India - Review of trends in manufacturing industry (Vol. 1 of 3) : Main report

RESTRICTED This report was prepared for use within the Bank and its affiliated organizations. They do not accept responsibility for its accuracy or completeness. The report may not be published nor may it be quoted as representing their views. INTERNATIONAL BANK FUK KECUNblRUCTUN AND DEVELOPMENT INTERNATIONAL EVELUPMENT AbUCIATION INDIA - A REVIEW OF. TRENDS IN MANUFACTURING INDUSTRY VOLUME I THE MATN REIPORT April 1, 1970 South Asia Department CURRENCY EQUIVALENTS 1 Indian Rupee = U.S. $0.13 1 U. S. Dollar Rs. 7.5 1 Lakh 100 thousand 1 Crore = 10 million The Indian financial year runs from April 1 through March 31. FOREWARD The attached report is part of a continuing program of studies on aspects of India's manufacturing industries. These three volumes are being distributed now, so that even the interim results of this work may reach a wider audience. The first volume - the Main Report - raises a number of important issues relevant to manufacturing policy, and sheds new light on some hitherto dark places. The volume of statistical tables and the second volume of the report both present much new material, which should be of grPat value both to respnrchers in the field and to those concerned generally with issues of industrial policy. There are many topics which merit further study: among them are the medium- and c.mall-qni etnr, to whnoc imnntnnr- thp nrPent study draws attention; the transfer of technology and the promotion of research and development capabilities in Tndin the niuro and prospects of industrial exports; the determinants and composition of private Sl rnve+Min+ anA +hn of4o ini nan -P nunh rili- nnA nYv-!n+n inraq.ment - the present study has concentrated more on the relative magnitude of the -4,k - r A n ---+- saneo -r' thnlrr o n n c ona-4c)-an n n . T - 4 Ai +inn the regional distribution of manufacturing would repay further attention, potential role of State planning, as would questions of employment and 4n±UuOs r- ' r ed. at.. 12 )5 JU LJ± U II & U.. L ±0 ;5 ; IUl1UU.lk1J t±..L%.0L9z,I%J5 the present study has employed standard criteria such as international compe.U±bvee1sB auu laUr productivity; more ±p1-cazU u cr±CW er±a might well provide assessments better adapted to Indian problems. Some of these topics are incorporated in our present plans for economic research on India; others will be when improvements in data and staff availabilities permit.  TABLE OF CONTENTS Page No. VOLUME I - The Main Report SUMM&RY ............. ........... i-ii I. PREFACE.. 1 IT. TWO DVrA1RA OF TNMMRT12TAT. PT.AWWTVC. (a) The Ante.edents.................................. (b) The Origins of the Strategy .......................5 rd) The* innov-1 Q..1%4t4*U*jn StAeg , _, --- --r-- -_-- . -*****************.*w. (d) Industrial Policy Tools ............................ 1.0 (i) Investment Planning ........................ 1.0 \.LA.. 1he CUcp U riLL **.................... (iii) Investment Location ......................... 13 /4.. oj - 1 A. ~J,O.L&C ........................... , (v) Prices ..................................... 14 %V.,l rwn0opoly COn-trUal............................ 5 (vii) Distribution ............................... 1.5 / _ , . " _ _'- _ _-- . -i kvill) Irade and Foreign Exchange Controls ........ . .U (ix) Financial Controls and Incentives .......... 1-6 (e) Conclusion - The Role of Government ................ 17 The Example of the Cement Industry ......... L8 III. RECENT INDUSTRIAL PERFORMANCE ........................... 21 (a) Introduction - Some Caveats on Statistics .......... 21 (b) The Role of the Small-Scale Sector ................. 2 (c) Trends in Output .................... . ........... . 24 (i) Aggregate Trends ......................... 24 (ii) The Changing Structure of Output ........... This report was prepared by a mission comprising E. Bevan Waide (Chief of Mission), Alexander Nowicki (Industrial Economist) and Bong Suh Lee (Economist). Mr. W. M. Gilmartin and the staff of the New Delhi Office - in particular Mr. Kenneth A. Bohr - gave valuable assistance, and C. Nalamlieng helped at an early stage. TABLE OF CONTENTS (Continued) Page No. (iii) The Relative Role of the Public and Private Sectors in Output ........................... 28 (iv) The Regional Distribution of Industrial Output ..................... . 29 (d) Trends in Investment ................................ 30 (i) Overall Public and Private Sector Trends 31 (ii) The Pattern of Public Investment ............ 33 (e) The Utilization of Installed Capacity ............... 35 (f) Trends in Industrial Finance ........................ 38 (iM The Private Sector - General Trends ... ... 1 (ii) Development Finance Companies ............... 39 (i1) Private Sector Profitability I-A-- (iv) The Public Sector ........................... 43 IV. AN ASSESSMENT OF THE RESULTS ............................. 47 (a) Trends in Import Substitution ................ 47 (c) An Overall View ..................................... 50 V. MEASURES OF INDUSTRIAL EFFICIENCY ........................ 53 (a) Some Absolute Comparisons ...................... . 54 (c) Performance and Size ..... .......... 57 VI. SOME PROBLEMS OF INDUSTRIAL POLICY ........... ...... 59 (a) Control of Monopolies ................................ 60 tol inoustrial laniug ................................. ANNEX TO VOLUME I - Statistical Tables 1 - 65 bound separately VOLUME II - Assessment of Major Industrial Statistics bound separately 1/ SUMMARY- Sl. It is in the nature of this Report that it cannot properly be summarized; its character is fundamentally a descriptive one, as befits the stated purpose of "clearing the undergrowth" to assist towards an un- derstanding of Indian industrial policy. A large proportion of the work has, in any case, been the assembling of the statistical material which is the Report's backbone. Further, many of the interesting findings are based on inferences from aggregative statistics, and it is well known that aggregation even of thoroughly dependable statistics obscures often important differences between the items aRgrezated. The dependability of the statistics is itself the subject of frequent comment in the Report. S2. If therefore a listing of some of the Report's findings and con- clusionn is aiven here, it is with the proviso that, quoted out of context- they are bereft of those qualifications and reservations even with whose nrotAction they may not be entirely beyond the reach of reasonable doubt, If they are questioned and, as a result of additional study, more light in thrown on the nnihipet the nurnoRe of the Repnort will have hppn qerve_ THE FACTS S3 The ine ofw, , manufacturing4 nout2tv in, tine. ,,w..4 .A a,4 a real growth rate of 6.6% during the 1950's, or 5.8% from the mid 50's small-scale sector - has been 3.5% a year since the start of the First: lan aI. AusMv n4w unu c Uveutums oAn LuI UUm1OLA LL ULMUC away from manufacturing and towards agriculture, which has helped to expand the domestic market for manufactures but raised manufacturing input prices. Capital output ratios rose substantially between 1959-65, reflecting heavy AIVemenH.L .AH JAnUr, JSWMaULUL JJLUJJ%kW0, CUAU L0 UrU ULCIO L LoefLUL. zl a result of these features, aggravated by the slow overall growth of the economy, manufacturing nas neither bcume th lauug growth sector nor the leading source of savings which many had hoped. S5. There has been a marked change in the structure of manufactur- iug output, mainly since 19O. Consumer goods output has only been al- lowed to grow at about 2% a year, while capital goods had been growing at 12% a year up to 964, and intermediates at 114. Whereas in the J13U's two thirds of production consisted of consumer goods, and capital goods and intermediates contributed one sixth each, the output proportions are now about one third in each type of production. 1/ This summary section was compiled in the India Division. It may not entirely reflect the views of the authors of the report as to what deserves emphasis in their findings. - ii - S6. Some of the empirical findings reflect magnitudes that are not generally well known. Important among these are, first, the share of the public sector. Even today, after considerable increase in its relative size, gross sales of Central Government manufacturing concerns (including railways and oil but excluding electricity) amount to little more than 10% of the factory sector. Its share in total manufacturing, and a for- tiori in GNP, is thus very small, though it has taken a large share of new investment in recent times. The Report concludes that "describing industrial performance over the last decade and a half means, in essence, describing the performance of the private sector", and that "one cannot hold the rather indifferent performance of the public sector enterprises solely responsible for the slow pace of industrial output or productivity growth in recent years." 57. Second, and perhaps still less well known, approximately half of all manufacturing is in the small-scale sector. Thirdly, policies for the regional dispersal of industrial output have had reasonable success and regional disparities in industry are gradually decreasing. S8. Trends in investment show moderate growth in public investment since 1963, such investment today being less than one third higher in real terms than it was ten years ago. The figures show some fluctuation, as do those for private investment, which began to falter in 1961/2 after fairly steady arowth. There is evidence that the Five Year Plans have had a noticeable impact of an 'indicative' kind on the private sector. The fiaures also sugeest a background to the recession of 1965 and after, which, though mainly caused by the droughts and the austerities conse- quent on the war, was accentuated by faults of various kinds in the pre- vious pattern of capital formation. In particular, priority was given to thp nrndutinn of rnnital aneds- the demand for which came larea1v from public expenditure; this made it difficult for the economy to maintain an Avan trand of overall nativitv q_ iTurning n intnarrinl finane- the Rennrt finda that hnth nrl- vate and public sectors have suffered in recent years from a declining level of internal resource generation. The nprI-tatea aaectorv ha had. to turn increasingly for funds to the development finance institutions and other sources. Reun Dn..o n .4 caia in. boh sectors have been -1-ss tha,n adequate. Maintaining industrial investment has thus required transfers - %- A =24 J 6L& =% %0 LLW.7 &.. ,k.V EXAMINATION OF PERFORMANCE SlU. The Report draws attention to a Rost of reasons for the unsat- isfactory performance of parts of the public sector, singling out manage- ment as a main weakness. it also points to the encouraging amount of at- tention paid to these weaknesses in Government of India publications and public statements. - iii - Sll. Looking at enterprises, the Report finds considerable differ- ences in performance between units producing the same type of product. It also finds that large enterprises on average out-perform small and medium-sized units. Optimum size of plant has however rarely been an overriding investment criterion. S12. Excess capacity in industry has a variety of causes; the Re- port attempts to distinguish between that caused by cyclical demand fluc- tuations, that due to imperfect forecasting in the past, and that attrib- utable to other causes. One conclusion, derived from the quality of the data and the nature of the concepts involved, deserves quoting in full, that "except for industries which consist of only one or two large firms, the use of the capacity concept as a planning tool is unlikely ever to produce acceptably accurate results." S13. A major theme running right through the Report is the pursuit of industrial efficiency. The Report comments on the large range' of goals aimed at by industrial policy: an equitable distribution of income and the raising of employment levels; a balance of new investment among the States, the development of backward regions; prevention of the abuse of monopoly power and - by no means the same thing - of economic concen- tration; promotion of new production in industries of social importance and discouragement of luxury production; protection of the balance of payments and the maintenance of a high rate of economic growth; and the overall aim of establishing an industrial sector in the widest feasible range of lines of domestic production. The Report does not - indeed it scarcely could - find fault with any of these goals individually. It: does suggest that in aiming at all of them simultaneously. industrial policy contains little in the way of a systematic attempt to weigh one against another, and without such systematic attempt is bound to contra- dict itself. Further, the number of instruments used in the pursuit of the goals - industrial licensini. nrice reeulation and subsidies. foreign exchange allocation and control, to name but a few - has given rise to a situation in which the weighing of alternatives is difficult. It is now very hard to estimate the true cost of any industrial activity. S14. The pursuit of industrial efficiency, the Report concludes, may now require a reaaxmination nf thPn nnlripa Tn thp rame of individual policy instruments, some may themselves already have become inadequate. Exchange allnention for example, mav nn in anma rnae he lnsing. by de- laying production, more foreign exchange than would be misspent under a remime of arenter flexhiility- Aut mor 4lnnrntnn1 In ArtnthAd hV the Report to the overall working of industrial policy in its present frame- work of a grat mnlHnliev both f onaM nnA ^f mann. Tt i2 the Rui- port's contention that a number of the aims of past policy are sufficient- 1v woll an thony t^ ha4n& avtn"A vn xi"nfhl nnllo- makove noW to rl;me more emphasis on economic efficiency as more conventionally measured in terma of omptf i tive,n eats- s. M on4tal 7 international competitiveness.  I. PREFACE 1. This report on Indian industry attempts to describe the pro-- gress of the manufacturing sector, and some of its problems today, in the light of the events of the past two decades. The study was under- taken because this sector is central to many aspects of India's long -run development, and has been the focus of a large and sustained investment and planning effort since the mid 1950's. The results of this effort have been mixed; on the one hand impressive engineering and other skills have been developed, as elsewhere in the economy, to manufacture a strik- ing range of modern products, yet on the other hand the level of effi- ciency and the economic return on some of the resources invested in the sector have so far often been disappointingly low. 2. Explaining such paradoxes is not easy, and arriving at conclu- sions on the likely or warranted course of future development is even more hazardous. Partly this is because the whole process of industrial- ization in any country, and especially one the size of India, is very complicated, involving as it does qualitative changes in entrepreneur- ship, in management, labor and technical skills, in attitudes and forms of organization, and correspondine developments in services from other sectors of the economy, including the government's planning and adminis- trative services. Development of the physical capacity to produce goods is in some ways the least difficult of the tasks to be tackled, and the state of knowledee seems to be such that social scientists today can really explain only a part of what constitutes an efficient industrial- ization nrocns. Partly also. since the start of deliberate nlannina in India twenty years ago, policy towards the industry sector has to be seen in the liaht nf the fact that thA induntrialization nrnrona In naked 1n serve many of the immediate and longer run social and political objectives nf Tndia's devalinment often at onnaid&rhA rnn- t-n aff4e4ant- AnAtalrial growth. As is discussed later, some of these conflicts of objectives are aito,h t-hat- a "rt nil not- nf ,nn4o t-w-A 4.iA.at- r -1 hardA to acjli%eve. In these circumstances, the ideal course of policy is often difficult to diarprn -And no rlAim in mnadp harp pit-hr to a enmplete ov n, AriatM understanding of these intricacies of the India industrial scene. 3. Having considered these and other caveats, however, we still a slight but revealing industrial recession, it would be useful to take This report thus covers, in general, the economic and policy environment wj ihi wic the,4 4a4i sgw 4- -As productn- deC,.i.4S.4 .a OF "eh mas.n u-rIng. .4.*&~~~~~~~ V& .. .- U*&M. .tf f%- .S4 OS UUUBLlA ~ UL.Lng sector are made, and the results so far. Wherever statistically possible, t-he mauacturis -a4. 4- .A4..-A -- -- to XC..A- .1...4JJ such as electric power production, and also mining and plantation agri- U.LL.oure. CmnCJlly CAu &LWUL U=LA.VU cnsLndatinA hLr e Lart U.I economic problems such as choices between processes, and other factors - 2 - such as research and product development, marketing, wage incentive ar- rangements, management quality, manpower training 1/ and the like. These of course are some of the factors which make all the difference between an efficient and inefficient firm, and which are also critical to any analysis of the public sector plants, each of which has its own set of usually formidable problems. The emphasis here is placed on the macro- economic aspects, rather than productivity aspects within the purview of an individual firm, partly on the grounds of brevity but mainly because the Indian economy since the end of the Third Plan has been, and still is, passing through a very important phase of adjustment in both macro- economic structure and policy which has important implications partic- ularly for the industry sector. 4. Readers or writers about industry in India rapidly acquire so much miscellaneous information that it becomes exceedingly difficult ei- ther to arrange or to store it. For this reason, it may be as well to offer some guidance to the format of this report. Chapter II, which fol- lows, attempts to set the scene by describing the antecedents to today's policies, and the origins and nature of the basic industrialization strat- egy which was adopted soon after independence in 1947. This is important because the same basic strategy still rules today. It goes on to describe the main policy tools that have been adopted, in pursuit of the chosen strategy, in principle and in practice, over the past twenty years. This is done not so much to evaluate these policies as to establish the gen- eral environment; included, therefore, are balance of payments policies which, although in part adopted for other purposes, have nevertheless had a major impact in the industrial sector. 5. Chapter III attempts to describe the fundamental trends in pub- lic and private sector industrial investment, the structure of output, capacity utilization, finance and profitability, in the light of the pol- icies described earlier, and trends in the rest of the economy. In part it hints at the conclusions which follow. Mainly, however, it is simply descrintive benause it is very clear that desnite the larae amount of raw data available, usable statistics on industry are few and far between. Sn Tmirh diamiaminin nf Tndian indnatry in enrripd n1i in ionnrancep of snme of the underlying trends and magnitudes. This chapter tries to remedy that defieancy. nnkina hark, with hindalaht- at the Ptatr nf the 1964-68 period, it is difficult to avoid wondering whether some of the mistsken interp,retations of the economic situation, made by l-cal andl foreign observers at the time the original Fourth Plan was prepared, could U.- k--- -.-4A-A '--A more~ 4-fly. and renleant, stastical indictor nnr vealed some of the underlying economic trends. 1/ Employment and manpower problems are being extensively analyzed at the moment by the Unit for Economic & Statistical Studies on Higher Education, London School of Economics & Political Science. See Manpower and Educational Development in India 1961-1968, T. Burgess, R. Layard and P. Pant, Oliver & Boyd, London, 1968, and subsequent studies. -3- 6. Chapter IV assesses these results in terms of the strategic objectives outlined earlier, concluding that, although in terms of out.- put and import substitution a lot was achieved, the strategy neither al- lowed for, nor produced, an overriding concern for industrial efficiency. In Chapter V some national and international comparisons of the aRre- gate efficiency of Indian industry are advanced, with particular emphasis on the relationship between size and efficiency. The question of whether India possesses distinct comparative advantages from her low labor costs is also exolored. The concluding Chapter VI examines policv trends in key areas such as monopoly controls, absolute protection from imports, and Romp othAr inainPR of industrial nlannint. 7- Thu, the PARnop of the annroach here is to examine certain underlying trends in the manufacturing industry sector, with emphasis on esthlishina aratiatie-nl and AnAlvtiral frnmPwnrk within which to An- seas trends in industrial efficiency. In other words rather than examin- in the mechan of f^r Povrn"10 inAuntriAl 14PPnnin and hAlAne^ nf payments policies per se, which has been done exhaustively elsewhere, the attempt here is to put tho at-rana n 411ium4natng tho Amnmite nf the industrialization process. The report does not pretend to come to definitiv AnAmenson such 4aaina, and aime 4n M00.nna oA nlan" OA-n some of the undergrowth obscuring a very complex subject. A lot more an lyssn ed ob done,u aCd to ---------------s, considerable .stress is given below to the statistical presentations; the Statistical Annex to thi4 , -1.... 4--f-her W4 h 1- l-- TT -,I4nk, a.s e -h- *- , ...14+- -f some of the main statistical series, are regarded as an integral part of LIA5 LG ULLe II. TWO DECADES OF INDUSTRIAL PLANNING I. 'SLy DIMa M UCLLI LILL UL LLU AMALL. LLLA. ML.&L8Z UL FU.LA" cies is bound to be misleading. In fact, policy towards industry is the sum of a Large number -ut UCparaLC pU4U.Wts UK pKaLLZtSI WLte11 ae U.LXCL- ly or indirectly related to the sector, each designed to meet some spe-- cific objective. Thus, on the one hand there is partial planning of in- vestment allocations, particularly in the public sector, on the basis of a strategy which is discussed below. On the other there is a range or controls which operate over output, investment, prices, finance, tech- nology, and tne like, mainly over the private sector, whose administra- tion reflects the pursuit of the strategy described below along with various other policy objectives, such as control of monopolies, protec- tion and promotion of small-scale and cottage industries, the develop- ment of backward regions, price stability, employment maximization, and many more. On top of these, the short-run problems of manging the bal- ance of payments, both on the import and export side, have become a dom- inating influence over industrial policy. A good many of these policy objectives, each laudable in itself, tend to conflict both with each other and with the general objective of increasing industrial efficiency. However, given the immediacy of the many internal political and social pressures, botn regional and national, which have to be accommodated, it is probably inevitable that purely economic considerations have to be compromised on many issues. (a) The Antecedents 9. Many aspects of the basic approach to industrialization, as practiced over the last twenty years, were developed well before inde- pendence in 1947, and are perhaps best understood in the light of their origins. Up to the first World War there was no positive encouragement of industry, although the cotton textile industry had captured parts of the internal market by the turn of the century, the iron and steel indus- try had made a start, and engineering shops and coal mining were stimu- lated by the development of the railways. Tea and other plantations were well established by this time. The Swadeshi or 'buy Indian' move- ment gave a fillip to local industry from 1907 onwards. In total, fac- tory employment in undivided India in manufac.turing industry outside the plantations had reached about a million by 1911, including jute and tea. Even at this stage:, government's predilection for using detailed controls over large projects was in evidence, and the late J.N. Tata, seeking to establish an iron and steel complex in the late 1890's was "prevented from pursuing the project further by the discouraging attitude of officials and the vexatious rules governing the grant of prospecting licenses." 1/ Later, however, government was to play an important part in establishing the project. 10. The first World War began to change the basically laissez-faire approach to trade. Internal and external trade was partially controlled. The buoyant market stimulated the production of chemicals and engineering goods, and the government itself established several factories. Shortly after the end of the war the use of protective tariffs was endorsed. Such import tariffs were extended to about forty industries during the inter- war period, and were administered on an ad hoc basis, the level of tariff being adiusted up or down from time to time in the light of the profita- bility of each industry in the face of external competition. 