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Indian Industry

Indian Industry Aftermath of Reforms India: Industrialisation in a Reforming Economy


reckoning, he suggests that continuation of reforms may be expected to pro-

Indian Industry

duce an even better performance. But as an economist well versed in policy mat-

Aftermath of Reforms ters, he also notes that such reforms on

India: Industrialisation in a Reforming Economy – Essays for K L Krishna,

edited by Suresh D Tendulkar, Arup Mitra, K Narayanan and Deb Kusum Das; Academic Foundation, New Delhi, 2006; pp 637, Rs 995.


osaraju Leela Krishna taught generations of postgraduate students and guided 40 students for their MPhil/PhD degree in economics at the Delhi School of Economics (DSE) during his fourdecade long career. His devoted and competent work for his students, freely giving his time to them, his natural humility, deep understanding of their problems, his fair and unbiased assessment of their strengths and weaknesses, and his abiding concern for their professional and personal growth – all these left an enduring impact on his students. As a mark of their affection and respect for their teacher, his students had earlier, on the occasion of his retirement, organised a conference at the DSE, and now on the occasion of his 70th birthday, four of them teamed up as editors of this volume (which embodies many of the papers of this conference). Krishna’s colleagues, as also those of us who have had occasions to interact with him professionally or at a personal level, have been equally impressed by his qualities. Indeed, Krishna has rightly earned that double honour of the conference and the volume, and it is well deserved.

To note some general features of this volume: It is composed of 24 papers on closely connected themes with a main focus on industry, specially Indian industry. Among the former are employment, urbanisation; infrastructure and environment; among the latter are productivity, growth, technology, multinationals, trade and individual industries. Second, almost all papers are based on field and/or secondary source data and these are analysed by employing quantitative methods/ econometric techniques. Third, although in some papers there are references to the earlier period, almost all of them focus on the 20th century.

The subject of recent economic reforms and their impact on productivity and growth has received great interest and wide publicity. It may, therefore, be advisable to summarise here the main findings and explanations thereof as found in these papers.

These papers show a marked improvement in industrial performance, measured by productivity and growth of production in Indian industry during the 1980s and 1990s relative to the earlier period. Further, the performance during the 1990s was not as good as during the 1980s even though the reforms of the 1990s were wider and deeper than those during the previous decade. This is explained by these researchers by one or more of the following reasons. The data of the 1990s are for fewer years. The early 1990s were years of transition, following the major reforms of 1991. Investments made during these years would impact productivity and growth later. It may be noted that these writers, guided by the experience of reforms of the 1980s and the on-going reforms, conclude with the expectation of better industrial performance than that shown by the data of the 1990s presented in their papers.

In his introductory paper, C Rangarajan traces the evolution of industrial policies from the early days of import-substitution and export-pessimism to the recent policies of economic reforms, and on that basis gives his assessment on the performance of Indian industry on growth and efficiency over these years. He notes, in particular, that efficiency has improved and GDP and industrial growth has accelerated and attributes this to economic reforms. On that a fast track are contingent on the prevalence of a consensus among political parties, policy-makers and other sections of the society. Has such a consensus been noticeable in recent times? Although Rangarajan does not raise this question, this needs to be answered. Such a consensus would give the green signal for faster reforms.

This article is followed by 23 papers grouped under five parts: (1) Indian industrialisation; technical efficiency and total factor productivity (five papers),

(2) urbanisation, employment and infrastructure issues for Indian industries (five papers), (3) trade and Indian industrialisaton (four papers), (4) MNC and technology transfer in Indian industries (five papers), and (5) Indian industry and environment (four papers).


This section has papers by Bishwanath Goldar, Subhash C Ray and Zhang Ping, T A Bhavani, Anita Kumari and Abdul Azeez E.

Goldar’s paper on productivity growth is a model of good research work. He begins by explaining how reforms may be expected to improve productivity, then reviews earlier studies highlighting their different findings and accounting for these differences. This is followed by his own findings based on alternative specifications and deflation procedures. His findings show that the 1980s experienced a rapid total factor productivity growth relative to the earlier period, but it slowed down during the 1990s. Goldar offers two hunches as possible explanations for his findings. The potential for productivity growth left untapped during the 1970s were being tapped during the 1980s. Increased investments made in the early years of reform in the 1990s may not have percolated into production and productivity growth during the years covered by his data, but with time they may show improved performance in the 1990s. One wishes Goldar had pursued this point a bit

Economic and Political Weekly March 4, 2006

further, citing supporting statistics (for example, on the levels of investment, capacity utilisation and employment during the 1970s, 1980s and 1990s) and used them to account for his findings for different periods.

