INDUSTRY
Indian economy has taken a peculiar developmental trajectory, as can be seen by the following table that summarizes sectoral shares in GDP in percentage terms
Sector / 1972-73 / 1993-94 / 2009-10Primary / 41 / 30 / 15
Secondary
(Manufacturing, mining, quarrying, electricity, gas etc.) / 23 / 25 / 26
Manufacturing (part of secondary) / 13.5 / 14.5 / 15.4
Tertiary / 36 / 45 / 59
As can be seen, the share of primary sector has significantly reduced from 41% to 15%; secondary sector and manufacturing have more or less maintained their shares, while the share of the tertiary sector has shot up. This clearly shows that India has been an exception to the Kuznet’s hypothesis, and has witnessed a services-led growth.
On the other hand, in terms of % shares of employment:
Sector / 1972-73 / 1993-94 / 2009-10Primary / 74 / 64 / 51
Secondary / 11 / 15 / 22
Manufacturing (part of secondary) / 9 / 10.5 / 11.5
Tertiary / 15 / 21 / 27
Thus, the agricultural sector still provides employment tomajority of the labour force, despite drastic reduction in its contribution to GDP. Also, manufacturing has had a low and stagnant share in employment.
India v/s China
China’s growth is manufacturing-led, as against India’s services-led. However, agriculture continues to provide the major chunk of employment in both countries, even though its share in GDP is significantly lower for China (just about 9% as compared to India’s 22%):
GDP shares:
Sector / 1978 / 2004China / India / China / India
Primary / 28 / 44 / 9 / 33
Secondary / 48 / 24 / 58 / 28
Tertiary / 24 / 32 / 33 / 39
Employment shares:
Sector / 1978 / 2004China / India / China / India
Primary / 71 / 71 / 47 / 57
Secondary / 17 / 13 / 23 / 18
Tertiary / 12 / 16 / 31 / 25
1947-1980:
At the time of independence, because of the policies followed by the British, the industrial sector had the following features:
· Production was focused more on consumer goods than producer goods
· Weak infrastructure
· Export orientation was against India’s interests (focus was to export raw materials and import finished goods)
· Technical and managerial skills were in low supply
Thus, the policymakers thought that economic sovereignty and independence lay in rectifying this situation by focusing on the industrial sector. During the first few years, and in the first FYP, the thinking was that the government should control those sectors of the economy in which the private sector would be unable or unwilling to invest- such as arms and ammunition, atomic energy, railways, coal, iron, steel, aircraft and shipbuilding etc.
The idea was that the rest of the field would be left open for the private sector. However, by 1956, things had changed towards an explicit preference for state control of most of the economy. Thus, although the second FYP is seen as the cornerstone of Indian economic planning, it was in fact the first plan that understood the nuances of good economic policymaking- it focused on indicative planning, rather than concern itself with allocation of public resources, which became the focus of future plans.
The industrial licensing regime controlled every key aspect of the economy, ranging from controls on foreign trade, capital issues, foreign exchange, transport (including raw materials), price controls, and allocation of credit. Over time, regulations began to cover everything from location, product, access to credit, foreign collaboration, use of raw materials and technology, for each of which the investor required a separate clearance from a different ministry. Further, a number of items were reserved to be produced by SMEs, and MRTP had all sorts of laws. The licensing regime was thus so tight and widespread that the focus of policy became regulation, rather than development.
Vested interests:Promotion of such a restrictive industrial policy had a common appeal to the state (which could maximize revenues by a multiplicity of tariffs), politicians and bureaucrats (with ample space for kickbacks), urban manufacturers who were sheltered from competition, and multinationals that provided technology and capital at high rates.
Thus, by the 1980s, Indian industry was characterized by low productivity, high costs, low quality of production, and use of obsolete technology.
Changes during the 1980s (‘Hesitant experimentation in domestic deregulation’):Several government committees recommended relaxing some of these controls to remove the chokehold on the Indian economy, and there was some improvement in deregulation:
· By 1988, all industries were exempted from licensing apart from a negative list of 26 industries. However, this exemption was subject to investment and location limitations, and came with its own set of myriad rules which significantly reduced the effectiveness of the exemptions
· Exporters could access inputs at international prices, but import tariffs increased further, to protect domestic industry
This led to significantly higher industrial growth in the 1980s; industry grew by about 6% p.a., and exports at 8.5%.
