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ECONOMICS ASSIGNMENT

What do you think are the factors that contributed to the stagnation of Indian Industrial sector?

Industry is the production of an economic good or service within an economy. The Industry sector makes up 18 percent of Indias GDP. Among the major sub-industries include textiles, chemicals, food processing, steel, transportation equipment, cement, mining, petroleum, machinery, software and pharmaceuticals. The Indian industrial sector has gone through various phases since independence. Industrial Stagnation since the mid-1960s: India achieved respectable rates of growth during the first 15 years of planning (roughly from 1950 to 1965). However, the mid-1960s were a tumultuous period for the young nation. India was at war with China (1962) and Pakistan (1965); there had been a drastic fall in food production, particularly during the drought year of 1965; and Nehru, the main architect of Indian planning, died in 1962. The stagnation in Indian industry between the mid-1960s and the mid- to late 1970s was the subject of an intense academic debate.

One side of this debate focused on the problems of state-led capitalist transformation in India without effectively implementing land reforms or other measures to empower the vast sections of the underprivileged in the country. A number of scholars have argued that Indias industrial progress was hindered mainly due to the slow expansion of domestic demand, a consequence of unequal income distribution and slow growth of agricultural incomes in the country. At the same time, according to another equally influential argument, the licensing system and import controls that characterized Indias industrial policy framework led to economic inefficiency and resource. Studies have also shown that Indias large business houses distorted the industrial licensing system to reinforce their oligopoly power. The slowdown in industrial production observed during the 1980s was primarily on account of low productivity. There was persistence of high costs on account of adoption of outdated technology and low quality of production. However, progress in the process of deregulation was initiated during the 1980s.

If we look at the below figure, the contribution of industrial sector to Indias GDP is almost constant.

If we consider China, in the same period of time, its percentage GDP rose from nearly 30 percent to 50 percent. It follows a growth-oriented autocratic business regime which targets a) Investment and export driven growth China's 'export-led growth' model has played a much broader role in transmitting new technologies and business practices to the wider economy, leading to substantial productivity gains. b) Suppress labor regime: The Labor Code has created a legal framework which sets out the rights and obligations of employers and employees, working hours, labor contracts, payment of social insurance, overtime work, strikes, and termination of employment contracts, etc. c) Financial repression: Investment funds are channelled through state-owned banks to stateowned enterprises (SOEs), there are few investment alternatives, stock markets are dominated by SOEs, interest rates are set primarily by government fiat, the capital account is closed, and the exchange rate is tightly managed. d) Strict Industrial policies e) Added feature of control over land acquisition and utilization.

Coming to the case of India, it is the opposite of an authoritarian regime. a) Chaotic democracy: Where every rule/bill has both significant support and opposition. Little difficult to implement strict rules and laws. b) Greater focus on social equity: Whichever rule is implemented, it should take into account whether social equality is achieved or not.

c) Promotion of Labor-proletariat: The proletariat is a term used to describe the class of wageearners in a capitalist society whose only possession of significant material value is their labour-power. d) Private ownership of land: Compared to China, more percentage of land is owned by private owners than the government. Globalisation is also a major cause. Globalization is the process of international integration arising from the interchange of world views, products, ideas, and other aspects of culture. Effects of Globalization on Indian Industry started when the government opened the country's markets to foreign investments in the early 1990s. Globalization of the Indian Industry took place in its various sectors such as steel, pharmaceutical, petroleum, chemical, textile, cement, retail, and BPO. The various negative Effects of Globalization on Indian Industry are that it increased competition in the Indian market between the foreign companies and domestic companies. With the foreign goods being better than the Indian goods, the consumer preferred to buy the foreign goods. This reduced the amount of profit of the Indian Industry companies. This happened mainly in the pharmaceutical, manufacturing, chemical, and steel industries. The negative Effects of Globalization on Indian Industry are that with the coming of technology the number of labor required decreased and this resulted in many people being removed from their jobs. This happened mainly in the pharmaceutical, chemical, manufacturing, and cement industries. The weak performance of the industrial sector has long been associated with the restrictive regulatory regime of industrial licensing, labor regulations, and limitations on Indias economic relations with the rest of world. Some other plausible reasons include 1) sluggishness or fall in export demand 2) reduced flow of finance for industrial investment and 3) decline in business confidence resulting in reduced investment The major reforms in Indian Industrial sector were witnessed during the 1990s. For instance, in 1991, there was a gradual dismantling of industrial licensing, removal of import licensing from nearly all manufactured intermediate and capital goods, tariff reduction and relaxation of rules for foreign investment. The reforms in respect of the industrial sector were intended to free the sector from barriers to entry and from other restrictions to expansion, diversification and modification so as to improve the efficiency, productivity, and international competitiveness of the Indian industry.

References: 1) On Measuring Productivity Growth in Indian Industry: Analysis of Organized and Unorganized Sector in Selected Major States by S. N. Rajesh Raj, Mihir K. Mahapatra 2) Indian Economy Sectors, (Economywatch: www.economywatch.com) 3) Indias Industrial Sector: Faltering Growth? by Barry Bosworth, Stanford University

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