy can be
divided into 4 periods (Table 7). In the first period from 1950-51 to
1977-78 the growth rate averaged 3.7 percent. Then there are increases
in the growth rate first to 4 percent during the period of the 6th Plan and
later to almost 6 percent from the middle of the 7th Plan to the beginning
of the 10th Plan and subsequently it further accelerated.13 Again the
picture is one of almost steady acceleration in the growth rate.

13 The deceleration in 2012-13 and 2013-14 is too short a period for it to

qualify as a separate period.
20

Table 7: Breaks in the Indian Economy (taking natural log series)

Variables Break Years Average growth rates

GDP at Factor Cost 1977-78 3.74 (1950-51 - 1977-78)

1986-87 4.03 (1978-79 - 1986-87)
2003-04 5.86 (1987-88 - 2003-04)
7.55 (2004-05 - 2013-14)
GDPPC at Factor cost 1963-64 1.79 (1950-51 - 1963-64)
1977-78 1.38 (1964-65 - 1977-78)
1988-89 2.30 (1978-79 - 1988-89)
2003-04 3.73 (1989-90 - 2003-04)
6.05 (2003-04 - 2012-13)
Manufacturing 1964-65 6.63 (1950-51 - 1964-65)
1978-79 4.62 (1965-66 - 1978-79)
1989-90 4.95 (1979-80 - 1989-90)
1999-2000 5.84 (1990-91 - 1999-2000)
7.53 (2000-01 - 2012-13)
Services 1960-61 3.65 (1950-51 - 1960-61)
1971-72 5.22 (1961-62 - 1971-72)
1984-85 4.37 (1972-73 - 1984-85)
1994-95 5.41 (1985-86 - 1994-95)
6.97 (1995-96 - 2012-13)
Agriculture 1986-87 2.52 (1950-51 - 1986-87)
2000-01 3.40 (1987-88 - 2000-01)
3.31 (2001-02 - 2012-13)

The breaks in manufacturing growth coincide partly with the breaks

in the GDP growth rate. For instance, the growth of manufacturing
accelerates in 1978-79 to almost 5 percent and in 1989-90 to 5.8 percent
and these breaks roughly correspond to the accelerations in the growth
rate of GDP in 1977-78 and 1986-87. We get an additional break for per
capita GDP because of variations in the rate of growth of population.

It is interesting to note that the break in the GDP series occurs

before that in manufacturing suggesting that manufacturing responded
to the higher growth of GDP which would in turn imply that the
manufacturing sector faced a demand constraint; overall exports were a
small part of GDP and similarly, exports of manufactures of manufacturing
 21

output. But later the manufacturing sector's growth accelerated in 1999-

2000 before that of GDP and we note that exports of goods accelerated
in 1996-67 suggesting that the last growth acceleration in value added
in manufactures was export driven. We explore the relation between the
manufacturing sector and GDP further in section 5.

The breaks in the growth rate of services are usually independent

of that in GDP except the acceleration in services growth rate in1984-85
pre-dates that in GDP in 1986-87. However, there is a break in the growth
rate of value added for services in 2003.

What is surprising are the breaks in the growth rate of agriculture.

There are only two - acceleration after 1986-87, which is well after the
onset of the green revolution, and a marginal decline after 2000-01.
This behaviour of the agricultural growth rate we believe is because the
value-added in agriculture fluctuates very extensively with growth rates
varying from -12.77 to 15.63. Consequently, the application of the
technique of structural breaks to the agricultural series may be
problematic.

We now consider the performance of the external sector, trying to

see to what extent it can explain the performance of GDP. As evident
from Table 8, a number of variables show structural breaks in the late
1990s or in the early 2000s. In particular, it is worth noting that the
merchandise trade deficit went up to 8.5% of the GDP in the last decade
from 3.2% of GDP during 1977-2002.

Now, one point is worth mentioning at this stage. The relationship

between India's exports and India's exchange rate with the US is non-
unique. As elaborated in Agarwal and Essid (2015), an expansionary
monetary policy of the US may both increase (real effect) and decrease
(monetary effect) India's exports to the US. An expansionary monetary
policy in the US increases US import demand and hence, exports of
partner country will increase. This is the real effect. On the other hand,
22

Table 8: Breaks in Indian Exports and Balances

Variables Break Average Values

Dates
Export of goods (% of GDP) 1964-65 4.51 (till 1964-65)
1973-74 3.21
1985-86 4.66
1996-97 6.52
12.30 (till 2013-14)
CAB (% of GDP) 1965-66 -1.53 (till 1965-66)
1977-78 -0.36
1988-89 -1.85
1998-99 -1.43
-1.54 (till 2012-13)
Merchandise Trade Balance 1976-77 -1.74 (till 1976-77)
(% of GDP) 2001-02 -3.21
-8.48 (till 2013-14)
Imports (% of GDP) 1972-73 5.61 (till 1972-73)
1984-85 6.16
1996-97 7.38
16.79 (till 2013-14)
Non-oil Imports (% of GDP)* 1992-93 4.53 (till 1992-93)
2002-03 7.34
13.88 (till 2013-14)
Exchange Rate (Re/US$) 1978-79 7.03 (till 1978-79)
1989-90 10.51
2002-03 32.68
46.27 (till 2013-14)
* For non-oil imports, the data period is 1970-71 to 2013-14. For the
rest, data period is 1950-51 to 2013-14.

an expansionary monetary policy of the US will raise US interest rates.

