Hindu College, University of Delhi

Generic Elective: Indian Economy II

Group Assignment (Sem: IV)

ECONOMIC GROWTH WITHOUT EMPOWERMENT

The Story of Indian Manufacturing
(An Assignment Based on the Paper by Jayan Jose Thomas)

Submitted To: Prof. Swati Yadav

Date of Submission : 20th April, 2023
Content Contributed By:
 S Muraleekrishna – 68
 Vaibhav Nath Tripathi – 2322
 Ganesh Kumar V – 110
 Alfeena Habeeb – 866
 Anvisha Srivastava – 222
 Akhila Ajayan – 440
 Ariba Suhaib – 2396
Compiled By: S Muraleekrishna

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 CONTENTS:
 Introduction – Page : 3-4
 Indian Planning and Capital Intensive Industrialisation – Page : 4-6
 Growth During The 1980s – Page: 7-9
 Industrial Growth During 1990s – Page: 9-11
 Impact Of Labour Laws In Industrial Development – Page: 11-14
 Constraints On Indian Manufacturing – Page: 14
 Supply- Side Constraints On Indian Manufacturing and The Role Of
Public Investment – Page: 15
 Industrial Policies – Page: 16-17
 Demand- Side Constraints On Industrial Growth - Page: 17-20
 The Plight Of Labour- Intensive Industries – Page: 20-21
 Conclusion - Page: 22

Economic Growth Without Employment:

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 The Story of Indian Manufacturing
(Based on the Paper by Jayan Jose Thomas)

S Muraleekrishna
Roll Number: 68
Course: BA (Honours) English - 4th Semester
Subject: Indian Economy II (Generic Elective)
INTRODUCTION:
Towards the mid twentieth century, three years after getting independence from the colonial
rule, Indian government decided to launch a very ambitious programme of ‘state-level
industrialisation’. It is that mode of industrialisation where the government promotes and
directs the industrial developments. Such an initiative from a newly independent country
which was under a lot of monetary pressure owing to the colonial rule was indeed
unbelievable. The people of our country along with the people from many other countries
who had just gotten independence around the same time started to look up towards the
Government of India and their efforts to improve their scientific and technological know-how
despite the lack of monetary resources.
Today, India has one among the fastest growing economies of the world with its GDP being
the third largest in the world.
Paradox in the Human Developmental Report 2014:
Despite all these developments, our country only got the 135 th position among the 187
countries in the Human Developmental Report, 2014 and it was categorised as having
medium level of economic growth.
60% of the people of our country depend on agriculture as their means of livelihood. It is
much greater than the number of people who are doing agriculture in the developed nations
of the world. But the contribution of the agricultural sector to our country’s GDP is just about
3.5% which is much lower than the share of agrarian industries and other primary and
secondary (manufacturing) sector activities in developed nations of the world which has far
lesser number of people involved in agriculture.
Our country’s economic growth is largely steered by the tertiary or the service sector. When
we consider the figures of 2013-14 financial year, even the manufacturing accounted only
15% of our GDP compared to the 30% in China. It generated very less employment
opportunities during those time periods.
One among the most important challenges faced by the nation is the slow progress when it
comes to the generation of greater employment opportunities when compared to the rate of
increase in the number of people who belong to the working age. With such a large labour
reserve, we could have generated job opportunities at a rate of 15 million a year between
2004-2005 and 2011-2012. But we were only able to generate only 7 million jobs per year

3
during these periods. Most of the jobs generated were in the construction sector which is a
sector where the workers would have relatively lower wages.
The lesser contribution of the manufacturing sector in job generation was one amongst the
primary concerns during the initial days of Indian Planning. To facilitate the growth of
secondary sector industries in India, there was a gradual shift from state-led to a market-led
path of economic development.
A market-led economy is driven by two primary forces: the supply and demand which direct
the production of goods and services. It isn’t controlled by a central authority as in the case of
state-led economies and are generally based on voluntary exchange.
Perceived Merits of The Market-Led System:
 Better labour generation.
 Exposure towards the international markets.
 Increased efficiency, innovations and increased productions.
Unfortunately, even such a step failed to bear fruits in our economic scenario.
Organised and Unorganised Sectors:
 Organised sectors comprised of those factories which employed more than 10 workers
and operate with the aid of electricity and machines which use electric current. It
could also include those factories which do not use electricity but employ more than
20 workers.
 The Unorganised sectors include those enterprises which employ a smaller number of
people (<10 people). They would generally be small and scattered units.
 Though a relatively fewer number of people (11.3 million people) worked in factories
in the year 2009-2010 compared to the 42.2 million work force engaged in non-
organised industries, the organised sector was able to generate 67.6% of India’s total
manufacturing GDP in the 2010-2011.
The above figures raised a question whether economic development can take place even
without the generation of employment opportunities.
INDIAN PLANNING AND CAPITAL-INTENSIVE INDUSTRIALISATION:
 During the first-half of the 18th century, before the country was colonised by the
British, India was a leading producer of handicrafts. But the European regime, led to a
massive process of deindustrialisation in India as the Indian cottage industries failed
to compete with the cheaper factory-produced clothes from Britain.
 Factory-based manufacturing started blooming in India in the 1850s with the setting
up of the first factories in Bombay and Calcutta for producing cotton and jute textiles
respectively. The rigid industrial policies combined with the discriminatory trade and
tariff of the British colonial regime, didn’t favour the development of Indian
industries.
 There was a severe setback during the first half of the 20 th century and our country
saw a decline in performance in all spheres of the economy. Even the food grain
production was affected very badly owing to the colonial rule.