2/ The gov- ernment. then as now, was a major buyer and in some cases such as railway wagons substituted a guarantee to purchase from Indian sources for the tar- iff. Manufacturinv activities by the railways themselves also continued 1/ nR _ andoi "The Tndutrial Fvnlutinn of India." 4th Ed.. n. 270. Mr. Tata's successors are still making the same point, as, for ex- ampl, 4 "The Anot-nmy An" rnnanianran nf falgav-" anprh hv JR-) Tata, January 3, 1969. 2/ e.g. see D.R. Gadgil, op. cit., p. 256-7, 273, etc., for the his- ho-vy er, wrts itilly eie tt aon te grons tat th indusy h however, was initially denied on the grounds that the industry had caused its own problems by overexpanding. to expand, however, causing some private sector concern about over- capacity. The state governments began to be involved in industrial de- velopment during this inter-war period, making substantial investments of their own, with limited success. The main point here, though, is that by the 1930's government had established itself as a prime source of control and initiative over any subsequent industrialization effort, al- though it was not until the 1950's that this power was put to signifi- cant positive use. On the whole manufacturing industry progressed stead- ily, if slowly, during the inter-war period, despite the worldwide re- cession, and by 1939 employed perhaps two million people in the organized sector. 11. The second World War had an impact greater than the first. It clearly revealed India's dependence on imported manufactured goods and, because of the disruption to normal trade, stimulated production in a number of new engineering and chemical industries. For example, the machine tools industry was born during this period, although it almost collapsed again at the War's end. India thus emerged from the War with some additions to the basic industrial structure, although with consider- able excess of capacity in the metal and engineering industries, and with a very comprehensive set of emergency controls over external trade, prices, production and distribution. All told, however, a century of industrial- ization was felt by the emerging Congress Government in 1947 to have brought only very modest results. (b) The Origins of the Strategy 12. More important from the point of view of explaining the origin of the basic stratepv of industrialization is the evolution of political. views before and during the second War. Decisions taken then are still influantial today. The Congress Party managed to embrace three main streams of thought, as it emerged to form the first government upon inde- oendence in 1947. Firstly there were those who supported the Gandhian philosophy, with its emphasis on the self-sufficient individual village economy. 1/ SpeondIv. there was a groun of generally Western-educated leaders of the Congress Party, who had been in contact in many cases with %inrilla iepA_a m - for axamn1. P-annumed in Britain during the 1920's and 30's. They brought a strong conviction that deliberate government inriwnt-inn nnd in anm hnir nartrnra enmprahin.- was annantial to in- duce change in economic structure. Thirdly, there were a number of busi.- nessmen, nothl Tmnxan RAin4 nnda .n- Rirln -whn onv thp Conorpaa Party strong support in its independence struggles, and who felt then that thare Tas no naracary cnfltt hatwan the atrrnn rantral rnlp of government envisaged by the Fabian socialists, and their own business in- terst*s. A group from the business community was responsihlo fnr ermple, of large-scale enterprise. e.g. "A Plea for Reconstruction of Indian rolity , Jayaprakasn 'Narayau, L7.. - 6 - for tne "amoay Pan in 19444. if' rolicles reflecting all three streams of thought are still to be seen today, but on the whole the greatest in- fluence on industrialization strategy has been exerted by the second group, and their successors. The Congress Party's National Planning Committee, meeting in 1938, for example, set the tone by concluding that the pursuit of rising incomes and national self-sufficiency would require key indus- tries and utilities to be either state-owned or controlled, and the es- tablishment of such heavy and basic industries was seen as the main strat- egic step, although cottage industries were not to be neglected. 2/ The work of the large National Planning Committee and the subsequent Advisory Planning Board revealed widespread endorsement throughout the country of coordinated industrial planning to bring about a rapid increase in stand- ards of living and fundamental changes in the social and economic struc- ture. 3/ 13. The "Statement of Government's Industrial Policy," (April, 1945) 4/ in contrast to pre-War policy, advocated explicit Government control of twenty key industries and ownership of many heavy industries, and the use of licensing and other controls to achieve a multiplicity of objectives including prevention of monopolies and regional concentrations, the setting up of a system of targets to determine the "correct" lines of balanced investment and thus also to prevent private capital going in the direction of excessive profits, to secure fair wages and security for in- dustrial workers, and other objectives. The basic approach of this Pol- icy Statement was reflected again in several statements of the government after independence, and all the preparatory work enabled the government to issue its basic Industrial Policy Resolution of 1948 very shortly after independence. It is interesting to note that industrial policy was thus firmly established well before the Planning Commission, for example, was created. The Resolution established six industries in which the state would be exclusively responsible for establishing new undertakings, name- ly, coal, mineral oils, iron and steel, aircraft manufacture, ship build- ing and telecommunications equipment; the government explicitly reserved the right to nationalize existing private firms in these six industries. Three government monopolies - arms and ammunitions, atomic energy and railway transport - were established, and eighteen further industries were subject to central regulation and control. Cottage small-scale in- dustry was given stronR support in this Resolution, while foreign invest- ment was cautiously welcomed; excessive profits were frowned on. The same resolution also mentions the government's intention of establishing the 1/ A ronnrt Anaanad to influence the courap nf nont-War aconomin noliev- two --------- authos of e 9/ J Issued nu-nv -y R-AeI,pn~1 A.- M--nnI,- d " inclde UJ *J O 6&V- L ,"6&5 "& two authors of the Bombay Plan. - 7 - Planning Commission, which was set up in 1950. The Constitution, enacted in 1949, codifies a theme mentioned above, in that it explicitly directs that policy should ensure that the economic system does not result in the concentration of wealth and means of production to the common detriment. The Industries (Development & Regulation) Act of 1951 was designed to im- plement the 1948 Industrial Policy Resolution. The act confers on the government, through a licensing procedure, very wide powers for regulat- ing production and the development of industries. One of its main ini- tial purposes was to establish that these responsibilities were those of the Center and not the States. 14. The spirit of the 1948 Resolution and the 1951 Act clearly fa- vored a deliberate acceleration of industrial growth, although it was not until the Second Plan (1956-60) that the public sector began to put in resources on a large scale - the emphasis in the First Plan being very much on the utilization of the excess capacities that had been created during the second War, and also during the Korean War boom. During the First Plan Period the Chittaranian Locomotive Works and the Sindri Fer- tilizer Factory were the only significant public sector plants completed. The 1947-1956 oeriod also saw only moderate investment activity by the private sector, and much energy was taken up with what appears to an out- sider to have been irrelevant ideological rhetoric between business and the government over the latter's intentions. Despite the involvement of ker businaAamen in the indenandence movement, that movement anawned a deen distrust of business, partly perhaps because of the association between eninlnm Ani rnlnniAlism in the minds of the anriallarQ of the Congarea Party, who also held business responsible for the lack of industrial pro- gress to date. Tho dintrust wA mutual, ani -hara ma miuh urn.rta4n"y in the private sector over the likely growth and ownership pattern that was not resolved until the Second Plan and the 1956 industrial Policy Resolution which preceded it. 15. The 1956 Industrial Policy Resolution has been accorded by some nhea~rwrev f-he af-us of an nomI 0 constItutIon.- It remains today the basic statement of industrial objectives, and was the guidance behind the Seod Thrd, .-an Four ~.th Five-YeVar Plan. Theo ---in4. point~ here- is that the objectives and procedures it outlines had at that time, and largely t-Aay oo a broa basis IJof suppor~jt. CerU tly, It recl.V red FuL from the 1955 Congress Party meeting at Avadi, which concluded that "the State~ wi.ll necess~OarlyA pa*y a vit-.ail. pJar.t .Lt --AU I.J.1, Il. _p CJ _ &.4 projects... (with*) ... overall control of resources, trends, and essential balances in ue ecosaumn ... wastrateg controAL sLu over tu pLA atVes c- tor to prevent the evils of anarchic industrial development ... coopera- U.Ves andL mall-SCML= .LUJL%%MLLy OUVU.LL2 U= =UQFLJZOJ_&U LU, MMOWVaL. 0. 15 17JJ AMOUUL.LULU U.LLurkU LEUU AL preuOceasor JU LWO M3.U ways 1/; firstly, mainly in the light of what was regarded as inadequate 1/ See Harry Robinson, "Industrial Development Policy in India", S.R.I., 1956. - 8 - private sector performance during the early 1950's, the scope of the sector in which future development is the exclusive responsibility of the State was enlarged from six to seventeen industries, and a further category of twelve industries was created, in which the State many gen- erally take the initiative. The second point is that, although the State reserves the right to start any industry, the threat of imminent nationalization which the 1948 Resolution contained, was absent here, and in general the positive role the private sector could play was felt to be recognized. 17. The 1956 Resolution marked the end of a decade of strategy formulation, during which the basic directions and tools of policy had been formulated, although relatively little effort to stimulate public or private investment had been made. The new Resolution and the Second Plan changed this, however, convincing the private sector that there was indeed a good business outlook, both from the point of view of the po- tential growth rate, and because after a decade of sparring the private sector saw the way to a partnership with public enterprise despite, par- adoxically, the extension of the State sector. Given the resultant buoy- ancy of private investment and the planned increase in public investment, together with some planning errors, a foreign exchange crisis emerged in 1957, requiring strict import controls and thus in turn stimulating im- port substitution. From that point onward, foreign exchange became a principal constraint on more rapid development. and industrialization policy over the last twelve years has often been dominated by short run balance of payments problems. (c) The Imnort Substitution Strateev 1_ Thin brinva uq to the Imnort substitution strateav. The basic decision to transform the industrial structure and accelerate the rate of ineviumtriAl grnwth- with havy relinncp on the ratalvtr rn1l of anv- ernment, is described above. This in effect was the first prong of a two-ron-ed trategy. The aemonnd prong was the drin.n to schieva 1elf- reliance through the substitution of imports by local products, rather than by r 1.-i-n on an --xp--. stratef or. O"W a^fmm4.,F nn fiha f-wtn nary work on the Second Plan during the mid 1950's, not perhaps as a delib- erat chice4 a19..-Iog .1, - 14*-1 --4f:4,nn .~44n.. had always been in evidence, as it is today. 1/ The government had long Uee pessLULL.L aUUUL CAjVLL U4LVo9.LD a%. LguouA GA ywooL ,nes Mu u a rapid transformation of the industrial structure it is difficult to Ueciue wnLcu proucts are ikely to uanu CUmpuaative 4uvantage. LI misleadingly simple economic growth models on the Soviet pattern, such as those prepared for the Planning Commission by Professor P. C. Mahalanobuis at the inception of the Second Plan, likewise had no place in them for a 1/ See, for example, Fourth Plan Draft, p. 235. - 9 - dynamic export growth strategy or other considerations of comparative advantage. nor did the Planning Commission's later "Industrial Programs for the Third Plan", which notes that "(non-traditional) export targets can be little more than guesses or expressions of hope." 1/ A further consideration was the belief that businessmen and consumers, left to themselves, would always prefer to continue to import, and absolute im- port prohibition was the stick necessary to induce them to enter un- familiar manufacturiny activities. 20. Whatever the oriain of the strategv. however, the aeute for- eign exchange shortages from 1957/58 onwards led the government to adopt strona mpasures to minimize foreian navments: "clearance from the ind-l0- enous angle" became the rule, normally prohibiting the import of any item canAhle of beinr nrndned in Tndia- often without rippard for the cost of production. The same near-absolute protection exists today. Durina murh of r'he pnar decad,A alan foroein oehane ainplien have been not only scarce but also unsure, partly because of the uncertain- rioa of tho fnvoaian ad rnivrnia4 n a cno,naea onA th4a kne En,eha encouraged the continuous preoccupation with short-run foreign exchange savin-s. 21. T r n t n , n - -a-* - tJ--- JS* in itself - it is disarmingly simple to adopt, and making it work is not difficult 4A- #temm o pomoiang unw prouctive oUoulmes . Van I.V India had adopted a more export-oriented strategy there is no doubt that LconsaUable impoLL 0-auvobuUo.ttuto WUlU have UCCn LULJy juS.L.LAL.LUWe. J.A fact, if any developing country can succeed in making such an autarchic strategy work it would be udia, with a market for manufactured goods almost seven times that of Pakistan, twice the size of that of, say, Brazil or apai, or LougULy haL l Luat u Japan or rrance touay. Witn the exception of Britain, as first-comer, most of today's large indus- trialized countries used an impOrt uUbstitution strategy at some stage of their development. The U.S.A., U.S.S.R., and Japan, for example, all enefitu Lrom. theiL Large JALCLM MUL&CFb AAH UUpL.LL -LAL25 t;LL&LtY although the latter, like Germany, also had strong export promotion pol- cies . 1owever, othe ouuntries such as Norway, and unprotected indus- tries in countries which were otherwise protectionist, 2/ have succeeded without using impOrt suZStitutXon ponlXes, thus reminding us that import substitution is not a prerequisite for successful industrialization. 22. Since the early 1950's most L.D.C.'s with industrial potential, such as Argentina, Brazil, Pakistan, the Philippines and perhaps Colombia, 1/ Page ix. 2/ See, for exanple, "The Capital Goods Industry in Brazil" by Nathanial Leff; H.U.P., 1969. - 10 - adopted such a strategy. Their experience 1/, and, as is argued below, that of India too, is that one of the principal weaknesses of the import substitution strategy is that it diverts planners' and businessmen's at- tention away from the key factors in any sustained industrialization pro- cess - savings and the growth of productivity. That is to say, cost- minimization, innovation, and product-adaptation all receive lower pri- ority than the achievement of specified physical output goals. Indeed it can be argued in the case of India that output goals were the only explicit objectives - a situation encouraged by a planning technique which uses physical objectives as indicators. (d) Industrial Policy Tools 23. In putting the above strategy into action various tools of eco- nomic policy have been used, and various subsidiary objectives pursued. This section describes some of them briefly, while subsequent chapters include a partial discussion of their impact and effectiveness. In pass- ing it is worth noting that although considerable attention is given in these sections to government policy tools, this is not to say that these are in themselves necessarily the most important objects of study. They have in fact been studied at length by a number of very competent commit- tees such as the two Swaminathan Committees, a Lok Sabha Committee 2/. the Mathur Committee, Dr. Hazari 3/ and others, and most recently by the Industrial Licensing Policv Inquiry Committee (led by Mr. S. Dutt) in a report issued in July 1969. 4/ What really needs more study however is the economics of the industrialization process in India which, if better understood, could itself suggest answers to a good many of the problems worrying the critics of the industrial planning system. (1) Investment Plannina 24- The four Piva-Year Plans and the related industrial programs included a fairly explicit statement of the intended course of industrial outnIt- iwwtpampnt and rAnnAity. The Patablishment of outnut and thun capacity targets certainly provided some guidelines for public sector 1/ See also "The Import Substitution Strategy of Economic Development - C A U -f V4-flA4 - 11, I- U *1t7 S =*.a ....1.. Ta, T . .tr, mga~, h Mmni,-a"tA"M A97 Williams College, April, 1969. 2/ Estimates Committee (1967-68) Ninth Report, Fourth Lok Sabha, Min- istry of Industrial Development adCmnyAfis Industr1al Licensing. 3/ "Industrial Planning and Licensing Policy", Final Report. Dr. R.K. Hazari, Planning Commission, new Delhi, 197. 4/ Henceforth the "Dutt Report." This report contains an excellent description of the mechanics of the licensing system. - 11 - investment choices, and also was supposed to give general guidance to the industrial licensing system - i.e. to the administration of the 1951 Act mentioned above - although the administration of such licensing was generally on an ad hoc basis. In any case as each Plan period progressed, the unrevised Plans became less and less useful as guides to action, as the projections they contained became less closely related to reality. 1/ In fact, an examination of the planned projections with the benefit of hindsight shows that both the statistical base years of the projections, as well as the projections themselves, were often far off the mark; more- over, physical proiections also deviated from financial projections. This was in part due to the statistical system which was simply not able to provide the precise data that comprehensive planning required. 25. However, even if the Plans had been reliable forecasts of pro- bable events - that is, events which it is within the power of government to brine about - there is no necessary relationshin between the Plan and its execution, at least as far as the private sector is concerned. This is because there is no way of enforcing compliance with the tarets. In most periods from the very start the volume and direction of licensing and cnnansnt investment have deviated sanbstantially from that imlipni by the Plans: even where capacity targets have been adhered to, output targers have not- The Ministry of Tnderial DPvPlnTMent and Cmpany Affairs acknowledges that "there were no general principles laid down fnr inaviin 14e-annaa for antnhl4ahad now sndertakinan or auetn%nal "- pansion of existing undertakings but the things are well known, that the unit ahould be ecnomical and sn aon" 9/ Tho am. nnint 4. ..Am reat- .=1 he same point is made mrat edly by the Dutt Report which notes 3/ "... in some industries a large part ,of thue caacit-, to~ be ,.wmaf- A T.o 14 ,.av.aa 4-, te firs year o #VW of the Five-Year Plans. In the case of some industries about which there revision of targets ...". In short, the much-vaunted Plans were really not~L direct O to l' of inVDLI~ AU ra14netetplic~y aJlU1L~IS-hL, CU w.ll. IU= shown below, they have often worked very successfully as indicative plans. (ii) The Concept of Priority 26. The licensing procedure is a regulatory instrument designed es- sentialAly to restrict activities rLeaded as being of Lower priority or in some other way less desirable. On occasion however it has been a pos- JLJ See Statisticall tAuInex, TM-bles 604 and 65. Zi I Estimates Coumaiee, op. cit., p. 135. 3/ Op. Cit., p. 10u. In fact this report is, like Dr. Hazari's report on Industrial Planning and Licensing Policy which preceded it, an indictment of industrial planning rather than of the large industrial houses. - 12 - willingness of government to issue a license has itself tended to pro- mote private investment, because of the implicit guarantee of a market, or of foreign exchange. However, the main point here is that the con- cept of priority, which presumably is the essence of a discriminatory licensing procedure, has never been satisfactorily defined and at vari- ous times "priority", "key", "merit", "core", "basic", "critical", "as- sential", and "banned" industries have been defined in various lists for the purposes of investment licensing, maintenance imports, alloca- tion of scarce indigenous materials, fiscal incentives, export incentives, foreign collaborations, etc. None of these lists is the same, and the government argues that the multiplicity of objectives is such that a consistent list cannot be expected. No basis has been established for priorities within each list, or for changing priorities over time. 1/ In fact the absence of a satisfactory definition of priority has been one of the causes of administrative confusion in industrial policy for the last twenty years. 27. The only consistent characteristic of the "tool" of priority is that it is invariably a ranking of products, with type of product as the variable according to some general notion of importance to consumers or to some development goal. This is of course consistent with the phys- ical balances method of planning which was thought to be used. Priority does not seem to have been conceived of in terms of a rate of return, or of potential for productivity gain, or some other economic criterion. Perhaps it is unreasonable to expect a satisfactory definition. Certain- ly it is possible to conceive of "priority" in the sense of taking pri- ority action to avoid an expensive bottleneck in the economy, on an ad hoc basis. Beyond this, however, to establish comprehensive priority lists ranking all industries implies the existence of clear ideas on what the industrial planning process is trying to maximize. Such ideas do not seem to exist. 28. India of course is not alone in this. It is in fact difficult - perhaps impossibly difficult - to attach numerical magnitudes to a wide range of policy goals in such a way as to rationalize economic policy completelv: to 'auantify the obiective function'. as current Jargon has it. It is only suggested that Indian policy might be improved if some attemots were made in this direction - if. for example. efforts were made to estimate the cost, say, of installing several units instead of one in order to nrnmnte Activity in different reeions. or to avoid monopolv. Minimizing cost may not always be the unique criterion of decision. But on QhniulA nt lanot have an idea of what it ansta to nursue alternative ends. _±, See R~.K. Hlazai, op. c-it., paras. 2.21 onLwrds. - 13 - (iii) Investment Location 29. There is a lot of discussion of questions of location and ":e- gional dispersal of economic activities" and "fair allocations between states." There really are two problems. The first is the need to avoid undue concentration of industry in excessively overcrowded areas where the costs of other social services such as transport and housing would be excessive. An example of this would be the Bombay-Poona region. The second problem is the need, in the interests of equality, to spread the alleged benefits of industrialization to relatively backward states or parts of states which for various reasons have not historically attract- ed much industry. As far as the first problem is concerned, state gov- ernments are mainly responsible for location policy, and many have a set of policies which attempt to discourage location in overcrowded areas and facilitate it elsewhere. The State of Maharashtra, for example, has a number of industrial estates in backward areas, offering concessionary finance, facilities for retraining and relocating labor and so on. The State Tnduqtr1al Develonment Cornorations and the State Finance Cornora- tions work together at promoting this kind of dispersal. 30. The problem of bringing industry to the less developed states or parts nf atnton Attrneta the orantPMt nonlitinl Attantinn AnA tn Qnm extent licensing is used to favor industries wishing to establish plants in knekAvA aA0 VnV OaMp1 in 1Q7 a annpknman nf the Ministry if Industrial Development mentioned that "All other things being nearly e- ual, in the 14cans4ng onmmittee we give nrior4ityt inusAnes4a from -a atively backward areas." 1/ He went on to acknowledge that such units should " -on -aa,4- p-p.,e 4 thpn v- nr *,s fho mnr%ci ecnomic, .t4ron..,a -.