This will lead to a depreciation of the US dollar. Hence, the currency of
the partner country will appreciate and in turn will lower the exports of
the partner country. This is the monetary effect. The total effect, hence,
will depend on the relative strengths of the real and monetary effects.
 23

5. Impact of Manufacturing and Services Sectors on the Indian

Economy

In this section we compare the effects of the manufacturing and

services sectors on the economy by examining the sectors' backward
and forward linkages. We used national input-output tables for India
from the World Input Output Database (2013) to aggregate the sectors
into five sectors - primary, manufacturing, utilities, construction and
services. We did these for the years 1995 and 2011. The input-output
tables for India are given below.

Table 9: Input-Output Table (India)

1995
Primary Manu- Utilities Constru- Services
facturing ction
Primary 0.117 0.116 0.072 0.030 0.105
Manufacturing 0.0501 0.328 0.085 0.317 0.017
Utilities 0.007 0.039 0.241 0.015 0.000
Construction 0.005 0.002 0.019 0.005 0.000
Services 0.054 0.181 0.169 0.144 0.015
2011
Primary Manu- Utilities Constru- Services
facturing ction
Primary 0.080 0.085 0.056 0.017 0.014
Manufacturing 0.088 0.261 0.388 0.391 0.079
Utilities 0.010 0.026 0.030 0.015 0.006
Construction 0.012 0.013 0.090 0.045 0.022
Services 0.014 0.223 0.196 0.056 0.114

Now, we invert these matrices to analyze the contribution of each

of these sectors on the final demand of all the sectors.
24

Table 10: The Inverse of the Input Output Table [(I - A)-1], 1995
Primary Manu- Utilities Constru- Services
facturing ction
Primary 1.156 0.244 0.169 0.134 0.127
Manufacturing 0.093 1.527 0.200 0.498 0.036
Utilities 0.016 0.081 1.330 0.047 0.003
Construction 0.006 0.006 0.027 1.008 0.001
Services 0.084 0.309 0.278 0.254 1.030
The above table shows that the primary sector supplies 0.244
units for the production of one unit of final demand for manufactures
and supplies 0.127 units for the production of one unit of final demand
for services. So per unit the manufacturing sector provided a larger
market for primary goods than did the services sector. This is true for the
other sectors also except for the services sector that provides 1.03 units
for production of one unit of final demand for the services sector but
only 0.309 for one unit of the manufacturing sector.

We can also examine what each sector provides to the other sectors
for their production. The manufacturing sector provides 0.093 for the
agriculture sector whereas the services sector provides 0.084. Again we
find that the manufacturing sector usually provides more inputs for
production in the other sectors than does the services sector. So, by and
large, the manufacturing sector has larger backward and forward linkages.

Table 11: The Inverse of the Input Output Table [(I - A)-1], 2011
Primary Manu- Ut1ilities Constru- Services
facturing ction
Primary 1.104 0.143 0.135 0.082 0.033
Manufacturing 0.157 1.452 0.678 0.617 0.152
Utilities 0.016 0.043 1.055 0.035 0.012
Construction 0.019 0.034 0.120 1.065 0.031
Services 0.062 0.379 0.414 0.232 1.172
 25

The above table shows that the manufacturing sector continues to

have stronger backward and forward linkages in 2011.

We know that exports of both goods including manufactures and

non factor services have increased considerably, that of services
increasing faster. We use the input output table to calculate the
contribution of the exports to output. In 1995 service exports were 2.014
percent of GDP and this contributed 2.4 percent of GDP as greater amounts
of goods of the other sectors were produced to get the output of services.
Exports of manufactures were 8.8 percent of GDP and this resulted in a
contribution to GDP of 19.2 percent. For 2011 exports of services were
7.6 percent of GDP and this contributed 10.6 percent of GDP; exports of
manufactures were 16.45 percent of GDP and this contribute 33.7 percent
of GDP. Despite exports of services increasing faster than exports of
manufactures, the latter continued to contribute more to GDP because
of stronger linkages.

