Industrial Growth in India From 1950 to 1991

Form or Structure of Industries, which is existing in a country, is known as Industrial Structure. Nature of Industrial Structure is not static. It is changeable from time to time. Present Structure of Indian Industries is different than earlier. The change in Industrial structure or Industrial development or growth during the planning era can be divided into four phases as under:

Phase I-High Growth Phase (1950-51 to 1965-66)

Building up of Strong Industrial Structure: It was the period from the beginning of the 1st plan to the end of 3rd plan which laid the foundation for the industrial development by building up a strong industrial structure .There was a noticeable acceleration in industrial output because of Two major factors – First and most important factor responsible for high growth was the emphasis on industrialisation; particularly since the Second five year plan. High priority was given to industrial growth vis-a-vis other objectives in first three plans. Substantial investments were made in the industrial sector, in general and in heavy industries in particular. The scale of investment efforts in certain heavy industries was thought to be beyond the capital-raising capacity of the private sector. As a result 17 industries were reserved for the public sector. These industries included the bulk of infrastructure, namely-Defence, Atomic Energy, Iron and Steel, Heavy Machinery, Coal, Railways, Airlines, Telecommunication and Electricity. In this period substantial investments were made in manufacturing and supporting infrastructure. The complementary character of public and private sector investment is an important factor in increasing the overall growth rate in Industry.

Secondly, this was a period of price stability and the food grain prices remained stable. The agriculture output showed a higher trend compared to pre-independence period. In case of any shortage, the domestic supply was supplemented by PL-480 imports. There is adequate inflow of foreign aid from other countries. Moreover, public sector investment was through non-inflationary means.

Phase ll-Industrial Deceleration and Structural Retrogression (1966-80)

This phase is also _ known as Low Growth Phase or Industrial Deceleration, particularly the period from 1965-1974 as shown in table 1. The rate of growth fell steeply from 9.0% per annum during the 3rd plan to a mere 4.1% per annum during the period 1%5 to 1974. It is also important to point out that even this meagre rate of Industrial growth does not express the true situation as there was a sharp increase of 10.6% in Industrial production in the year 1976-77. If this year is left out then the rate of Industrial growth over the 10 year period 1%5 to 1974 declines further to a meagre 3.7% per annum. In a similar way, the rate of growth of 6.1% per annum during the Vth Plan owes considerably to the 10.6% increase recorded in the year 1976-77. If this year is left out, the rate of Industrial growth for the remaining 4 years comes down considerably. It is clear from earlier table, the last year of phase II, i.e., 1979-80 recorded a negative rate of growth of Industrial production of -1.6% over the preceding year.

In addition to the phenomenon of deceleration in industrial growth during the period 1965-1980, Table 1 also brings out clearly the phenomenon of structural retrogression that plagued the Industrial Sector during this period. From the point of view of long run Industrial Development, the most important group of industries is the group of capital goods industries. This group registered a consistent and considerable increase from 9.8% per annum in the 1st plan to 13.1% per annum in the 2nd plan and further to a phenomenal 19.6% in the 3rd plan. However, in the next 11 years the capital goods sector grew at an annual rate of only 2.6%. If we consider the Vth plan period, the rate of growth of capital goods industries goes up to 5.7% per annum, even this substantially lower than the rates of growth recorded m: the 1st three plans. The same story is found in the case of basic industries.

Decline in the growth rate of capital goods industries and basic industries in the period after the 3rd plan clearly represents the phenomenon of structural retrogression .It is also observed that where growth has been moderately high, a majority of the Industries belonged either directly or indirectly to elite-oriented consumption goods sector. This is illustrated by the disproportionately large increase in the output of man-made fibres, beverages, perfumes and cosmetics, commercial, office and household equipment, watches and clocks, and fine varieties of cloth,

Causes of Deceleration and Retrogression

Several explanations were offered for the phenomenon of deceleration and retrogression in the industrial sector during Phase ll. The government expressed the view that exogenous factors such as the Wars of 1965 and 1971; Drought conditions in some years; Infrastructural constraints and bottlenecks; and the Oil crisis of 1973 were responsible for the slow down of growth.

K.N. Raj argued that low growth in the agricultural sector accounted for the slowdown of industrial growth by restricting the supply of raw materials on the one hand and the constraining the demand for industrial goods on the other hand, T.N. Srinivasan and N.S.S. Narayana argued that there was a considerable slackening or real investment in phase II particularly in the public sector and this brought down the rate of growth in the industrial sector. Some Economists pointed to the relationship between Income Distribution, the demand factor and industrial growth, “‘They pointed out that the market for industrial goods in this country is limited to the top 10% of the population due to extreme inequalities of income and wealth. Once the demand of this section of the population gets saturated, there is no further expansion in demand. This limits the demand for consumption goods limiting, in turn, the demand for machinery and capital goods in subsequent stages.

Some economists like Jagdish Bhagwati, Padma Desai, T.N. Srinivasan and Isher Judge Ahluwalia, blamed the wrong industrial policies, .complex bureaucratic system of licensing, irrational and inefficient system of controls etc., for, industrial deceleration.

