CHAPTER 4

PACE AND PATTERN OF MANUFACTURING GROWTH IN KARNATAKA

4.1 Introduction

Modern economic development theory establishes the fact that the

interregional and intraregional disparities are created as well as mitigated by the

industry. Manufacturing is regarded as the main “engine of growth”9 and “cumulative

causation” is the subject matter of industrial development rather than the development

of other sectors.10 Resource transformation /labour from agriculture to manufacturing

would immediately lead to productivity growth that would contribute to economic

growth.11 Technological development is mainly concentrated by manufacturing

sector, and this development would propagate to other sectors such as service sector.

Manufacturing industries have opportunities for economies of scale.

Manufacturing is not only connected to other sectors but is also the jewel of a

multi-strand necklace where the strands are flows of different kinds to and from other

sectors” (Prof Sodhi.S 2012). Manufacturing sector has many forward linkages

through supplying of capital goods12. Manufacturing sector has the power to generate

employment opportunities for semi-skilled labourers in highly populated countries.

It is estimated that one job creation in the manufacturing sector would lead to

creation of four additional jobs in related sectors through its multiplier effect13.

Manufacturing employment could increase productivity of labourers, thereby increase

the income levels of the people. People would tend to spend more for non agricultural

commodities and this necessitates the growth of manufacturing industries.

9
Kaldor, Nicholas (1975) Economic Journal, 85, December, 891-6.
10
Myrdal, 1957 Economic Theory and Underdeveloped Regions, Harper and Row.
11
Adam Szirmai and Bart Verspagen (2010)
12
Cornwall, (1977)
13
Arun Maira (2012)

74
 Verdoon’s law states that output growth of manufacturing leads to high

productivity, that results in transfer of labour outside the manufacturing particularly

from land based activities which in turn leads to growth in the rest of the sectors of

the economy14.

According to Kaldor (1975) firstly, the growth of industrial output attracts the

disguised unemployment and the excess labour from other sectors which will increase

the productivity of these sectors (i.e resources in those sectors have little opportunity

costs). Consequently, the faster the manufacturing grows, the faster would be the

transfer of resources from other sectors which are subject to diminishing returns.

Secondly, manufacturing has the power to create cumulative development via its

forward and backward linkage effects. Thirdly, manufacturing enhances the growth of

the economy which is explained by the balance of payment constraint. Lessening the

balance of payment constraint would lead to the growth of manufacturing sector; this

would results in the growth of GDP of the other sectors. Kaldor’s policy implication

is that both the Government and market economy should promote transfer of

resources from other sectors to manufacturing sector to enhance higher level of

economic development.15

4.2 Manufacturing Profile of Karnataka

After Independence the state of Karnataka progressed as the manufacturing

hub for some of the largest public sector industries of India. The public sector

industries are Hindustan Aeronautics Limited, National Aerospace Laboratories,

Bharat Heavy Electricals Limited, Indian telephone Industries, Bharat Earth Movers

Limited (BEML), Bharat Electronics Limited, Hindustan Machine Tools and Indian

14
Verdoon, J.P. (1949)
15
Jesus Felipe (1998)

75
Subsidiaries of Volvo and Toyota. Hindustan Aeronautics Limited has been highly

dedicated to R&D activities for the production of fighter aircraft for the Indian Air

Force. This industry employed around 9,500 employees so it has been called as one of

the largest public sector employers in Karnataka16.

National space Agency Indian Space Research Organisation (ISRO) is located

in Bangalore and which employs nearly 20,000 people. TVS Motors has a motorcycle

manufacturing plant at Mysore and Tata at Dharwad. Companies such as Kiroloskar,

ABB, Kavika, Larsen and Tubro etc manufacturing electrical equipment machines

and machinery they all headquartered in Karnataka.

4.3 Conceptual Framework

State income, fiscal deficit and public debt are the principal indicators of the

performance of the state and involved in comparing the fiscal performance of the

states. The estimate of state income is considered as an important measure of

economic development of the state, and an important tool for planning.

Theoretically, estimation of state income is prepared by either income

originating approach, or income accumulating approach. The income originating

approach regards the income of the factors of production which are located within the

geographical boundaries of a state and signifies value of goods and services produced

within the state during a given period of time usually a year, on the other hand the

income accumulating approach relates to the income accumulating to the normal

residents of the state.

16
Karnataka Development Report (2007)

76
 For this data on flows of factor income to/from the boundaries of the state as

well as flows to/from abroad is necessary. Though the income accumulating approach

of state income is considered as a better measure of welfare, due to inadequacy of data

presently the State Statistical Bureaus follow the income originating approach to

estimate State Domestic Product (SDP). This study follows the same approach to

measure state income.

The study used Net State Domestic Product (NSDP) data for the state

economy and this was compared with the NDP at national level. Different methods

have been used by different scholars for analysis of estimation of the growth rate. The

methods are ranging from average annual growth, and compound growth to

exponential fit. This study used the compound growth methodology.

The study categorised a period of 31 years (1980-2011) as the two phases of

liberalisation:- Period/Phase 1: 1980-81to1989-90 pre-liberalisation period, Period/

Phase 2: 1990-91 to 1999-00 post-liberalisation period and Period/Phase 3: 2000-01

to 2010-11.

To analyse the relative growth performance of the Karnataka state with some

growing states, the study selected five states on the basis of their manufacturing

contribution to the national output, employment and exports.

4.4 Comparative Analysis of Inter -State Growth Performance

Analysis of the growth performance of the state economies shows (see table

4.1) that there is a wide disparity in the growth performance of the states in the three

periods and for the entire period.

77
 As can be seen from the Table 4.1 that the growth rate of net state domestic

product of Karnataka is 5.2 per cent during pre-liberalisation period, which is more or

less similar to the growth rate of net domestic product of India (5.3 per cent).

