MANUFACTURING in India was to develop large

MANUFACTURING
SECTOR POST LIBERALISATION

INTRODUCTION

To  lead to an increasingly diversified economy and to give rise to institutional
changes, manufacturing sector is a principal indicator of economic development
of a nation. A well-developed manufacturing sector needs to provide the basic
needs of the population of a particular country. In 1951 India’s Prime Minister
Jawaharlal Nehru affirmed that India had to industrialise at the earliest
possible to build a well-developed industrial sector. We shall hence focus
on the manufacturing sector.

INTRODUCTION OF LIBERALISATION IN INDIA

While the policy makers strived to improve the state of the manufacturing
sector in India, however major policies that were formulated to industrialise
the country was not successful. India failed to become a manufacturing
powerhouse. In 1991, India faced a “Balance Of Payment Crisis”,
putting the government to default and the central bank had refused new credit.
This lead the Indian government to pledge its gold to the Foreign countries, a
deal with the IMF(International Monetary Fund) in exchange for a loan to settle
the payment debts. The then Prime Minister of India realized that the country
is in need of a reform.

In July 1991, new economic policies were introduced changing the economic
structure of India. The Indian government ushered in several reforms namely
Liberalization, extending Privatisation and Globalization of the economy known
as LPG(Liberalization, Privatisation, Globalization) or collectively termed as
liberalisation. These reforms initially faced significant opposition.

There are two phases in the liberalisation of India:

Ø
Pre-Liberalisation
Era: (Prior to 1991)

Post 1980 the key strategy for improving/ developing the manufacturing
sector in India was to develop large and heavy industries through central
planning. The strategy also included features like import protection policy
wherein trade with rest of the world was restricted and limited to exports,
price controls and on private sector through severe licensing. This framework
made foreign investments difficult to come to India, limiting the growth of the
manufacturing sector in India. Rigid controls led to widespread incompetence in
resource utilization, as reflected in the poor growth rate of the manufacturing
sector. The not-so-good state of the manufacturing sector was further
aggravated by the agriculture supply shocks Gulf oil crisis in the late 1970s’.

Fig.1 Pre-liberalisation era features

 

Ø
Post
liberalisation Era: (Post 1991)

After 1991, the
policies of liberalisation were introduced consisting of features like  licensing of industries was abolished, opening
avenues for international trade and investment, deregulation i.e. government
controls were removed to allow free and efficient marketplace, initiation of
privatization tax reforms, inflation controlling measure and movement of
international capital was liberalised.

However, there
are some areas which remained untouched by reforms in the 1990s, the labour
market, small-scale reservations and agricultural reforms. Some of these reforms
were gradually undertaken in the next stage. However, the labour reforms were
remained untouched to a large extent.

 

Fig.2 Post liberalisation reforms

 

There has been a
positive effects of these reform measures, like yearly average rate of growth
of GDP per worker increased. Previously only 40% FDI was allowed in selective
large and heavy industries. FDI limits for the manufacturing sector post 1991
(RBI 2011) is as shown below:

To immediately facilitate the inflow of capital from
foreign companies in 1991, 41% of FDI was revised and up to 51% .

Furthermore in 1997, 100% foreign investment was
allowed in some industries whereas investment ranging from 74% to 50% was
allowed in 111 sectors of the economy. This was followed by reducing the
protection for the small scale sector by allowing foreign investment up to 24%  in the small scale sector. The limit on the
share of foreign direct investment in individual Micro, small and medium enterprises
(MSMEs) was increased up to 100% in 2000s.

