Industrial growth and policy

1. Industrial Growth and Policy
Since Independence

2. Industrial Scenario in 1950
•Ratio of consumer goods to producer goods – 62:38
•Weak infrastructure
•Lack of government intervention
•Export orientation against the economy’s interests
•Structure of ownership highly concentrated
•Technical and managerial skills at short supply

3. Policy for industrialisation
•1st
5-year plan
•public sector to develop those industries “in wich private
enterprise is unable or unwilling to put up the resources
required and to run the risk involved”
•Formulation of customs and excise tariff structure, import
& export policy, investment & technology policy; monetary
& financial policy
•2nd
5-year plan
•public sector to be “commanding heights of the economy”
•Allocation of public resources

4. Industrial control regime
•Five Year Plan documents
•Import & export controls
•Control of capital issues
•Control of foreign exchange
•Transport controls including allocation of raw materials
•Price controls
•Allocation of credit

5. Industrial Licensing System
Letter of Intent
– Ministry of
Industry
Capital goods
import license
from Ministry of
Commerce
Capital goods &
raw material
import license
from Chief
Controller of
Imports &
Exports,
Ministry of
Industry
Foreign
collaboration
approval from
committee of
Finance Secretary
& Ministry of
Industry
Essentiality & indigenous
non-availability clearance
from technical wing of
Ministry of Industry
MRTP clearance
from Department
of Company
Affairs
SSI reservation
Public sector
reservation
Ban on location in
large cities

6. Industrial growth
•Share of industry has increased from 11.8% of GDP in 1950-51 to
24.6% in 1990-91
•Share in industrial value added from 1956 to 1990
•capital goods from 4.7% to 23.7%
•Basic goods from 22.3% to 28.4%
•Consumer goods from 48.4% to 20.5%

7. Phases of economic growth
•Rapid growth in 1956-65
•Value added in organised industry grew at 8%p.a
•Deceleration in 1965-66 to 1979-80
•Value added growth rate decline to 5.5%p.a.
•Decline more pronounced in capital goods and basic goods
•Consumer goods (particularly consumer durables) showed slight acceleration
•Recovery and revival in the 1980s
•Manufacturing sector grew at 7% p.a (8-9%p.a in the second half of 1980s)
•Consumer durables grew at 14.2%p.a
•Capital goods grew at 7.8%
•Beginning from 1991 economic policy reforms
•Rate of growth fell in 1991-92, recovered till 1995-96, then decelerated till
1999-2000

8. Causes of stagnation during 1965-66 to 1979-80
•Slowdown in public investment and the resulting inadequate infrastructure
investment (Prabhat Patnaik)
•Poor management of infrastructure (Isher J Ahluwalia)
•Slow growth of agricultural income and the resulting slow growth in demand
for industrial products (K N Raj)
•Restrictive industrial and trade policies leading to high cost industrial structure
(Isher J Ahluwalia)
•Domestic terms of trade for industry (Ashok Mitra)
•Oil price shock, agricultural supply shock and political uncertainty in the late
1970s
Demand constraints more important than
supply constraints
Demand constraints – slow agricultural growth, high unemployment rate,
public expenditure: Nagaraj, Kavita Rao
Supply constraints – low productivity, high costs, low quality of products,
obsolete technology – Isher J ahluwalia

9. Comparative growth rates in the 1980s and 1990s
Avg annual growth rate Avg annual growth rate
(1980-81 to 1991-92) (1992-93 to 1999-2000)
IIP
General 7.8 6
Manufacturing 7.6 6.3
mining 8.4 3.3
Electricity 9 6.6
Use-based classification
Basic goods 7.4 6.1
Capital goods 9.4 5.9
Intermediate goods 4.9 9.1
Consumer goods 6 6.3
of which
i) Consumer durables 10.8 11.2
ii) Consumer non-durables 5.3 5.1
Source: Economic Survey,
2000-01

10. Shift in policy regime in the 1980s
•Abid Hussain Committee on trade policy – easing of trade policy
•Narasimham Committee on shift from physical to fiscal controls
- from physical and other quantitative controls to fiscal & other
macroeconomic management
•Arjun Sengupta Committee on the public sector – greater public
sector autonomy in business and operating decisions and the
ened for measures for enhancing productivity efficiency and
modernisation

11. Delicensing in the 1980s
•32 groups of industries were delicensed without any investment
limit
•In 1988, all industries were exempted from licensing except for a
specified negative list of 26 industries subject to investment and
location limitations.
•Increased access of exporters to inputs at international prices
but tariff protection to industry increased significantly in the
1980s

