IMPORT SUBSTITUTION, INDUSTRIAL CONCENTRATION AND PRODUCTIVITY GROWTH IN INDIAN MANUFACTURING*
| DOI | http://doi.org/10.1111/j.1468-0084.1986.mp48002003.x |
| Published date | 01 May 1986 |
| Author | Bishwanath Goldar |
| Date | 01 May 1986 |
OXFORD BULLETIN OF ECONOMICS AND STATISTICS, 48, 2 (1986)
0305-9049 $3.00
IMPORT SUBSTITUTION, INDUSTRIAL
CONCENTRATION AND PRODUCTIVITY
GROWTH IN INDIAN MANUFACTUIRING*
Bishwanath Goldar
I. INTRODUCTION
Earlier studies on productivity for the industrial sector of developing
countries have indicated that increases in total factor productivity
(TFP) are an important source of industrial growth. The focus in these
studies has been on the measurement of TFP and very little attention
has been paid to the causes of productivity change. This neglect has
seriously limited the usefulness of the earlier studies from the point of
view of economic policy. Recently, Nishimizu and Robinson (1984)
have examined the effect of trade policies on TFP growth for major
industries of Japan, Korea, Turkey and Yugoslavia.
The object of this paper is to study the pattern of TFP growth in
Indian manufacturing at the two-digit industry level1 and provide an
explanation of the inter-industry variation in TFP growth using a
multiple regression framework. It seeks, in particular, to assess the
effects of import substitution and industrial concentration on TFP
growth. The use of multiple regression analysis for explaining inter-
industry differences in TFP growth is not new. It has been applied in
several earlier studies for American industries, including Kendrick and
Grossman (1980). But, there is hardly any study for developing countries
in which this type of analysis has been attempted.
A number of earlier studies (Reddy and Rao, 1962; Banerji, 1975;
Hashim and Dadi, 1973; Mehta, 1980; Goldar, 1981, 1983; Brahmananda,
1982; Ahluwalia, 1985; etc.) have estimated TFP growth in Indian
manufacturing at the aggregate level. Most studies have concluded that
the rate of TFP growth in Indian manufacturing has been very low
(some even found it negative) and the contribution of TFP growth to
output growth quite small. While no rigorous empirical analysis has
been undertaken to explain the poor productivity performance of
Indian manufacturing, the authors have sought an explanation of their
* J have benefited from the comments of Professor K. L. Krishna and an anonymous referee
on earlier drafts of this paper.
International Standard Industrial Classification. Industry Group 39 (Miscellaneous) has
not been included in this study.
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findings in under-utilization of capacity, gestation lags in investment
projects, shortages of coal, power and transport facilities, deteriorating
industrial relations, and ill-effects of government policies on industrial
efficiency.
There is a widely held view among Indian economists that policies of
import substitution and domestic industrial licensing have led to
considerable inefficiency in the industrial sector, and that policies for
checking concentration (restrictions against large industrial houses,2
discrimination in favour of small scale units, etc.) have resulted in
significant loss of scale economies. How government policies relating
to import substitution, industrial licensing and monopoly control have
adversely affected industrial efficiency, has been discussed by Bhagwati
and Desai (1970), Frankena (1974), Bhagwati and Srinivasan (1975)
and others. Bhagwati and Srinivasan in their study conclude that the
Indian foreign trade regime, along with the industrial licensing policy,
led to a wasteful misallocation of investible resources and accentuated
under-utilization of capacity (p. 191); it virtually eliminated all forms
of effective competition, actual and potential, the effects of which were
to eliminate incentives to reduce costs per unit of output and prevent
production from being concentrated in more efficient units (p. 45); and
it led to or accentuated the lack of attention to product quality, design
and technological improvement (p. 218). Similarly, Wolf (1982, p. 62)
notes that by international standards Indian industries are fragmented
into many rather small firms, causing difficulties in the exploitation of
scale economies and in product development. He attributes industrial
fragmentation, among other factors, to industrial licensing policy aimed
at creating a substantial number of producers3 by placing limits on the
size of new undertakings, large industrial houses and foreign controlled
firms, and to allocation of essential imports directly to firms, so curbing
the growth of the efficient and protecting the inefficient. Similar
comments about the effects of import substitution strategy, industrial
licensing policy and government policies for diffusing ownership and
preventing monopolies on industrial efficiency find place in the works
of many other authors writing on India's industrialization, including Jha
(1976, PP. 99-106) and Ahiuwalia (1985, pp. 147-65). There is,
however, very little econometric evidence in favour of this view as yet.
The present exercise attempts to remedy this deficiency.
The paper is organised as follows. Estimates of TFP growth are
presented in Section II. The explanatory variables used in explaining
2The official definition of a large industrial house, adopted in 1973, is a group of inter-
connected undertakings having assets over Rs. 200 million.
However, this by itself does not ensure competition. Bhagwati and Desai (1970, p. 272)
observe: 'The attempts at breaking up plant into a large number of uneconomic plants to
increase the number of "competitors" ignored the important economic insight that it is the
possibility of entry that makes a situation competitive and not just increasing the number of
units (especially in a framework which itself fostered a monopolistic environment)'.
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