India is now emerging as a model economy for some Pakistani economists.The imperialist press is also full of predictions about an impending growth surge in India. It is therefore essential to analyze the data and try to address the question. Has policy liberalization led to a fundamental structural transformation of the Indian manufacturing sector?

Policy liberalization began in 1991 and comprehensive industrialization of the economy was one of the major goals used to justify the change in the policy regime. Recently Balakrishnan and Babu have harmonized the statistical time series data presented in the annual survey of industries over the period 1991-2000. This enables us to compare the performance of Indian manufacturing over 1973-90 to 1991-2000.

The overall picture that emerges does not justify claims of structural transformation within Indian manufacturing. The annual average rate of growth of gross manufacturing output rose from 7.2 during 1973-1990 to 8.2 per cent during 1991-2000 but the growth acceleration does not represent a quantum jump. Nagraz shows that the difference in the two averages is not statistically significant. Moreover there is no acceleration of employment growth in the 1990s. This averages only 1.4 per cent during 1991-2000. Even in 2000 the Indian manufacturing sector accounts for only 12 per cent of the country’s work-force and 17 per cent of real GDP. The weight of the manufacturing sector within the Indian economy remains broadly similar to that in Pakistan.

Labour productivity acceleration is also modest - from 5.9 per cent per annum during 1973-1990 to 6.7 per cent per annum during 1991-2000. Labour productivity growth has decelerated in several key industries (textiles, textile products, chemicals and petroleum products). More significantly capital productivity has declined across the board and the incremental capital output (ICOR) ratio has risen by almost 50 percent in 1991-2000 compared to the average ICOR level of 1973-1990. Inefficiency has increased during the 1990s throughout the Indian manufacturing sector. This is shown by the fact that average

ICORs in traditional sectors producing beverages, textiles and paper products are higher and have risen faster than average ICORs in the metal products, machinery and transport equipment industries. Policy liberalization has contrary to theoretical expectations lead to a decline in efficiency and a fall in total factor productivity in Indian manufacturing during the 1990s.

The decline in total factor productivity has been accompanied by rising investment and a rising profit rate. However investment rose much faster and the increase in the profit rate (as percentage of book value of fixed capital) was only from an average of 13.1 percent during 1973-90 to 13.9 percent during 1991-2000. Investment has thus been fuelled by profit expectations which remain largely unrealized.

The source of the growth in profit has been a fall in the wages share of value added and in the growth of real wages. Table 2 shows that the share of wages in net output of the manufacturing sector declined from an average of 26.6 percent during 1973-1990 to 17.2 percent during 1991-2000.

(Tables 1 and 2 are taken from Balkrishnan P and S Babu “Growth and Distribution in IndianIndustry”, Economic and Political Weekly, Sept 20,03.)

The average real wage growth during 1991-2000 was only 0.3 per cent per annum as against 3.0 during 1973-91. Real wage growth was negative during 1991-2000 in textiles, textile products, paper, leather, chemicals, metal products and transport equipment industries.

The increase in labour productivity has thus fed profits and has partly been wasted in rising capital inefficiencies. Labour costs have declined but capital costs have risen for Indian manufacturing enabling capitalists to raise the rate of exploitation and worsen the pattern of income distribution. Policy liberalization has reduced the factory gate bargaining power of the union. Moreover the government’s policy of jacking up procurement prices of food-grains has eroded whatever gains are made by the workers in terms of money wages. The Vajpayee government has been viciously and consistently anti-union and anti-labour throughout its tenure.

Policy liberalization has also fed technological retardation. There has been a serious setback in domestic machine fabricating capability. The machine tool industry grew at a rate of just 1.7 percent during 1981-97. During 1997-2002 growth has been negative. The share of capital goods in manufacturing output has fallen for 22.1 in 1980-81 to about 15 per cent in 2000-01, the corresponding share of consumer goods has gone from 41 percent to 44 percent during 1980-2001. The import intensity of Indian manufacturing has risen sharply during the 1990s. Fixed investment growth which accelerated during the mid-1990s turned negative during 1997-2000 since when there has been a modest revival (due mainly to the plentiful rainfall of 2002-03 which is expected to stimulate middle class income). Huge excess capacity has been built up in several Indian industries.

Table 4: India and China: Industrial Performance 1985,1995

India’s relative decline as an industrial economy becomes evident when we look at UNIDO rankings of 87 countries in the years 1985 and 1998.

Table 2 shows that:

* among 87 countries India ranked 72nd in both 1985 and 1998 in terms of net manufacturing output per capita.

* the size of the Indian manufacturing sector in terms of net output was in 1998 only 17 per cent of that of China

* India’s rank in terms of manufactured exports declined from 70th among 87 countries in 1985 to 75th in 1998.

* Indian manufactured exports were equal to those of China in 1985. In 1998 Indian manufactured exports were only 15 percent of those of China.

* The technological content of Indian exports has not improved. India’s rank has deteriorated while that of China has improved on this score. The share of high tech exports by India was only 5 percent in 1998, as against 18 percent by China. * India’s rank fell from 60th to 69th among 87 countries in terms of human skills as measured by the Harrison Myers index.

* R and D expenditure as percent of GNP by India in 1998 was about a fifth of that of China. India’s rank in terms of per capita R and D expenditure deteriorated from 36th (among 87 countries) in 1985 to 46th in 1998.

The evidence is brutally clear. India is an industrial failure. It has institutionalized immiserising industrial growth. Total factor productivity growth has been negative. Real wage growth has been severely constrained.

The metal products industry - the heart of the domestic machine building sector - is in crisis. Under utilization of production is emerging as a serious problem in several sectors. India is falling behind technologically. As investment is switched from capital to consumer goods R and D expenditure as a proportion of GDP has declined.

India is no model for Pakistan. It is a classic example of how not to seek industrial growth acceleration. The Indian road to industrial growth leads to growing misery for the working people and increased erosion of the technology capabilities of the domestic manufacturing sector.