Evidence On Rate Of Growth And Sectoral Composition Economics Essay

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"At first sight, the record of industrial growth in India since Independence appears impressive… However, a mere glance at the aggregate data reveals that the pace of industrial development has been somewhat uneven over time".

-Deepak Nayyar 'Industrial Development in India: Some Reflections on Growth and Stagnation'

The Context:-

Modern industrial enterprise has taken root in India during the last half of the 19th century. It dates back to 1854 when the first cotton mill venture was set up, followed by the establishment of the first jute mill in Calcutta the next year. However, the progress was slow, and the growth rate stepped up steadily in the years after 1900, says Wilfred Malenbaun in his book 'Prospects for Indian Development'. He further mentions, "The record of 1850-1900 is clear. While other countries were undergoing steady industrial expansion and diversification from the beginnings of modern industry in the early and mid-nineteenth century, India had a beginning not until a century later, with the coming of independence". India emerged as a sovereign nation in 1947 inheriting a weak industrial base, underdeveloped infrastructural facilities and a stagnant economy. Rosenstein Rodan has rightly asserted that an economy, if it has stagnated for a long period, would not grow unless a 'big push' is given to it. It is in this context that India set on its phase of planned economic development. The picture of weak infrastructural base becomes clearer from the following table which shows the share of several sectors and their contribution to the national income of the country at the time of independence [1] .

Sector

Share in the national income (in %)

Modern large-scale industry together with mines

7

Small-scale industry

10

Agriculture

49

Construction and service sector

34

a) Period of industrial growth- Mid-1950s to mid-1960s-

The first phase of three five-year plans (1951-65) laid the basis for industrial development in the future.

(1)The first plan did not envisage any large-scale programmes of industrialisation. The plan attempted to give a practical shape to the concept of mixed economy by providing for the development of both, the public sector and private sector, in a complementary manner.

(2)The second plan based on Mahalanobis model emphasised on development of capital goods industries against consumer goods industries. The strategy was spelt out in the plan in the following words "If industrialisation is to be rapid enough, the country must aim at developing basic industries and industries which make machines to make the machines needed for further development. This calls for substantial expansion in iron and steel, non-ferrous metals, coal, cement, heavy chemicals and other industries of basic importance…" Accordingly such industries were given top priority in the industrial sector. Three steel plants were set up at Bhilai, Rourkela and Durgapur. Expansion and modernisation programmes were also undertaken in the private sector.

(3) The third plan also pressed forward with the establishment of basic capital and producer goods industries, with special emphasis on machine building programme so that the growth of the economy in the subsequent plans could become self-sustaining.

As a result, there occurred a noticeable acceleration in the compound(annual) growth rate of industrial production over the first three plan periods upto 1965 from 5.7 % in the First Plan to 7.2% in the Second Plan and further to 9.0 % in the Third Plan [2] .

b) Period of Industrial stagnation from mid-1960s to late-1970s-

Slowdown of industrial growth, particularly since the late sixties, has attracted a great deal of scholarly attention in India over the last few years. This discussion is in stark contrast to the relative consensus that prevailed in the professional economic circles in the 60s. Improvement in the balance of payments situation and an increase in the rate of savings were identified as factors that would accelerate the growth rate. This, however, did not happen, even as the balance of payments situation improved and the rate of savings went up markedly from 9 per cent of the GDP in the early fifties to 22 per cent in the early eighties. Many explanations have been offered to solve this paradox (Bhagwati and Srinivasan. 1975; K N Raj, 1976; Ashok Mitra, 1977; Vaidyanathan, 1977; Srinivasan and Narayana, 1977; Patnaik and Rao, 1977; Deepak Nayyar, 1978; Shetty, 1978; Sukhamoy Chakravarty, 1979; Desai, 1981; Bagchi, 1981; Patnaik, 1981). These explanations, some mutually reinforcing, others mutually conflicting, have highlighted the following set of factors: (a)poor agricultural performance despite the Green Revolution, (b)relative price movements resulting in a shift in terms of trade against industry, (c)unequal income distribution and resulting lack of demand, (d)slowdown in import substitution, (e)declining levels of public investment and (f)increasing inefficiencies in the industrial structure resulting from governmental controls and policies.

