Journal of Development Economics 23 (1986) 1-18. North-Holland INDUSTRIAL GROWTH IN INDIA Performance and Prospects Isher Judge AHLUWALIA* Centre for Policy Research, New Delhi 110 021, India Received October 1983, final version received August 1985 ‘The objective of this paper is to analyse the trends in industrial growth since the mid-fifties and examine the factors that contributed to industrial stagnation after the mid-sixties. More specifically, the paper focuses on the pathology of the organised industrial sector while also documenting the broad trends in the unorganised sector. Section 1 presents a brief review of the long-term trends in the growth of value added and productivity in the industrial sector. Section 2 analyses the major factors that contributed to the dual phenomenon of a slowdown in the growth of heavy industries and continued slow growth of consumer goods industries after the ‘mid-sixties. In the light of this analysis, an attempt is made in section 3 to draw some implications for policy if industrial growth is to be revived in the future. 1. Trends in industrial growth and productivity The first conscious articulation of industrial strategy for the economy of independent India was in the Industrial Policy Resolution of 1956. Beginning at this point and ending with 1979/80, we find that the overall growth in the economy was of the order of 4 percent per annum; industrial growth was 5$ percent per annum, while agriculture grew at a compound rate of a little less than 24 percent per annum. Industrial growth, however, was not only far short of expectations or targets set in successive Plans but it also suffered from a significant stagnation after the mid-sixties. An industrial growth rate in real value added of the order of 64 percent per annum over the period from 1956/57 to 1965/66 was followed by a growth rate of 44 percent per annum over the period from 1966/67 to 1979/80. Within manufacturing the while ‘the ‘unregistered’ sector grew at a relatively slow pace of 444 percent per annum throughout (table 1).' Before presenting more ‘facts’, it is important ‘*This paper is based on the author's recently published book ‘Industrial growth in India: ‘Stagnation since the mid-sixties’. I am deeply indebted to an anonymous referee for many helpful comments. "The registered manufacturing sector covers all organised manufacturing and processing establishments (classified as factories) which are registered under section 2m(i) and 2mi(ii) of the Indian Factories Act 1948. (0304-3878/86/S3.50 © 1986, Elsevier Science Publishers B.V. (North Holland)2 LJ. Ahluwalia, Industrial growth Table 1 Trends in net domestic product at 1970/71 prices (percent per annum).* Growth rates Relative shares 1956/57 1966/67 1956/57 —— to to Sectors 1956/57 1979/80 1965/66 1979/80 1979/80 (1) Agriculture 584 426 32 23 (2) Industry 124 116 64 44 60 Manufacturing 12 153 6.0 43 57 Registered (63) (9.6) (i) 42) (64) Unregistered 49) (57) (45) G8) (48) Electricity 03 13 138 716 122 Mining 08 10 12 25 53 (3) Construction 44 51 5.6 26 49 (4) Railways 13 16 59 34 52 (5) Other services 235 33.1 54 46 59 Total 100.00 100.00 29 38 40 *Source: National Account Statistics “The reported growth rates are based on data for the respective end-points. to draw attention to some significant features of the ‘facts’ as they are presented here. Almost all studies analysing the question of industrial stagnation in India have made use of the data on industrial production indices.’ This is mainly because not only are these data easily available on a detailed basis, but the Reserve Bank of India has also been recompiling these indices into broad use-based categories such as basic goods, capital goods, intermediate goods, consumer durable goods and consumer non-durable goods, and input-based categories such as agro-based, metal-based and chemical-based industries. The National Accounts data on value added and value of output which are based on the Annual Survey of Industries (ASI) were not available for these categories, We have attempted to fill the lacuna on the statistical side by computing indices for these broad industrial categories using the ASI data. The analysis is then conducted for (i) the manufacturing sector and its 20 groups and (ii) the wider industrial sector (including manufacturing, mining and electricity) and its use-based and input-based categories. One advantage of using the ASI data is to maintain consistency with the elements of gross domestic product for the economy as a whole. Second, industrial production indices 2The indices of industrial production are based on the production data received largely from the DGTD (Directorate General of Technical Development) and a weighting diagram from 1970/71 using the value added data from ASI. Until recently the DGTD production data were based on voluntary response from the producers.IJ. Ahluwalia, Industrial growth 3 suffer from problems of limited coverage and lack of representativeness of the items covered [1J. Ahluwalia (1985)]. These problems are avoided by the use of the ASI or National Accounts data. The choice of the mid-sixties as the dividing point in our analysis of trends is governed by a number of factors. First, earlier studies analysing the question of industrial slowdown using industrial production data had used this periodisation.? Our analysis using alternately the National Accounts/ASI data and the industrial production data highlights the differences in the answers and draws much overdue attention to the data problems.