The Hindu Business Line : Industry — a capital performance

The country's Gross Domestic Product has been 8 per cent-plus in 2006-07. At this rate, India should even by 2010 emerge among the world's top growing economies. This has been made possible by the structural transformation of industries. Industrial output growth has averaged 8.3 per cent annum during 2002-03 to 2005-06. Even over a longer period — 1999-2000 to 2005-06 — industrial output rose by more than 7 per cent.

The engine of this remarkable performance has been the high growth in capital and consumer goods. Output of capital goods has outstripped the performance of other sectors; during 1999-2000 to 2005-06, it rose an average 8.4 per cent per annum, surpassing the growth of all industrial segments.

Coping with globalisation

This implies that industry — as also other sectors — has been adding modern production capacity at a rapid pace to cope with the challenges of liberalisation and globalisation of trade. The rapid increase in the import of capital goods has evoked a prompt response — large-scale capital formation and a rise in productivity.

Also, the reduction in the import tariffs on capital goods has enabled exporting units to modernise and produce goods that are becoming increasingly acceptable in the developing world. Today, developing countries absorb nearly 60 per cent of India's exports .

A landmark achievement of the industrial sector is the rise in its share in the organised sector employment, from 14 per cent in the 1980s to 18 per cent now.

Changing trends

Segment-wise, the capital goods industry's contribution to overall industrial production has risen from 10 per cent in 1999-2000 to 20 per cent in 2005-06. On the other hand, the contribution of intermediate goods manufacturing industries has slipped from 37.4 per cent in 1999-2000 to 8 per cent in 2005-06. Since intermediate goods provide inputs to all industries, there is a dire need to expand this industry. Else, imports of these products will rise, impacting the manufacturing sector.

The second best performer is the consumer goods sector with 8.2 per cent annual growth; it contributed 42 per cent to industrial production in 2005-06 compared to 24 per cent in 1999-2000. Even within the consumer goods, non-durable goods with an average growth rate of 7.5 per cent per annum, contributed 32 per cent compared to 11 per cent in 1999-2000. This is a reflection of the rapid rise in consumer demand driven by a jump in the per capita income at 6.4 per cent now compared to 1.5 per cent during the first 30 years after Independence (Rakesh Mohan, RBI Bulletin, December 2006, P.1481).

An interesting development in the non-durable consumer goods sector has been the high growth in such areas as soft-drinks, confectionaries, chocolates, fast-food products, cigarettes, and readymade garments.

However, consumer durables recording the highest average growth of 12.5 per cent per annum during the period 1999-2000 to 2005-06 provides evidence of a strong multinational culture and high purchasing power. On the other hand, some non-durables consumer industries such as sugar, cotton clothes, tea, wheat flour, penicillin, etc., showed negative growth during the period 1999-2000 to 2005-06. This is a matter of concern. Globalisation is fast changing the consumption pattern of the urban population.

Consumer and capital goods industries have acquired the lead role and intermediate goods industries, which were leaders till 1999-2000, have taken the back seat.

Infrastructure troubles

The other area of anxiety is the massive investment requirement in infrastructure; this is keeping the economy from performing at its best. In the infrastructure sector, energy — electricity, coal and output of crude petroleum — is responsible for putting the brakes on the GDP growth rate. The RBI Annual Report 2005-06 notes that the "improvement in infrastructure facilities will be critical to sustain and accelerate the current growth."

Electricity and mining sectors need massive investments to sustain the manufacturing capabilities. Besides transmission and distribution losses, long outstanding collection dues, pricing policy and so on, are also acting as a drag on expansion of infrastructure.

Alternatively, power generation should be left open for the private sector. Similarly, the coal industry, which meets 55 per cent of the country's energy needs, should be opened to foreign direct investment so that this source can be exploited fully and efficiently.

Like agriculture, many industrial segments are facing capacity constraints. Some of them are not utilising their capacities fully because of massive imports. It appears that they have to work more competitively to displace imports.

Neglect of rural India

A visible shortcoming of industrialisation in India is its absence in the rural areas. The government as well as entrepreneurs should invest in the rural areas that has a huge potential vis-à-vis raw material and human capital. Again rural industrialisation can augment employment opportunities for landless labourers and small farmers. Disguised employment and poverty can be checked by setting up large and medium units. This will have a multiplier effect. It is of utmost importance that the rural unemployed and under-employed are gainfully employed in local industries.

The rapid increase in population, particularly in the rural areas, is creating a large employable workforce in dire need of a respectable livelihood. But opportunities for gainful and long-term occupations are not coming up proportionately.

Employment programmes so far have not been sustainable. The philosophy should be inclusive and de-centralised industrialisation based on merit and technical feasibilities. To advance rural industrialisation, the government can push forward strategies to create infrastructure in the rural areas by attracting FDI and domestic investors for joint projects.

(The author is a former economic advisor to SEBI.)