Pergamon

PII: SO305-750X(96)00135-0

World Development, Vol. 25, No. 5, pp. 681-694, 1997 0 1997 Elsevier Science Ltd All rights reserved. Printed in Great Britain 0305-750x/97 $17.00+0.00

Indias Industrial Development: Interpretative

RAPHAEL

An

Survey
*

KAPLINSKY

Institute of Development

Studies, Brighton, Sussex, U.K.

Summary. - In recent years there has been a significant shift in Indian industrial strategy, from a heavily regulated and inward-oriented structure toward significant liberalization in both domestic and trade policy. At the same time, Indian industry has sustained its historically impressive growth performance. The two waves of liberalization - in the 1980s and after 1991 - have been associated with significant structural change. There is some question, however, as to whether this change in strategic orientation is consistent with rising per capita incomes. This paper reviews these changing strategic perspectives and the economic performance of the industrial sector in the post-Independence period. It concludes that most studies which have been undertaken of Indian industrialization have been macroeconomic in nature and that there has been a poor tradition of microeconomic research into the

determinants of industrial competitiveness. 0 1997 Elsevier Science Ltd

Key words Asia, India, industrialization, industrial policy, productivity, industrial organization

1. INTRODUCTION Comparative analysis has shown a fairly close association between industrial development and high levels of per capita income (Syrquin and Chenery, 1989). This has led many countries to actively foster industrialization. Not all industrial growth leads however, to income growth. This is for two main reasons. First, as the experience of the former command economies has graphically shown, when domestic industrial production occurs behind heavy protective barriers, the border price value added in industry -that is, the value of industrial output when calculated at the cost of imported equivalents - can be much lower than when its value is computed in domestic prices and then converted into international units of account through the exchange rate. Secondly, some forms of industrial development, especially those based almost exclusively on cheap labor, are only sustainable with a depreciating exchange rate as countries engage in a process of competitive devaluation to lower their dollar wage rates (Kaplinsky, 1993). In these circumstances the international purchasing power provided by industrial production (in the medium and long term, if not in the short term) leads to what might be called immiserizing industrial development. Both these caveats point to the complexity of industrial development in an open trading world. On
681

the one hand, production behind closed borders may provide a misleading estimate of realizable incomes; on the other hand, openness per se does not lead to sustainable output growth, particularly that consistent with high levels of employment and desirable distributional patterns. But at the same time, exogenous forces at play in the global political economy effectively remove the option of industiialization behind closed borders and increasing openness is a reality which has to be confronted by industrial planners in both the private and public spheres of policy. It is important to note, therefore, that there are different structures of integration with the global economy, each with different consequences for meeting economic and social objectives, and industrial policy needs to be fashioned with this complexity in mind. As India enters the new millennium after half a century of policy-focused import-substituting industrialization, the global trend toward greater liberalization and openness has forced the industrial sector to confront new standards of price and product competition. As Ahluwalia observed at the beginning of the decade, [plrepating for international competitiveness is no longer a matter of choice. It is only a
*The author is grateful to John Humphrey and to an anonymous referee for helpful comments on an earlier draft.

682

WORLD DEVELOPMENT

question of time (Ahluwalia, 1991, p. 198). At the same time, as many other restructuring economies have found, this process of liberalization leads to profound industrial restructuring which has significant social costs. Given that Indias commitment to distributional concerns has long been a central objective of industrial development - and indeed, is reflected in the Constitution this poses particular strategic challenges in balancing the needs for sustained income growth, international competitiveness, domestic political cohesion and distributional concerns. This paper reviews Indias industrial trajectory in the postwar period, contrasting performance and challenges before and after the liberalization of the early 1990s. It begins by very briefly recapping the evolving policy framework governing Indian industrial development since the 1930s. This is followed in section 3 by a review of industrial performance, focusing both on growth rates and on the structural characteristics of this industrial growth. But since the Indian economy is opening up to the external world, it is necessary to expand the discussion by focusing on the trade account; together with a brief discussion of trade-policy related issues, this is the subject matter considered in section 4. Greater openness requires a focus on competitiveness and productivity growth, issues which are addressed in section 5. In the context of the relatively poor productivity performance of the industrial sector, the paper concludes by reviewing the weakness of the microeconomic research on Indian industry and identifies the major policy challenges facing future industrial development.

should also be restricted in order to ensure the development of national capabilities. - Market forces would not spread development to backward regions or the rural areas, and special measures would be necessary to ensure that the benefits of development reached the poor, including through the promotion of small-scale industry. In pursuit of these objectives, a series of policy instruments were developed, including the pervasive licensing of industrial activity; the reservation of key areas for state activity; an inward-focused trade policy; controls over large domestic firms foreign direct investment (FIX) and technology transfer; interventions in the labor market designed to protect labor; and policies designed to promote small-scale industry. These were defined within seven five-year plans, stretching between 1951 and 1990.

(b) The onset of revisionism The unwieldy nature of this complex system of controls - a system of forbidding complexity (Desai, 1993, p. 56) -became increasingly apparent and became a highly contested policy terrain. The critique of Indian import substituting industrialization (ISI) in particular (Bhagwati and Desai, 1970), and IS1 in general (Little, Scitovsky and Scott, 1970) blossomed into a resurgence of neoliberal policy thinking, premised both on the grounds of efficiency and political economy as the debate came to focus on rent seeking behavior (Kreuger, 1974; Lal, 1983). But even within the relatively closed confines of Indias domestic policy arena, pressures began to build against both the bureaucratic framework of Indian industrial policy and the corruption and other forms of rent-seeking behavior which it promoted. In the second half of the 1970s after foreign exchange reserves had begun to grow again, the foreign trade regime began to relax and a number of imported items were placed on the OGL (opengeneral licence) list. A loan negotiated from the International Monetary Fund (IMF) in 1982 was a further spur to change so that by the late 1980s much but by no means all of this restrictive framework had been extensively softened.

