It is imperative that the Indian economy strives
to achieve a structural transformation of industry by building up the
capital goods industry base and acquiring the technological competence
to boost the share of high-tech goods in merchandise exports. In the
long run, this is the only sustainable way of
achieving a trade surplus.
This alone will lend strength and stability to the rupee.
A t the outset, it is relevant to describe briefly what may be called
an “appropriate economic development path” for a developing economy,
which has been experienced by the developed countries, newly
industrialised economies (NIEs), China, and Malaysia (culled from
various sources). By and large, developing economies are dominated by
agriculture, supplemented by unorganised industrial and service sectors
in terms of the gross domestic product (GDP) composition. The
unorganised sector is predominant in the occupational structure of the
labour force (employment composition), with the organised sector having a
marginal presence. On the external front, such economies experience
trade deficits and exports comprise largely agro and processed products,
supplemented by light manufactured goods. There are hardly any heavy
manufactured goods in the export basket for obvious reasons.
However, when economic growth takes place, in which
“industrialisation” spearheads the whole process, agricultural
development takes place, followed by service sector development.
Industrial development is characterised by a structural shift in the
compositions of manufacturing value added (MVA) and industrial
employment. The growth of industry gives a fillip to the growth of the
organised sector in the entire economy. Organised sector employment
growth will outweigh that of unorganised sector employment. In organised
industry, the share of consumer goods will steadily decline,
compensated for by a steady increase in the shares of capital goods,
basic goods, and intermediate goods industries. The economic
transformation facilitated by industrial development leads to a
transformation of the export basket as well where the relative shares of
agro and processed goods are compensated for by the increase in the
shares of manufactured goods – initially light manufactured goods but
later heavy manufactured goods. The countries that have pursued this
path of economic development have achieved economic prosperity and such
economies experience continuous trade surpluses, current account
surpluses, and have strong and stable currencies (such as NIEs, China,
and Malaysia).
1 India’s Initial Achievements
Indian economic policymakers intended to pursue this path of
development when they launched the Industrial Policy Resolution of 1948
and the Industrial Policy Resolution of 1956, followed by a series of
industrial controls and regulations, supplemented by five-year economic
plans. In the process, agriculture developed in certain pockets, if not
across the country, organised industrial development progressed with a
shift from consumer goods to the capital goods, intermediate goods, and
basic goods industries, which also led to the development of an
organised service sector. The share of consumer goods industries in MVA
decreased from 49% in 1960-61 to 27% by 1991, whereas the share of
capital goods industries in MVA increased from about 12% to almost 22%
during the same period (Bala Subrahmanya 2009). Organised sector
employment grew from 20.63 million in 1977 to 26.73 million in 1991, an
annual average growth rate of about 1.9% (Ministry of Finance 1992,
1998). But the organised sector employed only about 8% of the total
workforce in 1991. The export basket shifted from agro and processed
goods towards manufactured goods, particularly light manufactured goods.
Agro and allied products, which accounted for about 44% of the total
exports in 1960-61, contributed 19.40% in 1990-91. The contribution of
manufactured products, which was about 45% in 1960-61, increased to more
than 79% in 1990-91 (Ministry of Finance 1998). Of course, manufactured
exports primarily comprised light manufactured goods. However, the
overall progress and the shift from the early 1950s to the late 1980s
were on the desired path of economic development.
2 Outcome of Economic Reforms
The launching of broad-based economic reforms in 1991 had the
objective of making the Indian economy (in general and industry in
particular) achieve international competitiveness. In the process,
several key policy reforms were introduced to enable the integration of
the economy with the global economy at large. The expectations were
high. Freer trade and freer investment laws were expected to accelerate
achieving the desired path of economic development. How far have we come
on the path of economic development since 1991?
The figures are dismal and disappointing. Organised sector employment
increased from 26.73 million in 1991 to 28.99 million in 2011, or at
the rate of 0.41 million per annum. During the same period, public
sector employment declined absolutely from 19.05 million to 17.54
million. Given the “much sought-after” “opening up” and “gradual
withdrawal” of the public sector from various economic and industrial
spheres, this development may be natural and therefore justifiable.
