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A Research Proposal/Report On

GROWTH AND STRUCTURE OF INDIAN MANUFACTURING SECTOR: IMPACT OF LIBERALISATION

Submitted To LOVELY PROFESSIONAL UNIVERSITY In partial fulfillment of the requirements for the award of degree of MASTER OF PHILOSOPHY

Submitted by: Kawalpreet Kaur Reg. No:11211548 Roll no:A06

Supervised by: Mr. Satinder kumar

SCHOOL OF MANAGEMENT LOVELY PROFESSIONAL UNIVERSITY PHAGWARA 2012-13

Contents for Synopsis S. No. Particulars Page No.

Introduction

1-2

Review of Literature

3-10

Need and Significance

10

Objectives

11

Research Methodology

11-12

Tentative Chapter Scheme

12

References

13-15

INTRODUCTION

Development is the most compelling challenge facing the world economies as it encompasses major changes in social structures, popular attitudes and national institutions as well as acceleration of economic growth, the reduction of inequalities and eradication of absolute poverty (Todaro, 1987). Economic development gives rise to some structural changes which constitute industrialisation, self-reliance and import substitution along with the change in occupational distribution (Mishan, 1977). Economic development is positively correlated with the number of working population engaged in secondary and tertiary sector and low per capita income is associated with high proportion of population engaged in agricultural sector. The development, therefore, entails the movement of resources from a low productivity sector-agriculture to a high productivity sector-industry (Clark, 1957). Even when the agricultural sector undergoes changes, it is primarily the industrial sector which encompasses these changes on large scale and hence industrialisation generally becomes synonymous with economic development. Industrialisation leads to increase in productivity, as a consequence of changes in structure as well as through more intensive use of given resources. Increased amount of capital is employed per unit of output and this process is described as capital deepening, while the growth of capital formation together with increase in output and final goods is termed as capital widening. Thus, industrialisation in a way involves the process of both the deepening and widening of the capital. Association between industrialisation and high productivity leads to high average incomes. Development and growth of vibrant and dynamic manufacturing sector is the pillar of accelerated economic growth as manufacturing industry is far more flexible in methods, competition and output than the agricultural sector. While decreasing returns may also be delayed in industrial sector, they are in fact usually postponed by continual improvements in techniques by the frequent introduction of new inventions, and improved machinery and by increasing specialisation and division of labour by raising the efficiency and productivity of labour force. It is of course basically through the application of inanimate energy that manufacturing industry offers greater productivity per worker than agriculture Industrialization plays an important role in the development of undeveloped countries like India with huge manpower and different resources. To make the progress in the economy underdeveloped countries need structural change through industrialization. Though, economic development is not mere industrialization. In the process of becoming developed economy the share of the industrial sector should rise and that of agricultural sector decline.

Surplus labour and rapidly growing population are main characteristics of underdeveloped countries like India. It is essential to industrialising the country rapidly to absorb all the surplus labour. More employment opportunities at an accelerated rate are generated with the establishment of industries only. The expansion of industries producing capital goods i.e., machines, equipment etc, enables a country to produce a different kind of goods in large quantities and at low costs, increases technological progress and make changes in the outlook of the people. The industrial development imparts to an economy changing element in the form of rapid growth and diversified economic structure which makes it a progressive economy. Manufacturing sector comprises of both large scale industries and small scale industries.It refers to any business that transforms raw material into finished or semi finished goods using machines, tools and labour. This industry is the largest organised in India either in terms of annual report or number of people employed. Manufacturing sector include production of food, chemical, textile, machines and equipment. Since the last 18th century manufacturing sector has been the main engine of growth. In underdeveloped economies there is correlation between the per capita income and degree of industrialization. Manufacturing is assumed to be more dynamic than other sectors. Economic development has been identified with industrialization, which means the growing volume of industrial output both in absolute and relative terms as contrasted with agriculture. It is generally accepted that high level of income cannot be reached without industrialization (Sutcliffe, 1971). Manufacturing Industry is potentially very important to India. India ranked second in global manufacturing competence. Manufacturing offers an important avenue to betterment for millions of less skilled workers. It is an important step in the development and upgrading of many economies. There are two very distinct forces which are pulling manufacturing in two different directions. One is technology which means frequent change and the second is global market which means scale manufacturing. Due to these firms are tuning to strategic contracting combined with deploying internal capabilities to meet the customer demands.() The manufacturing sector employed 58 million people in 2008. By 2012, it is estimated, that this sector will employ a further 12-13 million people. These industries not only modernise the agriculture which is considered as a backbone of our economy but also helps in reducing the dependence of people on agriculture by providing employment to number of persons in secondary and tertiary sectors. Industrial development helps in eradication of unemployment and poverty also .Export of manufactured goods helps in expansion of trade and commerce.