Ray and Ping describe the economic reforms in China beginning in the late 1970s, and assess their impact on state enterprises. Their assessment is based on a survey of 769 enterprises. Their main finding is that even when the rate of change in technical efficiency of these enterprises was uneven, on the whole efficiency improved. This improvement is attributed to increased competition, following entry of new firms, which was made possible by reforms. They hasten to add that reforms did not include privatisation, establishing the proposition that efficiency can increase even without privatisation. Would privatisaton of state enterprises increase efficiency even more? They do not meet this question squarely, saying that privatisation of state enterprises in China is at present ruled out on practical considerations, and so the emphasis on new entry to promote competition to improve efficiency will continue. The lesson for India under the present coalition government is: go slow on disinvestment/privatisaion but move fast on other measures to make the Indian economy more competitive.

What determines technical change at the firm-level in small-scale industries? Bhavani attempts to answer this question largely on the basis of her field survey of 31 Delhi-based garment units for the year 1998-99. Her answers cover the following factors: availability of information, fear of labour problems, and sales volume. More of each, it follows, the quicker will be the adoption of advanced technology. It is not clear whether Bhavani’s survey was based on the small-scale units as per the “official” definition. Technologies are of different vintages; which of these vintages would keep the small-scale units within the fold of the official definition of small-scale industry in the garment industry, and which would drive them out? On these specifics, one has to search elsewhere.

Kumari’s paper deals with productivity changes in the engineering industry – electrical and non-electrical branches. Her data relate to 44 companies for the years 1984-85 through 1994-95, selected from the Reserve Bank of India’s studies on medium and large public limited companies. She reports that productivity growth decelerated during the later period. Another important finding is that growth of size (output) is a significant factor influencing productivity growth, lending support to her hypothesis.

This paper, as also the previous paper, seems to have been hurriedly prepared; the two are long, excessively elaborate and not well focused.

In the last paper in this section, Azeez E analyses the statistics on domestic capacity utilisation and imports of capital goods of the non-electrical machinery manufacturing industry for the years 1974-96. His aim is to find out whether imports increased or decreased capacity utilisation in that industry. His finding shows a decrease in the earlier period, and an increase in the later period. As the later period was marked by reforms, he suggests that imports may now be expected to improve industrial performance in growth and productivity. These findings, he suggests, need to be supplemented by other findings based on more detailed data – product-wise and year-wise – to arrive at firm conclusions on the import-capacity utilisation relationship.

Urbanisation, Poverty and Employment

This part has five papers by Edwin S Mills, Arup Mitra and Prasad Sankar Bhattacharya, Suresh D Tendulkar, K Lal and Sanjeevan Kapshe.

The paper by Mills views Indian development within a broad framework of facts and theories about the relationships among industrialisation, urbanisation and poverty. The thrust of his thesis is that industrialisation alone has limited impact on poverty reduction, but along with urbanisation, it has a noteworthy impact. In promoting growth and development, Mills assigns a limited role to governments in general, but a major role in providing basic services and in enforcing property rights and commercial law. Big cities, he points out, have their own problems – congestion, overcrowding, pollution and the like. One way of attacking these problems is to make them more expensive by measures like charging user prices for government services and asking polluters to pay. Such measures will make them less attractive for living and work, and may also make small cities and towns relatively more attractive.

Mitra and Bhattacharya have a large load of empirical work, some of which support Mills’ thesis with a lot of Indian data. The data of the organised industrial sector are on output, gross value, employment and wages, and capital-intensity with labour and output, and labour productivity for 1976-77 to 1993-94; and the data for the urban unorganised sector for employment and gross value for 1989-90 to 1994-95, in both cases by industry and state. The data for the 1990s show a decline or slowdown of output growth. But these data are for a limited number of three/four years relative to the data for the earlier years, as also because investments trigged off by reforms of these years will take time to be seen in output. As the authors explain, growth will pick up once these investments fructify and other investments and their output will appear in the later years following further reforms. The authors’ analysis shows that the growth of the organised sector has led to poverty reduction through an increase in productivity of that sector and through indirect increases of employment in the urban unorganised sector. On that basis, the authors advocate establishing linkages between the two sectors and raising labour skills for making a further dent on poverty reduction. The book has been published in 2006 but the authors’ data stop at 1993-94 to 1994-95. Was it too much work for the authors to draw on data for some more years of the 1990s for this paper? Several other papers have such data.