In the next section we try to analyze the inter-relationships between

the performance of India's manufacturing sector and India's external
sector and, hence, in turn, try to identify the dynamics of India's growth.
We do the analyses using VAR estimations.

6. Vector Autoregression (VAR) Estimations

As discussed in the last section, the relationship between India's

exports and India's exchange rate with the US is non-unique and a more
formal analysis is warranted to have a better understanding of this
relationship. We do with the help of VAR estimation using three variables
- export, CAB and exchange rate. We used data on India's exports, CAB
(as a percent of GDP) and INR exchange rate (vis-à-vis US$) for the
period 1962-63 to 2012-13. However, while testing for stationarity, we

14 The source of data on exports of manufacturing and non-factor services as

a percentage of GDP is Reserve Bank of India.
26

applied (natural) log transformation of each of the three series. In doing

so, we further modified the CAB series by adding 10 to all the values on
an ad hoc basis, that is, we just performed a shift of origin for the CAB
series in order to make this transformed series free of negative values
and ready for log transformation. Phillips-Perron test (see Phillips and
Perron, 1988) for testing for unit roots exhibited that each of the three
series are integrated of order one I(1), and hence, are stationary after first
difference. The results of unit root test are given in Table 12.15

Table 12: Summary of Unit Root Tests

Series t-values at Level t-values at First Difference

lnexp -1.259891 (0.8863) -7.615512 (0.0000)
lnexrt -1.572066 (0.7900) -4.747715 (0.0019)
lnmodcab -3.233962 (0.0896) -8.208772 (0.0000)

* Probability values are given in parentheses

Before testing for cointegration, we tested for the optimal lag

structure of the system. Table 13 summarizes the VAR lag order selection
results. As evident from the results, the optimal lag structure turns out be
3 from maximum number of criteria.

Using the optimal lag structure thus obtained, we test for

cointegration using Johansen cointegration test (see Johansen, 1991).
The results, given in Table 14, indicate that there exists one
cointegrating equation using the Maximum Eigen-value criterion for
unrestricted VAR.

15 As in section 4 we have already identified multiple structural breaks in

almost all the variables, we incorporated the structural breaks while testing
for unit roots for all the variables using Perron (1997) technique. We found
that all the variables have unit roots.
 27

Table 13: VAR lag order selection criteria

Lag LogL LR FPE AIC SC HQ
0 -61.54419 NA 0.003129 2.746561 2.864656 2.791001
1 142.9427 374.1675 7.64e-07 -5.572029 -5.099651* -5.394270
2 155.4935 21.36317 6.61e-07 -5.723130 -4.896468 -5.412051*
3 167.3015 18.59131* 5.94e-07* -5.842619* -4.661673 -5.398221
4 172.9976 8.241120 7.01e-07 -5.702026 -4.166797 -5.124309

Table 14: Unrestricted Cointegration Rank Test

Hypothesized Eigenvalue Max-Eigen 0.05 Prob.**
No. of CE(s) Statistic Critical Value
None * 0.369415 22.13315 21.13162 0.0361
At most 1 0.230777 12.59400 14.26460 0.0903
At most 2 * 0.086529 4.344178 3.841466 0.0371
Max-eigenvalue test indicates 1 cointegrating eqn(s) at the 0.05 level
* denotes rejection of the hypothesis at the 0.05 level
**MacKinnon-Haug-Michelis (1999) p-values

Given the original series are non-stationary, we perform Vector

Error Correction estimation to establish the significance of the
relationship between these three variables as captured by the
cointegrating equation. Finally, we run Granger causality test (see
Granger, 1969) to understand the dynamics of the system.

As evident from the results, changes in exchange rate and exports

significantly influence CAB. The other causalities, were however,
statistically insignificant.

Before proceeding further, we return our focus to one more

interesting observation made in the last section. As evident from Table
7, the structural breaks in India's GDP and manufacturing output do not
reveal any unique pattern. To have a better understanding of this causality
between GDP and manufacturing output, we estimated a VAR model
using data for 1950-51 to 2012-13. We find that there exists one
28

Table 15: Vector Error Correction Estimation Results

Cointegrating Eq: CointEq1
LNEXP(-1) 1.000000
LNEXRT(-1) -0.519837
(0.28239)
[-1.84083]
LNMODCAB(-1) 6.712904
(1.47127)
[ 4.56267]
C -24.54734
Error Correction: D(LNEXP) D(LNEXRT) D(LNMODCAB)
CointEq1 0.033208 -0.022445 -0.069297
(0.01457) (0.01150) (0.02122)
[ 2.27946] [-1.95226] [-3.26547]

Table 16: VEC Granger Causality Tests Results

Dependent variable: D (LNMODCAB)
Excluded Chi-sq df Prob.
D(LNEXP) 10.14594 2 0.0063
D(LNEXRT) 3.233140 2 0.1986
All 14.55783 4 0.0057

cointegrating equation implying a long-run positive relationship

between GDP and manufacturing output growth rates. The rationale is
pretty straight forward - manufacturing is a component of GDP itself and
hence, there will exist a positive relation between the two. Interestingly,
Granger causality test results reveal that there does not exist any
statistically significant causality among the two growth rates16 .