REVIEW OF LITERATURE (Kumar, 1991)examined that during the eighties Indian Industry achieved an accelerated rate of growth. This acceleration of industrial growth during eighties has been led by chemicals, petrochemicals and allied industries. Further, the investment led growth of the earlier period (1955-65) was in contrast to the consumption led growth of the eighties. The consumer goods segment was traditionally the slowest growing amongst the various segments of industrial output until the end of seventies. It had been argued that during the past eight years there had been a decline in self sufficiency ratios in meeting the indigenous demand for capital and intermediate goods in the industry. These aspects bring out the impact of emerging structural weaknesses on the future industrial growth in the country. (Ghosh, 1993)evaluated the performance of twenty nine sunrise Indian Industries in terms of labour productivity and capital intensity. He shows the effect of technological advancement as reflected in rising capital intensity on the productivity of labour. The study used Annual survey of Industries (Factory Sector) data for the period from 1974-75 to 1986-87. Increased use of overhead capital has not produced any significant improvement in productivities and whether one considered skilled personnel or just production workers in the definition of labour, in both cases, the downward shift of productivity suggested that inefficient use of resources has become the order in Indian sunrise industries in recent years were the observations made by the author based on empirical analysis. (Ramaswamy, 1994)remarked the size and structure of small scale industries for the period 1972 to 1987-88. He estimated the share of small scale industry in total manufacturing employment and value added to be 12 percent and 20 percent respectively .A significant increase in the estimated labour productivity was found during the period 1972 to 1987-88, while estimate of aggregate capital productivity showed a marginal decline. Export intensity was found to be comparable to that of private corporate sector. Structure of SSI did not undergo any substantial change during the period 1972 to 1987-88. The primary material and agro-based industries showed a tendency to improve their employment and value added shares relative to metal industries. This was largely due to industry specific characteristics rather than governmental protection. In 1987-88 on the basis of employment shares, seven industries were found to be from this sector namely wood products, hosiery, metal products

etc. It was also observed that in the same period wages were lower relative to the large scale sector but labour productivity was not proportionately lower. (Viramani, 1997)analysed the performance of manufacturing sector in India. The average growth of manufacturing was about 8.9 percent during the eight plan period which was 1.2 percent higher than during the seventh plan and 1.9 percent higher than during 1980s. This had been so because it was heavily controlled sector and the impact of economic reforms was much quicker in this sector even though a lot remained undone. There was need to broaden and deepen the reform process if the momentum of higher growth is to be maintained. He concluded that the control mentality infecting all government and public organizations must be rooted and replaced by a pro-production and pro-investment approach. (Khanna, 1999)opined that the economic reforms in India, initiated in 1991, were based on the premise that macro-economic crisis, was a result of micro economic inefficiencies that distort the structure of incentives to producers. The most important feature of the industrial reforms had been to ease the entry of foreign direct investment in several sectors of economy. Though, the new policy demarcates the areas where foreign investment will be welcome, the government reserves the right to approve any investment in these on case by case basis. Further, the study showed that the restrictions on location, size, mergers and acquisitions and anti-monopoly restrictions had been withdrawn. Technology imports and payments for technology/ license fee or for hiring technicians had been eased. Price controls were confined to limited number of goods- mainly essential drugs. (Dembla, 2000)followed the two approaches one was the estimation of production relations and second was estimation of conventional production function and estimation of the socalled augmented production function. Both kinds of production relationsfor theregistered manufacturing sector as a whole as well as for each use-based sector-i.e. consumer goods, basic goods and capital goods using panel data for the period 1973-74 to 1995-96 and had reconciled and compared the two approaches. The pace of industrialization was sustained by growth in the domestic market, because the production capacities created in the investment goods sector must be absorbed by final consumer demand. The demand for exports originated in this sector is also another variable which had effect the demand for industrial goods. (Bhavani, 2002)remarked the ongoing changes in the business environment and the possible ways of improving the competitive strength and commercial viability of Indian small scale units in the changing scenario. It had been indicated that while liberalisation had exposed all

