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CAPITAL GOODS SECTOR IN INDIA, 1990-91 TO 2009-10

Sanjaya Kumar Malik∗∗∗∗ Trivandrum (Kerala), India

1. INTRODUCTION

Technological change is the panacea for the apparent limitdepletable stocks of natural

resourcesto sustain economic growth (Grossman and Helpman 1994). It is, however inhibited by the absence of a well-developed capital goods sector. Any change in process or product technologies invariably requires capital goods industries to produce new machines or equipments according to certain specifications (Fransman 1986). Secondly, capital goods sector is also essential for the successful diffusion of inventions. An infinitesimal of new inventions, new products, or new processes, once conceived, are of no economic relevance unless and until the capital goods sector has successfully solved the technical and mechanical problems or developed the new machines or equipments which the inventions require (Rosenberg 1970). Capital goods sector is, thus, regarded as the heart of the generation and diffusion of technologies in the economy (Rosenberg 1963a; Rosenberg 1963b).

Capital goods sector has an important role in the industrialization of developing economy. According to Hicks (1932) a relative scarcity of a factor of production is itself

an inducement to invention and invention of a particular kinddirected to economizing the use of the factor which is relatively scarce or expensive. This is evident from the experience of American and European history where the scarcity of labour has led to the development of much-admired labour-saving innovations (Rosenberg 1963a). If this is so why then developing counties, which are capital-scarce and labour-abundant, didn’t make capital-saving and labour-intensive innovations. It is because the absence of organized capital goods sector had deprived them to produce machinery and equipment efficiently or to produce capital goods at a reasonable low price1 which could have helped accelerate the technological innovation across the economy. Technological dynamism of capital goods sector in developed economies has enabled them to efficiently produce capital goods at a reasonable price which induces investment and income of the economy.

It is thus clear that capital goods sector is essential in the development process of developing countries and promotion of technological innovation in capital goods sector is the major boost up for technological change in developing economies.

In the light of above discussion, the present paper has made an attempt to understand the capital goods sector in India especially during the post-liberalization period. The paper also intends to study the competitiveness and technological development in

∗Corresponding Author: Doctoral Scholar at Centre for Development Studies, Thiruvananthapuram-

695011, Kerala, India. E-mail: sanjaya10d@cds.ac.in

1 Improving the efficiency in the production of capital goods or any reduction in the cost production of capital goods is in fact the capital-saving innovation to the economy (Rosenberg 1963a)

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capital goods sector. Further, this paper has made a brief analysis of machine tools and textile machinery which are very important part of capital goods sector. The paper is divided into six sections including introduction. Next section discusses the kind of data and methodology we are have employed for the present study; the third section has discussed the classification of Indian capital goods sector; the fourth section has attempted to understand the capital goods sector in the pre-liberalization period which acts as a rudiment to the analysis of the sector in a post-liberalized India; the fifth section has tried to discern structure and growth of capital goods sector in which we have basically studied the growth, competitiveness, and technological development of capital goods sector; the sixth section focuses upon the analysis of two branches of capital goods sectors, namely machine tools and textile machinery; and the final section sums up and concludes the discussion of the paper.

2. DATA AND METHODOLOGY

2.1. DATA

To study the capital goods sector we are employing the data from National Accounts Statistics (NAS) and Annual Survey of Industries (ASI) provided by Central Statistical Organization (India), PROWESS provided by Centre for Monitoring Indian Economy (CMIE), Commodity Trade Statistics Database (COMTRADE) sourced from United Nations Statistics Division (United States) and Office of Economic Advisor, Ministry of commerce & industry (India). For the analysis of capital goods sector during the pre-liberalization period, we have used data from NAS; for study of capital goods sector during post-liberalization period we have taken the data from ASI; for deflating the variables (particularly GVA and Output) Wholesale Price Indices (WPI) have been taken from the Office of the Economic Advisor; for the study of competitiveness, import and export value have been obtained from COMTRADE; and finally to study the technological development in capital goods sector we have got sales and R&D expenditures of the firms sourced from PPROWESS.

2.2. METHODOLOGY

The main focus of the paper is to study the trends and pattern of capital goods sector during the post-liberalization. Besides, it has also stressed its attention on the trends and pattern of capital goods sector during the pre-liberalization period. Hence, to analyze the trends in value added or output of capital goods sector, we have estimated semi-logarithmic time trends, wherein log � = � + � is estimated over a specific time period and the antilog of estimated coefficient � minus 1 yield an estimate of the compound annual growth rate (CAGR).2

Further, in a long time period there are sub-periods, so to estimate the trends of the sub-periods we have modified the semi-logarithmic time trend to include slope as well as

2 Let Y = ABt, where B = 1+ r, and r is the compound growth rate of Y. When the equation is estimated with

log Y as the dependent variable and t as the independent variable, we obtain an estimate b̂ for log B. The

antilog of b̂ minus 1 yields an estimate for compound growth rate, i.e. r.

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intercept dummies. The growth rates of the sub-periods are obtained from the estimated equation. The typical regression equation in our scheme takes the following form:

�� � = � + � ����

�

���+ �� + � ���� + ��

�

���

Where y = value added, t = time, i ranges from first year to last year of the time period j ranges from second sub-period to n sub-period ��=1 for sub-period j, 0 otherwise,

�� = ��, and �� and �� are coefficients of intercept and slope dummies respectively.

In the above framework the antilog of β minus 1 yields the annual compound growth rate of the first sub-period while the compound growth rate for other sub-periods can be

estimated from the coefficients, i.e., anti-log (� + ��) − 1. Such a growth rate, when

significantly different from zero, indicates the existence of a trend within the sub-period.

