.
.
I think the article below fails to mention that Indian governments have been ineffective at organizing, and mobilizing the natural advantages and resources of the country so that the country can be more heavily industrialized.
In addition the negative influence of the UK through its colonial heritage, and links to India through the Macaulay Brown Sahibs have not helped India industrialize more extensively than it should have after 65 years of Independence.
The article below identify the main causes of the slow industrialization process in India.
One is sure the corrupt leadership of India are aware of these facts.
_______________________________
What holds back India?
The Economist.
How do we explain these differences in the response to trade openness
of two
economies with very similar factor endowments? The key to answering this
question is the poor response of large-scale labour-intensive
manufacturing
including assembly and processing activities in India. As per the
conventional
wisdom, these activities have served as the magnet for DFI and a conduit
for
rapid expansion of exports in China. But this has not happened in India.
Large-scale labour-intensive manufacturing activities have been
virtually absent
from India. Apparel factories employing thousands of workers under a
single roof
found in China are non-existent in India.
The explanation for the poor performance of large-scale
labour-intensive
manufacturing is, in turn, to be found in the domestic policy
regime—both past
and present. Until the late 1980s, large Indian firms were confined to a
positive list of capital-intensive sectors. Even in these sectors, their
size
was limited through licensing based on the perceived size of the
domestic market
by the authorities. The same applied to foreign companies. These
restrictions
were largely ended by the mega reforms of 1991 and those that
immediately
followed them.
But this was insufficient to stimulate large-scale labour-intensive
manufacturing. In the late 1960s, India had also adopted the policy of
reserving
labour-intensive manufactures for the exclusive production by
small-scale
enterprises. Even after years of steady relaxation, the small-scale
enterprises
face a ceiling of 50 million rupees (approximately $1.25 million) on
investment
in plant and machinery. The small-scale industry list grew over time and
by the
late 1980s came to include virtually all labour-intensive products.
As long as this reservation was in force, high-quality
labour-intensive
manufactures that could compete on the world markets had no chance of
emerging
in vast volumes. The bulk of the small-scale enterprises operated in the
protected domestic market. The problem was finally recognized in the
late 1990s
and the government began to gradually trim the Small Scale Industy list.
Even
then progress was slow and the number of reserved items fell from 821 in
1998-99
to 114 in March 2007.
Most labour-intensive products including toys, footwear, sports goods
and
apparel have now been off the reservation list for some years. More
importantly,
even for products still on the list, large-scale production has been
permitted
since at least March 2000 as long as the enterprise exports 50% or more
of its
output. This latter change means that firms predominantly interested in
exporting their output have been free of such restrictions since March
2000.
Yet, labour-intensive manufacturing has remained stubbornly
unresponsive.
The most important factor that still holds back large firms from
entering
these products is a set of draconian labour laws in India. Under these
laws, it
is virtually impossible for a firm with 100 or more employees to fire
the
workers even in the face of bankruptcy. It is equally difficult for the
firms to
reassign the workers from one task to another. These provisions impose
very low
worker productivity or a high real cost of labour. Large-scale
capital-intensive
sectors such as automobiles, where labour costs are a tiny proportion of
the
total costs, can profitably operate in such an environment. But the same
is not
true of large-scale labour-intensive sectors labour. Few foreign
manufacturers
are willing to enter India outside of a small subset of capital- and
skilled-labour
intensive sectors.
Two additional factors have held back the labour-intensive
manufacturing in
India: costly power and poor transport infrastructure.
Not only do firms
pay a
much higher price for power in India than elsewhere in the world, they
also face
much greater uncertainty of supply. Likewise, despite considerable
improvement,
the transportation network in India remains unreliable and inefficient.
The time
taken to clear the goods entering and existing the ports and to move the
goods
between ports and manufacturing sites, which is so critical for assembly
and
processing activities, is much higher and more variable in India than in
the
competing countries such as China.
India’s path to modernisation
While high growth has helped India bring its poverty ratio (the
proportion of
the poor below the official poverty line) down from 36% in 1993-94 to
27% in
2004-05, its transition to a modern economy remains problematic: it must
still
move the vast majority of its workforce out of farming into non-farming
activities. With the services leg doing all of the walking, the economy
can only
limp along towards this transition.
For a more rapid transformation,
India must
walk on two legs. That means more rapid growth of the labour-intensive
manufacturing.
References
Krueger, Anne O. 1985. The Experience and Lessons of Asia’s Super
Exporters,”
in Vittotio Corbo, Anne O. Krueger, and Fernando Ossa, editors, Export
Oriented Development Strategies, Boulder and London: Westview
Press.
Panagariya, Arvind. 2008. India: The Emerging Giant, New
York:
Oxford University Press.
Prasad, Eswar and Shang-Jin Wei. (2006). ‘Understanding the Structure
of
Cross border Capital Flows: The Case of China,’ presented at the
conference,
“China at Crossroads: FX and Capital Markets Policies for the Coming
Decade,”
held at the Columbia University on February 2-3, 2006.
Footnotes
1 This article is based on chapters 12 and 13 of the author’s
forthcoming
book “India: The Emerging Giant” (OUP, USA) to be published in January
2008.
2 Sources: India: Foreign Direct Investment Policy, April
2006,
Department of Industrial Policy & Promotion, Ministry of Commerce,
Government of
India combined with the Reserve Bank of India Handbook of Statistics
on the
Indian Economy 2005, Table 157. China: Prasad and Wei (2006, Table
6).