industrial units including small units to market competition to a greater extent. Indian industrial units especially the smaller ones need to improve their productivity and quality and to reduce costs. For this, substantial improvements will be needed in technology. The economic policy in India had made it inevitable for these industries to integrate with the global industry. To play a meaningful role, it is essential for the both industry associations and government agencies to change their attitudes and to inbuilt confidence in small units. (Unni, 2004)analysed the impact of economic reforms on the organised and unorganised manufacturing sectors. The analysis indicates that economic reform policies had a differential impact on various industry groups. For this analysis the time series data had been used from 1984 to 2000. Initial reforms promoted the consumer goods industry, along with certain basic and intermediate goods, though protection and import liberalisation.The growth was not employment generating in this sector as capital-intensive chemical and consumer goods industries were promoted. How-ever, after reforms were introduced with firms allowed to expand their capacities and import of technology, there was a turnaround in the metal-based and machinery industries as they started to grow by the mid-1990; some of these industries also upgraded their technology. (Goldar, 2004)studied the productivity trends in Indian manufacturing by Unel (2003) and Tata Services (TCL) (2003).The total factor productivity (TFP) growth in Indian Manufacturing had been accelerated after the 1991 economic reforms.Further, it was concluded that Unel's estimate of TFP growth rate for the post-reform period was more than twice the growth rate estimated in this study, and this cannot be explained by the difference in the benchmark capital stock estimates alone. TFP in Indian manufacturing was 3.2 per cent during 1979-80 to 1990-91 and 4.7 per cent during 1991-92 to 1997-98. Both estimates indicate accelerationin the TFP growth rate in Indian manufacturingin the post-reform period, as compared to the pre-reform period.The estimates indicate a slowdown in TFP growth in Indian manufacturing in the post-reform period, and thus do not bear out the findings of the studies by Unel and TSL. (Nagaraj, 2005)study had compared the performance of the manufacturing sectors in India and China using independent estimates of Chinas industrial output over the past half century at a disaggregated level. He had found that Chinas industrial growth rate is close to one and half times that of Indias over the entire period, with the gap widening gradually. But Indian growth had been more stable. Chinas industrial progress was based on somewhat shaky

micro economic and institutional foundation. In comparison, Indias relatively strong foundations and domestic entrepreneurial capital seem to have the potential to improve performances, with a sounder macro economic environment. With a sizeable increased in public investment in infrastructure and agriculture, revival of long term industrial finance and easier access to credit for small enterprises, the Indian industrial sector would, in the long run, perhaps be in a better position to close the performance gap with China. (Manoranjan, 2005)studyanalysed the working of competition in Indias manufacturing sector by using firm level data for the period 1989-2001. They examined the impact of greater competition on profit mark-up over the last decade by using simple econometric models. The econometric analysis of the factors determining mark-up indicates that, contrary to received wisdom, trade openness by itself does not act to reduce the profit mark-up. They also investigated the degree of competitiveness defined as the Lerner price-cost margin. The analysis indicated that the estimated margins were in general high over the 1990s across all industries and in most of the industries considered, these margins had been increasing over the second half of the 1990s. The regulatory agencies probably had a crucial role to ensure a level playing field. (Shanta, 2006)propounded the mobility of firms in the Indian manufacturing sector during the post reform period. He had studied the change in size distributions of industries and their inter- and intra-class mobility, and tests for the relationship between the dynamic index of competition and the direction of mobility of firms among manufacturing industries. He had tried to fill the gap between competition and efficiency in the economy.It had provided several important insights on competition, which cannot be captured by other indicators, like the concentration ratio and is therefore an important tool for public policy. The identity of firms in a class had changed even the frequency does not changed. Further, it had linked up the pattern of mobility with market structure. It had also establishes that the mixing and reordering, upward and downward mobility, of firms in an industry, is an important dimension of what constitutes effective competition a dynamic dimension. (Cilasun, 2006)remarked that the entry of new firms into market plays an important role in efficient resource allocation and evolution for long term economic growth.This paper investigated the entry behaviour in 66 four- digit Turkish manufacturing industries for the 1993-1999 periods by employing panel data techniques. He had analysed the determinants of entry in Turkish manufacturing industries using the same methodology. It had been showed

