Until the previous section the evolution of the productivity regime of the Indian manufacturing sector was the focus of enquiry within the framework envisaged in section III. As discussed in Section III, that demand expansion stimulates productivity as output expansion takes place in response to the demand generation. Output expansion further leads to increased productivity. The analysis of the productivity regime of the Indian
manufacturing sector shows that intra sectoral structural change within the manufacturing sector has led to widened gap between the workforces engaged in low technology and medium & high technology sectors. This is based on the distribution value added shares between the technology groups as compared to the employment.
Growth in labour productivity did not involve a sustained process of employment generation. Increased capital intensity has reflected labour substitution instead of technological upgradation. The productivity regime impacts the demand generation in the economy through the channels of consumption, investment and exports as
previously discussed in Section III. The distribution of productivity gains between the different classes in the production process determines the consumption and investment demand which is domestic absorption (Ghose;
2016). Improved productivity also helps boost exports by making domestic production more competitive internationally. This section aims to understand the evolution of the demand regime by analysing the domestic
absorption (consumption plus investment) and exports. Domestic absorption and exports together constitute the effective demand or the realised demand for the domestic production. This is akin to the explanation provided by Bhaduri (1986). He explains that the actual demand faced by the producers in a capitalist economy reflects the size of the market. The principle of effective demand determines the size of the market in a capitalist economy as a part of the production process. The role of imports is crucial in the principle of domestic demand as they reduce the home market for domestic produce. The impact of the productivity regime on the demand regime in this framework works through the principle of effective demand. In case of improved export demand through increased productivity, the size of the market tends to be determined by the distribution of gains from export among various classes and the import demand generated domestically for consumption and exports. This conceptual understanding based on this principle of effective demand motivates the methods of analysis in this section.
Without even looking at the exact distribution of value added that accrued to different classes in the production process, it is clear from the previous analysis of the productivity regime that intra-sectoral distribution of value added has worsened in the Indian manufacturing during the post-reforms period. This analysis involves looking at aggregate demand metrics to understand the nature of the demand regime in the Indian manufacturing. The analysis begins by looking at the ratio of effective demand to domestic absorption for the Indian manufacturing sector.
Where, C=Private Final Consumption Expenditure, G=Government Final Consumption Expenditure, I=Gross Fixed Capital Formation, CIS=Change in stock, X=Exports, M=Imports. As depicted in Equation (1) effective demand is the realised market for the domestic production net of imports for a particular period. Domestic Absorption as reflected by equation (2) is the realised size of the home market for domestically and foreign produced output for a particular period. Effective demand greater than domestic absorption would mean total domestic production has been sufficiently large enough to satisfy aggregate domestic demand. In this scenario the domestic sources of production supersede imports. This could be due to positive net exports, build up of inventories in case of domestic absorption falling short of production or both occurring together. In case the domestic absorption supersedes effective demand, the home market tends to witness greater import penetration.
Table 9 below depicts the structure of Indian manufacturing demand in based on the discussion arising from equations (1) and (2) above.
Table 9
Components of Indian Manufacturing Final Demand (As a percentage of Effective Demand)
S No.
Components of Manufacturing
Demand/Years 1993-94 1998-99 2003-04 2007-08 2013-14
1 PFCE 61 72 62 52 55
2 GFCE 6 5 4 4 1
3 GFCF 42 37 42 44 30
Domestic Absorption (1+2+3)
4 Valuables 0 0 0 0 4
5 CIS -1 -1 3 19 18
6 Export 25 28 32 30 42
7 Import Demand 32 42 42 49 51
8 Effective Demand 100 100 100 100 100
9
(Effective Demand/Domestic
Absorption)*100; (ED/DA) 92 88 93 100 115
Source: Same as Table 8
Table 9 shows all the components of manufacturing final demand in India. The trend in percentage of effective demand to domestic absorption as depicted in row 9 is analysed with the change in composition the final demand components. To begin with, in 1993-94 the domestic absorption of the Indian manufacturing was greater than the effective demand with it being 92 percent of the domestic absorption. 32 percent of the effective demand was imported. By 1998-99, ED/DA fell to 88 percent from 92 percent in 1993-94. At the same time the share of private consumption as a percentage of effective saw a steep rise from 61 percent to 72 percent during the same period. The import demand share also rose steeply from 32 percent to 42 percent. This supports the explanation provided by Chandrasekhar (2011) on the consumption boom during the initial years of liberalization reforms.