* Second, the decade from the mid-fifties to the mid-sixties was a decade of structural transformation of Indian industry, while the subsequent decade and a half reflected by contrast a remarkable degree of stability of the structure (table 2). Finally, the mid-sixties witnessed the emergence of a number of external stresses as well as a few latent strains in the process of development. The former resulted from two severe agricultural droughts in succession, a sharp decline in foreign aid, and war with Pakistan — all of which contributed to the budgetary crunch. The latent strains related to the inability of the economy to utilise the growing capacities of the heavy industries and the mounting losses of the public sector enterprises which led to a sluggish growth of public saving. For all these reasons, it is of interest to explore if Table 2 ‘Changes in the shares of major industry groups in the industrial sector: Use-based and input-based classification (1960/61 to 1979/80) (percent).* 1960/61 1965/66 1970/71 1975/76 1979/80 (A) Use-based classification Total 100.00 100.00 100.00 100.00 100.00 (1) Basic goods 2749 30.58 = 30.73 31.89 30.76 (2) Intermediate goods 2104 1909 190117481625 3) Capital goods 1072 1496 1519 1631.17.72 (4) Consumer goods 40.75 3537 350734323527 (a) Durables 250 279 371 4654.90 (b) Non-durables 3825 3257 3136 29.66 3037 (B) Input-t Sea CaN (1) Agro-based 4368 36.35 33653103 33.65 (2) Metal-based 15.76 2069 2126 «= 22.13 21.26 (3) Chemical-based 884 8911240 11.90 1240 “Source: ASI, NSS, Chandhok. "The input-based classification is not exhaustive for the industrial sector. The figures relate to the share of each group in the net value added for the industrial sector. ®Raj (1976), Mitra (1977), Srinivasan and Narayana (1977), Nayyar (1978), Chakravarty (1979). “Using the industrial production data, the slowdown in industrial growth is across the board. Using the National Accounts data on real value added and real value of output, on the other hand, the slowdown is concentrated in heavy industries only.4 LJ. Ahluwalia, Industrial growth there was a structural break around the mid-sixties in the long-term trends of industrial growth. In order to document the trends in value added and value of output across industries over time, semilogarithmic time trend equations were estimated for each of the alternative measures, ic, value added and value of output. To explore the question of deceleration in growth after the mid-sixties, dummy variables were used to allow both the intercept and the slope to be different in the second sub-period. This approach allows directly for a test of the difference in growth in the two subperiods. The organised industrial sector experienced a growth of 5} percent per annum between 1956/57 and 1979/80 (table 3). This relatively modest average Table 3 Growth rates and tests of deceleration: Net value added, organised industrial sector (1956/57 to 1979/80) (percent per annum).* Share in net value 1956/57 1956/57 1966/67 added to to to Code Industry group (1970/71) 1979/80 1965/66 1979/80 (20) Food except beverages 9.1 16 20 38° (21) Beverages 08, 73 Sa 1? (22) Tobacco 26 24 32 136 (23) Textiles 202 28 23 44 (24) Footwear, etc. 04 ns 100145 (25) Wood and cork 06 48 104 54 (26) Furniture and fixtures 0s 68 89 6 (27) Paper and paper products 26 93 123 72 (28) Printing and publishing 25 43 70 7 (29) Leather and fur products 04 46 20° 3° (30) Rubber products 25 Sa 79 42 (31) Chemical and chemical products 12.4 96 126 94 (32) Petroleum products 18 52 -29 62 (33) Non-metallic mineral products 38 48 87 30 (34) Basic metals 96 60 15.5 31 35) Metal products 32 52 120 25 (36) Non-electrical machinery 65 99 159 18 (37) Electrical machinery 61 112 131 98 (38) Transport equipment 82 52 72 46 (39) Miscellaneous 63 13 102 45 (2) Total manufacturing 100.0 53 69 55 () Mining 42 73 30 (5) Electricity and gas 98 96 89° Industry 35 mM 35 “Source: National Accounts, Chandhok. The figures in the table show the antilogarithm of the relevant regression coefficient minus 1, when the equation estimated is of the form log Y=a+bt. For subperiod growth rates we estimated the equation log Y¥=a+aD+bt+ bDt where D=O for years up to 1965/66, and 1 thereafter. All data are at 1970/71 Prices. ‘Statistically not significantly different from the growth rate of the earlier period. ‘Statistically not significantly different from zero.J, Ahluwalia, Industrial growth ‘able 4 presents the trends for an alternative classification of the industrial sector. It corroborates the dual result of a major and significant slowdown in the growth of heavy industries and the continuing slow growth of consumer non- durables and intermediate goods industries. For example, value added in capital goods grew at a rate of 154 percent per year between 1959/60 and 1965/66 but only at less than 7 percent per year in the subsequent period till 1979/80. The growth of consumer non-durables such as food manufacturing and textiles, on the other hand, has been slow (about 44 percent per year) all along. Consumer durables was the only group which experienced rapid growth (around 12 percent) in the period before and after the mid-sixties. The evidence on poor growth performance as reported above is associated with evidence on very poor productivity performance in the industrial sector. Admittedly, quantitative estimates of productivity change over time Table 4 Growth rates and tests of deceleration: Use-based and input-based classifi- cation (percent per annum).