REFORMS IN INDUSTRIALSECTOR TOWARDS SUSTAINABLE DEVELOPMENT

J.VANITHA
ASSISTANT PROFESSOR
DEPT OF ECONOMICS
QUAID-E-MILLATH GOVT COLLEGE(WOMEN)
CHENNAI-2

INTRODUCTION
In july 2011,India completes two decades of economic libralisation. We now
stand at an era of sustained and inclusive high growth, were GDP rates are at 8-9%,
poverty levels are descending and human developments indicators are improving
rapidly. The economy has successfully withstood several global economic crises and
is set to become a top three economies of the world in the next couple of
decades.The dramatic statement on Industrial Policy, Presented on the same day Dr.
Manmohan Singh Presented his path breaking Budget, July 24, 1991, swept away
the licensing procedures that had shackled Indian industry since Independence.
Companies no longer had to languish in the corridors of Udyog Bhavan for permits
and licences to set up new businesses or expand existing once. This was nothing
short of revolutionary.

The new industrial policy was accompanied by transformational changes in

trade regulations, taxation, banking and finance, competition and foreign exchange
that further shifted the entire paradigm for industry. Under the licensing regime, the
Indian economy was one of shortages. Customers queued up, sometimes for several
years, for items such as gas cylinders, telephone connections, or two-wheelers
unbelievable in todays markets. Lack of competition and access to resources had
stunted productivity and efficiency of industry, rendering Indian companies
uncompetitive.

As import duties were slashed dramatically and foreign companies were

permitted to enter Indian markets, much of Indian industry was concerned about
being swamped by more efficient global companies.
It is to the credit of Indian industry that instead of allowing itself to crumble
under the new dispensation, it embarked resolutely and with courage on
restructuring itself to meet emerging demands. The entire model of doing business
that industry had been used to for decades was changed. This was done within a
tremendously compressed time-frame.
Several trends in industrial evolution mark the two decades of the
liberalization process. First, private sector energy has been released and the
corporate sector has greatly expanded its contribution of growth, savings and
investments, and taxes. Secondly, competitiveness and productivity of industry
attained a new level. Companies have melded family business with professional
management styles uniquely suited to the Indian context. Many are able to match
global benchmarks in quality and efficiency, and indeed are global trendsetters
today. Third, several key sectors have taken off decisively, such as IT,
telecommunications, automotives, pharma, etc. Fourth, globalization of the Indian
economy is visible in trade in goods, trade in service, especially IT, and fund flows.
Most creditable has been the decisive entry of Indian multinationals on to the global
industry scene.
Despite these success ,Indian manufacturing has two very different segments.
A modern one, where production occurs in factories with moderate to high levels of
technology, and under generally well regulated conditions for workers, who are
relatively well paid, have strong protection against dismissal in the courts, and who
often have other benefits such as gratuity and paid leave. In economics parlance, we
call this segments the formal sector. Then, there is the informal sector, where
production often takes place in small sweatshop type conditions, where there is very

little use of modern technology, where workers can be fired at will, are paid badly
and have almost no benefits. Unfortunately, in India, the majority of firms and
workers are in the informal sector, leaving only a small section of firms and workers
in the formal sector. Estimates vary on the size of the informal sector, but a recent
official report puts the proportion of workers employed in manufacturing is highly
dualistic.
Indias higher level of dualism is bad both from the point of view of
efficiency and equity. A large presence of the informal sector implies that overall
productivity is lower than what may have been if the informal sector were smaller,
given the low productivity in the informal sector as compared to the formal sector.
At the same time, large differences in earnings between workers in the informal and
formal sectors contribute to a high level of income inequality in the country, and the
lack of skills and education in workers in the informal sector constrains their ability
to move to the better paid jobs in the formal sector.
It has been often argued that the major reason behind the prevalence of
dualism in Indian manufacturing has the policy regime in the past, and that the
Licence Raj along with restrictive trade policies pursued by the Indian government
till 1991 contributed to the dualism structure of the manufacturing sector, as these
policies have been protective of the formal sect.

