EDITED BY Suman Bery Barry Bosworth Arvind Panagariya NATIONAL COUNCIL OF APPLIED ECONOMIC RESEARCH New Delhi BROOKINGS INSTITUTION Washington, D.C. Copyright © 2011 NATIONAL COUNCIL OF APPLIED ECONOMIC RESEARCH (NCAER) AND BROOKINGS INSTITUTION First published in 2011 by SAGE Publications India Pvt Ltd B1/I 1, Mohan Cooperative Industrial Area Mathura Road, New Delhi 110 044, India www.sagepub.in SAGE Publications Inc 2455 Teller Road Thousand Oaks, California 91320, USA SAGE Publications Ltd 1 Oliver’s Yard, 55 City Road London EC1Y 1SP, United Kingdom SAGE Publications Asia-Pacifi c Pte Ltd 33 Pekin Street #02-01 Far East Square Singapore 048763 Library of Congress Serial Publication Data applied for ISBN: 978-81-321-0747-7 (PB) All rights reserved. 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Editors’ Summary ix BARRY EICHENGREEN and POONAM GUPTA The Service Sector as India’s Road to Economic Growth? 1 Comments by Pronab Sen 38 General Discussion 39 ASHOKA MODY, ANUSHA NATH, and MICHAEL WALTON Sources of Corporate Profi ts in India: Business Dynamism or Advantages of Entrenchment? 43 Comments by Rajnish Mehra and Basanta Pradhan 85 General Discussion 91 RAM SINGH Determinants of Cost Overruns in Public Procurement of Infrastructure: Roads and Railways 97 Comments by Shashanka Bhide and Kenneth Kletzer 145 General Discussion 153 LORI BEAMAN, ESTHER DUFLO, ROHINI PANDE, and PETIA TOPALOVA Political Reservation and Substantive Representation: Evidence from Indian Village Councils 159 Comments by Devesh Kapur and Hari Nagarajan 192 General Discussion 198 T. N. SRINIVASAN and JESSICA SEDDON WALLACK Inelastic Institutions: Political Change and Intergovernmental Transfer Oversight in Post-Independence India 203 Comments by Dilip Mookherjee and Sudipto Mundle 244 General Discussion 248 iv INDIA POLICY FORUM, 2010–11 PURPOSE India Policy Forum 2010–11 comprises papers and highlights of the discussions from the seventh India Policy Forum (IPF) conference, held on July 13–14, 2010, in New Delhi. IPF is a joint venture of the Brookings Institution and the National Council of Applied Economic Research (NCAER) that aims to examine India’s reforms and economic transition using policy-relevant empirical research. The objective of the IPF is to generate theoretically rigorous, empirically informed research on important current and unfolding issues of Indian economic policy. A rotating panel of established local and overseas researchers interested in India has agreed to support this initiative through advice, personal participation and contribution of papers. Overall guidance is provided by a distinguished international advisory panel. Papers appear in this publication after presentation and discussion at a yearly conference in New Delhi. During discussions at the conference, the authors obtain helpful comments and criticism about various aspects of their papers. These comments are refl ected in the journal as discussants’ comments. The papers, however, are fi nally the authors’ products and do not imply any agreement by either those attending the conference or those providing fi nancial support. Nor do any materials in this journal necessarily represent the views of the staff members or offi cers of the NCAER and the Brookings Institution. CORRESPONDENCE Correspondence regarding papers in this issue should be addressed to the authors. Manuscripts are not accepted for review because this journal is devoted exclusively to invited contributions. Feedback on the journal may be sent to NCAER, Parisila Bhawan, 11, I.P. Estate, New Delhi 110 002 or at [email protected]. ACKNOWLEDGEMENTS NCAER and Brookings gratefully acknowledge generous fi nancial sup- port for the IPF 2010 from The State Bank of India, HDFC Ltd., Reliance Industries, HSBC Ltd., and IDFC Ltd. The support refl ects the deep com- mitment of these organizations to rigorous policy research that helps promote informed policy debates and sound economic policymaking. ADVISORY PANEL Shankar N. Acharya Indian Council for Research on International Economic Relations Isher Ahluwalia Indian Council for Research on International Economic Relations and National Council of Applied Economic Research Montek S. Ahluwalia Indian Planning Commission Pranab Bardhan University of California-Berkeley Suman Bery National Council of Applied Economic Research Jagdish Bhagwati Columbia University and Council on Foreign Relations Barry Bosworth The Brookings Institution Willem H. Buiter Citigroup Stanley Fischer Bank of Israel Vijay Kelkar National Stock Exchange of India Mohsin S. Khan Peterson Institute for