The issue of small versus large in the Indian textile industry : an analytical and historical survey

SWP645 The Issue of Small versus Large in the Indian Textile Industry An Analytical and Historical Survey Dipak Mazumdar WORLD BANK STAFF WORKING PAPERS Number 645   .f~7 WORLD BANK STAFF WORKING PAPERS Number 645 ,j,; The Issue of Small versus Large in the Indian Textile Industry An Analytical and Historical Survey Dipak Mazumdar INTERNATIONAL MCNETAAY FUND JOINT LIBRARY MAY 1 0 1904 INTE:INATIONAL M!INR FOR RECONSTRUCTION AND DEVELOPMENT WASHIM:GTMN, D.C. 20431 The World Bank Washington, D.C., U.S.A.  Copyright ( 1984 The International Bank for Reconstruction and Development / THE WORLD BANK 1818 H Street, N.W. Washington, D.C. 20433, U.S.A. First printing April 1984 All rights reserved Manufactured in the United States of America This is a working document published informally by the World Bank. To present the results of research with the least possible delay, the typescript has not been prepared in accordance with the procedures appropriate to formal printed texts, and the World Bank accepts no responsibility for errors. The publication is supplied at a token charge to defray part of the cost of manufacture and distribution. The views and interpretations in this document are those of the author(s) and should not be attributed to the World Bank, to its affiliated organizations, or to any individual acting on their behalf. Any maps used have been prepared solely for the convenience of the readers; the denominations used and the boundaries shown do not imply, on the part of the World Bank and its affiliates, any judgment on the legal status of any territory or any endorsement or acceptance of such boundaries. The full range of World Bank publications is described in the Catalog of World Bank Publications; the continuing research program of the Bank is outlined in World Bank Research Program: Abstracts of Current Studies. Both booklets are updated annually; the most recent edition of each is available without charge from the Publications Sales Unit of the Bank in Washington or from the European Office of the Bank, 66, avenue d'Iena, 75116 Paris, France. Dipak Mazumdar is a senior economist in the Development Research Department of the World Bank. Library of Congress Cataloging in Publication Data Mazumdar, Dipak, 1932- The issue of small versus large in the Indian textile | industry. (World Bank staff working papers ; no. 645) Includes bibliographical references. 1. Textile industry--India. 2. Small business--Govern- ment policy--India. 3. Textile industry--Government policy--India. 4. Industry, Size of--India. I. Title. II. Series. HD9866.162M39 1984 338.4'7677'00954 84-7264 ISBN 0-8213-0364-3  ABSTRACT This paper attempts a comprehensive review of the development of the handloom, powerloom and factory (mill) sectors of the Indian textile industry. Estimates of production in the three sectors are made. The evolution of economic policy towards increasing protection of the small-scale sector is outlined and the relevance of policies toward man-made fibres for the small-large issue is studied. The relative profitability of weaving cloth in the three sectors is studied in Part II within the framework of cost- benefit analysis. It is shown that while at prevailing market wage rates the powerloom sector appears to be profitable over a wide range of interest rates, at reasonable social prices of labor the profitability of this sector is much reduced. Finally, in Part III an attempt is made to evaluate some aspects of the impact of the Indian textile policy on employment, consumption of cloth exports and technological change in the large-scale factories.  EXTRACTO En este trabajo se procura hacer una reseda general de la evolucion de tres sectores --telares manuales, telares mecanicos y fabricas (tejedurias)-- de la industria textil de la India y se presentan estimaciones de su producci6n. Se describe la evoluci6n de la politica economica, cuya tendencia ha sido a incrementar la protecci6n del sector de pequefla escala, y se analiza la importancia que tienen las politicas relativas a las fibras sinteticas en lo que se refiere a las operaciones de gran escala frente a las de pequefla escala. En la Parte II se examina la rentabilidad relativa del tejido de telas en los tres sectores, dentro del marco del analisis de costos-beneficios. Se demuestra que a los salarios de mercado actuales el sector de los telares mecanicos parece ser rentable si los tipos de interes se sit6an dentro de una cierta gama amplia, pero que su rentabilidad disminuye considerablemente cuando los precios sociales de la mano de obra son razonables. Finalmente, en la Parte III se procura evaluar algunos aspectos de los efectos de la politica textil de la India sobre el empleo, el consumo de telas, las exportaciones y el progreso tecnologico de las fabricas de gran escala.  Le present document tente de faire le point de la situation dans les differents secteurs de l'industrie textile indienne (m6tiers A tisser A bras et electriques et usines textiles) et il fournit des estimations concernant la production de chacun d'eux. Il d6crit par ailleurs l'evolution de la politique 6conomique dans le sens d'une protection accrue du secteur artisanal et examine la portee des politiques favorisant les fibres synthetiques du point de vue des r6les respectifs de la production artisanale et industrielle. La rentabilite relative des trois secteurs est etudiee dans la Deuxieme partie, dans le cadre d'une analyse couts-avantages. I1 apparait que, compte tenu des niveaux de salaires actuels sur le marche, le secteur des metiers a tisser electriques semble rentable dans les limites d'une large fourchette de taux d'int6ret mais que cette rentabilite diminue fortement si les cofits sociaux de la main-d'oeuvre atteignent un niveau raisonnable. Enfin, la Troisieme partie tente d'evaluer certains effets de la politique suivie par l'Inde en matiere textile sur l'emploi, la consommation de tissus, les exportations et les innovations techniques dans les grandes usines textiles.   Table of Contents Page INTRODUCTION ............................................................. 1 PART I: The Evolution of the Three Sectors of the Industry and the Policy of Protection of the Small Scale Section 1. Production in the Small and Large Sectors, 1900-39........... 6 Section 2. Outline of the Government Policy on Cotton Textile Textile after World War II ......... ........,....... 12 Protection of the Handloom Industry ..... .... ............. 12 The Question of the Powerloom Sector.................... 17 Section 3. Production of Cloth in the Large and Small Sectors (1951-1979) .................................................. 21 Total Production of Cloth............. ...... 21 The Relative Importance of Handlooms and Powerlooms.m.s. 22 Distribution of Cloth by Count-Groups in Three Sectors... 23 Man-Made Fibers Policy and Trernnsd s................... 27 Conclusions... see.....o.eooso...o oeseeo.ooo.o. eee.oeo *......oo...e 37 PART II: A Cost-Benefit Analysis of the Three Sectors of the Weaving Industry A. Relative Costs of Producing Rs. 10,000 of Value Added.ood.... o...... 40 (i) Machine Productivityo...y...........0...................... 40 (ii) Number of Shifts Workedo....o.ooooe...... o.S* . * ....... 42 (iii) Value Added Per Meter of Cl oth 43  B. Relative Wage Levels in the Three Sectors ........................... 45 C. Private ......................... .................................... 45 D. Social Profitability ................................................ 47 (i) The Powerloom-Mill Comparison................................ 48 (ii) The Handloom-Powerloom Comparison............................ 49 E. Conclusions ...................................... 51 PART III: Dynamic Effects of Policy on the Textile Economy Since Independence Section 1. Adjustments in the Mill Sector to the Policy of Protection of the Small-Scale................................ 53 Section 2. Consumption, Employment and Exports Since World War II....... 58 Cosmto ....................... ...................................... 58 Employment .......................................................... 60 Exports ........................................................... 65 PART IV: Some Concluding Remarks. .................. 69 ANNEX Section 1. The ......... ............................................... 77 A.Hnlos .................................. 77 B* ......................7.................................. 78 C. Type of Products......................................... 79 Section 2 Economics of Handloom Weaving................................. 80 A. The Earnings and Productivity of Weavers................. 80 B. The Cost of Capital...................................... 82 (i) Fixed Capital ..................................... 82 (ii) Working Capital ................................... 83 C. Value Added Per Worker .................................. 