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Industrial Growth in India During Pre and Post Reform Periods

Article · December 2007

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International Journal of Humanities and Social Science’ (Chemchemi Vol 4 No 2) Kenya University, Kenya.

INDUSTRIAL GROWTH IN INDIA DURING PRE AND POST REFORM

PERIODS

Dr.Tamma Koti Reddy,

Faculty Member,
ICFAI Business School,Dohanthanpally(vi)Shankarpally(mo)
Ranga Reddy(Dist)Andhra Pradesh
Email: kotireddy_tamma@yahoo.co.in

and
Krishna Reddy Chittedi
Research Scholar, University of Hyderabad,
Hyderabad, Andhra Pradesh, India Email: krishnareddy5111@gmail.com

Electronic copy available at: http://ssrn.com/abstract=1557509

International Journal of Humanities and Social Science’ (Chemchemi Vol 4 No 2) Kenya University, Kenya.

INDUSTRIAL GROWTH IN INDIA DURING PRE&POST REFORM PERIODS

ABSTRACT
The annual average growth of industry during the Tenth Plan Period (2002-07) is 8.7 per
cent as against the targeted growth rate of 10 per cent. To achieve 10 per cent annual
industrial growth during the Eleventh Plan (2007-2012) the infrastructural impediments
have to be removed. The entire Post-reform period has been marked by considerable
yearly fluctuations. The author says deceleration in exports, low growth of rural incomes
as a result of deceleration in agricultural sector growth, slow down in industrial
investment and infrastructural facilities are the factors that contributed low industrial
growth rate since 1991. The author suggests that care should be taken to reduce its unit
cost of exports by improved infrastructure, better quality of products; better marketing,
policy rationalization and tariff reduction are the measures need to be taken to achieve
high industrial growth. Disinvestments and industrial restructuring programme, capital
market rationalization, protection against the displacement by imports and a faster pace
of expansion of the home market are the measures necessary to boost the industrial
sector of the Indian economy.. The present flow of credit from capital markets to
industrial sector has not been sufficient to support higher growth. Thus on the whole
industrial growth rate in the post-reform period is lower than that in the pre-reform
period.

INTRODUCTION

The Industrial policy initiatives undertaken by the government since July 1991 have been
designed to build on the past industrial achievements and to accelerate the process of
making Indian industry internationally competitive. It recognizes the strength and
maturity of the industry and attempts to provide the competitive stimulus for higher
growth. The thrust of these initiatives has been to increase the domestic and external
competition through extensive application of market mechanisms and facilitating forging
of dynamic relationships with foreign investors and suppliers of technology. The share of
this sector in the gross domestic product has increased from13.3 per cent in 1950-51 to
20.7 per cent in 1966-67,24.4 per cent in 2001-02 and 26 per cent in 2004-05. A
significant improvement in Industrial production since 1993 have enabled the rate of
growth of the GDP rise from 0.8 per cent in1991-92 to 5.1 per cent in 1992-93,5 per cent
in 1993-94, 6.3 per cent in 1994-95, 7 per cent in 1995-96, 9.2 per cent in2005-2006 and
9.4 per cent in2006-2007. The industrial production recovered gradually from an
alarming low growth of 0.8 per cent in1991-92 to its peak of 13 percent in 1995-96 and
again fell tom 8.2 per cent in 2005-06.. The rate of growth of capital goods industries fell
drastically from 9.4 per cent per annum during 1980s to only 5.4 per cent during
1990s.Deceleration in exports, reduction in consumer demand due to growing income
inequalities and low growth of rural incomes, slow down in Industrial Investment and
infrastructural bottlenecks contributed most to Industrial slow down. Since 1996-97 there
has been a significant decline in industrial investment and it led to a decline in the rate of
Industrial growth. The supply of finances to the Industrial sector from different sources

Electronic copy available at: http://ssrn.com/abstract=1557509

International Journal of Humanities and Social Science’ (Chemchemi Vol 4 No 2) Kenya University, Kenya.

has not been sufficient to support higher growth. The Tenth – five year plan document
clearly states The industrial development strategy is being re-oriented towards enabling
our vibrant private sector to reach its full entrepreneurial potential, to contribute towards
production, employment and income generation. Unless the economic environment is
conducive to high levels of private sector participation, there can be little progress in
accelerating Industrial development and growth”. On the whole Industrial growth rate in
the post-reform decade has been lower than that in the pre-reform period.