 

MAJOR INDUSTRIES FROM THE MANUFACTURING SECTOR BEFORE 1991

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

PHASE

PERIOD

MAJOR INDUSTRIES

PHASE 1

1950-
1965

Textiles
industry, sugar, vegetable oils, iron and steel, chemicals, petroleum, basic
metals, manufacturers of metal products and machinery

PHASE 2

1965-
1980

Capital
goods, Basic goods, high technology industries, ferrous metal, construction
material and mechanical engineering industries

PHASE 3

1980-
1991

Petroleum
products, consumer durables, export-oriented industries, modern technology
industries, non-electric machinery, F&B, intermediate goods

 

Ø  Phase- 1:

The period between 1950 and 1965 witnessed an increase in
industrial production by 2.8 times, whereas the period 1965–80 saw an increase
by only 1.8 times compared to the previous phase. The public and private
investment was a major contributing factor of heightened industrial growth in phase-
1. Also it was a period when the prices in general were stable.

Fig.3: Growth of manufacturing sector in India
(PHASE 1)

 

 

Ø  Phase-
2:

Here the Indian industrial growth was stagnant reasons
being the strict governmental controls, political instability and wars of 1965
and 1971. Similarly the infrastructural development was neglected which in turn
declined the infrastructural constraints for the manufacturing sector.

Fig.4: Growth of manufacturing sector in India
(PHASE 2)

 

Ø  Phase- 3:

Finally, the period from 1980-90 saw a growth of the
manufacturing sector in India as 7.4%. Growth in this period was not only due
to loosening of the controls but also because of the increased public, private
and foreign investment in the manufacturing sector in India. A key event was
the formation of Maruti Suzuki as government’s 50:50 joint venture with Japan’s
Suzuki motors.

Fig.5: Growth of manufacturing sector in India
(PHASE 3)

 

Ø  Phase- 4:

Since early
1990’s the industry was further liberalised, the scope of licensing was
significantly  reduced, Custom duties
were slashed and FDI opened up in various sectors.

 

Ø  Phase- 5:

Companies
began to reap the rewards of the various phases of development learning. Many
Indian business enterprises became quite competitive and looked at taking on
global players.

 

 

INDUSTRIES THAT
TOOK BIRTH FROM THE LIBERALISATION OF 1991

The key objective of the
Industrial Policy Statement of 1991 was to elevate the industrial growth and productivity,
provide employment and optimally utilize the human resources to achieve
international competitiveness and recognition. The policy statement included
the abolition of industrial controls except in some industries like the atomic
energy, railways and defence.

 Major manufacturing industries post 1991 can
be identified as: the Automotive industry, Computer hardware industry, Textile
industry, Machine tools and parts industry, Pharmaceuticals industry, Light
engineering industry, Iron and steel, Petroleum and refined product industry
amongst the others.

Fig.6: Value add by the
manufacturing Sector (GDP%) 1992-2013

 

In the 1990s’, due to the opening
up of the Indian economy, the manufacturing sector underwent complete painful
restructuring. Some drastic measures included plant closures, sell-offs and
relocation and unmatched lay-offs and retrenchments. However, it has improved
production efficiency to face global competition, especially from China. These
reforms introduced changed India’s economic strategy completely making it a
globalized one. Technological advancements transformed manufac­turing processes
and made mass production possible, which led to the industrial revolution.

 

 

GDP CONTIRBUTION IN
MANUFACTURING SECTOR POST LIBERALISATION

The
economic liberalization in India started in 1991 which was mainly aimed at
expanding the economic policy through introduction of FDI in many sectors,
reduction of import duties, income taxes & corporate taxes and  custom duties.

Major
Manufacturing Industries which were considered after 1991 reforms were the
automotive industry, computer hardware industry, textile industry, machine
tools ,pharmaceuticals industry, iron and steel industry.

In
1950-51, the manufacturing sector in India contributed only 8.98% to the
GDP. It had increased to 14.23%, at the start of 1980 which further increased
to 16.18% but it remained constant in that decade until 1990-91. During the
fiscal year 2014 -15 the manufacturing sector contributed about 16% to the GDP.