* Net value added Net value of output 1959/60 1966/67 1959/60 1966/67 to to to to 1965/66 1979/80 1965/66 1979/80 (A) Use-based classification Total 80057 88 66 (1) Basic good 110 59 me 138 (2) Intermediate goods 57 4s 94 62 (3) Capital goods S466 158 14 (4) Consumer goods 47 56° 39 62> (a) Durables us 108° 12300 119% (b) Non-durables 42 5.0" 57 37 (B) Input-based classification (1) Agro-based 4a 59 50 (2) Metal-based 65 146 72 2) (3) Chemical-based 1 3 *Source: ASI, NA, Chandhok. See footnote a of table 3. Statistically not significantly different from the growth rate of the earlier period. “Excluding electricity and gas.6 1.J. Ahluwalia, Industrial growth and over subsectors of industry are not easy to derive. Apart from the data problems there are numerous methodological problems in obtaining such estimates. The author has attempted such an exercise within the constraints (LJ. Ahluwalia (1985)). Table 5 presents estimates of total factor productivity growth based on translog production functions for individual industry groups for 1959/60 to 1979/80 as well as the two subperiods. The methodology essentially amounts to breaking up growth in a particular industry group into that due to Table 5 Total factor productivity growth estimates: Two-digit industry groups (percent per annum).* 1959/60 to 1979/80 Translog 1959/60 1966/67 Trans- Trans Trans to to log log log 1965/66 1979/80 Code Industry group i) 2 i) @ ® (20) Food, except beverages -36 -33 © -26 -33 -37 (21) Beverages 31 -26 -20 -22 -34 (22) Tobacco -36 -33 -26 24 61 (23) Textiles 10 1 16 10 10 (24) Footwear, etc. 07 10 13 09 07 (25) Wood and cork 300-24 0-22 -19 -10 (26) Furniture and fixtures 2.1 23 28 os 28 (27) Paper and paper products on 0s 12 08 (28) Printing and publishing 0.5 07 1 23 (29) Leather and fur products -24 19-16 -14 (30) Rubber products “55-50-46 -109 (31) Chemicals and chemical products “13-07-02 —04 (32) Petroleum products 56-50. 43 —205 (33) Non-metallic mineral products -12 09-03 03 -18 (34) Basic metals -09 = -06 0 24 -22 (35) Metal products 2200-20002 «14 -24 -22 (36) Non-electrical machinery —1.1 -08 = -04 -37 01 (37) Electrical machinery —0.2 on 03 -26 08 (38) Transport equipment 0.1 04 07 09 -02 (39) Miscellaneous 49 -45 -41 -127 -15 Manufacturing total 04 = -0.2 03 0. -06 “Source: NA, ASI, NSS, Chandhok. Columns (1), (4) and (5) are based on a capital stock series constructed by using an initial capital stock at replacement cost at 1970/71 prices for 1960/61 and perpetual inventory accumulation method, deflating the investment figures by the WPI of machinery and equipment. Column (2) is based on a similar capital stock series, except that the deflator for investment is a combination of (i) domestic and imported prices of machinery and equipment, and (ii) price of construction. Finally, column (3) is based on a capital stock which is derived as in (2) but it also assumes that 2 percent of preceding year's capital stock is written off every year.LJ. Ahluwalia, Industrial growth 7 increases in capital and labour and that in the efficiency in factor use. The results show that the contribution of efficiency factor or ‘total factor productivity growth’ is negligible or negative in most industry groups. Using a number of alternative assumptions in developing measures of the capital stock, our estimates of the growth of total factor productivity for manufacturing over the entire period from 1959/60 to 1979/80 range from a decline of 0.6 percent per annum to a small increase of 0.3 percent per annum.* These results are in sharp contrast to the experience of other developing economies. A study by Nishimizu and Robinson (1983) based on gross production function shows that total factor productivity in manufactur- ing increased at the rate of 10.6, 3.8, 1.4 and 5.8 per cent per annum in Korea, Turkey, Yugoslavia and Japan, respectively. The evidence on declining total factor productivity, however, is not combined with evidence of significant and across the board deterioration in the situation after the mid-sixties. While the evidence for the manufacturing sector as a whole suggests declines in TFPG at the rates of 0.1 percent per annum during the period before 1965/66 and 0.6 percent per annum in the subsequent period, this is not true of all constituent industry groups, ¢.g., machinery industries. On the whole, however, it appears that cumulative inefficiency through the years may.have had a stifling effect on the growth of industry. 2. Factors underlying industrial stagnation after the mid-sixties In our search for the factors underlying industrial stagnation in India, we explored the interactions of the industrial sector with other sectors and with the macro-economic environment. A number of plausible explanations were subjected to empirical examination and quite a few were found wanting. It is useful to first dispose of certain explanations of industrial stagnation which have been popularly advanced but fail to stand the test of empirical scrutiny. These relate As for the first, the available evidence on consumption distributions from National Sample Surveys and Household surveys of National Council of Applied Economic Research does not suggest any worsening of the distri- bution of incomes over time [M.S. Ahluwalia (1985)]. Even if we believe this to be not true on account of a systematic under-reporting of incomes at the upper end of the distribution, and assume that the distribution of incomes deteriorated after the mid-sixties, we would expect such deterioration to affect the growth of consumer goods adversely. In fact the slowdown in Similar findings are reported by Goldar (1981) and Brahmananda (1982)8g LJ. Ahluwalia, Industrial growth growth was concentrated in heavy industries, while consumer goods suffered slow growth throughout. The second popular explanation relates the slowdown in industrial growth to the slowdown in import substitution after the mid-sixties. Quite apart from the logical flaw in this line of reasoning, the evidence on such association is mixed. For example, capital goods did not experience a slowdown in import substitution and yet suffered a marked slowdown in growth; for consumer durables, on the other