2. THE EVOLVING

POLICY FRAMEWORK

(a) The state and the market in the postwar period Four basic assumptions underpinned Indian industrial policy in the postwar period: - Rapid industrialization was required, and the state would have to take the major responsibility for this, controlling the commanding heights of the economy. The development of heavy and basic industries were the key to long-term growth. - Private capital was not an efficient motor for development and had a tendency toward monopolization. The state must, therefore, intervene to control the growth of monopolies. - The path to development was self-reliance. Export revenues would be constrained by Indias limited access to export markets, and Indian industry required infant-industry protection. Import substitution was thus the appropriate strategy for development. The role of foreign capital

(c) The new economic policy of the 1990s Despite this significant change in direction which emerged during the 1980s the allocative role of the state in Indias industrialization remained critical, and it was only after the 1991 reforms (variously termed the New Economic Policy and the New Industrial Policy) that the driving force of resource allocation shifted decisively in favor of the market.

INDIAS INDUSTRIAL DEVELOPMENT

683

The reforms undertaken by the government in 1991 and after covered a wide range of areas - including on the financial system, the public sector deficit and subsidies, the banking system. With respect to manufacturing, the main elements were: - A currency devaluation of 18% in June 1991. By March 1993 the real depreciation of the Rupee had reached 25%. - The licensing system controlling internal production was scrapped in 1992. - The reservation of many areas of economic activity for the state was abolished. - The restrictions on the inflow of foreign capital and technology transfer were significantly relaxed. Foreign participation in companies up to 51% was permitted automatically in 34 industries. Clearance for higher levels or in industries outside the 34 were processed speedily, and foreign equity inflows jumped rapidly after 1991. - The restrictions on the large industrial houses (designed to curb monopoly) were significantly relaxed, and large companies became able to expand existing units and construct new ones. - Quantitative restrictions on imports of raw materials, intermediates and capital goods were abolished. Considerable restrictions on the import of consumer goods remained, although by 1995 an increasing number were being put on Open General License, albeit subject to tariffs. - Tariff levels were reduced sharply. The peak rate of tariff fell from over 200% in 1990 to 65% in 1994 and the average nominal tariff more than halved during 1990-94. Tariffs on consumer goods however, remained high. - Exchange controls were simplified and partial convertibility of the Rupee established. These are major changes for the Indian economy, but it is important to recognize what has not changed for manufacturing. First, little has been done to resolve the problems of inefficient state enterprises. Privatization has been limited, and the Board for Industrial and Financial Reconstruction (BIFR), established in 1987, has done little to resolve the problems of ailing public sector enterprises. Second, much of the protective framework for SSIs remains in place. Locational restrictions on tiny enterprises have been abolished, medium-sized firms are to be allowed into export-oriented SSI sectors, and equity links between SSIs and LSIs are no longer prescribed. But much of the reservation and subsidy system remains in place. Third, most of the labor legislation was left intact. Exit policy, both with regard to closures of plants and forced reductions in labor forces, has not been addressed by the government. It is politically too difficult to handle (Manor, 1995, p. 342).2 Finally, liberalization and deregulation in the domestic economy (for example the abolition of industrial licensing) has proceeded

further than that in Indias links with the global economy (where, for example, many controls over trade remain in place). The political consensus behind this internal deregulation has been much greater than that concerning Indias openness to foreign goods and FDI. After more than four decades of policy stability behind a trajectory of IS1 and government determination of resource allocation, these changes obviously have sparked furious debate. To some, this was the result of external pressures and reflected the growing dominance of a compradour-oriented industrial bourgeoisie in Indias political process (Kumar, 1993, p. 2740). To others, it is more a reflection of internal political and economic developments (Baru, 1995, p. 132). Whatever the underlying political substance of the reforms, they do appear to have fairly widespread support in India in the mid-1990s, particularly those aimed at domestic liberalization, although support for a sustained process of liberalization is more divided (Dasgupta, 1996).

3. INDUSTRIAL PERFORMANCE IN THE POSTWAR INDIAN ECONOMY (a) Some important aggregates Indias overall economic performance - at least insofar as it is reflected in terms of dollar per capita incomes - has not been particularly impressive, either in relation to other LDCs (both first and second-tier newly industrialized countries-NICs) or the developed market economies (Figure 1).3 By 1994, the share of industry in GDP had stabilized at about 27-28%, so industrial sector performance clearly had an impact on overall economic performance. So, if the macroeconomic achievement was poor, to what extent was this due to low levels of industrial development? From Table 1 it is evident that although industrial growth rates have been lower than those projected by the various FYPs, the sector has nevertheless grown consistently and at a respectable rate. From the late 1970s until 1990, the growth of Indias manufacturing sector outperformed that of the other main regions other than East Asia (Figure 2).4

(b) Structural characteristics

of industrial growth

These macroeconomic aggregates mask seven structural features which circumscribe the trajectory of future Indian industrial development. First, a common characteristic of import-substituting economies has been that the range of products manufactured has tended to be much wider than that

684

WORLD DEVELOPMENT

1,400 1,200 _ --e-NICs

Y.--*--- 2nd
&DM ---)c Indi tier NICs

1,000 F
800 600

---A-h
nT

-10

--)c i+1970-75

S and SE Asm China L. America 1975-80

from Humphrey

\ .\ \ 1985-90

-15 1965-70
Calculated from World Bank, World Tables (1996)

1980-85
(1995).