However, the growth of organised private sector employment (from 7.67
million in 1991 to 11.42 million in 2011, or at the rate of 2% per
annum) cannot be considered significant. The organised sector, which
employed about 8% of the total workforce in 1991, employed less than 7%
of the total workforce in 2011. This brings out clearly that a large
chunk of the growing workforce has been absorbed by the unorganised
sector and the growth of the organised sector has failed to make any
“dent” on the unorganised sector. The composition of the GDP has changed
– agriculture’s contribution declined from 33% in 1990-91 to 16.17% in
2011-12 and industrial contribution hardly improved (from 24.15% to
25.45% during the same period), implying that the fall in agriculture’s
share has been compensated for by the growth of the service sector
(Ministry of Finance 2013).
What is more alarming has been the change that has occurred in the
composition of MVA as well as the export basket. In the industrial
sector, the relative share of consumer goods industries is growing, with
non-durable consumer goods industries acquiring a dominant share and
the base of the “much-needed” capital goods industries shrinking. The
share of consumer goods industries in MVA increased from about 27% in
1991 to about 32% in 2007, whereas the share of capital goods industries
declined from about 22% to about 19% during the same period (Singh
2013). The disturbing change in the structure of MVA is also reflected
in the changing weights of sectors in the use-based classification of
Indian industry (Ministry of Statistics and Programme Implementation
2013).
Similarly, diversification in the export basket has not taken place
at all. The share of agro and allied products increased from 19.40% in
1990-91 to about 24% in 1996-97 but declined to about 15% in 2011-12. On
the other hand, the share of manufactured goods in total exports
declined from 79% in 1990-91 to about 74% in 1996-97 and further to
about 61% in 2011-12 (Ministry of Finance 2013). Meanwhile, the share of
petroleum products, which was nil in 1990-91, increased from <1.5%
in 1996-97 to >18% in 2011-12. These are not domestic petroleum
products, but imported crude refined in India and then exported. The
imported crude (for refining and exporting later) would have steadily
accounted for an increasing share of total petroleum, oil and lubricants
(POL) imports in 2011-12. This is crudely reflected in that the export
value of petroleum products as a percentage of the total POL import bill
increased from hardly 5% in 1996-97 to almost 36% in 2011-12 (Ministry
of Finance 2013).
Overall, the kind of shift in the export basket experienced by other
industrialising countries such as China, Malaysia and even Thailand from
light manufactured goods to heavy manufactured goods did not take place
in India at all. The domestic private sector has played a major role in
those economies. To prove the point further, India, China, and Malaysia
were in the list of top 25 exporters of “low-tech products” or
“resource-based exports” in 1985. Malaysia was also in the top 25
“high-tech products”. By 1998, China entered the list of top 25
exporters of not only “medium-tech products” but also “high-tech
products”, and Malaysia could improve its rank in the list of top 25
“high-tech products” from 19 to 10. India could only improve its rank in
the list of top 25 exporters of “low-tech products” (from 22 to 19) but
could not enter the list of top 25 “medium-tech products”, let alone
that of “high-tech products” (UNIDO 2003). This is because in India,
high-tech exports (aerospace, computers, pharmaceuticals, scientific
instruments, and electrical machinery) accounted for hardly 4% of the
total manufactured exports in 1988 and 6% in 2002. It reached a maximum
of about 9% in 2009 but declined subsequently to about 7% in 2010 (World
Bank 2013).
These macroeconomic indicators bring out that India’s economic growth
experience since 1991 defies established economic growth theories. Why?
The reasons for this development are not far to seek. The space vacated
by the public sector (which spearheaded the role of transforming the
Indian economy on the desired path of economic development till 1991)
was expected to be filled by the organised private sector (domestic and
foreign) when we launched broad-based economic reforms in 1991. The New
Industrial Policy in July 1991 claimed, among others, that “Indian
private entrepreneurship has come of age” (Ministry of Industry 1991).