The study suggests that this period saw increased domestic private consumption as a result of pent-up demand for a range of imported goods due to liberalization of imports. This also resulted in imported machinery and equipment to produce them domestically. The study argues that the consumption boom was unsustainable as it was largely concentrated in the upper income groups and did not percolate to the other sections of the Indian population. In the following periods, it can be seen that ED/DA rose consistently from 88 percent in 1998-99 to 115 percent in 2013-14. It is important to note that as the domestic production (realized demand/effective demand for domestic production) rose, the importance of private consumption in the effective demand went
down, with build up of inventories and improved export share. In the entire period the import demand for manufacturing as a share of effective demand rose steeply and consistently from 32 percent in 1993-94 to 51 percent in 2013-14. As the share of manufactured exports increased, the import demand continued to increase and surpass the exports by an average of 11 percent of the effective demand during the entire period. The most peculiar finding here is that the period after 1998-99, saw a fall in the importance of private consumption and decline in relative importance of domestic absorption, significant build up of inventories and increased export share, but the imports continued to expand its relative importance in the home market. Ghose (2016) argues that rapid service sector growth in India during the post-reforms period has led to income patterns that have
generated greater demand for manufactured imports. Further, the study shows that in the organized
manufacturing 1999-2000 and 2011-12 became increasingly dependent on imported inputs for production. He also shows that growth in the organised manufacturing was explained by imported input intensity irrespective capital or labour intensive industrial classification. These claims can be further verified for the manufacturing sector as a whole (organised and unorganised manufacturing) in Table 10 and Table 11 below.
Table 10
Net Imports as a percentage of Domestic Absorption in Indian Manufacturing S No.
Manufacturing Industries/Years
Technological Classification
1993- 94
1998-
99 2003-04
2007- 08
2013- 14 1 Food Products, Beverages &
Tobacco LT -7 1 -2 -5 0
2 Textiles, Textile Products, Leather
and Footwear LT -35 -49 -46 -36 -36
3 Wood and Products of Wood, Pulp, Paper, Paper Products, Printing and
Publishing LT 30 45 42 29 123
4 Manufacturing, n.e.c.; recycling LT 8 4 67 17 -47
5 Rubber and Plastic Products MLT -15 -4 -25 -7 72
6 Coke, Refined Petroleum Products
and Nuclear Fuel MLT 104 109 20 -19 -53
7 Other Non-Metallic Mineral
Products MLT -404 -864 -32 0 58
8 Basic Metals and Fabricated Metal
Products MLT 31 120 61 89 2760
9 Ships and boats MLT 16 28 132 399 95
10 Chemicals and Chemical Products MHT 71 78 40 124 198
11 Machinery, n.e.c. MHT 31 41 15 42 30
12 Electrical machinery MHT 14 23 6 16 20
13 Rail Road, motor vehicles and
transport equipment MHT 22 -3 -6 1 -9
14 Drugs and medicines HT -71 -412 -133 -226 -61 15 Radio, TV and Communication
equipments HT 11 32 44 95 123
16 Other high-tech manufacturing HT 3 -5 51 82 31
17 Manufacturing 7 12 9 19 10
Source: Same as Table 9
Table 10 above depicts the ratio of net imports (excess of imports over exports) to domestic absorption in the Indian manufacturing. A negative percentage shows the excess of exports over imports in the Table 10 above. As a broad observation, the Indian manufacturing witnessed a penetration of imports in the home market throughout the post-reforms period. This is depicted by a large and positive net import share of the domestic absorption in all the years shown in Table 10. It is noteworthy to see that in 2007-08 and 2013-14 when the share of private consumption in effective demand went down, inventory accumulation share went up significantly (Table 9), the import penetration as depicted in Table 10 continued to be higher than 1993-94. Further of the six medium high and high technology industries only Drugs and medicines was a net exporter.