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  These issues motivated the inauguration of state-directed efforts to promote modern
industrialisation soon after independence. The first Industrial Planning was done
under the leadership of Jawaharlal Nehru, India’s first prime minister.
The Second Five-Year Plan (1956 - 1961):

 According to the researcher Chakravarty, the Second Five-Year Plan reflected “a

major water-shed in India’s economic thinking”. It provided a sketch of the country’s
industrialisation strategy as it emphasised on the building up of heavy, capital-
intensive industries which could produce in such a mass quantity that, it can even
substitute the imports.
 As a nation which was totally crippled under the colonial rule, we were left only with
a very little capital as compared to the abundant labour reserve. India’s choice of
capital-intensive techniques was hence against the theory of comparative advantage.
 In order to have a higher saving rate and higher growth rate in outputs, the Second
Five- Year Plans aimed to allocate larger shares of investment in capital-intensive
industries or to the manufacturing of machineries that could help in the production of
other smaller machines.
 In these initial years of planning primary importance were given to the public sector
enterprises especially when it pertained to the matter of infrastructural development.
The government also took several measures for the protection of domestic industries
from foreign competition until the they develop to their full potentials.
Steps Taken by the Government to Protect the Domestic Industries:
 By the introduction of trade and tariff barriers.
 By imposing regulations on private sector investments in our country.
 By controlling the prices, the creation of production capacities and also putting
restrictions on the import of machinery.
 The government also tried to give the private entrepreneurs financial assistance
through the public-sector finance institutions which further helped to strengthen our
monetary base.
The Problems Which the Nation Had to Face in Spite of These Industrial Reforms:
 The effects of these measures were not far reaching. It didn’t bring any positive
influence on the country’s agrarian base. The complex social settings of the nation’s
village areas made the planning process to be relatively ineffective in those regions.
 The attempts made in land reformations were more or less a failure in different parts
of the nation. The rural areas ended up being deprived of most of the developments.
The agrarian transformation was not up to the mark which slowed down the growth of
agriculture in the post-independent India.
Hence, one could infer that the strategies were only partly successful. It didn’t have a uniform
impact in the economy.
 The slow economic growth and the subsequent industrial stagnations in the mid-1960s
could be attributed to the slow growth of demand owing to the huge disparities in the
distribution of income and the slow-paced development of income from agriculture.
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Consequences Of the Slow-Paced Agricultural Development:
 The slow progress in agricultural production could further lead to inflations and it
would negatively hit the poorer sections of the society. It can also affect the urban
workers and landless agricultural labourers. It would affect the food security of the
nation and could deteriorate the condition of the poor.
 It could further lead to the reduction in the availability of raw materials for various
industries especially the textiles and food processing industries.
 Unequal Income Distribution: Economies of scale refers to the cost advantages reaped
by companies when production becomes efficient. Unequal income distribution may
prevent firms from exercising the benefits of economies of scale.
 Owing to such an unequal distribution of income, the demand of consumer durables
and luxury goods (which were often imported) consumed only by the few elite
sections of the society would increase and the demand of mass-consumption goods
might decrease.

Alternative Explanations of India’s Industrial Growth Stagnation:

 Bhagwati and Desai, in 1970 gave better statements which explained the phenomenon
of industrial growth stagnation which focussed on the supply constraints on the
economy (based their observations on neo-classical theories) unlike the observations
based on Keynesian, Keleckian and Marxian theories.
 They critiqued the country’s industrial policy framework and according to them the
licencing regime (laws and regulations referring to the requirements of being
licenced) was ill-designed and was un-necessarily detailed which led to the slow
growth rate of industries.

Conclusion:
It is noteworthy that our country has been striving really hard since the time of independence
to achieve a very stable economic growth. Though there had been several setbacks, our
country has been able to progress a lot despite the many challenges it had to face during those
years which followed the independence. India is now one among the strongest economies of
the world just because of its concreted efforts in this field despite the confusions and
criticisms it had to face at every step of the process.

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Vaibhav Nath Tripathi
Roll Number: 2322
Course: BA (Honours) English - 4th Semester
Subject: Indian Economy II (Generic Elective)
GROWTH DURING 1980s
The decade preceding 1980s was the period of industrial stagnation because the domestic
demand during the years grew very slowly. The reasons that could be attributed to slow
expansion of domestic demand were:
 Unequal distribution of income
 Poor growth of agricultural income in the country
However, the Industrial growth revived during 1980s.
How Industrial Growth Revived?
The major reason behind the growth revival was the increase in government investment in
public sector. Increase in public sector investment improved the infrastructure and thus raised
the productivity and at the same time it conveyed message in the market that government is in
favour of business.
Though the gross value added by Industrial sector in GDP grew but the employment
remained almost stagnant during this period. Stagnation in employment creation was yet
another concern.
Reason Behind Employment Stagnation:
 During 1980s, Capital intensive Industries grew significantly thus lead to job creation
but at the same time factory-based production industries like textiles, underwent steep
decline thus leading to job loss. As a result, the net increase in job was almost
negligible.