16. The estimation results, as given in Tables A5 and A6 the appendix, show that
though there exists a long-run positive relation between lngdp and lnman,
there is no significant short run causality either way. In other words, both
GDP and Manufacturing growth rates move in the same direction (as
Manufacturing is just a part of GDP) but there is no significant causal
relation among them.
 29

Even though we do not find any causal relationship between the

performance of India's manufacturing sector and overall GDP, we know
that the percent of value manufacturing exports to manufacturing value
added has increased from 16.4% in the 6th Plan (1980-84) to almost
60% in the period 2007-10 (Agarwal and Whalley, 2015b). The
manufacturing sector's growth accelerated in 1999-2000 before that of
GDP and we note that exports of goods accelerated in 1996-67 suggesting
that the last growth acceleration in value added in manufactures was
export driven. To delve deeper into the matter, we resort to VAR estimation
to analyze the relation between growth of the Indian manufacturing
sector with India's exports and imports. In doing so, we can identify
whether it is the growth in the manufacturing that led to the growth in
exports or the other way round. In fact, it might be the growth in exports
which might finance growth in the import of intermediate goods needed
for the manufacturing sector.

First we consider three variables - exports, imports and

manufacturing (all as percentage of GDP) data for India for the period
1950-51 to 2012-13 to construct a VAR model. To achieve stationarity17
in all the series, we performed a (natural) log transformation of these
three series and found that all of them are integrated of order one, that is,
they are stationary after first differencing. Next we tested for the optimal
lag structure of the VAR18 and found the optimal lag structure to be one.
Using the optimal lag structure we test for cointegration using Johansen
cointegration test. However, the results, as given in Table A3 in the
appendix, show that there exists no cointegrating equation, that is, there
is no long-run equilibrium relation between the three growth rates in
this sample. Therefore, we performed an unrestricted VAR to find out the
short-run relations among these variables. Table 17 gives the results of
the VAR estimation results.

17. See table A1 in the appendix for the results of the Augmented Dickey-Fuller
test for unit roots (see Fuller, 1976 and Dickey and Fuller, 1979).
18. See table A2 for the results of VAR lag order selection.
30

Table 17: VAR Estimation Results Summary

DEXP DIMP DMAN
DEXP(-1) -0.045614 -0.047413 -0.114349
(0.155714) (0.18642) (0.05674)
[-0.29288] [-0.25433] [-2.01539]*
DIMP(-1) 0.048164 -0.003699 -0.063578
(0.12424) (0.14872) (0.04526)
[ 0.38766] [-0.02487] [-1.40467]
DMAN(-1) -0.105117 0.392407 0.180624
(0.34755) (0.41601) (0.12661)
[-0.30245] [ 0.94326] [ 1.42658]
C 0.015131 0.018139 0.006353
(0.01393) (0.01668) (0.00508)
[ 1.08606] [ 1.08772] [ 1.25166]

As evident from the above Table, it is only the last period's growth
in exports which has a significant impact on the present period's growth
rate in manufacturing. To complete the analysis we test for pair-wise
Granger causality. The results are given in Table 18 below.

Table 18: Pair-wise Granger Causality Test Results

Null Hypothesis: F-Statistic Prob.

DIMP does not Granger Cause DEXP 0.11994 0.7304
DEXP does not Granger Cause DIMP 0.01579 0.9004
DMAN does not Granger Cause DEXP 0.06014 0.8071
DEXP does not Granger Cause DMAN 9.32847 0.0034*
DMAN does not Granger Cause DIMP 0.85461 0.3591
DIMP does not Granger Cause DMAN 7.02541 0.0103*
 31

The Granger causality results not only reinforce the results of the
unrestricted VAR model, but also show that growth rate of imports has
significant impact on growth rate of manufacturing. These results imply
that it is the growth of exports which influence growth of manufacturing
via growth in imports rather than the growth in manufacturing influencing
growth of exports.

However, till now we have used total import data for the Indian
economy. Hence, we repeat the above exercise using non-oil imports
instead of total imports. Now, such a decision is not an arbitrary one. If
we look into the trends of exports, imports and non-oil imports for India
(though we have data only from 1970-71 for non-oil imports), it becomes
evident that the exports and non-oil imports series almost coincide with
each other and they grow almost smoothly during the period 1970-71 to
2012-13. On the other hand, oil imports show an increase till 1980-81
followed by a sharp fall till 1986-87 after which it increased gradually
till 2004-05 and after 2004-05 there is again a sharp increase 19.