Has the reform period been a period of “jobless” growth? Tendulkar answers this question on the basis of statistics of employment in the factory-manufacturing sector for the pre-reform period of the 1980s and the post-reform period of the 1990s. The answer is: No. In fact, Tendulkar shows that there have been significant employment gains in net terms in that sector during the 1990s. These gains have emerged, he explains, from stronger output growth of that period. He attributes these gains in employment and output to economic reforms. Specifically, measures like removal of entry barriers have led to increased investments in industry. This, along with other measures – fiscal, financial, procedural – have generated competitive pressures leading to improved allocative and X-efficiencies.

When reforms were introduced in 1991, the government had to face a lot of opposition from various sections of society. The opposition arose out of the fear that there would be retrenchments and the job potential in future would be less; also, in general, reforms were regarded as anti-poor. The question of job growth is an empirical

Economic and Political Weekly March 4, 2006 question and when it is answered by Tendulkar, an empirical researcher of high standing, the answer is well founded and it may be widely accepted as representing the reality.

The economic reforms introduced in 1991 and continued thereafter with varying speed were fairly comprehensive, wide and deep, and, therefore, that decade is commonly labelled as a post-reform period and the earlier period as a pre-reform period. Tendulkar has followed this practice. It must, however, be remembered that a number of reforms of the structural type affecting industry in particular were initiated during the 1980s or even during the late 1970s. These included, raising the investment limit for licensing, dropping of some industries from the list of industries to which the industries (D and R) Act, 1951 was applicable, “broad-banding”, raising the limit for the definition of MRTP company, etc. The impact of these reforms is writ large in the statistics on growth of that period and it will be there in later years as well. To label the decade of 1980s as the pre-reform period, as Tendulkar does, is strictly speaking, not correct.

Lal traces the institutional environment and the development of information and communication technology in India. He notes that government policies influence industrial performance more substantially in an underdeveloped country than in a developed country. He then describes the export, technology, human resource development and other related policies and their role in the performance of this industry. He is satisfied with the progress of the software and service branches but finds the hardware branch highly demoralised. He would like the government to adopt more liberal policies and measures for the latter in particular, to attract foreign direct investments there.

The last paper in this section is on infrastructure projects by Kapshe. The author lists the key features of these projects, focuses on the issues pertaining to contingent fiscal liabilities assumed by the government, describes option contracts in the context of managerial decision situations, and suggests modifications to a typical Build Operate Transfer (BOT) contract. He then shows how to estimate and mitigate/share such liabilities assumed by the government through a sovereign guarantee extended to such projects. This paper will be of special interest to students of management science, to consultants, contractors and government officials working on infrastructure projects.


The third section has four papers by Isher Judge Ahluwalia, Hiranya Mukhopadhyay, Deb Kusum Das and Saikat Sinha Roy.

Ahluwalia is among the earliest researchers to work on economic reforms and its impact on Indian industry. With this paper, she has one more contribution on this subject. Here she describes in detail the major reforms in trade, foreign investment, the public sector, industry and exports as also at the macro-level, and as a follow-up, assesses industrial performance variously with reference to investment, value added, productivity and exports, going back in some cases to the 1960s and ending at 1997-98. Reforms accelerated in 1991, relative to the earlier period, and yet the 1990s record, in general, a prolonged slowdown and at the industry level a mixed picture relative to the 1980s. She explains this as resulting largely from a slowdown of reforms, large fiscal deficits and weakening of political will (and more recently, if I may add, from the compulsions of a coalition government surviving with the outside support of the political parties generally opposed to reforms). Ahluwalia’s comprehensive paper on reforms appears to be misplaced in the trade section of this book. It should have been better placed in the introductory part.

Mukhopadhyay attempts to answer the question he has posed in the title of his paper, namely, do trade restrictions distort the domestic relative price-ratio? His answer is: No. He has based this on the data on the nominal rate of protection and price-cost margin in 12 selected Indian industries for the years 1980-81 to 1985-86 and 1986-87 to 1990-91 which were marked by trade restrictions. However, Mukhopadhyay does not want his reader to go away with the impression that he is advocating trade restrictions. He suggests that distortions may occur due to other reasons, also that they may inbreed inefficiency.