This data reveals that during 1980s, organised sector only contributed 5.6 lakh
jobs and unorganised sector contributed 70 lakh jobs. Thus total 75.9 lakh jobs
were created in manufacturing sector.

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 If you will observe this graph from the period of 1978 to the period of 1990,
you will find that though GVA (gross value added) by the manufacturing
sector has raised over time but still the employment over the period (1978-
1990) remained almost same.

# Unorganised sector generated significant employment during 1980s particularly industries

like food products, tobacco, chemical products, furniture, wood products etc. All these
industries were mainly active in rural areas hence played key role in the upliftment of rural
areas and eradication of poverty.
# IRDP (INTEGRATED RURAL DEVELPOMENT PROGRAM) was another scheme
helpful in upliftment of rural areas

 Rigidity in labour market is claimed to be another reason of slow employment growth.

INDUSTRIAL DISPUTE ACT (IDA), 1947 got amended in 1972, 1976 and 1982
and laid down many new rules.
 According to its amendment in 1976, Industries which employ 300 or more
than 300 workers need to obtain government permission before firing workers
or closing factories.
 And as per 1982 amendment, rule was now applicable for all the industries
having 100 or more than 100 workers.
These amendments made the labour market more rigid because it restricted the power of
employers to freely hire and fire the workers. This made them less interested in making large
scale investment and thus job growth slowed down.
Besley and Burgess Study On Employment Stagnation (2004):
Besley and Burgess conducted a study on the situation of jobless growth in Indian economy
in 2004. They divided all the Indian states under three categories i.e. ‘Pro worker’, ‘Pro
employer’, and ‘neutral’. In their study they found that the states which are more inclined
towards the interest of workers (pro worker) have experienced slow economic growth.
However, they were criticised for their methodologies.

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Criticism:
 Critics claimed that they misinterpreted the state level IDA amendments.

 They also claimed that the study conducted by them doesn’t include 100s of laws that
are concerned with labours.

 Questions were also raised on their scoring method.

 They also failed to distinguish between the minor and major amendments in the
labour laws and thus gave equal weightage to all the laws and amendments.

………………………………………………………………………………………………..

Ganesh Kumar V
Roll Number: 110
Course: BA (Honours) English - 4th Semester
Subject: Indian Economy II (Generic Elective)
INDUSTRIAL GROWTH AFTER THE 1990s:
The 1990s saw a significant economic liberation in India, which led to a boost in industrial
growth. The country embarked on a series of economic reforms to deregulate the economy
and open it up to foreign investment. This led to an increase in competition, productivity, and
efficiency in the industrial sector. The government in 1991-1992 introduced far-reaching
economic reforms and it had a significant impact on the country’s economy and society.

Far-reaching Economic Reforms 1991-92:

These reforms were initiated by the government in response to a severe balance of payment
crisis and a stagnant economy. The key reforms included liberalizing the economy by
reducing government regulations, opening up the economy to foreign investment, and
deregulating industries such as telecommunications and aviation. The government also
adopted a more market-oriented approach to economic policy, including allowing greater
competition and reducing barriers to entry. One of the most significant reforms was the
abolition of the License Raj. The reform led to a shift in the economy toward the service
sector, with the IT and business process outsourcing industries emerging as major growth
drivers.

Impact of Private and Public Sector Investment on the Organised Manufacturing

Sector in the 1990s:
There was a huge rise in the growth of the industrial sector during 1991-92 to 1995-96 which
also led to employment growth in the organized manufacturing sector. However, this growth
was not sustained in the following years. Between 1996-97 and 2001-02, India's organized
manufacturing sector, as well as its overall GDP, decelerated. The initial fast growth in
manufacturing during the early 1990s was primarily driven by a sharp revival in private-

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sector investment. The private sector responded positively to the new economic opportunities
and invested heavily in the manufacturing sector. However, the government's structural
adjustment program aimed to decrease public expenditure and fiscal deficit, which led to a
decline in public investment as a share of GDP throughout the 1990s, the private investment
also began to decline to lead to an overall slowdown in the countries’ industrial growth.
After suffering a huge loss in GDP growth in the late 90s, the manufacturing sector recovered
its GDP growth impressively during the early 2000s. The government continued with its
economic reforms and liberalization policies, which created a conducive environment for
private investment. As a result, private sector investment in the manufacturing sector
increased, leading to a revival in industrial growth. skill-intensive industries, such as metals,
machinery, automobiles, and chemicals, recorded extremely fast rates of growth during this
period, for example, Tata Motors, Mahindra, and pharmaceutical companies. Therefore
India's overall GDP growth and the growth of the organized manufacturing sector recovered
impressively during the early 2000s, this was led by private investment and exports and
capital and skill-intensive industries.

