Manufacturing sector in India before and after the liberalisation of 1991

A well-developed manufacturing sector is needed to provide the basic needs of the population. Similarly to  lead to an increasingly diversified economy and to give rise to social psychology and institutional changes manufacturing sector is a principal indicator of economic development of a nation (Mohommad 2010). Identifying the need of a well-developed industrial sector, in 1951 India’s Prime Minister Jawaharlal Nehru announced that India had to become industrialise as fast as possible. While the policy-makers did everything they could to improve the state of the manufacturing sector in India. However major policies including formulating Soviet-like planning policies, to industrialise the country was not successful. India failed to become a manufacturing powerhouse (Kumar 2014).

Policies that changed the face of the Indian economy

Post-1980 the key strategy for developing the manufacturing sector in India was to develop large and heavy industries through central planning. The strategy also included import substitution, price controls and restrictions on private sector through severe licensing. Also the controls on the foreign investment limited the growth of the manufacturing sector in India (Kumar 2014). Rigid controls led to widespread incompetence in resource utilization, as reflected in the poor growth rate of the manufacturing sector. The despondent state of the manufacturing sector was further accentuated by the Gulf oil crisis and agriculture supply shocks in the late 1970s’ together with political uncertainty which plagued the Indian economy throughout its development process.

After 1991, however, the licensing of industries was abolished and movement of international capital was liberalised. Previously only 40 percent FDI was allowed in selective large and heavy industries (Sadhana 2015).

INDUSTRY FDI ALLOWANCE ENTRY ROUTE
Alcohol- distillation and brewing 100% Automatic
Coffee and rubber processing and warehousing 100% Automatic
Defence production 26% FIPB
Hazardous chemicals and Isocyanates 100% Automatic
Industrial explosives 100% Automatic
Drugs and pharmaceuticals 100% Automatic
Power generation, transmission and distribution (except Atomic energy); 100% Automatic

FDI limits for the manufacturing sector post 1991 (Reserve Bank of India 2011).

The contribution of the manufacturing sector to GDP just after India gained independence was not substantial. During 1950-51, the manufacturing sector in India contributed only 8.98% to the GDP. However, by 1965-66, it had increased to 14.23%, at the start of 1980 this figure further increased to 16.18% but it remained constant in that decade until 1990-91. This slight dip stems from the growth of the service sector and its increased contribution to the GDP of the country. During the fiscal year 2014 -15 the manufacturing sector contributed about 16% to the GDP.

% Share of Indian Manufacturing Sector in the GDP from 1950-51 to 2015-16
% Share of Indian manufacturing sector in the GDP from 1950-51 to 2015-16

Major industries from the manufacturing sector before 1991

The industrial growth before 1991 can be categorised into three main time periods which are:

PHASE PERIOD MAJOR INDUSTRIES
PHASE I 1950- 1965 Sugar, vegetable oils, cotton textiles, jute textiles, iron and steel smelting, chemicals, petroleum, non‐metallic mineral products, basic metals, manufacturers of metal products and machinery
PHASE II 1965- 1980 Basic goods, capital goods, high technology industries, ferrous metal, construction material and mechanical engineering industries.
PHASE III 1980- 1991 Consumer durables, export-oriented industries, modern technology based industries, petroleum products, non-electric machinery, food and beverages, intermediate goods,

The period between 1951 and 1965 witnessed an increase in industrial production by 2.8 times, whereas the period 1966–80 saw an increase by only 1.8 times compared to the previous phase. The complimentary character of the public and private investment was a major contributing factor of high industrial growth in the phase- 1. Also it was a period when the prices in general were stable.

Pattern of Growth of Manufacturing Sector in India (PHASE I)
Pattern of growth of manufacturing sector in India (PHASE I)

The phase- 2 of the Indian industries was essentially stagnant which can be attributed to a number of factors including the rigid governmental controls, political instability and wars of 1965 and 1971. Similarly the general neglect of the infrastructural development paved way for the infrastructural constraints for the manufacturing sector.

