STATUS OF INCLUSIVE GROWTH IN MANUFACTURING SECTOR

J.VANITHA
ASSISTANT PROFESSOR
DEPT OF ECONOMICS
QUAID-E-MILLATH GOVT COLLEGE(WOMEN)
CHENNAI-2

INTRODUCTION
In july 2011,India completes two decades of economic libralisation. We now
stand at an era of sustained and inclusive high growth, were GDP rates are at 8-9%,
poverty levels are descending and human developments indicators are improving
rapidly. The economy has successfully withstood several global economic crises and
is set to become a top three economies of the world in the next couple of
decades.The dramatic statement on Industrial Policy, Presented on the same day Dr.
Manmohan Singh Presented his path breaking Budget, July 24, 1991, swept away
the licensing procedures that had shackled Indian industry since Independence.
Companies no longer had to languish in the corridors of Udyog Bhavan for permits
and licences to set up new businesses or expand existing once. This was nothing
short of revolutionary.
TRENDS
and
INDUSTRIAL
PERFORMANCE
AFTER
1991-

Source:National Accounts Statistics:Corporate Secto,CMIE, various issues.

Fig:Public secs and Foreign Firms Share in GDP manufacturing.
The above figure plots the annual growth rates in industrial output is measured by
(i) the index of industrial production (IIP)and (ii) GDP in industry since 1990-1; both
the indices show t he same trend. After an expected dip in 1991-2 on account of the
crisis and adjustment, output boomed for four years,peaking in 1995-6 at 13 per cent

following the predicted j curve, vindicating the reform stance. For a variety of
reasons, however, the boom petered out quickly, followed by a steep deceleration
for seven years until 2002-3. The next boom lasted for five years, from 2003-4 to
2007-8.
So, the average of annual growth rate over the 17-year period since 1991-2 is 6.6
per percent, During this period, consumer durables grew the fastest at8.1 percent per
year (weight in the index in 1993-4, 2.6 per cent), followed by capital goods at
7.4 per cent per year (weight 16,4 per cent) (Table ). By two-digit industry groups,
beverages (National Industrial Classification [NIC 22]) recorded the fastest growth
at 12 per cent per year (Table 6.2). However, capita] goods, hurt by the sharp
reduction in tariffs, stagnated during the first boom but bloomed in the next one,
growing annually at nearly 15 per cent during 2003-8, led by transport equipment
(NIC 37).
How does the industrial growth after the reforms reported above compare with
the 1980s? Table reports the trend growth rates for two-digit industry groups for
total manufacturing GDP using the National Accounts Statistics. In the aggregate,
there is hardly any difference in growth rate in the two periods. However,
electrical machinery (NIC 31 and 32) grew faster in the 1980s at 12.7 per cent per
year, while transport equipment fared better after the reforms of 1991.

Industrial Output Growth,1991-2 to 2007-8(Average of annual growth rates)

IIP
IIP
Use-based Classification of IIP
General Manufacturing

Consumer
Goods

1992- 6.2
6

6.1

Basic Capital Intermediate Consumer CDs CNDs

Goods
7.8
0.3
8.0
12.8
7.3 3.7

1997- 5.2
2002

5.6

3.9

5.8

6.2

5.6

9.6

4.3

2003- 8.2
8

8.9

6.5

14.8

6.6

9.0

7.2

9.7

1992- 6.6
2008

6.9

5.9

7.4

6.8

7.7

8.1

6.0

Source: Economic Survey,various issues

Note: CDs Consumer durables; CNDs:Consumer non-durables

The new industrial policy was accompanied by transformational changes in

trade regulations, taxation, banking and finance, competition and foreign exchange
that further shifted the entire paradigm for industry. Under the licensing regime, the
Indian economy was one of shortages. Customers queued up, sometimes for several
years, for items such as gas cylinders, telephone connections, or two-wheelers
unbelievable in todays markets. Lack of competition and access to resources had
stunted productivity and efficiency of industry, rendering Indian companies
uncompetitive.
As import duties were slashed dramatically and foreign companies were
permitted to enter Indian markets, much of Indian industry was concerned about
being swamped by more efficient global companies.

It is to the credit of Indian industry that instead of allowing itself to crumble

under the new dispensation, it embarked resolutely and with courage on
restructuring itself to meet emerging demands. The entire model of doing business
that industry had been used to for decades was changed. This was done within a
tremendously compressed time-frame.
Several trends in industrial evolution mark the two decades of the
liberalization process. First, private sector energy has been released and the
corporate sector has greatly expanded its contribution of growth, savings and
investments, and taxes. Secondly, competitiveness and productivity of industry
attained a new level. Companies have melded family business with professional
management styles uniquely suited to the Indian context. Many are able to match
global benchmarks in quality and efficiency, and indeed are global trendsetters
today. Third, several key sectors have taken off decisively, such as IT,
telecommunications, automotives, pharma, etc. Fourth, globalization of the Indian
economy is visible in trade in goods, trade in service, especially IT, and fund flows.
Most creditable has been the decisive entry of Indian multinationals on to the global
industry scene.
DUALISM
Despite these success ,Indian manufacturing has two very different segments.
A modern one, where production occurs in factories with moderate to high levels of
technology, and under generally well regulated conditions for workers, who are
relatively well paid, have strong protection against dismissal in the courts, and who
often have other benefits such as gratuity and paid leave. In economics parlance, we
call this segments the formal sector. Then, there is the informal sector, where
production often takes place in small sweatshop type conditions, where there is very
little use of modern technology, where workers can be fired at will, are paid badly
and have almost no benefits. Unfortunately, in India, the majority of firms and
workers are in the informal sector, leaving only a small section of firms and workers