Now, the Johansen test for cointegration reveals that there exists
one cointegrating equation when we consider the non-oil imports
(natural log transformed).

Table 19: Unrestricted Cointegration Rank Test (Trace)

Hypothesized Eigenvalue Trace 0.05 Prob.**

No. of CE(s) Statistic Critical
Value
None * 0.344017 30.94459 29.79707 0.0367
At most 1 0.219514 13.65819 15.49471 0.0928
At most 2 0.081752 3.496814 3.841466 0.0615
Trace test indicates 1 cointegrating eqn(s) at the 0.05 level
* denotes rejection of the hypothesis at the 0.05 level
** MacKinnon-Haug-Michelis (1999) p-values

19 See Figure 3 in the appendix.

32

Given, there is one cointegrating equation; we opted for a vector

error correction model this time to have a closer look into the exact
relationship between these three variables in the long-run equilibrium.

Table 20: VEC Granger Causality Tests Results

Dependent variable: D(LNNOIMP)
Excluded Chi-sq df Prob.
D(LNEXP) 0.561869 1 0.4535
D(LNMAN) 0.807996 1 0.3687
All 1.017143 2 0.6014
Dependent variable: D(LNEXP)
Excluded Chi-sq df Prob.
D(LNNOIMP) 1.582940 1 0.2083
D(LNMAN) 0.360388 1 0.5483
All 2.169366 2 0.3380
Dependent variable: D(LNMAN)
Excluded Chi-sq df Prob.
D(LNNOIMP) 5.337462 1 0.0209
D(LNEXP) 2.475464 1 0.1156
All 7.556824 2 0.0229

This time, the results (as given in Table A4 in the appendix) clearly
exhibit significant influence of last period's growth rate of imports on
present period's growth rate of manufacturing. Further, VEC Granger
causality tests (Table 20) reveal that growth rates of exports and non-oil
imports have significant impacts on growth rate of manufacturing while
the reverse does not hold.

Hence, the results from the analyses done in this section clearly
reveal that the growth in the manufacturing does not have a statistically
significant impact on the growth rate of exports. On the contrary, growth
of exports financing growth of imports, in particular, non-oil imports
 33

has a significant impact on growth of manufacturing. There is lag of one

period in such causality - that is, last period's export and non-oil import
influence present period's manufacturing.

7. Conclusion

Since the 1970s there has been a continuous growth of India's

GDP. However, a priori, it is not easy to identify any structural break in
the GDP series. On the other hand, there seems to be an increase in
exports and investment as evident from Tables 2 and 7. Manufacturing
sector experienced a sharp fall after aid was cut off in the mid 1960s
following a reversal in the pattern in the late 1980s and a continuous
increase after that.

In this paper we performed structural break analyses of several

macroeconomic variables for the Indian economy to have a clear picture
about the evolution of the economy from various dimensions.
Interestingly, though GDP and GDP per capita series exhibit multiple
structural breaks, we do not find any statistically significant structural
break in India's GDP growth rate. Hence, unlike many analysts20 who
claim that the policy changes began in 1991 had resulted in a significant
acceleration of the growth rate, we find that no such significant
acceleration has occurred.

Our analysis casts doubt on two perceptions about India's growth.

First, India's growth is domestic demand led as compared to the export-
led growth story of China. We show that India's export performance is
very similar to that of China's. Hence, one cannot claim that China's
growth is export-led and that India's growth is domestic demand-led.

Second, India's development is service sector led rather than

manufacturing sector led. We found no significant difference between
the growth rates of the value added in manufacturing and services.

20. Kotwal, Ramaswami and Wadhwa (2011).

34

Furthermore, we found that the backward and forward linkages are

stronger for the manufacturing sector vis-à-vis the services sector. Hence,
we do not find evidence in support of this perception that India's growth
can be largely attributed to the growth of the services sector.

While analyzing the components of GDP we found multiple breaks

in the Manufacturing and Services sectors. However, Agriculture
exhibited only a couple of structural breaks. So far the external sector is
concerned, almost all the indicators like exports, imports, non-oil imports,
CAB and exchange rate (vis-à-vis US dollar) exhibit multiple structural
breaks.

Interestingly, the structural breaks in all the major series of the

Indian economy exhibit a similar pattern - there is one break in almost
every decade from the 1960s to the 1990s. To have further insight to the
long run dynamics of these variables we performed multiple VAR
estimation models. In the external sector, we found that changes in
exports and exchange rates have a significant impact on the changes in
current account balance. Reverse causalities were not statistically
significant.