1990s
In 1990-91, industry (manufacturing) contributed 26% (15%) of GDP, employed 15% (12%) of the workforce, and used 39% (24%) of the economy’s capital stock.
While industrial growth rose in the 1980s, the government’s fiscal situation rapidly got out of hand due to rising interest payments, defense, and subsidies- gross fiscal deficit rose to 8.3% in 1990-91.There was agreement that industrial growth seen in the 1980s could not be sustained in this fiscal environment, and more domestic deregulation and foreign competition were needed. This point was exacerbated and driven home by three factors:
a. The Gulf war, which led to drying up of inward remittances and exports
b. Collapse of the USSR, which was then India’s biggest trading partner
c. Domestic political uncertainty
All these factors together led to the BoP crisis.
New Economic Policy: After the BoP crisis, wide-ranging reforms were brought in. Stabilization policies focused on correcting macroeconomic balances, whereas structural reforms were brought in to reduce public sector interventionism:
· Several barriers to entry were removed, such as:
- Removal of industrial licensing for investment
- Opening up all but a few strategic areas to private investment
- Reduction in the list of items reserved for production by small scale enterprises, as there were said to have bred inefficiency and labor-intensive manufacturing
- Removal of many output and investment controls
- In April 2015, the government has de-reserved all 20 remaining items on the list; there are now no items reserved for production only by MSMEs. Apart from allowing large firms to manufacturing these items (such as pickles, mustard oil, groundnut oil, glass bangles, safety matches etc.), these items can now also be imported
· Foreign trade and investment:
- Attracting foreign investment was expected to help improve the fiscal situation and release critical supply constraint for infrastructure
- Export/ Import tariffs were reduced, and quantitative controls over imports were dismantled, in the hope to promote competition (to reduce costs)
- Foreign investors were now allowed to own majority shareholdings over a wide spectrum of industries
- The overall policy moved from focusing on technology transfers to focusing on building global strategic alliances to penetrate world markets
· PSUs:
- Better performing PSUs were given greater autonomy and were allowed to access capital markets; budgetary support was reduced for non-performing PSUs
- In the initial years of reforms, the focus was on selling minority shares of PSUs (‘disinvestments’), instead of privatization, with the aim of financing fiscal deficits rather than improving the productivity of capital employed in these PSUs
The thrust of the policy was to create a more competitive environment, to improve productivity and efficiency of the system.Private sector was to be given a larger role in the economy. Thus, protectionism and quantitative restrictions were reduced; even still, rates of tariff remained higher than in most developing economies.
Lessons in planning from the experience so far clearly show that the role of the government is to improve the interaction, collaboration, and learning between producers, rather than top-down control of activity with the government deciding who should produce what, where, and how much, and what technology they should use.
Phases of industrial growth in India
A note on measuring growth in the industrial sector: There are multiple indices that can be used:
· Manufacturing (registered/ unregistered): components are capital goods, intermediate goods, consumer durables, and consumer non-durables
- Registered manufacturing accounts for about 70% of total manufacturing GDP, but only for 15% of manufacturing employment
· IIP: Manufacturing + Mining + Electricity
· Unless stated, numbers below are for total manufacturing (registered and unregistered)
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Several distinct phases since independence:
(*all the growth rates below are for industrial sector as a whole)
· 1930-1947: 1.2%
· 1951-1965: Evolution of industrial development strategy (relatively rapid growth- 6.3%; note that for 1959-1965, figure is 8.3%))
· 1966-1980: Inward orientation and industrial stagnation (slow growth- 4.1%)
- Strengthening of ISI, imposition of various government controls (bank and insurance nationalization, foreign exchange regulation act, reservations for SSIs, MRTP)
· 1981-1990: Deregulation and acceleration of growth (hesitant reforms, and growth revival-7.1% avg., went up to 8-9% in the second half)
- Efforts at industrial liberalization
- Better agricultural performance due to green revolution
- Increasingly expansionist fiscal policy
· 1991-2000: 5.7%
- 1991-1995 (schizophrenia; expected dip in 1991-92, but next four years, output grew at 13%)
- 1996-2001 (petering out of growth, steep deceleration, in part due to the Asian Financial Crisis)
· 2001-2010: 7.8%
- 2002-2007 (revival)
- 2008-2013 (international crisis, moderation, and revival)
Growth slowed down between 1965 and 1980s because of:
- Slowdown in public investment
- Poor infrastructure
- Slow growth of agricultural incomes
- Restrictive industrial and trade policies (import substitution)
The rectification of these concerns led to a growth revival in the 1980s.