As we move across sub-periods and compared the inter-period growth rates, there may be acceleration or deceleration in growth rate. The coefficient of multiplicative dummy term, i.e., ��, if it negative and statistically significant, shows that there was a deceleration in the growth rate in the subsequent sub-periods. And if it is positive and statistically significant then we can say there is acceleration of the growth rate in the subsequent sub-periods.

3. CLASSIFICATION OF CAPITAL GOODS SECTOR IN INDIA

Capital goods, in economic sense, are the means to produce consumer goods and services for an economy. They are basically mean machineries and equipments employed in the production of other sectors—agriculture, manufacturing, services, etc. Capital goods sector is very large and diverse in nature. It is divided broadly into three sub-sectors: (a) Electrical Machinery, (b) Non-Electrical Machinery, and (c) Transport Equipments. These sub-sectors have further been elaborated in a schematic manner in Figure 1. National Industrial Classification (NIC)-20043 has, however, demarcated capital goods sector by seven heads (29, 30, 31, 32, 331, 34, and 35)4. Electrical machinery

3 NIC-2004 follows the same classification of International Standard Industrial Classification (ISIC) revision 3.

4 Division 29: (Manufacture of Machinery and Equipment N. E. C.; Division 30: Manufacture of Office, Accounting and Computing Machinery; Division 31: Manufacture of Electrical Machinery and Apparatus N. E. C.;Division 32: Manufacture of Radio, Television and Communication Equipments and Apparatus; Sub-division 331: Manufacture of medical appliances and instruments and appliances for measuring, checking, testing, navigating and other purposes except optical instruments; Division 34: Manufacture of motor vehicles, Trailers and Semi-trailers; and Division 35: Manufacture of Other Transport Equipment.

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Capital Goods Sector

Electrical Machinery Non-Electrical Machinery Transport Equipment

General Purpose Heavy vehicles

Agricultural Machinery Passenger vehicles

Heavy Electrical Light Electrical Machine Tools Parts & Accessories

Turbines & Generators Machinery for Metallurgy Building & repair of ships Transformers Mining, quarrying & Construction and boats Boilers Food, beverage & tobacco processing Railways & locomotive Switchgears Textile machinery equipments

&Control gears Weapons & ammunition Aircraft & spacecrafts Other special purpose machinery Two & Three Wheelers Domestic appliances n. e. c. & other transport equipments

Electrical wires & Cables Transmission towers Cranes Lifts & Escalators Batteries Electrical lamps & tub

Figure 1

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constitutes division 31 and 32, non-electrical machinery includes division 29, division 30, and a sub-division 331, and transport equipment contains the division 34 and 35 of NIC-2004.

4. DEVELOPMENT OF CAPITAL GOODS SECTOR IN THE PRE-LIBERALIZATION

The poor development of capital goods sector at the dawn of independence had induced the formulation of strategy which would remove the serious bottlenecks of a lopsided industrialization under the colonial rule. P. C. Mahalanobis, however, constituted the strategy for Indian industrialization. He demonstrated a two sector model where the strategy was to direct a high proportion of investment to the capital goods sector which would lead in the long-run, to a higher rate of growth of consumption than if a much lower proportion of investment was allocated to the capital goods sector (Mahalanobis 1955)5.

The Mahalanobis model of development strategy was in operation for almost four decade since its initiation in second Five Year Plan (1955-56). Some are of the view that the state-dominated industrialization with high protective barriers to international competition had obstructed a rapid and efficient industrialization while some other have opined alternatively that there has been a significant achievement of this strategy, especially when it is compared to conditions permeated during the colonial period. The following section, however, focuses upon the development of capital goods sector during the pre-liberalization period.

4.1. TREND OF CAPITAL GOODS SECTOR, 1955-56 TO 1989-90

The scatter diagram of value added of capital goods sector in Figure 2 shows that Mahalanobis strategy resulted in an accelerating growth during second and third Five Year Plan periods, but this increasing trend of capital goods sector followed by a perceptible decline after the mid-sixties (i.e. 1965-66) till the mid-seventies and started reviving afterwards. We have, therefore, divided the entire time period, 1955-56 to 1989-90, to three sub-periods such as 1955-56 to 1965-66, 1966-67 to 1974-75, and 1975-76 to 1989-90 and these sub-periods can be described as Mahalanobis period, stagnation period and recovery period respectively. In the Table 1 we have shown the estimate of sub-period growth of value added for different sub-sectors of capital goods sector.

5 A high proportion of investment if diverts towards capital goods sector would lay the basis for future

investment by providing a flow of machinery and equipment. The consequent increase in the productive

potential of the economy through accumulation of stocks of machinery and equipment, though causing

consumption to grow slowly initially, because of the low proportion of investment going to the consumer

goods sector in the early stages, would eventually make possible a high rate of growth in the long-run,

when the existing capacities can be used to augment the productive potential of the consumer goods

sector.

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Table 1: Growth of value added of capital goods sector at 1980-81 prices (registered sector)

Industry Group

1955-56 to 1965-66

1966-67 to 1974-75

1975-76 to 1989-90

1955-56 to 1989-90

Non-electrical machinery

23.15 2.28 6.80 8.90

Electrical machinery

16.46 10.09 10.28 10.80

Transport equipments

8.16 3.30 6.39 4.26

Capital Goods Sector

12.47 4.49 7.80 6.98

Source: National Accounts Statistics, (various issues)

The estimates of sub-period growth of value added for different groups of capital goods sector are presented in Table 1. In the case of non-electrical machinery, during the sub-period 1955-56 to 1965-66, which we have described as the Mahalanobis period, growth was a phenomenal 23 per cent and this collapsed to a meager 2 per cent in the 1966-67 to 1974-75 which we describe as the period of stagnation. Subsequently, during 1975-76 to 1989-90, which we call the period of recovery, the growth rate increased to 7 per cent.