While analyzing the long and short run relations among the
external sectors and manufacturing growth we found that the growth in
the manufacturing does not have a statistically significant impact on
the growth rate of exports. On the contrary, growth of exports and imports
(particularly, non-oil imports) of the previous period have a significant
impact on the current period growth of manufacturing.

Our analysis provides an alternative narrative for India's

development process. A correct appraisal is important for appropriate
policy design. Further analyses of exact sectoral and dynamic
interlinkages are required to improve our understanding of the operation
of the Indian economy.
 35

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38

APPENDIX

Table A1: Summary of Unit Root Tests

Series t-values at First Difference*

lnexp -8.865972 (0.0000)
lnimp -8.576165 (0.0000)
lnman -7.547305 (0.0000)

* Probability values are given in parentheses

Table A2: VAR Lag Order Selection Criteria

Lag LogL LR FPE AIC SC HQ

0 38.88952 NA 5.82e-05 -1.237570 -1.130995 -1.196057
1 220.8142 338.7562* 1.50e-07* -7.200488* -6.774190* -7.034437*
2 226.4820 9.967525 1.69e-07 -7.085585 -6.339563 -6.794994
3 231.8369 8.863327 1.93e-07 -6.959893 -5.894147 -6.544763
4 236.8810 7.827093 2.23e-07 -6.823484 -5.438013 -6.283815
5 242.1003 7.558913 2.60e-07 -6.693113 -4.987919 -6.028905

* indicates lag order selected by the criterion

Table A3: Test for Cointegration

Unrestricted Cointegration Rank Test (Trace)
Hypothesized Trace 0.05 Prob.**
No. of CE(s) Eigenvalue Statistic Critical
Value
None 0.226952 27.74282 29.79707 0.0847
At most 1 0.173799 12.04058 15.49471 0.1550
At most 2 0.006448 0.394629 3.841466 0.5299
Trace test indicates no cointegration at the 0.05 level
* denotes rejection of the hypothesis at the 0.05 level
**MacKinnon-Haug-Michelis (1999) p-values
Cont'd.....
 39

Unrestricted Cointegration Rank Test (Maximum Eigenvalue)

Hypothesized Eigenvalue Max-Eigen 0.05 Prob.**
No. of CE(s) Statistic Critical
Value
None 0.226952 15.70224 21.13162 0.2427
At most 1 0.173799 11.64595 14.26460 0.1247
At most 2 0.006448 0.394629 3.841466 0.5299
Max-eigenvalue test indicates no cointegration at the 0.05 level
* denotes rejection of the hypothesis at the 0.05 level
**MacKinnon-Haug-Michelis (1999) p-values

Table A4: Results of VEC Estimates

Cointegrating Eq: CointEq1
LNNOIMP(-1) 1.000000
LNEXP(-1) -0.732755
(0.17168)
[-4.26806]
LNMAN(-1) 6.667456
(1.78057)
1[ 3.74455]
C -18.78447
Error Correction: D(LNNOIMP) D(LNEXP) D(LNMAN)
CointEq1 -0.079501 -0.086788 -0.055877
(0.04360) (0.03960) (0.01505)
[-1.82360] [-2.19184]* [-3.71280]*
D(LNNOIMP(-1)) -0.102506 0.184389 0.128691
(0.16136) (0.14656) (0.05570)
[-0.63527] [ 1.25815] [ 2.31029]*
D(LNEXP(-1)) -0.140160 -0.211625 -0.101560
(0.18698) (0.16983) (0.06455)
[-0.74958] [-1.24609] [-1.57336]
40

D(LNMAN(-1)) 0.391674 0.237583 0.113697

(0.43573) (0.39576) (0.15042)
[ 0.89889] [ 0.60032] [ 0.75586]
C 0.051060 0.041379 -0.001784
(0.01762) (0.01600) (0.00608)
[ 2.89772] [ 2.58550] [-0.29329]
R-squared 0.103022 0.149013 0.331760
Adj. R-squared 0.003357 0.054459 0.257511
Sum sq. resids 0.313078 0.258270 0.037310
S.E. equation 0.093256 0.084700 0.032193
F-statistic 1.033687 1.575952 4.468216
Log likelihood 41.75844 45.70361 85.36566
Akaike AIC -1.793095 -1.985542 -3.920276
Schwarz SC -1.584122 -1.776570 -3.711304
Mean dependent 0.041572 0.040764 -0.000381
S.D. dependent 0.093413 0.087105 0.037361
Determinant resid covariance (dof adj.) 6.26E-08
Determinant resid covariance 4.24E-08
Log likelihood 173.4783
Akaike information criterion -7.584306
Schwarz criterion -6.832006

* Statistically significant at 5% level of significance

 41

Table A5: VEC Estimation Results (GDP and

Manufacturing Growth Rates)