12. Effect of policy shift in the 1980s
•Hesitant experimentation in domestic deregulation
•Highly protectionist trade policy
•Loss making public sector intact
Gross fiscal deficit from 6.2% of GDP in 1980-81 to 8.3% in 1990-91 as the
government became increasingly expansionary to support growing government
expenditures on interest payments, defence, subsidies and administration.
Higher productivity and higher industrial growth
Following the Gulf War and current account crisis led to deregulation of foreign
competition and try to attain macroeconomic balance

13. Pattern of growth in the 1980s
•All round increase in growth compared to deceleration phase
•Increase in growth rate steeper in consumer durables than in other
sub-sectors
•Rise in real incomes of people in the middle income categories gave
rise to large demand for consumer durables (pent-up demand)
•Highly import and energy intensive with little potential for
employment generation
•Created bias for chemical based industries opposed to metal based
industries

14. Factors for revival in the 1980s
•Improvement in rate and pattern of gross domestic capital formation in
general and public investment in particular
•Better performance of infrastructure
•Less adverse trends in terms of trade for industry
•Increase in the use of manufactured inputs in crop protection leading to
growth in agricultural income by diffusion of green revolution technology
•Changes in industrial and trade policies leading to improvement in total
factor productivity
•Import restrictions moved from quotas to tariffs (although still very high)
and a steady depreciation of currency in nominal terms
•Greater reliance on private corporate sector with fiscal incentives for stock
market based financing of industrial investment

15. Effect of factors on different sectors
•Response of output of consumer goods to a given increase in
autonomous expenditure was greater in the 1980s than in the
previous decade
•Response of output of capital goods to a given increase in public
investment higher
•Import of capital goods had a negative impact on domestic
production while the same had no effect in 1951-59

16. New Economic Policy of 1991
•Stabilisation policy
•To correct weaknesses in the fiscal policies and balance of
payments
•Structural reform
•To remove rigidities in various segments (industrial licensing,
foreign trade, foreign investment, exchange rate
management, financial sector

17. Changes in trade & foreign investment policy
•Reducing tariff rates in stages
•Dismantling quantitative controls over imports
•Foreign investment rules moved from a policy of restrictive and
selective FDI mainly through technology transfers to a more
open one for better access to technology as well as strategic
alliances to penetrate world markets – 100% foreign ownership
allowed in many industries in most sectors except banks,
insurance, telecommunications and airlines.

18. Changes in industrial policy
•Removal of industrial licensing for investment
•Opening up of all but a few strategic areas of industries
earlier reserved for public sector
•Replace MRTP Act with a new Competition Law
•Many industries dereserved from small scale sector

19. Growth Pattern in the 1990s
•Decline in industrial production in 1991-92, pick up in 1992-93-1995-6,
deceleration in 1996-97
•Higher growth rate in 1997-98 with better performance in mining (better
performance of crude oil), electricity generation (hydroelectricity);
Manufactured growth rate remained the same
•Broad-based industrial recovery in 1998-99 and 1999-2000, contributed by
manufacturing and electricity
•Slowdown in 2000-01 and 2001-02 – structural and cyclical factors like
business & investment cycles, lack of domestic and external demand, high
real interest rates, infrastructure bottlenecks in power & transport, lack of
reforms in land & labor markets, adjustment lags of M&As, delays in
establishing institutional and regulatory frameworks

20. Profile of industrial growth
•First phase of reform period (1991-92 to 1996-97)
•While consumer goods industries sustained growth
momentum in the 2nd
period, basic & intermediate goods fell;
capital goods improved in the 2nd
phase but fell from 2000-01
•Second phase of reform period (1997-98 to 2001-02)
•Decline in capacity utilisation
•Decline in potential growth

21. Manufacturing slowdown (1996-2002)
•Satiation of pent-up demand for import-intensive consumer goods: short run demand
facilitated by easy access to credit; huge capacity build-up in the first phase
•Credit crunch – unexpected and temporary tightening of liquidity in money markets to
contain volatility in the forex markets
•Corporate funds locked up in inventories and receivables. Funds invested in financial
instruments also locked up – depressed stock markets inhibited redemption of
financial instruments.
•Rising interest rates prohibitive for new projects and investment
•Fall in government capital investment since 1995
•Over-expansion of capacities during the manufacturing boom
•Slump in capital markets for new issues
•Slowdown in rural demand for consumer durables and non-durables
•Slowdown in world trade

22. Deceleration in the second half of 1990s
•Post-reforms, expectation of further reforms led to huge capacity
creation.
•Investment boom in capital goods sector, without a
corresponding rise in output growth of the user sectors, especially
in the consumer durables goods for which the size of the market
was found to be smaller than expected.
•Investment in unregistered sector halved, implying that
investments are driven by potential size of the domestic market
and expectations of liberalisation. E.g, automobile and consumer
durables market, driven by FDI.
•Investment in unregistered manufacturing also hurt by high
interest rates in the 2nd
half of the 1990s.