The Impact of the 2008 Global Economic Crisis and Private Investment Slowdown on
India's Manufacturing Sector Growth and Employment in the Unorganized Sector:
The worldwide economic crisis of 2008 had a significant impact on India’s manufacturing
sector. The slowdown in demand from export markets led to a decline in the growth of the
manufacturing sector. In response to the crisis, the Indian government launched expansionary
monetary and fiscal policies, encouraging banks to lend more, especially in the form of
housing and automobile loans. These measures had some success in reducing the impact of
the global slowdown. However, from 2011-12 onwards, private investment in India slowed
down, leading to another phase of stagnation for the manufacturing sector. The impact of this
industrial growth slowdown has been more adverse in the unorganized sector, which is
characterized by small and informal enterprises. This was because the unorganized sector is
more vulnerable to economic shocks and lacks access to credit, technology, and skilled labor.
Therefore the worldwide economic crisis of 2008 had a significant impact on India's
manufacturing sector, and the decline in private investment from 2011-12 onwards led to
another phase of stagnation. The impact of this slowdown has been more adverse in the
unorganized sector.

Decline in Employment Growth in Unorganised Manufacturing Sector in India after the

1990s
The employment growth record of the unorganized sector in India's manufacturing sector has
been noteworthy. During the first half of the 2000s (1999-2000 to 2004-05), total
manufacturing employment in India increased by 9.8 million, with the bulk of it in the
unorganized sector. The labor-intensive and export-oriented industries such as textiles,
garments, leather, footwear, furniture, jewelry, and gem cutting accounted for more than 70
percent of the manufacturing employment growth during this period. However, these very
industries suffered significant job losses during the late 2000s, particularly in the wake of a
slowdown in export demand. Between 2004-05 and 2011-12, overall manufacturing
employment in India rose by only 5.1 million. This increase in employment represented just
10.6 percent of the 48 million net addition to non-agricultural employment during the same

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period. Of the total increase in manufacturing jobs of 5.1 million, an increase of 4 million
occurred in the organized sector, implying that the increase in unorganized sector
manufacturing employment in India since the mid-2000s was only 1.1 million.
Several reasons can explain the poor growth record of India's unregistered manufacturing in
recent years. One of the main factors is the decline in demand from export markets, which
affected labour-intensive and export-oriented industries in the unorganized sector. These
industries heavily depended on exports and suffered significant job losses when demand from
export markets declined. Another factor is the lack of government support and access to
credit, technology, and skilled labour. Additionally, the lack of infrastructure such as roads,
ports, and power supply affect the growth of the unorganized sector. These industries require
reliable infrastructure to transport goods and access markets, which is often lacking in the
unorganized sector
Conclusion:
The poor growth record of India's unregistered manufacturing in recent years can be
attributed to several factors, including the decline in export demand, lack of government
support and access to credit, technology, and skilled labour, and inadequate infrastructure.
…………………………………………………………………………………………………..
Alfeena Habeeb
Roll Number: 866
Course: BA (Honours) Political Science - 4th Semester
Subject: Indian Economy II (Generic Elective)

IMPACT OF LABOUR LAWS IN INDRUSTRIAL DEVELOPMENT

Labor law is legislation specifying responsibilities and rights in employment, particularly the
responsibilities of the employer and the rights of the employee. The central objective of
labour laws is to safeguard workers’ rights, promote trade union activities and make
employment more secure. They aim at improving the status of working-class people.
Furthermore, they ensure fair and reasonable conditions of work for all the employees. The
protection of the workers’ and employers’ interests is ensured primarily through elaborate
regulations that govern various aspects of employment relationships. Labour laws in India are
governed by the Constitution of India, which ensures the right to work with
dignity and respect.

PURPOSE OF LABOUR LAWS:

Labour legislation that is adapted to the economic and social challenges of the modern world
of work fulfils three crucial roles:

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1)It establishes a legal system that facilitates productive individual and collective
employment relationships, and therefore a productive economy;

2)By providing a framework within which employers, workers and their representatives can
interact with regard to work-related issues, it serves as an important vehicle for achieving
harmonious industrial relations based on workplace democracy;

3)It provides a clear and constant reminder and guarantee of fundamental principles and
rights at work which have received broad social acceptance and establishes the processes
through which these principles and rights can be implemented and enforced.

Acts in Labour Laws:

The Industrial Disputes Act, 1947 extends to the whole of India and regulates Indian labour
law so far as those concerns the trade unions as well as Individual workman employed in any
Industry within the territory of Indian mainland. The objective of the Industrial Disputes Act
is to secure industrial peace and harmony by providing mechanism and procedure for the
investigation and settlement of industrial disputes by conciliation, arbitration and
adjudication which is provided under the statute. The main and ultimate objective of this act
is "Maintenance of Peaceful work culture in the Industry in India".

The Industrial Employment (Standing Orders) Act, 1946:

This Act is to require employers in industrial establishments to formally define conditions of

employment under them and submit draft standing orders to certifying Authority for its
Certification.

The Trade Unions Act, 1926

Trade union is a voluntary organization of workers relating to a specific interests and welfare
by collective action.