86  Section 3 Relative Costs in Handlooms and Powerlooms................... 87 Section 4 Relative Costs in Mills and Powerlooms ....................... 89 A. Capital Cost Per Unit of Value Added .......,.............. 90 (i) Cost of Machinery....... ......................... 90 (ii) Productivity Per Loom............................. 91 (iii) Value Added ....... ...ooo .......................... 91 (iv) Non-Loom Capital Costs............................ 92 (v) Employment-Value Added Ratio...................... 93 Section 5 Summary of Machine Productivity.............................. 94  List of Tables I.1 Production and Availability of Cotton Cloth, 1900-39 ............. 8 I.2 Total Production of Cotton Cloth, 1951-81........................ 13 I.3 Estimates of Production in Handlooms and Powerlooms, 1956-81..... 24 I.4 Percentage Distribution of the Total Quantity of Yarn Consumed in Different Sectors by Count-Groups, 1942-1979 .................. 26 I.5 Production of Man-Made Fibers/Filament Yarns..................... 29 I.6 Estimated Textile Purchases Per Household at Different Income Levels, All-India, 1978 ................................... 32 1.7 Production of Cotton and Non-Cotton Cloth By Sector, 1951-81 ..... 36 II.1 Inputs Required to Produce Value Added of Rs. 10,000 Per Annum in the Three Sectors of the Weaving Industry..................... 41 II.2 "Switchover" Interest Rates for Various Values of Shadow Wage.... 50 II1.1 Per Capita Availability of Woven Cloth........................... 59 III.2 Consumption in India, 1960-1977 .................................. 61 III.3 Employment of Workers in Cotton Mills............................ 62 III.4 Exports of Cotton Textiles From India, 1961-79................... 66 III.5 Exports of Cotton Textiles (Yarn & Cloth) From the Main Exporting Countries, Relative Shares (In Percentages) of Total Quantity ............................................... 67 A.1 Distribution of Handloom Units in the Sample Siee 77 A.2 Labor, Loom and Production in Handloom.......................... 81 A.3 Current Value of Fixed Capital Per Adult Male Worker............. 83 A.4 Alternative Measures of Working Capital.......................... 85 A.5 Inputs Required to Produce Value Added to Rs. 10,000 Per Annum... 87 A.6 Machine Productivity in the Three Sett o r s 94  INM:RODUCTION The Indian policy of protection of the small-scale sector in the national economy in the post-Second World War era has been a topic of great interest to students of economic development. In this general area of policy the protection of the small scale (or "decentralized" sector, as it is called in India) in the textile industry tatkes pride of place, both because of importance of the industry to the Indian economy, and because it provides points of comparison with textile industries in other developing countries. In spite of the importance of the subject, however, a compact but reasonably comprehensive review of the Indian experience on textiles does not exist. The purpose of this paper is to fill this gap. Plan of the Paper The paper is divided into three parts. In Part I, starting with a review of the historical evidence of the role of the small-scale sector in the Indian textile economy, an attempt is made to bring together the various elements of government policy which have had a profound impact on the development of the decentralized sector. It is shown that these effects are only partly due to the explicit policy of protection of the small scale; equally important has been the parallel but distinct policy with respect to man-made fibers. The study provides an estimate of production in the large scale and decentralized sectors - and within the latter in the two distinct branches, the handlooms and powerlooms. Part II is concerned with a static cost-benefit analysis of the weaving technology in the three sectors. The analysis makes use of a special survey of handloom and powerloom units in a textile town of Uttar Pradesh, called Mau. The importance of the wage  -2 differential between the three sectors i.s stressed in the finding that the powerloom sector shows higher private profitability in the weaving of medium- grade cloth. The social profitability of powerlooms appears to be much less when we use shadow wages. Static cost-benefit analysis does not help us to evaluate the welfare aspects of changes over time of key economic variables like consumption, employment, exports, etc. Nor does it throw light on the response of the large-scale textile mills to government policy of protecting the small- scale. The approach here has to be much more ad hoc in the absence of a simple theoretical framework like that of project evaluation. Some of the more important aspects are discussed in Cart III. The Three Sectors The handloom industry is the oldest industry of the country, and provides employment to a large number of people. Different types of handloom are used, but the most common is the fly-shuttle pit loom. Although some factories or karkhanas accommodating a la:^ge number of handlooms exist, the vast majority of handlooms are small units mostly located in the household premises of the weavers. Generally they have relationships with master weavers who provide them with the raw material (yarn), and help with the marketing of the product. The powerloom industry started in the early part of the century when some handloom weavers set up small factories with second hand non-automatic looms sold off by the mills. But the rapid growth of the powerloom industry Is really a post 1950 phenomenon. It has been in response to the textile policy pursued by the Government of India which is discussed in greater detail below. Some powerloom units are operated solely by household labor, but this  -3- is rather a rare form of organization. Much the most common type is for powerlooms to be operated by hired labox with members of the owners' family sometimes participating in the production process. Some instances of powerlooms being rented out to a group o.f workers have also been known. Legally, powerlooms are distingulished from mills because they enjoyed exemption from excise taxes provided the number of looms in a single unit did not exceed four. However, this maximum limit has been widely violated. In any event, although powerlooms are suploos,d to obtain license from the government before they can operate, unetuthorized powerlooms have mushroomed in recent years. Although the number of loomh} in a powerloom enterprise generally tends to be much less than iii a fawctory, a few powerloom units might have a similar capacity in terms of lo'm size as small factories. For such units, the only distinction between powerlooms and factories would be that the latter are legally covered by the Factory Act (which applies to all units employing 10 or more workers and using power). Another point to emphasize is that although powerlooms make use of second-hand looms, in recent years non-automaiic looms are being produced extensively specifically for the powerlooms. They range in their degree of sophistication, but have generally less autovratic features than looms produced for the factories. The large-scale textile industry hE,s had a difficult history in the last two decades and a large number of mostLy small.er mills went into bankruptcy. They were in many cases taken over by the government and have been subjected to a policy of retooling and moderni2ation. Such mills (now under the umbrella of the National Textile Commissioiier) came to be known as  -4.- sick mills which accounted for around 20 pe.rcent of the entire large-scale sector of the Indian textile industry. It should be remembered that t:he three sectors referred to above are only concerned with the weaving indust:-y. Technology in spinning has made much greater progress in the mechanica:L age, so that there is very little of spinning done in the small-scale secto:r (in spite of some attempts at helping domestic spinning in parts of the country). The handlooms and powerlooms as much as the mills obtain their supply oi- yarn from the large-scale spinning or composite spinning-weaving mills.  