In the case of electrical machinery the growth rate of over 16 per cent in the Mahalanobis period fell to about 10 per cent in the stagnation period and continued growing at the same pace during the revival period as well. Similarly, in the case of transport equipments the growth rate slipped down to 3 per cent from a reasonable 8 per cent during the classic Mahalanobis period and then in the succeeding period it increased to 6 per cent.

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Figure 2: Value Added in Capital Goods Sector (Registered) (Rs Lakh), (1980-81 Prices)

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The case of transport equipment is somewhat different as it has a major share in capital goods sector it behavior affect the capital goods sector as a whole. This is why capital goods sector performance seems as a mimic of performance of transport equipment. Capital goods sector followed a sharp deceleration from 12 per cent in the Mahalanobis period to only 4.5 per cent in the stagnation period and then a recovery to around 8 per cent in the recovery period.

Summing up the analysis of capital goods sector during the pre-liberalization period, it can be said that although there was a revival in capital goods sector and its sub-sectors still the growth rates are during revival period were significantly less than those achieved during the classical Mahalanobis period.

4.2. CAUSES OF STAGNATION OF CAPITAL GOODS SECTOR

There has been a long debate among scholars to find out the causes of stagnation of capital goods sector during the mid-sixties to mid-seventies. We have however put forwarded the following explanations with respect to the pattern of growth displayed by the capital goods sector during the pre-liberalization period. There are many explanations especially with respect to the stagnation in capital goods sector after the mid-sixties and they are mostly related to demand and supply constraints. Growth of the capital goods sector strongly relies on the fixed capital investment made in various sector of the economy. It is demand for investment in plant, machinery and equipments which determines the growth of capital goods industries. This type of demand is limited by aggregate demand for production, it is reasonable to expect that the variation in aggregate demand will ultimately reflected in variation of the output of capital goods sector. Therefore, it can be said that decline in public sector investment after the mid-sixties has led to a deceleration in the growth of capital goods sector as is clear from Table 2.6 7 The Table 2 shows that the growth of capital goods sector follows a similar

pattern that of gross fixed capital formation (GFCF)high doses of public investment in Mahalanobis period enabled a higher growth in capital goods sector, a decline in public investment in the subsequent period led to the stagnation in capital goods sector and again the recovery of growth rate of public investment revived the growth of capital goods sector of the economy. Here, it is evident that the performance of capital goods sector is somewhat conditional upon the GFCF of the economy. Nevertheless, the growth of capital goods sector during the recovery period is less corresponding to the growth of GFCF in public sector.

Table 2: Growth Rates (1980-81 Prices)

6 The decline in agricultural income, due to adverse weather in 1964-65, and the two successive years of drought thereafter, affected the capital goods sector by creating a reduced demand for agricultural machinery. Further, the slow growth of agricultural incomes and their effect in limiting the demand for the industrial goods.

7 Besides the demand constraints, there were problems in availability of better quality intermediate inputs, raw-materials might have contributed to the retardation of growth in capital goods sector. In particular, there was a shortage of imported machinery, components and raw materials in capital goods industries due to decline in foreign exchange reserve in 1965-66 (Pradhan 1990) which might have affected the production of capital goods sector.

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GFCF GFCF (Public) GFCF (Private) Capital Goods

1955-56 to 1965-66 5.9 7.1 4.9 12.47

1965-66 to 1974-75 2.8 1.3 4.0 4.49ψ

1974-75 to 1988-89 5.1 7.9 3.5 7.80∗

Notes: GFCF: Gross Fixed Capital Formation GFCF (Public): Gross Fixed Capital Formation in Public Sector GFCF (Private): Gross Fixed Capital Formation in Private Sector

ψ stands for Growth rate during 1966-67 to 1974-75 & ∗ stands for growth rate during 1975-76 to 1989-90

Source: Table I from (Mundle and Mukhopadhyay 1992)), and Table 1 (previous table).

5. PERFORMANCE OF CAPITAL GOODS SECTOR IN THE POST-LIBERALIZATION

PERIOD

The centralized industrialization initiated in the beginning of second Five Year Plan, however, came to an end in the early 1990s. There were a number of reforms (both internal and external) taken place in 1991. They are as: abolishing the control over industry by withdrawing the licensing system, liberalizing the economy for free flow of goods and services by reducing the tariff structure to the minimum level and also allowing the economy for free flows of foreign investment (direct foreign investment and foreign portfolio investment) and so on. The goal of these reforms was basically to create a more conducive environment which will boost up investment and thereby accelerating output and employment in the economy. Let us look at the performance of capital goods sector in the liberalization period.

5.1. GROWTH OF CAPITAL GOODS SECTOR

We have presented the output series of capital goods sector in Figure 3 which shows that output grew increasingly following the economic reforms till the year 1995-96, and grew at a mild pace afterwards, and finally started regaining its growth momentum since 2001-02. We have accordingly divided the entire time period 1990-91 to 2009-10 into three sub-periods such as (1) 1990-91 to 1995-96, (2) 1996-97 to 2000-01, and (3) 2001-02 to 2009-10. The estimates of the sub-period growth rates of different sub-sectors of capital goods are provided in Table 3.