Calculated

Figure 1. Index of per capita incomes, 1970-92. Source:

World Bank (1996).

Figure 2. Superiority

of regional manufacturing growth rates over Indian growth rates. Source: Humphrey (1995).

which would have resulted had these economies been more open and subject to processes of international specialization. In Indias case, this does not show up at the aggregative level since the trade/ GDP ratio (measured as the sum of imports and exports over GDP) of 19.7% in 1992, was in fact larger than that of the United States (16.4%). (In general, large economies tend to have smaller trade/ GDP ratios than small economies.) But this lack of specialization has been more prevalent at the level of the firm, where the portfolio of goods produced has generally been relatively diverse. Often this has led firms into suboptimal scales of production, the recognition of which was one of the factors which led to a relaxation of controls over the large industrial houses (LIHs) during the 1980s. If anything, this lack of specialization became even more of a problem after the liberalization process was set in train (Jacobsson and Alam, 1994). A second relevant feature of this growth process was that it was associated with high levels of industrial concentration. Despite the extensive attempts to restrict the growth of monopolies under the MRPTA, concentration ratios remained high the four dominant firms in 38 leading sectors accounted for over two-thirds of the total market,

with little diminution of concentration during 197683 (Table 2). As Marjit and Singh observe, Indian firms were often operating in a policy environment where even the normal strategic rivalry of oligopoly was attenuated or frozen (Marjit and Singh, 1993, p. 41). Third, during the 1980s there was a marked shift in the relative growth rate of key sectors. In the early postwar period the primary growth sectors were metal-based. But in the 1980s it was petrochemicals and related industries which grew most rapidly (in part because of the exploitation of oil deposits in the Bombay High field) together with the food-processing and electrical machinery sectors (Kelkar and Kumar, 1990). A number of consequences flowed from this change in sectoral growth patterns: - the relative decline of the metal-related industries marked a further shift in industrial gravity toward Maharashtra and Gujarat in the West - W. Bengal, Bihar and Orissas share of industrial output fell from 23% in 1968-69 to 16% in 1984 85; - the employment elasticity of growth was low since the chemical industries are highly capital intensive; - there was a fall in export intensity in manufactur-

Table 1. Actual and targeted annual growth rates, 1951-56 to 1985-90 Period and 1951-56 1956-61 1961-66 1969-74 1974-79 1980-85 1985-90
Source: Plan Target Actual Deviation (%)

(1st) (2nd) (3rd) (4th) (5th) (6th) (7th)

8.3 11.1 8 to 10 7.0 8.0 8.0

7.3 6.6 9.0 4.7 5.9 6.4 8.5

-25.8 -25.3 -91.49 -18.6 -25.0 5.9

Mani (1992).

INDIAS INDUSTRIAL DEVELOPMENT Table 2. Number of sectors and size of four-jirm

concentration ratios, 1976-83 (38 sectors)

685

Table 3. Growth of industrial production by end-use,

1980-81 to 198&89and1990-91 1980-81 to to 1995-96

Share of market (%) 100 90-99.9 80-89.9 70-79.9 -9.9 50-59.9 40-49.9 30-39.9 2G29.9 10-19.9 <lO Average concentration ratio for all 38 sectors

1976 9 4 6 3 2 3 4 2 3 1 1 70.2

1983 5 7 6 5 4 3 1 0 3 3 1 68.4 Capital goods Intermediate goods Durable consumer goods

1988-89 10.0 5.8 12.4

199@91 to 1995-96 5.5 5.6 5.8

Sources: Kelkar and Kumar (1990) and CMIE Monthly Review of the Indian Economy.

(1996b)

Source: Calculated from Mani (1992).

ing. The domestic resource ratios in chemicals are much higher than in metal-based sectors and are reflected by high rates of effective protection.5 A fourth significant characteristic of the recent growth period has been the extent to which industrial growth has been fuelled by an expansion of middle income purchasing power, and hence in the expansion of the consumer durables sector. As can be seen from Table 3, the growth of the consumer durables sector was significantly higher than that of either the intermediate or the capital goods sectors during the 1980s (but not during the 1990s). This change in industrial structure was associated with a growth in income inequality, a drop in household savings and a growth in the trade deficit which occasioned the economic crisis and policy reforms of 1991. During the 1990s not only has the expansion of middleincome demand been sustained, but the openness to imports and to international taste-patterns has for the first time forced manufacturers to win over consumers rather than to produce poor quality standardized products into a supply-constrained market. This represents a major change in industrial orientation [tlhe striking feature of Indian planning is the almost complete disregard for any form of consumer preference (Mohan and Aggarwal, 1990, p. 690).