hand, continuing import substitution went hand in hand with continuing rapid growth [1J. Ahluwalia (1985)]. The absence of such association is not surprising since import substitution is only one element of demand facing an industry, and growth must surely depend on the overall conditions of demand and supply for the industry. If industries which received protection from foreign competition failed subsequently to export in the face of growing foreign demand [Wolf (1982)], the explanation must lie in the inefficiency with which the process of import substitution was carried out. Policies towards protecting ‘infant industries’ from foreign competition can by no means be described “as undesirable for a large developing economy such as India. In practice, however, not only ‘infants’ but also ‘elderly incompetents’ were protected. The process of granting import substitution was also very haphazard. As this was combined with a domestic industrial policy framework which also discouraged competition the result was the development of a high cost, low quality industrial structure with its obvious implications for growth. A third explanation of industrial stagnation emphasises the importance of the limited availability of wage goods in constraining the level of employ- ment and therefore output in the industrial sector. The evidence, however, suggests that neither the output of foodgrains nor the marketed surplus of foodgrains slowed down its growth in the period after the mid sixties. Even allowing for the decline in the import of foodgrains after the mid-sixties, there was no trend increase or decrease in the per capita net availability of foodgrains over the entire period. The upward pressure on the product wage that was exerted by a rising trend in the relative price of foodgrains in terms of manufactures in the period from 1959/60 to 1967/68 was also reveresed in the later period as this relative price experienced a distinct downward trend. Finally, the results of the growth analysis provide further support towards a rejection of the wage goods hypothesis of industrial deceleration. First, the slowdown of growth was concentrated in the relatively more capital intensive heavy industries. Moreover, since the overall wage-goods situation was no worse after the mid-sixties, if indeed the consumer goods growth in the earlier period suffered from a wage goods constraint, there should have been a pick-up in their growth in response to the release of wage goods from the heavy industries, assuming no other change in the factors affecting consumer goods. This did not happen.LJ. Ahluwalia, Industrial growth The factors underlying the phenomenon of stagnation with respect to industrial growth and productivity can broadly be classified into four heads, ie, 2.1. Slowdown of public investment A number of strains appeared on the economic system around the mid- sixties. Two severe agricultural droughts in succession with all their adverse effects on the economy were accompanied by a sharp decline in foreign aid. This, together with the failure of public saving to keep pace with growing investment demands of the public sector and a relativiey conservative attitude towards deficit financing resulted in a marked slowdown in public investment. In contrast with the growth of over 10 percent per annum in real public investment in the decade ending 1965/66, the growth in the following decade decelerated to 44 percent per annum. Far from picking up the slack, private investment also slowed down somewhat after the mid-sixties. The slowdown in private investment was more marked in fixed capital for- mation than in overall capital formation. 2.1.1. Effect on demand As public investment slowed down, this led to a direct set-back in the demand for certain heavy goods industries. The most often quoted example of this is the recession in the railway wagon producing industries. There were other industries facing demand recession where an offset could have been provided by an expansion in private investment. This failed to occur. An argument for expansion of public investment is often made in terms of the need to avoid a ‘disproportionality crisis’. It is argued that by the mid- sixties substantial capacities had been set up in the capital goods industries in the public sector. The slowdown in public investment after that point brought about a ‘disproportionality crisis’ in that the demand for capital goods did not rise at the rates required by the plans and there was a marked decline in capacity utilisation for capital goods industries. A close review of the evidence, however, suggests that the demand side impact of the slowdown in public investment was limited and unavoidable. First of all, the overall rates of capital formation and saving in the economy have been rising to attain respectable levels by any standards.° The problem “Out of 31 low-income developing economies for which data are presented in the World Bank's World Development Report for 1979-1982, there were only two economies, China and Indonesia, for which the rate of gross domestic saving exceeded that for India.10 IJ. Ahluwalia, Industrial growth seems to be more with the failure of public saving to grow at required rates. Boosting public investment in specific sectors may have secured higher utilisation of capacities in the short run, but this may not have been the best use of resources from a long run point of view. This is because capacities which were set up in the public sector were being increasingly underutilised. Capital goods industries in particular experienced a sharp decline in capacity utilisation after the mid-sixties. This reflected the incompatibility of the structure of the capacities with the evolving composition of demand