It was anticipated to give a fillip to industrial growth of the country
and thereby transform the economy at an accelerated pace (than during
1951-91). However, that did not happen. This can be attributed to two
factors. One, FDI and multinational corporations (MNCs) have entered the
service sector much more than the industrial sector, thanks to the
favourable climate in the country for knowledge-intensive industries,
housing and real estate, and consultancy and financial services (DIPP
2013). And two, the domestic private sector also entered the service
sector, covering wholesale and retail trade, and communications and
personal services, among others. This is reflected in that organised
private sector employment grew by a meagre 0.93% per annum in the
manufacturing sector during 1991-2011, whereas it grew by 4.15% per
annum in the service sector during the same period (Ministry of Finance
2013).
3 The Real Challenge
The much-desired “opening up” of the economy did not
trigger/accelerate the inflow of investments to the industrial sector
(particularly capital goods industries) to generate more industrial
employment and higher MVA, and thereby contribute to the shift in the
export basket from light manufactured to heavy manufactured goods. The
formation of the National Manufacturing Competitiveness Council (NMCC)
in 2004 has hardly made an impact and the National Strategy for
Manufacturing (NMCC 2006) has hardly taken off. The National
Manufacturing Policy of 2011 and the proposed National Investment and
Manufacturing Zones (NIMZs) are still in their infancy.
Given this, what needs to be done? The real challenge to our economy now is threefold.
(i) How do we build up the “diluting” capital goods industry base?
(ii) How do we develop and acquire an indigenous technology base?
(iii) How do we transform the export basket to comprise a growing
share of high-tech products, similar to some of the industrialising
south-east Asian countries (like Thailand), if not NIEs and China?
It is neither feasible nor desirable to reverse the ongoing trend of
economic reforms by bringing the public sector back to the centre stage.
Therefore the solution has to be found in the domain of private sector
and private entrepreneurship, both domestic and foreign. But MNCs are
more eager to deepen their presence in the ever-growing service sector
where their superior technology, supply chain efficiency, and managerial
skills will generate more assured and sustainable profits. It is
doubtful whether we can influence FDI inflow towards capital goods
industries and make them contribute to the generation of high-tech
exports. The other option is the domestic private sector. But domestic
large industrial houses (which have the financial muscle) also find more
comfort in deepening their presence in the service sector to enjoy
relatively risk-free “trade profits” rather than enter risk-prone,
capital-intensive industries, which would call for an increasing rate of
research and development (R&D) investments.
Perhaps it is here that our policymaking has not produced the desired
results. We have not been able to decisively influence the flow of
domestic and foreign private investments in the desired direction to
make an impact on the technology front of the global economy. It is an
irony that foreign investors (backed by/through international
institutions and foreign media) demand more and more economic reforms
(in the form of further “opening-up” of the service sector) when they
have not produced outcomes desirable to the Indian economy through their
participation in the already opened-up sectors (particularly
manufacturing), and domestic captains of industry are not far behind.
Acquisitions and takeovers abroad apart, it causes concern that none of
our private large industrial houses could make a mark globally with any
in-house developed high-tech product in the last two plus decades.
4 What Needs To Be Done?
It is high time the captains of Indian private industry take the
responsibility for driving industrial growth of the country towards
maturity, with a renewed growth of capital goods industries to ensure
that industry acquires its own technological competence. The apex
chambers of industry should take the lead in the interests of both
industrial growth and national economic growth. This should result in
tilting the country’s export basket towards medium-tech and subsequently
high-tech products, and favourably balance the trade and current
accounts to offset the ever-growing import bill and strengthen the
currency. (In this context, it is important to emphasise that fiscal
incentives and monetary policy actions will only provide short-term
relief but not long-term solutions.)
To conclude, it is imperative that the Indian economy strives to
achieve a structural transformation of (manufacturing) industry by
building up the capital goods industry base and acquiring the
technological competence to lead to a growing share of high-tech goods
in the composition of exports. In the long run, this can be the most
sustainable way to achieve a trade surplus and thereby a current account
surplus. This alone will lend strength and stability to our currency in
the international market. Unless and until we achieve this, our economy
will continue to experience a trade deficit leading to a current
account deficit and remain vulnerable to even “minor external
vibrations” turning into “shocks” more often than we can afford.