Das examines the relationship between trade liberalisation and improvement in industrial productivity. Figure 14.1 (p 324) neatly summarises the theoretical links between the two, His panel data consists of three-digit manufacturing industries of two sectors – capital and intermediate goods – for the period 1980-95. The use of explicit indicators in terms of tariff and non-tariff barriers to quantify trade orientation, the use of lags and the use of supporting variables in this research make this paper especially appealing. The

Economic and Political Weekly March 4, 2006

overall conclusion is that the liberal trade policy regimes of the 1980s and the 1990s contributed to an improvement in productivity growth – thanks to increased competition from imports. These findings are in line with the previous studies on India and Sri Lanka.

The last paper in this part of the book, by Roy, addresses the issue of persistence in India’s manufactured export performance. The stylised facts presented show a slow to moderate export growth of 6.05 and 6.19 per cent per annum during the periods 1960-73 and 1973-74 to 1984-85, respectively, and a high growth of 11.33 per cent during 1985-86 to 1997-98. And yet, India’s share in exports of the manufacturing sector has remained low throughout. It is this persistence that worries Roy. He explains this in terms of demand and supply related factors. Prominent among the former are restricted market access to India’s exports and a sluggish demand abroad for them, especially from developed countries. Among the supply factors are poor infrastructure, procedural delays and poor efficiency in manufacturing. From this diagnosis follows the prescription: bargain for greater market access, diversify exports by producing more of high value added and high technology products, improve and enhance infrastructural facilities, simplify procedures and improve efficiency of export-oriented and their inter-linked firms.

MNC and Technology Transfer

The five papers of this part are by V N Balasubramanyam and David Sapsford, Nagesh Kumar and Aaradhana Agarwal, K Narayanan, Neelam Singh and K U Umakrishnan.

The paper by Balasubramanyam and Sapsford deals with the determinants and efficacy of foreign direct investment (FDI) in promoting growth and development objectives in developing countries. The paper offers a fairly detailed review of the theoretical and empirical literature on this subject, and on that basis suggests that the determinants of FDI and the factors which influence its efficacy are broadly similar. These are the existence of a threshold level of growth, skilled labour, necessary infrastructure and market competition in developing countries. They determine effective utilisation and diffusion of technology in these countries. The authors summarise this by saying that FDI is a catalyst and rarely an initiator of growth. In the concluding part, the authors have listed a number of areas for future research. These include, among others, identification of channels and mechanisms through which FDI impacts on growth and diffusion, case studies of FDI flows in different types of policy environment and business practice, and the impact of fast growing e-commerce on determinants and efficacy of FDI.

Kumar and Agarwal analyse the determinants of the research and development (R&D) activity of Indian enterprises on the basis of a panel data set consisting of 4,209 observations of the companies in the manufacturing sector for the period 1992-93 to 1998-99, dividing it in two sub-periods of 1992-93 to 1994-95 and1995-96 to 1998-99, calling them early and fast reform periods. Among the important findings which emerge from the analysis are the following. First, R&D spending has declined over the period. Second, multinational enterprises (MNEs) show an increase and local firms a decline in their R&D activity over the period. But when extraneous factors such as firm size and profit margins are controlled, MNEs show lower R&D intensity than local firms. The authors explain this by the MNEs spending perhaps more on R&D in their parent companies. Third, R&D spending is focused differently in the two types of firms. Local firms focus on absorbing knowledge embodied in capital goods with a view to improving their competitive efficiency in export markets, whereas MNEs focus on customisation of their parents’ technology for local markets or using Indian R&D skills for the requirements of their parent companies. As to the role of government in promoting R&D, the authors are of the view that tax incentives have lost their relevance and suggest their replacement by more direct incentives such as R&D subsidies as used in many other countries.

Narayanan’s paper examines the impact of import liberalisation and technology transfer on the international competitiveness (proxied by export-intensity) of the Indian automobile industry. For this purpose, he analyses the statistical and other information of 11 firms for the period 1980-81 to 1995-96, dividing it into threesub-periods of 1980-81 to 1984-85,1985-86 to 1990-91 and 1991-92 to 1995-96 describing them as licensing, deregulation and liberalisation regimes respectively. The analysis shows that on the whole, interfirm variations in their competitiveness are explained by the variables representing technology acquisition, firm size, vertical integration, capital-intensity and import of components. Of the other findings, two may be listed here, In an inward looking policy regime, all firms tend to export less, more so the local firms than the foreign firms, Firms which have effected technological changes through foreign equity participation or by MNEs or in-house R&D efforts tend to be more competitive.

Singh examines the firm level determinants of R&D expenditure, import of technology and trade intensities, and their interdependence on the basis of data of 35 large and medium firms of the pharmaceutical industry in the private sector for the period 1988-89 to 1991-92. The results show that large imports of technology and higher R&D spending act as complements rather than as substitutes and that greater export-orientation and R&D intensity are mutually reinforcing.