Fifth, the growth of the consumer durables sector and the basic resource sector was associated with a relative retreat from technology- and capital-intensive sectors to resource- and labor-intensive sectors (Table 4).6 The upshot is not only that there was a systematic drift toward lower levels of labor productivity, but to sectors of lower skill intensity. Nambiar and Tadas observe that the ratio of skilled to unskilled workers in the high-tech sectors is 90% higher than that in the resource-intensive sectors (Nambiar and Tadas, 1994). (We will return to the significance of these developments later in this paper.) What is not clear from this analysis of Nambiar and Tadas, though, is the distribution of Indian manufacturing within these various sectors of activity. It may well be that there is no evidence of a drift away from skill-intensity and toward resource intensity at the intra-sectoral level; this is a matter for further research. Sixth, despite the long-lived attempts to first promote and then to protect SSI, the share of this sector in industrial output is lower than in comparable countries; most significantly, there appears to be a missing middle and the large progressive industrial firms appear to be hampered by a poor supplier infrastructure. The reasons for this weakness of SMEs are not entirely clear but two explanatory factors do appear to be relevant. The first is a consequence of the particular policy design utilized to stimulate SSI, in that these firms face the equivalent of a growth-trap since the significant subsidies and protection from which they benefit disappear as they grow in size. Second, they suffer

Table 4. Indias changing industrial structure, 1978-79 to 1989-90 Share of value added (%) 1978-79 49 21 15 9 from Nambiar 1983-84 49 26 14 11 1989-90 52 25 12 11 Value added per worker (Rs. million) 1978-79 13,905 22,438 24,535 9,998 1983-84 23,108 43,169 44,839 10,004 1989-90 65,553 126,908 7 1,020 10,ocKl

Resource intensive Hi-tech Capital intensive Labour intensive Source: Calculated

and Tadas (1994).

686

WORLD DEVELOPMENT so, it is necessary to confront important differences in product markets. In the past protected import substituting economies have tended to be supplyconstrained; given access to scarce inputs, manufacturers could generally sell what they produced, and the dominant order-winning features of successful operations were product availability and price. By contrast, the more open economies operated in a very different environment which was not only one in which input-access was unrestricted, but also one experiencing major changes in product markets. High levels of competition, rising per capita incomes and changing consumer tastes meant that product quality, differentiation and innovation became order-winning attributes. This was made possible because new approaches to quality, inventory control and interfirm organization - pioneered by Japanese and small European firms meant that these product attributes could be achieved simultaneously with cost-competitiveness (Kaplinsky, 1994).

from the high levels of concentration in product markets observed above. It is also significant that it is not just the SSI sector which has been relatively disadvantaged during the 1980s but also the unorganized sector which also grew relatively slowly (Kelkar and Kumar, 1990). Finally, investments in research and development (R&D) - already low by international standards fell as a proportion of GDP through the decade of the 1980s. The share directed to civilian purposes fell from 38% in 1980/l to 29% in 1990/l; and the share of the private sector in industrial R&D fell from 58% in 1980-81 to 54% in 1990-91. Hence, the response of industry, in particular private industry, to the new economic context was indeed very hesitant in terms of its commitment to R&D (Jacobsson and Alam, 1994, p. 99). These aggregate figures on R&D were reflected at the firm level, where leading Indian producers in the engineering industries produce at l5% of the scale of global leaders; in the power sector, average sales of $50-75 m, are small and R&D is less than 2% of sales compared to 12% for the major global firms (Sinha, 1994). But perhaps most importantly, the evidence suggests that Indian R&D was predominantly directed to materials technology in order to minimize imports rather than product development (Sinha, 1994). This was a direct consequence of the incentive structure erected by the state to encourage ISI.

(a) The trade policy regime One of the major gateways to this critical process of industrial restructuring in India is to be found through changes in the trade regime and it is for this reason that it is necessary to briefly unravel the changing structure of Indias external trade relations. From Table 5 it is evident that even by the late 1980s mean nominal import tariffs in India were comparatively high (although the coefficient of variation was relatively low). The collection rate of Indian tariffs grew significantly during the 1980s (from less than 50% to more than 80% during 197888), so that by 1987 not only were duties as a proportion of imports comparatively high, but so too was their share of the fiscus (Table 6). These tariffs were supplemented by a barrage of nontariff barriers (NTBs) including quotas and lists of items whose imports were restricted; the prevalence of these NTBs was highest in products with the highest tariff rates (Aksoy, 1992).8 But, high though these tariff rates might appear, they were not the high point of Indias protective regime, for some measure of relaxation had been instituted in the late 1970s (during the 1977-80 Janata Government) and in the early and mid-1980s (particularly after 1984). Many of these changes saw a reduction in NTBs. It was after the institution of the NEP in 1991 however, that the really significant reductions in the protective regime were to be felt, both in relation to the sweeping away of the bulk of NTBs (such as restricted lists and canalized imports) and the reduction in the tariff rates themselves. This is an ongoing process, but as can be seen from Tables 5 and 7, by 199495 the average weighted nominal tariff rate had fallen from 141% in 1988 to

4. THE EXTERNAL ACCOUNT AND TRADE POLICY As we have observed, in keeping with almost all LDCs and former command economies which for decades had committed themselves to an inward industrial strategy, India is facing the new millennium with a much more open stance toward international specialization. This poses a number of major challenges to industrial policy, and at various levels of decision making. At the macroeconomic level, policy has to identify an appropriate incentive system - including exchange rate and trade policies - which optimize allocative efficiency in a dynamic context. At the mesoeconomic level, regional and sectoral policies need to be attuned toward the maximization of external economies and collective efficiency (Schmitz, 1995). And at the microeconomic level, government needs to facilitate a process in which enterprises develop the capacity to identify their core competence, develop a strategic perspective, utilize an organizational framework which best serves this strategic orientation and utilize (and perhaps generate) appropriate embodied technologies effectively (Bessant and Kaplinsky, 1995). These changes are required if Indian industry is to draw closer to global competitiveness. But in doing

INDIAS INDUSTRIAL DEVELOPMENT Table 5. Meun nominal !ariJf rates in India, Pakistan, Thailand and Brazil in late 1980s India (198X) Mean Std. Deviation Coefficient of variation Source: Aksoy (1992). 141.2 50.4 0.36 Pakistan ( 1988) 65.6 53.2 0.81 Thailand (I 985) 33.8 27.3 0.81 Brazil (1989) 43.0 19.1 0.44

