Discuss the impact of economic reforms on the

manufacturing sector? What steps can be taken to improve

the condition of manufacturing sector?

Economic Reforms refer to the fundamental changes that were launched

in 1991 with the plan of liberalising the economy and to quicken its rate
of economic growth. The Narasimha Rao Government, in 1991, started
the economic reforms in order to rebuild internal and external faith in
the Indian economy.
The reforms intended at bringing in larger cooperation of the private
sector in the growth method of the Indian economy. Policy changes were
proposed with regard to technology up gradation, industrial licensing,
removal of restrictions on the private sector, foreign investments and
foreign trade. The essential features of the economic reforms are –
Liberalisation, Privatisation and Globalisation, commonly known as
LPG.
The key features of reforms in the 1991s were:
1) Import liberalization, particularly of capital goods and intermediate
inputs through the expansion of the range and number of goods on the
open general licensing list and through a reduction canalization;
2) The extension of export incentives through the tax system and liberal
access to credit and foreign exchange;
3) The significant relaxation of industrial licensing requirements through
direct ‘delicensing’ of some industries and through ‘broad banding’
which permitted firms in some industries to switch production between
similar product lines.

Economic Reforms & Manufacturing Sector

The government of India has been implanting structural reforms from
the year 1991. The policies have direct and indirect effect on the
manufacturing sector. The process of Economy reforms brought the
inflow of upgraded technology, inflow of huge capital. The production
capacity of India was increased due to the capital investment and better
technology. Economy Reforms has imposed various challenges along
with the huge opportunities for India. Before the year 1991, the Indian
industries were protected from the foreign competition. The key strategy
for developing the manufacturing sector in India was to give attention
towards the development of the large and heavy industries with the
help of proper planning by the central government of India. These
strategies include Import substitution, price control, control and
monitoring of private sector through the policy of license, control on the
foreign Investment. Our economists had a firm believe that India can be
a developed through Self-sufficiency model. The contribution of the
manufacturing sector to GDP during 1950-51, was only 8.98 percent. By
the year 1965-66, it had increased to 14.23 percent. In the year 1980 the
contribution is 16.18 percent of total GDP. The excess control over the
Indian industries was responsible to the poor growth of Indian
Economy. The government of India has been implanting structural
reforms from the year 1991. The policies have direct and indirect effect
on the manufacturing sector. The process of Globalization brought the
inflow of upgraded technology, inflow of huge capital. The production
capacity of India was increased due to the capital investment and better
technology. India’s manufacturing sector is undergoing a fundamental
change from a protected environment to the environment of global
competition. The key objective of the Industrial policy statement of 1991
was to Renu Arora & Dr. Prabhu Dayal Choudhary: Impact of
Globalization on Indian Manufacturing Industry 117 improve the
growth of productivity in Indian industries, increase the employment
opportunities. In the year 1998-99 the growth rate of manufacturing is
approx. 2.7 percent, which is further increase to 4.2 percent in the year
1999-2000, in 2001-02 the rate decline to 3.4 percent and further there
was a growth to 6.1 percent in the year 2002-03.Currently India’s
manufacturing sector contributes approx. 16 percent of GDP, and India’s
share in world manufacturing is only 1.8 percent. India is amongst one
of the lowest labour costs per worker in Asian countries. India’s
manufacturing is lags behind due to various factors such as improper
infrastructure facilities like water, electricity, transport, communication
etc. excess imports is also a major factor for the poor growth of
manufacturing sector in India. Manufacturing sector contribute not as
the engine of growth for India but as a hurdle in the growth of Indian
industries. India’s service sector shows a tremendous growth after
globalization, but manufacturing sector move on the path of decline.
Globalization has imposed various challenges along with the huge
opportunities for India. In the 1990s, due to opening up the Economy,
our manufacturing sector has to face painful experiences. Some bad
experiences like plant closures, sells offs and reallocation, retrenchments
due to declining manufacturing, are become very common after
Globalization. Increased import is a root cause of the decline
manufacturing in India. The Indian manufactured goods are costlier in
comparison to Indian Goods.