Successive failure of rain from 1983-88 may be the retarding factor for this low

growth rate of domestic product during this period. However, the economy of

Karnataka achieved the annual average growth rate of 6 per cent per annum during

this period, which is a remarkable achievement judged against the background of such

failure of rain.17

Table 4.1
Compound Growth Rate of Net State Domestic Product of Selected States
(1993-94 prices)

1980-81- 1990-91- 2000-01- 1980-81-

STATES
1989-90 1999-00 2010-11 2010-11

ANDHRA PRADESH 5.2 5.2 8.2 6.2

GUJARAT 4.8 8.0 10.3 6.6

KARNATAKA 5.2 7.0 7.4 6.1

MAHARASHTRA 5.6 7.0 10.2 7.0

TAMILNADU 5.0 6.4 8.7 6.2

WEST BENGAL 4.6 6.8 6.6 5.9

INDIA (NDP) 5.3 6.0 11.0 6.6

Source: Central Statistical Organization (CSO)

During the I-Phase of liberalisation growth rate of net state domestic product

of Karnataka grew by 7.0 per cent and the net domestic product of India grew by 6.0

17
G. Thimmaiah (2005)

78
per cent. The software sector growth led by service sector boom since 1990s has

boosted the economic growth of Karnataka economy during this period.

The growth of net state domestic product of Karnataka in the II-Phase of

liberalisation is 10.3 per cent, which is due to highest contribution of software

sector,18 but comparatively lesser than the domestic product of other states such as

Andhra Pradesh, Gujarat, Maharashtra and Tamilnadu. For the entire period the

growth rate of net state domestic product of Karnataka economy is 6.1 per cent.

Figure 4.1 Compound Growth Rates of Net State Domestic

Product of Selected States

12

10

8
Growth Rate

6
1980-81- 1989-90
4 1990-91-1999-00

2 2000-01-2010-11
1980-81-2010-11
0

States

The growth rate of Net State Domestic Product of Karnataka during 2010-11

is 2.8 percent, which has increased to 6.8 per cent during 2011-12 at constant prices

18
Karnataka Development Report (2007)

79
(2004-05 prices). 19Overall the performance in terms of domestic product growth of

Karnataka economy is more or less similar to the net domestic product of Indian

economy. This growth trajectory of Karnataka economy stimulates one to conduct an

analysis to trace the growth performance of different sectors of the economy.

Therefore, the following section investigates the growth rate of the major

sectors of the economy namely primary sector, secondary sector and tertiary sector in

terms of net state domestic product to identify the core sector of the economy.

4.5 Sector -wise Growth Rate in Net State Domestic Product of Karnataka

The sectoral composition of State income has changed over the years as the

primary sector’s importance has reduced, giving way to the tertiary sector. While this

is a natural phenomenon in economic growth, it needs to be accompanied by a

corresponding shift in employment shares to enable higher levels of income across all

sections (Karnataka Growth Story 2011). The primary sector, which contributed about

60 per cent to Gross State Domestic Product (GSDP) in 1960- 61 decreased to 16.22

per cent during 2010-11 and 15.2 per cent during 2011-12.On the other hand the

secondary sector contributed only 15.2 per cent to GSDP during 1960-61 increased to

28.60 per cent during 2010-11 but decreased to 27.74 per cent during 2011-12. The

share of the tertiary sector was 24.8 per cent which has increased to 54.61 per cent in

2010-11 and 56.32 per cent during 2011-12.20

4.5.1 Primary Sector Growth Rate in NSDP of Karnataka

It can be noted from the table 4.2 that the primary sector growth rate of

Karnataka has been most stagnant and also the least among the three sectors all the

19
Economic Survey of Karnataka 2011-12
20
Economic Survey of Karnataka 2011-12

80
times. During the I-Phase of liberalization the growth shows 2 per cent increase in the

growth rate of primary sector of Karnataka economy.

Table 4.2

Primary Sector Growth Rate in Net State Domestic Product of Karnataka

PERIOD KARNATAKA INDIA

1980-81 – 1989-90 2.0 3.0

1990-91 – 1999-00 3.9 3.3

2000-01 – 2010-11 3.4 4.6

1980-81 – 2010-11 2.4 3.1

Source: Computed

At the national level the growth rate increased by 0.3 per cent which is more

or less similar to the growth rate of Karnataka primary sector. Irresponsive policy

measures were blamed for dismal growth rate of primary sector of Karnataka during

I-Phase of liberalization.. Though the State government launched many programmes

like Karnataka Agriculture Mission, Farm Mechanisation scheme, Rashtriya Krishi

Vikasa Yojana (RKY) and major irrigation projects to boost the primary sector

especially the agriculture sector; the growth rate of primary sector of Karnataka

decreased during the II-Phaseof liberalisation. On the other hand the growth rate

increased by 1 per cent for the Indian primary sector. For the period as a whole, the

growth rate is low of 2.4 per cent suggesting that the primary sector is not a promising

sector for the growth of economy.

81
 Figure 4 .2 Primary Sector Growth Rate in NSDP of Karnataka

4.5.2 Secondary Sector Growth Rate in NSDP of Karnataka

The secondary sector of Karnataka recorded a growth rate of 8.1 per cent

during pre-liberalisation period (see table 4.3). However, during the I-Phase of

liberalisation secondary sector growth rate decreased to 4.6 per cent for Karnataka

and 5.8 percent for India. This sector of Karnataka seems to have lost more because of

lack of thrust than as a process of economic development during this period.21This

trend is same at all-India level where the service sector gained share at the cost of

manufacturing sector which has not been the case if we take countries like China,

Thailand, and Korea (Karnataka Development Report 2007).

21
Karnataka Development Report (2007)

82
 Table4.3
Secondary Sector Growth Rate in Net State Domestic Product of Karnataka

PERIOD KARNATAKA INDIA

1980-81 – 1989-90 8.1 7.4

1990-91 – 1999-00 4.6 5.8

2000-01 – 2010-11 5.2 11.2

1980-81 – 2010-11 6.4 6.8

Source: Computed

Sustained by strong fundamentals, industry friendly policies in the State and

infrastructure support, the secondary sector of Karnataka economy has grown at 5.2

per cent in the II-Phase of liberalisation. Nevertheless this growth rate is lesser than

the all-India growth rate. On an average the sector registered a growth rate of 6.4 per

cent for the entire period and demonstrating that this sector of the state is moving on

the growth trajectory.