Phase III—The Period of Industrial Recovery (1981-1991)

The period of 1980s can broadly be termed as a period of Industrial Recovery. This is clearly brought out by a study of the revised index of industrial production (base 1980-81). Rates of Industrial growth based on this index are presented in the following table:

Table 2 shows that the rate of Industrial growth was 6.4% per annum during 1981-85, 8.5% per annum during the VIIth plan and 8.3% in 1990-91. This is a marked upturn from growth rates of around 4% achieved during the latter half of Sixties and the Seventies. This performance is also an improvement upon the growth rates achieved during the first and second five year plans. Similar trends of Industrial Recovery in 80s are noted by some other Economists as well. As per Ahluwalia, a very important aspect of the growth revival during the first half of the 80s was that it was not associated with an acceleration in the growth of the factor inputs but was, rather, based on better productivity performance. Thus, total factor productivity which registered a negative and negligible growth of -0.2 to -0.3% per annum in the period 1966-67 to 1979-80 showed a marked improvement in the first half of the 80s when it registered a growth of 3.4% per annum.

Causes of Industrial Recovery

• New Industrial Policy and Liberal Fiscal Regime: One of the main causes of Industrial Recovery during 80s was the liberalization of industrial and trade policies by the government. The important features of Liberal Fiscal Regime were (i) maintenance of high budgetary deficits year after year; (ii) resort to massive borrowing often at high interest rates. All these phenomena were clearly witnessed in the VIIth plan. While Liberal Fiscal Regime helped in generating demand for manufactured goods, liberal industrial and trade policies ensured that an adequate ‘supply response’ was forthcoming.
• Contribution of the Agricultural Sector : Increased prosperity of large farmers in certain regions of the country during recent years has helped in creating additional demand for industrial goods. There was also a spurt in demand for a certain range of manufactured goods due to increase in the use of manufactured inputs per unit of cultivated area.
• The Infrastructure Factor: There was marked resurgence in Infrastructure Investment in 80s. As against only 4.2% per annum increase in Infrastructure Investment during 1965-66 to 1975-76, the increase was as high as 9.7% per annum during 1979-80 to 1984-85. Infrastructure Investment rose further by 16% in 1985-86 and 18.3% in 1986-87.
• Growth of Service Sector: There was a significant increase in government expenditure on all services in the 80s. The consumption pattern of the service class is less food-intensive and more oriented towards durable consumer goods. Therefore the· consumption pattern of effective demand in 80s changed in favour of consumer durable goods. As a result, consumer durable were pushed to the “fore front of growth” .Fast growth of the consumer durable goods sector up the rate of industrial growth.

Phase IV-Reforms Phase (July 1991 onwards) :

The worst industrial growth was observed in 1991-92. The recovery in Industrial growth started in 1992-93 when it grew at a rate of 2.3% followed by 6.0% in 1993-94. These were the initial adjustment years in response to the reforms. The industrial growth then accelerated to 9.1% in 1994-95 and 13.0% in 1995-96 surpassing the growth rates of 80s. After the initial birth-pangs of a competitive economy were over the benefits of liberating Indian Industry from the shackles of Controls Raj were clearly visible by mid 90s. When most of experts expected that India will enter in a period of sustainable growth, the growth performance slowed down. The Indian Industrial growth declined to 6.1% in 1996-97 which was much lower than the 13% growth of the previous. year. The deceleration of Industrial growth continued in 1997-98 as well. The main reason for the slowdown may be the tightening of the monetary policy in 1995-96 and consequent credit squeeze with high interest rates. The slowdown of industrial growth in 1996-97 to 1998-99 did not cause much panic as it was expected to be a cyclical downturn of a normal business cycle. It was not indicative of an Industrial Recession. The slowdown in 1998-99 was more pronounced for the manufacturing sector in particular. This did not prove to be a sustained Industrial Recovery.

The Industrial growth slowed down in 2000-01 and 2001-02 and this slow down was widespread covering all broad sectors such as Manufacturing, Electricity and Mining and all end use groups such as capital goods, intermediate goods and consumer goods, both durable and non-durables. Manufacturing sector growth fell to 2.9% in 2001-02, which was lowest growth in the past ten years.

The year 2004-05 started on a positive note in April 2004 with annual growth of 8.9% in the Index of Industrial Production (IIP). The year 2004-05 conforms to the normal historic pattern of industrial buoyancy following a good agricultural year. Industrial growth of 8.4% during April-December 2004-05 was the highest after 1995-96. Robust growth of 9% in manufacturing – a sector with a weight of 79.4% in IIP in the first three quarters of the current year not only came in succession to the high growth in the two previous years, but also contributed significantly to the satisfactory performance of IIP overall.

The Indian industrial sector has recorded a double-digit GDP growth of 10.3% in the first quarter of 2005-06. This growth rate is less than a percent of the Chinese industrial sector GDP growth? The Indian economy is now starting to inch closer to the Chinese economy. China has always been considered as the dominant manufacturing sector and the industrial hub of the world, but the Indian manufacturing GDP sector has recorded 11.4% growth. As a matter of fact the manufacturing sector has been instrumental in increasing India’s industrial GDP, as well as closing the gap between GDP growth rates of India and China. Higher global demand for Indian manufacturing goods, higher purchasing power within the country, and increasing internal demand for manufactured goods are some key reasons for the improved performance of the manufacturing sector. Of course, the Chinese manufacturing sector remains much larger in absolute terms.