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In the case of non-electrical machinery during the first sub-period 1990-91 to 1995-96, growth was a 10 per cent and this declined steeply to less than 4 per cent in the second sub-period 1996-97 to 2000-01. Succeedingly, during 2001-02 to 2009-10 (third sub-period), the growth rate increased sharply to 13 per cent and this is significantly different and higher than that of preceding periods. Like non-electrical machinery, electrical machinery has not the same growth picture. It grew at 8 per cent in the first sub-period, declined by 1 per cent in the subsequent sub-period and finally grew to 17 per cent during third sub-period. However we have a pretty different story of transport equipment, compared to its staggering performance during the pre-liberalization period (see Table 1), unlike other sub-sectors it fell more steeply to 5 per cent in the second sub-period from a phenomenal of about 17 per cent in the first sub-period and finally recovered to 17 per cent during the last sub-period. All the sub-sectors of capital goods sector had followed almost similar pattern, cyclical pattern, during the post-liberalization period.

Table 3: Growth of Output of Capital Goods Sector at 1993-94 prices (Registered Sector) (value in Rs Lakh)

Industry Group

1990-91 to 1995-96

1996-97 to 2000-01

2001-02 to 2009-10

1990-91 to 2009-10

Non-electrical machinery

9.88 3.90 13.13 8.17

Electrical machinery

8.27 6.95 17.57 10.80

Transport equipment

16.76 5.15 16.79 12.62

Capital Goods Sector

12.43 5.38 15.80 10.88

Manufacturing Sector

8.79 2.02 13.57 8.56

Source: Annual Survey of Industry (ASI), CSO, (various issues)

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Figure 3: Output of Capital Goods Sector at 1993-94 Prices (Registered Sector) , Value in Rs Lakh

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Manufacturing sector is the important part of capital goods sector. The former is the source of demand of the latter. Given the importance of manufacturing sector it is wise to see how the manufacturing sector is performing vis-à-vis capital goods sector. Like capital goods sector, manufacturing sector also followed the cyclical path during the liberalization period. It grew at 9 per cent in the period 1990-95-96, very steeply fell to 2 per cent during 1996-97 to 2000-01 and finally accelerated its growth momentum to 13 per cent in the period 2001-02 to 2009-10. One thing we can infer from this that the growth performance of capital goods sector may be correlated to the performance of manufacturing sector since capital goods sector has a strong forward linkage with manufacturing sector. Fluctuations in such linkages might have resulted in fluctuations in growth of capital gods sector in the post liberalization period.

Similar to the pattern observed for output, gross value added (GVA) of capital goods sector also followed a cyclical pattern during the post-liberalization period which is quite obvious in Figure 4. But compared to output growth, GVA growth of capital goods sector fell more steeply to less than 1 per cent in the second sub-period from 11 per cent in the first period and finally achieved a substantial growth of 15 per cent in the third sub-period (see Table 4). Likewise, the estimates of growth of value added of sub-sectors of capital goods sector pursued the same pattern as they all declined significantly during the second period. Further, growth of capital goods sector as a whole mimicked the growth pattern of transport equipment. Since transport equipment has a lion-share in capital goods sector its behavior strongly affects the behavior of capital goods sector as whole which is apparent from both Table 1 and 4.

However, the pattern observed for the GVA of manufacturing is staggering as it decelerated significantly to minus 4 per cent during the sub-period 1996-97 to 2000-01 from its gracious 11 per cent growth during the period 1990-91 to 1995-96 and finally it regained an increasing trend of 13 per cent during the period 2001-02 to 2009-10.

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Figure 4: Gross Value Added in Capital Goods Sector at 1993-94 Prices , Value in Rs lakh

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Comparing the performance of capital goods sector with manufacturing sector, it is evident that growth rate of capital goods sector is strongly dependent upon the growth rate of manufacturing sector.8 As we have discussed earlier that fixed investment in manufacturing sector is the demand of capital goods sector. The poor performance of manufacturing sector is expected to affect the performance of capital goods sector during the second sub-period. This is apparent from the Table 4: when manufacturing is growing, capital goods sector is also growing, when manufacturing is declining (-3.91 per cent during 1996-97 to 2000-01) capital goods sector is also declining (0.61 per cent during 1996-97 to 2000-01). Thus, the negative growth of manufacturing might have caused a poor growth performance in capital goods sector during the second period.

Table 4: Growth of Gross Value Added in Capital Goods Sector (Registered Sector) (1993-94 Prices)

Industry Group

1990-91 to 1995-96

1996-97 to 2000-01

2001-02 to 2009-10

1990-91 to 2009-10

Non-electrical machinery

10.47 2.16 14.19 7.22

Electrical machinery

8.62 1.85 17.24 8.45

Transport equipment

14.53 -2.19 15.93 10.48

Capital Goods Sector

12.00 0.61 15.67 9.00

Manufacturing Sector

11.00 -3.91 13.53 6.88

Source: Annual Survey of Industry (ASI), CSO, (various issues)

From the above discussion it is clear that both the output and GVA of capital goods

sector followed a cyclical pathincrease, decrease, and increase. But, we have a little different story to tell when we take share of value addition in output into account. During the initial years of economic liberalization till 1996-97, the share of GVA in output was averaged around 0.26; then it followed the declining trends for the period 1997-98 to 2004-05; and finally became stable at 0.21 for the period 2005-06 to 2009-10 (see Figure 5). This pattern is quite contrasting to the pattern observed for value added which is showing an increasing trend since 2001-02. The meager proportion of value added in output during 2000s may be attributed to the following: (i) low technological change in the capital goods sector, and (ii) high import density in the production of capital goods (i.e. the sector is not sourcing most of the components, spare parts, and raw materials locally available rater it is importing them). With the poor value addition in total output as observed above we can’t not expect Indian capital goods sector to be internationally competitive. The following sub-section is concentrating on measuring competitiveness of Indian capital goods sector during the post liberalization period.