Pattern of Growth of Manufacturing Sector in India (PHASE II)
Pattern of growth of manufacturing sector in India (PHASE II)

Finally, the period from 1980-90 saw a total growth of the manufacturing sector in India as 7.4 percent. Growth in this period was not only due to loosening of the controls but also because of the increased public, private and foreign investment in the manufacturing sector in India (Bhat 2014).

Pattern of Growth of Manufacturing Sector in India (PHASE III)
Pattern of growth of manufacturing sector in India (PHASE III)

Industries that took birth from the liberalisation of 1991

The key objective of the Industrial Policy Statement of 1991 was to maintain the growth of productivity, provide employment and optimally utilize the human resources to achieve international competitiveness. The policy statement included the abolition of industrial controls except in some industries like the atomic energy, railways and defence (Agrawal 2009). In 1991, 41% of FDI was allowed in certain selective industries. In the same year FDI policy was revised and up to 51 per cent FDI was allowed through the automatic route in 35 high priority and technology-intensive industries. This was to immediately facilitate the inflow of capital from foreign companies.

Furthermore in 1997, 100% foreign investment  was allowed in some industries whereas investment ranging from 74% to 50% was allowed in 111 sectors of the economy. The process of reducing the protection for the small scale sector was also initiated by allowing foreign investment up to 24 percent in the small scale sector (Chaudhuri 2007). The limit on the share of foreign direct investment in individual Micro, small and medium enterprises (MSMEs) was increased recently up to 100 per cent (Rao et al. 2014).

Major manufacturing industries post 1991 can be identified as:

  • The automotive industry,
  • Computer hardware industry,
  • Textile industry,
  • Machine tools and parts industry,
  • Pharmaceuticals industry,
  • Light engineering industry,
  • Iron and steel,
  • Petroleum and refined product industry amongst the others.
Value Added by the Manufacturing Sector (% of GDP)
Value added by the manufacturing Sector (% of GDP)

In the 1990s’, due to the opening up of the Indian economy, the manufacturing sector underwent painful restructuring. Some drastic measures included plant closures, sell-offs and relocation and unmatched lay-offs and retrenchments, some of which are yet to be properly recognised. In conclusion, however, it has improved production efficiency to face global competition, especially from China. Although research and development (R&D) investments have contracted as a proportion of the domestic output, the restructuring, and competitive pressure seems to have spurred innovation and product development (Nagaraja 2011).

References

  • Agrawal, P., 2009. The Impact Of Economic Reforms On Indian Manufacturers . Evidence From A Small Sample SurvEY Eckhard Siggel Institute of Economic Growth The Impact of Economic Reforms on Indian Manufacturers . Evidence from a Small Sample Survey.
  • Bhat, T.P., 2014. Structural Changes in the Manufacturing Sector and Growth Prospect. , (December).
  • Chaudhuri, S., 2007. Growth of Manufacturing Sector in Post-Reforms India. , 08(Table 3), pp.1–16.
  • Kumar, R., 2014. Industrial Development of India in Pre and Post Reform Period. IOSR Journal Of Humanities And Social Science (IOSR-JHSS) Ver. IV, 19(10), pp.1–7. Available at: www.iosrjournals.org [Accessed June 18, 2016].
  • Mohommad, A., 2010. Manufacturing Sector Productivity In India: All India Trends, Regional Patterns, And Network Externalities From Infrastructure On Regional Growth. ,
  • R. Nagaraja, 2011. Industrial Performance, 1991–2008.
  • Rao, K.S.C. et al., 2014. FDI into India’s Manufacturing Sector via M&As: Trends and Composition, Available at: http://isid.org.in [Accessed July 2, 2016].
  • Reserve Bank of India, 2011. Foreign Direct Investment Flows to India.
  • Sadhana, H., 2015. Impact Of Fdi On Output Growth Performance Of Corporate Manufacturing Sector In India –An. Available at: http://shodhganga.inflibnet.ac.in/bitstream/10603/36413/6/chapter 2.pdf [Accessed July 2, 2016].

Shikha Chauhan

Analyst at Project Guru
Shikha is masters in Economics from Kurukshetra University and major in International Economics and Finance. She graduated in Business Economic (Hons.) from University of Delhi.
Shikha Chauhan

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