The Employees Compensation Act, 1923

The Employee's Compensation Act, 1923 (the EC Act) aims to provide financial protection to
workmen and their dependents in case of any accidental injury arising out of or in course of
employment and causing either death or disablement of the worker by means of
compensation.

The Minimum Wages Act, 1948:

India introduced the Minimum Wages Act in 1948, giving both the Central government and
State government jurisdiction in fixing wage There is laws relating to wages like minimum

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wages act 1948, payment of bonus act 1965, equal remuneration act 1976. In the years 2019
and 2020, the Parliament passed four labour code bills. These were The Wage Code (WC),
2019, the Industrial Relations Code (IRC), 2020, the Social Security Code (SSC), 2020, and
the Occupational Safety, Health and Working Conditions Code (OSHWC), 2020.

Present Scenario of Labour Laws:

In light of current facts, the claim that labour restrictions have impeded India's economic
development is all but meaningless. There has been a recent uptick in employment growth in
organised manufacturing, a field where labour rules would have served to deter businesses
from making investments. In actuality, outside the scope of labour rules, contract workers or
other employees (including those identified as supervisory staff) have been responsible for
69% of the increase in employment in India's organised manufacturing throughout the 2000s.
Contract employees' share of total factory workers in India increased from 19.8% in 1999-
2000 to 32.8% in 2009-2010.eg:-contract workers were employed in almost every part of
production operations and formed 70-80 percent of all workers in Maruti Suzuki plants.

The claim that India's labour markets lack flexibility appears very implausible given the
expanding percentage of informal work, even within the formal organised sector. In fact,
since the early 1990s, trade union activism has been dropping in India, and labor's bargaining
power against capital has significantly diminished. There has been an increasing leniency in
the application of employment laws as the central government and the various state
governments in India aim to attract investment. Since the middle of the 1980s, fewer days
have been lost owing to labour disputes. Lockouts, which are imposed on employees by their
employers, have recently grown to be a significantly more significant source of labour
conflicts than strikes, which are employee-led work stoppages. It is also important to note
that since the early 2000s, the growth in real wages of India's factory workers has
increasingly lagged behind that of labour productivity. It is important to note that women
workers made up a sizable portion of the country's net increase in manufacturing employment
between 1999-2000 and 2004-05 (39 million out of 9.8 million).

The Industrial Disputes Act (IDA) requires firms with 100 or more workers to seek
government permission to retrench or lay off any worker. This permission is rarely granted.
The Industrial Employment (Standing Orders) Act, 1946 requires employers in firms with
100 or more workers (50 or more in certain states) to seek permission even for reassigning a
worker from one task to another. And the Trade Unions Act allows any seven employees to
form a union, thereby using up a large proportion of the firm’s managerial resources in
dealing with several unions within itself. Through this regulation, unions have the right to
strike and represent workers in legal disputes with employers. Last but not the least, the
Contract Labour (Regulation And Abolition) Act, 1970 restricts, and even prohibits, the use
of contract workers for certain tasks. Thus, these labour regulations effectively prevent firms
from using labor-intensive methods of production. Also, since these laws hold above certain

13
threshold employment levels, firms often have an incentive to remain small and “informal”.
The IDA threshold has been raised from 100 to 300 workers in Andhra Pradesh, Haryana,
Madhya Pradesh, Maharashtra, Rajasthan and Uttarakhand. Rajasthan has also raised the
membership threshold of a union to 30% of a firm’s employment.

Women and Employment:

In between 1999-2000 and 2004-05 women workers accounted for a substantial part of the
net increase in manufacturing employment in India (39 million out of 9.8 million). The share
of woman in incremental employment was particularly high in textiles, garments, and gem
cutting. On the other hand, 2.9 million out of the 3 million who lost jobs in Indian
manufacturing during the second half of the 2000s were also women. The sharp rise and the
subsequent fall in the number of women manufacturing workers indicates that women form
an increasingly substantial proportion of the flexible component of India's manufacturing
labour force. in urgent need of updating. At the same time however, there is little evidence to
support the argument that labour regulations represent the main constraint on the growth of
manufacturing employment in India.Of the 8 million workers employed in India’s formal
manufacturing industries in 2019-20, 1.6 million (19.7%) were women, data from the Annual
Survey of Industries (ASI) shows. This share has remained largely unchanged for over two
decades.

Of the 1.6 million women workers across India, 0.68 million (43%) were working in the
factories of Tamil Nadu alone. In fact, nearly three-fourths (72%) of all women working in
industries were employed in the four southern states of Tamil Nadu, Karnataka, Andhra
Pradesh and Kerala.Manipur is the only state with a gender balance among those working in
its manufacturing sector. The share of women workers in the state stood at 50.8% in 2019-20.
Manipur was followed by Kerala (45.5%), Karnataka (41.8%) and Tamil Nadu (40.4%). Over
nearly two decades, India's female labor participation rate looks like a steady downward
curve: From 32% in 2005, to 19% in 2021 – the most recent year for which statistics are
available. As India develops, women are dropping out of its workforce – in record numbers.

…………………………………………………………………………………………………..