Table 1.1 Gross Domestic Product by Industry of origin

Country Per capita Value added as percentage of GDP

Income 2004 Agriculture Industry Services
2004 2004 2004
Australia 3 26 71
U.K. 1 27 72
Germany 1 29 69
Japan 1 30 68
China 15 51 35
Philippines 14 32 54
India 22 26 52
Kenya 16 19 65
Sri Lanka 17 25 58
Ethiopia 46 10 44
Pakistan 23 24 54
Eritrea 15 24 61

Source: World Bank, 2006 “World Development Report”, P. 296&297

Table 1.1 shows percentages of Gross Domestic Product (GDP) by industry of origin for
some selected countries representing both developed and developing economies for
2004.The industrial sector accounted for 20.7 per cent of GDP in 1966-67. Since then, the
industrial sector has not grown much in relative terms and its percentage contribution to
GDP stood at 26 per cent in 2004.

II

Table 2.1 Annual growth rate of industrial production in major sectors of industry
(Based on the index of industrial production) Base: 1993-94=100
(in per cent)
Period Mining and Manufacturing Electricity Overall
Quarrying
Weights 10.47 79.36 10.17 100.00
1995-96 9.7 14.1 8.1 13.0

Electronic copy available at: http://ssrn.com/abstract=1557509

International Journal of Humanities and Social Science’ (Chemchemi Vol 4 No 2) Kenya University, Kenya.

1996-97 -1.9 7.3 4.0 6.1

1997-98 6.9 6.7 6.6 6.7
1998-99 -0.8 4.4 6.5 4.1
1999-00 1.0 7.1 7.3 6.7
2000-01 2.8 5.3 4.0 5.0
2001-02 1.2 2.9 3.1 2.7
2002-03 5.8 6.0 3.2 5.7
2003-04 5.2 7.4 5.1 7.0
2004-05 4.4 9.2 5.2 8.4
2005-06 1.0 9.1 5.2 8.2
2006-07* 3.8 11.5 7.3 10.6

*April-November

Source: Central Statistical Organization

It is evident from the table 2.1 that the trends in growth rates of overall industrial
production and its sectoral components viz., Mining, Manufacturing and Electricity
generation are given in table 1.1. From a peak level of 13 per cent in 1995-96 the
industrial growth declined to 4.1 per cent in 1998-99. After improving marginally to 6.7
per cent in 1999-00 it fell to 2.7 per cent in 2001-02. The average rate of growth of
industrial production during Ninth Plan (1997-98 to 2001-02) comes out to only 5 per
cent which is an unsatisfactory performance. The industrial growth rate during the Tenth
– Five year plan(2002-03 to 2006-07) was satisfactory. The rate of industrial growth
registered a significant increase from 5.7 per cent in 2002-03 to 8.2 per cent in 2005-06.

Table 2.2 Industrial Investment Intentions in terms of IEMs,LOIs, and DILs.

Industrial Entrepreneur’s Letters of intent( LOI)/Direct

Memorandum(IEMS) Industrial Licenses(DILs)
Year Number Proposed Proposed Number Proposed Proposed
Investment Employment Investment Employm
(In Rs, (000’s) (Rs. Crores) ent(ooo’s
Crores )
1991 3084 76310 769 195 2071 34

1992 4860 115872 923 620 13994 97

1993 4456 63976 703 528 12845 100
1994 4664 88771 829 546 17937 130
1995 6502 125509 1114 355 14265 91

1996 4825 73278 696 522 29932 181

1997 3873 52379 522 321 9528 96
1998 2889 57389 521 145 3274 27
1999 2948 128892 477 132 827 17
2000 3058 72332 411 203 1042 31
International Journal of Humanities and Social Science’ (Chemchemi Vol 4 No 2) Kenya University, Kenya.

2001 2981 91234 809 117 1318 14

2002 3172 91291 380 89 649 8
2003 3875 118612 833 116 1395 14
2004 5118 267069 856 100 5265 21
2005 6203 353956 1271 135 2990 23

Source: Economic Survey, 2005-06, p.137.

