EC 406: PROBLEMS

Term Paper On:

INDIAN

ECONOMIC

Describe and analyze the Changing structure of Indian Industry from 1950 to 1970.

Submitted To: Prof. Arun Kumar

Submitted By: Kirti Gupta M.A2ndSemester CESP

INTRODUCTION The Indian economy at independence was characterized by features typical of a backward excolonial country. It was predominantly agrarian, with mining, manufacturing and small enterprises contributing around 17 percent of the national income and less than 10 percent of the employment*. Within small contribution of the industrial sector, that of the organized sector stood at less than 40% and that too from units which by contemporary standards were extremely small. The principal aim of state policy was thus defined by the circumstances: viz, a rapid acceleration of industrial growth, with the aim of breaking the barriers to increases in productivity characteristic of predominantly agrarian economics. The industrial policy was influenced by the Bombay Plan which was framed by leading industrialists like the Tatas, Birlas, and Purushotamdas Thakurdas for post-independent development, stressed the major role for the state in industrialization. First, a widening and intensification of protection offered to manufacturing, through an across-the-board increase in tariffs and the institution of quantitative restriction on imports. Second, a massive step up in public investment, which would not only close such infrastructural gaps as could hamper industrial development, but also result, directly through purchases of commodities and indirectly through the creation of additional incomes. Third, a sharp increase in the

rate of savings, which would channelise these funds to the state sector as well as through the meditation of the state to the private sector. India adopted the pattern of mixed economy after the

independence. Defence and Heavy industries came under public sector whereas light and consumer based industry came under private sector. The Planning Commission emphasized that the distinction between the public and the private sector related to the mode of operation rather than to the ultimate objective. Private enterprise operating in terms of the legitimate profit expectations and the efficient use of available resources. The scope and need for the development were so great that it was best for the public sector in which private enterprise was unable to put up resources required and the risk involved. Industrial Policy Resolution, 1956 The 1956 Resolution laid down the following objectives for the industrial policy: 1. To accelerate the rate of growth and speed up industrialization. 2. To develop heavy industries and machine making industries. 3. To expand public sector. 4. To reduce disparities in income and wealth. 5. To build up a large and cooperative sector. 6. To prevent monopolies and the concentration of wealth and income in hands of a small number of individuals. This resolution emphasized the mutual dependence of public and

Private sectors. The only 4 industries in which private sector was not allowed to function were arms and ammunition, atomic energy, railways and air transport. However, the private sector was to remain subject to various government regulations and controls as specified in Industries (Development and Regulation) Act, 1951.

PROGRAMMES FOR INDUSTRIAL DELOPEMENT UNDER THE PLANS On the eve of the First Plan (1951-1955), the industrial development in India was confirmed largely to the consumer goods sector, the important industries being cotton textiles, sugar, salt, soap, leather goods and paper. Thus, the industrial structure exhibited the features of an underdeveloped economy. Industries manufacturing intermediate products like coal, cement, steel, power, alcohol, non-ferrous metals, chemicals etc. were also established but their production was small as productive capacity was considerably below the requirements (except cement). As far as the capital goods sector is concerned, only a small beginning has been made. On the whole, while consumer goods industries were well established, producer goods industries lagged considerably behind. The First Plan did not envisage any large-scale programmes of industrialistion. Accordingly, only Rs.55 crore out of total expenditure of Rs.1960 crore in the First Plan (a mere 2.8 per

cent) was spent on industry and minerals.1 The Plan made an attempt to give a practical shape to the concept of mixed economy by providing for the development of both, the public sector and private sector, in a complementary manner. The Second Plan (1956-1960) accorded top priority to

programmes of industrialization as would be clear from the fact that the expenditure on industry and minerals was hiked to Rs.938 crore under this plan which was 20.1 per cent of the total expenditure of Rs.4,678 crore. Based on MAHALANOBIS MODEL, the Second plan set out the task of establishing basic and capital goods industries on a large scale so that a strong base for industrial development in the future could be built. The strategy was spelt out in the Plan in the following words: If industrialistion is to be rapid enough the country must aim at developing basic industries and industries which make machines to make the machines cement, needed heavy for further development. and other This calls for of basic substantial expansion in iron and steel, non-ferrous metals, coal, chemicals industries importance The development of industries envisaged in the Second Plan can be studied under three broad categories. The break-up of anticipated investment on this basis provides a better indication of the pattern of industrial growth expected to emerge during the second plan. Investment of Rs.759 crore in producer goods industries occupied a place of paramount importance in the industrial expansion plan for 1956-61 as against investment in

