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Submitted by Kalpana on
As I have written (with my coauthors Raghu Rajan and Arvind Subramanian)in our 2006 JME paper: "The one area where Indian manufacturing appears to have thrived is in the industries using highly skilled labor. The far greater investment in tertiary education for a country of its per capita income—of which the Indian Institutes of Technology and the Indian Institutes of Management are just the best-known examples—resulted in the plentiful availability of highly skilled, cheap labor. This then enabled India to generate relatively greater value added and employment in skill-intensive industries as compared to the typical poor country." Based on this, I would agree that the investment in the IITs did pay off. But I disagree that that this is evidence that the government was proactive in aiding sectors that had a comparative advantage. Economic theory tells you that a labor abundant country has a comparative advantage in labor intensive industries. Yet, as we note in our paper "The paradox of Indian manufacturing...is that of a labor-rich, capital-poor economy using too little of the former, and using the latter very inefficiently." We interpret this as evidence of mostly distortionary policies.