India’s Industrial Performance, 1991-2008 R Nagaraj Indira Gandhi Institute of Development...

India’s Industrial Performance, 1991-2008

R Nagaraj

Indira Gandhi Institute of

Development Research

Mumbai

December 10, 2009 India's Industrial Performance 2

India Industry in 1991• Contributed 26% of GDP, employed 15% of

workforce and 39% of capital stock.– Mfg GDP share 15%, employing 12% workforce.

• In the 1980s, it was the leading sector, growing at over 6%, while the GDP grew at 5.5%, exports (2/3 of which were mfg) grew at 8 .5% (in current $ terms).

• 1980s witnessed modernization of production, de-licensing, trade policy shifted from quotas to tariffs, and step up in public infrastructure investment.

December 10, 2009 India's Industrial Performance 3

What did the reforms do?

• Made a bonfire of output and investment controls.

• Cut back public investment.

• Undermine policies to promote and protect small enterprises.

• Sell public sector enterprises’ equity.

• More generally, structural reforms.

December 10, 2009 India's Industrial Performance 4

Reforms - Hopes and Fears

• Protagonists predicted the reforms to speed up industrial growth and labour intensive exports – as had happened in East Asia and China.

• Critics fears – based on LA and African experience – debt, deflation and de-industrialization.

• We examine the evidence against these competing perspectives.

December 10, 2009 India's Industrial Performance 5

Trend Growth, 1991-08

• Industrial growth 6.6% p.a., during 17 years.

• Consumer durables grew fastest at 8.1% pa, followed by capital goods at 7.4% pa.

• By 2-digit industry groups, beverages grew the fastest at 11% pa.

• Growth rates after the reforms roughly same as in the 1980s.

December 10, 2009 India's Industrial Performance 6

Annual Growth Rates, 1991-08Industrial Growth, 1991-09

0

2

4

6

8

10

12

14

1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009

Year ending

Per

cent

IIP general GDP industry

December 10, 2009 India's Industrial Performance 7

Detailed Trends

• Boom for 4 year during 1993-96, following a “J” curve after the reforms.

• Then a steep slow down for 7 years to 2003-04, followed by a 5 year boom 2003-08.

• The first boom was led by consumer durables, the second one by automobiles.

• Boom in exports and cheap credit underpinned the recent growth.

December 10, 2009 India's Industrial Performance 8

Assessing the perspectives

• No acceleration in growth rates or in output shares • No de-industrialization either (Table)• No set back to industrial investment: share of

investment going into industry or into capital goods has not declined (Figure 2).

• Exports have diversified – mostly into services, a consequence of industrial investments early on.

December 10, 2009 India's Industrial Performance 9

Assessing the perspectives

• Yet, industry or, manufacturing sector’s share in GDP has stagnated (Figure 3)

• Share of labour intensive mfg and their exports have not increased, as expected.

• In merchandise exports, share of primary (iron ore) exports increased; mfg declined (Figure 4).

• So, while much of the apprehensions are unfounded, there are surely signs of concern.

December 10, 2009 India's Industrial Performance 10

Industrial Changes

• Effective competition in industrial markets has gone up - product quality, variety and after sales services has improved.

• Share of foreign firms increased; public sector’s share declined (Figure 5)

• After brutal restructuring, domestic firms have not only withstood external competition, but have spread their operations cross the world.

• Yet, Industrial growth, or labour intensive exports have not improved. Why?

December 10, 2009 India's Industrial Performance 11

Competing Explanations

• Incomplete reforms – labour market rigidities, lack of infrastructure, incomplete financial sector reforms, including CAC.

• Poor agriculture growth (Figure 6), declining public infrastructure investment.

• While there is unanimity for stepping up infrastructure investment, not on how to do it. Why?

December 10, 2009 India's Industrial Performance 12

Infrastructure

• Despite improved PSEs’ financial performance, rising domestic saving and tax/GDP ratios, policy makers have refuse to step up public infrastructure investment.

• They are committed to fiscal orthodoxy, and insist on promoting private and foreign investment in infrastructure.

• This is so, despite the costly disasters like Enron power plant in the 1990s.

December 10, 2009 India's Industrial Performance 13

Conclusions

• Reforms promised faster and labour intensive growth, as policy induced restriction on supply were dismantled – to take India closer to East Asia.

• Critics feared debt, deflation and deindustrialisation, as had happened in LA and Africa since the 1980s.

• This study sought to assess India’s performance, against these promises and apprehensions.

December 10, 2009 India's Industrial Performance 14

Conclusions

• No growth step up; nor deindustrialisation.• Export diversification, decline in mfg.’s share;

boom in services exports, and of primary products.• Enhanced competition, improved quality, variety –

greater share of foreign firms, and decline in public sector.

• Indian industry and enterprise are flourishing internationally, acquiring factories and firms to leverage their domestic capabilities.

December 10, 2009 India's Industrial Performance 15

Conclusions

• What is holding back industrial growth?Incomplete reforms, infrastrcuture, labour laws.Ag. Productivity, public infrastructure investment.

• Why low infrastructure investment?– Fiscal orthodoxy– Commitment to private entry.

December 10, 2009 India's Industrial Performance 16

Thank You

December 10, 2009 India's Industrial Performance 17

Industry and Mfg. share in GDPShares of Industry and Manufacturing in GDP

0

5

10

15

20

25

30

91 92 93 94 95 96 97 98 99 2000 2001 2002 2003 2004 2005 2006 2007 2008

Year Ending

Per

cent of G

DP

Manufacturing Industry

December 10, 2009 India's Industrial Performance 18

Investment Shares,1991-08

Investment shares, 1991-2008

0

5

10

15

20

25

30

35

40

45

91 92 93 94 95 96 97 98 99 2000 2001 2002 2003 2004 2005 2006 2007 2008

Year ending

Per

cent of G

FC

F

Manufacturing Infrastructure Agriculture

December 10, 2009 India's Industrial Performance 19

India’s Trade Balance, 1991-08India's trade balance, 1991-08

0

10

20

30

40

50

60

70

80

90

1990-91

1991-92

1992-93

1993-94

1994-95

1995-96

1996-97

1997-98

1998-99

1999-00

2000-01

2001-02

2002-03

2003-04

2004-05

2005-06

2006-07

R

2007-08

P

Year

Per

cen

t

Mfg. export share Mfg trade balance

December 10, 2009 India's Industrial Performance 20

Foreign and Public sectors

Public sector's and foreign firms' share in GDPmfg

0

2

4

6

8

10

12

14

16

18

20

1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008

Year ending

Per

cent

Public sector's share in GDPmfg Foreign f irms' share in GDPmfg

December 10, 2009 India's Industrial Performance 21

Employment and output share of principal sectors, 1983 to 2004-05. (per cent)

Employment GDP

  1983 1993-94 2004-05 1983 1993-94 2004-05

 1. Agriculture 68.5 64.0 56.5 37.1 30.0 20.2

2. Industry 13.8 15.0 18.7 24.3 25.2 26.2

2.1 Manufacturing 10.7 10.6 12.2 14.5 14.5 15.1

3. Services 17.6 21.1 24.8 38.6 44.8 53.6

December 10, 2009 India's Industrial Performance 22

Agriculture Output GrowthFigure 6: Trends in Agriculture Production, 1981-07

0

0.5

1

1.5

2

2.5

3

3.5

4

All Crops Foodgrains Non-foodgrains

Cereals Rice Wheat GDPag.

Per

cent

per

yea

r

1981-90 1991-00 1991-07