The idea of import dependence can be further analysed by observing the imported input intensity of the Indian manufacturing sector. The imported input intensities have been computed for the IOTTs in the following manner:
(∑
∑ )
In equation (1) A is the original input output coefficient matrix where each aij depicts the value of input procured by sector j from sector i and expressed as a ratio of gross value of output of sector j denoted by Xj. The coefficient of input aij consists of both imported and domestic inputs. Ad is the coefficient matrix of domestic inputs. The Ad matrix is not provided by the CSO and has been estimated using the methodology suggested by Bhattacharya & Rajeev (2014) and Veeramani (2016) for the Indian IOTTs (See Appendix C for the
methodology). Matrix M consists of the imported input coefficients mij which denote imported inputs used by sector j and procured from sector i. Equation (2) gives the method for estimating imported input intensity of sector j. Table 10 below shows the pattern of imported input intensity of production across manufacturing sub- sectors for the benchmark IOTT years spanning the post-reform era in India.
Table 11
Imported input intensity of manufacturing sub-sectors (Percentage of imported inputs to total input cost)
S No. Manufacturing Sectors/Years
Technological Classification
1993- 94
1998- 99
2003- 04
2007- 08
2013- 14
1
Food Products, Beverages &
Tobacco LT 2 4 3 3 5
2
Textiles, Textile Products,
Leather and Footwear LT 4 5 5 6 12
3
Wood and Products of Wood, Pulp, Paper, Paper Products,
Printing and Publishing LT 7 11 9 8 12
4 Manufacturing, n.e.c.; recycling LT 10 14 29 16 19
5 Rubber and Plastic Products MLT 9 11 9 13 13
6
Coke, Refined Petroleum
Products and Nuclear Fuel MLT 34 36 51 58 53
7
Other Non-Metallic Mineral
Products MLT 17 21 15 16 32
8
Basic Metals and Fabricated
Metal Products MLT 10 16 19 23 24
9 Ships and boats MLT 11 13 41 62 21
10 Chemicals and Chemical Products MT 12 14 12 19 24
11 Machinery, n.e.c MT 12 16 13 19 21
12 Electrical machinery MT 9 14 12 18 18
13
Rail Road, motor vehicles and
transport equipment MT 11 11 9 14 17
14 Drugs and medicines HT 6 8 7 9 19
15
Radio, TV and Communication
equipments HT 9 15 13 24 27
16 Other high-tech manufacturing HT 6 11 13 27 24
17 Average Imported input intensity 10 14 16 21 21
18 Manufacturing 10 12 15 20 25
Source: Same as Table 9
A clear pattern that emerges from Table 11 is the consistent and considerable rise in the imported-input intensity of the manufacturing sector in aggregate terms (Row 18). At the level of sub-sectors also there has been a consistent upward movement of imported input intensity across the technological spectrum. In the low-
technology category all the sectors except Manufacturing, n.e.c.; recycling, the imported input intensity has been considerably lower than the other sectors of the Indian manufacturing. Moreover, except Manufacturing, n.e.c.;
recycling, the imported input intensity of the low technology sector has been consistently lower than the average imported input intensity (except in the benchmark IOTT year 2003-04) of the 16 classified manufacturing sub- sectors. In the medium low technology category except Rubber and Plastic Products, all the sectors displayed much higher intensity of imported inputs during the entire period as compared to all the other sectors and the average imported input intensity. Within the medium technology and high technology category Rail Road, motor vehicles and transport equipment and drugs and medicines showed relatively low imported input intensity of production. The other sectors in the high technology category i.e. Radio, TV and Communication equipments and other high-tech manufacturing were either close to or higher than the average imported input intensity across sectors. The low technology sectors were less imported-input intensive than resource based medium low
technology sectors and high skill medium and high technology sectors in general.
The analysis in Table 9, Table 10 and Table 11 shows that imports continued to penetrate the home market in India. The net imports measured relative to the domestic absorption remained high and positive during the post-reform period. This happened even as the share of private consumption in effective demand fell, inventories accumulated and export share rose. The manufactured exports were unable to service India‟s import bill as imports have been much higher than exports during this period. Particularly, Table 11 shows that domestic manufacturing production itself became much more import intensive. These observations provide evidence in support of arguments made by Bhattacharya and Mitra (1990), Goldar and Mitra (2008) and Ghose (2016) in relation to a disproportionate growth of service sector. The argument suggests that concentration of service income in smaller segments of the workforce has lead to greater import penetration in the manufacturing sector by creating demand patterns for goods that are either produced through imported inputs or imported final goods.