Anvisha Srivastava
Roll Number: 222
B.Sc. (Honours) Mathematics - 4th Semester
Subject: Indian Economy II (Generic Elective)

CONSTRAINTS ON INDIAN MANUFACTURING:

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In our country, the infrastructural developments such as electricity, roads and ports didn’t
succeed in meeting the overall pace of economic growth. This has ended up in many supply
side issues negatively impacting the nation’s manufacturing sector.

SUPPLY SIDE CONSTRAINTS ON INDIAN MANUFACTURING AND THE ROLE

OF PUBLIC INVESTMENT
What do these supply side constraints look like?
In the last review of the monetary policy, while referring to the inflationary situation in the
country, D. Subbarao, governor, RBI, said: “On the upside, persistent supply constraints may
be aggravated as demand revives, resulting in price pressures."
Supply side constraints, which are now being referred to as a major problem, simply mean
that production in the economy is unable to keep pace with rising demand due to a variety of
factors.
What led to these severe supply side bottlenecks leading to an adverse effect on India's
manufacturing sector's growth?
In India, the growth of the infrastructure sectors such as electricity, roads and ports have
failed to catch up with the overall pace of economic growth. For example, it is common to
hear from business leaders that though India is a country where labour is abundant, it is
difficult to find quality people. Further, availability of fuel is affecting capacity creation in
power generation, which will impact sectors that depend on power for production, affecting
overall production in the economy.
Parameters such as inadequate infrastructure, lack of credit, availability of labour and
availability of technology being the leading factors in the game. Several studies have proved
that in the manufacturing sector, improvement in the global competitiveness, development of
physical infrastructure, role of small and medium enterprises, availability of skilled
workforce have been identified as the priority areas.
Estimates by the Ministry of Power, for e.g., show that the energy availability in India during
2011-12 was 857.9 billion units which was 8.5 percent less than the energy requirement of
the year. Power demand and supply shortages have been reported from every region of India
and from a majority of Indian states. Supply constraints like power shortages affect micro and
small industries much more than these large industries.
Final Understanding - On the policy front, there is a danger that if interest rates are cut, it
will boost demand in the economy and in the absence of adequate response from the supply
side, we may see a bout of even higher inflation. Therefore, as experts argue, in order to
control inflation, the government should also take measures to remove hurdles on the supply
side.
…………………………………………………………………………………………………..

15
Akhila Ajayan
Roll Number: 440
Course: BA (Honours) English - 4th Semester
Subject: Indian Economy II (Generic Elective)

INDUSTRIAL POLICY:

Industrial Policy is a formal declaration undertaken by the Government that outlines the
government’s general policies for industries. The influence of various factors under this
policy promotes the growth of the manufacturing sector of India.

Analysis of Two Important Features and Their Performance Across India’s Growth Rate:

1. Availability and cost of credit

Categorized under 4 time zones

•Pre – 1990s

During these years agriculture and small-scale industries participated much more
efficiently in contributing to the growth of the nation. Therefore, the target of bank
credit in these fields was high.

• During 1990s

The share of agriculture and industries declined therefore the total allocation of credits
under commercial banks also declined.

• Mid – 2000s

Large scale industries such as power and telecommunications, infrastructures etc.

were allocated with the beneficiary of bank credits.

• Second Half of 2000s

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 Small and micro scale industries disbursed in the total bank credits and started
depending on private banks and private finance companies.

Conclusion: Since the availability and cost of credit gave financial support to large
scale industries, automatically on the other hand agriculture and small-scale industries
started declining which made the growth rate decreased in the industrial sector of our
nation.

2. Exchange rates, prize fluctuations and their links to capital flows.

The liberalization of India’s capital account during 2000s and the increase in the
inflow of foreign portfolio investments FPI created problems for the country’s
manufacturing sector. The volatility In FPI flows since 2000s has led to fluctuations
in exchange rates as well as prices of commodities.

Two criteria that paved way to the systematic functioning of manufacturing sector
under this feature are:

• Rupee – Dollar exchange rate appreciated sharply between 2007 – 2008 which
resulted in a steep decline in the field of revenue and profits of export – oriented
industries like textiles, engineering, leather and garment.

• Sharp depreciations of Indian Rupee during the second half or 2008 and again
during the time period from 2011 – 2013.

In order to the depreciation, imports of machineries and raw materials became

costlier also the Indian forms which was dependent on the foreign currency loans,
incurred heavy losses since they were required to repay their loans in depreciated
rupee. These two features created a hard scenario for the smooth functioning of
nations growth which resulted in the decline of manufacturing sectors as well as the
industrial development.

………..…………………………………………………………………………………………

Alfeena Habeeb
Roll Number: 866
Course: BA (Honours) Political Science
Subject: Indian Economy II (Generic Elective)

Trade Liberalisation and Rising Import Intensity of Manufacturing:

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Trade liberalization is the removal of tariff and non-tariff barriers in trade, basically
international. It involves removing barriers to trade between different countries and
encouraging free trade. Trade liberalisation involves:
 Reducing tariffs
 Reducing/eliminating quotas
 Reducing non-tariff barriers.

