India - Economic situation and prospects (Vol. 3 of 3) : Recent developments in important Indian manufacturing and mining industries

RETURN TO RESTRICTED REPORTS DESK Report No. SA-3Za WITHIN ONE WEEK This report is for of ficial use only by the Bank Group and specifically authorized organizations or persons. It may not be published, quoted or cited without Bank Group authorization. The Bank Group does not accept responsibility for the accuracy or completeness of the report. INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMEIT INTERNATIONAL DEVELOPMENT ASSOCIATION ECONOMIC SITUATION AND PROSPEC S ETU1 T9 OF INDIA (in three volumes) VOLUME III RECENT DEVELOPMENTS IN IMPORTANT INDIAN MANUFACTURING AND MINING INDUSTRIES May 10, 1972 South Asia Department  CURRENCY EQUIVALENT 1 U.S. dollar Rs. 7.2793 1 Rupee U.S. $ 0.1374 1 Million Rupees U.S. $ 137,400 1 lakh of Rupees 100 thousand Rupees (U.S. $13,740.00 equivalent) 1 crore of Rupees = 10 million (U.S. $ 1,374,000 equivalent)  TABLE OF CONTENTS Page No. I. COTTON TEXTILE INDUSTRY 1 II. THE JUTE INDUSTRY 20 III. FERTILIZER 37 IV. STEEL 58 V. ELECTRONICS 69 VI. THE OIL SECTOR 71 VII. COAL MINING 82 VIII. IRON MINING 89 IX. NON-FERROUS METALS, MINING AND PRODUCTION 97  I. COTTCN TEXTILE INDUSTRY 1. 1971 was one of the most diff icult years in the long history of the largest Indian industry. Shortage of cotton was the primary cause resulting in a drastic rise in raw cotton prices which accounts for more than half the cost of producing cloth. Wages and other cost elements such as dyes, chemicals, fuel and interest charges also increased. Production of cloth and yarn fell by 7 percent and 9 percent respectively. There was consumer resistance to higher price of cloth and yarn and the mills were unable to pass on the full incidence of cost inflation. The net result was a shrinkage in the already low profit margin of the industry. Capacity 2. There was a marginal increase in spindles in place, and in October 1971, the total number of spindles in the country was 18.07 million, as against 17.88 in December 1970. The addition to spindleage was the smallest since 1962. The number of looms installed by the end of 1971 was 209,000 or about the 1966 level. 3. The number of cotton mills was 668 at the end of 1971, a rise of four since 1970. Qf this the number of composite mills was 291 and that of purely spinning mills 377. Of the addition of 190,000 spindles most were in the latter group of mills. In the ten years to 1971, the number of purely spinning mills has almost doubled from 192 to 377 and the share of these mills in the total spindleage rose from 22 percent to 32 percent. In absolute terms, the spindleage in the purely spinning sector has risen from 3.05 million to 5.66 million and that in the composite sector from 10.61 million to 12.22 million. The reason for spinning mills developing faster than integrated mills has been the large demand for yarn in the powerloom sector and the ceiling imposed by Government on the number of looms. The loomage in the mill sector has grown only fractionallry from 199,000 to 209,000. This stagnation in the number of looms reflects the government's policy to encourage the development of the decentralized weaving sector for non-economic reasons. The result has been to say the least unfortunate for the industry as a whole. Production 4. Yarn production in 1971 went down to its lowest level since 1962 and was not more than 881 million kgs. Cloth production in the mill sector was 6 percent lower than in 1970 at 3,947 million meters. fThis decline was after a fall in 1969 and 1970 and reached its lowest point since 1951. The continued set back in mill cloth production was accompanied for the first time in many years by a fall in the output of the decentralized sector. The latter suffered even more than the mill sector from the shortage of cotton yarn and its production declined by 8 percent. The total cloth production in both the mill and the decentralized sectors came to 7,364 million meters for 1971 against 7,849 million meters in 1970, a 7 percent fall.  -2- 5. Consumption of raw cotton in 1971 was the lowest since 1965/66. In 1970/71 cotton available for mill consumption from domestic sources declined by 8 percent and from foreign sources by 7 percent. Consumption of foreign cotton was very low in the first months of 1971 but much delayed imports provided some increase later on. 6. The output of raw cotton in 1970/71 has been estimated at 52 million bales (of 180 kgs) compared with the average for the four preceeding years of about 56 million bales. The wholesale price index for raw cotton (base 196i/62 100) rose to 232 (April - December) against 196 for the same period of 1970. The shortage of raw cotton and other factors (such as occasional shortage of power) also resulted in an increase in yarn prices (22 percent from April to December 1971 over the same period of 1970) and in cotton manufactures (+13 percent). The lower increase in cotton goods price was partly due to price controls and partly because of consumer resis- tance. The result has been a severe squeeze on profits at the weaving end. Cost Inflation 7. The cost inflation in the textile industry which was quite dis- turbing in 1970, gathered momentum in 1971. Soaring raw cotton prices have been the main factor. But wages, too, kept on rising, linked with the cost of living index. The increases in dearness allowance in the major textile centers were greater in Bombay than in 1970 and also substantial in Abmedabad and Kanpur. They swelled the wage bill of the industry without any correspon- ding rise in productivity. The other cost elements, too, were not free from the inflationary trend. While the prices of some chemicals went down from previous high levels, others moved up. Fuel and power, and also frbight and bank credit, cost more. Profitability of the industry declined sharply and continued to be below the average of Indian industries. Utilization of capacity 8. There was a deterioration in machine activity during 1971 as compared with the previous years and, underutilization of installed capacity remained large. As against an installed capacity of 17.87 million spindles at the beginning of 1971, the daily average number of spindles worked in the first seven months of 1971 was 13.32 million, 13.35 million and 11.37 million in the first, second and third shifts, the comparable figures for 1970 being 13.81 million, 13.87 million and 12.14 million respectively. On an average, nearly 4.5 million spindles remained idle or over 25 percent. Even if one excludes about 2 million spindles representing the capacity of closed mills, the underutilization of-capacity was about 2.5 million spindles. Had cotton been available in adequate quantity and, at reasonable price, a substantial part of these would have been employed. 9. There was also an increase in the number of closed mills during 1971. These mills suffer from old and dilapidated machinery and are almost bankrupt. About 85,000 workers were affected. After declining from 79 in 1968 to 69 in 1970, the estimated number for 1971 is 8h of which 34 have been  -3- taken over by the National Textile Corporation. The latter continued to be active in reviving closed mills but the success of its efforts made no visible improvement in the overall position, as other mills closed down. The number of closed mills includes16 mills recommended for scrapping and seven mills the licenses of which had been revoked. 10. In 1970 the ratio of active spindles to those installed was well below 1968 and was certainly a far cry from what it used to be seven years earlier, as seen below: Spindle Activity (as percentage of spindleage capacity installed) Year 1st shift 2nd shift 3rd shift 1964 89.80 89.99 68.59 1967 73*52 79.39 66.33 1968 79.25 79.6o 6h.h3 1969 77.20 77.29 6h.98 1970 78.35 78.iJ3 68.70 1971 (est) 7h.53 7h.70 63.62 11. Also the underutilization of loomage capacity continued to be sizeable in 1971. At the beginning of 1971, the number of looms in place was 209,000. Of these the daily average of looms worked in the first seven months of 1971 was 168,000, 164,000 and 79,000 in the first, second and third shifts. The corresponding figures for 1970 being 172,000, 168,000 and 83,000 respectively. The percentage of looms employed to looms in place was 80.38, 78.46 and 37.79 in the first, second and third shifts. Short term outlook 12. Since thLe major short term problem which confronted the cotton mill industry in 1971 was the inadequate supply and prohibitive cost of cotton, the situation should ease somewhat in 1971/72. The cotton crop might be around 5.7 million bales (estimates vary from 5.5 to 5.8 million bales) and the Govern- ment has allocated foreign exchange for the import of 8.5 million bales. Already prices have started to decline. The domestic raw cotton wholesale index price (1961/62 - 100) stood at 207 in December 1971 against 236 in December 1970 and 2h1 in August 1971. Cotton yarn prices were still at a high level (December 1970 - 180, August 1971 = 207 and December 1971 = 203), Only cotton piece goods have not shown a decreasing trend but they rose much less than cotton and yarn in 1971 and producers are trying to strike a balance between consumer resistance to high prices and fast increasing production costs. Given an expected higher cotton availability for mill consumption (in the order of 10 percent) and lower raw materials prices, profits should improve in 1972.  - 4 - 13. The extent of which profitability will improve partly depends on government price controls. Cotton textiles have been subjected to partial price control for a number of years. Since 1964, mills have been required to produce 50 percent of popular varieties to be sold at controlled prices. The mills complain against such controls especially regarding the prices offered, which were kept low for social reasons, as the government wanted to provide lower quality cloth at a cheap price. In 1968, the percentage was lowered to 25 percent but with an additional clause that there would be a penalty of 6 paise per meter in case of default on deliveries. Resistance by the industry however continued and the percentage of controlled varieties produced fell to about 20 percent in 1969 and to about 2 percent towards the end of 1970. Reacting to this, early in 1971, the government declared its intention to revise upwards the percentage to 50 percent and raise the penalty from 6 to 25 paise. However, after negotiations, the statutory control was removed and in return the industry committed itself to produce 100 million square meters per quarter (i.e. roughly 10 percent of the total production) for sale at controlled prices. Industrialists producing cloth involved in the agreement are given a cash incentive of 35 paise per square meter. Even then the loss per square meter is about 13 paise according to the calculations of the industry. The cost to the government of this arrangement is Rs. 50 million. It is met by subjecting imported cotton to a special premium and by collecting special levies on cloth of the higher category. In other words, part of the cost is passed on to the consumer of finer cloth and the balance cuts into the profits or adds to the losses of the mills. Structural problems 14. As is clear from the above, government policy with regard to the textile industry is affected substantially by welfare considerations. The policy is employment rather than efficiency-oriented. It has aimed at safeguarding the overall employment potential through the maintenance of the labor intensive powerloom and handloom sectors, and has (1) reserved for the handloom sector the production of dhoties and sarees for which they have assured domestic markets (2) frozen the weaving capacity of the organized mill sector (3) imposed a cess on mill-made cloth in order to enable the higher cost decentralized sector to compete with the mill sector and (4) arranged for an adequate supply of yarn for powerlooms. 15. These measures have arrested the trend towards vertical integra- tion in the mill sector. The employment policy has produced a three-headed production apparatus - mill, handloom and powerloom - the outputs of which are not always synchronized with the pattern of consumer preference in the domestic market, not to mention markets abroad. 16. The attitude of organized labor is quite hostile to the rationali- zation of work loads so essential as a precondition for the installation of automatic looms. The percentage of automatic looms has remained for years at a very low level, now 18 percent as against 38 percent in Pakistan, 28 percent in Japan, 48 percent in the United Kingdom and 80 percent in  Common Market countries. The combination of outdated equipment with rising wages has had adverse effects on the net productivity of labor. Compared with average industrial wages, textile wages in India are higher than they are in major textile producing countries where textile wages are below the general average. The Indian textile industry is a privileged employment sector both in respect of the number of persons employed and the wages paid. 17. If India continues to perform not too badly in textile exports, it is because the textile wages in India, in spite of recurrent increases, are still so low as to counteract low productivity and leave India with a modicum of competitive power. However labor cost per unit of output is now higher in weaving than in Pakistan, Hong Kong or Japan and much higher in spinning (see tables 10 and 11). The productivity in spinning operarions is ten times lower in India than in the US and half that of Hong Kong.