Figure 4 .3 Secondary Sector Growth Rate in NSDP of Karnataka

83
4.5.3 Tertiary Sector Growth Rate in NSDP of Karnataka
The long term growth rate of tertiary sector of both Karnataka and India

depicts encouraging trend and followed the pattern of industrialisation. As against the

two sectors (primary and secondary) the tertiary sector had grown progressively

during the nineties, in the last decade and for the period as a whole both for Karnataka

and India.

Table 4.4
Tertiary Sector Growth Rate in Net State Domestic Product of Karnataka

PERIOD KARNATAKA INDIA

1980-81 – 1989-90 7.2 6.5

1990-91 – 1999-00 9.5 7.6

2000-01 – 2010-11 10.3 13.0

1980-81 – 2010-11 8.6 8.1

Source: Computed

The growth rate steadily increased from 7.2 per cent during the pre-reform

period to 9.5 per cent during the I-Phase of liberalisation and to 10.3 per cent during

the II-Phase of liberalisation 8.6 per cent for the period as a whole, recording the

highest growth among the three sectors. Karnataka emerged as the hub of information

technology during the last decade which has tendered impetus to the growth of overall

services in the State. Besides, Karnataka is the leading exporter of software in India.

The state exported IT products equal to the amount of Rs.70, 375 crore, during 2009-

10, the highest in the country. The tertiary sector grew by more than 9 per cent over

the last eight years in the State. If continuing with the same pace of growth for the

next ten years, Karnataka is set to become the global services hub of India by 2020.22

22
Karnataka Growth Story (2010)

84
 Figure 4.4 Tertiary Sector Growth Rate in NSDP of Karnataka

Therefore, it is the service sector which is the propelling sector for both

Karnataka and India since eighties. The sectoral composition of 'state domestic

product shows that the relative shares of three sectors during the period 1980-81 to

2010-11 (See table 4.5) that for the entire period tertiary sector has been the major

contributor 55.83 per cent followed closely by the primary sector with 26.55 per cent.

However, the decadal trends demonstrate interesting patterns. In the eighties, it was

the primary sector that dominated 42.47 per cent followed by the tertiary sector with

40.58 per cent. The picture changed since then. In the 1990’s it was the tertiary sector

with 47.34 per cent that became dominant followed by the primary sector 33.55 per

cent. That pattern gained strength in the last decade when the tertiary sector share

grew to a high of 63.47 per cent while that of the primary sector declined to 19.39 per

cent.

85
 Table 4.5
Sectoral Composition of State Domestic Product of Karnataka
(Per cent)

Year Primary Secondary Tertiary

1980-81 to 1989-90 42.47 16.94 40.58

1990-91 to 1999-00 33.55 19.10 47.34

2000-01 to 2010-11 19.39 17.12 63.47

1980-81 to 2010-11 26.55 17.61 55.83

Source: Computed
It is disturbing to note that in all the three decades the share of secondary

sector is the lowest and has marginally increased from 16 to 19 per cent. Thus the

increase in the share of the tertiary sector has been at the expense of the primary

sector. Alternatively one could say that the decline in the share of the primary sector

has been offset both by the increase in the share of the tertiary sector and to a smaller

extent increase in the share of the secondary sector.

4.6 Growth Rate of Manufacturing in NSDP of Karnataka

As is evident from Table 4.6 during the pre-libaerlisation period the

manufacturing sector registered a growth rate of 8.7 per cent and it is marginally

higher than all-India rate. Inefficient infrastructural facilities, high price of power and

uncertainty of power supply hampered the Indian industrial growth. Equally, India’s

transportation network has not been developed well, 57 per cent of goods were

transported through road transport which was most inefficient, expensive and

emissions-intensive mode of transport, while the figure in China is 22 per cent

(Munjal.K.S 2012). Phase-I portrays different picture. To generalise further the

growth performance of Karnataka manufacturing was better during the pre-reform

86
period as compared to the I-Phase of liberalisation. May be there are some

shortcomings in the policy measures of the state. During this period the economy of

Karnataka was not able to parallel the success which had in the software industry to

manufacturing industries. Karnataka’s software sector pursued active policy

initiatives, while it was not the case with manufacturing sector. The industrial policy

of the central government made only tentative changes in the Karnataka’s industrial

sector through New Industrial Policy Resolution, 1993-98.The state was not in a

position to attract the investments, and there was no clear-cut plan to attract Foreign

Direct Investment (FDI). During the initial stages of liberalisation the state seems to

have lost the critical time. It was the service sector gained the share at the cost of

manufacturing sector.23

Table4.6
Compound Growth Rate of Manufacturing by NSDP (percent)

Period Karnataka India

1980-81 – 1989-90 8.7 7.5

1990-91 – 1999-00 4.3 6.7

2000-01 – 2010-11 5.5 12.6

1980-81 – 2010-11 6.4 6.8

Source: Computed
Empirical evidence from the above analysis clearly depicts much

improvement in the growth performance of Karnataka manufacturing during the last

decade as compared to the nineties the state-led planning period, by implementing

23
Karnataka Development Report (2007)

87
many attractive policies and acts in line with the central government initiatives for the

growth of industries.

Figure 4.5 Manufactuirng Sector Growth in NSDP of Karnataka

The growth rate increased to 5.5 per cent and pushed the job creation in the

state during this period. On an average for the entire period the growth rate is 6.4 per

cent suggesting that the manufacturing sector of the state has many avenues to

become a promising sector of the economy.

This impressive growth of Karnataka manufacturing sector instill one to know

whether it is the registered or unregistered segment of the manufacturing sector that

has been moulding the overall growth of manufacturing sector of Karnataka.

Therefore, in the following section the study analyses growth rate of registered and

unregistered segments of Karnataka manufacturing sector.

4.6.1 Growth Trends in Manufacturing: Registered vs. Unregistered

Manufacturing sector in India consists of registered and unregistered sectors.

