Structural Coherence with Factor Proportions – A Study with Focus on Tradable Sectors in Indian Economy

Abstract

Factor productivity is traditionally studied through the measurement of factor intensity for sectors of the economy. However, this measurement is restricted to their direct use within the sector ignoring their embeddedness in upstream sectors. Therefore, an underestimation of the factor intensities across economic sectors cannot be ruled out if evaluated using direct factor contents alone. An a priori external influence on demand (through exports) and investment (through FDI), is expected to shape the allocation of production. Thus, this paper examines the structural coherence of factor endowments with output, exports and FDI, separately for each tradable sector. Likewise for factor intensities, tradables are often studied in isolation from their interaction with the non-tradables. Using of Semi Input-Output (SIO) modelling, the factor proportions (K-to-L) show a significant underestimation of the capital intensity for the economy when compared with direct proportions. Although the output and export distributions are largely aligned with factor endowments, the distribution of FDI is skewed towards sectors with high capital proportions. Thus, FDI is unlikely to be solution to employment generation without re-orienting and enhancing the existing skills.