Rakshit (2007), Nayyar (2012), Ghose (2015) and Talreja (2018) have shown that final demand has been more important driver of service sector demand as compared to intermediate demand. Further, Talreja (2018) has shown that private consumption and exports have been two most important sources of service sector demand.
Moreover, the previous section shows that manufacturing dependence on service sector inputs did not increase during the post-reform period. In relation to this finding Kucera and Jiang (2019) show that developed manufacturing sector dependence on service sector in terms of its share in manufacturing production has been much higher than for manufacturing in emerging economies which includes India between 1995 and 2009. These findings suggest that the nature of service sector growth in India is different from the developed economies.
More specifically, because of its lack of integration with the production in different sectors specially
manufacturing of the Indian economy as compared to its rapid growth in India and the pattern of manufacturing dependence on services observed in various developed economies by various studies like Park (1989), Park (1994), Francois & Reinert (1996), Guerrieri & Meliciani (2005), Driemeier & Nayyar (2018) Kucera & Jiang (2019). Studies like Rakhsit (2007), Nayyar (2012) and Ghose (2015) have suggested that rapid services sector growth has accompanied greater inequality in India. This has happened through both changing demand pattern that has fuelled the growth of services and service sector growth itself benefitting relatively small section of the Indian population. Talreja (2018) and the present analysis of manufacturing sector show that value added composition within manufacturing and services has disproportionately shifted towards high skill and less employment intensive sectors during this period. This indicates towards a crude evidence of production related inequality in the Indian workforce. The claims and arguments made so far by analysing the aggregate figures can be further verified by a detailed analysis of the household consumption across various classes. This will help in understanding if the principle of effective demand has worked in determining the aggregate demand through the pattern of demand at the level of households belonging to different classes.
Another important aspect of the effective demand is the exports. It can be noticed from Table 9 that the export share of manufacturing effective demand has increased during the post-reforms period although it never surpassed the imports. In terms of the analysis in relation to the analytical framework presented in Section II, the enquiry remains incomplete without understanding the nature of export orientation of the Indian manufacturing.
Export diversification and movement of exports from low technology to high technology manufacturing has been an important aspect of the East Asian manufacturing growth as discussed previously. In terms of value
added medium and high technology manufacturing has become more important during the post reform period. It needs to be seen if this has also changed the export orientation of the Indian economy.
Table 12 below looks at the export diversification and concentration indices for the Indian manufacturing during the post-reform period. The export diversification index is based on Moneta and Stepanova (2018) index of diversification of commodities in household food expenditure.
∑
Where Si is the share of ith commodity in total manufactured exports and n is the total number of commodities. A greater value of D indicates greater diversity ranging between 0 and 1. The index of
concentration is based on the Herfindahl-Hirschmann Index using the UNCTAD definition of the index. This is as follows:
(√∑ ( )
) √ √
Where xi is the value of ith commodity exports, X is the total value of exports and n is the total number of commodities. A higher value of H ranging between 0 and1 depicts greater concentration of exports towards lesser commodities.
Table 12
Indian Manufacturing Exports Diversity and Concentration index over years Index/Year 1993-94 1998-99 2003-04 2007-08 2013-14
Exports Diversity
Index 0.85 0.85 0.87 0.88 0.88
Exports Concentration
Index
0.11 0.11 0.17 0.13 0.11
Source: Same as Table 9
It can be seen from Table 12 above that the overall export basket of the Indian manufacturing is diversified and did not remain concentrated in a few commodities. The diversity and concentration indices only fluctuated marginally during this period. To probe the nature of export orientation of the Indian manufacturing a disaggregated analysis of change in export orientation across manufacturing sub-sectors is required. Ghose (2000), Vashisht (2015) and Ghose (2016) suggest the methodology to identify the manufacturing sub-sectors as export oriented on the basis of the ratio of net exports to domestic gross output. It has been suggested that a
sector is export oriented if the ratio of net exports to domestic output is greater than five percent. This method has been used to identify export oriented sectors in the Indian manufacturing in Table 13 below.