that the past profit rate, the industry growth rate and the past entry rate are statistically significant and affected entry positively. He had suggested that entry, in general, does not seem to be a replacement process in Turkish manufacturing industries during the period studied. The firms and sectors in Turkish manufacturing had not yet reached their optimal sizes. (Shanta K. P., 2008)study had examined the empirical evidence on the dynamic view on the competition in Indian manufacturing industries. The competitive profit rate for all industries is estimated to be 5% and the average firm specific rent 4.2%. The observed average profit rate, 7.5%, is thus 50% higher than the competitive rate. The main focus was on the understanding of persistence of profit rates. Data that was used covers the 14 industries and 497 firms in the Indian manufacturing industries sector for the period 1988/99-2000/01. The results of persistence rates and the speed of adjustment were found to be closed to that of other studies of developed countries which were assumed to be competitive.

ADD latest studies

RELEVANCE There are possibly few issues that academics, policy makers and market participants regard as new chapters in the history. Emergence of impact of liberalization on manufacturing industries in India probably one of them, because manufacturing sector is base for industrialization and industrialization is backbone of economic development of any country. To make the progress in the underdeveloped countries like India needs structural change through industrialization. Both the rapid growing population and unemployment are major problems of Indian economy, therefore,itbecomes essential to industrialise the country rapidly to absorb all the surplus labour. More employment opportunities at an accelerated rate are generated with the establishment of manufacturer sector only. The present study will analyse the factors which not only modernize the agriculture which is considered as a backbone of our economy but also helps in reducing the dependence of people on agriculture by providing employment to number of persons in secondary and tertiary sectors. The present

study is a humble attempt to analyse the growth and structure of Indian manufacturing sector during the era of globalization. OBJECTIVES 1) To study the level and growth pattern of Indian manufacturing sector before and after liberalisation; 2) To evaluate the impact of liberalisation on total factor productivity growth of Indian manufacturing sector; 3) To study the impact of globalization and economic reforms on Indian manufacturing sector under WTO regime; and

4)

To draw policy implications from the empirical results and suggest suitable measures for the development of Indian manufacturing sector. Research Methodology The required data for present study have been culled out from the various issues of

Summary Results and Annual Survey of Industries (ASI) (Factory Sector). Various reports of Center for Monitoring Indian Economy (CMIE), Economic surveys, Reports on Currency and Finance, Reserve Bank of India Bulletins, National Accounts statistics, Handbook of Statistics on Indian Economy, World development Indicators and World Global Competitive Report are worth to mention as the additional sources of the data. The present study is confined to the period from 1979-80 to 2007-08. The choice of terminal year is governed by the availability of latest comparable data from the Central Statistical Organisation (CSO). The production structure and TFP growth for the manufacturing sector have been estimated using the Annual Survey of Industries (ASI) dataset over the period 1979-80 to 2007-08. In the present study, we considered two inputs (gross fixed capital at constant prices and number of employees) and one output (gross value added at constant prices) are considered. In order to analyse the data the study will make use of various statistical and econometric techniques and results interpreted according. Tentative Chapter Scheme 1. Introduction

2. Review of Literature 3. Database, Concepts and Methodology 4. Level Pattern and Growth Performance of Manufacturing Sector in India. 5. The production structure and factor substitution in Indian manufacturing sector. 6. Summary and Conclusion