Most economists consider 1965 as the year of great divide. As the planning process was interrupted around this time, and it never recovered its erstwhile importance again. Agriculture ran into a deep crisis that led to the initiation of a new agricultural strategy. And finally, the rates of growth for the industrial sector before and after 1965-66 have been found to be different to a statistically significant degree. Ishwer Ahluwalia made following observations of the trends in industrial growth (as depicted in the table).

TABLE: GROWTH RATES OF SUB-PERIODS AND TESTS OF DECELERATION-a USE-BASED AND IN- PUT-BASED CLASSIFICATION

(1959-60 to 1965-66: Period I; 1966-67 to 1978-79: Period II)

(Per Cent per Annum)

Value added Value of Output

I II I II

(A) Use-based classification

Total 8.0 5.7 8.8 6.5

(1) Basic goods 11.0 6.0 12.2 7.2

(2) Intermediate goods 5.7 4.4 9.4 6.1

(3) Capital goods 15.4 6.8 15.8 7.3

(4) Consumer goods 4.7 5.6 5.9 6.2

(a) Durables 11.5 11.5 12.3 12.6

(b) Non-durables 4.2 4.9 5.7 5.7

(B) Input-based classification

(1) Agro-based 3.7 4.1 5.9 5.1

(2) Metal-based 14.1 6.6 14.6 7.1

(3) Chemical-based 8.2 8.4 11.3 11.2

Notes: (a) The figures in the Table show an antilogarithm of the relevant regression coefficient minus 1, where the equation estimated is of the form Log y=a+a'D + bt + b'Dt. All data are at 1970-71 prices.

(b) Statistically not significantly different from the growth rate of the earlier period.

(c) Excluding electricity and gas.

Source: Ahluwalia. I J, 1983

The data reproduced in the above table depicts three important trends: (i) the growth rate of value added in the industrial sector as a whole declined from 7.6 per cent per annum in the period 1959-60 to 1965-66 to 5.5 per cent between 1966-67 and 1979-80; (ii) if we follow the use-based classification, then most of this deceleration is heavily concentrated in sectors producing basic goods and capital goods with intermediate goods and consumer goods showing no significantly different trend; and (iii) if we go by the input-based classification, then metal-based industries show the largest deceleration.

Nayyar, considering 1955 as the base year for economic observations, points out that during the decade 1955-65, total industrial production increased at an average annual rate of 7.8%, while manufacturing output increased at 7.6%. In the following decade, 1965-75, the rates dropped to 3.6% and 3.1% respectively [3] .

Some economists laid emphasis on the following factors for the slowdown in industrial growth. (a) the wars of 1962, 1965 and 1971 which diverted potential public investment into unproductive uses; (b) the successive droughts of 1965-66 - 1966-67, and later 1971-72 - 1972-73, which restricted the supply of raw materials and the demand for industrial goods from the agricultural sector; (c) supply constraints which became more pronounced in the late 1960s, in the form of infrastructural bottlenecks (power and transport) or shortages of intermediate goods; (d) the oil crisis of 1973 which led to considerable industrial dislocation and severe balance of payments difficulties. Nayyar mentions, "It would be naive to deny that such occurrences had a significant impact on the level of industrial production at the time. With the benefit of hindsight, however, it seems fairly obvious that the aforesaid random factors cannot account for the persistence of stagnation, simply because the economy should have returned to even keel after the event".

Arguments put forward by different economists to explain the phenomenon of industrial stagnation:

(a) Policies pursued by the government-

The volumes by Bhagwati and Desai (1970) and Bhagwati and Srinivasan (1975) are the main supporters of this view. According to the proponents of this view, the difficulties arising from the industrial policies pursued by the government is to be blamed for the deceleration in industrial growth rates. It is argued that the complex bureaucratic system of licensing, restrictions and controls led not only to inefficiencies but also to a misallocation of resources. The cumulative effect of these policies became an obstacle to growth. This argument comes under criticism because it does not explain the satisfactory performance of the industrial sector until 1965.

