INTRODUCTION

Manufacturing output grew 7%–8% annually since 1991, with a marked

improvement in the variety and quality of goods produced. Yet, its share in
gross domestic product has practically stagnated, with a sharp rise in import
intensity.

The manufacturing sector’s share has stagnated at about 14%–15% of gross

domestic product (GDP) after the reforms. Though India has avoided
deindustrialisation it stares at a quarter century of stagnation, in contrast to
many Asian economies that have moved up the technology ladder with a
rising share of manufacturing in domestic output and global trade

The reforms were built on the initial success in delicensing and import
liberalisation in the 1980s. However, deepening of the reforms since the
1990s meant a clear departure from the state-led domestic-oriented, capital
goods- focused, “heavy” industrialisation strategy, towards a market-friendly
regime.

The reforms, though initially centred on industry and trade, culminated in

encompassing financial globalisation in the last decade. The public sector
was rolled back even within the “conventional confines of utilities and
infrastructure” by allowing private and foreign capital in these industries.

India rode the boom during its “dream run” for five years from 2003 to 2008,
to clock an unprecedented annual economic growth of about 9%. After the
global financial crisis, as with the rest of world, India’s boom went bust, with
industrial deceleration, rising import dependence, and growing short-term
capital inflows.

INDUSTRIAL TRENDS =Over the entire period of reforms (1991– 2014), the
manufacturing sector grew at an annual trend growth rate of 7.7% or 7.2%
as per the Annual Survey of Industries (ASI) and Index of Industrial
Production (IIP), respectively.

However, with the expectations of a boost in demand not being realised,

industrial growth decelerated.

The period from 2003 to 2014 represents, as mentioned earlier, the recent
debt-led cycle of boom and bust. After the global financial crash in 2008–09,
fiscal and monetary stimulus domestically and capital inflows on account of
quantitative easing (QE) in the advanced economies sustained economic
growth until 2011–12 giving rise to a short-lived euphoria of emerging
market economies (EMEs) getting “delinked” from the advanced economies

PERFORMANCE DURING THE BOOM AND BUST

From 1991 to 2003, industrial performance was not particularly impressive.

After the initial boom until 1996, there was a nine-year period of
deceleration, when the output growth was buffeted by many shocks, such as
the Asian financial crisis.

Five years of India’s dream run (2003–04 to 2007–08) were surely led by
outsourcing services exports, but manufacturing growth matched the boom
with a 10% annual growth rate. This was made possible by a steep rise in
domestic savings, investment, and capital inflows, boosting the capital
formation rate to close to 40% of GDP at the peak of the boom in 2008.

The growth rate recovered after the financial crisis in 2008-09 but at a
slower rate of 7.3% per year in the following four years until 2011-12 and
decelerated rapidly thereafter.

During the period 2004-05 to 2013-14 foreign firms and brand names came
to dominate many markets especially consumer durables and capital goods.
The import to domestic output ratio went up quite sharply in most industries.
However, if indirect imports are included, the ratio would go up further

During the period 2004-05 to 2013-14 foreign firms and brand names came
to dominate many markets especially consumer durables and capital goods.
The import to domestic output ratio went up quite sharply in most industries.
However, if indirect imports are included, the ratio would go up further

The land market quickly got commercialised, with easy access to domestic
and international capital, and with property development acquiring primacy
over industrial use of land

These policies eventually became a means of acquiring scarce land, often

with state support, from gullible farmers who sold their land cheap or were
evicted with the state’s connivance, giving rise to the term, “predatory
growth”. This resulted in widespread political and social agitations against
such policies, contributing little by way of industrial output.

COMPETING EXPLANATIONS FOR THE TRENDS

With India’s tariff getting reduced, and with numerous bilateral trade and
investment treaties, India’s openness became comparable to its Asian peers.
In the last decade, the most significant variety of FDI inflow has been private
equity, venture capital, and hedge funds, which are, by definition, loosely
regulated alternative investment funds that are part of shadow banking.
They are not even considered as FDI by the United Nations Conference on
Trade and Development definition since they are not for the long-term.