687

33%. Moreover, the coefficient of dispersion had declined as well, with a significant fall in the disparity between tariff rates on capital and intermediate goods. The ongoing severity of the foreign exchange crisis was felt through much of the postwar period and for this reason successive policies provided protection not just against imports but also support for exports. In earlier years this export supporting infrastructure was bureaucratically complex, in keeping with much of the industrial policy infrastructure (Desai, 1993); but it was effective (DattaChaudhuri, 1990). Nevertheless, the combined weight of the protective regime overwhelmed these export incentives so that the net trade bias of the trade policy regime remained inward-looking. This is reflected in the incentive systems felt at the microeconomic level where a survey of more than 60 firms found that sales aimed at the domestic market were significantly more profitable than those destined for export markets (Table 8). In 1989 the World Bank observed that Indias exchange rate has generally not been used aggressively as an instrument of export policy. Until the 1990s crises in the balance of payments had been met by the imposition of tariff controls and NTBs. But it was only after the 1991 NEP that a series of significant devaluations occurred. This was in keeping with the change in approach we have observed in earlier sections which gave primacy to the market in resource allocation.

Unfortunately, there is some difference in views on the impact which exchange rate policy over the decades had on the real effective exchange rate. The Reserve Bank of Indias calculations (cited in Kumar, 1993, p. 2742) suggests a continual depreciation in the trade-weighted index after 1966, although with some measure of stability during 1975-87; by contrast, a recent World Bank study shows a significant post- 199 1 appreciation (a phenomenon not unusual in newly-liberalizing economies) (World Bank, 1994). Looked at in terms of purchasing power parity, India lost competitiveness compared to Asian competitors but gained relative to its major industrialized trading parties (World Bank, 1989).

(b) Trade perjbrmance Underlying problems have dogged Indias balance of payments since Independence. As Figure 3 shows. however, it was only during the 1980s that this was reflected in a persistent and worsening current account deficit, much of which was due to the previously observed boom in import-intensive consumer durables. Indias foreign debt began to grow and although by late 1980s it had (after Brazil, Mexico and Argentina) the fourth highest debt of $85bn (excluding military and Rouble debts), the large size of the Indian economy meant that the debtservice ratio was only 30% (Basu, 1993).

Table 6. Cross county

cowparison

of Indias customs tnr#

structure

Import Duty as a % of Imports 1980 India Pakistan Bangladesh Indonesia Thailand Turkey* Brazil Mexico** * 1979 and 1987 +1980 and 1988
Source: Aksoy (1992).

Import Duty as 9 of Tax Revenue 1980

24.8 34.8 39.1 4.5 21.8 12.3 8.7 7.7

1987
61.9 24.7 17.9 4.7 II.1

1987
34.8 38.8 38.7 6.4 20.6 17.8 2.5 6.5

29.7 24.6 19.8 4.7

10.1
39.1 16.0

11.8
8.7 3.9

11.0

688

WORLD DEVELOPMENT

Table 7. Weighted average import tariffs (nominuij 1990-91 Whole economy Consumer goods Intermediate goods Capital goods Source: World Bank (1994). 87 164 117 97 1992-93 64 144 55 16 1993-94 47 NA 40 50 1994-95 33 NA 31 38 Number of dutied items 5.040 1,341 2.337 988

In the early 1990s however, manufactured exports began to grow, so that after two decades in which Indias share of global manufactures had fallen (from 0.84% in 1962 and 0.55% in 1970 to 0.41% in 1980), this began to stabilize and then to rise as the 1980s proceeded (Figure 4). (There is no way, however, of knowing whether this apparent growth in global share represented a rise in the proportion of traded MVA, since the import-intensity of Indias manufactured exports probably grew as import barriers fell.) There is considerable debate about the causes of the improvement in the balance of payments from the late 1980s (although the current account deficit almost doubled between 1994-95 and 1995-96). On the one hand, the supporters of the NEP (Mohan, 1994; World Bank, 1994) believe that it is a response to a new incentive system which both freed up resource allocation and shifted away from an inwardoriented net trade bias. On the other hand, much of the recent improvement has been due to a drop in imports rather than an increase in exports (Figure 3) suggesting that in many sectors there has been a combination of declining domestic demand and a consequent increase in distress exports which may not be sustained with a sustained growth in domestic demand. A further issue of debate relates to the impact of trade policy in general and exchange rate policy in particular on industrial development. Nambiar and Tadas regressed MVA growth in 33 sectors against time and put in a dummy variable for a change in

Table 8. Gross projit margin (as % sales) of domestic and export sales, 1974-75. 1979-80 and 1980-81* 1974-75 Domestic sales Export sales - without incentives - with incentives Differential without incentives with incentives 14.6 -3.0 12.4 17.6 2.2 1979-80 12.4 -12.7 5.4 25.1 7.0 198G-81 13.9 -11.2 4.9 25.2 9.0 and 60 firms

*Based on Survey of 8 1 firms (1979-81) (1974-5). Source: Cited in World Bank (1989).