The registered sector consists of large units and use power. On the other hand the

88
units in the unregistered sector are small in size but large in number. Table 4.7

provides a synaptic view of the growth rate of manufacturing components in domestic

product of Karnataka and India. The table shows that there is huge disparity in growth

rate of registered and unregistered sectors of Karnataka manufacturing during pre-

reform period.

Table 4.7
Growth Rates of Registered and Unregistered Sectors of Karnataka
Manufacturing

Period Registered Unregistered

Karnataka All India Karnataka All India

1980-81 – 1989-90 11.0 8.6 3.6 6.1

1990-91 – 1999-00 3.3 6.8 5.4 6.5

2000-01 – 2010-11 4.4 11.8 7.9 14.0

1980-81 – 2010-11 6.7 6.9 5.5 6.8

Source: Computed

The registered sector recorded a growth rate of 11.0 per cent, while the

unregistered sector registered a growth rate of 3.6 per cent resulting in the average

contribution of the unregistered sector shrinking to almost above half of that of the

registered sector. The growth rate is little higher for unregistered sector (5.4 per cent)

as compared to registered sector (3.3 per cent) during the I-Phase of liberalisation. In

this period India’s real domestic product of manufacturing sector was more or less

equally distributed between its registered and unregistered sectors. Relatively low

growth performance of manufacturing sector during this period may be due to low

growth performance of registered sector of Karnataka.

89
 It is not possible to draw any conclusion from the above analysis because the

data for unregistered sector cannot be sourced from the secondary sources and hence

no detailed analysis can be made.

Figure 4.6 Growth Rates of Registered & Unregistered Sectors of

Karnataka Manufacturing

On the other hand a detailed analysis is possible for the registered sector by

using certain key variables like output, fixed capital, employment, no. of. factories

reported in the Annual Survey of Industries (ASI). Therefore, further analysis is

confined to registered sector.

4.7 Growth Rates of Basic Parameters of Manufacturing Sector

Data dissemination of ASI provides comprehensive database for the industrial

units, which covers all factories registered under Sections 2m(i) and 2m(ii) of the

Factories Act, 1948 i.e. those factories employing 10 or more workers using power;

and those employing 20 or more workers without using power.

90
 Certain servicing units and activities like electricity, gas, water supply, cold

storage, repairing of motor vehicles and other consumer durables like watches etc.

were covered under the survey till 1997-98. From 1998-99 these units were excluded

from the survey. To make comparable series and to increase the consistency of the

data the study reconstructed the dataset by excluding such activities from 1980-81 to

1997-98.The values at constant prices are computed using the all-India WPI series, as

this is not available at the state level. To construct fixed capital stock the study relied

on the standard perpetual inventory method. Real capital stock was computed by

deflating the capital series by the wholesale price index of machinery and machine

tools (at 1993-94 prices).

4.7.1 Growth of Output

It can be seen from the table 4.8 that average growth rate of output of

Karnataka manufacturing sector during the various decades spanning from 1980-90,

1990-00 and 2000-11 ranges from 8.2, 9.2 and 15.3 per cent. The growth performance

had been rather impressive since the eighties for both Karnataka and Indian

manufacturing sectors due to pro-business policies of the eighties (Rodrik and

Subramanian 2005).The output growth in Indian manufacturing sector during this

period was contributed by 70.23 per cent of domestic demand expansion, 13.8 per

cent export expansion, 12.3 per cent import substitution and 3.2 per cent intermediate

demand.

During the I-Phase of liberalisation, domestic demand expansion contributed

95.7 per cent to output growth, followed by export expansion 23.6 per cent to output

growth. The contribution of import substitution to output growth however turned

91
negative during this period is -17.7 percent, as compared to positive contribution of

12.3 per cent during pre-reform period.

Table4.8
Growth rate of Key Variables in Aggregate Manufacturing Sector (Per cent)

Period Karnataka All India

Output
1980-81 to 1989-90 8.2 7.6
1990-91 to 1999-00 9.2 8.7
2000-01 to 2010-11 15.3 13.2
1980-81 to 2010-11 10.3 8.8

Employment
1980-81 to 1989-90 0.4 -0.1
1990-91 to 1999-00 6.0 1.8
2000-01 to 2010-11 6.8 5.6
1980-81 to 2010-11 3.2 1.7

Capital
1980-81 to 1989-90 9.3 9.3
1990-91 to 1999-00 16.6 11.3
2000-01 to 2010-11 11.1 9.9
1980-81 to 2010-11 11.1 9.4

No. of Factories
1980-81 to 1989-90 0.7 0.9
1990-91 to 1999-00 2.7 2.6
2000-01 to 2010-11 3.6 3.8
1980-81 to 2010-11 1.8 2.1
Source: Computed from ASI Various Issues

92
 The contribution of intermediate demand to output growth also turned

negative, -1.5 per cent, as against positive contribution of 3.2 per cent during pre-

reform period (Dr. Kumari. A 2002).Historically, a substantial part of growth in

output in developing economies has been due to rapid increase in input use and little

is attributed to improvements in factor productivity. In fact, the average contribution

of inputs to output growth in developing nations was estimated to be close to 70 per

cent (Chenery, Robinson and Syrquin, 1986). The post-Structural Adjustment

Programme (SAP) period of high growth witnessed a substantial drop in factor

productivity, with a Total Factor Productivity Growth (TFPG) of -2.9 per cent at the

Karnataka level and 0.3 per cent at the national level. The growth in output is

therefore mainly due to input growth (Mukherjee.D and Rajarshi Majumder

2007).During the I-Phase of liberalisation the real growth rate of output of Karnataka

manufacturing sector was due to the high contribution of non agricultural industries,

though the reforms in the 90s did accelerate the output growth of Karnataka

manufacturing in the 1990s (Trivedi et.al 2011)

During the II-Phase of liberalisation the growth rate of output has

tremendously increased both for Karnataka and Indian manufacturing sectors. On a

whole the average growth rate for the entire period is 10.3 per cent. Thus the

performance of aggregate manufacturing sector of Karnataka in terms of output is

better than the performance of Indian manufacturing sector.