- In weaving Indian productivity is one eighth the US and half that of Hong Kong._/ 18. Merely changing machinery does not always mean reduced cost or more profits. Some mills with modern automatic looms show only 70 percent efficiency which is very low. Serious efforts at improving management of the mills would thus be highly desirable before investment decisions are made. A hard look should also be taken at the market and the product mix. A number of mills have shifted from coarse to finer varieties and invested heavily without changing their attitude towards quality control while at the same time they have had to satisfy a much more demanding clientele. 19. Inter-firm comparisons show that management is an important factor in explaining large cost and productivity differences despite similar equipment. In some cases, organization of work appears deficient particularly in regard to the competence of supervisors, discipline, delegation of authority and control. Cost accounting is often used for pricing, but not for improving internal processing. 20. Efforts are being made to help the exporting mill.s. Rs. 200 million of foreign exchange will now be allocated annually for importing modern, sophisticated textile machinery not made in the country. Already 75 mills with an average export ratio of 10 to 15 percent of their total production have applied. Also additional loomage and spindleage has been authorized for exporting mills. 21. Despite these efforts in favor of exporting mills, the much larger problem of modernizing and restructuring the textile industry remains. The current estimate of the cost of machinery required for rehabilitation is placed around Ra. 4 billion. The question is whether such a large quantity of equipment can be produced in India and more important whether the mills have the financial capability to go ahead with modernization. g/ In pounds per operator hour. 2/ In million pick inches/year.  - 6 - 22. The indigenous textile machinery industry has a capacity to produce about Rs. 400 million worth of machines annually, but the actual production has been only Rs. 242 million in 1968 and Rs. 287 million in 1970. The principal reason for this in earlier years was lack of demand due to poor profitability of the textile mills. Of late though demand has increased machinery manufacturers are finding themselves unable to deliver complete machines, due to non-availability of, or delay in, the issue of import licenses for vital components and spare parts. 23. The Low profitability of the textile industry raises doubts as regards its capability and/or willingness to undertake a modernization program. Average profits after tax as a percentage of net worth were 1.6 percent in 1967/68 and 1.5 percent in 1968/69, for 271 companies surveyed by the Reserve Bank of India. Another survey covering 30 large companies (presumably in better financial position than average) showed profits on net worth of 3.7 percent in 1968/69 and 7.4 percent in 1969/70. But in 1971 the profit margin of the industry has shrunk again. It would then seem that special assistance should come from government for rehabilitation and modernization, and this not only for exporting mills. This is justified by the fact that government has used the industry for social purposes for a number of years and as a result the industry is not in a position to solve its problems alone. Special arrangements must be made for providing the industry with for instance, a rebate of excise duty linked to the actual outlay on modernization, or other direct financial assistance measures. In addition, industry should push for the merger of weak mills with strong mills in order to prevent the increase in the number of closed mills. 