11.4 The management of industrial change: India

The advantages of the informal sector (when there are not enough formal sector jobs) are that it: l provides jobs l alleviates poverty l bolsters entrepreneurial activity l facilitates community cohesion and solidarity

Now test yourself

11 Distinguish between fixed transport costs and line-haul costs. 12 Distinguish between wage rates and unit costs. 13 What are external economies of scale? 14 What is industrial agglomeration? 15 What are export processing zones?

Answers on p.221

Tested

11.4 The management of industrial change: India

India is a newly industrialised country where the transformation of the economy has been based more on the service sector than on manufacturing. This has been at least partly due to a low level of foreign direct investment in manufacturing, a situation that began to change in the early 1990s. The service sector accounts for 52% of India’s GDP, with manufacturing industry and agriculture respectively responsible for 28% and 17% (Figure 11.4). l Textiles is the largest industry in the country, employing about 20 million people and accounting for one-third of India’s exports. l The car industry has expanded significantly in recent times and is now the seventh largest in the world. l However, it is in the field of software and ICT in general that India has built a global reputation.

60 50 40

% GDP

30

20

10

0 1970 1975 1980 1985 1990 1995 2000 2005

Year

Agriculture, value added (% of GDP) Manufacturing industry, value added (% of GDP) Services, etc., value added (% of GDP)

Figure 11.4 The main economic sectors’ share of Indian GDP

Foreign direct investment is overseas investment in physical capital by transnational corporations.

Typical mistake

Students should take care with the use of the word ‘industry’ as it can be applied to all sectors of the economy, for example the agricultural industry and the service industry. If you use it with reference to the manufacture of goods then state clearly that this is ‘manufacturing industry’.

Traditional industrial policy

The objective of India’s policy from the 1950s was to coordinate investment decisions in both the public and private sectors and to bring certain strategic industries under public ownership. Five-year plans were set up and this statedirected industrialisation model was followed from 1950 to 1980. The main objectives of the plans were: l industrialisation l raising per capita incomes l achieving equity in the distribution of gains from economic development l reducing the existing concentration of economic power l achieving a more even regional distribution of industrial development

The role of heavy industry, particularly iron and steel, was emphasised, with the public sector playing a major role. Technological self-reliance became an important element of industrial policy. Industrial policy measures under the 5-year plans included: industrial licensing, strict import controls, subsidising exports, and strict controls on investment by transnational corporations. The range of controls made India one of the most protected economies in the world. High tariffs made imports very expensive and thus controlled their volume.

Economic reform

The currency crisis of 1991 proved to be a major turning point, instigating bold economic reforms that resulted in rapid economic growth. The reforms were based on: l liberalisation l deregulation l market orientation

Tariffs on imports were significantly reduced along with other non-tariff trade barriers as a result of India’s membership of the World Trade Organization (WTO). In the last two decades India has spawned a modern, highly export-oriented ICT industry. The export intensity of Indian software is more than 70% and the ICT sector has attracted high levels of foreign direct investment. India’s technological success has not been confined to the ICT industry. India’s corporations have achieved significant growth in a number of industries including, in particular, pharmaceuticals and car components. It is one of only three countries in the world to build super-computers on its own and one of only six countries in the world to launch satellites.

Bangalore

Bangalore is the most important individual centre in India for high technology. In the 1980s Bangalore became the location for the first large-scale foreign investment in high technology in India. India’s ICT sector has benefited from the filtering down of business from the developed world. Many European and North American companies outsource to Indian companies because: l labour costs are considerably lower l a number of developed countries have significant ICT skills shortages l India has a large and able English-speaking workforce

Regional policy

Like many other countries India adopted regional economic planning and tried to encourage a better spread of industry around the country. In the early 1970s backward states and backward districts were identified and a scheme of incentives for industry to locate in these regions was introduced. This included:

Heavy industry is one with heavy/ bulky raw materials and heavy/bulky finished products.

l

a grant of 15% of fixed capital investment transport subsidies income tax concessions

The state of India’s infrastructure is an important issue. Infrastructure in India is at a lower level than that in China and other newly industrialised countries in the region.

Now test yourself

Tested

16 What proportions of india’s GDP are accounted for by agriculture, industry and services? 17 What three principles were the economic reforms of the early 1990s based upon? 18 Why have many foreign firms outsourced to Indian companies?

Answers on p.221

Exam-style questions

1 (a) Discuss the physical factors that can influence agricultural land use. (b) How can economic, social and political factors affect farming systems? 2 (a) Discuss the characteristics of the informal sector of manufacturing and services. (b) Describe and explain the influence of three factors (e.g. labour) on the location of manufacturing and related service industry.

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