Cointegrating Eq: CointEq1

LNGDP(-1) 1.000000
LNMAN(-1) -1.004999
(0.00921)
[-109.063]
C -1.870911
Error Correction: D(LNGDP) D(LNMAN)
CointEq1 -0.280878 -0.122863
(0.05162) (0.06427)
[-5.44075] [-1.91175]
D(LNGDP(-1)) 0.119223 0.187798
(0.14314) (0.17820)
[ 0.83290] [ 1.05387]
D(LNMAN(-1)) -0.2241999 -0.076101
(0.13898) (0.17301)
[-1.61894] [-0.43985]
C 0.124172 0.103331
(0.01586) (0.01974)
[ 7.83092] [ 5.23463]
R-squared 0.411763 0.137222
Adj. R-squared 0.380803 0.091813
Sum sq. resids 0.090331 0.139991
S.E. equation 0.039809 0.049558
F-statistic 13.29992 3.021885
Log likelihood 112.1568 98.79472
Akaike AIC -3.546125 -3.108024
Schwarz SC -3.407707 -2.969606
Mean dependent 0.111259 0.115231
S.D. dependent 0.050590 0.052003
42

Determinant resid covariance (dof adj.) 2.33E-06

Determinant resid covariance 2.04E-06
Log likelihood 226.5760
Akaike information criterion -7.100851
Schwarz criterion -6.754806

Table A6: Granger Causality Results (GDP and

Manufacturing Growth Rates)

Dependent variable: D(LNGDP)

Excluded Chi-sq df Prob.
D(LNMAN) 2.620971 1 0.1055
Dependent variable: D(LNMAN)
Excluded Chi-sq df Prob.
D(LNGDP) 1.110650 1 0.2919

Figure 3: Trends of Indian sExports, Imports and Non-oil Imports

 43

Manmohan Agarwal is RBI Chair Professor at Centre

for Development Studies, Trivandrum. His current areas
of interest include history of the international monetary
system, implications of establishment of the New
Development Bank and on topics such as analysis of
structural change in the Indian Economy and performance
of the Indian Manufacturing sector.

Email: [email protected]

Sunandan Ghosh is Assistant Professor at Centre for

Development Studies, Trivandrum. His research interests
primarily include Delegation Games, Economics of
Regional Integration and International Economics.

Email: [email protected]
44

PUBLICATIONS
For information on all publications, please visit the CDS Website:
www.cds.edu. The Working Paper Series was initiated in 1971. Working
Papers from 279 can be downloaded from the site.
The Working Papers published after February 2010 are listed below:
W.P. 464 M. PARAMESWARAN, Determinants of Industrial
Disputes: Evidence from Indian Manufacturing Industry,
November 2015
W.P. 463 K. C. ZACHARIAH, S. IRUDAYA RAJAN, Dynamics of
Emigration and Remittances in Kerala: Results from the
Kerala Migration Survey 2014, September 2015.
W.P. 462 UDAYA S MISHRA, VACHASPATI SHUKLA, Welfare
Comparisons with Multidimensional Well-being Indicators:
An Indian Illustration, May 2015.
W.P. 461 AMIT S RAY, SUNANDAN GHOSH Reflections on India’s
Emergence in the World Economy, May 2015.
W.P. 460 KRISHNAKUMAR S Global Imbalances and Bretton
Woods II Postulate, December 2014.
W.P. 459 SUNANDAN GHOSH Delegation in Customs Union
Formation December 2014
W.P. 458 M.A. OOMMEN D. SHYJAN, Local Governments and the
Inclusion of the Excluded: Towards A Strategic Methodology
with Empirical Illustration. October 2014
W.P. 457 R. MOHAN, N. RAMALINGAM, D. SHYJAN, Horizontal
Devolution of Resources to States in India- Suggestions
before the Fourteenth Finance Commission, May 2014
W.P. 456 PRAVEENA KODOTH, Who Goes ? Failures of Marital
Provisioning and Women’s Agency among Less Skilled
Emigrant Women Workers from Kerala, March 2014
W.P. 455 J. DEVIKA, Land, Politics, Work and Home-life at
Adimalathura: Towards a Local History. January 2014.
W.P. 454 J. DEVIKA, Land, Politics, Work and Home-Life in a City Slum:
Reconstructing History from Oral Narratives, October 2013.
 45