machinery and capital goods of Rs.179 crore. The total investment in these three groups of industries was envisaged at Rs. 1094 crore. The impressive achievement under the second Plan is the setting of the three steel plants of one million tons ingot capacity each in the public sector at Bhilai, Rourkela, and Durgapur and the completion of the modernization and expansion programmes in the private sector which added a further 1.5 million tons of steel ingot capacity. The index of industrial production (1950-51=100) rose to 194 in 1960-61 as compared to 134 at the end of the First Plan. The Third Plan (1961-65) was envisaged to be governed by the over-riding need to lay the foundations for rapid industrialization over the next 15 years, if long-term objectives in regard to national income and employment were to be attained. It was necessary to acquire the related skills, technical know-how and designing capacity, so that in the following plan periods the growth of the economy in the fields of power, transport, industry, and mineral production would become self-sustaining and increasingly independent of outside aid. The Third Plan aimed at providing fully for essential needs but some restraint on consumption seemed unavoidable, especially in the case of goods of a luxury character whose production would be difficult to increase in equal proportion with the growth of potential demand. A practical approach on the part of the

Government resulted in several modifications in the Industrial Policy in favour of the private sector. Fertilizer production reserved largely for the public sector was thrown up to the private sector which was expected to function in a larger way in the Third Plan. Progress under the Third Plan. The rate of growth of the industrial production during the Third Plan was as follows: 1961-62 1962-63 1963-64 1963.65 65 1965-66 7.0% 7.7% 8.5% 7.0% 4.0%

1964-

There was a sharp deceleration in the rate of growth in 1965-66. In fact, the progress achieved in the industrial sector during the Third Plan was generally unsatisfactory and much more uneven than during the Second Plan. The indices of industrial production-old and new series-are given in Table 1 which duly support the above statement. The percentage changes in index numbers of industrial production shows in Table 2 indicate a continuous decline after 1963. The structure of the Fourth Plan (1969-1974) was promoted and nurtured with minor changes here and there. Trends in Industrial Production

Phase I (1951-65): Building up of Strong Industrial Base As shown in Table 3, there occurred a noticeable acceleration in the compound growth rate of industrial production over the first three Plan periods upto 1965 from 5.7 per cent in the First Plan to 7.2 per cent in the Second Plan and further to 9.0 per cent in the Third Plan. Phase II (1965-80): Industrial Deceleration and Structural Retrogression As shown in Table 3, the period 1965 to 1976 was marked by a sharp deceleration in industrial growth. The rate of growth fell steeply from 9.0 per cent per annum during the Third Plan to a mere 4.1 per cent per annum during the period 1965 to 1976. Except sharp increase in industrial growth of 10.6 per cent in 1976-77, the rate of industrial growth over the eleven year period 1965 to 1976 declines further to a meager 3.7 per cent per annum. In a similar way, the rate of growth of 6.1 per cent per annum during the Fifth Plan owes considerably to the 10.6 per cent increase recorded in the year 1976-77. If this year is left cut, the rate of industrial growth for the remaining four years comes down considerably. As is clear from Table 3, the last year of phase II, i.e., 1979-80, recorded a negative rate of growth of industrial production of -1.6 per cent over the preceding year. Decline in the rate of growth of capital goods industries and basic industries in the period after the Third Plan clearly represents the phenomenon of structural retrogression. S. L. Shetty shows that where

growth has been moderately high, a majority of the industries belonged either directly or indirectly to elite-oriented consumption goods sector. This is illustrated by disproportionately large increases in the output of manmade fibers, beverages, perfumes and cosmetics, commercial, office and household equipment, watches and clocks, and fine varieties of cloth. Causes of deceleration in industrial production since the midsixties: According to the government exogenous factors such as the wars of 1965 and 1971; drought conditions in some years; infrastructural constraints and bottlenecks; and the oil crisis of 1973 were responsible for the slowdown of growth. K.N. Raj argued that low growth rate in agricultural sector accounted for the slowdown of industrial growth by restricting the supply of raw materials on the one hand and by constraining the demand for industrial goods on the other hand. T.N. Srinivasan and N.S.S. Narayana argued that there was a considerable slackening of real investment in Phase II particularly in the public sector and this brought down the rate of growth in the industrial sector. According to K.N. Raj, the rate of investment in the economy has not failed to rise since the mid-sixties but has fallen as a proportion of the national product(Table 4) CP Chandrasekhar argued that nature of industrialization engineered by public investment which was heavily biased in favour of non-agro based industry and partly because of the large imports of food under PL-480 that helped augment supplies and hold the price level.

