How reforms killed Indian manufacturing

NEW DELHI,ASHOK PARTHASARATHI: This year marks 25 years since the so-called “economic reforms” were launched in July 1991. By now, broad contours of the policies and practices that characterised such reforms are well known, viz. radical deregulation, marketisation and privatisation of the industrial, technological and financial sectors, and an across-the-board induction of foreign direct investment and foreign institutional investment, and so on.

“Products that we were manufacturing in the 1990s are being imported now.” Picture shows the Nokia Plant in Sriperumbudur which shut shop in 2014.

Basing himself on the erroneous views of India’s IT software and service sector behemoths, the “advice” of Western governments, large foreign companies and the trinity of the World Bank, the International Monetary Fund and the World Trade Organisation, Manmohan Singh, then Finance Minister, concluded around mid-1992 that we could be globally competitive only in IT software and services and not in hardware. Thus he reduced import duties on all IT hardware purportedly to “facilitate” software promotion and growth on a globally competitive basis using imported hardware. Result: by 1994 our fledgling civilian IT hardware industry folded up.

No one seems to have told Dr. Singh that IT hardware far more technologically sophisticated than the commercial hardware being imported by our software companies was being manufactured by Indian defence, atomic energy and space agencies and even exported to other developing countries such as Brazil, Malaysia, and Indonesia.

Death by policy
The “reforms” also dealt a body blow to the indigenous optic fibre telecommunication systems industry, a project begun by the Department of Electronics (DoE) in 1986 with the setting up of the public sector utility, Optel. Based on a global tender, technology-transfer agreements were concluded with two companies, Fujitsu and Furukawa, in 1987 and a blueprint for the Optel plant prepared. It indicated a project cost of Rs.45 crore and a construction period of 30 months; when completed, the actual numbers were Rs.46 crore and 32 months.

All this was possible because I got one of our top technocrat-managers, Bhagwan Khurana, to leave his job as CEO of Punjab Wireless Ltd. (Punwire) and become CEO of Optel. A top-class cluster of three plants was operational by end March 1989. In its very first year of commercial operations Optel’s turnover was Rs.64 crore with a profit of Rs.11 crore. In 1990-91 the turnover zoomed to Rs.298 crore with Rs.35 crore profit.

Around this time, Sterlite, a metallurgical company, and Finolex, a packaging material producer, entered the field. They would import fibres and merely sheath them into cables. Even the sheathing material was imported — the cables had merely 10-15 per cent domestic content. This, however, ran into a roadblock in the form of the graduated customs duties then applicable, which promoted local production. They started lobbying with the government to reduce the import duty on fibre — a manufactured component — from 40 per cent to 10 per cent, which was the duty on raw materials. I was then Secretary of the Electronic Commission and Additional Secretary in the DoE. Despite the DoE’s stout opposition to both the character of the companies’ “projects” and the drastic and irrational reduction of duties, they got their way. Within six months, large quantities of optic fibre began to be imported. Optel had to close down its optic fibre plant and import low-grade fibre from China to be able to compete in our own market with the likes of Sterlite and Finolex!

In 1990-91, there were at least a dozen electronics corporations producing a range of high-tech radio communication equipment, industrial electronics and control and instrumentation equipment worth annually around Rs.6,000 crore. However, the reduction in customs duties from 60 per cent to 30 per cent overall, which led to a glut of imports, forced many of these corporations to halt production and become import agents, a phenomenon repeated in the key solar photovoltaic industry.

“Reforms” also led to large-scale import of cell-phone handsets that could have been easily produced here had a policy of phased manufacture been adopted. Result? The entire market for such handsets was met by unnecessary imports from Day One in 2005-06. In 2013-14 cell-phone imports totalled Rs.35,000 crore.

By 2000, foreign brands grabbed 80 per cent of the television sets market, from a situation where 10 local companies catered almost fully to the demand. Six of the 10 indigenous television makers have folded up, with a ripple effect on the electronic components sector.

My final example is our heavy electrical equipment industry led by Bharat Heavy Electricals Limited (BHEL). Up until 1998-1999 this industry was doing very well. However from the next year onwards, four Chinese power plant equipment manufacturers began to seriously erode BHEL’s market. This erosion was despite the quality and technical reliability of the Chinese equipment being considerably inferior to BHEL’s products. The United States, home to General Electric and Westinghouse, imposed penal anti-dumping duties on Chinese power plant equipment. Yet, the Indian government merely watched as BHEL lost 30 per cent market share by 2014.

These examples indicate that in sector after sector, the “reforms” have led to deindustrialisation. Products that we were manufacturing in the 1990s are being imported now. The negative impact this deindustrialisation has had on employment and on our economy is gigantic. The government must act immediately to halt the destruction of domestic industry on such a massive scale instead of merely tom-tomming its “Make in India” policy.

Note: Ashok Parthasarathi was the Science and Technology Adviser to the late Prime Minister Indira Gandhi.

Posted by on March 15, 2016. Filed under Editorial. You can follow any responses to this entry through the RSS 2.0. Both comments and pings are currently closed.