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.
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