- 1- ... --- ------ .d compared with other areas. Sometimes applicants for licenses are given special ..nnae4a uhn an noas m4e _4oan na nfe 4aagn caboknratan I t hen .s....ooA ~LW Osa.. no *1LOO%LL I..- -50 *&A.bL WA.StS A'L AA LLU; agree to locate in certain areas. In the case of certain industries such made to encourage an advance allocation of licenses between states on However, the licensing procedure does not contain any compulsory devices censing authorities had no operative list of, or criteria for, backward areas. J±. wueuevec pusueuto, puuLic accouL projects have unu 'ucaLU iu backward areas if the government feels that essential technical and eco- nomic criteria would not be violated. All four major public sector steel plants - Bhilai, Rourkela, Durgapur, Bokaro - are cited as examples of ts, as were the various attempus to nave fertilizer factories located in almost every state; machine tool factories in Mysore, Kerala, AndrL Pradesh etc. 2/ In practice, there is more talk than action; the location 1/ Estimatea Committee. on. cit., D. 34. 2/ Thid.. n. 31. - 14 - of fertilizer plants has in fact been decided on different principles, and it can be argued that the steel plants' locations were determined more by the location of iron ore and coal than any other factor. (iv) Size 32. Policy towards size of plants varies in emphasis from time to time. The Third Plan 1/ in particular places a great deal of emphasis on facilitating small and medium-size entrants to industry. On the whole the main.positive efforts the government makes are to promote the small- scale sector, formerly defined as all firms with fixed assets of less than Rs. 5 lakhs but now defined as all firms with plant and machinery costing less than Rs. 7.5 lakhs ($100,000). A number of such industries (originally 73 but as of now 55) are banned from the large-scale sector, including both modern products like certain plastic goods, and certain traditional industries such as the textile hand loom sector. Such indus- tries also receive various concessions such as finance, and various forms of technical assistance. Small and medium-scale ancillary industries also receive special concessions. Generally speaking, whenever there is the possibility of choice, economies of large-scale production are regarded as secondary to objectives of regional dispersal, employment maximization and avoidance of monopoly. The Dutt Report points out, for example (para. 6.40), that small and uneconomic units were licensed to facilitate regional dispersal. 33. Small-scale industry has long attracted special attention as a medium for promoting employment, new entrepreneurship, savings and dis- persion of growth. During the first Plan this took the form of protect- ing parts of the traditional small-scale sector including textiles, foot- wear, soap, coir, handicrafts and bidi. Gradually this list was extended into a range of modern products such as bicycles, electronic components, plastics and radios - products in which the small-scale sector was felt to be capable of playing a role. It is evident 2/ that in many such sec- tors (as in textiles too) the large-scale sector would usually have been more efficient, because it was still necessary to use the licensing sys- tem to orevent or control the exnansion of the lar2e firms. desnite the various incentives enjoyed by the small-scale sector. The small-scale sector is &arly hunvnt- thagh it- i- difficult to inido whether the costs of this absolute protection are justified by the results. (v) Prices 34. Prices are controlled by the Essential Commodities Act (1955) or bDy specific orders suchi wa thee Cement Control Order, many of whIchk r/"age14 41 See, for example, the DJutt Re~pOrt, p4arabs. U.44 VILWLUO. - 15 - originated during the second World War. There was a period during which about forty major commodities were controlled, but the recent tendency has been towards gradual liberalization of price controls, and today they are relatively unimportant in a formal sense, although informal price control is prevalent for important commodities. The objective of such price controls on the whole is to ensure that scarce essential commodi-- ties are available to users at "fair" prices, and that no producers berL- efit unduly from scarcities. The administration of prices has often been such that production of essential commodities was relatively unprofitable, thus aggravating scarcities. Thus for example coal, steel and cement were sold at common retail prices throughout the country so that no region should suffer because it is remote. Prices of consumer goods such as textiles were controlled to minimize cost-of-living increases. (vi) Monopoly Control 35. There are two aspects of this problem in India, which tend to -t annfnigd. The first in that of nontrollina the activities of domi- nant firms within a particular industrial branch, including the entry of new firma rn indnatrinl brancha- And nreIna and distrihntinn nrAt-HIIn The second is control over the activities of the large industrial houses, or Conqlomratens i wrh in TndiA rpnraent a mainr And mn-ennfui1 fnrm of business organization. This latter concern over the "concentration of economic power" has ln" haon anaitiva nAlitiAl matter, enard- less of any question of the economic impact. The fear is, as Dr. Hazari oncluded in his re-ort an ind-narrial 1icnsaing policy that "The enter- prise and imaginative understanding of licensing formalities enables large houses to foreclose the m_arket." Thnere is no e=,,li1cit legislation yet, although monopolies and restrictive practices legislation has been con- "p&latedfLO by~ the goJ'vernmenUAt since.. B.J0, and4 a dmf t~ M is J now befor the Lok Sabha. The only formal control so far has thus been the 1951 Li- ceninO.U g I. AC-, L-.- 1,Z AJLI LjLL L FL=~ .LL.=0, ±LL %_UL1-a.LL= ILU =J6J..LL;.L. criteria on the use of the licensing system to control concentration. On the whole, 4*- 4s argued that +4- -- A fo 4-util±c1n-I4- have if anything eicouraged the growth of large houses because of their equal, however, the licensing authorities state that they prefer to issue liceuses to new entreprenueus unw buesune tuc na ocses -Lug__ houses. The remaining tool of monopoly control is the extension of the in the Third Plan (pp. 13-14). (vii) Distribution 36. There is little distribution control. The main instrument is the EssentLal Commodities Act of 1955 which is used to conLrol the dis- tribution of scarce materials such as coal and steel. Fertilizer dis- tribution is also partially controlled through the pooling arrangements. In addition to these a number of commodities are reserved for state trad- ing including caustic soda and soda ash, newsprint, sulphur, tires, pe- troleum products, tractors, and others - recently including raw cotton. - 16 - kviii) Trace and roreign Excnange Conrols 37. These controls are well known to readers of this report, and are described in Chapter 8 of the recent IBRD economic report, "Economic Situation and Prospects of India", SA-3, April 18, 1969. The adminis- tration of these controls intimately affects the industry sector, more than any other. A number of observers in recent years have pointed out that the administration of trade controls - in particular controls over current inputs both imported and domestic - have been a key constraint on the performance of individual firms. These arguments are not repeated here, although the importance of the import liberalization policy is touched on in the last chapter. The most powerful tool for the past dec- ade and a half has been the "'indigenous angle" clearance procedure, which is the principal tool of import substitution. Proof of non-availability of a local product is usually the obligation of the would-be importer, and considerations of timeliness or cost are generally ignored. Scrutiny of an import license application is now carried out with such thorough- ness that the Directorate General of Technical Development (the body re- sponsible for technical judgments) sometimes plays an innovative role, suggesting that a particular manufacturer could in fact produce the de- sired item, even if it is not yet made. 38. In practice the shortage of foreign exchange is such that few aspects of industrial control are without their exchange control aspects, and as a result the latter control such as clearance by the capital goods import committee is often the dominant one. Moreover, in administering such controls, short-run balance of payments considerations always tend to predominate, rather than longer-run considerations of productivity. Thus the question of whether a particular investment is subject to in- dustrial licensing is frequently a question of whether or not additional direct or sometimes indirect foreign exchange costs would be incurred. To give an example, although dividend payments to foreign investors are not controlled, the dividend cost of an innovation by the firm in India would be taken into consideration in licensing such an expansion. (ix) Financial Controls and Incentives 39. The government controls capital issues and has done so since 1943. The administering authority is the Ministry of Finance and on the whole the objective is to channel investment into desirable industries, and to regulate the capital structure of firms and access to the capital mArket- - rinrp ntite clear anidelines are established this control is not a major hurdle. On the whole selective credit controls are little isd, pnrtly heause inclustrial Iii-Anning enna away with the nptd for banks or finance companies to channel investment. Recently, however, as one working objective the diversion of some funds to backward areas. he such - as ICIC, I n, IDBI thrsu. In a tong t e fm i houses such as ICICI, IFCI, IDBI and others. In addition to these fi- - 17 - the customary pattern of other countries. The main tools are the devel- opment rebate of profits tax which is given at a higher rate of 35 per- cent to certain priority industries as against a normal rate of 25 per- cent. A nondiscriminatory tax holiday gives relief from tax on profits of up to 6 percent of capital employed for a period of five years for new concerns. A third instrument, a variable level of company tax, is also used and an 8 percent deduction in profits tax is given in some circumstances to industries which are defined as priority industries. (e) Conclusion - The Role of Government 40. In conclusion, it is clear from the above that government con- trols are pervasive; the policy tools are plentiful and are encountered daily by businessmen. Even the above list is not comprehensive and it would be possible to add many further points at which governmental con- trol is exercised. The result is that a large part of a businessman's time and creativeness have to be devoted to manipulating the various control systems. Some enterprises do this very successfully and in fact all large firms keep representatives in Delhi simply to expedite the is- suing of various clearances. The system produces a very heavy dependence on government for initiatives or judgments of all kinds; a glance at the financial press shows that not a day passes without representation from some section of industrialists for a concession from government to meet: a Particular problem. As other observers have pointed out. the-result is a very heavy burden on limited administrative resources, perhaps to the noint of being counter-productive. This is not to say, though, that the controls do not perform necessary functions; they do. Monopoly con- trol- eniouraent to small industrv. indicative nlannin. foreian ex-- change allocations and the like are all essential functions. Nor is it argued hArP thn thp nnrrnlq as onPrAtAd_ have nPnnPAsrilv nrodurpd poor results; many industries have in fact benefited substantially from the nrntaction and promotion tha have vrplvyt Tha main npntinn ralsed is whether the pursuit of all these social, political and economic goals (for whirh only vaon rritpriA have been oivRn to the adminintratorg)- using the strategy described above, is likely to produce a concern for the nroductiviit ovrlth on which Inng-run growth dpends 41 I t- wouldI also bep uroeng ton &4Ive the imn-rafann t-hat- gveOrm nn controls in fact are limited to any particular formal channel, and any lIsng o f the tools the ovearnment ues o Implement Its IndustrIal policies can give only an incomplete picture of the influence of govern- men onIndstr, bcaue here is in f__ a continuous dialogue between. the two in pursuit of the various development goals. The following study of the cement1 In4 sr A-* y help Illu.#trate 0,Is Point. The cement indus- try is chosen because it is long-established, has a homogeneous, "pri- . 1-7 .LUU .. 0. A L~.. - L J %_ I- .J = . wt . A WA 7 %J. .&L L. L 0 J. sified under the 1956 Industrial Policy Resolution, i.e., those indus- tLiCs n WHLl L L As expeL UtVedtht-UULo WLent w ~ Ue undrLaHen or- dinarily through the initiative and enterprise of the private sector." - 18 - (i) The Example of the Cement Industry 42. Since its earliest days the cement industry has needed some form of price regulation; in the early 1920's a destructive price war forced the government to step in to regulate prices, a function later taken over by the industry itself. In 1936 all firms but one amalga- mated to form Associated Cement Companies Ltd. (ACC) but competition from new firms led to another damaging price war in 1939. The price has been regulated by the government from 1942 until today. In 1956, all distribution became a government monopoly, with the objective of rationing supplies to consumers on the basis of government priorities, equalizing the price of all cement to the final users, and rationaliz- ing cement movements throughout the country. 43. The administration of price control since 1956 has had three main features. Firstly, in attempting to establish a fair price for cement, the government has set prices that have given the industry rela- tively low returns on capital employed - distinctly below returns in iron and steel, chemicals and engineering industries, for example, and only slightly better than in textiles or sugar, where prices were kept particularly low to protect the consumer. The warranted price level for cement was competently analyzed by the Tariff Commission in 1953, 1958 and 1961, but on each occasion the government (which until recently was by far the largest cement consumer) chose to set lower prices than the Commission recommended. The predictable result on the positive side has been that pressure has been kept on the industry to improve productivity, and output per man has in fact increased fourfold since 1940. On the negative side the results have been twofold; the industry has found it difficult to attract capital for expansion (as in the case of coal and textile) and thus has been reluctant to expand as fast as the govern- ment sought. Also, cement companies were induced to diversify both horIznntally and uprtiallv into more nrofitable lines and almost all have in fact done so. To some extent diversification into cement manu- factriing marhinery ww anrmnraaPd by government as nart of the imnort substitution program. The low cement price itself, of course, also raised demand, but onsumers sho dd ot receIve va "nrHnritv" llnntona __r twumers-- --- --- -----------etnn wr willing, on occasion, to pay between two and four times the official rke 44. The second feature of th priin 9-ste is tha llcnsmr throughout the country pay a common railhead price, regardless of loca- tion&. T.&e basict Jss-P-cto 12s that noCL,L, cosue shoul V-t _p_.14zedA 0 on grounds of location. Likewise producers are insulated from location Bombay, for example, which are far from limestone deposits are heavily subsidized by other users. The Location of cement plants has been biased towards the North and South zones which, with good limestone deposits, have slightly lower production costs than the East and West zones. Me - 19 - economic cost of this system is hard to determine but appears to be con- siderable. Such studies as have been done 1/, however, indicate that an undistorted system would favor locating plants nearer to consumers, and also that the use pattern of different building materials, such as steel, brick, etc., would change. 45. The third feature of price control, at least since 1956, has been the setting of ex-factory prices taking into account production costs. Up to 1961 there were almost as many such prices as there were plants, justified on the grounds that the cement shortage was such that every plant must be encouraged to produce, even at high cost. The extreme case is Travancore Cements, whose costs are 1/3 higher than the averaRe. After 1961 the system was modified to have differential prices reflect- ing mainly the age of equipment, and lower prices were given to older plants whose depreciation costs were low for historical reasons. Today there are three basic price tiers based on arbitrary estimates of the warranted return on capital employed. This system encourages cost re- ductions and efficiency. and ensures that no producer benefits by virtue of having made an earlier, rather than later, decision to invest. The indnRtry'n nrtdntion cots are comnetitive with those in advanced conn- tries. 46. On the whole licensing was not used to constrain the cement indttrv and At any nnp tHim thp unlumnp nf tnnind 1itnpnna ntitatAndino was considerably in excess of capacity required. This is because licens- ing was iiaaA no a mani of mnnnl onntrol to aenrnvrna new am InVA neurs who had not hitherto held any licenses for a cement factory. As refa,jl- ArI nIhare o.f out iin tv4he industy droppedsa f-.. about4 90 pe- cent in 1936 to 40 percent in 1966. The Tariff Commission in 1961 urged t-h gonment tonn - do-pt" a monre fleible 14 na---4- -f n14 nlF nnn.a the expansion of capacity because the policy of encouraging firms other tan APO 1-A 4a Jlan. 4. s. ceat8-- -9 UfLXU . 4..., L.=U U%j %~L@)'OL 7 LI LLL= U~ L.LJ&L ljL %.CFc&%..L.Y I. 7 A- - Ire,ady n-+-aA +'he .a -' ng an profi n1- ucant a o create n-t -- - were inadequate and there was during most of the Second and Third Plan periodsaacontinuous shortage of cement. 'Turoughou. *- U4- --.-4-A U was debate going on between the industry and the government, with the la-er tr ing .LoI inuc theLUL Lind Lustry to inL.crase capacity furter andL~ I the former arguing for a higher price. Eventually the role of govern- iuis cnugeu, anu tne Ument Coupuatiu u LLLULa kuCIj was otL up uy the government with the intention of engaging in production to alleviate -,- j J_ l .- - - - -- - I nICI - Wourages ad o unuertake etSItOne exPAu.VLLJLVUu. nUWVL, L& L700 U new price agreement was reached between industry and the government, 1/ A. Ghosh, "Efficiency in Location and Interregional Flows", North Holland Publishing Company, 1965. A.S. Manne, "Investments for Capacity Expansion", Allen & Unwin, 1967. - 20 - and the industry subsequently undertook a larger expansion program. In order to monitor this the government required the industry to deposit, in a blocked account with the government, the funds that would be used for the expansion program. Also, from January, 1966, the government, responding to years of urging from the private sector, handed over to the industry responsibility for cement distribution, which was then handled by the Cement Allocation and Coordination Organization (CACO). 48. However, in 1966, despite the understanding on increasing out- out reached with the industry, the government decided that the scarcity conditions warranted the establishment of two plants by CCI and these were duly started, although both are below the average size for the in- dustry and are placed in relatively high cost, surplus areas. It is also quite likely that the CCI involvement was also designed to reduce further the dominance of ACC. The industry did not particularly oppose the CCI's entry into the field because they felt it was clear that both plants would be smaller than the optimum size and thus have higher costs. Government plants are also welcome, in principle, because they take away from the private sector of the industry the need to generate cash resources for these expansions. The wish of the government at that time to expand the role of the public sector in cement is clear from the original draft of the Fourth Plan which implies that the CCI would be responsible for almost half the additional capacity to be created in the 1966-71 period. In practice financial constraints, together with the disappearance of the cement deficit, have meant that the CCI in the new Fourth Plan is limited to only two further plants in remote areas of the country, Assam and Himachal Pradesh. 49. CACO had a short life however and in January, 1968, after al- legations that it exploited the black market situation in cement, it was dismantled, and responsibility for cement distribution and regulation was handed over to the CCI. The government also felt it should have greater control over the cartel arrangements the cement industry had adopted. 50. In conclusion, it is clear from this story that the cement in- dustry has had a continuous dialogue with the government, to which it has turned whenever problems arose. For example, the responsibility of the government for price setting has meant that the industry spends a lot of time seeking price concessions from the government because of cost in- creases beyond the control of the cement industry. The government on the other hand spent a lot of time exhorting the industry to expand faster, nartirtlarlv nr the Pnd of the Rerond and Third Plana T1- in nianifinant- to note that although the government is inclined to argue that reluctance to e-vA vaeflected a Inrk %f onth,,rinam on the nwrt- %f ornnaira in fact expansions went ahead whenever price or tax adjustments made it volvement of government with the private sector has helped or hindered t~cment prouctionU. Certaly.L tfeU pric equ.af&A.L Polic.y *L* #-I,-C - JUL industry has had some undesirable effects in that expansion of production was thecentryeo the publisctorrdu to ete- fI wll aea that the entry of the public sector producer into the field will have an - 21 - undesirable effect, in that the industry can afford to take a cautious approach to expansion whenever it is uncertain about the future growth of demand. III. RECENT INDUSTRIAL PERFORMANCE (a) Introduction - Some Caveats on Statistics 51. Any chapter which purports to describe trends in industrial investment, output or structure in India must begin with a caveat about: the statistical limitations. A substantial effort has been made here :o assemble, in the Annex to this volume, a reasonably reliable set of da:a on some of the fundamental trends, and a close examination has been car- ried out of the major sources of industrial statistics. The results of this evaluation are presented in Volume II. Familiarity with these sta- tistics induces considerable doubt about their reliability. The Central Statistical Organization and the Reserve Bank of India (RBI) put a lot of effort into eatherine a large volume of raw data, and much additional data is generated by departments of the operating ministries such as In- dustrial Development and Comnanv Affairs. in the course of administering industrial development policies. Yet the resultant statistics are gen-- erallv neither timely. nor readily available, nor alwav in isalA fmvn and the consequence is that economic planners and policy-makers, as well as orivate husinesnmen and analvats, mist ften fnrmnite their plana -in the dark. 52. For example, in mid 1969 the basic series of the valuable Anniul wriyr ef Tnenaturigaa -rani h tho CA .sas ama- 1 kl a 1- .. to 1964. The industrial production index, a good short-run indicator, inallft 1, a 1 an n^f fl +. * c4ix m~- . ,onth- bu uses base-yea -U. are already nine years old and thus potentially misleading, given the ranid rhanean that hae ten plale in annnomic strno-aru. There Is very little feedback of hard information on the small-scale sector, to wahich an .much attention is givn, and when it c-mes- to an imortant variable like industrial investment, hardly anything is known about its magnitde dinAlrection and behavior in the prn4ivte saector, an there are no reliable series even for the public sector. 53. The result is that users of data now go to considerable lengl:hs to devel- the- blcdtanna P bA..4. .6 are sent to long-suffering industrialists by trade associations, private san u.ltnnts, nn.d4ASF4nni wa.0mm.k a nd*. a.. 1J1. .L. BT J.-&o.1 conuo anLLc oE.L vt4Wta L I. wc tL tganizatiUns .AAC LiC "ftLURLR UQIAU cil for Applied Economic Research and the Gokhale Institute, the daily press and periodicals, and oth-ers. *v- Th_ LUUjD iS usal-or1 n ± ror example, the WE 1a senCt a questionnaire on capacity utitization to 4,728 manufacturing units in 1965, and received replies from 129. - 22 - little new knowledge results. This is unfortunate, because the various partial decontrol measures, and some disenchantment with Plan targets, mean that greater reliance is now being placed on the market mechanism for making various choices, but only partial data on which to base one's own assessment of underlying industrial trends is available. Volume II suggests a number of possible improvements. 