Quantitatively, the most important of these sources is PE funds, which, by

definition, acquire existing assets and sell these after three–five years in the
stock market after restructuring. These are hardly the kind of foreign capital
that India needs for getting technology and acquiring industrial capability.

The contention that labour laws are holding up flexible and efficient use of
labour simply does not hold water. The “hire and fire” policy effectively rules
the organised labour market today. Arguably, the retrenched workers are
temporary or contract workers who are not protected by labour laws, which
are the bone of contention.

Currently, policymakers are using the World Bank’s “Ease of Doing Business”
(EDB) as a measure of hurdles faced by entrepreneurs, and are busy trying
to improve India’s global ranking to attract more foreign investment. This
dubious measure hardly explains the foreign investment inflows in
developing countries. If the foregoing arguments are reasonable and
evidence credible, then we should look elsewhere for the reasons of the
industrial stagnation.

Further, lack of adequate public infrastructure investment (as capacity

creation for power generation by proxy) seems to be holding back industrial
growth.

Indian industry is suffering from excess capacity in major industries like

steel, coal and machinery, as investment rates and exports have fallen.
Fixed capital formation ratio, for instance, has fallen by almost 10
percentage points, from close to 40% of GDP in 2008.

As the private corporate sector is mired in debt, and the banking sector is
left holding nonperforming assets, there is little option but to revive public
investment to boost investment and domestic output.

NEED FOR RECONFIGURING DEVELOPMENT STATE

State intervention during the planning era (1950–80) had many

shortcomings, and many aspects of it may have outlived their utility. Yet,
perhaps, the rush to open up markets after 1991 seems to have hurt long-
term industrial and trade prospects. So, there seems to be a need to
rebalance the equation between the state and the market keeping in view
the strategic considerations

Three aspects of industrial and investment policies that seem to need careful
attention are: (i) long-term finance, (ii) domestic research and development
(R&D) efforts, and (iii) bilateral investment and trade treaties.

India seems to have a disadvantage vis-àvis its trading partners, especially

with respect to China in all these policies. As part of financial liberalisation,
India turned its development financial institutions such as IDBI and ICICI into
commercial banks, resulting in shortening of loan maturity, thus constraining
capital-intensive manufacturing and infrastructure financing. The domestic
debt market was expected to fill the vacuum, and that has not happened.

India seems to have a disadvantage vis-àvis its trading partners, especially

with respect to China in all these policies. As part of financial liberalisation,
India turned its development financial institutions such as IDBI and ICICI into
commercial banks, resulting in shortening of loan maturity, thus constraining
capital-intensive manufacturing and infrastructure financing. The domestic
debt market was expected to fill the vacuum, and that has not happened.

Indian firms are perhaps unable to match the Chinese firms’ commercial
terms, despite producing goods of comparable quality and variety. There is a
need for revisiting national development or investment banks for supply of
long-term, low-cost credit for industrial capital formation.

At the height of the financial opening-up in the last decade, India signed a
large number of bilateral free trade and investment agreements, whose
outcome for industry appears to be questionable.

CONCLUSIONS

Liberal economic reforms or the market-friendly policy framework

constructed over the last quarter century has not served the manufacturing
sector well, despite faster economic growth, and output diversification. The
goal of rapid industrialising to catch up with Asian peers, in an open trade
and capital regime employing abundant labour for labour-intensive exports,
did not materialize.
Policies like make in India are yet to get translated into workable policies.
The easy starting point of it would be to try producing domestically what is
being imported. The sharp rise in imports during the recent years clearly
shows the potential to indigenise production quickly

The policymakers’ single-minded focus on improving India’s ranking in the

World Bank’s Ease of Doing Business index (mainly by whittling down
protective measures for the working poor) seems seriously misplaced as the
index has no analytical basis or empirical support.

The structuralist economic view of India’s long-term constraints, as low

agriculture productivity, poor public infrastructure and extreme energy
import dependence, seem to hold considerable value to this date. So, at a
macroeconomic level, such a view would call for state intervention to step up
domestic savings and public investment, and insulate the domestic economy
from shortterm volatility emanating from the global economy.