Fig.7: Manufacturing sector GDP contribution

 

 

 

 

 

CHALLENGES AND
OPPORTUNITIES IN MANUFACTURING

INTRODUCTION

Manufacturing is one of the most important sectors
in both developing and advanced nations. In developing countries, it provides a
vital source of income as well as a way to raise the standard of living of the
people. In advanced nations on the other hand, the manufacturing sector
provides a basis for innovation and rise in the competitive edge of the
country. It also gives rise to increasing focus on research and development,
exports and productivity in general.

In the recent past, this sector has seen manifold changes
and has paved way for various opportunities in the global scenario. It is also
facing several challenges to keep abreast with the changes that are taking
place in the market. These opportunities and challenges shall be discussed
further.

 

OPPORTUNITIES

When Manufacturing companies enter the global
market, they are exposed to various opportunities that help them to grow more
in terms of sales and profits. These opportunities are discussed in the
following section:

1. Global Consumers: Many companies maintain vast manufacturing units in
the global market to derive increased sales and income. The international
market increases the customer base of companies, thereby giving them increased
opportunities of earning. Consumer product companies like Nestle, P and
Coca-Cola are reaping the benefits of increased sales through their
manufacturing and service units outside their home country.

2. Cost Minimization: The manufacturing units have an opportunity to
minimise costs by setting up units in lower cost production sites such as Hong
Kong, Taiwan and Ireland.  As a result,
it can stay cost effective in both, home market and abroad. Companies like
Intel, Texas Instruments of the electronics industry are the leading benefactors
of reduced costs by having manufacturing units abroad. Companies develop a
global scanning capability to seek cost effective sites abroad for production
purposes.

3. Increased Knowledge: Some
manufacturing units are set in the foreign sector to get new information and
experience that might be useful in the future. Due to the rapid growth of
technology and innovation, it is imperative to track developments in the global
market. Manufacturing sectors have the prospect of gaining knowledge for
improving the product quality. Foremost in this issue are the Japanese
companies that systematically study foreign information, improve it with their
own research and development and thereby improve the productivity and sales.

4. Market Imperfections: Manufacturing units can reduce risks by exploiting
the imperfections in various different markets. The majority of systematic or
general risks affecting companies are prevalent due to the cyclical nature of
the economies. An effect of diversification is created by operating in
countries whose economic cycles are not in sync with each other. This reduces
the variability in earnings of such companies and result in reduction of risks.

5. Greater commitment to local market: When companies start producing abroad, they get the
advantage of added sales and greater supply stability. This stability is
important for firms manufacturing intermediate goods for selling to other
companies. The goods thus produced will be available in the local market for
immediate consumption and as per the requirements.

Basically, by setting up manufacturing units abroad,
firms avail the opportunities that would have been lost if they had confined
themselves to just export of their products.

 

CHALLENGES

Although the International Market provides a string
of opportunities, it also poses numerous challenges for the companies wishing
to expand globally. The challenges are evaluated in the following section:

1. Need for new approaches and capabilities: As companies go to a different country, they face
an increased need to develop a systematic understanding of the specific markets
and consumers. They will also need to be responsive to the changes in the
global economies and develop strategies and policies accordingly. They will
need to use advanced development strategies such as scenario planning to keep
up with the international market.

2. Currency Differences: While operating in the international market, the
manufacturing firms have to take into consideration, various issues of exchange
rate fluctuations, inflation, interest rates and also the impact on their
business activities. This is because the firms have to deal with countries
having different currency denominations.

3. Relevant skills and personnel: In order to be successful in the global
manufacturing sector, the firms must have access to appropriate personnel
having all the skills necessary to operate in the international sector. These
skills include the abilities to take important decisions regarding the
operations as well as another significant issue which is raising adequate
capital from the right sources.

4. Financial management: Firms that
operate in different countries face the challenge of handling differences
brought about by economic and legal structures of the nations. The issue of
documentation of financial records has to be addressed properly, by taking into
consideration the reporting requirements of the country in which it is
operating. This challenge has been considerably reduced by the introduction of
the International Financial Reporting Standards, however diligence is still
necessary.