8 It can be said other way around because negative growth value addition in manufacturing can be

attributed to poor performance of capital goods during the 1996-97 through 2000-01. Hence they are both

ways related to each other: one’s performance affects the performance of other.

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5.2. COMPETITIVENESS OF CAPITAL GOODS SECTOR

From the preceding discussion on share of value added in production of capital goods, it is inferred that there was an increasing import dependency capital goods sector. Let’s look at the performance of capital goods sector in the external sector. The following Figure 6 shows that growth of both export and import values are more or less stagnant during the period 1990 to 2000 and both started increasing afterwards. However, the striking feature is that value of import is more than two times of export value during the entire time period 1990 to 2010. The worrisome thing is that the gap between import and export has been getting widen since 2002 which is a great cause of concern for the economy as whole.

It can be followed from the above that external performance of India in capital goods sector is very poor as it imports more than what it offers to the rest of world. It can be inferred, prima facie, that Indian capital goods sector are not competitive internationally. Let us see India’s competitiveness9 in capital goods sector. We have employed Revealed Comparative Advantage (RCA) index10 to assess the international competitiveness of Indian capital goods sector. The RCA index, developed by (Balassa 1965) (also known as Balassa Index), basically compares national export structure with the world export structure. It is defined as a ratio of the share of a particular industry (or commodity) in a country’s total exports to the share of the industry exports in world’s total exports.

9 Competitiveness is defined as “the degree to which, under free and fair market conditions, a country can produce goods and services which meet the test of foreign competition while simultaneously maintaining and expanding the real income of its people” (OECD, 1992, p. 237)

10 RCA is a relatively better index to measure international competitiveness, unlike other indices it represents both price and non-price competitiveness of the country.

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Figure 5: Share of GVA in Output of Capital Goods Sector

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The Figure 7 shows that Indian capital goods sector has been uncompetitive relative to all benchmark countries (Japan, United States, Germany, and United Kingdom) as is obvious from its meager RCA value (<1.0) for the entire time period 1992 to 2010. And it is even uncompetitive in comparison to its neighboring China. In the early 1990s both India and China were uncompetitive and China was in little better position compared to India, and over the years China has improved its competitive position over India and it is clearly visible from its sharp upward RCA value which is the highest for last three years (2008 through 2010). But India could not improve its competitiveness over the long two decades since her inception of economic liberalization. Capital goods sector shares a major proportion in total manufacturing export (COMTRADE, 2011) then why India has been lagging behind in this respect. Why did not India improve its competitiveness in capital goods over the last two decades? The possible answer for the above question is the following. The users of capital goods sector are getting more sophisticated day by day, accordingly they demand for more sophisticated machinery and equipments from domestic as well as from foreign countries. Indian producers of capital goods sector have been failing to meet the sophisticated demand for machinery and equipments from users because of their inefficiency to cope with the latest development of technology by overseas producers.

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Figure 6: Trade in Capital Goods Sector (value in 1000 US$)

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It is thus clear that the comparative disadvantage of Indian capital goods sector may be attributed to the technological disadvantage. Further, it is the process of technological innovation, according to neo-technology theories, generates comparative advantages and influences the competitive position of countries in International markets (see Posner 1961). Economists like Katz (1984), Kaldor (1951), Fagerberg (1988) and Lall (1990 & 2001), inter alia, have emphasized that technological competitiveness is an inevitable factor to achieve comparative advantage.11

5.3. TECHNOLOGICAL DEVELOPMENT IN CAPITAL GOODS SECTOR

From the above discussion on value added and competitiveness of capital goods sector shows that there might be slow rate of technological development in capital goods sector in India. Technology is very difficult to quantify directly since it is an intangible goods. There are, however, indirect approaches to measure technology which are as (i) input measure (Research & Development (R&D) expenditures)12; (ii) output measure (patents); and (iii) the effect of technology (higher productivity). For the present study we are employing the R&D expenditures as a proxy to see the technological development in capital goods sector.13 We have used R&D expenditures and R&D intensity as the 11 “Firms create competitive advantage by perceiving or discovering new and better ways to compete in industry and bring them to market, which is ultimately an act of innovation” (Porter 1990, p. 45).

12 For the first time, internationally comparable information on R&D expenditures have been published by the Organization of Economic Cooperation and Development (OECD) since about 1965. A substantial amount of R&D has been taken place in relatively rich countries with a view to bring about innovations in the economy and resources spent on imitation and technology adaptation are not considered as R&D expenditures (OECD 2002).

13 There is a drawback of R&D as a measure of technology since it ignores the stochastic nature of the process of innovation and the current flow of R&D expenditures is thus a noisy measure of technology improvements in that period. Many authors have constructed R&D stocks from flows using the perpetual inventory method (Griliches 1995).

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Figure 7: Revealed Comparative Advantage of Capital Goods Sector

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conventional measures to see the technological innovations in capital goods sector and its sub-sectors.

