Causes Of Unsatisfactory Performance In Post Reform Period
The main causes for the unsatisfactory performance of the industrial sector in the post-reform period are as follows:
Exposure to external competition
According to the Planning Commission, the most important reason for the slower growth rate during the Eighth Plan period seems to be that the industrial sector, which had been almost totally protected from both industrial as well as external competition during the previous four decades, was suddenly exposed to foreign competition through a significant liberalisation of imports and a drastic reduction in import duties.
The industry was hardly prepared for it and the slow-down was only to be expected as is reflected in the very low growth rates realised in the first two years of the eighth Plan. The worst affected in the early · post-reform period was the capital goods. sector. First, the user sectors now had the option of importing the most modern capital goods and equipment instead of buying them from the domestic industry – an option which the new liberal import policy had now opened up.
Second, with a progressive reduction in import duties, many of the user sectors adopted a wait and watch policy and postponed their investment plans. A number of industries were not able to meet external competition due to a variety of reasons, an important one being their historical background. The ninth Plan cites the case of the copper industry and paper industry in this regard. In the hydrocarbon sector, a number of petroleum intermediates were imported while the domestic capacity languished. A number of commodities faced the problem of dumping. The machinery for the investigation of dumping was not adequate to deal with the increasing number of cases.
Slowdown in investment
An important reason for the slow-down of industrial growth in the recent past has been the slow-down of investment. It is a known fact that capital formation in the public and private sectors provides a stimulus for industrial growth in the form of both the direct demand or purchases that such expenditures involve and the indirect demand resulting from income generated by investments. However, consequent upon the adoption of the ‘macro-economic adjustment’ programme of the IMF in 1991, the Government of India was forced to cut down public expenditure drastically. As noted by C.P. Chandrasekhar, With a pre-existing administrative apparatus and a stock of debt that make a reduction in Government consumption spending and interest outflows difficult to ensure, public expenditure cuts more often than not result in a cutback in capital formation in the public sector. Since there is a strong complementarity between public investment and private investment, a reduction in the rate of growth of real public investment had a depressing effect on private investment as well.
The rate of private investment also came down due to
i) the capital market is in a bad shape;
ii) high cost of borrowings; and
iii) introduction of Minimum Alternate Tax ( MAT).
iv) Poor investor confidence further confounded the matters making it difficult for public limited companies to raise funds from the capital market.
The infrastructural constraints
Perhaps the most important reason for the unsatisfactory performance of the industrial sector has been the deteriorating state of infrastructure. Industrial production has suffered not only on account of inadequate availability of infrastructure like power and transportation bottlenecks, inadequate handling facilities at ports etc. but also due to `poor quality of infrastructure like frequent and unscheduled power breakdowns,” poor road conditions, unduly long handling time at ports etc. All these factors added to the real costs of manufacture and thus adversely affected the competitiveness of the domestic industry. Another factor that has impacted industrial competitiveness is the distinct rise in the cost of power for the industry. In fact, the cost of power has risen at a rate much faster than the rise in the prices of manufacturing products.
Difficulties in obtaining funds for expansion
Orderly’ development of the capital market is an important condition for industrial growth because in its absence, the private sector capitalists: will face difficulties in raising resources for expansion. The period since 1991 has witnessed two stock market scams – one in 1992 and the other in March-April 2001. These scams have fallen drastically leading to a setback to the primary market’. Trading in stock exchanges. ( i.e., secondary market) has also fallen. Because of this capitalists are finding it difficult to raise resources from the capital market for funding their expansion plans. The performance of financial institutions like IFCI (Industrial Finance Corporation of India Ltd.), IDBI (Industrial Development Bank of India Ltd.), etc. have been worrisome as non-performing assets (NPAs) have become quite large. Thus, the flow of funds from the financial institutions to the corporate sector has also not been adequate.
Moreover, it has been observed that a substantial part of the financing obtained by the large corporate sector from the financial institutions has been utilised in mergers and acquisitions, rather than any genuine investment activity. Banks have also been cautious in lending due to their high NPAŞ. As a result, small and medium corporates are facing extreme difficulties in obtaining funds for investment activity.