Policy still hobbles Indian manufacturing By Swati Lodh Kundu Asia Times Online | Feb 24, 2006 http://www.atimes.com/atimes/South_Asia/HB24Df03.html
BANGALORE - In a recent press release, India's Central Statistical Office (CSO) pegged the likely 2005-06 GDP (gross domestic product) growth rate for the country at 8.1%, up from the previous estimate of 7.5%. They reported that the industrial sector is almost equal to the service sector in propping up GDP growth. According to the latest Index of Industrial Production (IIP) estimates, the mining, manufacturing and electricity sectors registered growth rates of 0.6%, 9.4% and 4.9%, respectively, during April-November 2005, as compared with growth rates of 5.1%, 9.1% and 6.6% for those sectors during the corresponding period of 2004. The construction sector is expected to show a growth rate of 12.1% during the 2005-06 fiscal year, mainly due to production growth of 10.9% in cement and 7.1% in steel during April-December 2005, as against growth rates of 6.9% and 7.5%, respectively, during April- December 2004. Indeed, manufacturing seems to have come of age in India. Unshackled by reduced government control, Indian manufacturing has now reached a takeoff stage, with key players understanding that they must meet global standards if they are to survive. It has been conjectured that the next decade could well belong to Indian manufacturers, what with companies across many segments reporting improved competitiveness, wider product offerings, healthier growth rates and export competitiveness. At the same time, another significant trend has taken shape: close to a dozen Indian companies, in several sectors, have been cranking up manufacturing capacity through domestic expansion and global acquisitions to rank among the top five global players in their segments. Unfortunately, the picture is not all positive. India's economic history to date is a rather peculiar tale of an agricultural economy leapfrogging directly to a third-wave, service-sector-led economy, thereby completely missing out on the so-called Industrial Revolution. Economic liberalization has helped the country, but has not fundamentally changed this atypical narrative. With the service sector growing at a scorching pace, the comparatively higher growth rate of manufacturing industries in recent years has merely ensured that its share in India's GDP has not declined much below 27.05%, rather than increasing. In fact, manufacturing's GDP share of 27.05% in the 2004-05 fiscal year was an entire percentage point less than the 28.05% share enjoyed in 1995-96. An important reason the reforms have failed to deliver a more vital manufacturing sector has been the government's failure to play the role of a facilitator, as a government should do when a controlled economy is liberalized. For a capital-scarce country like India, the government should have ensured more development expenditure, either on its own or by encouraging private participation. But in reality, while the gross fixed capital formation (GFCF) in the economy grew at a compounded annual growth rate (CAGR) of 6.92% between 1980-81 and 1990-91, the GFCF during 1990-91 until 2003-04, rather than improving, actually declined to 6.54%. In fact, the most important single difference between the reforms in China and in India has been the unbelievable pace of growth in China's infrastructure. As a result, industry continues to account for close to 50% of China's GDP, nearly double the figure in India. Though nominally a communist country, China has embraced capitalism with more forward-looking policies than India. As a result, many Chinese manufacturers have achieved a scale that few Indian companies can even dream of. In addition, inflexible labor laws continue to impede Indian manufacturing, as articulated by Kunal Kumar Kundu in his report for Deutsche Bank (German FDI to India: Untapped Potential) last October. The other reason, of course, lies in inadequate infrastructure, as Kundu elaborated in the same report. In India, though everybody realizes just how inadequate the physical infrastructure is, there has been more rhetoric than real action on the ground. The government has not only failed to galvanize the private sector into infrastructure development but has also failed to do the development itself. On top of this, rather than aiming to reform itself by reducing wasteful expenses, the government has been profligate in all the wrong places. With the expenses of the government rising faster than its income, the revenue deficit rose at a whopping 16.31% CAGR between 1991-92 and 2003-04. Clearly, this is eating up resources that the government could use to create assets, so much so that the revenue deficit as a percentage of fiscal deficit in India rose from 44.9% in 1991-92 to as much as 75.62% in 2003-04. This means more than three-fourths of government borrowings are used to finance current expenditure and only one-fourth is used to create assets to service the total debt. While there have been signs of improvement in government finances lately, there is still a long way to go. In fact, while the CSO has revised the GDP growth estimate for India for 2005-06 to 8.1%, up from about 7.5%, India's