trade policy in 1984. (The Rajiv Gandhi government significantly speeded up the liberalization process.) They conclude from this analysis that for the period 1978-79 to 1989-90 trade shrank value added in manufacturing roughly by 6% points (Nambiar and Tadas, 1994, p. 2743). Most of the growth during the 1980s was directed at the internal market and was generated by the consumer goods sector; only 11% of the 52% output rise was due to exports. In capital goods, output fell by 78, and intermediate goods fell slightly. Marjit and Singh concur with this judgement - [tlhus there was no strong evidence that exports were a spur to improved performance, including technological change. (Marjit and Singh, 1993, p. 40). Further, as we saw in the previous section, this growing openness to the international economy was associated with a retreat from technology- and capital-intensive sectors to resource- and laborintensive sectors, from which Nambiar and Tadas conclude that [tirade is certainly the root cause of inverting the structure of Indian industry... If this is the kind of industrial restructuring that is being attempted, then the country is heading for long-run trouble. It will kick people from relatively high paid to low paid jobs (1994, p. 2746). This negative appraisal of the impact of trade openness on the Indian economy is shared by Kumar (1993). A final characteristic of Indias manufacturing exports is the determinant of their competitiveness. Again, there is a sharp difference of views. Kathuria (1993) and the World Bank (1989) argue that poor export performance could be attributed to an overvalued exchange rate. But the evidence for this is uncertain. Sen Gupta (1993) tested the sources of export growth during the 1980s and found that at an aggregate level it was correlated with industrial output growth rather than the real exchange rate. On a disaggregated basis, he found that textile export growth was sensitive to the exchange rate but this was an exception. This finding of the relative nonimportance of price as a determinant of export competitiveness echoed the conclusions of the 1984 Hussein Committee which concluded that [n]on-price factors such as quality or marketing effort, which in turn is a composite of several attributes, tend to reduce

INDIAS

INDUSTRIAL

DEVELOPMENT

689

40,000.00 3.5,000.00 30,000.00 25.000.00 20.000.00 5 15,000.00

-e
..-a.-., -A-

- Current account
Exports Imports Trade balance

Source:

Calculated and CMIE,

from CMIE. World Economy and lndros Place rn If (October Monthip Review of rhe lndton Ecmomy (August 1996)

1994).:

Figure 3.

Indias trade perjkmance.

Sources: CMIE (1994, 19966).

the ability of Indian exports to compete in world markets (cited in UNIDO, 1990). The poor quality and design of Indias manufactured exports also meant that there was a change in market focus and that the market composition of Indias export trade gradually shifted from industrial countries to other less developed and centrally planned economies (Datta-Chaudhuri, 1990, p. 15).

5. COMPETITIVENESS AND PRODUCTIVITY GROWTH The underlying model guiding Indian planners, especially in the first and second FYPs, was derived from a Harrod-Domar approach in which savings and

investment were the critical determinants of output growth. In this respect, Indias low level of domestic savings was frequently identified as being a major constraint to economic growth. The operative ratio however, in this approach to economic growth is not the level of domestic savings, but that of investment. Figure 5 charts the share of investment in GDP during 1970-92 and shows that at least in the 1980s Indias performance with respect to this critical ratio was not relatively poor; at the same time labor was freely available, and generally with adequate skills. This points to the need to focus on the productivity with which Indias factor inputs have been utilized. Here the evidence points to a bleak comparative

--e-NICs

---a..&

2nd

tier

NlCs

DMEs

India _._._.-.-.-.-_-.-._.____

::
_ Mexico

14L._._._._._._._._._._._.I 1980 Source. 1982 19x4 1986 1988 1990 1992

Calculated from CMIE, Foreign Trade Sluti~r~c,

o( lndtu

(May

1996).

Source

Calculated

from

World

Bank,

World

Tnhlrv

(1996).

Figure 4. Share of global manufactured CMIE (1996a).

exports. Source:

Figure 5.

Investment World Bank (I 996).

as a proportion

of GDP.

Source:

690

WORLD DEVELOPMENT

India (1959-79) China (1957-83) South Africa (I 973-79) South Africa (1979-90) Thailand (1963-77) Indonesia (1975-X2) Turkey (I 963-76) Korea { 1960-77) Argentina (lY55-73) Philippines (1956~80) Yugoslavia (1965-78) Zambia (1965-80) OECD Acerage (1973-79) OECD Aberage (1979-90) Source: Ahluwalia for South Africa.

-0.2 PO.1 PO.2 -0.1

I .s
I .Y I.5 1.5

I .5
PO.2 0.4 -2.6 0.5 0.7

(199 ); OECD (1992): own calculations I

performance. Estimates of total factor productivity (TFP), despite the essential caveats on problems of measurement. suggest that the broad aggregates

show that a significant proportion of capital investment, as well as labor inputs, have been wasted over the decades. From Table 9 it is evident that over a two-decade period (1959-79), economy-wide output grew less than the increase of inputs devoted to production; this contrasts sharply with the experience of many other economies, including not only the miracle Korean case, but also with laggard developers such as Argentina (whose problems clearly follow from a shortfall in capital formation). Ahluwalia shows that this poor economy-wide performance on TFP was mirrored within most industrial sectors (Ahluwalia. I99 I ) and concludes that
The irony is that India has moved from a saving\ rate of 10% at the inception of planning to over 20% in the eighties. but the growth rate of the economy has increased from 2.S% per annum to only 54 per annum. Clearly. more was needed than an increase in ravings and investment to gcncrate faster growth and economic development in the Indian economy (Ahluw;ilia. 1991, p. 2).

