INDUSTRY

Module 5B
 Page 350

Patterns of Growth
Timeline Phases

1951-52 to 1966-67 Evolution of industrial development strategy

1967-68 to 1980-81 Inward orientation and industrial stagnation

1981-82 to 1990-91 Deregulation and acceleration of growth

1991-92 to 2000-01 Economic reforms and service led growth

Recovery in industrial growth since 2002-03 and recent

2002-03 to 2008-09
industrial growth 2008-09 to 2013-14 & 2014-15 to 2015-16
 Industrial Growth Rates
Industry
9

8
7.8
7 7.1

6.3
6
5.7
5

4 4.1

0
1951-52 to 1966-67 1967-68 to 1980-81 1981-82 to 1990-91 1991-92 to 2000-01 2001-02 to 2010-11
 Page 351
Phase 1: 1951-52 to 1966-67
• Industrial strategy evolved as a part of development process.
• The strategy in second plan was based on Mahanalobis model
emphasizing heavy industry and public sector dominance.
• There was export pessimism and import substitution industrialization
(ISI) strategy was used.
• Re- imposition of exchange controls (forex crisis, 1957)
• Industrial investment licensing policy was an entry barrier leading to
least efficiency gains from competition.
 Page 352
Phase 2: 1967-68 to 1980-81
• Strengthening of import substitution strategy and imposition of
various government controls such as:
• Nationalisation of banks and insurance
• Foreign Exchange Regulation Act (FERA)
• SSI reservations
• MRTP Act

• With all this policy, environment became increasingly static.

 Page 352
Phase 3: 1981-82 to 1990-91
• This phase witnessed substantial acceleration of overall GDP as well
as industrial GDP growth.

• All this was because of following efforts made:

• Industrial liberalisation during 1980s.
• Better agricultural performance due to green revolution.
• Increasingly expansionist fiscal policy.
 Page 352
Phase 4: 1991-92 to 2000-01
• Wide range of reforms were introduced:
• Industrial deregulation
• Trade Policy
• Exchange rates and payment regime
• Capita market and banking sector
• Fiscal consolidation
• All the reforms led to acceleration of GDP.
• However after 1997,
• Fiscal balances worsened
• Investment and exports lost momentum
• Agriculture and industry showed significant slowdown
Phase 5: 2002-03 to 2008-09
• Remarkable growth in overall GDP with growth in industrial and
service sector. (High growth years)

• The per capita GDP also increased.

• Due to economic crisis in developed countries GDP growth rate

dropped but recovered in following two years.
 Primary goods
Mining
Intermediate
Goods

Infrastructure/
Manufacturing Construction
Goods

Consumer
Durables

Electricity Consumer Non-

Durables
 Page 357

The Manufacturing Slowdown

(1996-2002)
Substantial deceleration in
• 11 industries: having 64% weightage in manufacturing production.
• 6 industries: having 36% weightage in manufacturing production.
 Page 357, 358

The Onset Of Slowdown..

• Hypothesis 1: It is often attributed to the saturation of pent-up

domestic demand which could be domestically assembled or
produced following trade liberalisation.

• Hypothesis 2: Credit crunch triggered off manufacturing

slowdown.
 Cyclical Factors Structural Factors
• Significant fall in govt. capital • Infrastructure constraints:
investment. 1.Declining real capital formation in
• Decline in fixed investment in electricity, gas, water supply and
railways.
industries in context of over-
2.Declining public investments in
expansion of capacities infrastructure (fiscal imbalances at
during manufacturing boom. center and state)
• Lagged effect of negative • Rate of return from infra
agricultural growth. (declined services extended by govt.
demand for consumer durables and
non- durables)
was abysmally low. (because of
which there was constraining ability
• Declining manufacturing to generate internal sources for
exports. investments)

Page 358 - 360

 Recovery In Growth: Since 2002-03
• More of capital formation leading
to upswing.
• Growth process was investment- Growth Rates in Industrial Sector
led and evenly spread within GDP Growth Industrial Growth Manufacturing

manufacturing sector. 15

10

• Rising demand in domestic as 5

well external markets. 0

2002-03 2003-04 2004-05 2005-06 2006-07

• Better competitive environment

created by reduction of external
barriers to trade. Page 360- 361
 Page 361- 363

Industrial Growth: 2008 to 14 & 2014 to16

• 2007-08: Deceleration, largely because of global economic
meltdown.
• 2008-09: Deceleration, due to high interest rates to tackle
persistent inflation, slowdown in investments and loss of
business confidence.
• Post 2008-09 (for consecutive 3 years): Remarkable
recovery in manufacturing, mining, electricity and
construction. But again lost momentum due to supply side and
demand side constraints.
 Continued.. Page 361- 363

• 2013-14: Again
lackluster
performance of
Reasons
industrial sector
(manufacturing).
Deceleration
Domestic and External
• World in
Manufacturing Factors
manufacturing
gained strength
(more demand of Inflationary
Drop in
pressure
domestic and Infrastructure
consumer durable leading to
rising input
external
High Interest
bottlenecks
demand
costs
by industrialized
economies)
 Continued.. Page 361- 363

