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INDUSTRYIndian economy has taken a peculiar developmental trajectory, as can be seen by the following table that summarizes sectoral shares in GDP in percentage termsSector1972-731993-942017-18Primary(Agriculture)413017Secondary (Industrial)(Manufacturing, mining, quarrying, utilities, construction etc.)232529Manufacturing (part of secondary)13.514.516.7Services364554As 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:Sector1972-731993-942011-12Primary746449Industrial111524Manufacturing (part of secondary)Services152127Thus, 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. YearGDPIndustrial growth1990s (a lot of ups and downs)5.6%5.5%2002-2007 (10th plan)7.9%9.2%2007-2011 (11th plan)8%7.7%2012- 2017(12th plan)6-8%4-5%2017-187.1%3-4%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 on goods like cotton, jute and steel Unavailability of capital goods industries Limited public sector investmentWeak infrastructureFocus was to export raw materials and import finished goodsTechnical and managerial skills were in low supplyThus, the policymakers thought that economic sovereignty and independence lay in rectifying this situation by focusing on the industrial sector. First Industrial policy 1948 : Social outlook but promoting private sectorIndustrial Policy Resolution 1956It was adopted with philosophy of state commanding the hights of economy (Lenin’s theory) which also became the basis of second FYP. The resolution classified industries into 3 categories: Exclusively owned by state Industries where private sector could supplement state Industries for private sector but 2 conditions:Licensing – for regional equity and quota of goods produced Small-scale industries- Few industries were reserved (Karve committee) as they are labour intensive and needed shielding from large companies While above measures diversified Indian inudstries and promoted small-scale industries, multiple issues were felt by economist: Govt. regulation continued for longer than needed for eg. TelecomPSUs even if loss making could not be closedRampant corruption and reulation due to lincense rajCustomers had to accept the captive product No focus was given on exports till late 1980s.Low productivity and technological know-how. 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 exemptionsExporters could access inputs at international prices, but import tariffs increased further, to protect domestic industryThis led to significantly higher industrial growth in the 1980s; industry grew by about 6% p.a. (compared to ~4% growth in 1961-81), and exports at 8.5%.1990sWhile 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. This point was exacerbated and driven home by three factors:The Gulf war, which led to drying up of inward remittances and high prices for imports of crude oil (3x)Collapse of the USSR, which was then India’s biggest trading partnerHigh interest and principal repayment of foreign loans were dueAll these factors together led to the BoP crisis.New Economic Policy:After the BoP crisis, wide-ranging reforms were brought in. Stabilization and structural reforms were undertaken :-Stabilization of measures – a) Balance of Payments and b) check on inflationStructural reform measures-Improving efficiency of economyRemoving rigidity and govt. interventionThe reforms were taken across industrial, financial/foreign trade and PSU revampingSeveral barriers to entry were removed, such as: Removal of industrial licensing for investment: Still applicable only for alcohol& cigarettes, drugs &pharmaceuticals, hazardous chemicals, industrial explosives, electronics, aerospaceOpening up all but a few strategic areas (Atomic energy, railaway transportation) to private investmentReduction in the list of items reserved for production by small scale enterprises, as there were said to have bred inefficiency and labor-intensive manufacturing: (In April 2015, the government has de-reserved all 20 remaining items on the list)Removal of many price fixation and investment controlsForeign trade and investment:Devaluation of money was done to attract foreign investment, it was was expected to help improve the fiscal situation and release critical supply constraint for infrastructureExport/ Import tariffs were reduced, and quantitative controls (quotas) 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(cuurently?)The overall policy moved from focusing on technology transfers to focusing on building global strategic alliances to penetrate world marketsPSUs:Better performing PSUs were given greater autonomy and were allowed to access capital markets; budgetary support was reduced for non-performing PSUs(Maharatnas, Navratnas, Miniratnas)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 PSUsThe 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. The economy moved from directive to indicative planning. Thus, protectionism and quantitative restrictions were reduced; even still, rates of tariff remained higher than in most developing economies. Industrial growth in the 1990s:Source1990s were kind of schizophrenic when it came to industrial growth; we saw everything from crisis(1991-92, growth was 0.34 %), reform, adjustment, recovery, rapid growth(1992-97, avg. growth 7%), and a downward slide (1997 onwards avg growth 4.5%; brought down the decadal average to ~5.5%) where as GDP growth in respective period were (1.43%, 6.7% and 5.35%) decadal average of 5.6%(Crisis, recovery, Asian Financial Crisis)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 liberalizationShift 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 sectorsEmployment 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 sectorExport-oriented industries played a large role in growth of manufacturing employment in the 1990sShare 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 minimalCredit 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 (East Asia Crisis)Labour productivity in manufacturing declinedduring 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:Source10th plan period (2002-2007): (9.2 % industrial v/s 7.9 % GDP)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 2000sSectoral 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 10thplanThis 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.Eleventh Plan Period (2007-2012): (7.7 % industrial v/s 8 % GDP)However, due to the financial crisis in 2008 and its knock-on effects, Some of these effects were:Increase in input costs:increase in price of crude oil and other inputs such as metals and oresDecline in export demand: export growth declined from 29% in 2007-08 to 4% in 2008-09Decline in access to funds:Freezing of trade credit by foreign banks, depreciation in rupeeSubsequently, industrial growth recovered between 2009-11, but again lost momentum thereafter;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) Twelfth Plan Period (2012-2017): (4-5% industrial v/s ~7-8% GDP)Reforms (Ditch)Thus, overall performance of the industrial sector can be summarized as follows:There have been some gains from reforms:Relative price of capital goods has declinedCompetition has increased, with easier import and entry of new firmsShare of PSUs in manufacturing GDP has declined by half since 1991 to 8%Industry’s share of domestic output and employment has stagnatedReforms have failed to promote labor-intensive, export-ledgrowthThe reforms clearly failed to yield faster output, employment, and labor-intensive growth; manufacturing sector, especially, has remained slack. This isbecause of: Supply factors:Persistinglabour-market rigidities: Infrastructural bottlenecks: pre-1991, public sector used to provide much of the infrastructure, like in most industrializing economies. Reforms encouraged entry of private and foreign capital in infrastructure services; this might be ill-founded, given the long gestation periods and low rates of returns associated with such projectsPoor market integrationIncomplete financial integration including full convertibility of the currencyThere is a dominance of large-sized factories in manufacturing Indian firms are either too large (1000+ workers), or too small (<10); firms employing 100-500 people are relatively less; international evidence shows that mid-sized firms are much more efficient than the other two kinds, but India suffers from this ‘missing middle’Slow growth of MSME sector due to credit unavailability, policy regimeMore focused collective action to demand quality and accountability for delivery of public services in a time-bound manner from the governmentEase of doing business in India to be further improved Demand factorsPublic investment has been declining (check)Share in exports has declined, with rising share of primary exports (such as iron ore) ................
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