INTRODUCTION: The Indian economic reforms of the early 1990s have

smulated much
research. It is common to a!ribute India’s recently accelerated growth to
the reforms. An aspect
that has remained relavely unclear is which policy changes within the
reforms have led to
which consequences for employment, incomes and poverty. There is
also debate about which
further policy changes are required to sustain the increased growth and
to strengthen the
di*usion of progress to the lower-income segments of the populaon.
Most studies have
analyzed the reform impact on macro aggregates, which leaves it
unclear how di*erent policies
have worked. In order to examine this aspect it is useful to invesgate
at the 0rm level how
di*erent industries were a*ected by speci0c policy changes
INTRODUCTION: The Indian economic reforms of the early 1990s have
smulated much
research. It is common to a!ribute India’s recently accelerated growth to
the reforms. An aspect
that has remained relavely unclear is which policy changes within the
reforms have led to
which consequences for employment, incomes and poverty. There is
also debate about which
further policy changes are required to sustain the increased growth and
to strengthen the
di*usion of progress to the lower-income segments of the populaon.
Most studies have
analyzed the reform impact on macro aggregates, which leaves it
unclear how di*erent policies
have worked. In order to examine this aspect it is useful to invesgate
at the 0rm level how
di*erent industries were a*ected by speci0c policy changes
INTRODUCTION: The Indian economic reforms of the early 1990s have
smulated much
research. It is common to a!ribute India’s recently accelerated growth to
the reforms. An aspect
that has remained relavely unclear is which policy changes within the
reforms have led to
which consequences for employment, incomes and poverty. There is
also debate about which
further policy changes are required to sustain the increased growth and
to strengthen the
di*usion of progress to the lower-income segments of the populaon.
Most studies have
analyzed the reform impact on macro aggregates, which leaves it
unclear how di*erent policies
have worked. In order to examine this aspect it is useful to invesgate
at the 0rm level how
di*erent industries were a*ected by speci0c policy changes
INTRODUCTION: The Indian economic reforms of the early 1990s have
smulated much
research. It is common to a!ribute India’s recently accelerated growth to
the reforms. An aspect
that has remained relavely unclear is which policy changes within the
reforms have led to
which consequences for employment, incomes and poverty. There is
also debate about which
further policy changes are required to sustain the increased growth and
to strengthen the
di*usion of progress to the lower-income segments of the populaon.
Most studies have
analyzed the reform impact on macro aggregates, which leaves it
unclear how di*erent policies
have worked. In order to examine this aspect it is useful to invesgate
at the 0rm level how
di*erent industries were a*ected by speci0c policy changes
INTRODUCTION: The Indian economic reforms of the early 1990s have
smulated much
research. It is common to a!ribute India’s recently accelerated growth to
the reforms. An aspect
that has remained relavely unclear is which policy changes within the
reforms have led to
which consequences for employment, incomes and poverty. There is
also debate about which
further policy changes are required to sustain the increased growth and
to strengthen the
di*usion of progress to the lower-income segments of the populaon.
Most studies have
analyzed the reform impact on macro aggregates, which leaves it
unclear how di*erent policies
have worked. In order to examine this aspect it is useful to invesgate
at the 0rm level how
di*erent industries were a*ected by speci0c policy Economy Reforms &
Manufacturing SectoThe government of India has been implanting
structural reforms from the year 1991. The policies have direct and
indirect effect on the manufacturing sector. The process of Economy
reforms brought the inflow of upgraded technology, inflow of huge
capital. The production capacity of India was increased due to the
capital investment and better technology. Economy Reforms has
imposed various challenges along with the huge opportunities for India.
Before the year 1991, the Indian industries were protected from the
foreign competition. The key strategy for developing the manufacturing
sector in India was to give attention towards the development of the
large and heavy industries with the help of proper planning by the
central government of India. These strategies include Import
substitution, price control, control and monitoring of private sector
through the policy of license, control on the foreign Investment. Our
economists had a firm believe that India can be a developed through
Self-sufficiency model. The contribution of the manufacturing sector to
GDP during 1950-51, was only 8.98 percent. By the year 1965-66, it had
increased to 14.23 percent. In the year 1980 the contribution is 16.18
percent of total GDP. The excess control over the Indian industries was
responsible to the poor growth of Indian Economy. The government of
India has been implanting structural reforms from the year 1991. The
policies have direct and indirect effect on the manufacturing sector. The
process of Globalization brought the inflow of upgraded technology,
inflow of huge capital. The production capacity of India was increased
due to the capital investment and better technology. India’s
manufacturing sector is undergoing a fundamental change from a
protected environment to the environment of global competition. The
key objective of the Industrial policy statement of 1991 was to Renu
Arora & Dr. Prabhu Dayal Choudhary: Impact of Globalization on
Indian Manufacturing Industry 117 improve the growth of productivity
in Indian industries, increase the employment opportunities. In the year
1998-99 the growth rate of manufacturing is approx. 2.7 percent, which
is further increase to 4.2 percent in the year 1999-2000, in 2001-02 the rate
decline to 3.4 percent and further there was a growth to 6.1 percent in
the year 2002-03.Currently India’s manufacturing sector contributes
approx. 16 percent of GDP, and India’s share in world manufacturing is
only 1.8 percent. India is amongst one of the lowest labour costs per
worker in Asian countries. India’s manufacturing is lags behind due to
various factors such as improper infrastructure facilities like water,
electricity, transport, communication etc. excess imports is also a major
factor for the poor growth of manufacturing sector in India.
Manufacturing sector contribute not as the engine of growth for India
but as a hurdle in the growth of Indian industries. India’s service sector
shows a tremendous growth after globalization, but manufacturing
sector move on the path of decline. Globalization has imposed various
challenges along with the huge opportunities for India. In the 1990s, due
to opening up the Economy, our manufacturing sector has to face
painful experiences. Some bad experiences like plant closures, sells offs
and reallocation, retrenchments due to declining manufacturing, are
become very common after Globalization. Increased import is a root
cause of the decline manufacturing in India. The Indian manufactured
goods are costlier in comparison to Indian Goods.