(b) Performance of Agricultural Sector-

Scholars like Chakravarty (1974), Raj (1976) and Vaidyananthan (1977) have sought to explain the sluggish growth of industrial production in terms of the meagre growth in agricultural production. The shift of the inter-sectoral terms of trade in favour of the agricultural sector might have held back industrial expansion. Chakravarty (1974) notes this point in his analysis, but ascribes the shift in relative prices to the deceleration in the growth of agricultural output. But this argument also comes under scanner, as Mitra (1977) argues, landlord class, through political influences, can likely manipulate the inter-sectoral terms of trade in its favour. An increase in agricultural production would not be of advantage to industries unless the benefits accrue to the rural majority.

(c) Level of Investment-

There are two different sides to this argument.

(i) Srinivasan and Narayana (1977) made following observations for the period since the mid-60s-

(a) A slackening of real investment, particularly in the public sector and

(b) A deceleration in the rate of industrial growth.

These developments were a marked departure from the trends observed in the first three five year plans. The scholars argue that stagnation of real investment is the principal cause of sluggishness of industries and advocate a recourse to deficit financing. That implies large net inflows of foreign aid until 1965 sustained high levels of public investment, which in turn, meant high private investment. This analysis, according to Nayyar, is controversial on two fronts-

(a) It assumes that aid supports investment alone and not, even in part, consumption.

(b) Net aid inflows rose very sharply in the 70s, but public investment failed to pick up.

(ii) Patnaik and Rao (1977) put forward this hypothesis about industrial stagnation. They consider two cases leading to - (i) a decrease in public investment, and (ii) a loss of stimulus for private investment, deceleration in industrial growth. Nayyar criticises this viewpoint on two grounds- (a) The failure on the part of the private sector to invest its accumulating resources productively cannot be attributed to the stagnation in public investment alone. (b) Resource mobilisation on its own cannot step up industrial growth.

(d) Income Distribution and Demand factor-

Bagchi (1970), Mitra (1977) and Raj (1976) have sought to explain the relationship between income distribution, the demand factor and industrial growth. Scholars have given immense importance to agricultural sector, private consumption expenditures obviously depends to a large extent on farm-incomes. As a result, slow growth in agriculture could restrain the demand for manufacture goods thus hampering industrial expansion. Raj (1976) stresses this aspect by noting that "regions characterised by moderately high and stable rates of agricultural growth have also experienced high growth rates in industry".

Bagchi (1970) argues on similar grounds. He says, "The unequal income distribution (that exists) is reinforced by the process of growth for it is, the private sector which owns the means of production and, as such, appropriates the increments in, income. The government is unable to exercise effective control over the allocation of resources between: (a) consumption and saving - as reflected in the failure to mobilise' domestic resources for investment; and (b) 'essential' and 'non-essential' consumption - as revealed by the excessive importance of luxury goods in industrial production. Therefore, it is not possible for the government to maintain a high rate of investment irrespective of the unequal income distribution and the demand pattern generated by it".

Ashok Mitra reckons a mechanism through which a worsening income distribution might have retarded industrialisation in India. Mitra argues that the redistribution of income attempted in the country via the manipulation of real prices in favour of agriculture and against industry is a major factor responsible for the deceleration in industrial growth since the mid-60s. He further adds on his argument by suggesting that, "the shifting terms of trade have been instrumental in eroding the level of real incomes of the majority of the population in both urban areas and the countryside" [4] .

Conclusion:-

All the above arguments put forward to explain industrial stagnation do not stand alone. A culmination of all these arguments led to the industrial stagnation of mid-60s and mid-70s. Nayyar advocates mobilisation of savings of rich for investment and channelling increments in income to the poor, which in turn, would generate a demand for industrial goods for sustained industrial growth. The government set on a process of industrial recovery after analysing the growth rates in different industries. The main ingredients of the government policy were the following- (a) continued restraint on aggregate effective demand via fiscal and monetary devices (b) advance placement of orders on private firms by the public sector (c) selective credit measures for receiving home demand for engineering products of high priority (d) relaxation of controls on industry aimed at facilitating adjustment (e) renewed emphasis on export promotion. India, with sustained efforts over the next few years, was able to achieve partial recovery. The country has still to go a long way to build an industrial structure at par with its counterparts.

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