Insights into Editorial: How reforms killed Indian manufacturing
15 March 2016
Manmohan Singh, the then minister of finance, ended his budget speech of 1991–1992 with a quote from French novelist Victor Hugo: “No power on earth can stop an idea whose time has come.” He then went on to conclude with the declaration: “Let the whole world hear it loud and clear. India is now wide awake. We shall prevail. We shall overcome.”
- This speech set the stage for the cleanest declared break from the past that India has seen on the economic front.
- 2016 marks 25 years since the so-called “economic reforms” were launched in India in July 1991.
- By now, intentions behind policies and practices that characterized such reforms are well known, viz. radical deregulation, marketization and privatization of the industrial, technological and financial sectors, and an across-the-board induction of foreign direct investment and foreign institutional investment, and so on.
What necessitated such transformation?
Licence raj had the unintended consequence of giving birth to a vast and unending bureaucracy, significant public expenditure and the development of a few large corporations that would dominate the private sector. Besides, exports were encouraged while at the same time imports were discouraged.
What changes were introduced?
The external shock of 1991 set the stage for a fundamental mindset shift. The government no longer selectively removed restrictions and rules, though they were only selectively applied. The government also did away with licence raj, ended many public monopolies, and opened several sectors to automatic approval of foreign direct investment. It was an undeniable paradigm shift, and one that changed India dramatically.
The broad goals of this transformation were:
- To increase the productivity of investment of Indian industries.
- To improve the performance of the public sector in order to gain a competitive edge in a fast changing global economy.
- To achieve greater social equity.
Twenty-five years hence, it is evident that the economic growth rates are transformed; not only was India’s growth in this quarter-century substantially higher than in the past, it was also less volatile than in the high-growth period of the 1980s, when it was hovering at an average of around 6%.
- As a result, India has taken its place on the global economic stage—both as a key market for most multinational corporations and as a global provider of services.
- The reforms spurred a new age of entrepreneurship, making India the fourth largest country and one of the fastest growing computer and digital start-up hubs in the world.
However, not all goals have been met:
- Income inequality has grown, and the ratio between the top and the bottom wage-earners has doubled in 20 years.
- Conglomerates created during the license raj still dominate many sectors.
- India is No. 130 in the global Ease of Doing Business rankings.
- Also, industrial India is plagued by a lack of skilled, educated workers.
- Additionally, some sectors—such as broadcasting, telecom, retail, and information technology—have leapfrogged in their development cycle, while others such as agriculture, roadways, manufacturing and electricity have yet to change much.
- Structurally too, despite consensus at the central level—which has transcended governments led by different parties and coalitions—reforms have been deployed in fits and starts and not as a continuous process.
- The reform mindset has taken hold in states to different degrees, as evidenced by variable progress on state-level fiscal and social indicators (education and health).
Negative effects of these reforms:
As part of 1991 economic reforms, the government reduced import duties on all IT hardware purportedly to facilitate software promotion and growth on a globally competitive basis using imported hardware.
- However, by 1994 our fledgling civilian IT hardware industry folded up. During those days, IT hardware far more technologically sophisticated than the commercial hardware being imported by our software companies was being manufactured by Indian defence, atomic energy and space agencies and even exported to other developing countries such as Brazil, Malaysia, and Indonesia. But, the government failed to take note of this.
On fibre telecommunication systems:
The reforms also dealt a body blow to the indigenous optic fibre telecommunication systems industry, a project begun by the Department of Electronics (DoE) in 1986 with the setting up of the public sector utility, Optel. This was mainly because of the reduction in import duty on fibre from 40% to 10%. With this, large quantities of optic fibre began to be imported. This move affected the domestic industries very badly.
On electronic corporations:
In 1990-91, there were at least a dozen electronics corporations producing a range of high-tech radio communication equipment, industrial electronics and control and instrumentation equipment worth annually around Rs.6,000 crore.
- However, the reduction in customs duties from 60% to 30% overall, which led to a glut of imports, forced many of these corporations to halt production and become import agents, a phenomenon repeated in the key solar photovoltaic industry.
- Reforms also led to large-scale import of cell-phone handsets that could have been easily produced here had a policy of phased manufacture been adopted. As a result, the entire market for such handsets was met by unnecessary imports from Day One in 2005-06. In 2013-14 cell-phone imports totalled Rs.35,000 crore.
- Also, by 2000, foreign brands grabbed 80% of the television sets market, from a situation where 10 local companies catered almost fully to the demand. Six of the 10 indigenous television makers have folded up, with a ripple effect on the electronic components sector.
On heavy electrical equipment industry:
This industry was led by Bharat Heavy Electricals Limited (BHEL). Up until 1998-1999 this industry was doing very well. However from the next year onwards, four Chinese power plant equipment manufacturers began to seriously erode BHEL’s market.
- This erosion was despite the quality and technical reliability of the Chinese equipment being considerably inferior to BHEL’s products.
- Besides, the United States, home to General Electric and Westinghouse, had already imposed penal anti-dumping duties on Chinese power plant equipment. Yet, the Indian government merely watched as BHEL lost 30 per cent market share by 2014.
The above analysis indicates that, despite few positive gains, the reforms have largely led to deindustrialisation. Products that we were manufacturing in the 1990s are being imported now. The negative impact this deindustrialisation has had on employment and on our economy is gigantic. Therefore, the government must now act immediately to halt the destruction of domestic industry on such a massive scale.