in the formal sector. Estimates vary on the size of the informal sector, but a recent
official report puts the proportion of workers employed in manufacturing is highly
dualistic.
Indias higher level of dualism is bad both from the point of view of
efficiency and equity. A large presence of the informal sector implies that overall
productivity is lower than what may have been if the informal sector were smaller,
given the low productivity in the informal sector as compared to the formal sector.
At the same time, large differences in earnings between workers in the informal and
formal sectors contribute to a high level of income inequality in the country, and the
lack of skills and education in workers in the informal sector constrains their ability
to move to the better paid jobs in the formal sector.
It has been often argued that the major reason behind the prevalence of
dualism in Indian manufacturing has the policy regime in the past, and that the
Licence Raj along with restrictive trade policies pursued by the Indian government
till 1991 contributed to the dualism structure of the manufacturing sector, as these
policies have been protective of the formal sect.

An

oft

repeated

view,

particularly originating from the World Bank, is that economic reforms that allow
for a level playing field between the informal and formal sectors can reduce dualism
significantly. Given the significant economic reforms have occurred in India since
1991, has this happened?
The answer is in the negative. While average efficiency levels in both the
informal and the formal manufacturing sectors have increased in industries which
witnessed the most reforms, economic reforms have increased the difference in
average efficient informal firms in Indian manufacturing. Economic reforms have
also increased the gap between the most efficient firm in an industry and the average
firm in that industry, and this widening of the efficiency gap has happened more in

the formal sector. Economic reforms have, thus, increased dualism in manufacturing,
both by increasing the difference in efficiency between formal and informal firms
and by increasing the efficiency gap between the most efficient firm and the average
firm in both the formal and informal sectors.
Surprisingly, even the withdrawal of reservation policies of the small scale
sector, a set of reforms which many believed would allow informal firms to catch up
with formal firms, has in fact had the opposite effect, exacerbating the differences in
productivity between informal and formal firms. Trade liberalization and industrial
relicensing have had similar unequalsing effects on the productivity difference
between informal and formal firms.
INEQUALITY
This suggest that while economic reforms have had strong positive effects on
overall efficiency of the manufacturing sector, by widening the gap between the
productivity of formal and informal firms in manufacturing, the reforms have made
it difficult for informal firms to complete in external and domestic markets that are
increasingly integrated. Given the large presence of unskilled and semi-skilled
workers who comprise the majority of the Indian manufacturing workforce in the
informal sector, such an increasing process of dualistic development could have
been an important contributing factor on why Indias economic growth has not been
inclusive.
SUGGESTIONS
The following are the suggestions for development of small sectors during the
eleventh plan.
Reservation of items :
To makes the small sector more successful the first step is to save small sector
from competition with the large sector. This can only be done by reservation of
items for production in small-scale sector. Items so selected should be those for

which there is a rising effective demand at home. Government should freeze the
production of items consumed by the countryside population be assigned to this
sector and an exhaustive list of such items be prepared by the experts.
Marketing assistance :
One of the major and difficult problems currently faced by small units may be
marketing their finished products. The small producers with limited resources may
find it difficult to complete with organized sector. Thus, Government should provide
assured market to them. In government sectors consumption of these items should be
made compulsory. Co-operative marketing should be encouraged. Every possible
effort should be made to problem the consumption of labour intensive items.
Low Cost Economy :
To make the small sector responsive to social needs, adequate assistance
should be provided for reducing cost to bring down the prices. The small sector
would meet the social needs it produces goods and services required by the masses,
modern agriculture and construction activities in sufficient quantities and at cheaper
rates. This objective can be achieved by assuring adequate raw materials, cheap and
financial assistance as basic inputs.
Development of Agro Industry :
Ours is the rural agriculturally dominated economy spread over seven lakhs
villages, we should develop agro-industries which can be started with local talent,
resources and in the villages. These industries cater for demand and possess forward
and backwards linkage in the country could be labour intensive.
Finance :
Founding of these industries is another problem. For financing this sector the
help of the banks may be sought. Banks have very ambitious plan for industrial

development and are busy in mobilizing rural areas, mobilization of rural resources
may be quite effective for mopping up the rural saving rural adventure scheme be
popularized.
Planning from Below :
In order to make success of the new strategy of development, we have to
reverse the process of centralized planning to decentralized planning. District level
planning bodies be formed. The village nucleus massive thrust be laid on the
development of small scale, village and cottage industries. The plan should serve as
mode for every economic region and district in the country covering handloom,
sericulture rural industries projects and rural artisans programmes.
To make the growth to be inclusive, the measures
suggested in the eleventhth five year plan should be implemented.
REFERENCE:
1.India Development Report 2011
2.Indias Inclusive Growth in the age of Globalisation.
3.Econimic Times-5,January,2012.
4.Economic Times-25,july2011.