Non-tariff barriers are factors that make trade difficult and expensive. Harmonising
environmental and safety legislation makes it easier for international trade.
The list of restricted commodities was significantly reduced as a result of liberalization, and
many new industries were made accessible to large corporations.
However, there is still a small-scale sector that supports the Indian economy. It significantly
impacts exports and private-sector employment. Although they only exist because of
government backing, overall value addition, product innovation, and technology adoption
continue to be poor. It allows countries to specialise in producing the goods and services
where they have a comparative advantage (produce at lowest opportunity cost). This enables
a net gain in economic welfare.
Lower prices:
The removal of tariff barriers can lead to lower prices for consumers. E.g., removing food
tariffs in West would help reduce the global price of agricultural commodities. This would be
particularly a benefit for countries who are importers of food.
Increased competition:
Trade liberalisation means firms will face greater competition from abroad. This should act as
a spur to increase efficiency and cut costs, or it may act as an incentive for an economy to
shift resources into new industries where they can maintain a competitive advantage. For
example, trade liberalisation has been a factor in encouraging the UK to concentrate less on
manufacturing and more on the service sector.
Economies of scale:
Trade liberalisation enables greater specialisation. Economies concentrate on producing
particular goods. This can enable big efficiency savings from economies of scale.
Inward investment:
If a country liberalises its trade, it will make the country more attractive for inward
investment. For example, former Soviet countries who liberalise trade will attract foreign
multinationals who can produce and sell closer to these new emerging markets. Inward
investment leads to capital inflows but also helps the economy through diffusion of more
technology, management techniques and knowledge.
Problems of Trade Liberalisation:
Structural unemployment:

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Trade liberalisation often leads to a shift in the balance of an economy. Some industries grow,
some decline. Therefore, there may often be structural unemployment from certain industries
closing. Trade liberalisation can often be painful in the short run, as some industries and some
workers suffer from the decline in uncompetitive firms. Though net economic welfare
improves, it can be difficult to compensate those workers who lose out to international
competition.
Environmental costs:
Trade liberalisation could lead to greater exploitation of the environment, e.g. greater
production of raw materials, trading toxic waste to countries with lower environmental laws.
Infant-industry argument:
Trade liberalisation may be damaging for developing economies who cannot compete against
free trade. The infant industry argument suggests that trade protection is justified to help
developing economies diversify and develop new industries. Most economies had a period of
trade protectionism. It is unfair to insist that developing economies cannot use some tariff
protectionism. Because of this argument, some argue that trade liberalisation often benefits
developed countries more than developing countries.
PRESENT SCENERIO:
During the 2000s, India reduced the tariffs on the import of several manufactured goods.
These reductions mostly came about as a result of the country’s commitments to international
trade agreements, but they have adversely affected the prospects of India's manufacturing
firms, which are already disadvantaged by many supply - side constraints. Industrial growth
in India since the 2000s has been accompanied by a marked rise in the level of imports,
notably of capital goods. It is significant that the industries that recorded fast rates of growth
in imports during the 2000s were machine tools, electrical and non - electrical machinery,
electronic and computer goods, and transport equipment. Imports as a share of domestic
production have been rising rapidly in these industries, most likely as a result of the reduction
in import tariffs. The weighted average of import tariffs in India on capital goods declined
from 94.8 per cent in 1991-92 to 28.7 per cent in 1995-96, 23.1 per cent in 2001-02, 9.5 per
cent in 2005-06, and just 5.6 per cent in 2009-10. The data released by the National
Statistical Office (NSO) showed that the manufacturing sector’s output grew by 3.7 percent
in January 2023 compared to 2.6 percent posted in the previous month. Mining output grew
by 8.8 per cent against 9.8 percent posted in December 2022.According to the latest WTO
data, India's average bound tariff rate is 48.5 percent, while its simple MFN average applied
tariff is 13.8 percent (per the WTO latest 2017 data available).
Status Of Small-Scale Industries:
Industrial growth that is increasingly based on imported components reduces the growth
opportunities for domestic industry and depresses the possibility of linkages between the
large and the small - scale sectors. Typically, a substantial part of the production of ancillaries
and components for the machinery and transport - equipment industries in India has occurred
in the small - scale or unorganised sector. With the rise in the import of components, such
opportunities for production in the small-scale sector are reduced.

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 After independence, the government attempted to revive the small-scale sector by reserving
items exclusively for it to manufacture. With liberalization list of reserved items was
substantially curtailed and many new sectors were thrown open to big players. Small scale
industry however exists and still remains the backbone of Indian Economy. It contributes to a
major portion of exports and private sector employment. Results are mixed, many erstwhile
small-scale industries got bigger and better. But overall value addition, product innovation
and technology adoption remain dismal and they exist only on the back of government
support. Indeed, studies have pointed to the growing technological distance separating the
organised and unorganised sectors, and to the absence of a complementary
relationship between the two.