23. Structural change in industries
•Shift towards registered against unregistered manufacturing
•Within registered, traditional industries like textiles, jute and
other vegetable fiber textiles declined while modern segments
like metal products & electrical machinery rose
•Stagnant share of manufacturing sector in GDP

24. Use-based groups
•Capital goods sector grew at 6.7%p.a during 1981-98 and at
5.7%p.a during 1992-98.
•Within capital goods, production of passenger cars grew at 15%
during 1981-98.
•Machine tools industry grew at 1.7%p.a during 1981-97 and at
negative rate thereafter.
•Share of consumer goods increased from 35% to 42% during the
period. Including the unregistered sector, the share is higher.
•Share of basic and intermediate goods went up while that of
capital goods increased marginally.

25. Underestimation of the Capital Goods Sector
•Real price of capital goods and construction has come down
with reduction of tariffs and growth of the cement industry
(gradual decontrol, entry of new firms and technological
upgradation) respectively.
•As price of fixed investment has come down, the share of the
machinery sector in total industrial output is lower.
•But, addition to capital stock is more productive.

26. Long term constraints for industrial
growth: different views
•Arthur Lewis: “productivity of farmers whose marketable surplus
will exchange for manufacturers”. Land productivity in China 1/3 of
China’s and per capita value added in manufacturing 1/4th
of that of
China’s
•Large countries generally have low trade ratios and depend on the
domestic market. K N Raj: in a poor agrarian economy, lack of
demand is a binding constraint for industrial growth
•Prabhat Patnaik: Lack of autonomous public investment

27. Employment effects
•In the 1980s, employment fell despite growth in manufacturing sector
as employment fell in cotton & jute textiles
•Employment growth picked up from 0.8% in the 1980s to 2.3% in the
first half of the 1990s
•Deceleration of manufactured growth in the second half had adverse
effects on employment growth (-2.1% in this period)
•Employment in the manufacturing sector fell because of the shift from
unregistered to registered sector.
•Construction sector compensated for the loss of employment in
manufacturing sector so industrial sector (manufacturing, mining,
electricity and construction) showed a marginal increase in
employment

28. Recovery since 2002-03
•Industrial sector recovered in 2002-03 (5.7%), 2003-04 (7%),
2004-05 (8.4%), 2005-06 (8.2%) and 2006-07 (11.6%).
•Recession since 2007
•Capital goods and consumer goods sectors improved
•Investment-led growth and evenly spread within manufacturing
sector
•Rising demand in both domestic and external markets

29. New Manufacturing Policy, 2011
aiming to increase the share of the manufacturing sector from
16pc to 25pc in GDP within a decade, creating 100 million jobs.
aims to be inclusive and sustainable, empowering rural youth and
protecting the environment.
proposal for National Investment and Manufacturing Zones
(NIMZs)
rationalized and simplified the Foreign Direct Investment (FDI)
procedures, making them more investor-friendly. The approval
mechanism has been streamlined, with only projects of over
INR60bn requiring to be placed for consideration of the Cabinet
Committee of Economic Affairs.

30. Consolidated FDI Policy, 2011
•FDI in single-brand retail up to 51pc is allowed only for
foreign investors who own brands.
•The conditions in terms of minimum build-up area,
minimum capital requirement, lock-in period, etc. for
100pc FDI in construction activities for schools, colleges,
universities and old-age homes have been removed.
•FDI limit for terrestrial broadcasting and FM radio has
been raised from 20pc to 26pc.

31. FDI in retail
•Up to 51pc FDI is now allowed in single-band retail while retailing
foreign products through Indian companies is allowed. The
industry ministry had allowed FDI in multi-brand retail in 2011 but
had to roll back the measure in a few days, following severe
protests by the opposition as well as coalition partners. DIPP had
suggested that a minimum investment of $100mn with at least
half in back-end infrastructure including cold storage chains,
refrigeration, transportation, packing, sorting and processing. It
also suggested that a minimum of 30pc of sourcing from Indian
micro and small industry would be mandatory.

