Impact of the Reforms on Manufacturing Enterprises in the Delhi Region

The findings of a small sample survey of manufacturing enterprises in the Delhi region regarding perceptions of the impact of the economic reforms of 1990s show that most firms felt that the reforms helped them by increasing access to foreign technology and making imports of capital and intermediate goods cheaper.

NOTES

Impact of the Reforms on Manufacturing Enterprises in the Delhi Region

Eckhard Siggel, Pradeep Agrawal

i ndustry performance in terms of growth and exports.

Within these industries, sample enterprises that were located in the Delhi National Capital Region (NCR) were c hosen in a partly random fashion. Many firms declined to participate and the s ample is therefore biased in favour of those firms whose managers were more

The findings of a small sample survey of manufacturing enterprises in the Delhi region regarding perceptions of the impact of the economic reforms of 1990s show that most firms felt that the reforms helped them by increasing access to foreign technology and making imports of capital and intermediate goods cheaper.

The authors wish to thank Caithlin McArton for the good work of interviewing the respondents and the Shastri Indo-Canadian Institute for financial support. They also wish to thank the participants in this survey for their kind cooperation and time.

Eckhard Siggel (siggel@alcor.concordia.ca) and Pradeep Agrawal (pradeep@iegindia.org) are with the Institute of Economic Growth, Delhi.

Economic & Political Weekly

EPW
september 19, 2009

T
he Indian economic reforms of the early 1990s have stimulated much research. It is common to attribute India’s recently accelerated growth to the reforms. However, it has remained unclear as to 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 ensure increased growth of the manufacturing sector as this sector can strengthen the diffusion of benefits of growth to the lower-income segments of the population by creating many much needed jobs. In order to examine these aspects it is useful to investigate at the firm level how different industries were affected by specific policy changes.

This article attempts to achieve this with the help of a survey of manufacturing firms to examine how they were affected by the reforms of 1991 and what further reforms they felt were needed. For this purpose a small-sample interview survey was conducted in 2006. Fifty-one manufacturing firms across six industries were contacted and their managers were interviewed using a questionnaire, which was adjusted for some specific aspects of the sub-sectors.

The selection of industries for the present survey was based on two considerations. First, our earlier study (Siggel 2007) of industry competitiveness using ASI data had identified rising (clothing, rubber and plastics and transport equipment) and declining (wood products and chemicals) industries. It was decided to investigate the reasons for both, growth and decline. Second, some sectors are presently very much in the public eye, such as pharmaceuticals and automobiles and automotive parts. They attracted our interest in spite of p ossibly average

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open and generous with their time. To start with, they were asked which policy changes affected them most strongly and how. Also, the firms were asked to describe specific problems of their industry that were related to the reforms and what additional reforms were needed for rapid growth of their industry.

Industry-Wise Perceptions

Industry-wise perceptions of the impact of reforms of 1990s and the additional reforms needed for rapid growth that emerged from our survey are discussed below.

Textiles and Clothing: The survey c overed 17 enterprises, nine of which produce predominantly textile products (yarns, fabrics and other non-garment products) and eight of them produce mainly garments. The majority of them were small and medium-sized firms and only three employ more than thousand workers. All except one were privately-owned and only two firms were partially foreign-owned.

While cotton textiles have seen their share in gross domestic product decline, the share of wool and silk products, as well as that of garments, has increased. While textile products occupy the second rank in Indian exports, garment exports held fourth rank in the late 1990s. The ratio of exports to output has gone up in the combined three textile branches, from 15% in 1987-88 to 25% in 1997-98, while it has gone down in clothing. Finally, employment in textiles has grown less rapidly than in other manufacturing (at about 1%), but in clothing it has grown at 10%, significantly above the manufacturing average of 2.2%. Labour productivity rose by 7.5% in textiles, but only 5.5% in clothing.