The plotted series of R&D expenditures in Figure 8 shows that there was hardly any effort to bring about technological innovations in capital goods sector and its sub-sectors during the 1990s soon after the economic liberalization. There were however some improvements in R&D spending in 2000s and in particularly after 2006-07. Of the all sub-sectors, transport equipments has been spending more on R&D, followed by non-electrical machinery and electrical machinery. Further, the share of R&D expenditures in output (total sales of the sector) is very much insignificant since the average share of R&D expenditures in total output of capital goods sector is turned out to be less than one per cent during the post-liberalization period. Nonetheless, the second half of 2000s has showed that there have been some efforts to make technological capability building in capital goods sector (see figure 9). Among the three sub-sectors of capital goods sector, it is the non-electrical machinery which has been diverting more of its income towards R&D compared to the remaining two.

It is clear from the above analysis on R&D that there has not been any persistent effort from the part of the producers of capital goods to make any technological development in capital goods sector. Overall there has been very poor technological change in capital goods sector during the period 1990-91 to 2009-10 and poor technological improvements in capital goods sector has led to production of inefficient or low value-added products which have failed to satisfy the demand of users from domestic as well as from overseas.

However, the statement derived from the above discussion is quite aggregative in nature which offers only an overview of capital goods sector. Given the wide diversity of capital goods sector and its sub-sectors there should be industry-specific study to delineate the problem more clearly. Further it is not plausible to study all the industries of capital goods minutely. We are therefore focusing upon two industries of capital goods sector, namely machine tools and textile machinery which are the major part of non-electrical machinery. Machine tool is the mother of capital goods sector as whole

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50000 Figure 8: R&D Expeniditure of Capital Goods Sector, value in Rs Million

Electrical Machinery

Non-Electrical Machinery

Transport Equipments

Capital Goods Sector

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and textile machinery has an important bearing on development of textile industry which is a major source of employment after agriculture. The detail investigation of these industries may help delineate the problem of capital goods sector more clearly.

6.1. MACHINE TOOL

Machine tool is an important segment of non-electrical machinery. Machine tools are power-driven machine used to cut, shape, or form materials such as metal and it consists of wide range of products ranging from simple bench-top lathes to large machining centers. Machine tools are indispensible to the production and repair of the various new machines being introduced in all branches of the economy. The industry forms the pillar for the competitiveness of the entire manufacturing sector since machine tools produce capital goods which in turn produce the manufactured goods. Machine tools are also known as mother or master machines because they are used to manufacture both machine tools and other machines, i.e. a means of manufacturing the end product. It generates and transmits new technology to user industries, imparts initial solution to technological problem by developing new skills and techniques in response to new demand from the specific customers. Once these are developed, the newly developed techniques are transmitted to the other part of the machinery using sectors of the economy (Rosenberg, 1976). As technological change in machine tools production is more rapid than any other branches of capital goods sector, its growth and technological development is crucial for the growth of the industry as a whole.

Keeping in view of the importance of machine tools it is pertinent to have a discussion on machine tools industry. Let us discuss some important indicators of machine tools industry.

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Figure 9: Share of R&D Expenditure in Output of Capital Goods Sector (value in percentage)

Electrical Machinery

Non-Electrical Machinery

Transport Equipments

Capital Goods Sector

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Using the factory sector information of ASI we have made an attempt to study briefly the machine tools industry in India. Following figure 10 shows the trend and pattern of value addition in machine tools industry. The plot of GVA of machine tools industry shows that the industry grew at a reasonable pace (9 per cent) following the economic liberalization in 1991; this growth momentum fell to negative 20 per cent during the period 1995-96 to 2001-02 and finally accelerated its growth rate to 19 per cent during 2002-03 to 2007-08.

Further, when we look at the GVA share in total output, machine tools industry seems to be performing better than the overall performance of capital goods sector. Though the line of the ratio of GVA to output seems declining from its better position during the 1990s, still it is reasonable during the 2000s (Figure 11). The average ratio of GVA to output turns out to be 0.30 during the entire study period 1990-91 to 2009-10.

We have seen above that value added in machine tool has been increasing since 2002-03. Now see whether it is enough to satisfy the domestic demand for machine tools. The Figure 12 depicts the distribution of share of domestic consumption between domestic production and import of machine tools. From 1990-91 to till 2001-02 the industry was able to cover major portion of domestic demand for machine tools, but after 2001-02 the industry have started losing its share in total domestic demand and in the financial year 2009-10 it has covered only 20 per cent of domestic demand and rest is met by import.

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Figure 10: GVA of Machine Tools Industry at 1993-94 Prices (value in Rs lakh)

Next seeing the international performance of the industry, it can be said prima facie that the industry is not competitive. When the industry is failing to full fill its domestic demand how we can expect it to be competitive internationally. The following figure on trade of machine tools is revealing the industry poor performance in the world market. Both export and import of machine tools has been increasing since economic liberalization, but import value has been significantly higher than export value of machine tools as it is observed by the COMTRADE data that import is more than four times higher than export during study period

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Figure 11: Share of GVA in Output of Machine Tools

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Figure 12: Distribution of share of domestic demand between

Industry share in Domestic Demand

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Next seeing the international performance of the industry, it can be said prima facie that is not competitive. When the industry is failing to full fill its domestic

demand how we can expect it to be competitive internationally. The following figure on trade of machine tools is revealing the industry poor performance in the world market.

xport and import of machine tools has been increasing since economic liberalization, but import value has been significantly higher than export value of machine tools as it is observed by the COMTRADE data that import is more than four

port during study period (see Figure 13).