resulting from the actual processes of income generation. Apart from the questionability of expanding public investment for demand considerations, there is a legitimate question about the feasibility of such an effort. Besides the resources constraint discussed earlier, the net impact of an expansion in public investment on demand would depend on the extent of the crowding out of private investment (through competing for the limited funds for investment available to the economy) as opposed to the positive stimulus for private investment arising from the ‘leading sector’ type linkages. Recent empirical works by Sundararajan and Thakur (1980) and Krish- namurti (1985) show that the effect of public investment on private invest- ment is clearly adverse in the short run. Rangarajan (1982b), on the other hand, finds that ‘in the case of private investment the positive (stimulation) and negative (crowding out) effects almost cancel out each other out, whereas in the case of private corporate investment the positive effect seems to dominate the negative’. It would seem therefore that the quantitative dimensions of the crowding out phenomenon need to be studied further in order to determine the potential impact of any expansion in public investment. 2.1.2. Effect on infrastructure The supply side effect of the slowdown in public investment was not only more widespread than the demand effect but was actually avoidable. The problem in this respect resulted from the manner in which cuts in public investment were distributed across sectors. The brunt of the adjustment was borne by the infrastructure sectors and this led to certain basic supply bottlenecks in the economy. As table 6 shows, the share of power, railways and coal in total public investment declined from 36 percent in the first half of the sixties to 28 percent in the first half of the seventies. The heaviest burden of the slowdown in public investment was borne by railways (table 7). Gross investments in railways experienced a significant and sustained decline throughout the latter half of the sixties. While the declining trend was arrested in the seventies, the recovery was still somewhat erratic. The situation was similar for power although the decline in invest- ment was more moderate for this sector. Even the moderate slowdown, however, is significant when viewed in the context of a major increase in theTable 6 ‘Composition of public investment (net domestic capital formation in public sector).* Growth by sector Share in total (percent) (percent per annum) 1960/61 1966/67 1976/77 1960/61 1965/66 1975/76 to to to to to to 1965/66 1975/76 1980/81 1965/66 1975/76 1980/81 Agriculture” 124 140167 19 30 120 Manufacturing 186 © 189-201 66 17 82 Infrastructure 361 288 321 167 21 83 Railways (166) (7.1) (46) (25) (-77)— A) Electricity, gas and water (164) (189) (21.6) (23.7) 42) 6.6) Mining GB) 28) 38) (24 = (158) (6.4) Public administration and defence 23S 201 158 06 = -01 116 Other 94 182153 18.1 138-165 Total 100.0 1000 1000 92 39 36 “Source: National Accounts. “Including forestry and fishing. Table 7 ‘Trends in infrastructure investment.* 1960/61 1961/62 1962/63 1963/64 1964/65 1965/66 1966/67 1967/68 1968/69 1969/70 1970/71 1971/72 1972/73 1973/74 1974/75 1975/76 1976/77 1977/78 1978/79 1979/80 1980/81 Share in total investment (percent) Infra- Rail Elec- Min- structure ways tricity ing 132 68 4816 190 90 8416 29 105 106 19 B4 10 100 24 213. 99-8628 181 ale 92) 12. 3600 «46718 4300 «450 BLT 38 4183 La 2702771920 1330035) 8613 135 age se 19) B7 4300-7716 10. 27 5519 17-026 65S 2-26 93.43 1545 208 0te as tage 22 1980) 32-20-8526 ISS 269534 155288642 Growth of investment (percent per annum) Infra- Rail structure ways 340 23.2 318356 100 135 09 9-13 1-137 -143 310 38 9-93 69 ~152 90 ~212 100 328 65 19 =33 8S 02-115 42-122 316 25 14-165 (oo 172) 05 147 60 198 BS 269 Elec. Min- tricity ing 624-29 416 309 35247 -53 318 176-362 -1S 761 24-136 13-216 134 737 133 -338 —31 554 —54 ~182 62 S81 85 157 416 654 65 257 133-29 65-258 06 © 120 26 33 “Source: National Accounts. Data relate to gross domestic capital formation at 1970/71 prices.12 IJ. Ahluwalia, Industrial growth share of electricity in total energy consumption (including coal, oil and electricity) from 17 percent in 1960/61 to 30 percent in 1978/79. 2.2, Poor management of infrastructure The underinvestment in the infrastructure sectors was associated with evidence of growing inefficiency in these sectors. To some extent the problems arose because of the neglect of replacement associated with declines in investment as in the case of railways. However, more generally, the inefficiencies covered the entire spectrum from project formulation to imple- mentation and finally to operational stages. In railways, the efficiency in wagon utilisation showed a declining trend from 1960/61 to 1973/74. This was true not only of wagon turn around time (trends in this indicator are partly due to increasing average leads of railways), but also of net tonne kilometres moved per wagon day and net tonne kilometres moved per tonne of wagon capacity. The subsequent improvement in efficiency was shortlived but there has been some improve- ment once again in the early eighties. A similar picture emerges with respect to engine utilisation and engine speeds. Apart from the general operational inefficiency, certain specific aspects of inefficiency of railway operations have created significant infrastructural constraints. Coal transportation is an example of this. The increased detention of wagons and lack of co-ordination between the railways and coal producers resulted in an actual decline in coal traffic by railways between 1976/77 and 1979/80. In the power sector, the evidence on the poor operational