The majority viewpoint expressed by the sample firms of the present survey is

NOTES

that the reforms had a positive impact Rubber and Plastics Products: The through reduced red tape and increased present survey sample includes five manu-

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availability of new technology. The increase of exports was also related to the abolition of quotas of the multi-fibre agreement (MFA). A smaller number of firms reported either no or a negative impact of the reforms, due to increased competition of imports. This was particularly emphasised by producers of silk products, who blamed cheap silk imports from China for the reduction in silk p roduction. Subcontracting is particularly prevalent in the clothing industry, where many firms have much of their output p roduced by a large number of families in the villages.

Among the complaints and recommendations for change most respondents mentioned the labour laws, infrastructures, the need for export incentives, tax and interest rate policies, as well as bureaucracy and corruption. Although infrastructure improvements in recent years were recognised, more needs to be done in the opinion of most of the responding firms. In that context, unreliable electricity s upply is often responsible for high cost. The call for export incentives, even when limited to duty draw-back schemes, was heard from five out of 17 firms.

Wood Products: The seven sample firms of our survey are all in the small to medium sized range: only three of them employ more than 100 workers, the largest one no more than 300. Although five of the seven firms do export (two of them 100% of their output of handicraft and furniture), the majority expressed dissatisfaction with the reforms. Import penetration of cheaper products, mainly from China, seems to have been the main reason for declining profits. Another factor, however, which is specific to this industry, seems to have affected the industry’s competitiveness. The 1997 ban on domestic logging forced the industry to use more expensive imported wood, which contributed to the profit squeeze. The firms’ recommendations to government include, besides the frequently heard complaint against the labour laws, stronger incentives for exports through duty draw-back, but also further reduction of import duties on material inputs.

facturers of plastics and rubber products. All of them are privately-owned, without foreign participation, and all are mediumsized with between 25 and 150 employees. Four of them export, but only small p roportions of their output (maximum of 15%). The general consensus on reform impact is positive and includes the following benefits: easier procurement of raw materials, access to new technology, enhanced opportunities for trading, increase in production efficiency and improved quality of products. Two firms reported declining profits due to increased competition, especially from Chinese imports, and increasing costs of power, transportation and labour.

Chemicals Including Pharmaceutical Products: The Indian pharmaceutical industry derives its strength from the development, production and export of generic drugs, which was encouraged by India’s Patent Act of 1970. The legislation removed medicines, food and agro- chemicals from product patent protection to process patents, which had a shorter life (seven years as opposed to 14 years of product patents). Since 1995, when traderelated intellectual property rights (TRIPS) legislation was adopted by the World Trade Organisation (WTO), India had to amend its patent laws to make them compatible with TRIPS. Since 2005 the law is now fully TRIPS-compatible, with product and process patent protection of 20 years. This means that the Indian industry experiences a similar confrontation between the R&D-based formulation drugs dominated by multinational corporations and its low-cost bulk drug manufacturing arm, as in other WTO member countries. India has competitive advantage in the latter, due to the expansion of this industry since 1970, but it also searches niche markets in the prescription drug domain.

All 10 enterprises covered in the present survey are in pharmaceuticals, so that, unfortunately, the apparent ambiguity about performance of the chemical industry could not be clarified further by the interviews. Industrial chemicals (the other major sub-sector) also

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Economic & Political Weekly

NOTES

increased their share in global exports; therefore, the observed decline in value added and employment remains unexplained. The sample firms are mainly (7/10) of small-to-medium size, but three of them employ more than 100 workers. Only four of them sell in export markets. In addition to the 10 pharmaceutical firms the survey also benefited from an interview with a representative of the Indian Drug Manufacturers’ A ssociation (IDMA).

Although the sample firms are predominantly in the business of generic drugs, which suffers from the TRIPS-based constraints, the majority view of the respondents is positive about the reforms. The main advantages are seen in reduced trade restrictions, free flow of technology, increased foreign investment and fewer restrictions on collaboration with foreign firms. The industry-specific policies, such as pricing control policies, testing procedures and patent rights, seem to have a larger impact on the firms than the 1991 economic reforms. In spite of these constraints, which tend to lower profits, the Indian drug industry seems to be a strong international competitor.

