Industrial Performance and Government Controls

This paper examines the growth and utilisation of industrial capacity in India, the factors responsible for inter-industry variations in capacity utilisation and the policy implications of the findings of the study. The period covered is 1960-71. The major findings are summarised below: 1) Industrial capacity expanded during 1960-70 at the rate of 5.7% per year. The highest rates of growth were in the capital and intermediate goods segments of industry. The rate of growth of capacity declined from 6.1% in 1960-64 to 4.6% in 1967-70. 2) An unusual finding is the steady growth in the consumer goods capacity over the decade. Frow a low rate of growth of 2% in 1960-64, the rate has increased to 4% since 1965. 3) The average utilisation of capacity during the period 1961-71 is approximately 53%. Capital and intermediate goods sectors had relatively higher rates in the earlier part of the period, but declined with the onset of the recession. However, in the consumer goods group, utilisation has steadily improved over the period. 4) Selected industry characteristics and policy variables together explain nearly 72% of the inter-industry variations in capacity utilisation. All the net regression coefficients are significant. 5) Neither market control (concentration) nor large size of firms seems to have any adverse impact on capacity utilisation. It could well be that in a regime of shortages, the effective constraint is on the supply side and the firms with greater market control or size may be more successful in getting more raw materials and other inputs. 6) Higher effective rates of protection are associated with lower capacity utilisation rates. Government controls tend to provide high levels of protection even to inefficient industries which may not be able to utilise their capacities adequately. 7) There are policies and controls which work against the full utilisation of capacity. A realignment of such policies is in order. It is argued that banning socially undesirable products will be preferable to the present system which leaves considerable scope for delays, influence and inconsistent decisions.