efficiency of the thermal power plants is overwhelming. Capacity utilisation of thermal plants (all-India average) was at its peak of 56 percent (a little below the recommended norm of 58 percent) in 1976/77 and declined steadily until 1980/81 when it reached a level of 44.6 percent. While the poor and variable quality of coal and transportation bottlenecks for coal were factors adversely influencing the operational efficiency of thermal plants, by far the most important factor was the underlying problem of the poor management of the State Electricity Boards. A recent report of an official committee on power [Rajadhyaksha (1980)] spells out some of these management problems of State Electricity Boards which in the committee’s view stem from political interference in management and in hiring practices. The environment is not conducive either to efficient functioning or dynamic planning. The problems of management in coal have not become any easier with nationalisation in the early seventies. The politicisation of the unionised labour has impaired the capacity of the managers to improve operational efficiency and production not to speak of the problems of declining quality resulting partly from the increasing investments in open-pit mines. The cumulative impact of underinvestment and inefficiency in the three1J. Ahluwalia, Industrial growth 3B highly interdependent subsectors of infrastructure led to a marked deteriora- tion in the situation with respect to railway freight traffic, coal transpor- tation by the railways, and electricity generation [Ahluwalia (1984)]. To take one example, a sustained average growth in electricity generation of 134 percent per annum in the sixties can be sharply contrasted with the relatively less rapid and fluctuating pattern of. growth in the seventies averaging 7 percent per annum, The infrastructure bottlenecks had an adverse effect not only on the industrial sector but on the economy as a whole. As the industrial system became more diversified and more complex, the importance of the intrasectoral and intersectoral demand-supply balances increased and so did the cost of mismanagement in planning. 2.3. Slow growth of agricultural incomes The importance of agricultural growth for the growth of industry can hardly be exaggerated for the Indian economy with its relatively high share of agriculture and the relatively closed nature of the economy with respect to foreign trade. Examining the linkages between agriculture and industry within the framework of a quantitative econometric model, Rangarajan (1982a) has shown that a one percent growth in agricultural output increases industrial production by about 0.5 percent. Using a more heuristic approach, IJ. Ahluwalia (1985) examines the historical evidence on the various links between agriculture and industry. The evidence suggests that while the growth of wage goods was not a retarding factor on the growth of the industrial sector and the slowdown in the growth of commercial crops may have held back the growth of agro-based industries only to a limited extent, the slow growth of agricultural incomes could have meant slow generation of demand for consumer goods. In particular there are certain industrial consumer goods, i, clothing, footwear, sugar and edible oils (accounting for about a fourth of the value added in consumer goods) for which rural consumption is over three times the urban consumption.” The growth of agricultural incomes was relatively slow, being of the order of 2.3 percent per annum between 1956/57 and 1979/80. When combined with the growth of rural population of 1.7 percent per annum, this yielded a negligible growth of per capita agricultural income of less than 4 percent per annum. It is worth noting in this context that tremendous strides were made in particular regions and particular crops over this period, but these were not sufficient in making a dent on the problem of slow growth of overall agricultural incomes in the economy. The slow growth of agriculture implied slow expansion of an important component of demand for consumer goods. In order to answer the question of whether the growth of industrial 7NSSO Tables on consumer expenditure, 28th Round, October 1973-June 1974.14 IJ. Ahluwalia, Industrial growth consumer goods could have been faster even with the slow growth of agricultural incomes, we turn to the final factor, ie. the industrial policy framework. 24. Industrial policy framework Beginning with the Second Five Year Plan in 1956/57, the industrial planning strategy entailed an ambitious public investment programme which was directed at developing heavy industries in the economy. The process was facilitated by policies of import substitution and was based on an explicit but perhaps questionable pessimism with respect to export prospects. Govern- ment was to provide infrastructure and a leadership role for industrial growth, while the private sector was expected to play a complementary role in the ‘mixed’ economy within the broad framework of government regulation. The system was operated in a manner calculated to influence the pattern of investment down to product level, the choice of technology with its implications for scale, expansion, location, direct import content as well as the terms of foreign collaboration in finance and know-how. The principal instruments of policy used were an elaborate industrial licensing framework under the Industrial (Development and Regulation) Act of 1951 and a protective foreign trade regime. To ensure against concentration of economic power, dominant undertakings and large houses were required to obtain clearances from the MRTP (Monopoly and Restrictive Trade Practices) Commission. There was a seperate policy of reservation for certain lines of production by small scale producers. Clearance from FERA (Foreign Exchange Regulation Act) was designed to control foreign investment in India. The operation of the system has been characterised by undue conservatism and administrative delays. Whatever the original justification for the system of controls through the industrial policy framework, it cannot be denied that by the mid-sixties the industrial sector had undergone a significant diversifi- cation and the ‘initial conditions’ had altered. Far from recognising the growing complexity of the industrial system, there was an increasing ten- dency to rely upon various ad-hoc criteria of controls. Unnecessary delays were endemic.