5 0 O Y E A R S O O F O I N D I A N O I N D E P E N D E N C E
Industry passing through phase of transition
Firm political leadership need of the hour
by S. L. Kapur
In 50 years of Independence, India has sent satellites in space, constructed nuclear power plants and boasts of having one of the largest pools of technical manpower in the developing world.
Over the four decades after Independence, India followed a planned development strategy based on extensive public ownership of commercial assets; a complex industrial licensing system; substantial protection against imports (including some of the worlds highest tariffs on imports of capital goods, and a ban on imports of consumer goods); restrictions on exports; virtual prohibition of foreign investment; and extensive regulation of financial intermediation. At some point in the 1970s and early 1980s, these policies enabled the government to control the most basic business decisions down to the firm level.
While the development strategy it adopted helped the country escape from the massive illiteracy, recurrent famines, fertility rates of about seven children per woman, and secular stagnation prevailing before Independence, it also isolated India from the rest of the world, with the result that from 2 per cent in the 1950s, Indias share of world trade declined to less than half of one per cent in the late 1980s. It forced Indian consumers to pay higher prices for goods of lower quality and deprived the country of the benefits of foreign direct investment and modern technology. It discouraged production for exports, created recurrent shortages of foreign exchange, and made the balance of payments extremely vulnerable to internal circumstances. Most important of all, it held back the countrys growth and thus the pace at which poverty could have been reduced.
Indias first Five Year Plan (1951-56) was a comparatively moderate document. It said that detailed planning should be attempted only for a few selected industries (notably capital goods) which India lacked and which the private sector, for one reason or another, could not be expected to provide. The Industrial Policy Resolution (IPR) of 1956, which is rumoured to have been drafted by Nehru himself, along with the Second Five Year Plan marked the ushering in of a new phase socalled Command Capitalism. The Nehru-Mahalanobis model aimed at transforming India from an agricultural economy into an industrial one. It said that, investment would be channeled into the production of capital goods. Imports would be turned away with tariffs, quotas or outright bans. There would be no need for exports. Consumer goods would stay in short supply, so that people would save. These savings would provide the resources for more investment. Major programmes were undertaken to spur indigenous research in technology. Simultaneously considerable attention was given to plans for training industrial workers and developing strong technical human resource base. The public sector was mandated to control the commanding heights of the economy, although a large field was left open for the private corporate sector, including foreign capital. To this end the I.P.R. 1956 reserved large areas of industrial activity exclusively for the State (Schedule A Industries) while in a number of other industries (Schedule B) all new enterprises were to be state-owned.
The World Bank and IMF, in particular, advised the Indian Government to devalue the rupee in June, 1966; this highly controversial step was followed by a major delicensing of some 42 industrial items in the second half of 1966. Significant imports of foreign investment and technology took place, even in Schedule A and B industries which normally should have been banned to the private sector. Whereas foreign capital accounted for 29 per cent of fixed investment in the private corporate sector between 1948-53, this relative proportion increased to 32 per cent in 1960-61. India has made huge strides in terms of industrial output, economic growth and even on some human development indicators since its independence in 1947. But the contradiction is that India has slipped behind many emerging nations, notably China, Thailand and Malaysia, which surged ahead in the eighties by rapidly integrating with the global economy. Between 1960 and 1990 Indias G.D.P. grew by an average of a little under 4% a year the Hindu rate of growth, as it came to be known. In round numbers, Pakistans GDP over the same period grew by 5% a year, Indonesias by 6%, Thailands by 7%, Taiwans by 8% and South Koreas by 9%. Indias planners had laid great emphasis on rapid industrialisation, the ostensible reason for interfering with a more market-driven course of development. Yet in India, between 1960 and 1990, industrial output grew on an average by only 6% a year. In Pakistan it grew by 8% a year, in Indonesia by 9%, in Thailand by 9%, South Korea by 10% and in Taiwan by 12%. Indian industrial production over 1980-92 has grown at a compound annual rate of 6.4 per cent. China heads the ranks with a C.A.R.G. of 11.1%. In terms of value added in industry, in 1965, India ranked 13 at $ 11.1 billion. By 1992, around the time economic reforms began, India had fallen to number 22 with industry value added of $ 57.9 billion. China in the same period only lost its ranking a notch from number 8 ($ 23.5 billion) to number 9 ($ 172 billion). India was overtaken by Taiwan, which powered up the rankings from 47 in 1965 to number 16 in 1992. South Korea improved from 49 to 11 in 1992. We need firm political leadership at this time when Indian industry is passing through a critical phase of transition and re-structuring. Many Indian industrial firms, spoiled for decades by the absence of competition at home or abroad, feel that the ground has vanished from under their feet. On the other hand the U.S. and Western industry feels that Indian markets remain among the most protected, regulated and over-administered in the world. They have, therefore, complained to the World Trade Organisation. Our Indian status quoists have formed clubs, like Bombay Club, and created lobbies, like Swadeshi Andolan to oppose further reforms.
The writer is a former Union Industry Secretary.