Year

Figure 11: Share of GVA in Output of Machine Tools

Year

Figure 12: Distribution of share of domestic demand between Industry & Import

Industry share in Domestic Demand Import Share in Domestic Demand

Next seeing the international performance of the industry, it can be said prima facie that is not competitive. When the industry is failing to full fill its domestic

demand how we can expect it to be competitive internationally. The following figure on trade of machine tools is revealing the industry poor performance in the world market.

xport and import of machine tools has been increasing since economic liberalization, but import value has been significantly higher than export value of machine tools as it is observed by the COMTRADE data that import is more than four

Figure 11: Share of GVA in Output of Machine Tools

Figure 12: Distribution of share of domestic demand between

Import Share in Domestic Demand

It is therefore can be said that despite having a spectacular performance during 2000s the machine tools industry is neither able to meet domestic demand norexport value.

6.2. TEXTILE MACHINERY

The textile machinery manufacturing is one of the largest capital goods segments in India. Indian textile machinery industry is large and covering a wide ranges of machinery used in the textile manufacturing and they are, broadly, spinning machinery, weaving machinery, processing and finishing machinery. Development of textile machinery industry has an important bearing on the development of textile industry of the country. Textile industry has an overwhelming presence in the economic life of the country. Besides providing one of the basic necessities of life, it also plays a pivotal role through its contribution to industrial output, employment generation, and the export earnings of the country. Technological change in textile industry is the essehour. Technological change in the textile industry is connected with changes in two

other spheresmodernization of domestic machinery production segments, i.e., technological improvements in textile machinery industry and import policy. Textile industry sources its capital goods from textile machinery. There is a strong userrelationship between textile industry and textile machinery industry. Textile manufacturers relies strongly on textile machinery manufacturers for its inevitable machinery inputs and textile machinery manufacturers relies on textile manufacturers for its demand. A well-developed textile machinery industry is prethe growth of textile industry. Import of machinery can, of course, help improving thquality and quantity of textile production.

14 In 1999 Govt. of India has implemented the Technological Upgradation Fund Scheme (TUFS) which

is meant for supplying a large interest subsidy on a wide variety of modernization loans to textile

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Figure 13: Export & Import of Machine Tools (value in Rs Crore)

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It is therefore can be said that despite having a spectacular performance during 2000s the machine tools industry is neither able to meet domestic demand nor

The textile machinery manufacturing is one of the largest capital goods segments in India. Indian textile machinery industry is large and covering a wide ranges of machinery used in the textile manufacturing and they are, broadly, spinning machinery,

aving machinery, processing and finishing machinery. Development of textile machinery industry has an important bearing on the development of textile industry of

xtile industry has an overwhelming presence in the economic life of the country. Besides providing one of the basic necessities of life, it also plays a pivotal role through its contribution to industrial output, employment generation, and the export earnings of the country. Technological change in textile industry is the essehour. Technological change in the textile industry is connected with changes in two

modernization of domestic machinery production segments, i.e., technological improvements in textile machinery industry and import policy. Textile industry sources its capital goods from textile machinery. There is a strong userrelationship between textile industry and textile machinery industry. Textile manufacturers relies strongly on textile machinery manufacturers for its inevitable

hinery inputs and textile machinery manufacturers relies on textile manufacturers developed textile machinery industry is pre-requisite to sustain

the growth of textile industry. Import of machinery can, of course, help improving thquality and quantity of textile production.14 However, from the longer time perspective

In 1999 Govt. of India has implemented the Technological Upgradation Fund Scheme (TUFS) which

is meant for supplying a large interest subsidy on a wide variety of modernization loans to textile

Year

Figure 13: Export & Import of Machine Tools (value in Rs Crore)

Export Import

It is therefore can be said that despite having a spectacular performance during 2000s the machine tools industry is neither able to meet domestic demand nor to boost up its

The textile machinery manufacturing is one of the largest capital goods segments in India. Indian textile machinery industry is large and covering a wide ranges of machinery used in the textile manufacturing and they are, broadly, spinning machinery,

aving machinery, processing and finishing machinery. Development of textile machinery industry has an important bearing on the development of textile industry of

xtile industry has an overwhelming presence in the economic life of the country. Besides providing one of the basic necessities of life, it also plays a pivotal role through its contribution to industrial output, employment generation, and the export earnings of the country. Technological change in textile industry is the essence of the hour. Technological change in the textile industry is connected with changes in two

modernization of domestic machinery production segments, i.e., technological improvements in textile machinery industry and import policy. Textile industry sources its capital goods from textile machinery. There is a strong user-supplier relationship between textile industry and textile machinery industry. Textile manufacturers relies strongly on textile machinery manufacturers for its inevitable

hinery inputs and textile machinery manufacturers relies on textile manufacturers requisite to sustain

the growth of textile industry. Import of machinery can, of course, help improving the However, from the longer time perspective

In 1999 Govt. of India has implemented the Technological Upgradation Fund Scheme (TUFS) which

is meant for supplying a large interest subsidy on a wide variety of modernization loans to textile

Figure 13: Export & Import of Machine Tools (value in Rs Crore)

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we need to be self-reliant in the production of textile machinery, and need to establish a well-developed and diversified textile machinery industry for the sustained growth of textile industry. Given the importance of textile machinery industry it is pertinent to have a clear understanding of the industry. We are here focusing our discussion on some major indicators of the textile machinery industry in the following.