Future of Manufacturing Sector in India

Manufacturing sector has so many potentials to emerge as the highest
growing sector in India. To remove the hurdles in the way of growth of
manufacturing in India, our honourable PM Mr. Narendra Modi had
launched the “Make in India” initiative. The motive of this program is to
place India on the position of manufacturing Hub in the world by the
end of 2020. Under this the Government of India aims to increase to
increase the share of the manufacturing sector to GDP to 25 percent by
the end of 2022. There is also expecting to create 100 million jobs in
manufacturing sector in India. With the help of the engine of “Make in
India”, India is moving on the path of becoming the hub for hi-tech
manufacturing. The foreign direct investment in India’s manufacturing
sector grew by 82 percent. India has emerged as one of the most
favourite destination for investment in manufacturing industry. The
Indian Government makes several efforts to develop a suitable
environment for the growth of manufacturing in India. The
implementation of GST will also prove a milestone for making a
common market.
Measures to improve the condition of manufacturing sector.
With almost a million people joining the workforce every month, a
vibrant manufacturing sector is needed to absorb them. The recent
thrust on manufacturing is timely and much-needed. Only about an
eighth of India’s workforce is in the manufacturing sector, against a
third in China. Yet, with almost a million people joining the workforce
every month, and employment in agricultural sector not growing, a
vibrant manufacturing sector is needed to absorb them.
Every manufacturing job creates three-four jobs in the wider economy.
This is the reason that at a similar stage of development, countries such
as China, South Korea and Indonesia had a share of manufacturing in
the economy at upwards of 25%. In India that share has stagnated at
around 15% for the past few years.
The opportunity for India is staggering. Besides serving a large domestic
demand, exports of Made-in-India goods is an attractive proposition.
Geographically advantaged with a long coastline, India can target to
serve markets from the Philippines in the east to Africa in the west. This
would translate into serving a population of over three billion across
economies that are collectively growing at more than 5% annually over
the next five years.
Interestingly, the recently published BCG Global Manufacturing Cost-
Competitiveness Index, which tracks the direct manufacturing costs of
the top 25 exporting nations, indicates that India is the second lowest
cost manufacturing destination globally among them, even lower than
China. This competitive advantage can be further enhanced if access to
abundant raw materials and natural resources can be streamlined.
So, why do we have an insignificant 2% share of global manufacturing
exports?
Competitiveness on “within the factory gate costs" is offset by the total
cost of doing business. Time and cost escalation due to long gestation
periods for capital projects, complex procedures and compliances, and
poor logistics infrastructure reduce the overall competitiveness.
The shifting economics of global manufacturing, led by lower energy
costs in North America and productivity-adjusted labour wages, is
putting traditional low-cost countries such as China under pressure.
Manufacturing is returning to several locations such as the US, Mexico
and the UK, bringing supply chains closer to large demand centres. As
companies rethink their global manufacturing footprint, the cost and
raw material advantage of India will bring it in their consideration.
However, what will it take to get them to invest in India
I believe we should focus on five areas.