Table 13
Export orientation of manufacturing sub-sectors (Net Exports as a percentage of Domestic Gross Output)
S No. Manufacturing Sectors/Years
Technological Classification*
1993- 94
1998-99 2003-04 2007- 08
2013- 14
1 Food Products, Beverages & Tobacco LT 5 -1 2 3 0
2
Textiles, Textile Products, Leather and
Footwear LT 18 24 23 16 19
3
Wood and Products of Wood, Pulp, Paper, Paper Products, Printing and
Publishing LT -8 -14 -11 -9 -11
4 Manufacturing, n.e.c.; recycling LT -5 -3 -60 -6 14
5 Rubber and Plastic Products MLT 5 1 6 2 -17
6
Coke, Refined Petroleum Products and
Nuclear Fuel MLT -37 -40 -4 5 11
7 Other Non-Metallic Mineral Products MLT 27 27 3 0 -3
8
Basic Metals and Fabricated Metal
Products MLT -5 -17 -11 -15 -19
9 Ships and boats MLT -21 -31 -374 -122 -255
10 Chemicals and Chemical Products MT -10 -11 -6 -16 -19
11 Machinery, n.e.c MT -34 -47 -10 -26 -34
12 Electrical machinery MT -11 -15 -3 -9 -11
13
Rail Road, motor vehicles and transport
equipment MT -21 2 4 -1 5
14 Drugs and medicines HT 5 10 12 18 23
15
Radio, TV and Communication
equipments HT -11 -37 -26 -99 -170
16 Other high-tech manufacturing HT -2 3 -83 -207 -36
17 Manufacturing -3 -6 -4 -8 -3
Source: Author‟s calculation based on IOTT 1993-94, 1998-99, 2003-04 and 2007-08, CSO, MOSPI, GOI and IOTT 2013-14 Kanhaiya and Saluja (2016)
*LT- Low-technology; MLT: Medium-low technology; MHT: Medium high technology; HT: High technology Note: The sector “Other high tech manufacturing” is not strictly comparable the definition in1993-94 and 1998-99 on one hand and 2003-4, 2007-08 and 2013-14 on the other hand. The former definition contains “watches and clocks”
and “office computing machinery” and the latter definition is “watched and clocks”, “medical, optical and precision instruments” and “aerospace”.
Table 13 above shows the ratio of net exports by domestic gross output for each sector for the benchmark IOTT years during the post-liberalization period. All the negative values in Table 13 reflect sectors where the value of imports has been greater than value of exports. The only two sectors that consistently
remained export oriented during the post-reform period are Textiles, Textile Products, Leather and Footwear and Drugs and medicines. The former being a low-technology sector and the latter being a high technology sector.
Analysing the IOTTs it has been seen that across the benchmark years the share of the former in manufacturing value added declined from 17 percent to 12 percent but remained constantly much larger than the latter which hovered around 3 percent across the IOTT years. A relatively much smaller segment of high technology manufacturing has been export-oriented during this period while a much larger low technology sector saw a decline in the value added share despite being export oriented18. Another, clear and noteworthy pattern here is the consistently high degree of import penetration faced by medium and high technology sectors like Chemicals and Chemical Products, Machinery, n.e.c. and Electrical machinery during this period. High tech sectors like Radio, TV and Communication equipments saw a steep rise in the share of net imports during this period. Wood and Products of Wood, Pulp, Paper, Paper Products, Printing and Publishing which is low technology sector also faced considerable degree of import penetration during this period but also saw steep decline in its value added share in manufacturing. Ships and boats sector belonging to medium low-technology also faced clear and consistently high level of net import but remained below one percent in terms of value added share in manufacturing across IOTT benchmark years19. The broader understanding that emerges from this analysis suggests that the structural adjustment of value added shares within manufacturing during post-liberalization era from low technology sector towards higher spectrum of technology did not translate into an export oriented demand regime, but an import-dependent demand regime. The structure of export orientation did not change as
18 India KLEMS database also shows a similar decline in the value added share of Textiles, Textile Products, Leather and Footwear and Wood and Products of Wood, Pulp, Paper, Paper Products, Printing and Publishing during this period both in real and nominal terms. The data on drugs and medicines and ships and boats is not separately available in India KLEMS database.
19 Data only available in IOTTs and not in KLEMS India database for this sector.