Aspects of India's Economy Nos. 36 & 37: The Real State of India's Economy

The Real State of India's Economy
II. Six Years of Depressed Industrial Development

Whereas the business papers project a boom on the basis of one or two quarters' growth, a better picture of the state of industry can be got by looking at industrial investment. The slowdown is brought out sharply in the RBI's survey of corporate investment (see Table 1). Capital expenditure, that is, expenditure on lasting assets such as plant and machinery, fell by 2002-03 to half the level of 1996-97. From the available information, the RBI concludes that in all likelihood investment will sink even lower in 2003-04 than in 2002-03.⁸

Table 1: Phasing of Capital Expenditure of Projects Sanctioned Assistance
by Term Lending Institutions/Commercial Bank

	Rs. cr	% change	in 1993-94 Rs
1992-93	26,777	34.7	28,373
1993-94	33,362	24.6	33,362
1994-95	41,948	25.7	38,894
1995-96	64,319	53.3	54,620
1996-97	70,691	9.9	56,554
1998-99	70,724	0.0	54,539
1999-2000	67,131	-5.1	49,666
2000-01	53,491	-21.4	37,786
2001-02	40,887	-23.6	26,685
2002-03	37,154	-9.1
2003-04 on projs. sanct. in earlier yrs.	19,518
-- RBI Bulletin, December 2003; column 4 calculated by us using deflator for fixed capital formation.

This picture of industrial investment is also borne out by the trend in investment in the economy as a whole. Investment in fixed assets such as plant and machinery⁹ as a percentage of GDP grew steadily from 10.6 per cent in the 1950s to 21.9 per cent in the latter half of the eighties. That is, a larger and larger share of the GDP during these four decades (1950-90) went toward building up lasting assets. However, after 1991, the rate of such investment first dropped, then soared, touching 24.4 per cent during 1995-96. This was the period when large industrial capacities were put up in anticipation of booming demand from the elite. After that, when that demand ran out, investment fell as sharply as it had risen, and has remained depressed since, falling to below the rate at the start of the decade (see Chart 1). For the first time in the past five decades, there has been a downward trend in fixed investment over six years (the only comparable period is 1966-67 to 1970-71).

As industry sank into recession during the first few years of the 1990s, and then again in the latter half of the decade, a large share of manufacturing capacity was kept idle. In India, it is difficult to calculate the rate of capacity utilisation in industry because of the lack of information on installed capacity in industry. However, the RBI's Currency and Finance Report 2000-01 attempts two different methods to measure capacity utilisation in Indian industry since 1970-71. While there are some differences between the results, both measures show at the end of the decade the lowest rate of capacity utilisation in the three decades covered by the study.

Uneconomic use of capital
According to the official propaganda, the 'liberalisation' programme of the past 13 years was to unleash the creative, competitive spirit of capitalism. With the dismantling of State regulation and withdrawal of the State from various economic activities, the private sector would be freed to make the most efficient choices, and thereby improve its competitiveness vis-a-vis the industry of other countries. The improved efficiency was meant to show up in increased productivity, which measures the rate at which output flows from a given factor of production (here, labour or capital).

	1980-90	1991-2000
Total factor productivity growth	3.9	2.1
Labour productivity growth	6.5	7.8
Capital productivity growth	1.3	-0.7
-- RBI, Report on Currency and Finance, 2002-03

However, according to the RBI's Currency and Finance Report 2002-03, Total Factor Productivity Growth (which is meant to capture the productivity of labour and capital together) slowed down very sharply in the 1990s. The report has also calculated productivity separately for the two factors, labour and capital. Labour productivity -- the rate at which output flows from a unit of labour -- has grown faster in the 1990s. But capital productivity -- the rate at which output flows from a unit of capital -- actually dropped in the same period. The growth of fixed capital outpaced the growth of value added. In other words, on the one hand, more value added was extracted from each worker; on the other hand, less and less value added was got from fresh capital investments. In a country where labour is plentiful and capital is scarce, we are faced with the economic nonsense of the use of abundantly available labour being restricted and scarce capital being squandered.

In fact, this is one of the reasons why this measure of `productivity' has its dangers: it ignores whether the factor of production is being fully employed, and looks only at the productivity of what is employed. (Thus the non-productivity of unemployed labour is not part of the calculation.) But despite this limitation, in the above instance the productivity measures -- the very measures preferred by the international financial institutions -- point to greater idle industrial capacity and more intense exploitation of labour.

Notes:
8. Although the full figure for 2003-04 is not available, we do know the figure for expenditure on projects sanctioned in earlier years (the last row of Table 1); the remainder would be expenditure on projects sanctioned in 2003-04 itself. The RBI survey comments that "if the aggregate capital expenditure in 2003-04 has to show growth over that in 2002-03, the capital expenditure in 2003-04 on projects likely to be sanctioned in 2003-04 must be above Rs 17,636 crore (Rs 176.36 billion).... such a high amount of investment in 2003-04 on new projects sanctioned assistance seems to be very unlikely. Thus the year 2003-04 may also witness a fall in corporate investment when compared to that in 2002-03." (RBI Bulletin, December 2003). (back)


Nos. 36 & 37, March 2004