corporate chieftains have pooh-poohed this and feel that, given continuing infrastructure woes, the GDP growth rate during the current financial year could at best be 7.7%. Indeed, infrastructure remains the biggest single obstacle to "Made in India" emerging as a world force. With the exception of telecommunications, the cost of most infrastructure services is 50- 100% higher than in China, with Indian manufacturers paying twice as much for electricity and three times as much for rail freight. The gap is widening, too. China spent seven times as much as India on infrastructure in 2003, and three times as much relative to the size of its economy - $150 billion (10.6% of gross domestic product) compared with $21 billion in India (3.5% of GDP), according to Morgan Stanley. India's cash-strapped state and central governments are unlikely to be able to bring infrastructure up to Chinese standards any time soon, especially as politicians prefer to expend their limited resources on voters in the form of subsidies, rather than investing in construction projects with a longer payback. And even when they do, the results need not always lead to desirable outcomes. The number of unfinished projects - irrigation canals, roads, railways and power projects - is mind-boggling. According to some estimates, as much as Rs1 trillion (about $21 billion) may be tied up in unfinished projects. A substantial part of this investment will be lost forever, and in many cases, time and cost overruns will render the projects unviable. To name just one of many examples, in the 1970s the government of Madhya Pradesh, a central Indian state, began to harness the Narmada River. It built a dam near Jabalpur at Bargi, submerged 162 villages, and displaced thousands of people, but forgot to build the irrigation canals that largely justified the project. So far, it has spent Rs28 billion on this project but realized only 14% of its irrigation potential - just 56,000 hectares have received water instead of the promised 400,000. Hundreds of thousands of people in the districts of Jabalpur, Katni, Narsinghpur and Satna are still waiting for water - so near and yet so far. Had another 25% of the outlays been spent, this vast area would be bursting with prosperity and becoming the granary of central India. Instead, it remains arid and poor. What went wrong is that a succession of chief ministers diverted Bargi's funds for projects in their own constituencies. The first one started a dam at Bansagar in northeast Madhya Pradesh. Before he could finish it, the second deflected Bargi's and Bansagar's funds to his constituency in Chhattisgarh, a state recently curved out of Madhya Pradesh. A third came along and rerouted the funds to his Khandwa district. Had they built canals simultaneously in Bargi, Bansagar and Khandwa, they could have completely transformed Madhya Pradesh. Droughts would have been averted and local incomes doubled to the levels of Punjab. They spent 75% of the funds on each project, and the farmers got nothing out of it. Any process of sustained economic reform and investment requires a framework of long-term policy to which the government can credibly commit itself. But the political process in India seems to be moving in the opposite direction. While becoming more democratic and inclusive in terms of incorporating newer and hitherto subordinate groups, it is frittering away most of the structures of economic management because of the wheeling and dealing of day-to-day politics. There are very few assurances that commitments made by a government will be kept by successive ones, or even by itself if under pressure. A political party that introduces some reforms is quick to oppose them when it is no longer in power. Indian corporates have shown remarkable efficiency improvements post- liberalization, and demonstrated unprecedented resilience by standing on their own against foreign competitors as barriers went down, some even going global with gusto. But the fact remains that successive governments have failed to address basic problems that continue to inhibit a faster transformation. Overall, the Indian economy continues to grow despite the government and not because of it. A performance analysis of the various sectors of the economy shows this quite starkly: the least regulated sector, services, performs the best, while the most regulated sector, agriculture, performs the worst because of mindless policies and deplorable infrastructure. As for manufacturing, its performance has been improving ever since the government began to cut away its self- created barriers. But realizing industry's full potential is still many years away. Swati Lodh Kundu has a master's in economics from the University of Calcutta. (Copyright 2006 Asia Times Online Ltd. All rights reserved. Please contact us for information on sales, syndication and republishing .) «¤»¥«¤»§«¤»¥«¤»§«¤»¥«¤»§«¤»¥«¤»§«¤»¥«¤»§«¤»¥««¤»¥«¤»§«¤» This is ZESTEconomics. Post economics-related articles and event info to [email protected] If you got this mail as a forward, subscribe to ZESTEconomics by sending a blank mail to [EMAIL PROTECTED] OR, if you have a Yahoo! 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