4.7.2 Growth of Employment

The manufacturing sector of Karnataka recorded low growth rate of

employment (0.4 per cent) during the pre-reform period. During this period many

industries became power intensive due to the availability of power at cheaper rate

93
from the Sharavathi Hydel Project, consequently reduced the employment

opportunities.24 Labour intensive industries were not encouraged in India until 1980s.

Many large Indian and foreign firms were restrained to capital-intensive sectors.

A look at India’s manufacturing performance during eighties (-0.1 per cent)

suggests that it was a period of growth without employment creation, which has also

been referred to as ‘jobless growth’. This shows that the performance of Indian

manufacturing sector in creating employment has been unsatisfactory, especially

when compared to other Asian economies. High growth in output itself may not be an

assurance to create sufficient employment. This is best demonstrated from the table

4.8 that when 7.6 per cent growth in output of manufacturing not generated

employment growth. This was great surprise to economists because during 1970 a 5

per cent growth in manufacturing output generated 3.8 per cent increase in

employment [Goldar (2000)]. Structural firmness connected with transformation of

labour from agriculture to manufacturing could be partly blamed for this.

During the I-Phase of liberalisation the employment growth rate of Karnataka

manufacturing sector is 6 per cent which is due to the growth of non agricultural

industries. The positive growth of employment in the Indian manufacturing during

this period is due to the investment boom in that decade (Nagraj 2001). The high

growth rate (6.8 per cent) of employment in the Karnataka manufacturing during last

decade is due to good performance of non agricultural industries.25Employment in the

Indian manufacturing sector marginally increased (5.6 per cent) during the II-Phase of

liberalisation despite a relatively high growth in output during the whole period.
24
Karnataka Development Report (2007)
25
L. G. Burange (2002)

94
4.7.3 Growth of Capital

Growth rate of capital in Karnataka manufacturing sector is 9.3 per cent,

which is similar to all-India growth rate during the pre-reform period. One could see

rapid improvement in the growth rate of capital during the I-Phase of liberalisation

due to the availability of relatively cheaper capital, made the firms to get an

opportunity to move toward capital-intensive technology and reduce the use of labour.

Empirical evidence (Fallon and Lucas, 1993 cited in Goldar, 2000) shows that rise in

capital intensity is associated with a substantial decline in capital productivity led to

substitution of capital for labour. Larger use of capital did increase the productivity of

labour, thereby helped growth in output. Job security regulations in the late 1970s

made difficult of labour retrenchment, and this forced employers to adopt capital-

intensive techniques. According to another view the capital-intensive techniques were

adopted because of the increase in real wages in the 1980s (Ahluwalia, 1991; Ghose,

1994). During this period Karnataka recorded relatively high growth rate of capital

(16.6 per cent).

However, the growth rate of capital decreased in the II-Phase of liberalisation

both for Karnataka and India. The growth rate of Karnataka manufacturing in terms of

capital is 11.1 per cent for the entire period (1980-2011) which is higher than the all –

India growth rate. Thus the overall performance in terms of capital growth is better

for Karnataka manufacturing sector as compared to Indian manufacturing sector.

4.7.4 Growth of Number of Factories

The number of factories in Karnataka manufacturing sector shows marginal

growth which is hardly encouraging. The growth rate is 0.7 per cent during pre-

reform period which increased to 2.7 per cent in the I-Phase of liberalisation and

95
further increased in the II-Phase of liberalisation. That is the growth rate is 3 per cent

in the last decade. For the entire period the growth rate is 1.8 per cent which is lesser

than the Indian growth rate of 2.1 per cent by showing that the performance of

manufacturing sector in terms of growth of factories is better for India as compared to

Karnataka.

It is not possible to draw any comprehensive conclusion from the above

analysis; there could be variations in the growth stimuli, so the analysis seeks to trace

the growth performance of the manufacturing sector at disaggregate level for ten

industrial groups.

4.8 Performance of Manufacturing Sector at Disaggregate Level

For analysis at disaggregate level the study selected 10 major industries on the

basis of their contribution to Gross Value Added (GVA) in the organised

manufacturing, in terms of job creation and their contribution to export earnings.

To increase the consistency of the dataset appropriate mapping of the

National Industrial Classification (NIC) between NIC 1987 and NIC 1998 was made

by using the concordance table published by the CSO (Balakrishnan.P (2003).The

following section shows the growth performance of two digit industries.

4.8.1 Growth of Output

The analysis of the growth rate of output of industries in order to gain more

understanding of the individual industrial performance depicted in Table 4.9. The

analysis shows that the output growth of Leather industry is highest among all the

industries during the pre-reform period. This industry had used the labour, capital and

other inputs efficiently among the selected industries (Kalirajan.K and

96
M.H.Balasubrhamania 2009). Only Textiles industry and Basic metal and alloy

industry recorded less than 5 per cent growth rate during this period. Inputs growth

mainly contributed to output growth of the industries during the pre-reform period.

The Non metallic mineral industry utilised the available resources efficiently in the

eighties. So the growth rate of this industry was high in this period.

During the I-Phase the Beverages and tobacco industry, Wearing Apparel

industry and Basic metal and alloy industry registered comparatively high growth

rates. Karnataka is one of the major tobacco producing states in India. Flue-cured

Virginia tobacco, used in the manufacture of cigarettes, is primarily cultivated in AP

and Karnataka. Karnataka is blessed with rich mineral resources distributed more or

less evenly in the whole territory. The state is endowed with rich deposits of asbestos,

bauxite, chromite, gold, iron ore, kaolin, limestone, manganese, ochre, and quartz and

silica sand. The state is also the sole producer of felsites, moulding sand (63 per cent)

and fuchsite quartzite (53 per cent). There is deceleration in the growth rate of output

in the rest of the industries in this period. The less growth rate in the food products

industry during this period is that agricultural growth rate of the state was not

significantly higher in the 1990s over the 1980s.This is not surprising, as it was

generally agreed that this sector received no direct benefits from reforms in the 1990s,

though it could have benefited indirectly from liberalisation of industry. This

hampered the growth rates of agro based industries (Shand. R and S. Bhide 2004).The

less growth of Textile industry during this period is poor recovery of the finished

product from the raw materials (Trivedi et al 2011). The negative growth rate of wood

products industry in this period is due to the implementation of forest protection and

afforestation policy. The reason for the deceleration of paper products industry in this

