CHAPTER 6

FINDINGS AND POLICY IMPLICATIONS

Karnataka is the personification of modern India in many ways. A landlocked

state with salubrious climatic conditions, availability of raw materials and human

resources made Karnataka as one of the most developed states in India. Being a

proactive state, today Karnataka is the most sought after destination for cutting edge

technology and manufacturing in the country. Main advantages for investors in this

state are the availability of large pool of technical and skilled manpower and the

presence of internationally renowned research institutions in every field. Karnataka is

popularly known as Gateway of Knowledge, it is the Knowledge Hub of Asia. The

state witnessed economic growth over time, compared to other states in the country.

This study addressed the issues related to growth rates of Net State Domestic

Product of six states namely Andhra Pradesh, Gujarat, Karnataka, Maharashtra, Tamil

Nadu and West Bengal, sectoral growth rates, industrial policy measures,

manufacturing growth in terms of certain key variables (output, employment, capital

etc), productivity growth (partial factor productivity, Total Factor Productivity).

Estimation of output growth and thereby estimation of growth of TFPG

requires at least two distinct time periods over which their growth can be measured.

Therefore, the study categorised a period of 31 years (1980-2011) as the two phases

of liberalisation:- Period/Phase 1: 1980-81to1989-90 pre-liberalisation period,

Period/Phase 2: 1990-91 to 1999-00 post-liberalisation period and Period/Phase 3:

2000-01 to 2010-11.

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The choice of the industries and range of years for analysis were decided to ensure

that the analysis was carried out on maximum but same industries operational during

all the years considered for the analysis.

The twelve industry groups to be found at the two-digit level have been

rationalised by the study to ten. The recombination is apparent in the presentation of

the data, for which see the tables. The industry groups chosen for investigation are:

Food products (20-21), Beverages and tobacco products (22), Textiles

(23+24+25),Wearing Apparel (26), Wood products (27), Paper and paper products

(28), Leather and leather products (29), Chemical and chemical products (30), Non

metallic minerals (32) and Basic metal and alloy products (33).

6.1 Findings

The industrial policies of 1948, 1956, 1973, and 1977 focused on regionally

balanced industrial development, growth of capital goods industries, control of

monopoly power and foreign direct investment. To control monopoly power the

policies restricted working of the MRTP companies which reduced the industrial

growth.

In fact the industrial production floated around 8 per cent before 1956 came

down in the 80s. To remove the problems of industrial sector the Govt of India

announced industrial policy of 1980.The industrial policy of 1980 had set broad socio

economic objectives to attain industrial growth in the country. This policy promoted

the domestic industrial competitiveness by introducing some liberalisation measures

like de-licensing, broad banding, licensing minimum capacity, re-endorsement of

capacities on licenses based on maximum production, liberalisations in respect of

MRTP companies and period of validity of letters of intent/ registration.

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Correspondingly the state of Karnataka introduced new industrial policy in 1983. The

policy framed plans and programmes to promote Khadi and village industries, leather

industry; agro based industry, and provided adequate support to export-oriented

industries.

The study found that the policy measures of 1983 policy of Karnataka has

enhanced the growth of manufacturing sector of Karnataka in terms of output,

employment, capital at the aggregate level. At the disaggregate level the policy

promoted the output growth of Leather Products , Food Products, Wearing Apparel

and Non-Metallic Minerals; employment growth of Wearing Apparel and Leather

Products; capital growth of Beverages & Tobacco, Textiles, Wearing Apparel,

Leather Products and Non-Metallic Minerals and no.of factories growth of Leather

Products. To accelerate industrial development, the state of Karnataka restructured

this industrial policy and introduced the New Industrial Policy during September

1990.

It is noticed that industrial policies of India pursued before 1990 were not

conducive for the growth of industries in the country, though being relevant in the

early stages of development. However, the industrial policy of 1980 proved to be

better from the industrial development perspective. There were drastic changes in

industrial policy, tax and tariff policy and trade policy, to remove these changes and

bring stability in the industrial growth the government introduced new industrial

policy of 1991.

The revised industrial policy of Karnataka 1990-95 concentrated on balanced

growth of all the sectors viz, tiny, small, medium and large scale etc, provided special

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concessions for thrust sector industries, implemented locational policies for dispersal

of industries.

The industrial policy of India 1991 is a comprehensive one in the industrial

scenario of India. The policy had introduced sweeping changes in the industrial

sector, provided special identity to small scale sector through the implementation of

small scale industrial policy in August 1991.But at the state level this policy made

only tentative changes in the industrial sector of Karnataka through New Industrial

Policy Resolution 1993-98, it is observed from this study that during the post-

liberalisation period particularly the growth rates of secondary sector and the

manufacturing sector did not increase.