5. Language and cultural differences: Culture in the business sense implies the system
through which the employees share their values and beliefs in the organisation.
An international manufacturing unit will have to deal with the local culture
and behavioural norms, thereby adjusting its policies as suited to the same.
These cultural barriers also have to be taken into consideration with respect
to the consumer base. For example, McDonalds diversifies its menu to suit the
country and the culture in which it is situated.

6. Build R Capabilities: To stay competitive in the global scenario,
companies have to build strong and upgraded research and development
capabilities. They also need to acquire expertise in data analytics and product
design to be in line with other firms in the same industry. Additional skills
will be required to manage the global supply chain.

7. Creation or acquisition decision: One of the major decisions a firm has to take is to
decide whether to create its own affiliates or acquire already going concerns.
Both options have their own set of advantages and disadvantages. The
manufacturing concern has to analyse all the available options and take a
decision which would ensure ease in setting up as well as increase in benefits
to the organisation.

 

CONCLUSION

This
year marks 27 years since the so-called “economic reforms” were launched in
July 1991. By now, broad contours of the policies and practices like marketization
and privatisation of the industrial, technological and financial sectors, and
an induction of foreign direct investment and foreign institutional investment,
and so on are well known.

Already
showing tremendous progress in the service sector, now India’s manufacturing
sector is also slowly gathering pace. The long waited GST bill had been passed
by the government of India which would enable an easy and a cost cutting flow
of goods across different states of the country. And the government of India is
investing maximum funds in building a strong network of roads, rails to elevate
the growth of the manufacturing sector. India’s manufacturing sector has evolved through several phases from the
initial industrialisation and the license raj to liberalisation and the current
phase of global competitiveness. Today, Indian manufacturing companies are targeting
global markets and are becoming global competitors.

Prime Minister Narendra Modi’s plan of a new manufacturing policy could
transform India into an
international manufacturing hub, giving tough competition to China. However, to
realise this goal, reforms in labour
laws, special economic zone policy, foreign direct investment rules, taxation
policy, and land acquisition policy
is very important. The whole sector has gone bad, as today our manufacturing
contributes less than 17% of GDP , while
in China, it is 50%. And the Chinese labours are 50 to 60% more productive than
Indians, but the wages are also a factor which is higher by almost 70% and have
high incentive structure.

The Chinese and Indian economy were almost
similar during the 1980s. But China took a bold step by making its
manufacturing sector the mains of its economy.

Our Honourable Prime Minister, India offers factors
for business to thrive, like — democracy, demography and demand. This by adding
and changing many things in the country, few of them being a tech-savvy and
educated population, skilled labour and a strong commitment to calibrated
liberalization.

With
the ‘Make in India’ campaign India plans to be the leader of the manufacturing
sector in the world. States like Gujarat have laid the foundation for other
states to follow in its footsteps in order to become a manufacturing hub.
Andhra Pradesh has made a steady rise as a leading electronics manufacturer in
the country with many foreign investors making huge investments. With the help
of good facilities and world class infrastructure by the state and the
government, most of the backward states are also contributing to the GDP. The government
has successfully initiated many projects which will improve the road and rail
network of the country. Amendments in old labour and land laws will bring a sea
change to the Indian manufacturing sector and also with easy licensing to lands
and flexible labour laws. With so many positive changes taking place, Indian
manufacturing sector is set to welcome its glory days.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

References:

·        
Agrawal, P., 2009. The Impact Of
Economic Reforms On Indian Manufacturers.

·        
Chaudhuri, S., 2007. Growth of
Manufacturing Sector in Post-Reforms India.

·        
Kumar, R., 2014. Industrial Development
of India in Pre and Post Reform Period. 

R. Nagaraja, 2011.
Industrial Performance, 1991–2008

·        
Rao, K.S.C. et al., 2014. FDI
into India’s Manufacturing Sector via M;

·        
R.K. Mishra, K.R.S Sastry (2013),
‘Industrial Structure and Performance in Andhra Pradesh and Gujarat vis-?-vis
India.

 

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