Some economists like Deepak Nayyar, K.N. Raj and C. Rangarajan pointed out that the market for industrial goods in the country is limited to the top 10 per cent of the population due to extreme inequalities of income and wealth. Once the demand for this section of the population gets saturated, there is no further expansion in demand. This limits the demand for consumption goods limiting, in turn, the demand for machinery and capital goods in subsequent stages. Some economists like Jagdish Bhagwati, Padma Desai and Isher Judge Ahluwalia, blamed the wrong industrial policies, complex bureaucratic system of licensing, irrational and inefficient system of controls etc. for industrial deceleration. Small-Scale and Cottage Industries during the Plans- The Government policy It has been argued by some economists that small-scale industries are hampered in growth by imperfections in capital markets (particularly distortions in capital markets as small scale industries are discriminated against in these markets). The policy of government of India towards the small-scale sector has been guided by this consideration. In fact, as noted by Rakesh Mohan, amongst developing countries, India was first to display special concern for small scale enterprises, before it became fashionable to do so.2 A large number of steps were initiated by the Government of India after Independence for the development of small-scale and cottage industries.

Organisational Structure: A cottage industry board was set up in 1947 itself. This was split into the following three boards during the First Five Year Plan All Indian Handloom Board, Coir Board and Central Silk Board. Thus, at the end of the First Five Year Plan, there was a total of six boards covering the entire field of small-scale and cottage industries. National Small Industries Corporation Ltd. (NSIC) was set-up in 1955 to provide machinery to small-scale units on hire-purchase basis and to assist these units in procuring orders from government departments and offices. Small Industries Development Organization (SIDO) was set up in 1954. It functions as an apex body in the formulation of policies and co-ordination of institutional activities for sustained and organized growth of smallscale industries. The programme of Industrial Estates was initiated in 1955. The programme aims at providing factory accommodation and a number of facilities like power, water, transport etc., at one place. Plan Expenditure: Expenditure on small-scale and cottage industries has increased considerably over the plans. It was Rs.42 crore in First Plan, Rs.187 crore n the Second Plan, Rs.1,945 crore in the Sixth Plan(1980-85) Reservation for SSIs:

To protect small-scale units from competition from large scale units, government has reserved the production of large number of items for the small-scale sector. The list of reserved items was expanded from 77 to 124 in the Fourth Plan to 500 in 1977. Efficiency of small-scale industries: Some studies have pointed out small-scale industries are more efficient, others point out that small-scale industries are more efficient, others point that small scale industries are more efficient. One of the earliest studies on the relative efficiency of small-scale industries in India was undertaken by Dhar and Lydall.3 They concluded that modern small-scale industry is fairly capital intensive; that is, these units dont generate more employment per unit of capital than large-scale industry. In contrast to this, data presented in Annual Survey of Industries for 1960, 1963, and 1965, Ramsinh K Asher 4 showed that the small-scale units are more efficient. Table 9.6 of his study showed that small-scale factory combined the largest number of workers with a rupees worth of fixed capital; that a rupee worth of fixed assets produced almost seven times an output in small as compared to large industries and that value added by a rupee worth of fixed investment in small factories was at least three times as large as that for a large factory.

Position of public Sector Undertakings

At the time of launching of the first plan, there were only 5 nondepartmental units of the Central Government with an investment of Rs. 29 crore by way of equity and loans. By the end of 1971-72, the number of such units rose to 101 with total investment amounting to Rs. 5,052 crore. Table 5 shows the trend of growth of investment in such units during each Plan period. The fastest rate of increase in investment was recorded during Second Plan, although in absolute terms, the largest increase took place in the Third Plan. Thereafter, the tempo slowed down to the annual rate of about 17 per cent during the three years of Annual Plans. During the first year of the Fourth Plan, the growth rate declined to 10 per cent and further decelerated.

STRUCTURAL CHANGE ACCORDING TO CP CHANDRASEKHAR Indian industry was characterized by high degree of concentration. Even as far back as 1964, the Monopolies Inquiry Commission had reported that of a total of 1,298 products studied by it, 87.7 per cent were in hands of oligopolists, with 437 being produced by only one firm each and 229 by two firms each. 5 In fact, excepting for food products, cotton textiles and jute textiles, almost whole of Indian industry was characterized by monopoly, duopoly and oligopoly. According to Hazari, in 1958, out of 22 rudimentary categories of actual business, the Tatas as a group were present in 21, the Birlas in 25, Bangurs in 19, Thapars in 15, JK in 18, Shriram in 7, and so on. As a result he found that in most industries, the same set of business groups appeared