* The management machinery of the government had a built-in bias towards ‘regulation’ rather than ‘promotion’ of private industry which was assigned the task of providing consumer goods for the economy.? In view of the constraints on the growth of public investment referred to earlier, the adherence to an inward-oriented development strategy should have made *Hazari (1967), Bhagwati and Desai (1970). *Sha (1980).IJ. Ahluwalia, Industrial growth 15 it all the more necessary to create a policy environment conducive to the growth of consumer goods industries. In fact this did not happen. One of the most serious consequences of the industrial licensing system has been its contribution towards creating barriers to entry into individual industries. In fact the system has been grossly manipulated to ensure that potential entrants are kept away. While the Monopoly and Restrictive Trade Practices (MRTP) Act of 1969 has been used to accentuate the already slow and cumbersome functioning of the administrative system by subjecting the MRTP cases to stringent and long enquiries, the instruments that would guarantee the reduction of monopoly power, ie., the threat of free entry by new firms and a measure of foreign competition, were not tried. Additional problems with respect to efficiency and growth arose because of the policy objectives to promote small scale industries and regional dispersal of growth. These objectives stood in the way of choosing the optimum scale of production. For example, the policy of reservation of certain industries for small scale sector amounts to providing total protection from competition for small units from elsewhere within the economy and conflicts with considerations of economies of scale in production, marketing and quality control. It appears that the resulting sacrifice in efficiency did not even achieve the alternative policy objective, ie, more employment through the promotion of small scale units. Empirical investigators have found a lack of positive association between size and capital intensity and affirmation of a positive association between size and output-capital ratio.'° Attempts at regional dispersal of industrialisation also meant that there was a tendency to license a number of smaller plants in different regions/states rather than ‘one large plant which would exploit the economies of scale. Government's soft policies towards sick enterprises further had the effect of encouraging inefficiency rather than penalising it. The problems of inefficient allocation of resources were compounded by a major and widening technological gap in India relative to the rest of the world. The latter was the result of restrictive policy towards import of tech- nology and inadequate recognition of the need for technological innovation within the economy. The growing complexity of the industrial system over time required a constant review and suitable reorientation of the industrial policy framework. In fact the system became more and more regulatory and less and less develop- mental, thus belying the original promise of ‘channelling’ growth in desired directions. While it was possible to check certain kinds of ‘undesirable’ growth within the administrative system, there was no equivalent provision or generation of incentives to channel growth in desirable types of consumer goods. As the private sector tried to circumvent the system of controls, the *°Sandesara (1969), Sutcliffe (1971), ICSSR (1975).16 1J. Ahluwalia, Industrial growth result was to shift their energies away from more productive pursuits and perhaps even push industrial activity into the parallel sector. Apart from the irrationality and the inconsistency of the various elements which together constituted industrial policy, the piecemeal approach generated a sense of impermanence and uncertainty which was detrimental to the growth of private industry. 3. Policy implications The analysis of trends in industrial growth in the Indian economy from 1956/57 to 1979/80 has revealed two significant findings: (i) that there has been a major and significant deceleration in the growth of heavy industries in the period after the mid-sixties, and (ii) that the growth of light consumer goods industries has been slow all along both in absolute terms and relative to that of the heavy industries. These findings are associated with evidence of negative total factor productivity growth which implies declining efficiency in factor use over time. ‘Our diagnosis of these trends suggests a strong need, on the one hand, for the development of infrastructure and an overhaul of the industrial policy framework to develop cost and quality consciousness in industry and, on the other hand, for policies to generate strong expansion of domestic demand through continued efforts to raise the rate of growth of agriculture. The major setback to the growth of the heavy goods industries after the mid-sixties is apparently associated with a significant slowdown in public investment and some slowdown in import substitution. However, it