32. National Investment and Manufacturing
Zones (NIMZs)
•at least 5000 hectares each, which would be greenfield
integrated self-governed industrial township projects with state-
of-art energy-efficient technology and infrastructure. Although
the policy is sector-neutral, it would be applicable to industries
that would are able to operate in clusters.
•The first phase of the NIMZs is proposed along the 1483km Delhi
Mumbai Industrial Corridor
•identified nine investment regions along this corridor that can
promote NMIZs. It will also have high speed freight lines, three
ports, six airports, a six-lane intersection highway between the
political and financial capitals of the country and a 4000MW
power plant.

33. Infrastructure Constraints
•Decline in steel, coal, cargo handling and freight loading
•Improvements in power and communication
•Improvement in telecommunications with decline in unit cost
reflecting regulatory reforms and increased competition from private
sector participation.
•Real gross capital formation in electricity, gas and water supply,
railways declined
•Pace of public investment in infrastructure slowed down
•Response of the private sector has not been adequate in absence of
user charges, lack of clarity in regulatory projects

34. The case of power sector
•High cost of power affect price competitiveness of
manufacturing.
•Electricity tariff charged from industrial/ commercial
users higher than average cost of supply.
•Issues of pricing, cross subsidy, ownership and regulatory
issues.
•Poor recovery of SEBs’ dues and T&D losses
•Poor response of the private sector

35. Credit growth
•Small firms are largely dependent on bank credit compared to large firms
•Credit off-take from commercial banks declined in the 1990s
•Slowdown in credit growth for segments like exports, SSIs, medium and large
industries
•Shift in credit towards iron & steel, electricity, food processing, cement, gems
& jewelry, petroleum.
•Industries that had lower credit were metals, engineering, cotton, jute & other
textiles, paper, chemicals, leather, construction
•Highest decline in engineering
•Long to medium term financing for greenfield projects and expansion activities
also declined

36. Trend in corporate financing
•Increasing recourse to internal sources of financing against
borrowed sources of funds
•More public placements of debt and equity with less stringent
disclosure norms, low cost of issuance, ease of structuring
instruments and reduced time lag in issuance.
•Reduced industrial credit result of risk-based prudential
requirements like capital adequacy and provisioning norms
following which banks are deploying funds in government
securities

37. Productivity trends
•Turnaround in TFP in mid-1980s but declined in the
1990s
•Labor productivity low
•TFP decline since the 1990s because of slow structural
reforms, infrastructural constraints.
•Production more capital intensive because of
inflexibilities in the labor market

38. Public sector
•Policy of disinvestments and privatisation since 1991-92, when 1/5th
of GDP
was from the public sector
•In 2004-05, policy shift expressing commitment towards a strong and
effective public sector deciding that profit-making PSUs will not be
privatised.
•With acceleration of domestic output growth rate since 1980-81, PSUs have
contributed additional output growth equally. After peaking at 12.5% of GDP
in 1986-87, share came down to 6.4% in 2001-02 as a result of privatisation.
•Share of infrastructure in public sector investment has increased while
manufacturing sector has come down.
•Fall in public sector employment growth

39. Privatisation
•Full or part sale of government-owned companies to private
companies
•Partnership between public and private sectors
1991-92: disinvest up to 20% of equity in selected PSUs to MFs and Fis in the
public sector
1996: Disinvestment Commission. Revenues generated would be allocated
for education and health and for creating fund to strengthen PSUs.
2001: restructure and revive potential PSUs, close down PSUs that cannot be
revived, bring down govt equity in all PSUs to 20% or lower, entire receipts to
go for social sectors
2004: Ministry of Disinvestment became a department in the Ministry of
Finance. Case-by-case decision. To retail navratna companies
2005: National Investment Fund for investment in social sectors, capital
investment in selected profitable and revivable PSUs

40. Continued importance of public sector
•Output of the public sector as % of GDP peaked in 1991-92 at 26% and
declined marginally.
•With acceleration of domestic output growth after 1980-81. public sector
contributed to output in equal measure.
•With industrial deregulation and import competition, share of public sector in
domestic output has remained roughly the same even though gross capital
formation in the public sector has halved.
•Share of public sector investment has remained to be more in capital-
intensive industries like mining, electricity, gas and water, transport &
communication compared to manufacturing sector.
•Productivity in the public sector has improved