Table2.3 Sectors attracting highest Foreign Direct Investment Inflows (Amount in

Rupees)

Sectors Cumulative Inflows (from Share of FDI Inflows (In

Aug1991 to Sep 2006) Per cent)
1. Electrical Equipments 27311 17.54

2.Service Sector 19759 12.69

3.Telecommunications 16172 10.39
4. Transportation Industry 14502 9.31
5.Fuels 11608 7.45
6. Chemicals 9019 5.79
7.Food Processing 4852 3.12
Industries
8.Drugs and 4531 2.91
Pharmaceuticals
9.Metallurgical Industries 3328 2.14
10.Cement and Gypsum 3327 2.14
Products

Source: FDI Data Cell, Ministry of Commerce.

It is evident from the table 2.3 that the cumulative FDI Inflows since August 1991 up to
September 2006 were Rs. 1, 81,566 Crore (US$43.29 billion). Electrical equipment
which attracted the biggest chunk of FDI inflows worth 27311 crores. This is 17.54 per
cent of total inflows. The service sector grabbed the second highest share of FDI at 12.69
per cent or 19759 crores. The telecom sector saw inflows of 16172 crores, a 10.39 per
cent share of inflows. Sectors which receive more FDI are the ones which are technology
intensive.
III

Table 3.1

Rate of Growth of Industrial Production From 1951 to 1991 (per cent per annum)

Use Based or 1951 1955 1960 1965 1974 1979 1981 1985 1990
International Journal of Humanities and Social Science’ (Chemchemi Vol 4 No 2) Kenya University, Kenya.

Functional To To To To To To To To To
Classification 1955 1960 1965 1976 1979 1980 1985 1990 1991

1.Basic 4.7 12.1 10.4 6.5 8.4 -0.5 8.7 7.4 3.8
Goods
2.Capital 9.8 13.1 19.6 2.6 5.7 -2,3 6.2 14.8 17.4
Goods
3.Intermediate 7.8 6.3 6.9 3.0 4.3 1.9 6.0 6.4 6.1
Goods
4.Consumer 4.8 4.4 4.9 3.4 5.5 -4.4 5.1 7.3 10.4
Goods
(a)Durables - - - 6.2 6.8 5.6 14.3 11.6 14.8
(b)Non- - - - 2.8 5.4 -6.1 3.6 6.4 9.4
durables
General Index 5.7 7.2 9.0 4.1 6.1 -1.6 6.4 8.5 8.3

Source: (1) From 1951 to 1980, Hand Book of Statistics, 1992, GOI, Table 50 P.150 and
Table 54 P.155.
(2) From 1981 to 1991, Hand Book of Industrial Statistics, 1992, Table 50 P.50
and Table 54 P.155.

It is evident from the table 3.1 that the compound (annual) growth rate of industrial
production increases from 5.7 per cent in 1951-55 to 7.2 per cent in 1955-60 and further
to 9 per cent during 1960-65. The period 1965 to 1976 was marked by a sharp decline in
industrial growth. The industrial growth during 1965 to 1976 was registered to a meager
3.7 per cent per annum. The rate of growth of 6.1 per cent per annum during 1974-79
owes considerably to the 10.6 per cent increase recorded in 1976-77. 1979-80 recorded a
negative rate of growth of industrial production of-1.6 per cent over the preceding year.
The rate of industrial growth was 6.4 percent per annum during1981-85, 8.5 per cent per
annum during 1985-90 and 8.3 per cent in 1990-91. The period 1980-81 to 1985-86 was
marked by significant acceleration in the growth of value added in the manufacturing
sector and all its use-based sectors. The factors contributed for the better productivity
performance of the industrial sector in 1980s was liberalization of industrial and trade
policies by the government, increased prosperity of large farmer sin certain regions of the
country helped increasing additional demand for industrial products, significant increase
in service sector and significant increase in infrastructure investment.
The industrial growth in 1980swassubstantially higher than the industrial growth in the
earlier periods.

The most important group of industries in terms of long run industrial development in
the group of capital goods industries. The group registered a consistent increase from 9.8
per cent during 1951-56 to 13.1 per cent during 1955-60 and further to 19.6 per cent in
1960-65. During the period 1965-76 the capital goods sector grew at an annual rate of
only 2.6 per cent and it raises upto 5.7 per cent in 1974-79, 6.2 per cent in1981-85, 14.8
per cent in 1985-90 and further to 17.4 per cent in 1990-91.
International Journal of Humanities and Social Science’ (Chemchemi Vol 4 No 2) Kenya University, Kenya.