54. The sections that follow in this chapter consist of a number of separate vignettes describing certain fundamental trends in the struc- ture of output, investment, and industrial finance. They are only loosely related, but are drawn together in the concluding section, which pro- vides an interpretation of overall trends in the industrial economy dur- ing these past two decades. (b) The Role of the Small-Scale Sector 55. The remarkable fact about this sector is that it accounts today for half the manufacturine product in India - that is, half the value added in the industry sector. In discussing industrial trends and per- formance. it is all too easy to forget this. (as we do ourselves on oc- casion), and to concentrate on the large-scale sector, but despite a dec- ade of fairly heavy investment in large enterprises, the small-scale sec- tor has in fact dominated until now. Statistical details are given in Volume II- Chanter VIII_ which shows that the small-scale sector contribu- ted about 56.5% of industrial value added in 1960/61, 52.7% in 1965/66 and thm nrnbably around 50% today. The definition nmed in the aovern- ment's own definition of small-scale enterprises qualifying for conces- %innA1 treatment, namely, an enternrise with fixed asets of tn to Rs 500,000 ($70,000). This limit was recently raised to Rs 750,000 ($100,000), so the ave perentaes may be imdarantat 1/ 56. it is common, of course, to find the vast majority of enter- prises in the small-scale sector, and this is true of India too. About 09 2 F .%o al fil,_ ar n thi s- seoahr. ComparedA with other deve loping countries with relatively large markets, however, the sector is unusually large aso l=I LLP_L.LVW LLr LaL,L a1XJWW l/ Some expanding firs, though, are known to divide in order to keep the size of each unit under the ceiling, and thus to retain the various concessions offered. - 23 - 11 PERCENTAGE OF INDUSTRIAL VALUE ADDED FROM LARGE-SCALE SECTOR'-= Mid 1960's Brazil 68 Chile 79 Colombia 71 Mexico 77 India 46 /1 This estimate uses an employment figure of 100 persons as the dividing line between large and small. 57. The small-scale sector is dominated by consumer goods indus- tries, which account for about 77% of the added value in this sector, and which reflect the structure of industry before the industrialization effort began in earnest twelve years ago. Since industrial planners re- garded the country as being more or less self-sufficient in consumer goods, such industries normally did not receive the priority treatment given to imnort-substitution Industries. The food processina industry is a good example of this, being an industry with great potential for improvement. in Pffilenev Pven thouph larva ineran1 in nhvaital mut- put - the planners' criteria - are unlikely. Dominating the small-scale sectnr hnovr- in the tpvrtilp indnar"y in whirh the amall-arAlp nr- ri- centralized sector has been deliberately expanded, in the search for short- run -mlo-mnt -ains, and in renonition of the witdiarand ne-antanra nf Gandhian ideas on textile production. The following table shows the basic trend. SHARE A nPNTDATITD CPCTA TM COTTNA TEYTTI TuITRDV Percentase Share in Tntn1 f. Decentralized Scorr - Pducn.tionn Decnalize1d.~ in Million Meters Mill Sector Sector 1951 1,013 78.6 21.4 aV LVUUJ I9 .J AJ .J 1961 2,372 66.5 33.5 10KT 1 170 JV 1A 7 te ULLAL WULU , LUh sUl -sector LAL secLU Has mUre Lha Lip'led its output and doubled its relative importance since 1951, a trend which, because of the relatively high cost of such output, has nardly improve. the competitive efficiency of the industry. 58. The industries mentioned so far are the traditional ones, to which should be added leather goods, and wood, stone and glass products. These altogether probably account for four fifths of the output of the - 24 - sector. The remainder consists of nontraditional activities such as radio assembly, plastic goods, sewing machines, bicycle parts and even machine tools. These are dynamic branches, strongly encouraged by State and Central Governments to the point, in the case of fifty-five indus- tries, of totally banning the entry of large firms. No satisfactory sta- tistics have been found which isolate these nontraditional industries. Whether the growth of the small-scale sector, and the consequent disper- sion of ownership, and the short-run employment gains, is worth the price of restraining the growth of generally more efficient, larger, firms is difficult to say. Certainly there is no shortage of examples of the costs involved (as in the case of plastic containers) and Government's recogni- tion of this fact may have accounted for, in part, the reduction of banned list from the original 73 to the present 55 industries. (c) Trends in Output (i) Aggregate Trends 59. We examine first the contribution made by manufacturing indus- try to the national product. As Annex Table 2 shows, the contribution rose from 13% in 1950/51 to about 15.5% in the early 1960's, the height of the Third Plan expenditure boom, only to fall to 13% again in 1967/68 and perhaps 14% in the current year. In other words, net manufacturing output has grown only marginally faster than the economy as a whole since the start of the First Plan, i.e., at a compound rate of about 3.5% a year. 60. However, the organized sector grew relatively faster, at the expense of the small-scale sector.. When the growth of the organized sec- tor is measured in absolute physical terms, the results are impressive. The index of manufacturing output, which is an index of physical output in the organized sector weighted by value-added weights, shows growth rates of 6.6% a year during the 1950's and 5.8% from the mid 1950's to the present (Annex Tables 4 and 5). Similarly the annual growth of na- tional product in constant prices since 1960/61 at 3.4% is well exceeded by that of manufacturing at 5.4%. Almost every modern branch of the manufacturing sector shows growth rates considerably faster than these. 61. These trends give a number of clues about the performance of th- Rertnr. Firnt of all, with the economy erowine overall at only 3.5% a year on average, or 1% per capita, because of generally slow growth in ngriltItira and aloswhre thp frpdom to makp aharn channon in thp atrur- ture of output is very limited, short of exporting, or drastic changes in cons-mption and employment patterna To some extent thin is nf canu-n a cause-and-effect problem, in that greater increases in industrial effi- -4encyn wou.1Ald n hae _ 4 14tiated gate*r n.1mra" - anth I-#- n., gs-~g#-6 4- nevertheless a limiting factor. Secondly, in the first half of the 1960's period ofl rising prices and Aslow agricultural growth, Ied to a oslti the terms of trade towards agriculture and against manufacturing. This trend starteu even ueufe tnC uruguh yeas and isnw reveOs iug, 4uu3a8-_ ing that the trend may be partly cyclical, but even so in 1968/69 the - 25 - price index of finished manufactured goods, compared with all commodities, stood at only 79 compared with 100 in 1960/61. These terms of trade rep- resent one of the delicate balances in the economy; some improvement of them (from the point of view of agricultural producers) has been desir- able in expanding the domestic market for manufactures. At the same time, such a movement represents an increase in material costs for agriculture- based industries and - via rising food prices - in the wage bill. Over a long period it would be normal to expect the terms of trade gradually to move away from manufacturing as its efficiency increased, but at least at this stage of development the relative contribution of manufacturing to GDP would be expected to rise faster than it is doing currently. 62. Thirdly, despite the fact that investment in manufacturing has accounted for about a fifth of public sector investment and at least one half or more of private monetary investment over the past ten years, out- put growth has not increased proportionately. Thus the capital output ratio has risen by about 50% in the six years, 1959-65. Again there are several reasons for this - the change in the structure of output that was planned required heavy investment in capital-intensive, long-gestation projects, which inevitably meant that the capital-output ratio would rise, although for reasons which are discussed below a lot of unused capacity has been created as well. Indeed up to 1966 the tax structure strongly encouraged the use of capital. Also, there may have been a decline in overall industrial efficiency over this period, for reasons explained further below. Taken together, these factors - the slow growth of the economy, the adverse movement of the terms of trade, and the apparent de- cline in aggregate efficiency - help explain why the sector has not yet been the leading growth sector. nor the leadina source of savings, that had earlier been hoped. (ii) The Changing Structure of Output 63. Although total output has grown relatively slowly over the past two decades, there has been a marked chanee in the structure of output. The achievement of this change, which is the result of the growth of mod- ern branches of the industrial sector. in perhans the main qualitative development, and has required large infusions of new management, labor and Pnainerina akills. The mont marked dprline has hpnn in the rerrilp industry which from 1951 to 1967 declined in importance from 53% to 24% of indintriAl ualun added- althnngh ita tntal ntirnui rnnntrinit n rnw slowly over this period. On the other hand, the relative importance of mahinpry nrndntitnn more than triItri t-n Almnar 197 rhamit-ra r t.hA doubled to 10%, and iron and steel rose by half to 13% of net output. T_he e8sentiAl 1-hATCAa WrP QhnW.m in thea fr%1I%%rn& table. - 26 - STRUCTURAL CRANGE IN MANUFACTURING INDUSTRY PERCENTAGE OF VALUE ADDED Output Growth (T% na 1951 1956 1960 1964 1968 1956-1968 Consumer Goods 67.6 64.4 48.8 39.4 35.0 2.0 Intermediate Goods 15.2 17.0 22.8 24.3 29.5 9.0 Capital Goods 17.2 18.6 28.4 36.2 35.5 9.0 100.0 100.0 100.0 100.0 100.0 5.7 (1960 Base) 55 80 100 143 156 5.7 64. Thus up to 1956 there were only slight changes in structure, rLlecUig the .10W HLLLV=5D6OWCH L =V=A.D CL WALL L.LC:, UUL O.% 11=H LHC major structural changes envisaged in the Plans have taken place rapidly, with pysical output of the capital goods sectu growing at 12% a year between 1956 and 1964, and intermediates at 11%. Since then, the demand Lor caLa gdUU mslacu eneu Lu UI unA1L=U LU 47u =aUU LUI, CexL- though the output of a wide range of intermediates such as chemicals fparricu.Lr.&y t:.%#e,; ULLUpCUU pLVUUULt5s papC anU rubber continueu to rise. The 2% long-run annual growth rate of consumer goods output con- firms the low priority given to that sector, and the slow growth in real incomes in the economy as a whole. Although it depends on one's exact definitions or intermediate goods, the position today could be faIrLy summarized by saying that roughly one third of output today comes from each of tne consumer, intermediate and capital goods branches, whereas in the early 1950's two thirds was consumer goods output, and only one sixth each came from tne other two. 65. This major structural change has resulted in a n er or changes in inter-industry linkages. The ideal way to examine such canges would be to examine a series or input-output tables, ana some pioneering work along these lines has been done in recent years. 1/ Since these data from 1/ Notably by Dr. P.N. Mathur and others at the Gokhale Institute of Rrnnnm4ir and Politira at the Planninv Unit nf thp Tndian Staria- tical Institute, and in the Planning Commission's Perspective Plan- ning Division. The Cokhale institute has prepared input-output tables (32 x 32) for 1959 and 1963, and more comprehensive tables wIth ove 0 sectors are forthcomnIng. chars at the TCT did early work with input-output tables for 1950/51, 1951/52, 1955/56 -a 1C cn A lae TO96011 Ile Dlman Ing ro--slon cal-Waled an A 7J , anuL La e L.vy a 1n Wm nu u eu m n v wea ua&o a WUL& M table for 1959, and in "Material and Financial Balances for the w. -s ni..If /18&&1----------...4 Cf.. 1hA J/L ..*4. J. -- a -a ZUuLLU r.La , %.L7UVy FK=WCULCU uLL= LUL .L;YVt/J-, WL"L;nU n UUL Uu subsequently to have been updated although unfortunately it is not publcly avaaUeble. Delays in the puolication of the tASI mean that any such up-to-date table must to some extent be based on guesswork and partial information. - 27 - different sources are not fully compatible with each other, or over time, precise conclusions are difficult, but these data confirm that the share of intermediate consumption in the production of industrial goods has in- creased. From the Gokhale Institute Tables for 1959 and 1963, for exam- ple, it appears that in 1959 the steel industry was selling only one third of its total supplies (production plus imports) to other branches of in-- dustry, the rest being used directly for capital formation by final users such as the construction industry and the railways. By 1963, however, 73% of total supplies of basic iron and steel were consumed by various industrial branches such as transport eauipment. basic machinery and metal products. The same trend is seen in other industrial inputs such as paper. These structural changes have made the manufacturine sector branches more interdependent and thus more sensitive to business fluctuations. 66. The structure of Indian industry can be divided into a few angular matri rp%z anmn nf ihich have only a ilight nnnnectinn with the othArs- Ac- cording to Alan Manne's findings 1/, the bulk of such transactions take n1Ara Within t-wn nmlaran- n"A hnaad n nrt2n1tur (PRI 4"nludincy 4ni and cotton fibers, foodgrains, plantations and animal products, and the other on machineryI mtalS and mining (MM) including oil, rham4-nla and construction. A third and smaller complex produces universal intermedi- ates (TTTN Such a fueml a"d trakoport a1 4n fam- av-r "q, 1"Ia hik,a- tween MM, and the power, transport, and construction industries, through OTTIXUADV TMWDTWMITCrrDV MDATCArq'TTTC 1OKA/41 OUL U LUu cHIRau Inter- Consump- Capital Gross ProUcd bY rAW1 JAL VU W *t *A "9t.9.W.U 4UV JJe A UV FF 1.9 20.4 0.2 2.0 24.7 77.7 -- 100 tir a, ^ fti C Ia f a n n ^1 U1. 424. 0 1 .I.J JL.U .3 .I1 10 . L..U--LU / Details do not add to 100 because of stock changes and external trade. 1/ In Sankhya: The Indian Journal of Statistics, Series B, Vol. 27, Parts I & 11, pages 63 et seq. Similar results are shown in R. Eckhaus and K.S. Parikh Planning for Growth - Multisectoral, In- tertemporal Models Applied to India, Cambridge, Massachusetts, 1968, pp. 55, 63. - 28 - In addition to this block angularity, 70% of the total intermediate con- sumption by the MM group is of products of that group, and the compara- ble percentage for the FF group reaches 83%. 67. This structure would imply that a shortfall in agricultural output would have an immediate effect on the supply of consumption goods but only a secondary, income, effect on the demand for industrial prod- ucts. Industrial output depends mainly on demand generated within the sector by a process of rising investment, which in the Indian context means investment necessarily financed in part, and in fact a growing part, by supplementary savings from outside the sector. Since 1960/61 inter- dependence between these sectors has probably grown significantly, par- ticularly in view of the recent growth in demand for agricultural machin- ery and fertilizers and also the growth of motor transport and electric power. Unfortunately, comparable current data with which to measure such a trend do not exist. The above table does emphasize. however, that much of the growth in demand for products of the machinery and metal-based in- dustries must come from within the sector. If erowth is to be continuous. investment resources generated within the sector must be supplemented by surpluses from the rest of the economy. In fact, in recent years. such resources have not been sufficient. (iii) The Relative Role of the Public and Private Sectors in Output 68. Given the heavy investment in public sector industry over the nast twelve vears. one would exnect the oublic sector to nlav a sizeable role in total output. So far, in the aggregate at least, this is not the VRan. Tn 1960/61- arosa sala of Central Government manufacturing ron- cerns including the railway factories but excluding Indian Oil Corpora- tinn Ammintpd t-n ahmu 3-Z nf ornan mitnut in the AqT fanctnry a&tnr (excluding electricity), rising to 6.3% in 1964/65, 6.7% in 1966/67 and 9Q0 toay. 1/ Tn terma of unlia aAd (and thia time inrluilne natrv- leum refining) the contribution of the public sector has risen from 3.6% 4" 10ia/Ai Qz h Yndisau Tnt-2inn ef at-a& enwava-nt- anfqu-rnv-4caa would increase these figures only marginally. 69. Partly of course these relatively low percentages of manufac- 6 A..LU U L.puL % UL .L L. L~L~ UWjJ~5 V.L U .LW "& WJLI 4 a ft - JJ of investment the public sector has absorbed, and with the publicity gov- CLrmeL eLILLLAi LecVC LOruL LLUUI Lm LULfa cttlat LeLe ae V.LLTUAJ.L.Y no public enterprises in the consumer goods sectors; most are in the capital goods branches, and in iUtemeuiAtes if -=LuLeum s iUCluded. In the capital goods sector the growth of the public sector has of course been rapid, an the heavy inVestmeHUn U tHe laLe 177U aU early 1670U 1/ The Indian Oil Corporation is excluded because crude oil and imports represent a large part of its sales volume. Inclusion of- IOC brings the public sector sales to 10.5% of total gross output in 1966/67. For details see Annex Table 6. - 29 - have matured, and between 1960/61 and 1967/68 public sector output of capital goods increased fivefold in physical terms; intermediates ex- cluding oil increased threefold. Thus in 1967/68 the public sector ac-- counted for about one seventh of the output of capital goods and a small fraction (about one fourteenth) of intermediate goods production, again excluding petroleum products. Public sector manufacturing industry con- tributed only about 20% of the increase in capital goods output and 8% of the increase in non-petroleum intermediate output over the same period. 70. If one examines particular sub-sectors then the public sector in some cases occupies a dominating position, for example Hindustan Ma-- chine Tools Ltd. accounts for half the output of machine tools and all the output of certain specialized types; Hindustan Steel Ltd. produces 60% of the country's output of finished steel. Heavy Engineering Corpo- ration (Ranchi) and Heavy Electricals (India) Ltd. (Bhopal), are sole producers of certain types of heavy machinery. Apart, however, from these concentrations in the commanding heights of the economy, not to mention the oil industry, the conclusion from the data is that the public sector, at least as a producer, is rather less important in its aggregate than is normally thought. This is said not of course to belittle the very substantial productive achievements in the public sector, but rather to stress that describing industrial performance over the last decade and a half means, in essence, describing the performance of the private sec- tor in the liRht of industrial policv. The other main implication is that one also cannot hold the rather indifferent performance of the pub- lic sector enterprises solely responsible for the slow pace of industrial output or productivity growth in recent years. (iv) The Regional Distribution of Industrial Output 71. This is a topic which always generates a lot of discussion in India: the loal nolitical nulls for an "eanitable" diRtrIbutinn of in- dustry between States are strong, and "balanced regional development" has lone been an obiective of industrial policV. As the new draft Fourth Plan points out (p. 236), the need for non-farm employment is large and evenly spread throuahout the country. and oreater disaersal of industrial de- velopment is regarded as a necessity. As pointed out earlier, these lo- eationnl nnnearnAi rpAlv tAke two forma! one In the dist-rihttinn hatwan States which is discussed below; the other is the location of industry in imnnoamted nr hnkwArd rpoinni in gneral. The diatintiinin int always clearly made. Incentives for dispersal to backward regions are offered hv nlmnat all statan 1/ and are tendin& to incranna l athonh results are not yet hopeful. So far, however, even partial data on such trends are availah.le frnt -,- two -.ta rvnly 1/ See "11Mcal -Ad In-ancIal Inetve o tartIng- Industries in Back- ward Areas," DCSSI, Ministry of Industrial Development, Delhi, April 10Fr an 10TA96 444-on oaC---A A---- Dt Pebruary 1969. - 30 - 72. As far as statewise distribution is concerned, however, the available data seem to make it clear that regional disparities are gradu- ally decreasing. Provisional Annual Survey of Industries data, for the large-scale sector only, are now available on a consistent basis from 1959 to 1966, and show that the five most important industrial states in 1959 - Maharashtra, West Bengal, Gujarat, Bihar and Uttar Pradesh, in that order - had all declined in relative contribution to total out- put, employment, etc., by 1966; whereas Madras and almost all other states (except Assam and Kerala) improved their relative positions. I/ This equalizing trend would probably be more pronounced if small-scale industries, which account for about half of all output, were more fully brought into the statistical picture. Punjab and Haryana, in particular, would show an even more dramatic rise in industrial output. 73. Essentially the same conclusion emerges from examining the growth in per capita incomes from manufacturing. Again. Maharashtra. West Bengal and Gujarat dominate the scene, but the latter two declined relatively, reflecting the slow growth of the cotton and lute textile industries. Cotton textiles dominate in Maharashtra also, accounting for almost a quarter of all output there, but the rapid growth of non- traditional engineering and chemical industries more than offset the textile decline. givine Maharashtra an income per head from manufactur- ing thrice the national average. Almost all states whose income per head was below the national averate grew faster than average over the 1960-66 period, confirming that growth in manufacturing was an equaliz- ine trend. Madhva Pradesh. Bihar and Orissa all benefited in particular from the growth in the iron and steel industry, and Mysore, Punjab and MNdrns from anainearine anods. 74&- Thpap Pnii01ina trrinda Annr Mo hAVP hPPn AgAiRtPA hV thP regional distribution of Central Government industrial projects. Sixty- two peveant of tho i%nmlntwa invPatment in such nr 40r-a up tn Mari.h 1Q#;7 was in four states - Madhya Pradesh, Bihar, Madras and Orissa - and almost RA of the invatment wna in staten whna nor canita incnma 'frnm induaitra was below the average. 2/ If West Bengal is omitted - the Central Gov- ern.m--nt -nvst-int there being the result of the coal nd irmn -ree re- source base - then over 95% is allocated to such states. 3/ (d) Trends in Investment 75. Most planning and industrial policy administration in India .La direcly Or) indrel~.y a-medU~ at dhe inLvstment LULU LUC FiLAUV..f. 1/ For details, see Annex Tables 7 and 8. 2/ in fact, only Maharashtra, West Bengal and Gujarat were above the average. 3/ Details from Bureau of Public Enterprises, 1966-67 Annual Report, p. 122. - 31 - direct tools being the industrial licensing system and the Central Gov- ernment budget. This is entirely appropriate; although the quantum and direction of investment are only two of the many factors affecting the irowth and efficiency of industry in the short or long run, it is prob- ably true to say that the investment decision is the most important one. It follows that knowledge of past investment trends, and if possible investment behavior, would be most helpful to planners whether in the government or private sectors of the economy. Unfortunately, and de- spite the effort put into the planning of investment, little is known about actual nast trends. particularly in the private sector. and even less about behavior. This section makes an attempt to uncover some facts. Volume II of this renort examines in detail the various sources of data on manufacturing industry investment. (i) Overall Public and Private Sector Trends 76. It is clear that public sector manufacturing investment was very low until 1056/57, in wh4eh yanv inrantment Amihlaj nly to vir- tually triple again the following year to about Ra 180 crores (in 1960/ 61 -v4-1a Th- ftnv4-A 10r% 0-- 10rRA +-k.. 4h-s -h na4A -f TnAiava "his 61 p ices . -Th period 1956 to 1958 wa -t u the perIod- of I d as "~ push." In real terms public investment then remained on a plateau at the middle of the Third Plan, whereupon it rose to about Rs 240 crores yeJar anu to a peak Vo anu crores In 396-5/61, fagan in 10vvIfvl prices). Thereafter fixed investment fell off in 1966/67 and 1967/68 aD sHG LAHRUA fUnaiL Lcostai U. the LecUsUsi LU U Le± lt. VC L- ment in other sectors, such as the railways, had already begun to fall in 176Jfru. AM In Lue private sector, hUwever, siuce 1966 large stCk- of raw materials and finished goods were built up as investment demand fell, ausoruing almoUSt a tnirU of investment in new assets in thNe years. There really has thus been no advance since 1963 in the real rate of in- vestment in fixed assets by the public sector, and such investment today is less than one third higher than a decade ago. 77. Private sector investment (in 1960/61 prices) followed a sini- Lar pattern, doubling between A93> and 17, from around fus 1m crores to Rs 200 crores, and in fact this private sector investment boom pre- ceded that in the public sector because of the surge in investors' con- fidence described. earlier. There was a period of hesitation during the Second Plan, caused in part by the new foreign exchange constraints, but this did not prevent a further boom at the start of the Third Plan to around Ra 350 crores - again followed by a slight hesitation - and a further increase to a peak in 1965/66. Although the exact magnitudes are not known, it is clear that private fixed investment fell off fairly sharply in 1966/67 and 1967/68 but is probably hesitantly recovering now in some branches. However, stocks of raw materials - particularly im- ports - and finished goods seem to have risen to record heights during this recession period. 