There are some similarities between the policies of 1990-95 and 1993-98. On

the other hand, the industrial policy of 1993-98 is different from the policy of 1990-95

with respect to few aspects such as reclassification of developed and developing

areas, high- technology and non polluting industries in tiny, small, medium and large

scale sectors permitted to be located even in Zone- I, exemption of stamp duty and

concessional registration charges and waiver of conversion fee for converting

agricultural lands to industrial purpose.

To correct the deficiencies experienced by the Industrial Policy of 1993-98 the

Karnataka Government has introduced the new industrial policy of 1996-2001. The

policy of 1996-01 differ from the policy of 1993-98 in few respects viz, introduction

of package of incentives and concessions for automobile sector. From the provisions

of industrial policy statements of the central government the changes have not been

perceived at the state level.

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 The policies accentuated in changing limits, reclassifying zones, changing

procedure for realising subsidies, empowering Single Window Agency for realising

subsidies etc. The study found that the policy measures of the industrial policy of

1996-2001 promoted the growth of manufacturing sector of Karnataka in terms of

output, employment and capital.

Keeping in mind the strategic plan for industrial growth, Government of

Karnataka introduced Industrial Policy of 2001-2006.The main concern of this

industrial policy was to strengthen manufacturing industries, promote exports and

sustained growth. New set of incentives and subsidies like patent right subsidy,

technological upgradation subsidy and exemption of AMPC cess were introduced by

this policy, so this policy signifies departure from the earlier policy of 2001-06.

The Government of Karnataka introduced New Industrial Policy for the period

2009-14 Special incentives provided by this policy were interest free loan on VAT

(value added tax), anchor unit subsidy, interest subsidy and incentives for energy and

water conservation, special incentives for enterprises coming up in low Human

Development Index (HDI) districts and interest free loans to sugar sector. On these

fronts the policy of 2009 departure from 2006 policy.

The industrial policies of 2001-2006, 2006-11 and 2009-14 of Karnataka

divided the state into different zones and the areas under each zone differ from each

policy. By introducing several incentives, subsidies and concessions these policies

promoted the growth of manufacturing sector in Karnataka during the last decade.

Comparative analysis of compound growth rates of Net State Domestic

Product (NSDP) of the selected states in the study reveals that during the I-Phase and

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in the II-Phase of liberalisation the Net State Domestic Product of Gujrat is highest.

The state of Karnataka registered 7 per cent growth rate in these periods. The analysis

clearly shows that there is growth prospect in the state of Karnataka. But the relative

growth rate of Net State Domestic Product of Karnataka was lower than the growth

rate of Net Domestic Product of India in Phase-II.

At the sectoral level the tertiary sector of the economy occupied the first

position in all the three sub periods and for the entire period (1980-81 to 2010-11).

Notwithstanding the secondary sector of the economy registered good growth

rate in the three sub periods and for the entire study period, it could not compete with

the tertiary sector growth rate; by this the tertiary sector became the promising sector

for the growth of the economy. Analysis at the national level also reveals the same

pattern of the sectoral growth during the study period.

Under the secondary sector the analysis of the growth of manufacturing sector

in the state shows that during the I-Phase of liberalisation the growth rate has

decreased, however, there was increase in the growth rate during the last decade. The

growth rate of registered segment of the manufacturing sector declined during the

same period, but increased in the last decade. Registered segment of the Indian

manufacturing sector also witnessed low growth rate during Phase-I but, increased in

in the II-Phase of liberalisation. The unregistered segment of Karnataka and Indian

manufacturing sectors maintained increasing growth rates in the sub periods and for

the entire period.

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 The growth rate of output, here measured by value of output, shows an

increase in the I-Phase of liberalisation. The higher growth since 1990 is a feature

across the Karnataka and Indian manufacturing sectors at the aggregate level.

Analysis at the disaggregate level depicts that seven out of ten groups recorded

deceleration in the growth rate of output in the I-Phase of liberalisatio. The

deceleration in the growth rate was more pronounced for Leather products industry.

Wood products industry registered negative output growth rate in the II-Phase.

However, Wearing apparel industry registered highest level of output growth in the

same period. Four industrial groups: Food products Paper and paper products Non-

Metallic Minerals and Basic metal and alloy industries recorded growth rates of above

10 per cent in Phase-II. However, Textile industry recorded least output growth

rate in the last decade.

The behavior of employment growth is usually a matter of interest second only

to that of output. The study found an increase in the growth rate of employment in the

I-Phase. However, the acceleration in employment growth of Indian manufacturing

sector is less pronounced than that of Karnataka manufacturing sector. The estimate

of employment growth in Phase-II appeared quite credible and tends to be robust for

Indian manufacturing sector indeed, viewed alongside the Karnataka manufacturing

sector at the aggregate level. As regards industries, Food products, Beverages and

Tobacco products, Wearing apparel, Chemical products and Basic metal and alloy

products have displayed better performance in terms of employment growth in the

II-Phase of liberalisation.