97
period is, in the seventies and eighties, wood and bamboo constituted the chief raw

material for the paper industry. With the implementation of central and state

government policy towards forest protection and afforestation, pulp and paper mills

had to take responsibility for the reduction of forest material consumption and

afforestation efforts. The government encouraged the industry to create plantations on

degraded forest and waste land (dedicated forest program). The overall constraint of

raw materials forced the paper industry to rely more and more on imports of pulp or

final paper products. Leather industry though registered a high growth rate during the

first period, the growth rate declined during the second period due to shortage of

skilled manpower (mainly in leather cutting) and raw materials (Report of Working

Group on Leather & Leather Products Twelfth Five Year Plan 2012-17, Department

of Policy and Promotion Government of India, Ministry of Commerce and Industry).

During the II-Phase of liberalisation only Beverages and Tobacco industry and

Wearing Apparel industry registered less growth. The rest of the industries recorded

increased growth rates of output. During nineties the consumption of beedi declined

to a larger extent than that of other tobacco products. This reduced the growth rate of

output of the Beverages and Tobacco industry in this period.

98
 Table 4.9
Industry-wise Growth Rates of Output in Manufacturing Sector of Karnataka
(1980-81 to 2010-11)

1980-1990 1990-2000 2000-2011 1980-2011

Industry Group
Kar Ind Kar Ind Kar Ind Kar Ind

Food Products (20-21) 9.3 8.6 7.9 7.3 13.4 10.1 8.3 7.3

Beverages & Tobacco (22) 7.1 5.6 10.7 6.2 6.9 8.5 8.4 5.5

Textiles (23+24+25) 3.8 6.2 1.6 4.5 3.2 8.8 3.4 4.9

Wearing Apparel (26) 19.2 9.0 23.0 14.1 9.6 11.9 18.6 11.6

Wood & Wood Products (27) 6.7 4.5 -2.6 -1.6 19.2 11.3 2.1 5.5

Paper & Paper Products (28) 8.5 4.9 1.5 5.3 13.8 9.6 5.0 5.8

Leather Products (29) 40.2 9.3 3.3 7.3 5.2 10.4 9.5 8.7

Chemical Products (30) 6.7 9.2 6.6 9.0 8.8 7.6 8.4 7.8

Non-Metallic Minerals (32) 10.8 10.4 7.3 6.8 10.3 11.8 7.3 8.2

Basic Metals & Alloys (33) 2.2 5.3 7.5 6.4 17.1 14.2 9.5 7.7
Source: Author’s Computation

After recording less growth in Phase-I textiles made progress in Phase-II

following the fiscal policy reforms in the 2004–05 Budget, which created a level

playing field between the small-scale and other industries.26

To overcome the raw material shortage of the Paper industry the Government

has liberalised the import of raw materials and given excise concessions for the use of

non conventional raw materials.27This reform enhanced the growth rate of Paper

industry in the I-Phase of liberalization. The robust paper demand contributed to the

26
Eleventh Five Year Plan
27
IPMA , htpp://www.ipma.co.in/index.asp, accessed on 11 May 2012.

99
high output growth in the last decade. According to Indian Paper Manufacturers

Association (IPMA), the economic growth; increasing literacy rate; changing

demographics with higher urbanisation; increasing living standards, aspirations for

changing lifestyles and media growth, demand for high quality paper and paper

products (e.g., magazines, multi-colour printings, advertising and direct mailers for

promotional materials) are among the major growth drivers of paper market. As for

the Chemical industry, chemical products were lifted by the accelerated growth in the

export of pharmaceutical products.28 This increased the growth rate during II-Phase of

liberalisation. There is high growth rate of Basic Metal industry in this period is , this

industry seems to have benefitted due to the backward linkages it has with other

industries/sectors. Booming automobile industry in India and Karnataka provided the

metal industry the demand linkage and growing interest of global players in

automobile industry is also related to the better performance of metal industry.

Besides, the growth of infrastructure and construction sector in India in the recent

years seemed to have provided the metal industry the much needed impetus for its

growth. Privatisation and globalisation of metal industry also seems to be related to its

better performance in the post-reform era. The overall performance in terms of output

growth is better for Karnataka manufacturing industries as compared to Indian

manufacturing industries.

4.8.2 Growth of Employment

The employment growth of Wearing Apparel industry, Leather industry and

Non metallic mineral industry registered positive, particularly Leather and leather

products industry shows remarkable growth in the pre-reform period. This could be

28
State Economy and Socio Economic Profile Karnataka November 2010

100
because of increased growth performance of capital and no. of factories of Leather

industry, Non metallic mineral industry and capital growth of the Wearing Apparel

industry. And the location of Leather industry around Bangalore also one of the factor

that increased the growth rate of employment of this industry. This apart, employment

growth has been meager in most other industries. The industries for which the

Government has decided to give greater thrust, like Food processing industry and

Textile industry have fared rather dismally in augmenting employment is quite

unfortunate. The growth rate of capital and of no. of factories of the other industries

did not contribute to employment growth in any significant measure during the pre-

reform period.

During I-Phase of liberalisation two industries: Textiles and Wood products

registered negative growth rate of employment. The growth rate of Leather products

industry declined sharply during this period. Rigid labour laws, inadequate training

facilities in textile sector, low product quality and unreliable assured power supply etc

are the major obstacles for the growth of Textile industry of Karnataka and India

(Trivedi et al 2011).