78. The essential aggregate trends are shown in the following table, which is derived from Annex Table 13. The deflator is taken from a carefully argued paper by T.R. Talwar of the Planning Commission. - 32 - ANNUAL AVERAGE GROSS INVESTMENT IN MANUFACTURING (Ra crores) 1950/56' .1956/60 1960/63 1963/66 1966/68 (a) at Current Prices Private Sector 145 276 556 749 1000 - Fixed Assets 110 205 373 501 600 - Inventories 35 71 183 248 400 Public Sector 33 171 199 343 515 - Fixed Assets 28 143 172 298 344 - Inventories 5 28 27 45 171 Tnta.Ql TInvPtmPnt 17R 447 7%9 in91 1516 - Fixed Assets 138 348 545 799 944 - Tnventoria a 99 210 792 571 (h) jet 19fin1Al Prippa Total Fixed Inv. 159 364 525 664 629 - Private 19 215 36r 417 A0 - Public 20 149 165 247 229 /1 April 1, 1950 through March 31, 1956, etc. 79. Several interesting conclusions emerge from these data. Firstly, thne slowuown in LnLuo%a.L.LM activity IaM a siniufiano uakgronu in 1Lu1 period before 1965. Fixed investment in private industry had begun to Xalter in 1Mo.Wo2 Owce laulse 1.j; anu the rsyionAu tuougu XUnuanmcnLally caused by the drought and the reactions to the war was accentuated by the pre-exiateuce of overcapacity and other industrial problems we have notea. Secondly, both the magnitude and growth of private sector investment are much greater than is generally supposed, and the public sector if anything smaller. Thus, fully two-thirds of manufacturing investment during the 1960's appear to have been in the private sector, according to these data, although the impression usually gained from the Plans and other documents is that it is the public sector that has dominated. For example, the new draft Fourth Plan (March 1969, page 49) shows private investment in in- dustry to be only 40% of the Third Plan total and also less than half the similar Fourth Plan total. On closer examination these Third Plan data turn out to be planned (as of 1961) figures rather than actuals which are considered to. be unknown (see government statement in the Lok Sabha, August 4, 1969). Certainly it is not difficult to point out the tenuousness of these dat-a we have worked out, but if anything the private sector series is an underestimate. Firstly, it excludes the non-corporate sector which as argued earlier is an important part of the sizable small-scale sector; secondly it excludes newly established companies that have not yet issued - 33 - Lualance sLee-s. T-UUUA . k4 DDT UL&nL WGJ.6a ...I. A.44M 4 1 isut DcLe Iundeud ,u nue ROLoue woits unt-ilo afim so fully com- missioned before including in its sample. The public sector data used Uee,o tL1e other hLand, LLLIC.LU'eL 'u-1- JUL LL~LZ~L OU. 1t can argUeU, oL cours, thIaL Ral these inVUese stiL U mates, and indeed the rate of industrial growth in physical terms, are overestimated because tne effect of the rather inefficient i-port aub- stitution process is to encourage the increased use of indigenous capi- tal goods and components, sometimes or high cost and perhaps or lower quality during the "infant industry" stage. The use of a simple in- ternal price index may not adequately reflect, say, trends in world prices for comparable investment goods. 81. This view of the role of the public sector in manufacturing investment is broadly borne out by data from other sources. One of these shows the role of government as a purchaser of goods produced in India (Annex Table 10). Various attempts were made to calculate this. The Central Government budgets are of course a mine of detailed informa- tion, although it is difficult to relate a particular department's ex- penditures to particular goods. The Director General of Supplies and Disposals, the main government purchasing agency has useful data on expenditures but since not all transactions pass through this office, the data are incomplete. The best source, used here, is an adaptation of input-output tables for 1963 prepared by the Gokhale Institute of Economics. It shows that government expenditures on all capital goods in that year, including capital goods required by other branches such as electric power and transport, as well as manufacturing industry, amounted to only 22% to 25% of total demand. A considerable proportion of such goods would also have come from abroad - and a greater propor- tion in 1963 than today - but it still seems clear that the role of pub- lic sector industry's investment demand was relatively small. (ii) The Pattern of Public Investment 82. As would be expected, heavy industries dominate the public see- tor, although it is not quite as true to say that the public sector domi- nates heavy industry. In 1960/61 Hindustan Steel Limited (henceforth H.S.L.) alone accounted for 65% of the capital invested in public enter- prises and a further 5% was in other heavy engineering plants. Petro- leum, fertilizers and mining developments accounted for most of the rest: at that time. By 1968, H.S.L. was still dominant, being as large as the next six enterprises combined, although by this time it represented only 39% of total investment in government enterprises (Annex Table 21). Al- together steel and engineering plants accounted in 1968 for 60% of pub- lic investment, petroleum products and chemicals (mainly fertilizers) another 20%, with the rest in miscellaneous enterprises, mainly mining and minerals (Annex Table 19). The details are summarized below: - 34 - UMULATIVE PUBLLU bECTUK INVESTMENT (as of March 1968) Ra Crores Principal Branches Principal Firms Steel 1179 Hindustan Steel 1083 Engineering 851 Heavy Engineering Corp. 211 Chemicals 350 Neyveli Lignite 175 Petroleum 378 Hindustan Aeronautics 160 Mining & Minerals 273 National Coal Dev. Corp. 167 Aviation & Shipping 143 Oil & Natural Gas Comm. 168 Others 159 Fertilizer Corp. of India 137 3333 Bharat Heavy Electricals 143 Heavy Electricals (India) Ltd. 104 Indian Oil Corp. 154 Others /1 831 3333 /1 Of which, Rs 80 crores went to the Bokaro Steel Plant. By the end of the current year, Bokaro will exceed all except H.S.L. in terms of total assets. 83. Unfortunately the available breakdowns of total investment or of installed capacity are not sufficiently accurate to risk drawing conclusions about the concentration of public sector capital stock in particular branches. In the aggregate, however, it would appear from ASI data that the total in- crease in productive capital in manufacturing industry between 1959 and 1964 was about Rs 2,200 crores, of which about Rs 1,050 crores or 48%. ac- cording to the Bureau of Public Enterprises data, was in the public sector. This implies (since in 1959 almost all the capital soods industries were in the private sector) that by the mid 1960's between a quarter and one third of the capital stock in the capital goods branches was in the pub- lic sector, and the proportion is rising. Comparable data for the inter- mediate and consumer 2ooda branches are around 10% and 1% reanectivAly - the latter being investment in Hindustan Photo Films and in certain drug industria. Rk Onp ainrinina roailt tn Pmpran frnm an anAlvaln nf t-h ntihlir sector data is that since 1960, concerns in operation consistently ac- cont for the ulkk nf inventment (Anner TAhla 1 tn 18) The imagonea often retains of the public sector is of a large number of incomplete enterprises bu 1.t in. fact opeatin o ncnffs havem accou.nted fr -an aera of 87% of cmulative investment since 1960, and this average has been ris- 4 ng.steaA4 1.. 4nc 106.4. t tad a*GA 4-. IGM V_ 4 4 work in progress on expansions of existing operative concerns, an average U UVeL II U L ULa1 inVCtunt iD prouuctVe A.=-VCULeLW=", CLM.LA L.L.U6 in recent years to 84% in 1968. Investment that is unutilized because - 35 - the plant concerned is not yet commissioned is thus not now a major fac- tor depressing the performance of public enterprises. (e) The Utilization of Installed Capacity 85. Capacity utilization has lona been a matter of concern in India. partly because the planning process uses installed capacity as one of its key variables, with the general obiective of attempting to match capacity with required output. The emergence of excess capacity is thus felt to represent a vaste of searce resourras and a less than fully successful industrial plan. All four five-year Plans have stressed the need to utilize ewnaeitv more fully - for examlp- the aSpnnd Five Year Plan (p. 394) has as one of its priorities the "fuller utilization of exist- ina ingtallAd cnnrity in indwarria sharo thrio are wiid Ann hatweari capacity and production." It goes on to stress (p. 395) that "it is a hanlc nrinrinlp nf planned deopninment that ianntal rannures- which are scarce in relation to competing demands should be conserved, and -iat Addlitin"2l n1rodutionschou'A hbe aevawAed tohe maximum ertent 1MaRihlfa through greater use of idle capacity." The Third Plan went further (p. n"AR' fnt avrp _rafnApfnn t *U-anna n.a A,n e~ Use Of ti%a -rom- tion of new capacity; the licensing authorities frequently used the exis tence, or pr~ospective- existence, of capacity as a reason for denyj ng an industrial license. 86. Other strong forces, however, have been acting in the other A oLnLAU. .A ImpULL UUULLULUH stLULCgy HUUUL L e gLWth L capacity, in that the objective is often to substitute for all imports Ou. a specifieu prouuct, so that deman LIUCLuaLIOUS L-L. a L1a LUa&nLIL on Indian rather than foreign suppliers. The policy of accommodating re- gALUrLaL LAXIM LUr AUOUSLUa. UtallaLOUB, 8 WCL U LHe Uan U. muL ple licensing and public sector investment, as forms of monopoly control Hve likewise Led to the emergence of unutilized capacity, by encouraging the proliferation of firms. Another general factor that makes for un- used capacity is the ineviLaUxILy, at early stages of growth, U Ut=p increases in capacity caused by the indivisibility of large investments wAch do not produce exportables - sucn as the heavy electrica equipmlent plant at Bhopal. (Though one is obliged to say that a fuller order book is not all that is needed to bring Bhopal up to capacity.) in any cawe, during a period of rapid structural change, perfect synchronization of capacity and output is not to be expected, nor is a perfect equation be- tween expectations and results. 87. Whatever measure one uses, however, it is clear that much more excess capacity exists today than at any time in the last two decades. The picture seems to have been one of a fairly large margin of capacity over production after the second war and after the Korean war boom, fol- lowed by a long period of declining excess capacity interrupted only by years of acute foreign exchange shortage such as 1958. Most of the under- utilization during the First and Second Plan periods was in chemicals (over 30%), metal products (40%), transport equipment (30%), general ma- chinery (25%), and the principal cause consistently throughout this period - 36 - was shortage of raw materials, machinery, steel, coke, pig iron, and spare parts, both imported and locally made. During the Third Plan pe- riod, underutilization was less and the input supply position improved although it remained the main bottleneck. Agricultural raw materials became more of a constraint during this period. This period came to an end around 1964. 1/ 88. Since then large excesses of capacity have emerged, mainly in the capital goods industries and particularly in engineering goods. In 1966 out of 200 products surveyed, 6 products belonging exclusively to basic metals and metal products accounted for about half the underuti- lized capacities. Lack of demand was reported as the reason for unuti- lized capacities for textile machinery, plastic molding machinery, ma- chine tools, railway wagons, trucks and trailers, cement products, tractors, diesel engines, electric cables and wires. This explains in its turn the lack of demand for heavy structurals, cast iron pipes, steel castings and rolling and foundry products. The lack of demand for coal, iron ore, electrodes, automobile parts, wire ropes and certain industrial chemicals follows naturally from inter-industry and 'accelerator' linkages. It ap- pears from available statistics 2/ that 40% to 70% of capacity remained unused in 1967/68 in most capital goods industries, perhaps 30% in con- sumer goods and 40% in intermediates. R.K. Koti made an attempt to ex- press total unutilized capacity in terms of the value of output fore- Rone and on this basis at least 40% and perhaps 45% of total industrial capacity was unused in 1967/68. 3/ 89. Only a small part of this excess capacity (notably part of that in the food industries and cotton textiles) is directly attributa- ble to the delayed effects of the droughts on the supply of agricultural raw materials; in fact the situation did not change markedly in 1968/69, when the crop was much better. However, it is interesting to note that while in 1966/67 around one third of output was being constrained by low demand, another third was still inhibited by shortages of raw materials. By 1967/68. however, lack of demand as a reason was more dominant, while shortages of raw materials and parts, especially imported, was a much Ian Imnortant ~constraint. Tt in probably fair to conlude. from the 2/See Anne- Table 27 f^v- Adan4lo. Th4m nb f4ew A,,-a f a togt ful study by R.K. Koti of the Gokhale Institute of Politics and fl.tI, M tO ---.A ..A~. - -- - ion.S o..2 fl - d- __% .4 C.sap. y India, 1967/68," (Mimeograph Series No. 9). Another study (No. 2) by the samp auhnu camnes tn e s ituation in L7ujUV1, aLLUWU6u VU Lue basis of a small survey. 3/ R.K. Koti, ibid., Paper No. 9, p. 28, etc. - 37 - evidence of Anmex Table 29, that the import liberalization policy was partly responsible for this improvement. Of the 500-plus firms sur- veyed, 23% found the policy change inapplicable, but of the remainder, 48% found the import liberalization policy helpful - a fairly impressive endorsement considering that some firms undoubtedly suffered from the competitive forces released. 90. However, in every industry in which unused capacity was high, it is clear that i. 1967/68 there were a number of products being pro- duced by firms which were operating either in excess of normal maximum capacity, or less than 20% under such capacity. To be within 20% could normally be regarded as full capacity utilization in most industries. In non-electrical machinery and equipment, for example, 28 out of 108 items were close to capacity, and in the transport equipment industry, one of the hardest hit by the recession, 6 out of 20 were within 20% of maximum capacity. Details are given in Table 5 of Koti (Paper No. 9) although unfortunately data is not available to weigh these more suc- cessful firms or products by value of output. 91. Of course, all these measures are no better than the defini- tion of capacity on which they are based. R.K. Koti adopts the manager's own assessment of the "maximum possible production with available equip- ment assuming normal operative conditions." This is an improvement over the government's usual assessment of capacity as published in '"onthly Statistics of Production" (MSP) which are acknowledged to understate capacity partly for definitional reasons (e.g., number of shifts actu- ally worked exceeds the number on which the stipulated definitions are based 1/) and partly for legal and control reasons in that actual ca- pacity in excess of licensed capacity may not be reported. However, if reported caoacity is beine used as a criterion for import allocations or for control over new entrants, the tendency would be to overreport canacitv. However, none of the definitions currently used are aimed at the key question, which is how much capacity exists for economic produc- tion. This can be ascertained only by intensive industry studies, that can distinguish between old or high-cost capacity and usable capacity, and even then no definitive answer is likely, because management skills tend to emerge as the key variable in most multifirm industries. The same variable arnlaIns why some firms continue to add ranne-itv - aa in the cable or cotton textile industries - even when excess capacity is widatpread. 92- Yn nthor wrAn-s hv no mweana nll pvr'eaa r'nnAr-itv ahmtild ho ,-ra garded as undesirable, because underutilized capacity promotes the weed-- Ina nnt of Ian affiriint firms nr their mroav i nn nthare- Thin hnoa happened to a greater extent in the last three years than in the preced- ing ten, n wA4hch npriod nf h4ah Amand and hi"h capacIty nt414znt4nn ucts the~ MSP, so - 1 sma .. umber of shft t inP fc a w .1 *.1s t .1 ibid. , p. .&14 shotws .. th a. *or 63 ot, of 1213 su-meyed V~ prod,.- ucts, the NSP shows a small number of shifts than in fact was worked. - 38 - a high cost was paid in not weeding out such firms. (Although when the crunch comes, as in the textile industry recently, government has been willing to step in and operate failing firms, rather than suffer the unemployment consequences of their closing down - an action that in- creases underutilization elsewhere.) However, after becoming familiar with the data that exist on capacities, and the absence of information for planners on the economic cost of using capacity or the alternatives open to business managers, one becomes convinced that except for indus- tries which consist of only one or two large firms, the use of the ca- pacity concept as a planning tool is unlikely ever to produce accepta- bly accurate results. (f) Trends in Industrial Finance (i) The Private Sector - General Trends 93. Examination of profitability trends, and sources and uses of funds, can give some useful clues to general trends in economic activity. as well as to the performance of particular sectors of the economy. The ideal analysis would include a cash flow study showing the relationship between savings and investment in industry and in the rest of the econ- omy. Unfortunately, this is not yet statistically possible so various indirect indicators of performance are used. 94. Since the late 1950's there have been three major structural trends in industrial finance - all interrelated. Firstly, the role of the industrial securities market as a source of funds has steadily di- minished: secondly. the several development finance institutions have come to play an increasingly important role in industrial finance, and thirdly (and also as a result of the steady decline in profitability), the role of sources of finance that are external to the firm have in- creased. 95. Takina the securities market first, there was a bull market n to 1961/62. The general optimism generated by the relatively successful Rprand PlAn hAInAd ana.tin a anprnitivp mand whirh did nnt rpedp intl the Sino-Indian border incidents of 1962, whereupon, aggravated by the rlemaud inAiialAI wrna.-t fnr tha Third Plan the nirea nf nauritIa fell. By 1966 all the gains of the 1956-62 period had been lost, and a hesitant eaenwr is on1w new smAav Ta% T" a nf tha Aael4ina nvnf4t trends, this adjustment was inevitable. Government "consents" to raise capital fell sharply up to 1966 to a level that in constant prices was only a third of the 1962 level, but the sharp increase in "consents" in L.7 I .y presnae as n 4. the past, a reco,%mery I/ T_ *U- ----- .I EU ULRJJZI MCC tLulA Tal JJ . M%LLU-M.LA.y , ConUHLD 4W.L. M6CILn A 1968/69 and the expected recovery of the market seems recently to nave evaporated. - 39 - given to non-government companies have accurately reflected businessmen's views of the future, and amounts raised have borne a consistent relation to consents - in 1956-60 and 1961-65 the ratio was 75%. Capital raised averaged around Ra 100 crores a year from 1961 onwards - a steady decline in real terms - and reached a low point also in 1966. 1/ The actual amount of new money is rather less than this, as typical experience from 1967/68 shows. 2/ That year, attempts were made to raise Rs 60 crores for certain public limited companies - most were existing companies since the recession had a particularly depressing effect on new company flota- tions. About one-third of this amount - Rs 20 crores - was atreed in advance to be taken up by directors, friends, various institutions, state governments. etc.. leaving about Rs 40 crores to be offered to the pub- lic - virtually all of this had to be underwritten because of the high risk of failure of the insuaR. Tn thp and. 58% of the amount offered to the public had to be taken up by the underwriters and only 42%, or Rs 17 crores. Van nnhacrihPd hv thp nh1fr Rpatewn 1964/65 and 1967/68 on average 53% was left with the underwriters. 96. The underwriting business in India started in earnest in the mid 190'1a* 4 ialllw Itha hanks and hkrsnva wre the m-in aents .bu more recently ICICI, IDBI, IFCI, SFC's, LIC and UTI have come to domi- nate the scene. 3/ For the Thlrd Plan Period as a whole 587 of the total issues were taken up by these institutions and about 70% since 1964. assistance from the government in the form of loans and initial sub- an-40-4n, 4. Lnnan i e slear that te cap-1-a' maeta has a l ta go before becoming a satisfactory channel for eliciting private savings. (ii) Development Finance Companies 97. The role of the development finance companies both as providers A. mouudium anu loug-term Loan fLinnce adu ouL unuLWL.L4u and uirect s capital has steadily increased. Very roughly, disbursements from the . o HVE Lshave .LLUrs fo UUm L a M UL L LAA grossfe private invemut iU u first Five Year Plan period to 8% in the Second and 18% in the Third. A.VJM ULDUUL5WWCHLU HW~VU AH LUCCHL CEWUncuUK LJ u LIvoJuIt A. noJ LAV..'J crores a year, slightly exceeding the stock market in importance as a source of corporate finance. During the 7jU 5 Luau uaC UUM.uaLeu the DFC's lending activities, but during the Third Plan about one fifth of the total issues floated by non-government companies were taKen up Oy the DFC's, including the Life Insurance Corporation (LIC) and the Unit Trust of India (i:11). n addition to this the WK's have resold about 1t For details see Annex Table 35. 2/ illuatrated in Tables 36 and 37. 3/ Table 38. - 40 - half the shares taken up under underwriting arrangements. In summary, whereas during the Second Plan about 8% of the average annual assis- tance by DFC's was in the form of taking up shares, by the 1966-68 pe- riod the proportion reached around 20%. 98. Trends in the anprovals and disbursements by DFC's are a valu- able indicator of business activity. I/ As Chart I following Annex Table 33 indicates, sanctions exceeded disbursements at the start of the Second Plan and again during most of the Third Plan - these being periods when private investment was accelerating. On the other hand, disbursements exceeded approvals at the end of the Second Plan and again from 1966 on- wards as the recession beean to take hold. In fact. anorovals began to decline during 1965. 99. Turning now to the sources of finance for the DFC's during thp Third Plan- ni Table A2 indiAtPa% ahnilt 412 of rPnre-pa Wr hnr- roved directly from the government or from the Reserve Bank of India. After aind4& 4n the onaarnmant'a ahara nf naid-un rnntn and nthv lend- ing, the role of the public sector as a source of finance approaches 50%. ThpQP inaritutrinns ;rp rhPrPfnr& n mainr rhannel fnr gnvernmant finanea to the private sector. During the Third Plan period, then, the implica- tion i hat government provided, through th F',aot1%of the total financial needs of the private sector and that over this period the shar -nlae 4--ra.4- Awar the 1-at- - -hree years ho.wever #J- Aie ,a.. cline in investment and the even steeper decline in disbursements from however, the DFC's play an important role in expanding companies, as is AOassauA .n u JA- w-Ulve 1n1 w6cU U Jan1 4- vv 1fIL. compayie whMiCh Laseu capital through prospectuses also planned to raise almost 30% of their requireu fLiansfo um uh DXs - and for unw companics tue propourton rose to 34% from direct loans alone. If share capital is included, the proportion would 'L-s to abut .40% in tha year. 