Industrial growth in the 1990s:
1990s were kind of schizophrenic when it came to industrial growth; we saw everything from crisis (1991-92, growth was minus 2.3%), reform, adjustment, recovery, rapid growth (1993-96, avg. growth 13%), and a downward slide (1997 onwards; brought down the decadal average to 9%).
From 1991 to now, consumer durables have grown the most (8% p.a.), followed by capital goods (7.4% p.a.)
· Share of capital goods in industrial production declined drastically: During the 1990s, relative contribution of capital goods in industrial production reduced, whereas that of intermediate and consumer goods rose – basic and capital goods provided about 70% of total industrial production in 1980-1991, but only 43% in the next decade. This reflects a decline in investment demand in the economy, partly due to trade liberalization and consequent ease of imports, and financial liberalization
· Shift in favor of registered manufacturing against unregistered:Even within registered manufacturing, share of modern sectors (such as metals, electrical machinery etc.) increased at the expense of traditional sectors (such as jute, textiles etc.), possibly due to low growth in productivity and reduced access to credit for these traditional sectors
· Employment growth in organized manufacturing declined:Traditional manufacturing sectors such as cotton and jute textiles were high employment generating industries; with a decline in growth in this sector, the employment growth turned negative at -2% in the latter half of the 1990s. Most of the growth in manufacturing that occurred, occurred in the unorganized sector
· Export-oriented industries played a large role in growth of manufacturing employment in the 1990s
· Share of manufacturing in GDP stagnated:It stayed at about 25%, whereas in countries with comparable levels of development, it is usually 28-50%
· In general, there was a significant slowdown in manufacturing between 1996 and 2002, because of two primary reasons:
- Satiation of pent-up demand: There were a lot of goods that couldn’t be assembled/ produced domestically before 1991 because of import restrictions; after these import restrictions were lifted, there was a short-run increase in domestic demand, which the producers mistook as a long-term change, and invested in huge capacity buildup. By 1996, this transitory domestic demand was pent up, and Indian manufacturers for these products weren’t yet globally competitive, so export demand was also minimal
- Credit crunch: Around 1996, there was an unexpected and temporary tightening in liquidity by the RBI, in face of forex market volatility. This was misread by the markets as a permanent squeeze, and credit dried up for a while
· Labour productivity in manufacturing declined during the 1990s, especially during the second half of the reform period, due to faltering pace of implementation of structural reforms, binding infrastructure constraints, and lack of required industrial restructuring
Industrial growth from 2002-present:
10th plan period (2002-2007):
Industrial growth recovered significantly between 2002 and 2007 (10th plan), and remained around 9% on average (growth in manufacturing), as compared to only about 4% in the 9th plan (1997-2002). Some features:
- Growth was investment led: Capital goods sector witnessed double digit growth since 2003; manufacturing sector’s share in GFCF went up from 27% in 1980s to 40% in 2000s
- Sectoral share of industry in GDP started rising after several years of decline (was about 27% in 2006)
- Exports grew rapidly, from 6% p.a. in 9th plan to 19% during 10th plan
This growth momentum was gained due to rising demand both domestically and externally, and also because of the cumulative effect of industrial and trade policy changes carried out since 1991.
However, due to the financial crisis in 2008 and its knock-on effects, growth in industry (IIP) reduced to only about 2.5%. Some of these effects were:
- Increase in input costs:increase in price of crude oil and other inputs such as metals and ores
- Decline in export demand: export growth declined from 29% in 2007-08 to 4% in 2008-09
- Decline in access to funds:Freezing of trade credit by foreign banks, depreciation in rupee
2008-present:
Subsequently, industrial growth recovered between 2009-11, but again lost momentum thereafter; industrial sector grew by just 1% in 2012-13, and 0.4% in 2013-14. Capital goods sector showed a very weak performance, after being hit by a steady deceleration in fixed investment. Core industries (coal, steel, electricity, fertilizers, crude oil, natural gas, cement, and refinery products) grew only by 2.3%, as compared to 5+% during the two preceding years