Geographic Concentration in Indian Manufacturing and Service Industries: Evidence from 1998 to 2013

• Date: 01 January 2019
• Author: Yi Jiang,Amrit Amirapu,Alex Klein,Rana Hasan
• DOI: http://doi.org/10.1111/aepr.12251
• Published date: 01 January 2019

Geographic Concentration in Indian

Manufacturing and Service Industries:

Evidence from 1998 to 2013

Amrit AMIRAPU,

1

†Rana HASAN,

2

Yi JIANG

2

and Alex KLEIN

1

1

University of Kent and

2

Asian Development Bank

This paper uses a comprehensive new data source to document basic facts about geographic con-

centration among industries in India from 1998 to 2013. Unlike previous studies, our data allow

us to accurately measure industrial concentration at the district level and cover manufacturing

and services, as well as the formal and informal sectors. Our most striking finding is that average

levels of industrial concentration fell dramatically between 1998 and 2013, driven by steep reduc-

tions in capital-intensive manufacturing industries. We provide suggestive evidence that this

increasing dispersion may be due to improvements in interregional transportation coupled with

inefficient land management policies and limited labor mobility.

Key words: India, industrial agglomeration, labor mobility, land management, regional inequality

JEL codes: O14, O18, R11, R12

Accepted: 27 June 2018

1. Introduction

The spatial distribution of economic activity within countries has profound implications

for both efficiency and equity. Understanding where firms choose to locate and why is

therefore of considerable policy importance. In this paper, we use comprehensive new

data to examine aspects of the spatial development of both manufacturing and services

in India from 1998 to 2013, a period that witnessed significant investments in transpor-

tation infrastructure and over which India’s economic reforms of the early 1990s had

solidified and had a chance to influence the locational choices of firms. It is also a period

We are grateful to the editors and referees of the Asian Economic Policy Review. We would par-

ticularly like to thank Colin McKenzie, Marcus Noland, Shuji Uchikawa, Rakesh Mohan, and

other participants at the 27th AEPR Conference in Tokyo for a number of helpful suggestions

that have improved the paper. Finally, we wish to thank Radine Michelle Rafols and Marjorie V.

Remolador for their support in putting together the data. All errors are our own. The views

expressed in this publication are those of the authors and do not necessarily reflect the views

and policies of ADB or its Board of Governors or the governments they represent. ADB does

not guarantee the accuracy of the data included in this publication and accepts no responsibility

for any consequence of their use.

†Correspondence: Amrit Amirapu, School of Economics, University of Kent, Canterbury, Kent

CT2 7NP, UK. Email: a.amirapu@kent.ac.uk.

148 © 2018 Japan Center for Economic Research

doi: 10.1111/aepr.12251 Asian Economic Policy Review (2019) 14, 148–168

during which the Indian economy grew rapidly –but unevenly –so that regional

inequalities increased, with some regions forging ahead while others lagged behind.

There is a body of research which tries to understand this process (e.g. Desmet

et al., 2015; Ghani et al., 2016). Their findings will be reviewed below, but it is fair to

say that two strands have emerged: studies attempting to quantitatively measure the

patterns of spatial inequalities and their changes over time; and studies which try to

understand their determinants. Both strands of research ask policy-relevant questions

and offer some conclusions.

This study belongs to the first category and chiefly aims to quantify the extent of

geographic concentration among Indian industries over the period 1998–2013. To do

so, the study takes advantage of the recent advances in geographical indices by measur-

ing industrial concentration with a spatially adjusted index of industrial concentration

based on Ellison and Glaeser (1997) and Guimarães et al. (2011). The paper’s main

contributions flow from the data that we marshal for the task: establishment-level data

from the last three rounds of the Economic Census of India (EC).

EC data have not yet been used to study questions of industrial agglomeration –

although they are uniquely suited for it. First, they allow us to quantify agglomeration

at a suitably geographically disaggregated level of analysis, namely at the district level.

1

Previous studies have relied on sample surveys that are only representative at very

large geographic units –usually states, which in India are often the size of large coun-

tries, and may thus be inadequate for capturing agglomeration externalities at the rele-

vant scale. Second, most previous studies have focused their analysis exclusively on the

formal manufacturing sector. In contrast, our data allow us to characterize industrial

concentration in the entire economy (excluding agriculture), including manufacturing

and services, and the formal and informal sectors.

This last point is of particular importance as it is the service sector which has been

driving India’s fast growth rates, despite the fact that most of the reforms of the early

1990s were focused on unleashing India’s manufacturing sector from (i) restrictive trade

and foreign direct investment (FDI) policies and (ii) an industrial licensing regime that

influenced what, how much, and where firms could invest. A closer look at the spatial

development of economic activity in India becomes particularly important when we con-

sider what has not been reformed or addressed. Chief among these are labor and land

regulations on the policy front, and India’s large deficits in infrastructure (Panagariya,

2008). Given that the impact of these constraints is concentrated in urban locations, an

examination of the spatial development of economic activitycan be illuminating.

Our main tool for examining the spatial development of economic activity in India

is the Ellison and Glaeser (1997) index (henceforth EG index or EGI), which quantifies

the degree of spatial concentration among plants in an industry. The EGI overcomes

major shortcomings of the previous indices of industrial concentration such as that

proposed by Krugman (1991), and remains an essential tool among economic geogra-

phers and others who study spatial patterns of economic activity. The main limitation

of most previous indices is that they fail to distinguish between spatial concentration

due to industrial characteristics and spatial concentration due to agglomeration

Amrit Amirapu et al.Geographic Concentration in Indian Manufacturing and Service Industries

© 2018 Japan Center for Economic Research 149