24. A long term reorganization of industry should also be studied. Spinning mills have developed in past years at the expense of composite mills, because the latter have to bear labor and fixed costs increasing mostly on the weaving side and had to compete with the non-mill sector. Under present conditions weaving of grey cloth in the mill sector is usually not a profitable operation._1 On the other hand, finishing operations are profitable and large efficient units specialized in finish- ing may be developed. The weaving decentralized sector has been expanding, not only because of the protection given by government, but also because of lower labor and other costs, and some industry experts are of the opinion that it ls more economical or India to avoid integrated mills, because the latter are losing on the weaving side. In fact the legal limit of 4 looms is being more and more ignored and the trend is to set up medium size weaving units in the decentralized sector. A number of large mills have also asked for the removal of the now more and more artificial distinction between the mill sector and the non-mill weaving sector. They are advocating the setting up of low cost producing cooperative or small private weaving companies (from 16 to 100 looms) 1/ Reserve Bank of India Bulletin October 1971. 2/ If the government's policy had not systematically protected the decentralized sector through measures outlined in paragraph 14 integrated mills might have had a chance to remain profitable on the weaving side, but there is no absolute evidence of this.  -7- processing yarn supplied by large spinning mills. An expansion of these weaving units might absorb part of the weavers now employed in composite mills. The production from weaving units would be processed in large, modern finishing plants. Such a reorganization would be similar to the solution adopted in Japan to meet increasing weaving costs. In vie'4 of the present state of the Indian textile industry, such reorganization of the weaving operations would. seem to deserve immediate study as it might lead to much needed cost reduction.  Table 1: AVAILABILITY OF COTTON VIS-A-VIS MILL CONSUMPTION Cotton production Export and Available for Total avail- Total (Trade estimate extra mill consump- ability for cotton Cotton year inclusive of factory tion from do- mill consumP- consumption ended 31st August loose cotton*) consumption mestic sources Imports tion in mills 1950-51 32.80 4.4t3 28.37 8.00 36.37 35.78 1955-56 46.36 8.74 37.62 6.02 43.61h 49.09 1960-61 56.28 6.4o 49.88 11.00 60.88 53.73 1961-62 49.70 6.76 42.94 8.08 51.02 56.88 1962-63 59.60 6.81h 52.76 8.61 61.37 56.70 1963-64 64.o0 6.23 57.77 6.48 64.25 60.81 1964-65 60.00 5.93 54.07 9.28 63.35 63.71 1965-66 56.08 5.32 50.76 5.26 56.02 58.21 1966-67 52.80 5.95 46.85 7.82 54.67 57.63 1967-68 62.20 5.81 56.39 7.78 64.17 61.66 1968-69 61.20 5.40 55.80 4.29 60.09 61.99 1969-70 59.20 5.77 53.43 9.10 62.53 63.71 1970-71 54.70 5.50 49.20 8.50 57.70 59.4O 1971-72 (est) 59.70 5.50 54.20 8.50 62.70 - *Loose cotton traditionally estimated at 2070 lakh bales.  Table 2: PRODUCTION OF YARN AND CLOTH (In million kgs) Year : Yarn s CLOTH : Mill : Percentage : Percentage Spindle : Cloth : to : Handloom and to point : (Million Total Cloth: Powerloom Cloth Total Cloth : Total Cloth production : metres) : Production (Million metres) Production : Production 1959 781 4,504 68.5 2,075 31.5 6,579 1960 788 4,616 69.6 2,013 30.4 6,629 1961 862 4,701 66.4 2,372 33.6 7,073 1962 860 4,56o 65.4 2,)J12 34.6 6,972 1963 893 4,423 60.6 2,876 39.h 7,299 1964 965 4,654 60.3 3,o66 39.7 7,720 1965 939 4,587 60.0 3,056 40.0 7,643 1966 901 4,239 57.8 3,097 42.2 7,336 1967 896 4,097 56.3 3,179 h3.7 7,276 1968 961 4,366 55.3 3,530 Lh47 7,896 1969 951 4,168 54.1 3,538 li5.9 7,706 1970 968 4,157 53.0 3,692 47.0 7,849 1971 881 3,947 53.6 3,417 4604 7,36h  -10 - Table 3: EXPORTS OF COTTON YARN AND CIDTH Yarn Mill-made Cloth Handloom & Powerloom Quantity Average unit Quantity Average unit Quantity Average unit Year (mil. kgs.) value realized (mil.metres) value realized (mil.metres)realized (US centeAsg.) (Us cents/metres) (US cents/retre) 1961 7.14 109.7 525-14 3.8.5 25.92 38.8 1962 10.42 106X5 464.85 18.1 25.96 46.8 1963 13.55 95.9 485.69 17.7 33.87 48.5 1964 12.37 99.9 502.87 20.4 35.o6 48.3 1965 12-75 99.2 506.85* 19.6 40.72 49.9 1966 16.20 86.5 424.33 19.0 37.47 30.4 1967 11.02 90.6 409.56 19.3 33.43 28.3 1968 16.54 86.2 475.10 18.7 20.77 31.4 1969 33.07 95.7 418.50 20.1 25-05 34.7 1970 3050 117.6 413.40 21.2 27.00 37.5 1971 11.90 144.5 381.00 22.6 na na * Since April 1965, figures are in square metres.  - 11 - Table 4: EMPLOYMENT OF WORKERS IN COTTON MILLS (in thousands) Total No. overaue nuuber of wokers employed in Year workers on list First Shift Second shift Third shift Total 1957 9,43 4,39 2,78 96 8,13 1958 9,O 94,22 2,62 83 7,67 1959 8,85 4,17 2,61 85 7,63 1960 8,95 4,16 2,63 93 7,72 1961 9,18 4,17 2,66 1,10 7,93 1962 9,29 4,17 2,65 1,16 7,98 1963 9,38 4,18 2,63 1,23 8,904 1964 9,70 4,22 2,71 1,38 8,31 1965 9,67 4,18 2,67 1,37 8,22 1966 9,31 4,'04 2,54 1,30 7,88 1967 9,28 4,'