101
 Table 4.10
Industry-wise Growth Rate of Employment in Manufacturing Sector of
Karnataka (1980-81 to 2010-11)
1980-1990 1990-2000 2000-2011 1980-2011
Industry Group
Kar Ind Kar Ind Kar Ind Kar Ind
Food Products (20-21) -3.5 -2.8 0.7 1.6 4.1 2.4 1.5 0.8

Beverages & Tobacco (22) -0.9 1.9 1.7 1.1 1.2 -0.4 1.3 1.5

Textiles (23+24+25) -3.6 -2.3 -1.8 -0.6 -3.1 1.2 -3.8 -1.5

Wearing Apparel (26) 8.8 4.8 18.6 11.3 8.6 8.2 14.8 9.5

Wood & Wood Products (27) -2.3 -1.4 -7.2 1.1 2.4 3.8 -1.1 0.8

Paper & Paper Products (28) 0.4 -0.7 0.4 0.5 3.4 3.7 1.2 0.5

Leather Products (29) 22.6 5.8 2.6 1.9 0.6 8.1 4.8 4.6

Chemical Products (30) 0.2 1.8 7.3 4.5 0.2 1.0 2.6 2.1

Non-Metallic Minerals (32) 2.2 1.9 1.0 -0.1 2.3 7.2 0.1 2.1

Basic Metals & Alloys (33) -2.5 0.2 0.6 0.4 8.5 7.1 0.6 0.8
Source: Author’s Computation
A glance at the Table 4.11 reveals that the growth rate of employment has

witnessed a decline in a few industries; Textiles, Leather and Chemical products

during the last decade. The declining growth rate of Leather products industry during

Phase-I is due to the fact that there was less than full coverage of the enterprises

engaged in manufacturing in this sector in the collection of production data by the

Department of Industrial Policy and Promotion (DIPP).Large pool of skilled

graduates and technicians produced in the colleges and institutes of Karnataka

dedicated to agricultural and food technology, the state provided comprehensive

support to the food processing industry during the II-Phase of liberalisation. The

overall performance in terms of labour growth is not good for Karnataka

manufacturing industries as well as for Indian manufacturing industries.

102
 4.8.3 Growth of Fixed Capital

Fixed capital growth is less in only one industry; the Basic metal and alloy

industry during pre-reform period. During I-Phase of liberalisation the growth rate of

fixed capital decreased in five industries; Beverages and Tobacco, Textiles, Wood

Products, Leather products and Non metallic minerals. This has largely contributed by

a drastic decline in the growth rate of no.of factories of these industries during this

period. And inadequate capacity of the domestic textile machinery manufacturing

sector retarded the growth rate of capital of the Textile industry.

Table 4.11
Industry-wise Growth Rate of Fixed Capital in Manufacturing Sector of
Karnataka (1980-81 to 2010-11)

1980-1990 1990-2000 2000-2011 1980-2011

Industry Group
Kar Ind Kar Ind Kar Ind Kar Ind

Food Products (20-21) 7.8 9.6 14.6 10.6 13.4 9.0 10.1 9.2

Beverages& Tobacco (22) 18.1 15.1 13.6 14.6 5.9 8.4 13.1 12.5

Textiles (23+24+25) 12.7 9.5 11.0 12.3 5.7 6.4 7.8 8.5

Wearing Apparel (26) 21.5 14.9 29.1 21.5 12.3 12.3 22.8 16.5

Wood & Wood Products(27) 8.8 8.6 7.2 11.4 4.3 9.6 6.6 9.5

Paper & Paper Products (28) 1.0 8.4 4.1 10.3 9.8 8.0 3.6 7.7

Leather Products (29) 31.4 10.0 12.2 11.0 1.8 9.0 13.6 10.4

Chemical Products (30) 6.0 8.2 8.0 11.5 9.2 3.5 8.2 8.1

Non-Metallic Minerals (32) 15.0 17.9 13.7 12.9 9.5 8.8 8.1 10.4

Basic Metals & Alloys (33) 3.7 6.3 25.1 8.1 14.8 11.8 14.5 8.1
Source: Computed

103
 During the II-Phase of liberalisation the capital growth has increased only in

two industries; Paper and paper products and Chemical products. This is the fact again

the meager growth rate of no. of factories in these industries impacted on their fixed

capital growth rate during same period.

The overall analysis depict that the performance in terms of capital growth is

little better for Karnataka manufacturing industries as compared to Indian

manufacturing industries.

4.8.4 Growth of Number of Factories

A glance at the table 4.12 reveals that during the pre-reform period the

number of factories have witnessed negative growth rate in three industries; Textiles,

Wearing Apparel and Wood products. However, of these, only textiles show hardly

any growth in output. This implies that there is a growing concentration in the other

industries (especially in the Wearing Apparel and Wood products groups where their

output is 19.2 per cent and 6.7 per cent respectively).

During the II-Phase of liberalisation five industries; Food products, Textiles,

Wood products, Leather products and Non metallic minerals have registered meager

growth rate of factories. The Food industry had the problems29 like poor infrastructure

in terms of cold storage, warehousing, inadequate quality control and testing

infrastructure, inefficient supply chain and involvement of middlemen, high

transportation and inventory carrying cost, affordability, cultural and regional

preference of fresh food, high taxation and high packaging cost.

Scarcity of raw material has been the major obstacle for the growth of

factories in the Wood product industry since Karnataka’s forest reserves account only

20 per cent of the total geographical area of the state.

29
Reported at http://mospi.nic.in/Content age.aspx?CategoryId=122

104
 During the II-Phase of liberalisation industries; Beverages, Textiles, Wearing

Apparel and Leather products registered less growth rate. The dismal output growth

rates of Textiles, Leather products have highly reflected on the less growth rate of

factories in the last decade. It was in the last decade Karnataka has established Food

Karnataka Limited, a Special Purpose Vehicle, as the Nodal Agency for development

of infrastructure to establish Food Processing Industries in the State30. The use of

tobacco and its various products appears to have declined in Indian rural and urban

populations over the period from 1987–88 to 1999–2000.