The last paper of the section by Umakrishnan examines the inter-source differences in technology transfer behaviour with reference to the US and Japanese FDI in Indian manufacturing. This is done by analysing the relevant data of 68 US and 35 Japanese companies, participating in foreign collaboration defined as foreign equity participation of 10 per cent or more in Indian companies. It is found that Japanese firms were more wary of transfer of technology than US firms. Also, the extent of ownership control was found to be crucial as in the case of Japanese firms. Technology transfer was more by the majority owned Japanese affiliates than by the minority Japanese FDI firms. In the early part of the paper, the author has given some data on FDI by country and by industry. While these data are very informative, they may have had greater value in a different context or if used for a different purpose. Their insertion in such detail as presented does not seem to be of much relevance here, as the paper is essentially one of case studies of the technology transfer behaviour of the firms in two countries. This has increased the length of the paper. This one, like the two other papers cited earlier, seems to be a hurriedly prepared paper.

Environmental Issues

For long, hard-headed economists have kept the branch of environment economists at a distance. This is specially true of Indian economists. But of late, thanks to increased awareness of the dangers of

Economic and Political Weekly March 4, 2006 rising pollution, they are doing some work, largely elsewhere, but some in India as well. The inclusion of four papers on this subject is therefore most welcome. There are papers in this section by U Sankar, M N Murty and Surender Kumar, Smita Misra and Sarmila Banerjee and Simanti Banerjee.

In the paper on policy options, Sankar reviews the Indian policies for pollution control/prevention and concludes that these policies have been largely of the command and control type, and they have proved to be ineffective or inefficient. They should therefore be used rarely and reliance should be placed on market-based incentives. He cites the following advantages for the latter: less burden on administration, more revenue for government, flexibility to economic agents and possibilities of discovering the least cost solutions for compliance. The paper has a detailed discussion on the problems of large and small industries and also has case studies of two small-scale industries (tanneries and textile bleaching) of Tamil Nadu.

How does one measure productivity of natural capital? This question is taken up by Murty and Kumar with water as a resource. They describe various methods of measuring productivity and, on the basis of generalised frontier production functions, give some estimates. This exercise is based on the data of 66 firms belonging to a number of high pollution-prone industries. This exercise gives them new numbers for use in social cost-benefit analysis on environmental considerations. The paper underlines the importance of environmental resource accounting for the firm and for estimating the environmentally corrected gross domestic product.

Misra’s paper focuses on economies of scale in water pollution abatement. The paper is based on the data from a sample of 38 small-scale industrial units located in the Nandesari industrial estate in Gujarat for the years 1993-94 to 1995-96. She has given the cost estimates of pollution treatment by various methods. These show that the cost of control is the highest under command and control measures, then under the market-based method, followed by the two-stage method at the unit level and the common effluent treatment plan (CETP). It is the economies of scale under the CETP that makes the cost the least. So for water pollution abatement, the two-stage method is the best for small-scale units.

The last paper, by Banerjee and Banerjee, examines the prospects of the market for water pollution in India with reference to a number of dirty industries. They note that pollution abatement standards vary across industries, and find that the marginal abatement costs differ across industries even when they use the same techniques for pollution control. Following these facts, they suggest that pollution control policies must be based on such differences, allowing trading in emissions. The paper concludes with the thought that while setting up new industrial estates and choosing industrial units for location there, policy-makers should consider, among other things, differences in their pollution abatement standards and pollution abatement costs, so as to ensure efficient trading in emissions.

General Comments

In their note, the editors have paid a handsome tribute to Krishna. A reader will, however, miss from this volume a list of Krishna’s published works as also a list of MPhil/PhD dissertations supervised by him. There is no subject index or author index. This is a bulky book, running into 637 papers. Some papers are far too long and seem to have been hurriedly prepared. Also, as mentioned, Ahluwalia’s paper fits better in the introductory part than in the trade section. All of which suggests that this is a quickly edited volume. But that apart, this volume is a welcome edition to the literature on economic reforms of recent times and the industrialisation experience in India, and also offers a social cost benefit analysis of pollution abatement. A reader interested in these subjects will find himself, as I have been, well served by this collection. A researcher with poor skills in quantitative methods/econometric techniques but with a desire to learn and improve upon her skills will also find these papers very instructive.



Economic and Political Weekly March 4, 2006

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