'iiiy Private Sector Profitaoility 100. Ine private sector has been through several interesting periods. In the early 1950's neither profitability nor the demand for funds was high until 1954/55 and 1955/56, when a combination of increased rural de- mand and improved prices and output of metal and engineering goods en- gendered high profits which, along with the policy decisions mentioned in Chapter II above, were a factor in inducing the private investment boom in 1955/56. Profits thereafter fell, in the dislocation of the first foreign exchange crisis of 1957, but recovered to higher levels from 1959 to 1963. Thereafter they gradually sagged as industrial growth slowed, excess capacity emerged, and as the internal terms of trade moved against 1/ It would be helpful to businessmen and government alike if this in- dicator could be made available more promptly - perhaps quarterly. - 41 - industry. The lowt point was probably reached in 1967/68 and subsequently there have been signs of recovery. Some typical profitability ratios f4or the 1960's are shown here. 1/ 1960/1 to and 1963/4 9516 1967/8 L0 Gross Profit/Sales 10.2 9.7 7.6 7.9 Gross Profit/Capital Empl. 10.6 10.2 7.8 8.2 Net Profit/Net Worth 9.8 9.0 7.3 7.6 101. Such aggregate trends hide some major differences among indus- trieiz. .nutrina the Second Plan nerlod. for example "essentlal" commodi- ties which were subject to formal or informal price control, such as cement and iro-n and Stee1.- Ahnwpd QtPnAIv Aimininhing nrnfitAhity- Coal, and consumer goods such as cotton textiles, tobacco and edible o4ls had lowrer m <a han, the awnerane huer TANXAIotM anh an silk and rayon textiles, chemicals and rubber goods, and also most en- Egineeri4ng goods, hade a period of4 h$ig4h and r4 a4"- -"-f4". eFkMa1 tt group in particular benefited from the boom period of the protected sell- tal goods industries had higher profits than in the 1950's, although LeLil a V L othr AUon L umUego L nLLi again ha lower Luan v-L-V-A age returns. The striking trend during this period was the decline in pLoitiULiLy UL LC LeALLl indusLLy, Which,sq UezeCU UCLWeH pLi controls and depressed demand on the one hand and rising raw material anu wage costs on ue uLer, was caught in a pLEaL UL LUW pLULLLO &LU low investment. Given the importance of this industry, the decline in net profits to 1.2% of owned funds in 1965/66 had a depressing effect on aggregate industrial earnings. Since then, textile profits have re- mained very low, and a number of mills have closed down or been taken over by the government. The effects of the recession on profits in the engineering and electrical goods industries began to be felt about 196o, and since then both aggregate profits and investment demand have been low, with gross proris in engineering goods falling from i.9A in ±oo to 6.1% of capital employed by 1968. Thus during this recession period the overall return on private capital, whether measured by net profit on owned funds, or by gross return on capital employed, at 7-8%, was lower than the cost of borrowed funds. 102. Given these trends in the industrial securities market, in the role of the DFC's, and in profitability, it is possible to advance a few tentative generalizations about the sources and uses of funds in private sector. The essential trends are shown in the following table. 2/ 1/ Details in Annex Table 39. 2/ Derived from the same sources as Table 30. - 42 - DUUMoz AlUaQa~r uK ruilua ~ Private Corporate SctLor Second Plan 1961/2 1962/3 1964/5 1965/6 1966/7 1967/8 eSt. est. Uses 1UU iUU 1UU 1UU 1UU 1UU 1UU Gross Fixed Inves.. 63 52 5U 46 46 45 43 Inventories 22 26 21 21 28 30 32 Other 15 22 29 33 26 25 25 Sources (a) Internal 45 42 38 43 38 37 35 Reserves & Surplus 20 19 15 18 14 13 i Depreciation etc. 25 23 23 25 24 24 24 (b) External 55 58 62 57 62 63 65 Paid-up Capital 11 15 11 6 9 8 8 Borrowings 29 20 28 26 29 30 31 Other 15 23 23 25 24 25 26 103. Although these data have to be interpreted with a great deal of caution, it would seem that there are two forces, working in the same direction. The first is a secular trend from the start of the Third Plan onwards towards a declining role for both profits and paid-up capital as a source of finance. On the other hand, borrowings particularly from the DFC's are rising in relative importance. The second is the cyclical trend associated with the recession from 1965 onwards which further aggravated the declining contribution of profits and paid-up capital. All told, in- ternal resources which financed about 45% of financial needs during the Second Plan have now dropped in importance to about 35%, whereas sources external to one enterprise have risen from 55% to 65%. However, the pro- portion of fixed investment financed by internal sources has been fairly constant, so the declining overall trend can be seen to reflect the growth in inventories financed by borrowed capital. To a considerable extent, the overall trend is limited to certain industries which for one reason or another have consistently been relatively low-profit industries. Notable amonst these are cotton textiles, coal, mineral oils, cement and iron and steel. These industries were the subject of price controls (it seems that homoteneous uroducts attract such controls) and in some cases of high costs of raw material inputs. On the other hand, a good many modern in- Annrian ineluding momt branches of chemicals and nharmaceuticals and the new engineering goods showed above average financial and profit trends. in the naxt -ection the financial nrformanep of nnhlie anetnr induntripn is examined. - 43 - (iv) The Public Sector 104. Examining financial trends in the public sector has to be done in the light of a somewhat different set of rules than in the case of the private sector. In March 1968, for example, cumulative loan finance for all Central Government enterprises amounted to Ra 1,700 crores and equity capital to Rs 1,633 crores. Since over 90% of all finance for new in- vestment comes from the Central Government in any case, and since fail- ure to pay a dividend is as yet no barrier to obtaining further finance, the distinction between these two types of finance is arbitrary. The government's policy, though, is to attain parity between equity and loans for new enterprises. Since in the private sector the pursuit of "lever- age," and the relative costs of different forms of finance have led to borrowing beine about three times as imnortant as eauity financina. this distinction has to be borne in mind when comparing public and private sector financial ratios. As in the case of the private sector, the data below do not exclude mining enterprises, nor are all public sector firms included, but these Droblems of novaraa do not nicnificantlv affect the results. 105. Altogether there are about 250 public sector industrial and mining enternrises of whih aiwty- nrrmintina for ahout 902 of total investment, are owned by the Central Government, and the rest by the states. They have abnrhPd At 1at one thiVA of all manufacturina in- vestment - some observers would argue that the proportion has been higher - and the financiAl renrns ^n th4m 4nwat7nxt hae heen noolialhlp. The following profitability ratios 1/ are consistent in definition with those fEn the irient.aatii in parakgrh 100 above. Cross~f P rnf1I#-/Sal _. 1-7_ 1e% P hrnfitr.a V -C 1.T a . an 1.9 1h.5 Net Praf$t/Net M We th, 7 11u.uu1 use n;e that for the private sector. Gross profit as a percentage of capital employe anu net prit cumpareu wiL nt woth aLss UWLSt WnLJy LLe . of the comparable private sector returns. Dividends paid, at least on th,e Central 'GoIvernmentIs eqiy U WK.L..LL.UW, CUU6LL& UW . UM .LA& 1967/68. In some ways, these ratios overstate profitability; for ex- ample, interest payable by puUic enterprLuU on YUvernmCnU LUUM, lo n 6% to 7% and formerly 5% to 6%, is 2% to 3% less than such loans now cost Lue private sector on tne open market. Also, waivers Ul JILILWuOmLe payments have been granted on some loans, and sizable subsidies paid to 1/ Details in Table 42, - 44 - meet the operating losses of certain enterprises (although in other cases losses have been capitalized). On the other hand, these ratios under- state the returns to the enterprise, in that firstly, selling prices are sometimes kept lower than the-scarcity situation would warrant for social reasons such as "to avoid stifling development by providing es- sential sunolies at fair prices" 1/ and secondly because costs include certain social costs such as employees' townships. In 1967/68 the net loss on townships alone was RE 12 crores or 1/3 of the total loss of operating enterprises. Whatever adjustments are made, however, both the Pnonomic and the financial returns on investment are evidently very low and, in recent years, have been declining. 107. Because profits have been so low, the generation of internal rennures fn ra-invpatment nurnnen han Alan heen Inw, And in fArt tho depreciation allowance is the main item. An RBI analysis of sources and uses of funds in well-established public sector operating firma showed that in recent years about 80% of all sources were external to the firm, compada wah AV 4.- 1h -a4-at- gz v no n -h- 10AA./r, eno107/2 period. 108. The recession in demand for capital goods hit particularly hard tories. This is shown in the following table, although this is only one U many far 'LUL X =- LuccutL W&&A..1o wn LIM suusu puJ. L.uA..ALy, uh.uctL cost factors are rising wages and "dearness allowances" coupled with Gov- ernment imposed ceiling in prices, labor troubles, and a-lo the fact that several large enterprises such as Heavy Engineering Corporation, Bharat Heavy Electricals, etc., are still U their early years u productou. Many such projects also have to bear the large costs of carrying excess capacity, resulting from overoptimistic past estimates of dwand. 21 1/ As a result, it is not uncommon to hear consumers of certain steel products urging the government to raise prices so as to stimulate production. 2/ For example, the Chairman of Indian Drugs and Pharmaceuticals Ltd. recently noted (Financial Express, May 17, 1969) that IDPL's capa- city to produce tetracycline antibiotics will be out of line with demand for the next ten years. - 45 - NET PROFIT AND LOSSES OF MAJOR PUBLIC SECTOR ENTERPRISES /1 Profits (+) and Losses (-) (Ra Crores)'± 1964/5 1966/7 1967/8 Hindustan Steel Ltd. +3 -20 -38'- Heavy Engineering Corp. - - 6 -13 Neyveli Lignite - - 8 - 6 Heavy Electricals (I) -7 - 5 - 6 Bharat Heavy Electricals - - 6 - 5 Indian Oil Corporation (IOC) +1 + 8 +11 Oil & Natural Gas Commission (ONGC) -4 +11 +13 Others +16 + 9 + 9 Net Profit +9 -17 -35 /1 For dptailn na Tahlp 41. /9 T.naa in 1QARIQ Wn RQ 1% PrnrAn 1n0 Ir%m -h. 4t ovan f-hat a amnll nuimhr nf 1nve ontoernvinan other than petroleum-based enterprises, now account for the bulk of the losses, while retufns from sm-ller enterriesae mvre favorable. So-.e of the large plants - Bhopal, for example - were known from the start # o 1 wJ Ua ..n . 4mlA L 1h -1.. .J U_ AbaA Wag eU . anyway. Others suffer from a mltitude of initial production problems Un dAelwf and can ouly U expecteu to pLufLta-oule aoewyremal yeas from now. Successful public sector firms tend to be medium-sized and WeL.LL-es LtLU LU LUL A ale, TelUepLaiHe A LAHL DHRLaa DE Lrns Indian Telephone Industries Ltd., Bharat Earth Movers, Tungabhadra Steel oAvus o, Tuu"au Rarre Eaass, and nmuar Sa'so were amongost nn __ U U LU UL. , L LUA U~~ OCULLIL 'uu X~mia JG.a WL 8 L. 6L&W== L4&LLU6 earned 15% to 40% on capital employed in 1967/68, although since in some oA theD LJeLi, suh as BhaaLaL ECLLUetoi, mUWL oA t@ he seW LU Llie armed forces, high profits cannot necessarily be equated with efficiency. usually State Government enterprises are considerably more profitable 1uan Central Government concerns. Recently, IOC and ONGC have emerged as gen- erators of sizable monopoly surpluses. 110. Examiuat-on or the causes or this low profitability can only De done satisfactorily by following the unique history and problems of each enterprise - and this is not attempted here. The Government of India is concerned about the question, and, as the Administrative Reforms Commis- sion report on public undertakings makes clear, there is no simple or sole cause. Some are external to the firm, such as initial planning er- rors or the pursuit of social goals through, for example, provision of - 46 - wo rMrs nousUg anLU tmp.LuyMUW 1mAJm4CUL.ULn. LJ OLuL ar ucicerna," anu depend on intangibles such as ill-defined lines of decision-making and responsibility, trade union rivalry, labor iUiseipiXue, and management quality. This last is difficult to measure but such indications as are available, for example, inventory control performance, show that manage- ment quality is a serious problem in public sector plants of all sizes. Such a measure is not in itself, of course, conclusive. However the concern over management quality, including inventory management, recently shown by the government 2/ is reassuring. INDUSTRIAL CONCERNS - INVENTURY ULDINGS AS Z OF ANNUAL SALES 1960/61 1/2 2/3 3/4 4/5 5/6 6/7 7/8 Public Sector /1 106 93 79 54 50 46 56, 64 Private Sector /2 30 30 30 28 28 29 29 31 /1 BPE Annual Report, 1967/68, pp. 108 and 116. /2 RBI Surveys. 111. To an extent, of course, profitability was not considered to be a prime objective of public sector industry, and is still not in many quarters. Rather, the role was to act as a pioneer in the production of goods considered to be of strategic importance in the planned development process. That objective has been well achieved, and the country is now capable of producing a wide range of sophisticated products, unimaginable only two decades ago, albeit generally at high economic cost. 112. To conclude this section on industrial finance, it is clear that the private and the public sectors of industry have in recent years been suffering in the aggregate from (a) a declining level of internal resource generation and (b) too low an absolute level of resource gen- eration. This is seen in the increasing reliance of the private sector on the development finance institutions and other sources of borrowings, and in the failure of both sectors to raise internally-enerated surpluses. To the extent that prices of key industrial goods are deliberately kept down- onp would exoect to see correspondina benefits elsewhere in the economy. This does not seem to be the case. In fact, even the gross 1/ For example, HSL's labor complement is thrice that envisaged in each plant ~ ~ 1M 1s 1r4c /?~r 1n-n 1 f/2O ngba that- 413 th'a sector plants per ton of ingot capacity. Not all public sector o Fant ac .e. De'rl hw.-- i- e thi burden, Fbur19 . aee, L LA XUWJ.LAt_. 0.L.VL CLI~pL~e L1=UWJLfLL%&ZU, LLLU.LM LLY of Fin ance, New Delhi, February 1969. - 47 - return before tax, etc., experienced in the private sector as a whole -- 10% declining to 8% recently - is inadequate to sustain any rapid growth of investment, while the return in the public sector of 1% to 2% obviously will not induce self-sustaining growth. Therefore, maintaining the pace of industrial investment has required transfers of resources from the rest of the economy or from abroad. A point was reached, in about 1963, after which the slow growth of the rest of the economy, the slow growth of savings. and the diversion of resources to other uses such as defens3e and later drought relief, made it difficult for such transfers to in- crease. The arowth of industrial investment slackened from 1963 as a result, and declined after 1965 in real terms, and hence the industriali- zation effort slowed to a frnation of its intended nace. 1/ The rest of this report includes an analysis of some factors affecting industrial afficienev the nuratit- of whiph unild atim rn he an easnntial nart of gradually increasing savings performance and hence the growth of the indtintriAl agartanr4 IV. AN ASSESSMENT OF THE RESULTS (a TrnU 151lt± I .*UPO& WUbstit. L A.Juto .L%P.L . L AX L!J~. 164A *n.1L theL Luain in erst of L the jLJ im o t sua tit tl nALaL~ - - is, or at least should be, its impact on industrial efficiency, it is o examiue just n fw - rt substui .as neveL rthle i e.L uLe to i ngtWCe-ain-- UUF I LUW J. ft.LLpULU&6 ZS UM L..L k. A.~J ~ gone, and what contribution it has made to industrial growth. Adequate statistics exius only since 06ou1o and extenu only to 19U51U on tlue basis of ASI or RBI data. The basic comparisons are presented in Tables as aroug- 58. An attempt is also made to extend the measurement u m- port substitution through 1967/68. A number of methodological problems arise when comparing the value of output with the value of imports, and the tables reflect the various assumptions that were made. 2/ 102. In the aggregate, according to ASI data, 16% of the market for manufactured goods in India in 1960/61 was met by the import or manufac- tured products, but by 1965/66 the proportion had dropped to 12.8% and further to about 11% in 1967/68. If various industrial inputs are in-- cluded, such as raw cotton, crude petroleum, etc., then the overall de- pendence on imports seems to have declined from 21% in 1960/61 to 15% in 1965/66 and 14% in 1967/68. According to Reserve Bank data, the decline 1/ This argumnt is more fully presented in the latest IBRD General Economic Report on India (SA 3, dated April 18, 1969). 2/ The detailed explanation of the methodology is too long to include here but could be obtained from the authors on request. - 48 - in total import dependence has been even more rapid, falling from 24% to 15% over the 1960/61-1967/68 period. 1/ 103. Most of the imoort substitution that has taken place has been in the capital good industries, particularly in basic metals such as iron and steel. metal products, transport equipment and electrical ma- chinery. Even by 1965/66, however, 60% of the market for non-electrical machinery was still met from imports. but in the followine two vears im- ports of such machinery declined sharply, partly because of the reces- sion in demand but also because 1966/67 and 1967/68 oroved to he nPrinda of very rapid import substitution in capital goods, particularly various tynPa nf rmsaphina-ry Thin w.ca the r4nu1lt nf a nmbihr of n1anna rnminer 4-en operation, that had been started during the Third Plan. Within most eAnit-n1 onn%Aa itoanv4ian of Intu2atirinl 4mr%nrt thare wier ala phanoma 4. the type of imports, in that finished products were substituted steadily h- conents and -arts6 Thus, within the nn-electricall m-achine-. -ae gory, the proportion of components rose from 49.8% to 57.8% between 10KAIA1 .A. 1o.IAQ 4- ele4ial m-h4n-a FS 9 . 9 fro A toA 40 O a - transport equipment from 62.5% to 73.9%. The following table shows the import content, including all raw matv4la and 4miearmedat4es of W1A_ range of industrial machinery in 1967/68. 2/ Sugar machinery 8% Industrial Cmun machinery refr itgeanLuL maciaery 14k Boilers 20% Tea processing machinery 4% 7%. t.2 1J ACV 1T TI_9 -L..J- - - t.-j - ULA.L.L.Lng equiLpment JAIf& WC.LgLI.ug W&t11LLues Z5 Conveyors 7% Rice and oil mill machinery neg. LP gas cyLiuers neg. LUUUrLaX. centriuge uu Chemical machinery 13% filtration equipment 15% Pulp and paper machinery 25% industrial cooling towers 3% Construction machinery 5% Pesticides equipment 6% Reduction gears and gear boxes 15% 104. The trend in import substitution is less marked in intermediate goods, and in the aggregate imports supplied 21% of the market in 1960/61 and 19% in 1965/66, although if anything, the importance of imports rose again the following two years. Partly this is because fertilizer imports increased rapidly - more rapidly than domestic output - and partly because 1/ This is a very cautious measurement. It can be argued that as the economy develops, the demand for sophisticated goods rises and a growing import dependence could be regarded as the norm. Against this norm, the reduction in import dependence is all the more im- pressive. 2/ S.K. Sinha, Senior Industrial Adviser, DGID "Import Substitution in Industrial Machinery Manufacturing Industries" in Seminar on Import Substitution, FICCI, New Delhi, 1968. - 49 - the rest of the chemicals industry showed no progress toward import substi- tution. In fact, if the high production costs for a number of basic chemi- cals are any guide to the efficiency of this branch, it is entirely appro- priate that import substitution proceed slowly. One interesting character- istic of recent industrial trends has been the sharp spurt in imports of industrial inputs in 1966/67, without a corresponding increase in total output. It seems clear from the data that these imports, which reflect, the availability of non-project foreign aid, were accompanied by a rise, in stocks which had been seriously depleted over the preceding four or five years. Inventory data confirm such a trend. As far as consumer goods are concerned, import substitution is virtually complete and by 1965/66 only 1/2% of the market was met from direct imports of manufactures. Of course, some of the imported intermediate inputs such as raw cotton also go into consumer goods. 105. It is interestine to know whether this import substitution trend was critical to the rate of growth of the industrial sector. This does not seem to have been the case: total outnut of manufa-turina industry rose by about 51% from 1960/61 to 1967/68, and since the overall dependence on imnorta danlflnd from 211 to 142 over thin neriod thin means that Ahout 11 percentage points of the growth in manufacturing output consisted of import An1hatitut1iln Wnr,v nprrantAvi n^inta or 797 nf the &rnwth wa dnmanrir production. It may now be that the import substitution strategy has already n1nvad fa i~nm 4tn a4timnen growth and It in not nos eannotial a stimulant, since the growth of demand is a much more important factor. indeed, it isentirely possible that if a rather lo asolue form of im- port substitution policy were chosen, that is, a policy that does not always elncourvagomestic p. roducti n, -f.,.,..n.o- *.a lno4 -9 .A the economic cost of producing them, then an improvement in efficiency the real price of industrial goods, would result in a growth in physical vusu Un 'a- cou"u a- lenast compeunate 40u "um reduction .n w g_w P J.p kU L & L . I.L LU aL. A~ . .. m 6I L .W&JJ U&A= &=~UL L.L'.L in the~ 15rPwt ofL the market that might follow some relaxation of import banning. The argu- MGSk V VW OG M W LVL L A .&%. CRV GLVRL% %49- 0LA%VAL%.LUMLL A4L AU%JL5 & exchange that a relaxation of the banned list of imports would imply. This, however, only POins up th nudpene between Inusal expous rt, imports, and the efficiency of production. With imports now accounting for onLy 14% of the market for manufactured goods an interm-UXates, the scope for indefinite continuation of import banning as a way of minimizing Loreign exchange costs is ~ILU oou ~me Basic RIa.ioaJ wo. another way or looking alt te resuxts or tne srrartegy is to ex- amine trends in labor or capital productivity. This is done in Tables 52 and 53 for the 1959/65 period. Labor productivity measured in terms or value added per worker (in constant prices) rose by about 1.8% a year over this period, while capital per person rose 11% or six times as fast. This sharp divergence can be partly explained by employment maximization on the one hand, and on the other by changes in the structure of industry - the move towards more capital-intensive products - and by increasing - 50 - underutilization of capacity over the period. Nevertheless this and other comparisons of labor productivity are not too favorable. 107. Capital:net output ratios show similar trends. According to ASI data, the capital:value added ratio rose from 2.2 to 2.9 over the 1959/65 period, implying a marginal net ratio of 3.6 - very high by in- ternational standards. Some of the increase was caused by the invest- ment in petroleum refining and basic metals, but even without these the capital-output ratios were rising steadily in most consumer, intermedi- ate and capital goods branches - particularly the latter. Capital-output ratios for the public sector firms, as would be expected, are somewhat higher than equivalents in the private sector; for example, those of HSL 1/ are twice those of the private sector firms. Those who have studied industrial productivity trends over longer periods 2/ come to essentially the same conclusions. (c) An Overall View 108. It is now possible to bring together the threads of the various arguments and statistical analyses presented above and to draw some con- clusions about how the strategy of the past two decades has worked. As was described in Chapter II, the strategy has two main elements. The primary element or objective was to accelerate growth and to induce a ma- jor change in industrial structure, with government playing a leading role as innovator, regulator, and investor. The second element was the pursuit of self-reliance using the absolute import substitution strategy which was adopted subsequently in the mid 1950's. Have these objectives been realized? This question is broken down here into four elements: (a) industrial growth, (b) structural change, (c) self-reliance and (d) im- provements in efficiency. 109. As far as arowth is concerned. at least until recently the strategy has generally succeeded. The growth of physical output has been on averaae at least one third faster than the arowth of the econ- omy as a whole, although rapid growth was concentrated in the 1957-1962 narind- rreoth In indnatr4al nativltv ainee 1950 has beAn unaven and can best be divided into three distinct periods 3/, reflecting the ges- tation 4m1AmentAtion and h0atAtinn Af the Pn strategy. The finat period was from 1950-56 when the role of public sector investment was 1/ "Performance of HSL" - Ministry of Steel, Mines and Metals, 1968, page 17. LI E..IUjE/IUUI~U~ 1U~ L~~.V. L ~UO LU "L ~gC Scale Industries" Economic and Political Weekly, October 26, 1968. 