Table 4.12
Industry-wise Growth Rate of No. of factories in Manufacturing Sector of
Karnataka (1980-81 to 2010-11)

1980-1990 1990-2000 2000-2011 1980-2011

Industry Group
Kar Ind Kar Ind Kar Ind Kar Ind

Food Products (20-21) 1.4 0.9 0.5 1.7 3.3 1.3 1.2 1.4

Beverages & Tobacco (22) 0.2 -1.1 1.6 -7.4 0.8 3.3 0.7 -3.0

Textiles (23+24+25) -3.1 -2.7 -7.1 -0.1 -1.5 1.7 -6.3 -0.5

Wearing Apparel (26) -0.6 1.6 12.7 6.9 -0.2 3.2 7.1 4.8

Wood & Wood Products (27) -2.2 -1.6 -2.3 1.8 0.6 1.0 -1.0 0.4

Paper & Paper Products (28) 0.2 0.8 3.0 2.4 4.4 3.8 1.9 2.0

Leather Products (29) 14.0 3.8 4.8 5.1 -2.6 3.6 4.4 4.7

Chemical Products (30) 0.2 1.9 2.2 4.7 2.4 1.2 1.4 2.8

Non-Metallic Minerals (32) 2.7 3.6 1.9 2.5 3.1 6.3 1.6 3.1

Basic Metals & Alloys (33) 0.4 0.7 0.1 2.2 7.1 4.4 1.1 1.4
Source: Calculated from ASI various issues

30
Karnataka the new destination for Food Processing Industries

105
 According to the National Sample Survey (NSS) data consumption of tobacco

in all forms has reduced. Again this trend of decline in consumption is faster among

the urban population. This has reflected in the growth rate of factories during the last

decade. As regards the bottlenecks to better performance of textiles industry

identified31 are: structural weaknesses in weaving and processing, fragmented and

technologically backward textile processing sector, fragmented garment industry,

infrastructural bottlenecks in terms of power, utility and road transport. The Textile

industry in the state has been asking for textile parks on the lines of IT parks32. It was

during 2009-10 policy incentives and infrastructure in the state favoured investments

in the textile sector. Now the state is making significant investments in industrial

infrastructure, such as setting up industrial clusters and Special Economic Zones

(SEZ) and Public Private Partnership (PPP) projects to provide an impetus to further

industrial development33. It was in the last decade shortage of skilled man power and

raw material availability in the state reduced the growth rate of number of factories of

leather industry. The performance in terms of number of factories is better for Indian

manufacturing industries as compared to Karnataka manufacturing industries in all the

periods.

From the third chapter the study observed that industrial policies of Karnataka

enhanced the growth of Karnataka manufacturing sector in the following respects.

The study found that the policy measures of 1983 policy has enhanced the

growth of manufacturing sector of Karnataka in terms of output, employment, capital

31
Government of India (2006), Report of the Working Group on Textiles & Jute Industry, Ministry of Textiles
32
State Economy and Socio Economic Profile Karnataka November 2010
33
Twelfth five Year Plan Period (2012-17)

106
at the aggregate level. At the disaggregate level the policy promoted the output

growth of Leather Products, Food Products, Wearing Apparel and Non-Metallic

Minerals, employment growth of Wearing Apparel and Leather Products capital

growth of Beverages & Tobacco Textiles Wearing Apparel Leather Products and

Non-Metallic Minerals and no.of factories growth of Leather Products.

The finding of the study is that New Industrial Policy Resolution of 1993-98,

did not support the manufacturing growth, during the post-liberalisation period (1990-

2000). This is because of the 1991 industrial policy of the central government made

only tentative changes in the Karnataka’s industrial sector through New Industrial

Policy Resolution, 1993-98 (Karnataka Development Report (2007).

The industrial policies of 2001-2006, 2006-11 and 2009-14 of Karnataka by

introducing several incentives, subsidies and concessions promoted the growth of

manufacturing sector during the last decade.

The above result confirms that state policies had influenced the structure of

industries especially manufacturing industries. Therefore, the state level industrial

policies even though National Level Policy prevailing help for the systematic

planning of industrial structure at regional level. So it is proved that the hypothesis of

industrial policies of Karnataka enhanced the manufacturing growth of Karnataka is

positive.

4.9 Sum Up

In this chapter an attempt has been made to study the growth rate of NSDP of

different states, sectoral growth rates of Karnataka state and manufacturing growth of

Karnataka.

107
 Karnataka experienced significant growth rate of domestic product in all the

three sub-periods and for the entire period. Karnataka’s primary sector growth rate

was not significant in all the periods, especially during the pre-reform period. On the

other hand the tertiary sector growth rate was high and significant in all the periods,

especially during the I-Phase. The growth rate of secondary sector was higher than the

growth rate of primary sector but lower than the growth rate of tertiary sector.

Manufacturing sector growth in domestic product was found to be declined in

Phase-I both for Karnataka and India but for Karnataka the decline is sharper. The

registered manufacturing sector of the factory sector experienced high growth rate and

the unregistered manufacturing sector achieved the steady growth during the study

period.

Karnataka’s aggregate manufacturing sector experienced relatively high

growth rate of output, labour and capital in all the periods than Indian manufacturing

sector growth. While number of factories grown at low rate.

At the disaggregate level four out of ten industries experienced high growth

rate of output during the I-Phase. The growth rate of output of Wood products had

been low and declined to turn negative in 1990s relative to 1980s and thereafter

increased in Phase-II.

The employment growth in the many industrial groups is negative during pre-

reform period. Five industries maintained positive growth rate of employment in the

I-Phase of liberalisation. Only one industry registered negative growth during the last

decade.

108
 Five industries registered high growth rate of capital during pre-reform period.

In Phase-I high growth rate of capital experienced by three industries. However,

growth rate declined for the eight industrial groups during Phase-II.

Four out of the ten industrial groups witnessed growth in the factory in Phase-I

relative to pre-reform period. While the growth rate of factory is negative for Textiles

and Wood products in all the periods.

High growth rate of value of output employment and capital all reflect the

satisfactory performance of the state in the industrial activity.

This good performance instigates one to analyse the productivity growth of the

manufacturing sector of the state. So the succeeding chapter would focus on the

productivity analysis.

109