International Economics Anne O. Krueger Johns Hopkins University Ashok Lahiri Asian Development Bank Rakesh Mohan National Transport Development Policy Committee, Yale University, and National Council of Applied Economic Research Arvind Panagariya Columbia University T. N. Srinivasan Yale University Nicholas Stern London School of Economics & Political Science Lawrence H. Summers Harvard University John Williamson Peterson Institute for International Economics RESEARCH PANEL Abhijit Banerjee Massachusetts Institute of Technology Kaushik Basu Ministry of Finance, Government of India and Cornell University Surjit S. Bhalla Oxus Investments Pvt. Ltd. and National Council of Applied Economic Research Mihir Desai Harvard Business School Esther Dufl o Massachusetts Institute of Technology Vijay Joshi University of Oxford Devesh Kapur University of Pennsylvania Kenneth M. Kletzer University of California – Santa Cruz Robert Z. Lawrence Kennedy School of Government, Harvard University Rajnish Mehra Arizona State University Dilip Mookherjee Boston University Urjit R. Patel Reliance Industries Limited and The Brookings Institution Raghuram Rajan Booth Graduate School of Business, University of Chicago Indira Rajaraman Indian Statistical Institute, New Delhi Centre M. Govinda Rao National Institute of Public Finance and Policy Partha Sen Delhi School of Economics Ajay Shah National Institute of Public Finance and Policy Arvind Virmani International Monetary Fund All affi liations as of January 2011. STAFF Geetu Makhija National Council of Applied Economic Research Sarita Sharma National Council of Applied Economic Research Sudesh Bala National Council of Applied Economic Research IPF PARTICIPANTS WHOSE COMMENTS APPEAR IN THIS VOLUME Ritu Anand Infrastructure Development Finance Company Limited Sudipto Mundle National Institute of Public Finance and Policy Pronab Sen Indian Planning Commission Alakh Narayan Sharma Institute of Human Development Ratna M. Sudarshan Institute of Social Studies Trust viii INDIA POLICY FORUM, 2010–11 Editors’ Summary he India Policy Forum held its seventh conference on July 13 and 14, T2010 in New Delhi. This issue of the journal contains the papers and the discussions presented at the conference, which cover a wide range of issues. The fi rst paper examines the services sector in India, evaluating its growth and future prospects. The second paper looks at India’s corporate sector, analyzing the profi tability of fi rms in the wake of liberalization. The third paper explores the reasons for the large time and cost overruns that have been endemic to Indian infrastructure projects. The fi nal two papers focus on more political issues, looking at the impact of political reservations used to increase women’s political voice, as well as the politics of intergov- ernmental resource transfers. Among fast-growing developing countries, India is distinctive for the role of the service sector. Whereas many earlier rapidly growing economies emphasized the export of labor-intensive manufactures, India’s recent growth has relied to a greater extent on the expansion of services. Although there are other emerging markets where the share of services in Gross Domestic Product (GDP) exceeds the share of manufacturing, India stands out for the dynamism of its service sector. Barry Eichengreen and Poonam Gupta critically analyze this rapid service-sector growth in their paper “The Service Sector as India’s Road to Economic Growth?” Skeptics have raised doubts about both the quality and sustainability of the increase in service-sector activity. They have observed that employment in services is concentrated in the informal sector, personal services, and public administration—activities with limited spillovers and relatively little scope for productivity improvement. They downplay information technology and communications-related employment on the grounds that these sectors are small and use little unskilled and semi-skilled labor, the implication being that a labor-abundant economy cannot rely on them to move people out of low-productivity agriculture. Some argue that the rapid growth of service- sector employment simply refl ects the outsourcing of activities previously conducted in-house by manufacturing fi rms—in other words, that it is little more than a relabeling of existing employment. They question whether shift- ing labor from agriculture directly to services confers the same benefi ts in terms of productivity growth and living standards as the more conventional pattern of shifting labor from agriculture to manufacturing in the early stages