The plot of GVA of textile machinery industry unlike machine tools industry shows a different pattern. The figure 14 shows that the increasing trend of value addition in textile machinery industry following the economic liberalisation got interrupted in the year 1995-96 and it started declining afterwards for 10 years till 2004-05 (and compound annual growth of GVA is -2 per cent during the same period). Although , the GVA of textile machinery finally started reviving in 2005-06, still it failed to maintain its momentum as it got interrupted in 2008-09 due to global financial crisis. It is therefore clear from the figure 14 that there has not been any growth in textile machinery industry as the compound growth of GVA of textile machinery is estimated to be less than 1 per cent (0.29 per cent) during the entire period 1990-91 to 2009-10.

We have observed above that there has hardly been much growth in textile machinery industry during the study period concerned. The stagnancy of growth of value added in textile machinery industry can be further ascertained from the ratio of value added to output which seems constant throughout the time period (see Figure 15). The average share of GVA in output is turned out to be 0.25 which might be due to high import dependency and low technological change. We can't therefore ensure that the industry is not self-sufficient to cover the domestic demand of the country.

manufacturers. This scheme is however being used to import used or second hand machinery which

of course helps increase the output of textile but this cannot help sustain over the longer run.

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Figure 14: GVA of Textile Machinery Industry at 1993-94 Prices, value in Rs. Lakh

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It is seen that production of textile machinery Industry in India has failed to meet the domestic demand of textile machinery. As is seen from Table 5 that production of textile machinery industry (after meeting the export demand) has not been able to meet the machinery demand from textile industry. The share of textile machinery industry in total domestic demand has been declining and it has been more pronounced after 2000-01. Since 2001 to 2008 the industry has been capable of satisfying only 20 to 30 per cent of total demand of domestic textile industry. With a meagre growth of output (annual compound growth of textile machinery industry between 1990-91 and 2007-08 is 0.43 per cent (ASI)) the industry has been unable to meet the domestic demand during the period 1990s and 2000s.

Table 5: Demand of Textile Machinery in India, value in Rs. Crore

Year Production Less Exports

Imports Less Parts Imported by Machinery Manufacturers

Total Indigenous Demand

Share of Demand Met

by Indigenous Industry

1993-94 1025 1024 2049 0.50

1994-95 1303 1601 2904 0.45

1995-96 1284 2127 3411 0.38

1996-97 978 1672 2650 0.37

1997-98 1168 1743 2911 0.40

1998-99 880 1406 2286 0.38

1999-00 867 1099 1966 0.44

2000-01 862 1161 2023 0.43

2001-02 645 1232 1877 0.34

2002-03 769 1834 2603 0.30

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Figure 15: Share of GVA in Total Output of Textile Machinery

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2003-04 806 2179 2985 0.27

2004-05 1228 3140 4368 0.28

2005-06 1730 6768 8498 0.20

2006-07 2299 9014 11313 0.20

2007-08 (E) 2524 7049 9573 0.26

Abbreviation: E: Estimated. Source: Ministry of Textiles, Govt. of India.

It is clear from the above discussion that most of indigenous damand for textile machinery has been fulfilled by imports from abroad. Let’s see how the industry is performeing in the export markets. The export penetration of the industry has been increasing since 2000, nevertheless it is pathatically lower compard to country’s import of textile machinery (see Figure 16).

From the above analysis of two sample industries of capital goods sector shows that they are somewhat mimicking the overall pattern of capital goods sector. However, all the industries in capital goods sectors are not performing alike. There might be industry-

specific problems akin to each industry as is obvious from the two industriesmachine tools and textile machinery. It is observed that both textile machinery and machine tools decelerated in 1995-96, the former was stagnant for long 10 years whereas the latter started reviving after 2001-02 though it decelerated more steeply than the former.

7. CONCLUSIONS

The paper is based on the discussion of capital goods sector in the post liberalization period. Basically, we have here tried to understand how the capital goods sector has performed during the last two decades. The paper has focused its analysis on three major dimensions such as growth of output or growth of value addition, international competitiveness, and technological development. The finding of the paper is the

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Value in M

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Chart 16: Export & Import of Textile Machinery Industry, value in million US$

Export

Import

Source: chart prepared using data from COMTRADE

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following. Both output and GVA have followed a cyclical patter during the period 1990-91 to 2009-10. In the first sub-period 1990-91 to 1995-96, capital goods sector pursued an increasing path, then a declining path in the second period 1996-97 to 2000-01, and finally made a phenomenal growth in the last period 2001-02 to 2009-10. But, share of value addition in the production of capital goods sector has not followed the same cyclical path it rather followed a quite different path. From 1990-91 to 1996-97, it was more or less stagnant, and took a steep declining trend after 1996-97. The declining share of value addition in capital goods sector when its output is growing implies a low technological development and import dependency of the sector.

To see where Indian capital goods sector stands in international markets we have estimated RCA of the capital goods sector which shows that there has been a persistent comparative disadvantage in capital goods sector during the post-liberalization period. This has resulted due to poor technological development in capital goods sector in India. Employing R&D expenditure which is an input measure of technological change we have seen there has been very minimal and negligent effort to bring about technological change in capital goods sector. Nonetheless, the second half of 2000s has showed that there have been some efforts to make technological capability building in capital goods sector and this might have been correlated with the growth of capital goods sector during the same period.

The drawback of our analysis is that it is very much aggregative in nature. Given the largeness and wide diversity of the capital goods sector, the aggregative analysis cannot be the proper diagnosis to make policy suggestations. Capital goods sector is the sum of three sub-groups and each of group is also not small one which can be studied easily. The industry-specific study is required to delineate the problem of the capital goods sector specifically which is obvious from the our brief analysis on two industries such as machine tools and textile machinery as they both differ to each other so far as their performance is concerned. This entails the industry-specific analysis which will help delineate the problem properly and enable reaching at a definite solution.

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