41. Private sector superior to public sector?
•No empiricial evidence
•Non-departmental public sector savings has increased while
that of departmental (administration) has decreased
•Degree of competition and regulatory environment rather than
ownership is important
•Assets of PSUs need to be put to productive use.
•Public sector employment has decreased

42. Public sector profitability
•PSUs have high depreciation cost since they have to invest not only in plant &
machinery but also on social overhead capital for which budgetary provisions
are required.
•PSU capital structures are not aimed to maximise shareholders’ investment
but provision of goods and services that are not provided by the private sector.
•PSUs usually begin with high proportion of debt
•Gross profit to capital employed is more important, which is rising. But, net of
the petroleum sector, profitability of PSUs is rising.
• Revenue to cost ratios are higher because of inefficient pricing autonomy.

43. Nature of Infrastructure development
•Provision is monopolistic in nature
•High upfront costs
•Long payback periods
•Investments bulky and lumpy
•Existence of externalities
Mainly in the public sector in almost all countries

44. Commercialisation of infrastructure
•Massive investment requirements against fiscal stringency
pushing governments to look for additional sources of finance
•Doubt over efficiency of public sector provision of
infrastructure
•Global competition putting pressure on efficient infrastructure
•Dynamism and integration of world capital markets has
increased the possibility of raising large funds for infrastructure
investment on commercial basis

45. Major infrastructure sectors
•Transport
•Roads
•Railways
•Airports
•Shipping
•Power
•Telecommunication
•Rural infrastructure
•Irrigation
•Roads

46. Transport sector
•Roads
•National Highway Development Project (Golden Quadrilateral
and the North-South East-West Corridors)
•Main source of finance of National Highways Authorities is
the fuel cess and budgetary grants
•Public –private partnership: private bidders funding
construction of some stretches that promise high toll
collections; projects on build-operate-transfer basis

47. Transport sector
•Ports
•12 major ports and 200 non-major ports (60 non-major ports
handling traffic)
•Private ports like Mundra coming in
•Bulk cargo like coal, steel, driving port expansion in the
private sector
•Multimodal shipping involving coordinating rail and road
connectivity between ports and hinterland becoming more
important

48. Transport sector
•Railways
•Dedicated freight corridor linking ports on the anvil
•Private container operations
•Four mega-terminals at New Delhi, Mumbai, Howrah and
Chennai are being considered for overhaul
•Railway wagons for coal transportation a major hindrance for
supplying coal to power stations

49. Transport sector
•Airports
•Tremendous growth
•Private airlines account for 76pc of domestic
traffic
•Low cost airlines
•Privatisation of airports: Delhi, Mumbai,
Hyderabad, Bangalore

50. Power sector
•Generation capacity is planned to be increased from
the present 167,000MW to 200,000MW by 2012.
•Rate of return for the power sector still negative
•Most SEBs are loss-making and depend on subsidies
•Power losses during transmission and distribution
40pc

51. Power sector
•Nuclear power dependent on imported uranium
•Hydropower
•Issues of land acquisition and people displacement
•Private participation in small and medium projects
•Thermal power
•Coal supplies major bottleneck: coal imports 52mt in 2011,
expected to be 104 in 2012
•Gas supplies: Dual pricing for domestic gas (APM pricing for
ONGC fields, private fields prices also fixed by government),
LNG prices highly volatile

52. Telecommunictaion
•Highly competitive
•Problems
•Frequent call drops
•Poor connectivity
•Absence of customer redressal cell
•Unwarranted messages and telemarketing calls
•Network performance in rural areas poor

53. Rural infrastructure
•Lack of private participation in roads, telecom, water,
power, warehousing, banking
•Reliance and Bharti are venturing into
commercialising agriculture
•Supply chain modernisation
•Rural eletrification program
•Rural roads

54. Challenges for infrastructure
•Financing
•Land acquisition
•Environment
•Regulations
•Designing of contracts

55. Delhi Mumbai Industrial Corridor
•covers 6 states, Haryana, Uttar Pradesh, Madhya Maharashtra
and Gujarat, which account for 43pc of the GDP, 50pc of
industrial production and 40pc of the labor force of the country.
•identified nine investment regions along this corridor that can
promote NMIZs.
•high speed freight lines, three ports, six airports, a six-lane
intersection highway between the political and financial capitals
of the country and a 4000MW power plant