PART I THE EVOLUTION OF THE THREE SECTORS OF THE INDUSTRY AND THE POLICY OF PRODUCTION OF THE SMALL-SCALE  SECTION 1 Production in the Small and Large Sectors, 1900-39 There are no direct data on the amount or value of cloth produced in the three sectors. They have to be estimated from statistics on the production of yarn. The amount of yarn produced each year in the country is known by the nature of its use -- consumed by large scale mills for further production, exported, and available for "civil consumption." The last item gives a measure of the amount of raw material used by the small-scale or "decentralized" sector including handlooms and powerlooms. The Indian Textile Bulletin has been providing estimates of cloth produced in the decentralized sector on the assumption that (a) 90 percent of civil yarn deliveries are consumed by handlooms and powerlooms and (b) on an average one (1) kg. of yarn is used to produce 10 meters of cloth. Before the Second World War the powerloom sector was not of much importance, hence the output from the decentralized sector was that of handlooms. The figures on the quantities of cotton cloth consumed in India in the four decades before the Second World War are brought together in Table I.1. The outstanding fact revealed by these figures - which could be of some surprise to non-specialists -- was the importance of handlooms in the supply of cloth to the Indian economy through out this period. It is not just that handlooms held their own against competition both from imports and the expanding domestic mill-industry. Handlooms continued to grow, and provided a significant share of the increase in cottom cloth consumed by the Indian population.  -7- Table I.1: PRODUCTION AND AVAILABILITY OF COTTON CLOTH, 1900-39 (Million Yards) Years Indian Mills Handlooms Imports Total Exports 1900-1903 482.8 792.8 1,967.7 3,243.3 113.3 1912-1915 1,187.0 1,048.5 2,738.7 4,974.2 121.7 1918-1920 1,575.8 712.4 1,132.0 3,420.2 220.0 1927-1930 2,195.6 1,155.5 1,916.3 5,267.4 171.7 1936-1939 3,629.6 1,420.5 654.7 5,704.8 173.3 Change in Production between: 1900-1915 +704.2 +255.7 +771.0 +1,730.9 +8.4 1917-1939 +2,058.8 +708.1 -477.3 2,284.6 -46.7 Sources: A.K. Bagehi, Private Investment in India, 1900-1939, Cambridge, 1975, Table 7.1, pp. 226-7. The original sources for the figures of production in mills and handlooms are derived from Report of the Fact-Finding Committee (Handloom and Mills), Delhi, 1942. The estimates of production of cloth in the two sectors have been made on the basis of conversion factors of yarn into cloth: one lb. of yarn = 4 yds. of cloth (handloom) = 4.78 yds. of cloth (mills). The original sources for the figures on Imports and Exports are from the Indian Tariff Board, Reports on the Cotton Textile Industry, (Delhi: 1972, 1932 and 1936), and Government of India Commercial Intelligence and Statistics Dept., Statistics of British India, (Calcutta, annual).  -8- In the period up to the First World War the very large increase in the consumption of cotton cloth in India (rather more than 50 percent of the level at the beginning of the century) was satisfied by imports, the mills and the handlooms to the extent of 44, 40 and 16 percent, respectively. Handlooms in this period did enjoy a small amount of (unintended) fiscal protection. In 1896 an excise duty of 3-1/2 percent on Indian mill-made cloth was imposed to offset the duty of 3-1/2 percent imposed on imported cotton price goods for revenue purposes. (This duty was abolished in 1925). On the other hand, efforts at improving the technology of handloom weaving were confined largely to private organizations. For example, it was generally recognized that fitting a fly-shuttle sley to the ordinary pitloom increased the productivity of handlooms by 50-100 percent. But as late as 1942 the Fact Finding Committee of 1942 found that out of a total of two million handlooms in India, about 64 percent were throw-shuttle looms, and only 35 percent fly-shuttle looms. 1/ The nature of direct competition between handlooms on the one hand, and mills and imports on the other, in the first decades of the 20th century have not yet been researched. But it is likely that the specialization of handloom in coarse cloth (using yarn of less than 10s count) which we notice in later years (see below) probably accounts for a good proportion of the factors responsible for this sector playing a significant role in the increase in cloth consumption of this period. 1/ Government of India, Report of the Fact-Finding Committee (Handloom and Mills), Delhi, 1942, p. 31.  -9- The First World War and the years immediately following it saw a remarkable drop in the availability of cloth in India, such that the level of consumption (in quantity) in 1917-20 nearly fell back to the level of the years at the beginning of the century. The years of the Second World War saw a similar marked fall in cloth consumption. Such adjustments in consumption are spectacular features of the war economy of a country like India. As can be seen from the figures of Table I.1, while imports took the brunt of the fall in cloth consumption, handlooms also shared in (or contributed to) the decline. It is only the mill sector which increased its supply of cotton cloth to the Indian market -- and it did so very strikingly with a 40 percent jump in production between the years 1912-15 and 1917-20. In 1917-20, handlooms accounted for 22 percent of total cloth consumption, mills 50 percent, and imports 28 percent. In the absence of detailed research we can again only speculate about the decline of handloom production during the war years. Most likely the crucial factor was the supply of raw materials -- viz cotton yarn. The war- induced fall in the import of yarn in the higher counts clearly affected the class of handloom products directly which made use of finer yarn. (The Indian spinning mills in the first three decades of the century were heavily specialized in the production of coarse yarn of under 20s count). At the same time the shortage of cloth in the economy meant that it became more profitable for composite mills to make more use of the yarn in their own weaving sheds rather than sell it to the handloom sector. The period of recovery and growth of cloth consumption in the inter- war years again showed that handlooms had a significant role to play in the supply of cloth to the Indian economy -- though a quantitatively smaller role  - 10 - than the mill sector. A new actor entered the scene in this period -- protection against imported cotton cloth. The major factor in the policy of protection gradually accorded to the Indian textile industry was the rise of Japan as a big exporter of cotton cloth. Import of piece goods from Japan started during the war years and became increasingly important in the 'twenties, accounting for a third of total imports in 1928-9. Initially the import duty was used as a budgetary weapon rather than a protectionist device against the growing Japanese imports. By the end of the 'twenties, however, protection of the Indian textile industry became a declared objective of tariff policy. Import duties were increased several times in 1930 and 1931 ending up at the end of 1931 at rates of 25 percent and 31.25 percent, respectively, on British and non-British goods. The depreciation of the Japanese yen in the 'thirties threatened to overcome this tariff policy, so that quantitative restrictions had to be resorted to by the Government of India following a trade conference involving the Japanese. The upshot of these developments was that, as shown in Table I.1, the quantity of cloth imports into India fell by 477 million yards. Of the total increase in cloth production of 2,300 million yards by the Indian industry in the inter-war years, as much as 30 percent was supplied by the handloom, and the remaining 70 percent by the mills. It is clear that the handlooms benefitted from the policy of protection from imported piece goods along with the mill industry, though the latter took the bigger share of the market created by the trade barriers. The relatively low productivity (and higher labor costs) of the Indian mill-industry, which made it incapable of survival in open competition with Japanese factories, also allowed the handlooms to continue to play a substantial role in the Indian weaving industry. It might  - 11 - be mentioned in this connection that Japan also had a substantial handloom sector until after the First World War. It was the spectacular increase in productivity in the Japanese mills, particularly in the latter half of the 1920's, which caused the handlooms in Japan to go into rapid decline after the War.  - 12 - SECTION 2 Outline of Government Policy on Cotton Textile After World War II As during the First World War availability of cloth in the Indian economy was severely reduced during World War II. As can be seen from Table I.1, the import of cloth in India in 1936-39 accounted for a little more than 10 percent of the total of 5.5 thousand million yards consumed. The virtual shutting out of this import together with some fall in domestic production led to a reduction of nearly one thousand million meters of cloth consumed in 1951 compared to the level of the pre-war years. After Independence, the Indian government pursued a policy of import substitution in the textile industry, with quantitative restrictions on the import of cloth. The immediate post-Independence years, therefore, saw a rapid expansion of cloth production in India. It is seen from the figures given in Table I.2 that cloth production in Indian mills increased by more than a thousand million meters in the five-year period 1951-56. That is to say, the void left by the cut-off of imports, and the shortages of the World War II period, was more than made up by increased production in the early 'fifties in the mill sector. The handlooms also shared in the increased production. While the proportion of production in the decentralized sector had gone down from 24 to 21 percent between the late 'thirties and 1951, it had bounded back to 25.5 percent in 1956. Protection of the Handloom Industry The post-Independence textile policy, however, introduced for the first time the reality of the protection of the small-scale in India vis-a-vis  - 13 - Table I.2: TOTAL PRODUCTION OF COTTON CLOTH, 1951-81 Percentage of Percentage of Total cloth cloth production Calendar Mill Cloth total cloth production in handloom and Year (million meters) production (million meters) powerlooms 1951 3,727 78.6 4,740 21.4 1956 4,852 74.5 6,515 25.5 1961 4,701 66.4 7,073 33.6 1966 4,239 57.8 7,336 42.2 1971 3,957 53.8 7,356 46.2 1976 3,881 48.9 7.945 51.1 1979 3,206 42.5 7,540 57.5 1981 3,147 38.8 7,973 61.2 Source: Handbook of Statistics of Cotton Textile Industry, Indian Cotton Mills Federation, Bombay, 1982, Table 14, p. 31.  - 14 - the large scale (as opposed to the conception which had been in the air for sometime). The two principal instruments in the policy of protection are: (i) the physical restriction on the output of the mill sector and (ii) the excise duty imposed on this sector. (i) The suggestion that certain fields of production should be reserved for the handlooms was made as early as 1932 in the case presented to the Tariff Board Enquiry favoring the grant of protection to the textile industry. The Tariff Board gave reasons to show that the issue of reservation was full of difficulties but recommended that the large-scale industry should "regard it as an essential obligation arising from the grant of protection to refrain from entering into unfair competition with the handloom industry so as not to impair its relative position." 1/ No action was taken, but the issue was a constant element in the discussion of public policy during the ensuing years. It was after Independence that the Government of India directed the reservation of certain areas of production for the handloom and prohibited their manufacture by mills from June 30, 1950. The reservation was on a generous scale. 2/ The policy of protecting the handlooms was further developed at the initiation of the Second Five-Year Plan. It took a theoretical justitification from a model of industrialization which was articulated by Professor P.C. Mahalonobis in particular. The crux of the "model" was that 1/ Government of India, Report of the Indian Tariff Board Regarding the Grant of Protection to the Cotton Textile Industry. 2/ It covered a variety of commonly used fabric ranging from dhoties and sarees to bedcovers and towels. See V.B. Kulkarni, History of the Indian Cotton Textile Industry, Bombay, 1979, p. 178.  - 15 - investment resources should be heavily devoted to building up heavy industry (e.g. steel) while the need for consumption goods during the period of growth of capital goods industries should be met by the existing capacity in the small-scale sector which was presumably underutilized. In this way scarce resources for new capital formation would be saved for strengthening the industrial infrastructure of the economy. The build up of the capital goods sector of large scale industry would, however, make sense only if it provided opportunities for increased supply of machines to produce consumer goods (including textiles) sometime in the future. The models of planned development in the Indian discussion of this period did not directly address the question how and when the transition from small to large scale production in the consumer goods sector was supposed to take place. Be that as it may, the Government of India banned the installation of new looms by large-scale factories in 1956. Since then mills have been allowed to buy looms only for replacement or for export production. (ii) A second instrument of discrimination against the mill sector has been the excise duty. The handlooms are exempt from this duty, as are powerlooms units with four or less looms. Throughout the post-Independence period the excise duty has been partly seen as a consumption tax, and has been "progressive" in the sense that a higher rate has been imposed on the finer varieties of mill cloth. The effective rates of tax in the different sectors for different varieties of cloth cannot, however, be judged from the relative levels of tax on the final product alone. For one thing, the ratio of value added to gross value will be different for the different sectors and types. Secondly, taxes are levied on a variety of inputs -- raw cotton, cotton yarn, chemicals, fuel,  - 16 - etc. -- used by all three sectors. Handlooms bear the burden of some of these taxes along with powerlooms and mills -- to varying degrees. Murty and Stern have produced estimates of the effective rates of tax (in 1973-74) through a detailed study of the input-output structure and the large number of taxes involved. According to their calculations in the fine and superfine varieties (using 34 and above counts of yarn), the effective rate of tax is in the expected direction. As a percentage of the rate on mills, it is around 70 for powerlooms and 45 for handlooms. But in coarser varieties (using 29 or less count-groups of yarn), the burden on handlooms is almost the same as for powerlooms (which still works out as 70 percent of the effective rate on mills). 1/ The relative effective rates of tax, then, do not fully explain the rough specialization by the three sectors in different grades of cloth. As we will see in detail in the next section, handlooms do specialize to some extent in fine varieties where the tax differential favors them most, but so do they in coarse cloth where the differential is least. At the same time, mills have found it easier for technical and marketing reasons to leave much of the production of coarse cloth to the decentralized sector (both powerlooms and handlooms). This important aspect of technological change in recent years in the textile industry is discussed more fully in Part III. This effect on the production structure threatened to create shortage of coarse cloth at a price which poor consumers could afford at various periods of the post-war history. The government tried to counter this problem 1/ M.N. Murty and N.H. Stern, "Price and Tax Policies for Cotton Textiles in India", mimeo, Delhi, October 1982, Table 5.7, p. 89.  - 17 - through another important instrument of textile policy - the direction to the mill sector that a certain proportion of the mill output should consist of coarse cloth which had to be sold at or below a controlled maximum price. This policy was pursued with varying intensity in the years between 1965 and 1978. One effect of this policy was to impose serious financial burden on the weaker mills and was clearly a factor in what became known as the "sick mill problem", with a large number of mills going bankrupt at regular intervals. The problem of sick mills has led to another facet of the textile policy -- the taking over of the bankrupt mills by the government which used them to produce the bulk of the cheap mill cloth for sale. The nationalized sector of the mill industry -- specializing in the production of coarse cloth -- has become quite large, accounting for perhaps a third of the total number of factories in the large scale cotton textile sector. It is clear that the policy of production of subsidized coarse cloth in the nationalized mills runs counter to some extent to the policy of protection of handlooms insofar as the latter supply a large share of the output of course cloth. The quantitative importance of this particular effect has not yet been analyzed. The Question of the Powerloom Sector It is now necessary to bring into the discussion the development of the powerloom sector which has played such an important role in the post-World War II development of the textile industry. The powerloom industry had established itself as an industry with a future even before and during the Second World War. Thus the high-level Fact-Finding Committee (Handloom and Mills) of 1942 put on record its view that the markets lost by the handlooms were annexed not by the organized sector but their new rivals, the powerlooms. At first the powerlooms were installed in the handloom sector by  - 18 - the weavers themselves to improve their earnings, but later they grew with amazing rapidity under the ownership of outsiders. In the Bombay Province, for instance, there were barely 2,500 powerlooms in 1939, but in two years their number rose to 6,400. The Committee estimated that there were 15,000 powerlooms in the country and said that their number was growing daily. 