3/ The same distinction of periods is made by Dr. P.B. Mehora of NICI in his valuable DOOK, -Industrial Growth since 1750-, Bomay, 1968. - 51 - small, accounting for about one sixth of total industrial investment and less than one twentieth of overall Plan expenditures. Up to 1954 there was no dramatic growth and there was considerable doubt about tax and industrial prospects and the role of the state sector. Subse- quently, good crop years, the introduction of the development rebate, a selective tax holiday and other measures improved the climate and by the mid 1950's profits were rising. 110. The second period runs from about 1957 to 1962 during which trends in the industrial sector were in marked contrast to the quies- cence of the first. There were two events of importance; firstly, there was a boom in private investment which reflected the new confi-- dence of industrialists in the likelihood of substantial further growth. This was encouraged, in part. by the 1956 Industrial Policy Resolution. and the ambitious Second Plan, following the generally successful imple- mentation of the First. Licennes were inaued fairlv freely and in fact doubled from 1954 to 1957 and tripled from 1957 to 1960 (Annex Table 11). The boom that ran1tPd wan wAll in e-rcea nf Plan Pnnetatons. The second characteristic was the rapid surge in public sector investment which hrniht ha, indts.etry apptnr tn t-ho fnrafront of Plan exnenditures. absorbing 22-25% of Plan outlays from 1957/58 onwards. The Third Plan had the Rnma init-il affear an ita inraAarpaanv Rt-4Tn21li-fn* private in- vestment once again to another boom in 1960/61. During this 1957/62 narin indsntry reew ate a vate,a ^f In way, lad hy the enoineAr- ing goods industries as a group which grew at 20% a year, a rate that: has not han en.n11d since. 111L. 7h4 .1 4-A, kwer., from TO94-91/34 onwards ha heen -a period of a declining growth rate and consolidation, during which it bec,---e clear that. a- ShLo r tagIe of In-UVeM-tmt reouces an otee--reC of a high-cost industrial structure are major constraints on further -" * aLIwa t LrLoL L, UWC VEL , was J.aUH L'Long teUUmg nu a drS. Fourth Plan was formulated in 1966 which again projected rapid growth inOl.LUL0 . 4. L4-- LIU..,L ULLL 1LA Ub..L. anA th pAr- a sser. 'Ay t4hse time, however, both dne puv", ausmy vate sectors were suffering from rising stocks and unutilized capaci- confidence, to rise to the occasion. The effect of the war with xCLM..LULtan, an"' Le two poorE harLvests, IeU to LLle draft Pl.ans' wJidawal. 11 A- Z~ a* Lar as structural hnge is concerned, nere oUO tUu LLMLKgy has generally succeeded. India can now produce a very wide range of in- dAustriaL produces, and about two thirds of nLustrial output now consIts of capital goods and intermediates compared with one third at the start of tMe Frs r.aU. vespite all the delays and frustrations, the struc- tural change has been rapid by any standard; since this meant doubling the number of industrial enterprises and undertaking diverse new business ac- tivities, it is small wonder that some mistakes were made during the whole learning process. 113. It is interesting to note that the strategy has succeeded in the two above respects mainly because the private sector responded to - 52 - LII ~ ~ ~ ~ ~ ~ ~ ~ A .LLL..UAUI A.L U& 4. l. L .9.J LI .J~Z~~. icy and events. Twice in recent years, when optimism has been encour- aged and flt, tne private seoru naM r=MpUUMU WALLu VULy A16 Lu- creases in investment - increases that it was in fact beyond the capa- c'ty of the balance o. payments to manage. LTere were a"Nu CAUeciVe increases in that the generally rather uncritical acceptance of the outloo-, promised by the Plans and implied by the lceuses, led in fact to the creation of excess capacities. Overall in 1968 the private sector still accounted for about 90% or output and thus was responsible for well over 90% of the growth in output. This point is made not to praise the private sector but rather to stress that the strategy worked because the indications of the Plans were effective; in other words, private sector behavior shows that indicative planning has been working all along. This conclusion emerges rather strongly from data in Chapter M11 partly because the role of the private sector seems to be larger than is commonly thought. It also needs to be stressed that although the licensing procedure used may on occasion have had a stimulating rather than a control effect because of the implicit assurances of a market, nevertheless, it is basically a negative instrument, a substitute for market research and product adaptation, which cannot induce investment if there are no applicants for licenses. It should be noted, though, that government on occasion induces license applications, as in the cement example above. 114. Thirdly, there is the question of self-reliance. The question of just how far import substitution has gone was explored in section (a) above. It is clear that there has in fact been a marked substitution of imports by domestic production, and in that sense considerable self- reliance has been attained. However, self-reliance in the sence of de- veloping export earnings has not been achieved, and the rapid growth of industrial exports really did not begin until about three years ago, since when exports have been stimulated by substantial incentives and facilitated by depressed domestic demand. 115. There has, however, been an unplanned and unwanted slowdown in industrial growth over the last few years. There are a number of reasons for this. Some are external to the sector and others internal. As far as external causes are concerned, the low rate of growth of the rest of the economy, and in particular the agricultural sector, has placed a ceiline on the growth rate of industry (apart, that is, from export growth). So too has the low and uncertain level of capital in- flow in recent years. The third external cause has been the recent trend in the terms of trade caused by the relative increase of agri- cultural prices. It is difficult to say whether this is a cyclical or secular trend. Certainly up to about 1963 prices in the agricultural sector were kent low- nartly hv cntrols and nartly by subatantial food imports. However, food output growth and stocks were also low and when the two drought yearS rnma in 19A5 nd 1966 the nroaurp of demand rp- sulted in a rapid shift in relative prices, strongly encouraged by the products. Recently, however, it looks as if the cyclical trend is - 53 - 116. The internal causes are of greater interest to this report. It is clear that the single-minded pursuit of the development objectives, expressed always in terms of physical output, and without considerations of comparative advantaze. has been at the expense of efficiency and pro- ductivity. It is not difficult to point to examples, and the next chapter reviews some of the trends in efficiency. Partly as a result of this, the capacity of the industry sector - particularly the public sector - to finance its own axoansion has steadily diminished and Chanter III above provides substantial evidence of low and declining profits. These low nrofftrs wprp aggravated hv nric cnntrol nn a number of mainr rnMMAdi- ties, and by serious delays in authorization and construction of plants; it Is alsn nna4hle that in recent- years incraensing enTnuaviton hat'pain _ - _ ---J- - - - - - -- - -- - - . - firms, brought about by various policy liberalizations and the recesion, lai t-n hn-h a roditrinn in nrnfit-o as well no owma 4neano in aff4oione-w The other sense in which low efficiency curtails growth, whatever the trends in Vh MVOt ^f t-h" -Afnn^mw maw hn hmann 4. 1 , 4oh enal -n trenAa -n i-h- rest of the econ-my my have been, is __i at 51 h _ha1 and prices simply curtail demand. The improvement of productivity has nt so Far been given t-he non. high priorityu no -f.ann -&na -in - - - . put or meeting one of many social objectives, but since the major objec- productivity would seem to be the next objective. TY LM AVIVT ^M TXarrTC-PnTAT wwwYt T T' ou V 17JZZWU%X-uI J r _LLN1JU~L2L .%J ErC4.r L LM%,1 117. How efficient is industry in India? This is not an easy ques- t-ion tU unwer, UCUuse tLr s Ho universiL measure or elliciency, in- ternational comparisons of production costs are imperfect because results can be biassed by an inappropriate exchange rate, or because a high cost of production may only reflect high input costs from elsewhere in the economy. Other comparisons can be based on the number of physical input units necessary to produce one unit of output - with number of man-hours as a principal measure. rULter evidence can De gained by examining trends in the productivity of factors of production over time. This chapter tries a. the above approaches, which are beloved of economists, although they would be regarded as imperfect by a businessman who would attach a lot of weight to quality and design, service, timeliness of de- livery, etc., which are not measured here. Firstly, some absolute com- parisons are made, both of prices of certain homogeneous products, and of the performance of certain large- and medium-size firms in relation to similar foreign firms in industrialized and semi-industrialized coun- tries. Particular emphasis is put on the relative efficiency of substi- tuting "low-cost:" Indian labor for capital. Secondly, a number of nea- sures are advanced of the relative efficiency of different size-groups of firms within India, and again, the benefits of substituting labor by capital are considered. Thirdly, since concentration is closely related to size, some data on the relationship between productivity and size are put forward, because of the importance now being given to controls over monopolies. Some basic ratios measuring trends in.performance over time of industry in recent years were given in Chapter IV above. - 54 - (a) Some Absolute Comparisons 118. Data on a few commodities believed to be homogeneous are given in Annex Table 43. From this and other evidence it appears that India, even at the official exchange rate, is a competitive producer of consumer goods, such as footwear, textiles and many food items, including rice but excluding sugar which costs several times the world price. The same is true for minerals and many basic metal goods, particularly those in which India has had long experience. Thus, coal, both coking and non-coking, pig iron, and steel bars, rods, structurals, sleeper bars, etc., all appear to be generally competitive. So too is some textile machinery, in- cluding both spinning frames and various looms of modern design; this com- petitiveness was confirmed during recent textile plant visits. Smaller electric motors and transformers, some power shovels, basic machine tools, telephone equipment, some cables, and sugar and cement mill machinery are amongst products that appear also to be competitive. On the other hand, most chemicals, non-ferrous metals, and more complicated machinery and components often exhibit a marked price disadvantage. This is particularly true in, for example, automobile sub-assemblies such as starter motors, distributors, propeller shafts, etc., which range in price from 60% to over 100% more than prices in the U.K. What is interesting, however, after examining a wide ranie of price quotations, is that different firms manufacturing products of similar sophistication show markedly different dearees of competitiveness, and one is led to conclude that India contains a large enough universe of firms such that, over a wide range of manufac- tured goods, differences between firms are at least as important as dif- ferences in comparative advantage between products. The same conclusion emerves from even a curaory glance at the relative success achieved by various firms in breaking into export markets. Often, the firms which have nurepaded in annturing eport markets are thnan which are alan suc- cessful competitors at home. 119. It emerges clearly from Table 47 that the volume of production of the largest Indian firms is wry much amaller than thafir fnraecn un- terparts. With the exception of a few branches such as textiles, cement, or ray on,3 which w~-r one quater oion tentvh thep awp, t-hp T"A.- f surveyed were not more than one twentieth as large. The exception is LA ~ ~ ~ ~ ~ ~ ~ ~ ~ ' 047t saS St e Is ml A.5 'f . 5l J.ac ~ ~ SC L 7* LAme 1 arge than HSL and in terms of employment only 2 times, but sales are as much .A1 ime larges. "Lim~ L La os, p35jarl.y be a"e act~ is .L. £1'JWAA, %_FLCj and labor in the latter are not well used. 120. Although the sample of 13 firms here is small, a few conclusions emerge. Six of the 13 are subsidiaries of international cuncerns, and most of these six perform better than average large Indian firms. Where capital invested per employee is similar to that in the foreign firm, as in Goodyear for example, then sales per employee are likewise similar, lending support to the thesis that given adequate management and technology, Indian firms can be as efficient as any in the world. Despite the large differences in scale of operation, however, these Indian firms do not emerge - 55 - badly from the comparison. All except HSL, Premier Automobiles and Orient Paper have capital-output ratios that are equal to or better than their foreign counterparts - reflecting, of course, the substitution of capital by labor; for example. Delhi Cloth and General Mills have assets that are four times smaller than those of Coats Paton, but sales are only 2.7 times smaller. The comparative profit uicture of these large Indian enterprises is also not bad; all the five firms producing price-controlled commodities (textiles, paper. cement. steel and cars) had lower profits than their counterparts, but six of the eight others had better results despite grow- ina impnet nf t-he rnepaann - All t-nli therfnre desnite the size dig- advantages, which reflect size of firm rather than of plant, large Indian firms d not neam n nmnva rnn infsvariahly with lAre foreign firmN. 121. A fioirt-hpir at-at- ati-l nnnlua4a e%f t-nmniiv Pffiripnt-v ha been carried out on a selection of 67 enterprises, other than the largest. Twentysix of these rwll-st_ehl4ahed TnAan f4ms, whidh are paired with 41 firms from Israel, Yugoslavia, Japan and Frarce, which ar ova copral medium. siz tan wdhi,4clh produ.ce th,a soname e-l Details are given in Table 51. To draw firm conclusions from these data.. wouldI be unwise4a - the. firms. selec.t area not ecearillv ----- sentative and the sample is small - but certain conclusions emerge. r4Irstly, ap'ad ' per .worl-er Is A - J. 1 .--. 4- T-A4- nhes w KaLJp .LA.L &ot wULAL in.uvariauly LVWUS L&& Ltn&"uuCL, j&aLnoo sOM flecting, inter alia, the characteristic employment surplus in Indian tns. So nu"y in Iun tne snare -in v--u -ucu-acs nput -1- Jn.m a tLU.y J.AA LUU.La UM~ 1511U&C 0V. V&t.UC alUed LU 6V%a.L VULJU4- LM usually below that of other countries, indicating that inputs such ni raw materials, components with a high rate or wastage, transport or pawejr may be more costly than abroad. Both depreciation and the indirect tax bur- den are lower, and overall, profits in this sample generally equal oT ex- ceed those in the other countries. However, the average gross profit rate in this sample of Indian firms (13.6%) is significantly higher than 'tat shown by the RBI for the corporate sector as a whole. The other conclu- sion on efficiency to emerge from this sample is that most plants pro- ducing consumer and intermediate goods work more shifts than those in other countries, showing that productive capacities in these groups of industries appear to be utilized as well in India as in other countries. This, however, is not the case in most capital goods industries. (b) Gains or Losses due to Capital-Labor Substitution 122. It is noted above that in India invariably the amount of capi- tal per employee is less than in industrialized countries, and the num- ber of employees per unit of output is greater, as indeed would be ex- pected. The question, however, is whether this substitution of labor for capital - which sometimes although not always means the adoption ot a less capital-intensive process - gives India any particular advantage over comparable firms abroad. To arrive at a tentative conclusion on this, 16 of the largest Indian enterprises and 10 medium-sized are com- pared with medium-sized foreign competitors in Table 50. Since there are not many very large firms in India (except in terms of employment) - 56 - there is a tendency for the foreign firms used here for comparison pur- poses to be much larger than their Indian counterparts. However, this does not necessarily mean that plant sizes are disproportionate, and in any case, these are the firms with which India would have to compete in, say, export markets. Every effort was made to get comparable data, but nevertheless the results are very tentative because the sample is small (17.4% of total net manufacturing output), relates to one year only, and the data are sensitive to the choice of exchange rate. It should be stressed that the comparison here applies only to the use of labor and capital, the main production factors, and eliminates all other ele- ments of cost and competitiveness. 123. The results are interesting. The firms studied can be divided into several arouos. Those in which the cost of both caoital and labor was distinctly higher than abroad include government enterprises produc- ina qteel. fp-rtilizers and heavy electrical eanuinment. and a textile machinery plant and oil refinery. The basic causes of these high costs arp 1a-raL umAakrntiliad vanneitlea cominea on trn of hiah nriainal rnni- tal costs, and labor surpluses. Next, India has an apparent advantage in lahnr coats but disadvantaa in canital- in certain metal nrodunta paper, and iron and steel in the private sector. Thirdly, the reverse is true - i.e., Tndian ant-rnrindan hmp lyaar ranirnl nata hut hichar labor costs, in textiles above all. It is clear that as long as excess oIim4wtant manf unitnnsi e"an ha ann ar, that tha twv4 ina J4,n tiia is one in which India should have a significant comparative advantage. This has always been the ase f cavse hut in recent yearn the cum. lative effect of price controls, support of the small-scale sector at +.1-0 oma exp -s -4 *1- -4 1 1 agb^s.ow m,1nnn t.o4,4' i ti e n r moved the competitive edge. Lastly, both labor and capital costs are .Js J c l lower~. 4 T-..4- 4- 1------.e,oA A4 -..1 -1, U L. L..L F.LY .LU . LnI IdaLie m n ,11 lww-ve d diesel4 wtLj.nes , A. I Ue A products, rayon yarn, certain chemicals, certain wire and steel prod- ucL dU a mediUmledo iLU an Dteel plant ILn seveL lsu.;U" L dustries, however, high raw material input costs as for rubber and rayon, -Makee 10L 1.Lg1-P.kCU PLUUUF.;LUfo hs nutis 124. These data, as well as those in Table 51, provide confirming evidence also that differences between firms in India are at least as important as differences between types of products. Tne same conclu- sion emerges from a number of case studies of individual firms in India carried out by the .uEu vevelopment Center. 1/ These studies, using the methodology suggested in "Manual of Industrial Project Analysis in Developing Countries" 2/ are similar in approach to those used here, though more thorough in their breakdowns of real production costs and 1/ Papers presented at Bellagio Conference on Industrialization and Trade, March 2-8, 1968. 2/ Vol. II - Social Cost/Benefit Analysis by Ian M.D. Little and James A. Mirlees, OECD, 1969. - 57 - returns. They show social rates of return that are extremely high in some firms - at least +50% - and low, indeed negative, in others (less than -100%) - differences that are far too high to be attributable wholly to size, or to the choice of technique, or its adaptability to Indian conditions. Rather, they suggest that management quality is the key variable. (c) Performance and Size 125. If we aggregate various size-groups of enterprises for the economy as a whole, however, it emerges very clearly that larger firms generally out-perform small- and medium-sized firms, using various per-- formance indicators. This is not to say, of course, that in particulax branches small- or medium-sized firms cannot be competitive - in fact there are any number of examples both in public and private sectors where they do successfully compete, and in fact in the public sector small- and medium-sized firms consistently out-perform the giant This general relationship between performance and size is important, though, because of the stress the government places on controlling the activities of the large houses and promoting the interest of small-scale and medium-sized industries. 126. The most: telling comparison is of aggregate rates of return 1/. Financial returns, as was noted in Chapter III above. have not been suf- ficient to generate adequate internal financial resources. The following data are for the nrivate sector in 1964/65. but other years also show the same pattern. Profits Net Retained Paid-in Canital an % of Grna Prnfita Profits: Profits as Z Size Group Sales Total Capital Net Worth Total Profits Under Rs 25 Lakhs 7.2 8.7 6.4 14.4 Rn 2% T.nkh% tn Rs 1 Crore 8.2 9.4 7.9 17.0 Over a 1 Crore 11.7 111 103 20-1 S4milan realt saa ahown in Takle A al thoa hae tha inclusin of &eN- ernment firms amongst the largest enterprises biasses the profit rates d -a rd . Itis int-e-sing to note tha -pof4t. In 109q/9A n"anvftwhAt higher in capital goods than in other sectors, which, given the high lev- high-priced in India. 127. In terms of growth of sales, again the largest companies showed great strength1. In& al . but oLIe oA. LIe capital. goods I----L.~ JW. A./ DCIe-JILs" are given in Anumex Table 40. - 58 - firms' sales grew faster than the average in 1965/66. The same is true of consumer goods industries. Since these aroups were hit by the incioi- ent industrial recession and the droughts, this performance seems to re- flect the competitive ability of these firms under adverse circumstances. The same divergence in trends is observed in 1966/67. As far as we can see, this is not the result of quasi-monopoly pricing practices, because in general the ratio of profits to sales in larger companies is lower than the averate - but rather it reflects their ability to diversify and seek sales outlets. 128. On the whole the performance of the largest companies seems to indinAtp that the low coat of Tndiari lahor in nnt nsrtimilAvly helpful in competition against reasonably productive fixed capital. This is il- ltnnrad in Tnhlp 49 from which It, anapnrn thha for oil i-la 4nx' hv^nMA groups of industry there are substantial benefits, even in India, from the replacement of labor by capital equpment. T" ^fe " A alihmma the largest enterprises have more capital per employee, this is more than ouitm4fhaA hy the nAAt4nan traluth nAAmA h- alaw * h4U gain is least significant in the cement industry, which strengthens the anIment hnna it- ja 1inknwn fhnt thar nva n xiAm A4ffM%-es kaetn- firms in techniques used or in size of plant. Within these broad group- 4na-a hn.a there *.na re exanep.love ton ite vrnl - latihes fo e-apyle can be produced satisfactorily using labor-intensive techniques - but 111 M.I.LS CORCI U " MarL..0 MC OMI jJUL D LL. W& MU =MAy VyM1=&A6 maximizing policy at the expense of capital-intensity is likely to be accompanied b0y losses tCo the economy as- a whole. A.L4 L&LH Du LULE CLutaumAno U. DUaC U1Lia' LACRLAA U "AI India? The opportunities are considerable; the market for industrial guous is u o $60 biion a year - Larger uy far than any oCer Ue- veloping country and a good many industrialized countries - and the above calculations auggest Lhat large enterprises LU Inula are rela- tively efficient; some are so, even compared with their foreign coun- terparts. Yet all the influences seems to be in tne direction of mini- mizing size. Firstly, a look at some facts. Table 48 examines 17 products for unich some data are available on optimum sizes; even al- lowing for large data errors, in none of these industries does the optimum size seem to be attained and in only one or two such as news- print is the optimum approached. No wonder industrial inputs such as rayon acetate, urea, nitric acid, etc., are relatively expensive. The unfortunate thing is that for a number of these products the total demand comfortably exceeds theoretical optimum in the vast Indian mar- ket, which would not be the case in most developing countries. Opti- mum size is not quite as critical in the engineering industries where generally plant is not wholly specialized in nature, and where one needs only a sufficient volume of output to ensure that the larger, indivisible, pieces of equipment are well used. However, in chemicals, or in specialized activities such as automotive production, size is of the essence. It is thus difficult to imagine that the production of - 59 -- 38,000 cars a year in 3 plants 1/ when the optimum certainly exceeds 100,000, or 1 million tons of oxyen a year in 50 plants when two or three would be ideal, can ever be efficient. 