cannot be argued that the solution lay in keeping up the rate of growth of public investment. Apart from the feasibility of such an effort, we have argued that its desirability is also questionable. While rejecting the case for an overall expansion in public investment, the study strongly suggests the need for expanding public investment in infra- structure. Not only has this sector been neglected through a declining share in public investment, but it has also suffered from inefficiency in management. The combined effect has been disastrous for the economy. A careful revitalisa- tion of the infrastructure sector is an essential prerequisite for industrial as well as agricultural growth in the economy. It is heartening to note certain significant breaks that have been made in this respect in the Sixth Plan. Even ignoring the success story of petroleum, there has been a significant pick up in investments in railways and electricity and the declining trends with respect to efficiency also seem to have been arrested. However, the performance of the State Electricity Boards leaves a lot to be desired still, and handling the coal problems requires strong political will. The rationalisation of the railways is also a long term process which calls for sustained attention.1J. Ahluwalia, Industrial growth ry The overall industrial policy with respect to consumer goods industries has been dominantly influenced by the objective of bringing about a socialist pattern of society. However, a multitude of controls on capacity and production on the types of goods which the rich demand have not been combined with a suitable incentive system designed to attract investment in the ‘desired’ consumer goods sectors. Until recently, reforms in the industrial policy framework have been hesitant and far short of what is required. The need for an overall review of the industrial policy framework has been recognised for some time. A high- powered committee under the chairmanship of M. Narisimham has reported recently after examining the role of physical controls and the feasibility and desirability of replacing these by financial controls. A number of major moves towards liberalisation of the domestic industrial policy regime have been made in recent months. It is worth stressing that in evolving a New Industrial Policy primary emphasis must be placed on generating an economic environment which encourages competition and facilitates the delivery of growth in ‘desirable’ areas through the provision of suitable incentives. ‘As regards the foreign trade regime, we have argued that the slowing down of the process of import substitution is inevitable beyond a point. The significant feature of the Indian experience in this respect has been that the import substituting industries were not able to exploit foreign demand opportunities even as they came of age. This was because the foreign trade policies together with the domestic industrial policies led to the evolution of a relatively high cost industrial structure which tended to render exports uncompetitive. Following the recommendations of the Alexander Committee on Import-Export Procedures, certain reforms in trade policy have been introduced. It is important to ensure that protection from foreign com- petition must not be given haphazardly and must most certainly not be permanent. The release of supply side constraints needs to be combined with measures to ensure expansion of demand in the economy. Agriculture has a major role to play in this respect. The growth gains in the agricultural sector in the last two decades or so have firstly not been broad-based and secondly been dissipated owing to rapid growth of population. It is important to replicate the successful experience in agriculture to more crops and wider areas, and combine these with policies to check the rapid growth of population. As the constraints stemming from the agricultural and the infrastructural sector are released and the policy framework is reoriented to encourage cost consciousness, competition and efficiency, the tremendous potential for growth offered by the diversified industrial base can be exploited. When growth objective needs to be sacrificed for some other ‘more important’ objective, e.g., promotion of employment, regional dispersal of growth, etc., a18 LJ. Ahluwalia, Industrial growth careful cost calculation must be made so as to achieve the ‘more important” objective with minimum sacrifice of efficiency and growth. References Ahluwalia, 1, 1984, Industrial growth and stagnation: Infrastructural constraints, Paper submitted at the Silver Jubilee Seminar, Institute of Economic Growth, Delhi, April. Ahluwalia, TJ, 1985, Industrial growth in India: Stagnation since the mid-sixties (Oxford University Press, New Delhi). 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Jha, LK, 1980, Economic strategy for the cighties (Allied Publishers, Delhi). Krishnamurti, K., 1985, Inflation and growth: A model for India, in: K. Krishnamurti and V. Pandit, eds, Macroeconometric modelling of the Indian economy (Hindustan Publishing Co, Delhi). Mitra, A. 1977, Terms of trade and class relations (Frank Cass, London). Nayar, D., 1978, Industrial development in India: Some reflections on growth and stagnation, Economic and Political Weekly, Special number, Aug. Nishimizu, M. and S. Robinson, 1983, Trade policies and productivity change in semi- industrialized countries (Development Research Department, Economics and Research Staff, World Bank, Washington, DC). Patnaik, P. and S.K. Rao, 1977, 1975-76: Beginning of the end of stagnation? Social Scientist, Jan-Feb. Raj, K.N, 1976, Growth and stagnation in In Political Weekly, 26 Nov. 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