DEMAND-SIDE CONSTRAINTS ON INDRUSTRIAL GROWTH:

Since the middle of the 1960s, India's industrial growth has slowed, and one major reason for
this is the slow increase of effective demand, which was caused by low per capita incomes
and substantial income disparity. The nature of the demand, which came from "a large
number of low-income machine tool users," or the type of market rather than the market size,
is what caused the slow expansion of the machine tool industry in Taiwan during its
formative years. The richest 10% of families spent significantly more per capita than their
less wealthy counterparts, according to the 2009–10 NSSO survey on consumption
expenditures. For instance, the monthly per capita expenditure on consumer durables in urban
areas was Rs. 969 for the 10th decile of households, falling drastically to just Rs. 74 for the
9th decile, and to even smaller amounts for households belonging to the lower deciles It is
likely that the demand for consumer durables (e.g., furniture) in India is segmented, with the
demand from the richest decile of households being fulfilled mainly by the organised sector
industries, and to some extent imports. On the other hand, the small scale and unorganised
sector enterprises largely cater to the demand from the vast majority of poor households. The
market for the unorganised sector industries appears to be constrained by the low purchasing
power of individual consumers. As a consequence, unorganised sector industries are likely to
be trapped in a cycle of poor quality of production, out dated technologies, and low levels of
profitability.
…………………………………………………………………………………………………..
Ariba Suhaib
Roll Number: 2396
Course: BA (Honours) English - 4th Semester
Subject: Indian Economy II (Generic Elective)
THE PLIGHT OF LABOUR-INTENSIVE INDUSTRIES:
Even though India has an immense labour force with it, the labour-intensive industries
haven’t flourished at the same rate. Even after the introduction of market-oriented economic
reforms, India s labour-intensive industries couldn’t keep up with the pace.
What exactly are market-oriented economic reforms about?

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A market-oriented reform is a political action that encourages and permits private agents to
compete in a certain industry, activity, or market. Private participation and competition
among private agents are thus the fundamental ideas behind market-oriented reforms. The
financial sector reforms, public sector reforms, tax reforms, trade and exchange rate policy,
foreign investment, de-licensing of items reserved for the MSME sector, industrial policy,
and fiscal stabilization were India’s significant economic reforms in the 1990s
Stages of Economic Development:
A country's economic development mainly takes place in 3 stages
 Agrarian Economy
 Industrial Economy
 Service led economy
In the case of India, it has skipped directly from agrarian to service and that’s one of the
main reasons for the stagnation in its growth. In economic paradigm this is called as India
missing the manufacturing bus. And this omission of industrial led economy has a direct
effect on the labour market.
Failure of Labour-Intensive Industries (Textile Industry):

It’s noteworthy that India could not flourish into the textile industry even after it had set its
feet into the industry may before any other country in the world specialized in it so there are
several reasons for this failure and one of it is the failure in the textile industry was a result of
the government regulations in the planning era, for example
1. According to the second five year plan the production of consumer goods should ideally
have been initiated in the small-scale sector which would have promoted employment and
resolve the problem of unemployment, which didn’t take place as planned.
2. The consumer goods sector was also expected to generate savings to sustain the capital
goods production to achieve this the government banned the textile production in the Mills
and instead encouraged the small-scale production in handlooms, the textile production in
Mills was further discouraged by putting restrictions on the use of the synthetic fibres by
Mills and excise duties were imposed on mills made cloth, moreover the government
discouraged the production of cloth in power looms.
3. The technological process was also inactive as expansion of industry occurred mainly
through unlicensed power loom units. Another reason was the low per capita demand of the
textile and strategies adopted by large businesses
4. The comparative advantage theory suggests that since India is a labour abundant country it
should have specialized in commodities which require intensive labour. The failure of the
labour-intensive industries dates back in the planning era from 1950s to 1990s, which had a
lot of restrictions and became a reason for hindering the growth of textile sector and thereby
leading to poor labour employment.
India however has seen a slight hope in the form of growth rival since 1990s as many of the
government restrictions were removed from the industry and it had better export
opportunities. In 2011, India ranked 2nd only to China in the export of textile yarn whereas the

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5th to countries like Pakistan and Hong Kong in the export of cotton yarn. Overall, the labour-
intensive industries were badly affected by the supply, demand and policy related factors that
we’ve already discussed.

CONCLUSION:

In India 12% of the workforce is in the manufacturing sector of that 12% , 21 is in the
organized sector and 79% in the unorganized, the major reasons for the slowdown in the
growth of manufacturing sector is the industrial policy, the lack of demand, the kind of
policies with respect to investment.
Even in the contemporary times we don’t have policy stability, there are banking crisis for
example the NPA problem.
The Covid 19 also had a major blow on the growth of manufacturing sector. There’s also a
significant slowdown in both investment and consumption which will create huge challenges
to revive the manufacturing growth. While the focus of the previous government Under UPA
was the national manufacturing policy and the current government had 'make in India'
initiative both of these initiatives somewhat are facilitative platforms for private sector they
don’t significantly indulge or encourage public investment. So, the need of the hour in the
current global and economic slowdown is that the public sector needs to start investing
directly without any mediators. The country needs huge investments in irrigation, electricity,
rural and urban infrastructure as well as basic research. Moreover, revival of traditional,
labour-intensive, and agro-based industries is a way of generating jobs in rural areas and
requires funding for new areas of knowledge and technology.
These are some of the ways to tackle the problem of a slowdown in the economic growth of
the country.

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