1/ The post-war policy of protection of the handlooms at first had the effect of protecting the powerlooms as well. The quantitative restriction and excise duties were applied to the mill industry only. In fact, during the early years of the new policy of protection of the small-scale, an influential body of opinion was looking upon the powerlooms rather than the handlooms as the major feature of the decentralized sector of the textile industry in India in the medium-term future. The most important report on this question was that of the Kanungo Committee, submitted to the Government of India in 1954. The substance of the recommendation of the Kanungo Committee is best summarized in the following paragraph from the study of the industry by V.B. Kulkarni: 2/ The essence of the Kanungo Committee's proposals was its conversion scheme. It considered that for ordinary cloth "the prime and simple handloom is and must be a relatively inefficient tool of production." Except in the case of those piece goods which required an "intricate body pattern" there appeared "to be no variety of fabric which the handloom industry could produce in better quality or at a lower price (consistent with a reasonable wage being paid to the handloom weaver and his assistants) as compared to the mill industry." The Committee noticed that there were many powerloom centers such as Ichal Karanji, Malegaon, 1/ V.B. Kulkarni, op. cit., summarizing the findings on this point of the Report of the Fact-Finding Committee (Government of India, 1942). 2/ Ibid., pp. 181-82, citing Government of India: Report of the Textile Enquiry Committee, September 1954. The quotations within the passage cited refer to paragraphs 75 and 81 respectively in the above report.  - 19 - Bhiwandi, Surat and Cambay which were at one time the strongholds of the handloom sector... Evidently the Committee wanted this process to be hastened through organized effort. It accordingly recommended that the handloom industry should be "technically more efficient by converting the handloom either into a semi- automatic loom and/or into a powerloom, as power becomes available more generally in areas where the handloom industry is widely prevalent." This view of the role of powerlooms in the coming years was not shared by another body of opinion which was more devoted to the cause of handlooms. This point of view was forcefully put forward by another Committee under the chairmanship of Professor D.G. Karve which was appointed by the Planning Commission while the Kanungo Committee recommendations were still being considered by the government. This Committee suggested that the weaving capacities of both the mills and the powerloom sectors should be frozen at their existing levels. It went even further by recommending that efforts should be made to build up the production capacity of spinning as well in the non-mechanical sector. This was the basis for the government's brief honeymoon with the policy of promoting a new type of hand spinning machine -- the Ambar Charkha. As far as weaving was concerned, the final policy for the Second Five-Year Plan favored only a small role to powerlooms (an additional 35,000 looms producing only about 10 percent of the additional output was envisaged). Mills were to be allowed expansion only for the export sector with the help of newly installed automatic looms. The bulk of the new production of cloth was expected to come from handlooms. The translation of the government's declared objective to actual policy has, however, been much less effective for powerlooms than for the mills.  - 20 - First, the two instruments of control on mill-made cloth -- the excise duty, and the reservation of specified lines of production for the decentralized sector -- were not applied to powerloom units employing less than five looms until 1974. Secondly, the lines of production prohibited have always been a much longer list for mills than for powerlooms. At the same time, as we have seen, the excise duty has been much heavier on mill cloth. Thirdly, and probably most importantly, although powerlooms (like new loom capacity created in the mills) are supposed to be set up only after a license has been granted by the government, the government's ability to enforce this policy has been meagre. "Unauthorized" powerlooms have mushroomed all over the country. Sometimes they are nominally broken up into units of less than five workers to give some legal validity to their evading the heavier controls and duties on units of larger sizes.  - 21 - SECTION 3 Production of Cloth in the Large and Small Sectors (1951-1979) Total Production of Cloth No definite estimate of production of cotton cloth is available for either the powerloom or the handloom sectors. The amount of yarn produced by the mills and sold for "civil consumption" is the only definite statistics. The Indian Textile Bulletin produces a series for the production of cotton cloth in the decentralized sector (i.e. outside the mills) on the assumption that (a) 90 percent of civil yarn deliveries are consumed by the two industries; and (b) an average one (1) kg. of yarn is used to produce 10 meters of cloth. The figures of cloth production estimated in this way for the decentralized sector as a whole and the known figures of production of cloth by mills are given in Table I.2. They show the extraordinarily high growth of production in handloom and powerloom (taken together) in the post- World War II period relative to the mill sector. In fact, the only sub-period in which the mills were able to increase their production was the First Plan period during which the decline of the level of production of cotton cloth during the war years was more than made up. In 1956 total cloth production in India was higher by about 20 percent compared to the level just before the war, and the mills reached their highest level of production, although the share of the decentralized sector in total production had already started to increase. Since 1956 there has been a continuous decline in the absolute quantity of cloth produced by mills, until at the end of the 'seventies mill production was only two-thirds of what it was in 1956. The total quantity of  - 22 - cotton cloth produced has continued.to increase in this period, as the decentralized sector has stepped in a big way to increase its share of total production from 25 to 57 per cent. But the rate of growth of the total quantity of cotton cloth produced has been much slower than in earlier periods. No direct or immediate link should, however, be established between the increasingly important role of the decentralized sector in meeting the demand for cotton cloth, and the slow growth of production. Many other factors are involved in the latter phenomenon, notably the growth of the man- made fiber industry. Some attempt to underline the more important of these factors is made in a later section. The Relative Importance of Handlooms and Powerlooms The task of estimating production separately in handlooms and powerlooms is even harder than that of arriving at a figure of total production in the decentralized sector. A first attempt at this estimate was made by M. Padmanabhan for the years between 1956 and 1963 "based-on such factors as the increase in the number of powerlooms, pattern of cloth production in the two-industries, level of yarn consumption by them, etc.". 1/ More detailed data on yarn delivered for "civil consumption" has been published in the Indian Textile Bulletin since 1968. These statistics give details of yarn supply by "form" as well as by count-groups. It is generally believed that yarn which is supplied in the form of hanks is used by handlooms. This is the major information which provides a clue to the production of cloth by the handloom sector. However, it is known that 1/ M. Padmanabhan, "Estimates of Production by Handlooms and Powerlooms", Indian Textile Bulletin, August 1956.  - 23 - powerlooms do use same yarn in hank form, particularly in the production of colored sarees. On the basis of a field study in Maharashtra, Padmanabhan found about 7 percent of yarn supplied in hank form was used by powerlooms. Padmanabhan was also able to provide a more refined estimate of production in the three sectors by allowing for the different yarn to cloth ratio in different count groups of yarn supplied to the decentralized sector. Based on past studies he assumed that 8, 10 and 15 meters of cloth are produced from one (1) kg, of yarn in the 1-20, 21-40 and 40 and above count-groups of yarn. Padmanabhan's estimate of cloth production in the three sectors was made on the basis of the above principles for the period up to 1971. We have extended the estimate to 1981 on the basis of the same methodology, and the information published by the Indian Cotton Mills Federation. The data for the entire post-World War II period are presented in Table 1.3. The table shows the growing influence of powerlooms in the production of cotton cloth in the Indian economy in the last two decades. In fact, throughout the 'sixties and 'seventies, most of the additional production in the decentralized sector has been due to powerlooms. Taken in conjunction with the data given in Table 1.2, it would seem that at the beginning of the 'eighties handlooms, powerlooms, and the mill sector accounted for 29, 32 and 39 percent, respectively, of the total quantity of cotton cloth produced. The estimate is, of course, as described above based on rough procedures. In particular, the assumption that most of the yarn supplied in hank farm is used by handlooms would seem to be a fairly loose one. Distribution of Cloth By Count-Groups in Three Sectors A question of great importance is the share of coarse and fine cloth produced in the three sectors. The indication of the degree of coarseness is  - 24 - Table I.3: ESTIMATES OF PRODUCTION IN HANDLOOMS AND POWERLOOMS, 1956-81 (Million Meters) Year Handlooms Powerlooms Total 1956 1,379 (84) 255 (16) 1,634 1960 1,527 (72) 606 (28) 2,133 1963 1,891 (66) 985 (34) 2,876 1968 2,050 (58) 1,480 (42) 3,530 1971 1,770 (52) 1,630 (48) 3,400 1979 2,063 (44) 2,270 (53) 4,334 1981 2,253 (45) 2,720 (55) 4,973 Source: For 1956-71, calculation made by M. Padmanabhan, "Estimates of Production by Handlooms and Powerlooms", Indian Textile Bulletin, August 1975; and "The Sick Mill Problem in the Indian Cotton Textile Industry", Ph.D., Bombay, 1974, pp. 360-63; for 1979, calculated from data given in the Handbook of Statistics (ICMF), 1980 and following the method of Padmanabhan.  - 25 - provided by the counts of yarn used in the production of the particular type of cloth. As already mentioned since 1968 figures are being published showing (a) the total quantity of yarn available for civil consumption (i.e. in the decentralized sector, (b) the total quantity of yarn in hank form (consumed mostly by the handlooms), and (c) the total quantity of yarn consumed by mills -- all broken down by broad count-groups. It is, therefore, possible to construct for the 1970's percentage distribution of count-groups of yarn consumed by the three sectors. These data are given in Table 1.4. The table includes another important set of figures for 1942 giving the distribution for mills and handlooms constructed specially for the Fact-Finding Commission. (Powerlooms were unimportant at this date). Looking first at the picture for 1979, the following points stand out: a. Handlooms produce a considerable proportion of their total output in the very coarse variety (10s count and less), much more so than either mills or powerlooms. b. Both powerlooms and handlooms have a proportionately higher share of the output of very fine cloth (higher than 40s count) compared to the mills. Powerlooms also have a major share of their output in the "finer than medium" count group, 31s-40s. c. The major share of the mill output is in the medium (21s-30s) and the "'coarser than medium" (11-20s) count groups. Some rough specialiation by sector thus does seem to emerge with handlooms concentrating in the coarser types of cloth, mills in the medium and the powerloom in the finer types. A word of caution should, however, be entered here. The strength of the cloth produced depends not only on the  - 26 - Table I.4: PERCENTAGE DISTRIBUTION OF THE TOTAL QUANTITY OF YARN CONSUMED IN DIFFERENT SECTORS BY COUNT-GROUPS, 1942-1979 1942 1970 1975 1979 Count Hand- Power- Hand- Power- Hand- Power- Hand- Groups Mills loom Mills loam loom Mills loom loom Mills loam loom ls-lOs 8.1 20.0 8.4 3.9 27.2 5.9 6.0 24.8 10.7 8.7 24.1 lls-20s 49.6 34.4 26.5 20.8 31.1 28.7 23.5 37.0 34.1 18.2 33.2 21s-30s 25.7 19.6 39.3 23.6 13.6 38.0 22.0 9.2 37.3 21.3 13.8 31s-40s 11.6 14.2 19.7 21.9 15.8 20.9 22.0 15.6 18.2 32.4 15.5 40s 5.0 11.8 6.5 29.8 12.3 6.6 26.5 13.5 4.5 19.4 13.4 100.0 100.0 100.0 100.0 100.0 100.0 100.0 ,100.0 100.0 100.0 100.0 Note: Civil deliveries of yarn in hank form are considered to be consumed by the handloom sector; the rest by the powerloom. Source: 1942, Report of the Fact-Finding Committee. 1970, 1975 Indian Textile Bulletin, Annual Number 1976. 1979, Handbook of Statistics, ICMF, 1980.  - 27 - count of yarn used, but also on the closeness of the weave. Some reference to this point is made in Section 4 when we look specifically at the adjustments made in the mill sector in response to the post-World War II textile policy. Let us now consider changes in the count-wise distribution over time. Little change seems to have take place in the decade of the 'seventies. The only point which remotely strikes one as perhaps being indicative of a perceptible trend is the increase in the share of the "finer than medium" (31s-40s) count group within the powerloom sector at the expense of the "fine" group of above 40s count. More interesting is the comparison of the distribution of 1942 with that of the 'seventies. The pattern of prodution in the handloom sector has not changed very much. But it is clear that mills have "gone finer". Between 1942 and 1979 there has been a reallocation of 15 percentage points from the 11-20s count-group to the 21s-30s and 31s-40s count-groups. As already mentioned earlier, a large proportion of the output of the increasingly important powerloom sector is in the finer count-groups. These trends therefore reflect a major change in the pattern of consumption of cloth in India. Much more finer cloth is being consumed now compared to the situation in the early 'forties -- and the more mechanized sector, including mills and powerlooms, has been in the vanguard of this change. Man-Made Fibers Policy and Trends It is now time to bring into the picture the other major development in the textile scene of the post-World War II period -- second only to the development of the powerloom sector. It is well known that in the world economy man-made fibers and blended fabrics have made great strides at the expense of pure cotton products. It is estimated that the share of man-made  - 28 - fibers in total cloth production is probably as much as 50 percent in the world today. The synthetics and blended fabrics have been, comparatively speaking, new-comers to the Indian scene. The data on production of cotton and non-cotton fabrics are brought together in Table I.5. It shows the strong increase in non-cotton fabrics in the last decade -- increasing from about 10 percent in 1968 (in quantity) to around 30 percent in 1979. The development of man-made fibers in India has been like the rest of the textile industry, severely affected by government policies. From the point of view of the present study of the large-small issue, two elements of the goverment policy are of particular significance: (a) the package of policies which sought to encourage the production of man-made fibers in the small scale sector as much as in the cotton industry; and (b) the system of taxes and physical controls which has tended to dampen down the growth of man- made fiber demand and has indirectly had an impact on the role of the small- scale sector in the textile industry as a whole. Let us first deal with the rationale and instruments of government policy seeking to discourage the growth of the man-made fiber industry. The basic motivation for this bulk of policies has been the desire to protect the agricultural sector producing raw cotton. The underlying assumption has been that the alternative use of land developed to producing cotton has low productivity (cotton being grown on special types of land suitable for monoculture), and a significant reduction in the production of cotton cloth will have adverse effects on small farmers in the raw cotton sector. This concern for preserving the agricultural base of the raw material for producing cloth carried over into the government policy with respect to the two major types of man-made fibres available for the manufacture of cloth  - 29 - Table I.5: PRODUCTION OF MAN-MADE FIBERS/FILAMENT YARNS (Million kg.) Staple Fiber Filament Yarn Year Viscose Acetate Polyester Total Viscose Acetate Nylon Polyester Total 1951 - - - 0 2.5 - - - 2.5 1956 7.9 - - 7.9 7.6 1.4 - - 9.0 1965 37.2 - 1.4 38.6 35.2 2.0 1.5 - 38.7 1975 66.8 0.3 14.3 81.4 33.1 1.9 13.4 2.5 50.9 1981 93.4 0.3 26.7 120.4 40.2 1.5 21.7 15.1 78.6 Note: Viscose (cellulosic) fiber is based on forest products; polyester, nylon and acetate are petroleum bond products. Filament is a continuous strand of yarn which can be used directly on the looms; while in the case of fiber, it has to be spun in the same manner as cotton fibers. Source: Handbook of Statistics (ICMF, 1982, Table 35, p. 51.  - 30 - -- viscose and polyester. Viscose yarn is based on forestry products. The implicit assumption of government policy has been that the opportunity cost of growing trees in the Indian economy is close to zero -- or at least much lower than that of producing petroleum which is the basic raw material needed to produce polyester yarn. Thus although there has always been fiscal disincentives to the production of viscose it has never been of the magnitude imposed on polyester. Viscose was the first to arrive in the Indian textile scene, and continues to be more important today in spite of the relative growth of polyester and near-substitutes of polyester (see Table 1.5). It has built up a political lobby -- in much the same way as there has always been a cotton lobby -- so that the burden of fiscal discrimination has fallen disproportionately on polyester. In the international market, there is not much difference in the price of polyester and viscose fibres, but when these fibers are imported into India, the differential becomes almost four times on account of the government policy and consequent duties as levied on these fibers. The implication of the differential treatment of the two basic types of man-made fibers on the textile economy in India is profound. Polyester- based fabrics (usually blended with other fibers) have important crease- resistant and durability properties which are not nearly so important for 1/ There are four plants in India for the manufacture of polyester fiber and two for viscose. The excise duty, a3 revised in the 1982 finance bill, is Rs.4 per kg. for viscose, but as much as Rs.45 per kg. for polyester fiber. Imports of man-made fibers are permitted. The import duty on polyester fiber is 165 percent on the c.i.f. value, but only 10 percent in the case of viscose. In both cases the excise duty is added to the import cost.  - 31 - viscose-based fabrics. Polyester-based fabrics have the potentiality of competing with cotton cloth for low income groups. Because of the fiscal costs imposed in India, however, they have become the rich man's cloth; 1/ while it is the viscose-based fabrics which cater to the tastes of low income groups as relatively cheap silk substitutes. The relatively high price of the raw material, which the producer in India of man-made fabrics has to pay, suggests that these newer types of textiles are still available only to high income groups. Table I.6 reproduces some relevant data on consumption of different kinds of textiles in households of varying income levels. It shows, as is to be expected, (a) that non-cotton textiles are 4 or 5 times as expensive per meter as cotton textiles and (b) it is only at a level of household income of above Rs.3000 per annum that non- cotton textiles become a significant part of the household's textile budget. But it must be emphasized that the household income group of Rs.3,000-6,000 or even Rs.6,000-Rs.10,000 cannot by any means be called the high income households in the Indian context. Many blue collar workers will be in these groups, and it is significant that in the Rs.6-10,000 group, nearly half of total expenditure on cloth is spent on non-cotton textiles. The evidence for strong consumer preference for non-cotton textiles -- in spite of the relatively high price per meter -- is very clear. 1/ As an example, a representative of the industry stated in January 1981 that the international price of polyester fiber was Rs.12 per kg. The ex- factory price of fiber produced in India was Rs.34 per kg., the higher cost of production partly reflecting the small capacity of the plants. Adding the excise duty of Rs.45, the price of the fiber would be more than six times the international price.  - 32 - Table I.6: ESTIMATED TEXTILE PURCHASES PER HOUSEHOLD AT DIFFERENT INCOME LEVELS, ALL-INDIA, 1978 Cotton Textiles Pure Non-Cotton Mixed All Textiles Annual House- hold Income Quantity Value Quantity Value Quantity Value Quantity Value (Rs.) (meters) Rs. (meters) Rs. (meters) Re. (meters) Rs. Less than 1,500 38.02 189192 0.90 17.02 2.16 34.36 41.08 241.31 1,500- 2,999 52.20 277.20 1.58 25.09 2.63 52.77 56.41 355.06 3,000- 5,999 70.09 411.54 3.87 83.41 6.04 147.96 80.00 642.10 6,000- 9,999 91.26 598.35 7.26 172.46 10.97 286.48 109.49 1,056.29 10,000-19,999 114.16 806.27 16.52 436.27 17.42 508.21 148.10 1,750.75 20,000+ 141.16 1,031.48 25.34 770.49 27.13 909.21 193.99 2,711.18 Average for All Income Groups 74.69 449.96 5.53 132.53 7.67 198.80 87.88 781.37 Source: Handbook of Statistics on Cotton Textile Industry (13th edition), ICMF, Bombay, September, 1980, Table 21, p. 36 (quoting data from the Market Research Textiles Committee).  - 33 - We can now turn to assessment of the government policy on man-made fibers on the small-large issue in the Indian textile industry. It can be argued that the maintenance of the demand for cotton textiles at the expense of man-made and particularly polyester-based fibers together with the physical and fiscal controls on the cotton factory industry which has been discussed earlier, has had an effect of protecting the small-scale sector in the textile economy as a whole. This is indeed true. But there is another aspect of government policy within the man-made fiber sector of the industry which has to be brought into the picture now. As in the cotton industry an attempt has been made to encourage small units within the man-made fiber sector. The policy of protection of the small-scale units in the production of cloth using man-made fibers has been the simple one of "sectoral demarcation"' in the supply of raw material, rather than reservation of lines of production as in the case of the cotton industry. Sectoral demarcation meant that 100 percent man-made fiber fabrics was left entirely to the decentralized sector, and was futher enforced by loom permits allowing use of only one type of raw materials -- viz. cotton, art-silk, natural silk, jute or wool -- depending on the sectoral location of the loom. Naturally it is easier to enforce the loom permits in the organized sector, so that mills have been effectively excluded from 100 percent man-made fabric production. The government policy has, however, permitted cotton mills to use filament in weft, so that blended fabrics can be produced in both the organized and the decentralized sectors. As far as excise duties are concerned, the structure of duties were transferred from fabrics to yarn in 1974-75, so that both sectors are equally affected by it. (The representatives of the decentralized  - 34 - sector seems to have been very much in favor of this change). 1/ At the fabric stage there are (smaller) additional duties to be paid, depending on the cloth produced, and also a handloom cess. These duties presumably affect the powerlooms producing grey man-made cloth less than the mill sector, and should affect the handlooms even less. The net effect of the policies has been to encourage a very large increase of specialized powerlooms involved in the production of man-made fabrics. Handlooms have been involved in the development of this industry to only a small extent (producing only about 7 percent of the total quantity of cloth). The Federation of Indian Art Silk Weaving Industry estimates that there is a total of 200,000 powerlooms involved in the industry, of which 91 percent are in the decentralized sector. 2/ The average size of the powerloom units is about 8 powerlooms. Many of them are "unauthorized", which means that they are not licensed by the authorities, and can escape excise taxes on the fabric produced. 3/ The grey fabric produced by the small powerloom sheds are finished in larger units, normally in the same town. The relationship between the small powerloom units and the larger mills which are involved in the dyeing, printing, finishing and marketing of the fabrics is close. A large part of the powerloom industry can then be said to be in the nature of 1/ 41st Annual Report of Silk and Art Mills Association Ltd., Bombay, August 1980, pp. 19-21. 2/ Memorandum of the Federation, dated 9 January 1981. 3/ The situation seems to have been a fairly open (i.e. unforceable) one. The goverrment recently tried a scheme for voluntary registration of the unathorized looms on payment of a small fee.  - 35 - ancilliary units, specializing in one important aspect of the processing of man-made fabrics. While governnent policy has been instrumental in producing a very high cost raw material for man-made fabrics, and contributed to the high price-low quantity textile economy in India, it is not clear that a policy of making available cheaper raw materials would have made a big difference to the relative importance of small and large sectors in the textile industry. We have seen how the structure of the industry has been shaped with the small powerloom units playing a dominant role in the production process of man-made fabrics. The profitability of these units would, if anything, be increased by policies which tend to reduce the raw material costs, The Federation of India Art Silk Weaving Industry maintained that the raw material problem forces the powerloom units to work at 33 percent of installed capacity. 1/ The over-all picture of the production of cotton and non-cotton cloth, broken down by the small (decentralized) and large (mill) scale of production is presented in Table I.7. It will be seen that even in the blended-mixed fabrics, in which the large scale mills have some advantage (and in which restrictions on the use of the raw material in mills do not apply), the mills have not overtaken the small sector. 