As to the complaints and recommendations for further reform, industry representatives added some industry-specific points to the often heard demand for labour law revision and improvements in electricity supply. In particular, the approval process of new drugs by the government should be shortened and price controls of drugs were criticised. Some concern was also expressed over the TRIPS-based constraints, which amounted to a call for government support in patent litigation against multinational corporations and in favour of laws that benefit the generic drug industry.

Metal Products: In this industry six enterprises were visited, all of which are privately-owned. Only two of them employ more than 100 workers, but three of them have more than one plant. Three firms export, but no more than 15% of their total output. Four of the firms reported that the reforms had positively affected their industry, while two firms described the new business climate as more difficult and reported serious profit

Economic & Political Weekly

EPW
september 19, 2009

squeeze due to import penetration and relatively inflexible costs. On the positive side, the main benefits were seen in the increased availability and lowered cost of manufacturing equipment and technologies. They helped the firms in competing with imports and in expanding exports. Only two of the six firms reported having benefited from export incentives, such as duty drawback and, in one case a subsidy for installing new machinery. Profit margins were reported to have declined in four firms, but increased in two. This apparent contradiction is most likely due to differences in product-mix and the nature of material inputs used.

The main obstacles to future growth were described as infrastructure deficiencies, especially those of the transport network and harbours, but also electricity supply (power failures) and the rising cost of fuel. All respondents emphasised the need for increased public expenditure for infrastructure development. Another argument frequently heard concerns the tax structure. All respondents argued in favour of more standardisation of taxes across regions and states. The discussion of labour laws triggered the most unanimous recommendations for change. All respondents agreed that more flexibility in hiring and firing, as well as with regard to overtime regulation, is needed. It was also argued that, in spite of visible improvements, further reduction of bureaucracy, especially regarding small business, is required.

Automobile and Automotive Parts: This industry is one of the most interesting ones because of its visibility and the attention it has recently received by the government. The industry has attracted significant amounts of foreign investment and has become an exporter of automotive parts and a limited number of cars.

The survey has covered only seven enterprises, which included two very small firms (five to 10 employees) but also three large firms with over 1,000 employees. Their output ranges from automotive parts and maintenance/ repair to assembly of commercial vehicles, buses and trucks. Three of the firms

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do export, one at a rate of 30% of its output. Four firms have existed since the 1960s or 1970s, but three of them have started operations only in the 1990s. Four of the firms were either foreign-owned or had joint ventures with foreign partners.

The reform impact was viewed quite differently by the participating firms, depending on whether the respondents were connected with foreign firms or not. The foreign-linked firms described the impact as favourable due to their access to new technology. The firms that are not connected to foreign firms saw the impact as unimportant or negative, due to diminished protection, increased competition and falling profits. The main obstacles to business were identified by the respondents as electricity supply failures, infrastructure deficiencies, rigid labour laws and access to and cost of credit.

Conclusions

A number of common perceptions across industries emerge from our survey regarding the impact of the reforms of 1990s on Indian industries. First, the manufacturing sector as a whole did not decline as a result of the country opening its borders to freer trade and foreign investments. The main benefits occurred to industries through the access to new products, technologies and skills, as well as lower costs of intermediate inputs. In some industries the increased competitive pressure led to shrinking profit margins, but others managed to increase profits by adjusting to the new environment. Second, although the majority of firms in the sample were small firms and not affected directly by the existing labour laws, the need for further reforms in this area was frequently stated. Finally, the manufacturing sector faces serious constraints in the form of infrastructure deficiencies in electricity supply, road and rail transportation and sea ports. These findings suggest that improvement in infrastructure and more flexible labour laws will facilitate future growth of India’s manufacturing sector.

Reference

Siggel, E (2007): “Economic Reforms and Their Impact on the Manufacturing Sector: Lessons from the Indian Experience”, Asia Pacific Development Journal, Vol 14, No 1, June.

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