Industrial Policy

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and Industrial Policy Which 1980: since

Performance Now? Way

Since 1980-81, manufacturingsector output has grown at 7 per cent per year, with economic reforms making little difference to the trend in the 1990s. But growth has decelerated over the last seven years, after peaking in 1995-96. Why is this so? The reforms have narrowlyfocused on policy-induced restrictions on supply, ignoring the demand constraint due to the cut in public infrastructureinvestmentsince the late 1980s and indifferentagricultural performance in the 1990s. These issues have to be squarely addressed to revive industrial growth, and to reap the benefits of the investmentboom in organised manufacturingin the last decade. R NAGARAJ

sector currentlyaccounts for about India's manufacturing 17 per cent of real (measured)GDP, 12 per cent of total and workforce, close to 80 percent of merchandise exports. Overthe pasthalf century,this sectorhas grownat nearly6 per times the growthrate of cent per year;at over one-and-a-half a domesticoutput- representing majorbreakfromthe colonial past. rate Theannual trend gross growth of totalmanufacturing value added(output,for short,hereafter) duringthe last two decades (1980-2000) is close to 7 per cent. While this representsa turnaround comparedwith the preceding period of 'relative stagnation'(1965-1980), the record is modest in contrastto China's(official)double-digit growthduringthisperiod,as also Asian economies (Table 1). most other industrialising

Evolution Policysince 1980 of
Industrial upturn in the 1980s: Around 1980, the initial year of

our studyperiod,therewas considerablegloom aboutthe immediate prospects for industrial growth, despite having a of surplus food and foreignexchangestocks for a few yearsin on the late 1970s - widely regardedas long-termconstraints India'seconomicgrowth.For a varietyof reasons,lack of industrial demand,especially for investmentgoods, was widely acceptedto be the principalreasonfor the relativestagnation that sincethe mid-1960s.However,therewas also an argument called the controlson output,investmentand trade- popularly the 'permitlicence raj' - were stifling private initiativeand the wastingmeagrepublicresources.Reportedly controlsled to use, inefficiencyin resource as reflectedin poortotal widespread factor growth,or in the economywiderise in increproductivity mentalcapital output ratios in the 1970s [Ahluwalia 1985; 1982]. The gloom was perhapsaccentuated the by Rangarajan oilpriceandagricultural supplyshocksin thelate 1970s,together as withpoliticaluncertainty the Indiandemocracyenteredthe coalitionera at the nationallevel for the first time in 1977.

However, from 1980 onwards, after the domestic political uncertainty had ended, industrial policy witnessed greater pragmatism with a gradual loosening of controls, and a greater willingness to import technology and foreign private capital to modernise the manufacturing sector. Greater realism in policy-making also included stepping up of public investment in infrastructureand energy production (to insulate the economy from external shocks), rural development for diffusion of green revolution technology, and for a 'direct' attack on poverty. As the second oil shock was successfully met by increasing domestic oil productionand import substitution in fertilisers in a short time, the second half of the 1980s witnessed considerable de-licensing and relaxation of import controls to upgrade the industrial technology - as reflected in Rajiv Gandhi's political slogan of taking the country to the 21st century! To achieve these, there was a greater reliance on the private corporate sector with fiscal incentives provided for stock market-based financing of industrial investment, as government faced a growing resource constraint to meet the ambitious planned investment target. In the 1980s, many branches of manufacturinglike automotive industry,cement, cotton spinning, food processing, and...
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