INDIAN INDUSTRY IN POST-LIBERALISATION ERA

Summary

S. S. Bhandare, an economist and consultant with Tata Services Ltd., uses this Forum of Free Enterprise booklet to take stock of Indian industry roughly a decade after the July 1991 reforms. His verdict is mixed: quantitatively, post-reform industrial growth (averaging 6.5% in 1992–2001) has been only marginally better than the pre-reform decade’s 6.3%, and the sector has become more volatile, with the coefficient of variation rising from 38.75 to 47.18. Qualitatively, however, he sees real gains — a liberalised and intensely competitive market, wider consumer choice, market-determined pricing, productivity drivers in manufacturing, and the compulsion to globalise both prices and profit margins.

The booklet is organised around a series of “critical issues for debate.” Bhandare contests the fashionable thesis that industrialisation will “by-pass India” in favour of a services-led trajectory, pointing out that India has slipped from being the world’s tenth-largest industrial power around 1970 to roughly 17th or 18th, while its consumption of steel, cement and power is one-third to one-fourth of China’s. He argues for an indigenous industrial programme rather than dependence on imports, and presses for second-generation reforms: rationalisation of domestic indirect taxes (excises, sales taxes, octroi), reduction of customs tariffs towards East Asian levels (the Shome Advisory Group’s 15% peak by 2004-05), repeal of SICA, dissolution of BIFR, flexibility in labour markets, and acceleration of mergers, acquisitions and divestments.

Further sections evaluate the challenges of globalisation (India’s exports remain concentrated in labour-intensive, low-value categories with only a 0.7% share of global exports), the social fallout of rationalisation (the stalled National Renewal Fund, the case for aggressive privatisation to fund retraining), and the rising disciplinary role of stock markets as the Planning Commission’s influence wanes. The closing piece on the “jigsaw of new economy” cautions against treating IT-led growth as a substitute for fixing the “old economy,” arguing instead that brick-and-mortar industries must absorb new-economy productivity gains. Bhandare ends with a Dickensian flourish: it has been the best of times and the worst of times for Indian industry, and the next few years will determine whether India remains a serious industrial power in the global league.

Key points

• Post-reform industrial growth (6.5% p.a., 1992-2001) is only marginally higher than pre-reform (6.3%, 1981-1992), while volatility has risen sharply (coefficient of variation 47.18 vs 38.75).

• Qualitative gains — competitive markets, wider consumer choice, market-determined pricing, productivity discipline, globalised price and margin pressure — are the real dividends of reform.

• Bhandare rejects the ‘industrialisation will by-pass India’ thesis, citing India’s slide from 10th to 17th-18th in global industrial rank and consumption levels one-third to one-fourth of China’s.

• He argues for rationalisation of domestic indirect taxes (excises, sales taxes, octroi) and customs tariff cuts to East Asian levels as a precondition for global competitiveness.

• Restructuring impediments include rigid labour markets, SICA and BIFR, fragmented capacities, transaction costs, and infrastructure infirmities; mergers, acquisitions and divestments need vigorous pursuit.

• India’s 0.7% share of global exports is concentrated in labour-intensive, low-value categories like gems and jewellery, garments and leather; IT software is a bright spot but hardware lags.

• The National Renewal Fund concept has fallen by the wayside; aggressive privatisation could fund retraining and a credible social safety net, but political will is lacking.

• Stock markets have become the new allocator of capital as the Planning Commission’s role declines, punishing diversified, commodity-oriented, capital-intensive businesses; IT euphoria must not displace fixing the old economy.