Another important group of industries from the point of view of industrial

development is basic industries. Basic Industries registered an annual growth rate of 4.7
per cent during 1951-56, 12.1 per cent during 1955-60, 10.4 per cent during1960-
65.BasicGoods Industries registered a negative growth of -0.5 in 1979-80.The growth
during 1981-85 was 8.7 per cent and it fell to 7.4 per cent during 1985-90 and further to
3.8 per cent during 1990-91.

Table 3.2

Average Annual Growth Rate of Industrial Production during Post-Reforms Period

Use Based 1992- 1997- 2002- 2003- 2004- 2005- 2006-

Or functional 93 98 03 04 05 06 07*
classification To To
1996- 2001-
97 02
1.Basic Goods 6.8 4.1 4.9 5.4 5.5 6.7 9.3

2.Capital Goods 8.9 4.7 10.5 13.6 13.9 15.8 16.1

3.Intermediate 8.5 5.8 3.9 6.4 6.1 2.5 10.9
Goods
4.ConsumerGoods 6.6 5.5 7.1 7.1 11.7 12.0 9.7
(a)Durables 13.4 10.7 -6.3 11.6 14.4 15.3 12.5
(b)Non- 4.8 3.8 12.0 5.8 10.8 11.0 8.7
Durables
General Index 7.4 5.0 5.7 7.0 8.4 8.2 10.6

*April-November
Source: Central Statistical Organization

It is evident from the table 3.2 during the second half of 1990s the performance of
industrial sector was highly unsatisfactory. The targeted Industrial growth during viii
five-year plan period (1992-97) was 7.4 per cent and the actual achievement was 7.4 per
cent. The rate of growth of Industrial Production during Ninth five-year plan (1997-2002)
was 5.2 per cent per annum but it was considerably less than the targeted rate of growth
of 8.2 per cent per annum. The industrial growth during 2002-03 to 2006-07 was
satisfactory.
The growth registered in capital goods sector and basic goods sector was low in 1990s
as compared with 1980s.Capital goods sector registered an average annual growth of 9.4
per cent in 1980s. The growth in capital goods sector fell to 8.9 per cent during 1992-97
and to 4.7 per cent during 1997-2002. This sector is registered a high growth rate since
2002-03. As compared with pre-reform decade intermediate goods sectors and consumer
International Journal of Humanities and Social Science’ (Chemchemi Vol 4 No 2) Kenya University, Kenya.

goods sector have shown a better performance. The entire post-reform period has been
marked by considerable yearly fluctuations.

IV

Table 4.1 Minerals & Ores, Manufactured Goods Exports (Rs. Crore)

Year Value of Value of Percentage share Manufactur Percentage

Minerals&Ores Total Exports Of minerals & ed goods Share of
Ores in Manufactured
Exports total Goods in
Exports total
1991-92 2291.97 44041.81 5.20 32411.12 73.59
1992-93 2136.72 53688.26 3.97 40540.62 75.51

1993-94 2785.76 69748.85 3.99 52239.97 74.89

1994-95 3103.20 82673.40 3.75 64067.06 77.49
1995-96 3930.09 106351.84 3.69 79433.34 74.68
1996-97 4161.91 118817.32 3.50 87377.38 73.53
1997-98 3943.42 130100.65 3.03 98659.72 75.83
1998-99 3758.73 139751.77 2.68 108506.18 77.64
1999-00 3969.78 159095.20 2.40 128760.68 80.93
2000-01 5267.36 201356.45 2.60 156858.42 77.90
2001-02 6020.60 209017.97 2.80 159146.40 76.14
2002-03 9659.92 255137.28 3.70 194764.52 76.33
2003-04 10884.62 293366.75 3.70 222828.84 75.95
2004-05 22818.77 375339.53 6.07 272872.23 72.70
2005-06 27401.32 454799.97 6.0 317953.16 69.91

Source: CMIE Data Base, Business Beacon

The total exports of Minerals&Ores, Manufacturing goods and also their share in total
exports of the country is shown in table 4.1. With economic progress and consequent
diversification of production base, the share of Minerals&Ores, Manufactured goods in
total exports has consistently fallen.
International Journal of Humanities and Social Science’ (Chemchemi Vol 4 No 2) Kenya University, Kenya.