1/ Memorandum of the Federation, dated 9 January 1981.  - 36 - Table I.7: PRODUCTION OF COTTON AND NON-COTTON CLOTHS BY SECTOR, 1951-81 (Million Meters) Cotton Cloth 100% Man-Made Cloth Blended/Mixed Cloth Decen- Decen- Decen- Total cloth Year Mill tralized Total Mill tralized Total Mill tralized Total production 1951 3727 1013 4740 13 287 300 - - - 5,040 1956 4852 1663 6515 6 430 436 - - - 6,951 1968 4366 3530 7896 4' 980 993 - - - 8,889 1973 4169 3602 7771 1 886 887 129 121 250 8,908 1978 3251 4074 7325 12 1,463 1,475 983 765 1,748 10,548 1979 3206 4334 7540 6 1,308 1,314 942 731 1,673 10,527 1981 3147 4913 8120 - 1,458 1,465 919 641 1,560 11,145 Source: Handbook of Statistics (ICMF), 1982, Tablle 12, p. 29; also various years.  - 37 - CONCLUSIONS ON PART I The following findings are worth stressing by way of concluding this Part. 1. Handloom weaving had held its own against both the indigenous mill sector and imported cotton cloth in periods before Independence when protection of this sector became a reality. Unlike Japan in the 'twenties, there was no period of absolute decline in handloom production. 2. The policy of protection of the decentralized sector introduced in 1950, and extended in severity subsequently, was meant to encourage primarily the handlooms. In effect it has created a new industrial sector -- operating with low grade non-automatic looms in small units, called powerlooms -- which has had a phenomenally high rate of growth. Its share of cotton cloth produced in the decentralized sector is estimated to have increased from 16 percent in 1956 to 55 percent in 1981. Our figures suggest that since about the mid-'sixties, almost all of the increase in production in this sector has been provided by powerlooms. Production of cotton cloth in mills has declined by one-third between 1956 and 1971. 3. There is a rough specialization by types of cloth produced, with the handlooms accounting for a considerable proportion of total output in the very coarse variety (using yarn of 1Os count or less). Both powerlooms and handlooms have a disproportionate share of the output of fine cloth (40s count and over), and mills are important in the medium varieties. But there is a significant degree of overlap between the sectors.  - 38 - 4. Along with the policy of protection of the small-scale, a major aspect of textile policy in India is the protection accorded to cotton against man-made fibers. The latter policy -- while contributing to the creation of a high cost-low production textile economy -- has also had indirect effects on the relative growths of small and large sectors. It is likely that a more liberal policy towards man-made fibers would have led to a more dynamic development of large scale industry. This conclusion is not absolutely clear because, within the restrictive framework, powerlooms (but not handlooms) have done well in developing as ancilliary units weaving grey man-made cloth for future processing by larger factories.  PART II A COST-BENEFIT ANALYSIS OF THE THREE SECTORS OF THE WEAVING INDUSTRY  - 40 - In this part we attempt a cost-benefit analysis of weaving technology in the three sectors of the industry. As we saw in Part I, there is some specialization by the type of cloth produced in handlooms, powerlooms and mills, but all three sectors produce enough standard cloth of medium count to make a comparison of costs meaningful and worthwhile.. Our analysis refers to the cost of weaving yarn of 40s x 408 count. Both private and social profitability are considered. The data for the handloom and powerloom sectors are derived from a World Bank survey in a textile town in Uttar Pradesh -- Mau. For the factory sector (mills), we depend on secondary sources. The sources of the data, the definition of concepts and the way individual figures are derived are fully explained in the Annex to this paper. A. Relative Costs of Producing Rs. 10,000 of Value Added Table II.1 brings together the labor input and capital cost required to produce Rs. 10,000 of value added in the three sectors. The cost ratios are crucially dependent on the following: (i) the machine productivity, i.e. the output per loom shift and the number of workers needed to look after one loom; (ii) the number of shifts worked in each sector; and (iii) the value added per meter of cloth produced in the three sectors. While the details will be found in the Annex, a few words on each of these factors are useful for the benefit of the general reader. (i) Machine Productivity Handlooms are, of course, the cheapest type of looms, and their productivity per loom shift is correspondingly the lowest. A large proportion of the handlooms are worked in sheds within the worker's residence. The adult  - 41 - Table II.1: INPUTS REQUIRED TO PRODUCE VALUE ADDED OF Rs. 10,000 PER ANNUM IN THE THREE SECTORS OF THE WEAVING INDUSTRY Handlooms Powerlooms Mills Number of workers 3.36 1.76 0.51 (adult male equivalents) Fixed Capital Costs: (a) Machinery 534 3,426 (b) Land and building 5,155 4,480 TOTAL 5,689 7,906 Working Capital 3,024 2,600 Total Capital 8,713 10,506 19,000  - 42 - male weaver is generally assisted by other members of the family. Our data showed that two adult male equivalents of labor worked one loom and produced about 11 meters of cloth per day. The length of the working day is typically variable, but was on average equivalent to one standard 8-hour shift. Both the powerloom and the mill sectors use non-automatic looms, and the productivity per loom shift is three times that of the handlooms. However, the quality of the looms used in the two sectors (powerlooms and mills) is different. The powerlooms make use of second-hand looms requiring a fair amount of maintenance. Even new looms which are being increasingly produced for this sector in India have less automatic features than non- automatic looms found in the mill sector. Thus, labor required to look after a loom is more for the powerlooms than for the mills. Our estimates are that taking weavers and other workers together, 1.6 workers are required per loom in the powerloom sector, and 0.8 per loom in the mills (powerlooms and mills use largely adult male workers). (ii) Number of Shifts Worked The capital-output ratio is significantly affected by the number of shifts worked in the three sectors. Our research showed that while handlooms worked a standard 8-hour shift, powerlooms were used on the average for 1.5 shifts and mills worked 2.5 shifts. The differences in the number of shifts worked are due in large measure to the varying availability of electricity in the three sectors. Handlooms are worked in weavers' households in which there is no supply of electricity. They can only be used in daylight. Powerlooms do indeed need electricity to operate, but small decentralized units in this sector have to depend on public supply of electricity which, in India, is not in continuous supply especially in the small towns. Mills, by contrast, often  - 43 - have their own generators. They are able to take advantage of the economies of scale in providing their own supply of electricity. The difference in the cost of machinery between powerlooms and mills given in Table II.1 partly reflects this fact (and partly the difference in the cost of the loom). (iii) Value Added Per Meter of Cloth The difference in the value added per meter of cloth between the sectors (even when we are comparing cloth produced from yarn of the same count) derives partly from the cost of power and maintenance, and more importantly, from the varying prices of the final product. Mills weave their cloth more closely than powerlooms; cloth produced by handlooms are also perceived to be more durable than powerloom cloth in the local markets. Powerloom cloth is consequently priced something like 20 percent lower than both handlooms and mill-made cloth. This difference is reflected in the cost figures of Table II.1. The cost data are portrayed in Figure II.1. It shows a well-behaved isoquant with the variation in capital intensity being in the generally expected direction. Note that two alternative points are plotted for handlooms: point H represents only the cost of machinery plus working capital, while point H' adds 75 percent of the value of land and building to capital costs. As explained more fully in the Annex, the former is relevant for calculation of private profitability. The master-weaver in the handloom sector typically advances raw material and maintains the loom in the weaver worker's residence. He pays the weaver a piece-rated wage based on the amount of cloth produced. Thus for the master-weaver's calculation of private profits, the capital cost of the handloom and the working capital used are relevant -- not the value of land and building for which no rent is paid.  Figure 1: ISOQUANT FOR COTTON WEAVING 21.0 ---II 18.0M 15.0 - -