to predominate, though each time with a different pattern of market shares. 6 The large business houses have always had an edge over other entrepreneurs in a system where capacity is licensed with the aim of achieving plan targets. But CPC criticized that these licenses did not necessarily lead to the creation of capacity. Rather, the business houses have always followed a two-fold strategy. The business houses have adopted an offensive strategy of obtaining licenses, establishing capacity and bidding in the area where profits are high. But in areas where profits lower either because of slack market conditions or price controls, they have pre-empted capacity by obtaining licenses, preventing entry by others, but not translating their own licenses into installed capacity. This defensive strategy permits retaining earlier bases of monopoly power without actually investing in productive capacity. With the highly skewed distribution of income in the country providing a lucrative market for manufactured luxury consumer goods including consumer durables, private investment flowed in those directions. Even with over-licensing, there were persistent shortages of controlled items. This indicates the consequent growth of black market. A typical instance of this tendency is the cement industry where, prior to partial decontrol, inadequate capacities and shortages were a major problem. Trends in Public Investment The impact of the deceleration of the public investment in an India-type mixed economy was two-fold: first, it resulted in a slower growth of of the

home market and therefore a slower growth in the demand for products of the private sector; second, it resulted in a slow-down in capacity creation in certain crucial sectors like power, transport, and irrigation. The slowdown in investment in irrigation obviously limited the pace of pace of growth of production in general and food grains production in particular. And the cut back in investment in infrastructural bottlenecks whenever the economy, after a good harvest, found itself on an upswing. The role of declining public investment in explaining the deceleration in industrial growth is corroborated by trends in the composition of industrial output as well. In the 1950s and the early 1960s industrial growth occurred across-the-board. While consumer goods as a whole grew at a pace slower than the basic, capital and intermediate goods sectors, consumer durables, sustained by upper income group demand, registered extremely high rates of growth, going up to nearly 11 per cent per annum during the period 1960-65.

Black Economy A Cause of Deceleration In Industrial Growth: Competition and Efficiency Indian industry is supposed to be inefficient because of 1. Lack of competition. 2. The economy being closed, allowing monopolies to emerge. 3. Lack of economies of scale.

In major segments of Indian industry there have been far too many firms so that world scale plants have not come up, in spite of large size of the market. For instance, in terms of mass consumption, competition should have been fierce but this did not materialize since oligopolies emerged. In some sectors, like automobiles, where the size of the market was small, oligopolies emerged naturally. But this argument was criticized. It was said that the business practices and not the number of firms or scale economies is the issue. Some argued that opening up has the benefited the consumer by giving him/her more choice and better goods. That is true but at what price? Who is the consumer? The businessmen and the workers. How can that which reduces their incomes be good for them? One has to earn before one can consume. Only those employed or connected with MNCs can benefit and they are but a tiny minority of the population. The problem of Indian industry clearly lies less with the degree of openness but elsewhere; the size of the black economy. Public versus Private Sectors It is often argued that public sector is inefficient while the private sector is efficient. The public sector management and workers assumed to provide poor service while the private sector, driven by profit motive, is presumed to be slow to react while the private sector is taken to be dynamic.

Corruption plagues both the sectors. The private sector suffers from inefficiencies too it siphons out profits, reinvesting only some of it and slowing down growth. It got cheap infrastructure from the public sector and a lot of state patronage. Capital siphoned out of profits from the public sector for short-term gains and thereby reduced its own effectiveness. The public sector was set up to command the economic heights (to hasten development) but the black economy has thwarted this. Curtailing the role of the public sector or making it like the private sector misses the point about why it is needed and is a suboptimal solution. The problem is not one of the choice between public and private but how to curb the black economy which affects both the sectors. If this is done, both sectors will become viable and complement each other. CONCLUSION Broadly two factors have been responsible for bringing the high growth of the first decade-and-a-half after independence to an unacceptable low. To start with, the stimulus arising from protection had exhausted itself. This was not surprising, since import substitution results in a once-for-all increase in indigenous output. Once domestic markets have been captured by indigenous producers from foreign ones, any further growth depends on the growth of a market as a whole. The element of exhaustion of import substitution possibilities come through from the available evidence on import-availability ratios. By 1965-66 the share of imports in domestic availability exceeded

20 per cent in only 4 out of 20 industrial groups: petroleum products, basic metals, non-electrical machinery and electrical machinery. A large part of this significant but residual reliance on imports may be explained by the fact that import substitution occurs most often only at the final stages of production, while dependence on imports for certain initial, second and subsequent stage goods, where the size of the domestic market may completely rule out indigenous production, continues. That is, the possibility of substituting imports that were meeting existing domestic demand were extremely limited. Last but not least monopoly in industry, protectionism and less investment in agrobased industries were the responsible factors behind the stagnation of Indian industry.