First, focus on reducing the skill gap. Less than a fifth of the workers
entering the workforce annually are skilled. If we have to improve
productivity, we need to invest in vocational training not just for new
entrants into the workforce, but also for retraining existing workforce.

Second, with product life cycles reducing by up to half, we need to

invest in innovation and research and development (R&D) if we have
to ensure long-term competitiveness. In a recent survey of CEOs of over
70 manufacturing companies, we found that about 75% of respondents
felt that India needs to focus beyond low-cost labour on technological
innovation and quality to maintain long-term competitiveness.
Currently, India spends less than a percentage of its gross domestic
product (GDP) on R&D, significantly less than in China or developed
economies.

Third, India’s micro, small and medium enterprises (MSMEs) account

for about half of its manufacturing output and over 40% of its exports.
They are an important part of the manufacturing value chain, often
acting as supply-chain partners and outsourced processing agents for
larger companies. Yet, the sector is in distress, with MSME defaults
among the highest across all credit classes. If India has to revitalize the
manufacturing sector, it cannot ignore these individually small but
collectively large group of companies. The German Mittlestand, similar
to the MSME sector in India, accounts for over 50% of its GDP and
employment, and forms the backbone of that country’s manufacturing
sector. Its success is underpinned by razor-sharp focus on innovation
and efficiency, apprenticeship model supported by collaboration with
local universities and tailor-made financing schemes.

Fourth, large-scale investment in infrastructure is needed to build

highways, expand the capacity of the rail network and build ports. In
addition, India should look to develop inland waterways as it can
provide the cheapest mode of transportation across locations, as much
as a third lower than rail. Countries such as China and the US use inland
waterways very effectively, especially to connect ports to inland
warehouses. India with its network of rivers should tap the latent
potential to reduce cost, provide better access to inland locations and
decongest other modes of transport.

Finally, besides simplifying policies and procedures, we need to

leverage technology to reduce the cost of doing business. E-governance
can provide transparency as well as reduce the time and cost of
compliance. Several government agencies, both at the state and centre,
have launched successful e-governance initiatives. We need to now
broad-base the roll-out by leveraging these existing centres of excellence.
India has the necessary pieces of the manufacturing jigsaw to revitalize
the sector. If government able to put it together before global supply
chains get fully re-defined That could be worth more than a few billion
dollars.
We need to identify industries and products in which imports are
succeeding on account of easy credit, and those which require
productivity improvement. There is apparently a need for reconfiguring
a strategy for capital goods development (in items like information and
communications technology hardware or in solar energy), in which
India has become seriously import- dependent, undermining the
strategic national interests. This is not, however, a plea for blanket
import substitution, and export pessimism, but for infusing
technological dynamism to recapture the domestic market and the
dynamic comparative advantage in trade. Capital and technology
import should be accompanied with commitments for R&D investment.
There is a need to reimagine the role of domestic financial institutions to
provide long-term credit for capital intensive industries, infrastructure
and exports; along the lines advocated (separately) by Robert Skidelsky
and Adair Turner in the current global context. These measures
necessarily have fiscal counterparts, which need to be addressed by
revisiting fiscal rules. Similarly, domestic R&D, expenditure which has
barely inched up during the reforms as a share of the GDP compared to
China, which tripled the ratio—needs to be seriously viewed and
corrected if our present political dispensation is serious of realising its
dream of techno-nationalism.