130. There are various reasons for this; some are economic, such as the fraementation of markets which makes it preferable to establish regional plants, as does the wish to avoid concentrating production facilities in one area of labor unrest. Also. the absence until re- cently of incentives to capture export markets has reduced the scope for canturina Aannmln of annlp in rhAt dirpetion. Mnat of the other reasons are policy reasons, though. In some cases products, such as hattrian nd many conmer good, are reserved fr *he amal-ae sector. Balanced regional development encourages the growth of sub- ontimal pnsa na Aa the aminImrnt4n mf 4nAintv4n1 14tanaina nel- icy in its pursuit of monopoly control. For example, medium-sized lcp- c-Al tob%hcco^ fIrm ar5g "^w~. 1K4nft w4t m .v -h k-ho four- large foreign firms that dominate the market today; and the del. ct.asing of Ivesmen Inthevanaspatl Industry- recentl a applIcable to 01.1 producers "except those producing over 100 tons/day", which happens to ~ LI~ L~J DJU ~JL~LL~LL jLL3 UL.LO. .Lf. 4XP =CL0, -_4 -.1. results that optimum size of plant is generally not a dominant criterion LA. UP6 .AJ. lainnUing, anuU A.U LaL, as pUiLteU rUe UOL-As aha ws of small enterprises in total production is still unusually large. VA. aU ILL rLJ.11 131. There is no shortage of policy problems, and this report does not attempt an encyclopedic classification of them. To do so would be meaningless, because they are all interrelated, and have emerged over two decades or more, leaving quite limited freedom of action in the hands of policymakers. Thus it is unreasonable to expect any startling changes in the short run, and in fact the history of policy change is one of slow and marginal evolution. One way of clarifying this exceed- ingly complicated situation is to attempt to get to the underlying eco- nomic roots of the various industrialization problems and policies, as has been attempted selectively in this report. The last chapter touched on the relationship between size and economic performance, and concluded that in the pursuit of productivity gains, large firms performed better. The economic forces encouraging the growth of corporate enterprises are very strong the world over, and India is no exception. The important thing is thus to realize the productive and innovative skills of the large firms, without the abuse of a monopoly position. There followa a section on monopoly policy, as an example of the process of policy formulation today. 1/ The Minister for Industries is now seeking Cabinet approval for a fourth plant, to produce a small, cheaper car. - 60 - (a) Control of Monopolies 132. This is a matter which has attracted political concern right from independence. The 'directive principles of state policy' in the constitution, and successive statements of industrial policy, make it clear that the main fear is of large concentrations of economic power as characterized by the large business "houses" or conglomerates; earlier, the managing agency system, now on its way out, came in for similar scrutiny. There is really relatively little interest in the monopoly practices of one particular firm, or of restrictive practices. within one sector. Of course the business houses are large in the Indian context although small by international standards and small com- pared with the government monopoly companies such as HSL 1/ which in terms of assets is as large as all the companies that could conceivably be regarded as belonging to the Birla and the Tata houses, taken together. Tn faet nine nf the country's ton ten companies- ranked by assets in 1966/67, are government quasi-monopoly companies. 133. The size and behavior of the large industrial houses have long hppn thp obiect of scrutinv. Durine the late 1950's and early 1960's Dr. R. K. Hazari undertook a monumental piece of empirical research for the Planning Commission 9/ he MahalAninhn emmit-oo nn Tintrihiinn nf Tn- come and Wealth also discussed the subject in 1960 and 1961. The latter led to the work of the Monopolies Enquiry C0lnin. *A/ anel then i. 4105 a draft Bill, and the Lok Sabha committee report. Dr. Hazari followed up h-4. 4a r v41-h thn 14cnann atitAw -rafairv-,o t n 4 M2Phantbr TT a"A --..-..-.....---- -- 5- -- -- ------- - this was followed by the Dutt committee report referred to earlier. In efft, -61AILerefoe,a there hae ben. to sepaate 14nna n F __-.4 n an +-UJ subject. All these studies come essentially to the same conclusions on prouuct cuncentration,, unma--ely, no tuere apwpar to ue no aunonua.1 deleterious effects of branch monopoly, even though it is clear that con- aUilel cUUcLLatiu nUD CAes exit n l larg UI-Bu& 0A FLOCUlL. LLle Monopolies Commission mentioned finding some evidence of resale price maiutenance, pr-ice-fxiug, LesricAve eVLLUUL.UU aaUJ3=l=mL0 alU Un or two minor cases where existing producers attempted, by price wars or by putting pressure on the licensing authorities, to prevent entry to an industry, but control of these practices did not find a prominent place in their recommendations. L. A. Joshi saw no cause for concern in the industries he studied. 1/ HSL is the only Indian company among the top 200 non-American cor- porate giants. HSL in 1967 ranked 10th in assets and 120th in sales. 2/ "The Corporate Private Sector - Concentration, Ownership and Control", Planning Commission, 1966. See also L.A. Joshi "The Control of In- dustry in India", Bombay 1965. 3/ Report (v.I and v.II), Government of India, 1965. - 61 - 134. In a number of industries there are effective barriers to entry in particular branches because (a) of the high absolute capital cost of the minimum size plant, or (b) because the minimum optimal plant would constitute a large proportion of total sales and establishine a foothold would be difficult. The latter is likely to be a particular problem if the industry is one with atanlv falling averaea cost curves, in which case objections by competitors, who would face being pushed into low- volume high est nroduetinn- wnuld hp Arneted tn he narticularlv fierce. Vinod K. Gupta 1/ cites a number of cases. Such problems are not con- sidprpd hv any of tho nffiriAl tanniHiripn ThiQ anrAnt lack of concern is surprising, because the conflict between economies of scale and a monrnly or nonr-mnopnly nsIton in a nr e'ni hrnn-h neesirn all th. time in India, because of an insufficiently large internal or local mrar- kecht. Alao, bus4nessmen 4- Tnd4a as els-where av ar distinct,. n-.aAillentinn for restrictive practices, which are known to be widespread - such as the pntar ind----..- crtel. 77heis Mo.nopolie nd ..ADa-n--l+4e r Tr-ade Prac,ti ,ces Bill, 1967, contains provision for compulsory registration and -.-iew of suc prcics an this would appear o be a welcoAme step~ fo5Jar,ail though the value of this proposed procedure depends entirely on the com- petence of tne review and tne pupuou Mnuuopoly CM"IAsson's view of tla public interest. So far, economic considerations have not been important incns- de rn-LI40LFU 1>>.~ In uecmiLe uIssui-minued pursuit of the 'arge .LJIeDutt Comittee, in its single-m e pusi of LU Ll1 Industrial Houses, refers to product-concentration only in passing, in connection with the pre-emption of industrial licenses. Such pre- emptions consist of obtaining but not using permissions to add to capa- city in a particular branch, by obtaining licenses issued up to the Limit of "planned" capacity. Other applicants for licenses are thus subse-- quently denied them on grounds of no further scope. This restricts entry (assuming that the other applicants would themselves have started produc- tion) and, if the holder of the unused license is already a large pro- ducer, it enables him to maintain his dominant position. The emphasis in the committee report is however more on the acquisitiveness of the large houses, which such actions are said to reveal, rather than on the effect on the efficiency of production. 136. This brings us to the large houses. Tables 59 and 60 give some indication of their relative importance, and it appears that the six largest houses (Birla, Tata, Martin Burn, Mafatlal, Associated Cement and Bangur Group) accounted for about 20% of assets in 1958 and 21% in 1966/67 - not a significant change. However within this total the relative position of the houses has changed sharply - Tata's, which in 1958 held over half the total assets of the top six, now holds less than one third, while Birla's, having doubled in assets over those 1/ "Cost Functions, Concentration, and Barriers to Entry in 29 Manufac- turing Industries of India", Indian Economic Journal. - 62 - nine years, has reached about the same relative size as Tata's. Martin Burn fell relatively too, so it would seem that those houses with large holdings in basic metals and machinery grew more slowly than the more diversified Birlas and Mafatlals. Birla in particular has displayed great energy in moving into new fields and has thrice the number of com- panies, although smaller ones, compared with Tata's. 137. This finding about the stable share of the largest houses in total assets is consistent with that of the Dutt Committee (p. 74) which concludes that "our study of the share of the large industrial sector in licenses aggregatively as well as in regard to certain prod- ucts shows that the large industrial sector did not obtain a dispro- portionate share of the overall licenses in any significant sense of the term." The only disvroportion noted was that certain houses "the most prominent among them being Birla" understood the system and ob- tained a significantly larger share 1/. It is explicitly argued that the decisions to issue such licenses were, on merit, not necessarily wrone. However, economic considerations about the misuse of mononoly power are not raised. The principal concerns seem to be over the auestion of "unfair shares" in the licenses issued. and over sheer size, (although the actual growth of the industries concerned was not examined). Neither the noncent of excessive size nor of fair sharen was defined, but these apprehensions are consistent with the genuine conern that hna long hen ernreased about the undue conentration of economic power. 138. A definition is advanced, however, in the Monopolies Bill, which eak tn tcnntrl Inae firm, ultincy twin -ritgarlia nf aonlute size or product concentration. According to the Bill, if a firm's own assets, or those of the industrial house to which it belongs, ex- ceeds Rs. 20 crores, or is one which occupies a dominating position In a --aticu-lar branch, it n.at seek government approval for a "sub- stantial expansion" (over 25%) or merger to show that it is in the that would become dominant. A dominant undertaking is one which, with any rL±U U L U L La..L"6, CL'JL.%."A6 W L'JV U LAW ~ WJ_ 1 %P.JLt_U.L a specific product or service. A majority of large firms in India I2 IC 11 i .. 23 _ WOULL UL L±±UAUCL teedfntos LJ7w. Ine IJULL %UMmJWLLC--, nUWVUL, LeCmUUMMIeuS SupJLUmn"-&-LUg Late Monopolies Bill by banning Large Industrial Houses (also foreign firms) from all except the "core" sectors or industry - a limited range or "priority" heavy and technologically complex industries. This goes rather further than the Fourth Plan draft which would disallow such 1/ The government has since announced (Economic Times, August 29th, 1969) a special com mission to probe these findings about the Birlas and other houses. - 63 - Houses from entering "relative"Ay umoLL "nuusiea .-U no thA rrnti tion of consumer goods". Both the Dutt Committee and the Plan would sharply restrict the resources available LrUm LA dvelpment na institutions, although the Dutt Committee further suggests that if the government finance institutional courioution io LaLLr= a ernment should share in the equity and in Board decisions, and such com- panies would be considered to be in the "joint" sector. 140. It wouLd be rash to predict today the trend in policy towards branch or product monopoly, and large multifirm holdings, but it seems clear that size, per se, is being increasingly regarded as undesirable, and all indications are that large enterprises will tend to be discOVLr- aged from substantial expansions except in specified core industries. There is no doubt that legislation on monopolies and restrictive prac- tices is badly needed; for too long such control as nas existed has been through the overloaded industrial licensing authorities, who have had no clear guidelines in any case. Missing from the current exlague on monopoly control, however, is explicit consideration of the aconomic aspects of size, concentration, productivity and market behavior, or the economic relation between complementary products in the production process. As was shown earlier in this report, large enterprises have consistently performed better than average in a number of important re- spects, and it would be unfortunate if such considerations were over- looked. 141. Also absent from the current dialogue is discussion of ways of controlling monopolies, once they are allowed to exist. The most ef.- fective control is perhaps import competition, or the threat of such competition. Government can also exert effective control as a purchaser, and in fact given the galaxy of policy tools as described in Chapter II above, effective control would not be difficult to arrange in practice 1/. The real question though is the same in India as in the rest of the world. Given that in the future a growing proportion of production is inevitably going to be from large corporate enterprises, whether in the public or the private sector, what is the best policy mix, and what are the best corporate and personal incentives, to ensure that steady productivity im- provements occur? (b) Industrial Planning 142. Until the middle of the Third Plan a powerful sense of direc- tinn Wa riven tM industrial Doliev by Mr. Nehru and the Planning Com- mission and the strategy adopted up to then succeeded in its objective 1/ Of course, this is already done on occasion. Recently crude oil im- __rt allocatinna for the nrivae sector were cut. in order to en- courage companies to purchase crude oil from cheaper sources. Large polyethUylene --p-rt aer 1ed in another case. to control monop- oly practices in the petrochemicals industry. - 64 - of inducing structural change and created the urge to industrialize. Thereafter, however, as the rate of growth slowed under the weight of the inexorable economic problems analyzed above, there was progressive disenchantment and uncertainty about the right course of policv. The problem is an exceedingly difficult one to analyze and does not fall into neat compartments. To complicate matters, industrial policy has multiple social objectives - all of them laudable but not all consis- tent with each other or with a process of self-sustaining growth. Likewise, there is a multiplicity of tools used to put the strategy into nrActic. Many of thenq tools- in narticular th- industrial licensing system and foreign trade controls, have become institution- alivpd_ and AR n rPe1ta A Int of nuhlie diRe-11iaainn Ahnit- industriq1 policy has become focused on the administrative systems themselves rather than nn the underlyin& indtntrial Anti ao-nnnmit- noliv nrnhlama 14T t Iscla th%at rap%4d nr1- -hnera 4a rt 4#-hckv- 14key 1nr feasible. Too many investments have been made, too many interest groups created, a-A 0- 14ti*-1n 1 oo -^l~amra. 1aa.a- short-run balance of payments constraints) to bring about any radical rny4t nshnna in r%mcnlie-w s v ap orietn11a hRns uar ir is equally true to say that an industrial sector faced with the formi- ab p-.l----- described abmove i ain need of polic c nhange, _-.d the problem is to define the longer-run objectives and a strategy for get- described earlier: firstly, the costs of the autarchic import substi- tut'JIL DOA. 1...y, LaL 'as ueu an unvasyung LwaLutc UL @ ue .-uA-6-4- since the mid'50's, are getting too high to tolerate indefinitely. SoUUUy, Lae pursuit U productivity grUwth oujectives, rathe tnan simple output targets, would help reveal the real growth bottlenecks. 144. To elaborate briefly on these twin objectives: import substi- Lution has become, under the constant pressure of acute short-run bal- ance of payments crises and accompanying (and justified) gloom about the short-run prospects, something of an obsession. Avoidance of "waste" of foreign exchange, often regardless of cost, has long been the watchword of balance of payments management, and this objective finds popular po- litical support, as well as backing from substantial interest groups. For example, Mr. H. Mahindra, Chairman of the Mahindra Ugine Steel Com- pany, said in a June 16, 1969 speech that "the import licensing policy for tool, alloy, and special steels announced by the government is an exercise aimed at gradual import substitution. The declaration that such types of steels as are being produced within the country are not being allowed to be imported is the heartening feature of this policy. However, there are specific areas where further tightening of imports is desirable. . ." Likewise, the recent seminar on import substitution, organized by the Federation of Indian Chambers of Commerce and Industry, in all its discussions uncritically endorsed the concept of absolute im- port substitution. - 65 - 145. Policymnakers recognize that to move away from the present posi- tion will, at least for a few years, have its foreign exchange costs, and here the freedom of movement is small, and the short-run risks appear high compared with the more distant gains. Yet the real cost of further absolute import substitution is also going to be high. With manufactured goods imports now down to around 11% of the market for both final and in- termediate products (14% if raw material inputs are included) the costs of reducing this to 10%. 9% or further can only rise. This in turn will help perpetuate the high-cost industrial structure that has emerged, and further hurt the export effort. which is alreadv seakine by various neans to insulate the exporter from the high cost of some import substitutes. 146. The second objective - that of seeking productivity growth above all - in 1PR Annv rn define. Partly thin in henuse economists have traditionally been able to show that increasing supplies of capi- tal and lanr- and the nptimal nllnrntinn of nnniral_ Pwnlnin only a part of the growth process. 1/ The rest is accounted for by ir- rant intangibles such no inntyarn4e in say predr nAati on innrnve-- ments in management skills, incentive motivations, and so on, which almn~a h, A 4m4 <an nea ,ne amendbla o .hwad,a l slannia The ad- vantage of focussing on productivity, however, is that it offers more which in its present form has caused so many scarce resources to be sed 'fr np o u C ti vLJ eLLJUU~. V FU&1JUD=M, CLLU Q.LiDJ CLL4.L..O L~f'-~~l real costs of pursuing the various social objectives such as promotion u10 smalxncs Iuusy ns-sne umu maximization and so on. ILIA.. sca.L~ =LLMUO LLY, MIKULL-L US& Cutp.LVYWLU wa.IILL~.I al1" Unlike planning using output targets, greater freedom of choice in reaching the~St obetv 2i-fclttd 147. Any discussion of moving away from absolute impurt "ustu1 tion, or from material balances planning 2/, implies the need to broach alternative devices, and this is a touchy subject. In a Sense pLanuHLng has been rather narrowly conceived so far, having concentrated on pro- viding a macro-economic plan and projectioUs wiCh turn Vut to have been effective as indicative plans. The physical balances approach was adopted, with all the limitations of the data, but as tne experice UL the Plans has shown, this technique has great drawbacks. Economics has really not yet produced an effective optimizing instrument - at Least not for India - nor does it seem likely to do so soon. Really, since in India at least four fifths of economic activity is in the private sector, including agriculture, commerce, and both small and large-scale industry, the Plan could be regarded as the provision of technical aU- vice on all government decisions affecting resource use such as those 1/ E.g. H. Leibenstein "Allocative Efficiency vs. X-Efficiency", A.E.R. June, 1966, and sources cited therein. 2/ As was pointed out earlier, such planning was only partially im- plemented, at best. - 66 - of taxation and subsidies, price formulation and controls, investment controls, import pricing and allocations and the like. 148. It is in these areas that an examination of alternatives is important, although the present approach is still to attempt detailed control of investment and other decisions. This kind of central plan- ning although not nearly as detailed as that attempted in the USSR, for example, is falling into disfavor in the eastern bloc because of its inefficiencies, and such countries are now seeking ways to attain the same social objectives by other means and are moving zway from rigid planning. For example. Nikolai 7. Fedorenko in a conference on plan- nin aad markets in 1966 1/ said that "any actual social and economic system is so complex that in principle its exhaustive description is unfeasible and therefore a system of direct administrative control is doomed to be relatively weak and inadequate. The limited capacities of the administrative channels exclude the possibility of foreseeing and planning all the factors and trends in economic development. These limits are explained both by technical deficiencies and by con- siderations of reasonable costs of management." Likewise Yugoslav, followed by both Polish and Hunearian economic planning have. in the course of extensive debates on economic reform, come to the same con- c1nsions. 149. Tranda in nnlinv in Tndia have been tentatively in the Rame direction, at least until recently. Since the Swaminathan Committee of 1QAI the nrnvrPanive diQnnhantfment with the administrative ann- trols had led to a cautious relaxation of both industrial licensing and import 14cnaing_ A numhor nf Inin-rlia have hean delicenned- The minimum size of project requiring a license has been raised and about a qarer of all 4mports are unw alloctoA teb the mark-cet mechn- nism. However, this liberalization trend is tentative partly because there is no great confidence in thei meltv rcs Vn n.A4s reasonable allocation of resources. Dr. Hazari noted 2/ that "The p romo tiAon of competition l.s not a weJ1.1_A-9ne- be-Iv in ndA. Competition is not one of the basic values of the Indian way of life. VLL±cia1. pulicy on inuutrl puliy aUU impout iJeunsuig, in faU, aims at the minimization or elimination of competition to conserve economic resources." However, as is Clear fruom the analysis made earlier, competitive forces, including those released by these modest relaxations of controls and those honed by the recession, have been effective in the short run in enabling efficient firms to succeed both in exporting and local sales at the expense of the less elficient. 1/ "Planning & Markets: Modern Trends in Various Economic Systems," John T. Dunlop and N.P. Fedorenko, eds., 1969, McGraw Hill, p. 62. 2/ "The Corporate Private Sector - Concentration, Ownership, and Con- trol", Planning Commission, 1966, p. 359. - 67 - The encouraging thing about these relaxations is that trade and invest- ment controls have been relaxed together - as indeed they must, to be effective. 150. Industrial, import and export policy are all thus inter-related. A gradual movement towards a tariff-based import allocation system would have three effects - firstly, it would provide a competitive force to encourage more efficient productive techniques, secondly, it would provide pricing guidelines on India's comparative advantage in trade, and thirdly, substitute productivity criteria for the "priority" criteria in today's administrative systems. Of these three, the second is perhaps the least important, because the differentials between firms seem to be much greater than the differential between products. This also means, though, that internal policy must give priority to low-cost producers and enable them to expand if necessary, as well as to innovate. Export policy, today, apart from its price incentives, is a useful lubricating tool for such expansions. Unfortunately, the discussion reported above on monopoly policy, and the partial reversal of some of the industrial licer7ing freedoms, are steps in the other direction. 1/ 1/ In February 1970, just before the draft of this report was turned to the printer, the Government of India announced new licensing policy. (a) It raised the exemption limit for licensing from Rs 25 lakhs to Ra one erora- hut abolished industry-wise de- licensing policy of the past. This unlicensed sector is cloRed to the "indnairrial hoimes" and to the proiects requiring more than Ra 10 lakhs or 10 percent of project nnat via forlan wrechano fnr imnnrr of machinery and equipment. In fact, Government is not committed to nrnvidp fn-raiwn avh an"a fnv minnannna imnnrtm even for investments under the new exemption rule. (b) The middle sector encompasses investments between Rs one to five crores. The licenses will be issued "liberally" for this sector provided applicants are not "industrial houses". Applications from the industrial houses will be considered only on .grounds of efficiency. industries as designated by the Planning Commission. served for the government enterprises. The private enter- core sector industries, just as they are for the "heavy invest- Mnt"I seto, LAAat s .1"vstet requiring5 moreL4AI thsan~ Rs 5 crores. The new policy clearly extended investment scope for the public enter- prises and restricted opportunities for 'large houses'. Whether it has actually liberalized the licensing procedure by raising the exemption limit is not too clear as there are other counter restrictive measures.