During the 1980s howecer. productivity growth began to revive. But the significant feature of this change in trend was that most of this improvement in performance was contributed by an upturn in labor productivity (largely arising from low employmentelasticity rather than labor shedding) and not from an increase in capital productivity: in turn, this rising labor productivity was not a consequence of rising capital-intensity. but represents pure productivity increases as reflected in strong performance with respect to total factor producticitv growth (Ahluwalia, 1991. p, 182). (This is an important conclusion which we shall address in the concluding section.) From all of this. Ahluwalia concludes that there is the need for reform not only of industrial policy. but also of the whole framework of macroeconomic policy (pp. 96-97). Ahluwalia has become a controversial figure in the debate on Indian economic policy in which she is identified with a neoliberal policy agenda. But whatever the merits of the policy framework which she supports, it would be foolhardy to ignore the critical productivity weakness of Indias past economic performance and indeed the significance not just of the recent turnaround in productivity growth. but alao the fact that it has largely arisen from an upturn in labor rather than capital productivity.

6. CONCLUSIONS As we observed at the outset of this paper, most of the debate on Indian industrial strategy and performance has been exercised at the macroeconomic and sectoral levels. making use of secondary census data, and with little feel provided for the determinants of performance at the micro tevel. From rhe review of this evidence. a number of major conclusions can be drawn: (a) Although not reaching the levels attained by the East Asian first and second-tier NICs. or indeed that of China, in the five decades since Independence. India has managed to achieved a sustained positive level of industrial growth. (b) Until very recently this industrial growth was almost exclusively inward-oriented and domestic manufacturers benefited from very high levels of protection from external markets: industrial production was characterized both by barriers to entry and barriers to exit. in product and in factor markets. (cl This sustained period of inward-oriented industrialization was associated with high levels of bureaucracy and generated associated problems of rent-seeking behavior; it also saw high levels of concentration. a missing middle of mediumscale enterprises and, surprisingly. a relatively poorly developed small-scale industrial sector.

and that this poor productivity due to the fact that

performance

has been

Indian planning and policy has been dominated by the concern for raising the levels of savings and investment in the economy. By contrast, ensuring productive USCof the invested resources ncvcr really formed part of the explicit policy agenda until the eighties. (Ahluwalia, 1992, p. 201). A similar view is held by the World Bank (World Bank, 19891.

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(d) From the early 1980s and especially after 199 I, there has been a major change in policy trajectory; this has seen a significant process of liberalization. especially in the internal market but also in external trade and investment flows: there has been a decisive shift in command over resource allocation from the state to the private sector. (e) The 1980s also witnessed important changes in industrial structure. Previously. the metala-related industries in the North East had dominated, but increasingly the locational center of gravity shifted to the North West as the chemicals and consumer durables industries became the main engines of economic growth. There was also the beginning of a process of economy-wide apecialization as trade barriers fell. and a retreat from the pursuit of dynamic comparative advantage into resource- and labor-intensive industries, (f) Both exports and imports (and hence the trade ratio) have grown rapidly since the liberalization process began and the Indian economy appears to be becoming more specialized. (g) Indias productivity performance lagged badly behind that of more successful industrializing economics: the increase in productivity performance during the 1980s was associated with static capital productivity and rising labor productivity and the employment elasticity of industrial output-growth was low This industrial performance thus suggests a mixed picture. But the rapid trend toward opening-up the economy - which is by no means unique to India ~ and the growing pace of international specialization and competition makes it clear that industrial growth during the lY9Os will require a significant change in the pace and quality of Indias industrial development if real income grovvth is to be sustaincd.3 Hence the key to sustaining income-enhancing industrial growth in an open econon~y is to bc found in the determinants of microeconomic industrial restructuring. It is important to bear in mind at this point that over the past two decades there has been a major change developin, a in these external markets - variously described as the transition from fordism to post-fordism or from mass production to flexible customization - in which competition in product markets is not primarily based on costs but on a combination of costs and product quality, differentiation and innovation (Kaplinsky. 1994). This is not only of concern to Indian producers manufacturing for external markets, but also those who are increasingly havning to compete with imports. Policies facilitating a rapid process of industrial restructuring are required. Yet, as this survey of the literature on Indian industrialization shows, with few exceptions (such as Jacobsson and Alam, 1994). little is known of this microeconomic picture.

Kathuria corroborates this judgement in his review of the competitiveness of Indian industry, [t]he section is brief not because of the lack of importance of this issue, but owes (sic) to the paucity of empirical work relating to international competitiveness to (sic) firm-level factors (Kathuria, 1993, p. 35). The types of analysis which are required at the microlevel in order to support the development of appropriate industrial policies (at the macro-, mesoand micro-economic levels) include the following: - To assess the extent to which Indian industry measures up to international competition. This is not only a matter of computing comparative cost performance but. more importantly. performance with respect to the product and innovation characteristics which are so critical to competing in international markets. It is especially important to gauge the ability of Indian industry to generate the organizational and technological rents which are necessary to escape the commoditization of manufacturing production. - Related to this is the question of which market segments are filled by Indian industry in the respective sectors - are these solely related to costs (and hence to the low,-end of each respective market) or are there also signs that Indian firms are able to target more dynamic and profitable niches in product markets? - What processes underlie this industry-level performance. and in particular, what is the trajectory (as opposed to static comparative performance) of industrial activity? This involves an estimation of the trend rate of cost-performance, but also of performance with respect to the changing criteria of dominance in post-fordist global markets such as product development lead-times, customer lead-times, product vintages. quality performance. and so on. - What are the specific characteristics of the poor productivity performance of Indian industry? Are there only gains to be realized from shedding labor if the barriers to retrenchment are to be lowered, or are there also gains to be realized in capital and materials productivityC?5 ~ To what extent does the strategic orientation of Indian industry reflect the particular incentive system of ISI, and how does this affect their ability to compete in global markets. There are tvvo especially relevant elements here. The first concerns the issue of whether there has been a bias in R&D toward materials savings and materials substitution. The second queries the tendency for Indian firms to have unusually wide product portfolios, to suffer from an absence of specialization and to produce a relatively high proportion of the products value-chain. - International experience has shown that the