Infrastructure/
Intermediate Consumer Consumer Non-
Primary goods Construction
Goods Durables Durables
Good

More or less Increment Weak Deceleration Increment

constant Performer Reason: Particular Small exception
Reason: Declining automotive of decline in
fixed investments, because of sugar production.
slow pace of limited domestic
mega projects & demand owing to
decline in no. of low per capital
new projects. income, gems and
jewelry (restrictive
gold imports)

2013-14
 Page 361- 363

Continued..
• 2014-15: Growth in industrial production, reason being
recovery in mining and growth in electricity sector.
Manufacturing growth was lukewarm (same reasons of domestic &
external factors as in slide no. 20)

• 2015-16 to 2018-19: Improved estimates of industrial

growth, reason being:
• Change in base year from 2004-05 to 2011-12, changed
methodology.
• Remarkable growth in manufacturing, electricity, gas, water supply,
and construction while declining performance in mining as compared
to previous years.
 Page 368- 372

Why Manufacturing Growth Has

Stagnated??
Labor Deployment Rigidities
Infrastructure Bottlenecks
High Cost and Non-availability of Commercial Bank Credit
Regulatory Delays and Lack of Transparency
Difficult Business Environment
Lack of attention in:
— Long term finance
— Domestic R & D efforts
— Bilateral investment and trade treaties
Labor Deployment Rigidities
• Indian industries had been suffering from militant trade
unionism and excess of labor legislation.
• This has discouraged foreign investments and induced firm to
keep employment minimum (less employment (more than 10)
demands because of heavy paper work and inspection).

• Hardly any enterprise is in total compliance with legal

provisions.
 Infrastructure • Peak power deficit and industries
Bottlenecks are not insulated from frequent
power cuts.
• Manufacturing units have to put
100% power backup which
India 760 kWh increases their capital costs and is
China 3000 kWh
40-50% costlier than electricity
US 12000 kWh
directly consumed from grid.
High Cost and Non-availability of
Commercial Bank Credit
• Most of the MSMEs does not prefer commercial bank credits
because of:
• Long and complicated processing times.
• Large volume of collateral demanded by banks.

• Owners prefer to take loans from informal market at high rates

but less burdensome conditions.
Regulatory Delays, Lack of Transparency &
Difficult Business Environment
• Despite of improving position of India in the World Bank’s
“Ease of Doing Business” index, there is insignificant
improvement in job creations and exports.

• Too many regulations and compliances at center and state

level is also a major challenge for industries.
 Page 377

Idiosyncratic pattern of development

in India
A direct shift of labor from agriculture to services sector bypassing the
industrial sector (missing middle).
 Idiosyncratic Pattern
• Within manufacturing, India emphasized on skill intensive rather
than labor intensive industries.
• Manufacturing firms were not able to fully utilize their
comparative advantage of low- labor costs and remained small
in scale as well capital intensive.
• This direct shift and unique development in manufacturing will
have huge implication on employment generation capabilities.
• Lack of blue collar jobs will have serious implications and if not
corrected or no alternative found, we may miss the ‘window of
opportunity’.
MSME’s
 Why
Important???
GDP contribution: 30%
Manufacturing contribution: 36.2%
(2021-22)
Exports contribution: 43.6% (2022-
23)
Employment generation: 360.41 lakh
jobs out of 11.10 crore jobs
Range of 6000+ products
 Why
Important???
Helps in dealing structural problems:
- Unemployment
- Regional imbalances
- Unequal distribution of income &
wealth
Low capital costs & forward-
backward linkages.
Instrument of inclusive growth
 Page 386- 388

To generate large scale

employment

To sustain economic growth

and increase exports

Making growth inclusive

 Page 388

Less availability of credit and institutional finance

Outdated technology and innovation

Need for skill development and training

Inadequate infrastructure

Marketing and procurement

 Page 388

Objectives for MSMEs (12th Plan)

I. Promoting competitiveness and productivity.

II. Making MSME innovative, improving technology and depth.

III. Enabling environment for promotion and development.

IV. Strong presence in exports.

V. Improved managerial processes in MSMEs.

 Page 389

Globalisation and SSI Performance

• 1947: Policy introduced with reserving 47 items for SSIs.

• Overtime more items reserved, 836 by 1991.

• Till 2014, only 20 items are reserved for SSI.

• Other SSI sector items are exposed to intense competition

with large firms.
 • Possible reasons:
— No new SSI units after liberalisation due to threat of competition, directly
affecting employment generation as well.
— New SSI if came were more of capital intensive, technologically upgraded
and more modernized (relying less on labor) and even few existing SSI
modernized themselves.
— SSI which lacked basic infrastructural facilities and could not strengthen
their competition exited the market.
— Significant proportion of existing SSI units might have strengthen their
competitiveness to take advantage of global market.
Page 392
 Recent Performances in
Industrial Sector & Industry:
Steady Recovery
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