An

oft

repeated

view,

particularly originating from the World Bank, is that economic reforms that allow
for a level playing field between the informal and formal sectors can reduce dualism
significantly. Given the significant economic reforms have occurred in India since
1991, has this happened?
The answer is in the negative. While average efficiency levels in both the
informal and the formal manufacturing sectors have increased in industries which
witnessed the most reforms, economic reforms have increased the difference in

average efficient informal firms in Indian manufacturing. Economic reforms have

also increased the gap between the most efficient firm in an industry and the average
firm in that industry, and this widening of the efficiency gap has happened more in
the formal sector. Economic reforms have, thus, increased dualism in manufacturing,
both by increasing the difference in efficiency between formal and informal firms
and by increasing the efficiency gap between the most efficient firm and the average
firm in both the formal and informal sectors.
Surprisingly, even the withdrawal of reservation policies of the small scale
sector, a set of reforms which many believed would allow informal firms to catch up
with formal firms, has in fact had the opposite effect, exacerbating the differences in
productivity between informal and formal firms. Trade liberalization and industrial
relicensing have had similar unequalsing effects on the productivity difference
between informal and formal firms.
This suggest that while economic reforms have had strong positive effects on
overall efficiency of the manufacturing sector, by widening the gap between the
productivity of formal and informal firms in manufacturing, the reforms have made
it difficult for informal firms to complete in external and domestic markets that are
increasingly integrated. Given the large presence of unskilled and semi-skilled
workers who comprise the majority of the Indian manufacturing workforce in the
informal sector, such an increasing process of dualistic development could have
been an important contributing factor on why Indias economic growth has not been
inclusive.
Just as remarkable are the trends that did not take place .Indian companies were not
swept under by a surge of foreign companies. Imported goods did not take over
Indian markets. Small enterprises did not collapse under the impact of de-reservation
and globalization.Credit goes to the government fior effective management of the
reform process. Despite these successes,there is a long way to go. Going

foreward,the revolutionary policy decisions of 1991 need to be replicated to achieve

develop ment aspirations.Growth now needs to be more inclusive.At the central
level,the imperatives of employment generation and integration with the global
economy would involve a range of policy measures from areform of labour laws to
more flexibility for foreign investments.Taxation reforms have been on the table for
several years,while the financial sector should be recalibrated to meet the exigencies
of an 8.9% growth rate.In particular,industry regulation should not impose
unwarranted restrictions to expansion.Industry has observed with some concern the
debate and discussions on the proposed new companies bill,where there are signals
of a throwback to the old practices of control and regulation,which might stifle the
development of corporate India.
In the social sphere, raising worker productivitry of the emerging demographic
bulge is critical.Education and skill development roll out is urgent through
innovative routes leveraging new technologies.Health care too can b e delivered
with public-private partenerships.Further, governance and administrative reforms are
part of the economic liberalization package.On its part,CIIs agenda for the year
focuses on affirmative action to look at the issue of inclusivity,employability
creation to address the issue of skill shortage and goveranace to ensure that
delivery of the policy measures are with the least amount of dilution.
In order tomake the growth to be sustained,India has to promote
publicinvestment and agricultural productivity.Moreover, in a large agrarian
economy, public investment removes constraints on productivity growth in
agriculture, creating demand for industrial goods-a crucial insight that the
writings on the reforms have inadequately appreciateda view also endorsed
by Krueger (2009). Surely, the creative function of competitive industrial
structure is to spur efficiency, but it need not necessarily translate into faster
and labour-intensive growth, as argued in the mainstream economic literature.
As the experience of the 1980s has demonstrated, gradual deregulation of

industrial markets, along with stepping up of public infrastructure investment

and rising agriculture productivity perhaps provided the right demand and
supply conditions for industrial turnaround.

Arthur Lewis famously said that if a nation wants to industrialize, it should enrich its
farmers. But farmers have got impoverished after the reforms as the growth rate of crop
product ion has decelerated (Figure) . This seems to get reflected in the widespread
phenomenon of farmers committing suicide (under debt burden), which is not just a crisis of
production but also a serious humani tarian problem. The agrarian distress has also
man if' ested itself in a political crisis, fuellin g rural violence, as evi dent from the spread
of left-wing radical movements, engulfing nearly one-third of the districts in the country.
Proponents of the reforms would probably c ontend that agriculture has lost the capacity to
absorb labour and, in any case, India is saddled with excess food stocks. Both are probably
half-tr uths, as best.

As Table sho ws, Indias land producti vity in all major crops is a mod est fraction of the
world average, so the argument that agriculture has little scope for ab sorbing labour to

increase pro ductivity is simply incorrect. As is widely acknowledged, overflowing food

stocks are not a measure of food self-sufficiency when a large proporti on of the poor

cannot demand foo d for lack of purchasing power. So, the argument that agricu l ture
cannot absorb labour is patently false. If we believe tha t the pace of workforce
tran sformation depends on agricult u re productivity to sustain non-agricultural
employment, then poor agricultural growth is surely retarding industrial progress.
The oth er extreme viewof agrarianism and antiindustrialization mainly emanating from
the r ecent West Bengal experiencethat agriculture alone can cure all the ills of
unemployment and underemploymen is perhaps equally false, as t he excess growth of

agricultur e can choke industrialization via rising wages in the industrial sector and lack of
industrial inputs in agriculture. Therefore, what is needed, as Le wis argued long ago, is
balanced growth