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ability to speed up innovation and to attain new levels of performance with respect to quality and inventory management requires new patterns of interfirm relations (Humphrey, 1995; World Development, 1995). This involves both new forms of vertical cooperation (with both suppliers and customers) and horizontal alliances (for example, in relation to strategic alliances). So, to what extent has Indian industry moved toward these new forms of interfirm cooperation? Has the weakness of the supply-chain (bearing in mind the relative underdevelopment of SMEs), poor physical infrastructure and the lack of sophistication in product markets undermined the ability to forge these new relationships? Has the search for strategic alliances required a new role for FIX, and, if so, on what terms is this FDI entering India and with what implications for the distribution of technological rents between the Indian and foreign partners? International experience also identifies the importance of new procedures for controlling quality and inventory? Have these new Japanese-inspired techniques of quality and inventory permeated through to Indian industry, with what degree of success and what are they constrained by? To what extent has Indian industry suffered from the economy-wide under-investment in human resources? What is the educational profile of the labor force and, critically, to what extent has this been supplemented by relevant training, and in what areas? But the human resource issue is

much greater than education and training - it also involves participation in processes of continuous improvement which requires a focus on the social relations underlying the capital-labor relation in Indian industry. This list of issues which need research and determination at the microeconomic level is largely illustrative of the complementary insights which are required for the design of effective macroeconomic and mesoeconomic policies, as well as policies designed to enhance firm-level performance. The specific issues which are raised at the enterprise and sectoral level will, however, inevitably reflect the particular characteristics of individual product markets, firm trajectories and physical location. But, given the rapidity of the changing policy environment in which Indian industry operates, it is important to move ahead with some decisiveness. For, as Kathuria observes, despite Indias recent industrial successes, it faces a moving competitive frontier:

Of one thing there can be little doubt: taken as a whole

there has been a decline in Indias international competitiveness since the 1950s and the recovery of the 1980s has by no means compensated for the ground lost in previous decades. Since competitiveness is always a relative concept, this decline is reflected in the far better performance i.e. improvement in competitiveness in countries who started off much later than India on the path to industrialization and most of whom were not as well-endowed with natural resources and labor including skilled labor (Kathuria, 1993, p. 2 1).

NOTES
More detailed discussion of the evolution of indus1. trial policy can be found in Inoue (1992) and Humphrey (1996). It should be pointed out that the careful pacing of the 2. reforms makes economic as well as political sense. Shock treatment has caused dislocation and social crisis in Latin America. The Indian government has been much more sensitive to the impact of reforms than many others. Note that the decline in per capita incomes after 3. 1990 reflects the devaluation of the Rupee. Measured in constant Rupee prices, per capita incomes continued to increase. The reason for using the dollar index is to facilitate international comparison. The definition of these two groups of LDCs is drawn from a UNIDO classification as utilized in Forstner and Ballance (1990). Nevertheless, the annual growth of manufacturing 4. value added (MVA) of 7% during 1980-87 was only exceeded by China. Pakistan and South Korea. Moreover, Kelkar and Kumar argue that this underrepresented Indias annual growth during this period, which in fact exceeded 9%. In all of these three respects, Indian experience 5. during the 1980s is remarkably similar to that of South Africa (see Kaplinsky, 1995). 6, This conclusion appears to be at variance with the previous observation that there was a move from metalsbased industries to more-capital intensive chemicals industries. Nambiar and Tadas however. are measuring the skill and technology intensity of different industries rather than the degree of capital intensity alone.

7. In the opening paragraphs to this paper we observed the danger of retreating into a vicious circle of commodity specialization (based on static Hecksher-Ohlin comparative advantage) and exchange rate depreciation. All these data refer to nominal tariffs; effective rates 8. of protection will of course vary, but given the low levels of dispersion of Indias tariff structure (Table S), the distortion

INDIAS INDUSTRIAL

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caused by utilizing nominal tariffs is not as great as it might be in the analysis of other countries tariff structures. 9. It is true that the existence of quantitative restrictions on imports make a nonsense of coefficient of dispersion calculations (since they are equivalent to an infinite tariff), but in general this form of NTB has declined in incidence during the 1990s. 10. India also has a low relative debt-GDP ratio.

same period grew at 0.6%, 2.3%. 68, the terminal year, 1995-96.

9.4% and 12.1% in

As we observed in the introduction, the growth of 13. industrial output need not necessarily lead to a concomitant increase in per capita incomes and an outcome of immiserising industrialization is within the bounds of possibility. In Central America the retreat into labor-intensive 14. tasks within the clothing and shoe industries has meant that these economies have been forced into a series of competitive devaluations. This is a prime route into what we have termed immiserizing industrialization, that is the growth of industrial activity with declining per capita incomes (Kaplinsky, 1993). It is relevant to note here that the incremental capita1 15. output ratio in industry rose from 2.8 in 1950s. to 4.4 in 1960s and to 6.2 in 1970s (IJNIDO, 1990)

1 1. Jains critique of Ahluwalias work not only observes the adverse impact of this policy agenda on labor, but also concludes that the author...has abandoned caution in drawing an unambiguous conclusion that the relationship between liberalization policies and productivity is clearly established (Jain, 1993~. MIO). 12. After a blip in 1991-92 (0.9%), real GDP grew at 4.3% (1992-93) 5.7% (1993-94), 6.3% (1994-95) and 7% (1995-96). The index of industrial produciton during the

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