Table 4.2 Public Investment in Industrial Sector during Planning Period (Rs.Crores)

Plan Total Expenditure Public Investment Percentage Share of

On Industry& Public investment
Minerals In total
Expenditure
I Plan(1951-56) 1960 55 2.8
II Plan(1956-61) 4672 938 20.1
IIIPlan(1961-66) 8577 1726 20.1
IV Plan(1969-74) 15779 2864 18.2
V Plan(1974-79) 39426 8989 22.8
VI Plan(1980-85) 109292 15002 13.7
VII Plan(1985-90) 218730 25971 11.9
VII Plan(1992-97) 485457 40623 8.4
IX Plan(1997-02) 941041 44695 4.7

X Plan(2002-07) 1525639 58939 3.9

Source: Plan Documents

It is evident from the table 4.2 that the share of public investment on Industry and
Minerals in total expenditure was 2.8 per cent during I plan period (1951-56). This share
increased to 20.1 per cent during 1956-61 and further to 22.8 per cent during 1974-79.
But this share started declining since 1980. The share of public investment on Industry
and Minerals in total expenditure during IX plan period (1997-2002) was 4.7 per cent but
it fell to 3.9 per cent during 2002-07.It can be said that the low public investment on
industry and minerals led to deceleration in industrial growth.

Table4.3 Growth in Agricultural Sector

Period Annual average growth of the agricultural

sector( in per cent)
1951-61 3.3
1961-71 2.2
1971-81 1.7
1981-91 3.9
1991-01 2.8
2002-07 2.3
International Journal of Humanities and Social Science’ (Chemchemi Vol 4 No 2) Kenya University, Kenya.

It is evident from the table4.3 that the agricultural sector registered an average annual
growth of 3.3 per cent during 1951-61. During 1971-81 it registered a very weak positive
growth of 1.8 per cent. It again registered a strong positive growth of3.9 per cent but a
weak positive growth of 2.8 per cent during 1991-2001 and2.3 per cent during 2002-
07.The rural purchasing power has been severely affected by lower agricultural growth
and increased fluctuations in industrial growth during the post-reforms period. Low
agricultural growth rate limited the demand for consumption goods and inturn, limiting
the demand for capital goods during post-reforms period.

The sudden withdrawal of the government from infrastructure related investments

without facilitating the private sector to fill in the void effectively, the wide fluctuation in
agricultural growth and the unsustainable level of government borrowings constitute the
root causes for the slowdown of the economy from the second half of 1996. The flow of
funds from the financial institutions to the industrial sector has also not been adequate.
As a result of heavy competition in the international market and inability of domestic
industry to meet external competition by ensuring quality products exports grew a very
low rate during 1990s. Power breakdowns, lack of transportation facilities, poor road
conditions, and increase in the cost of power are the factors that adversely affected the
domestic industry.

IV

CONCLUSION

The areas providing thrust to India’s Industrial recovery were the growth of domestic
demand and the external demand for industrial goods. Several studies have shown that
India’s market penetration has always gone down whenever the world trade exhibited a
deceleration. On the supply side India has to reduce its unit cost of exports by improved
infrastructure, better quality of products, better marketing, policy rationalization and
tariff reduction. On the demand side, it has to take a more positive approach regarding
rupee adjustments and lay emphasis on proper choice of markets through a rational
approach to regional groupings. The first set of policies is mostly of medium and long
term nature. Hence, the second set should be considered seriously. Care should also be
exercised to ensure that increase in public investment should not resulting crowding out
of private sector efforts. For achieving this revival of foreign direct investment in
infrastructure areas is a must. The present policy of the government in this area needs
more emphasis and a sense of urgency. Along with the policies of accelerating
investment in infrastructure by the public sector and encouraging increased private sector
investment including joint ventures, a much faster reform process of deregulation,
improving the capital market and prudent exchange rate policy will be imperative. To
facilitate rapid deployment of investment from unproductive to productive lines of
activities there is a need to formulate legislative reforms. Employment opportunities
should be promoted in the organized segment of the industrial sector. Promotional
policies should be framed for the development of small scale sector rather than
 International Journal of Humanities and Social Science’ (Chemchemi Vol 4 No 2) Kenya University, Kenya.

protection. Government has to take steps to provide more credit to industrial sector
through industrial financial institutions at cheaper rate of interest.

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