The study found faster growth rate of capital in the aggregate manufacturing

sector of Karnataka in the I-Phase of liberalisation. As it has expected, there was also

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a rise in capital growth of Indian manufacturing sector, though perhaps not

commensurate with the increase in the rate of growth of capital of Karnataka

manufacturing sector.

Across the Karnataka manufacturing sector Food products, Wearing apparel,

Paper and paper products, Chemical products and Basic metal and alloy products

witnessed increased capital growth in the I-Phase. During the II Phase the

deceleration of the capital growth pronounced for eight out of ten industrial groups in

the Karnataka manufacturing. However, the deceleration in the growth rate more

pronounced for Indian manufacturing in the same period.

The growth rate of no. of factories was found to be highest for one out of ten

industrial groups in the I-Phase. It improved for four industries in the same period.

However, the growth rate became negative for two industrial groups during the same

period. The high growth has more pronounced at the national level. That is the growth

rate has increased for seven industries. There was deceleration in the growth rate for

Non metallic mineral products. However, Beverages and Tobacco and Textiles

experienced negative growth. Five industries of Karnataka manufacturing sector

experienced high capital growth rate in the II-Phase. Chemical products experienced

marginal growth. Textiles, Wearing apparel and Leather products experienced

negative growth during the same period.

Beverages and tobacco, Textiles, Paper and paper products, Non metallic

mineral products and Basic metals and alloys of Indian manufacturing sector

registered increased growth rate of no. of factories during the last decade. All the

other five industrial groups registered deceleration in the growth rate of no. of

factories.

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 Productivity growth is often examined with a view to accounting for profits.

This is of course, unexceptionable. The result of labour productivity of the aggregate

manufacturing sector of Karnataka and India shows deceleration during Phase-I. As

regards industries, Wearing apparel, Wood products, Paper products, Leather products

Chemical products and Non metallic minerals have displayed poor performance in

terms of labour productivity in the same period. Whatever may be the underlying

cause though, increase in labour productivity growth is a notable feature in Phase-II at

the aggregate and at the disaggregate level.

Turning to the capital productivity growth the picture is less rosy for

Karnataka and Indian manufacturing sectors during nineties, that is the productivity

growth turned negative for nine out of ten industrial groups and for aggregate

manufacturing sector. As against these industries, the Beverages and tobacco industry

has performed rather well. Though not as pervasive as the increase in labour

productivity growth, the capital productivity growth has increased pretty for the

period 2001-2011.

As regards the TFPG the post-reform period has witnessed deceleration at the

aggregate manufacturing sector and in all the industries except Beverages and

Tobacco industry of Karnataka and Basic metal industry of India. This does not mean

that reforms failed to have a favorable effect on industrial productivity. Rather,

(Goldar and Kumari, 2003; Topalova, 2003) have shown that trade liberalisation had a

positive effect on industrial productivity. Goldar and Kumari (2003) have presented

econometric evidence that indicates that the slowdown in TFP growth in the post-

reform period is attributable to a large extent to deterioration in capacity utilization.

As against this the TFPG is rather well in Phase-II.

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6.2 Policy Implications

The elaborate analysis of Karnataka domestic product, Karnataka

manufacturing industry (at the aggregate and at the disaggregate level) in terms of

growth of output, employment, capital, no. of factories, partial factor productivity

growth and the comprehensive measure of total factor productivity growth (TFPG) for

two different periods of liberalisation and ten sub-sectors of the manufacturing

industry enabled the study to derive substantial insights relating to growth issues.

At the same time this analysis also has revealed certain shortcomings and

inadequacies in policy support and infrastructure. Considering these, the study would

make the following recommendations for achieving manufacturing growth in

Karnataka:

1. It is observed from the study that the State Domestic Product of Karnataka is

less compare to other growing states. There is a need to enhance the growth

rate of manufacturing sector for achieving higher growth of development path.

2. From the study of Total Factor Productivity in Karnataka manufacturing sector

there is low Total Factor Productivity in Karnataka manufacturing sub-sectors.

Therefore there is a need to emphasis the Total Factor Productivity in general

for more export.

3. In view of liberalisation and globalisation of Indian economy the state

industrial polices have to play important role as observed in the analysis for

industrial competitiveness and attracting foreign investment to the state.

Therefore technological adoption and technical utilisation in manufacturing

sector is very much needed for industrial growth in the state.

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4. As the study observed that tertiary sector has contributed substantially in State

Domestic Product and export, but the importance of manufacturing sector at

the state level has not been considered that is why the productivity of

manufacturing sector in Karnataka is lower. Therefore, to promote export in

capturing the international market there is a need to enhance the

competitiveness of manufacturing sector at the state level.

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