W.P. 453 SUNIL MANI, Changing Leadership in Computer and

Information Services, Emergence of India as the Current
World Leader in Computer and Information Services,
September 2013.
W.P. 452 VINOJ ABRAHAM, Missing Labour Force or
‘De-feminization’ of Labour Force in India ? May 2013.
W.P. 451 SILVIA MASIERO. Transforming State-citizen Relations
in Food Security Schemes: The Computerized Ration Card
Management System In Kerala December 2012
W.P. 450 K. C. ZACHARIAH, S. IRUDAYA RAJAN, Inflexion In Kerala’s
Gulf Connection Report on Kerala Migration Survey 2011, September 2012.
W.P. 449 TAPAS K. SEN Recent Developments in Kerala State
Finances, July 2012.
W.P. 448 SUNIL MANI AND ARUN M, Liberalisation of Technical
Education in Kerala: Has a Significant Increase in
Enrolment Translated into increase in Supply of Engineers?
March 2012.
W.P. 447 VIJAYAMOHANAN PILLAI N. Modeling Optimal Time-
Differential Pricing of Electricity Under Uncertainty:
Revisiting the Welfare Foundations, March 2012.
W.P. 446 D. NARAYANA The Pricing Problem of Public Transport
in Kerala, September 2011.
W.P. 445 PRAVEENA KODOTH AND V. J. VARGHESE
Emigration of Women Domestic Workers from Kerala:
Gender, State Policy and the Politics of Movement, September
2011.
W.P. 444 SUNIL MANI The Mobile Communications Services
Industry in India: Has it led to India Becoming a
Manufacturing Hub for Telecommunication Equipments?
April 2011.
W.P. 443 K. C. ZACHARIAH, S. IRUDAYA RAJAN, From Kerala
to Kerala Via The Gulf; Emigration Experiences of Return
Emigrants. March 2011.
46

W.P. 442 VIJAY KORRA, Short Duration Migration in India: An

Appraisal from Census 2001. March 2011.
W.P. 441 M.PARAMESWARAN, Financial Crisis and Kerala
Economy. January 2011.
W.P. 440 P.L. BEENA, Financing Pattern of Indian Corporate Sector
under Liberalisation: With Focus on Acquiring Firms
Abroad. January 2011.
W.P. 439 RAJEEV SHARMA Diversification in Rural Livelihood
Strategies: A Macro-Level Evidence from Jammu and
Kashmir, December 2010.

W.P. 438 APARNA NAIR, The indifferent many and the hostile few:
An Assessment of Smallpox Vaccination in the ‘Model Native
State’ of Travancore 1804-1941. November 2010.
W.P. 437 VINOJ ABRAHAM, The Effect of Information Technology
on Wage Inequality: Evidence from Indian Manufacturing
Sector. September 2010.
W.P. 436 S. IRUDAYA RAJAN, D. NARAYANA, The Financial Crisis
in the Gulf and its Impact on South Asian Migrant Workers.
August 2010.
W.P. 435 ANUP KUMAR BHANDARI, Total Factor Productivity
Growth and its Decomposition: An Assessment of the Indian
Banking Sector in the True Liberalised Era. August 2010
W.P. 434 BEENA SARASWATHY, Cross-Border Mergers and
Acquisitions in India: Extent, Nature and Structure. July 2010.
W.P. 433 VIJAY KORRA, Nature and Characteristics of Seasonal
Labour Migration: A Case Study in Mahabubnagar District
of Andhra Pradesh. July 2010
W.P. 432 K.C. ZACHARIAH S. IRUDAYA RAJAN, Impact of the
Global Recession on Migration and Remittances in Kerala:
New Evidences from the Return Migration Survey (RMS)
2009. June 2010.
W.P. 431 GARGI SANATI, Integration of India’s Financial
Markets on the Domestic and International Fronts: An
 47

Empirical Analysis of the Post-Liberalisation Period,

June 2010.
W.P. 430 SUNIL MANI, Has China and India Become more
Innovative Since the onset of Reforms in theTwo Countries?
May 2010.
W.P. 429 T. R. DILIP, School Educational Attainment in Kerala:
Trends And Differentials. April 2010.
W.P. 428 SUNIL MANI, The Flight from Defence to Civilian Space:
Evolution of the Sectoral System of Innovation of India’s
Aerospace Industry. April 2010.
W.P. 427 J. DEVIKA, V. J. VARGHESE, To Survive or to Flourish?
Minority Rights and Syrian Christian Community Assertions
in 20th Century Travancore/Kerala. April 2010.
W.P. 426 ANUP KUMAR BHANDARI, Global Crisis, Environmental
Volatility and Expansion of the Indian Leather Industry.
March 2010.
W.P. 425 P L. BEENA, HRUSHIKESH MALLICK, Exchange Rate
and Export Behaviour of Indian Textiles & Clothing Sector:
An Enquiry for Major Destination Countries. March 2010.
W.P. 424 K. C. ZACHARIAH, S. IRUDAYA RAJAN, Migration
Monitoring Study, 2008 Emigration and Remittances in
the Context of Surge in Oil Prices. March 2010.
W.P. 423 VIJAYAMOHANAN PILLAI N, Loss of Load Probability
of a Power System: Kerala. February 2010.
48