Industrialization and the big development push!

Industrialization and the big development push!

Industrialization is the major driving component of the major developed country of our world. This article is devoted to developing a theory of how industrialization can gradually divide it into core and periphery. Production firms tend to cluster in regions with greater demand. Therefore, there is a strong case for the industrialization of countries like India, where the level of development is still low compared to that of capitalist countries. Industrialization is a must for developing countries. So, what is the significance of the Indian industrialization record for economic development?. How far can industrialization lead to growth in a nation?

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Bases for Regional Divergence of industrialization

Alfred Marshall’s original exposition of the concept of external economies was illustrated with industry localization. Most of the literature in this area follows Marshall in identifying three reasons for localization, why some regions are characterized as core while the others play the role as periphery.

First, the concentration of several firms in a single location helps to create a pooled market for workers with industry-specific skills. It ensures a lower probability of unemployment and a lower probability of labor shortage and thereby creating a positive externality if complete information.

Second, localized industries can support the production of specialized inputs.

Third, informational spillovers can give clustered firms can have better advantage than individual producers.

Role of industrialization in India

Raising income

The development of various industries leads to an increase in production and productivity in our country. It provides a secure basis for a rapid acceleration in income. Empirical estimates do represent a close relationship between income growth and industrialization. In economically developed countries GNP level was as high as $28,000. But in the industrially backward nations, it is as low as $ 4000.

Changing the Structure of the Economy

Industrialization is the process of gradual change in the economic structure to make a nation economically develop. As a Nation gradually develops, the share of the manufacturing sector gradually increases while that of the Primary Sector falls. Kuznets describes the increase in industrial output as part of the general transformation identifies as modern economic growth. Industrialization is a response to changing demand and supply conditions and a principal means of acquiring modern technology. The trickle-down effect benefits the agricultural and service sector.

Sustained growth

The sustained growth of the world economy from the mid-1950s to the mid-1970s provided a more optimistic view of the benefits of trade and industrialization. As manufactured exports from developing countries grew at more than 10 percent a year, the assumption that export markets were limited became significantly less tenable. If we look down the records, most of the developed countries in the world have achieved success through industrialization. The argument for shifting from an inward-oriented to an outward-oriented strategy got greatly strengthened by the success of a small group of newly industrializing economies.

Overcoming deterioration of the terms of trade

India is an underdeveloped country, hugely dependent upon its agriculture. Industrialization required in such countries due to fluctuating price rates of primary products causes their terms of trade to deteriorate a lot. They usually export Primary Goods and import manufacturing products. The price of Primary goods is not stable, while the price of manufacturing goods keeps increasing causes their terms of trade to aggravate. They must shake up their dependency on agriculture and devote themselves to import substitution export promotion can be an optimum path for it.

Strengthening the Economy

  • There is a saving of time and labor.
  • Industrialization has resulted in a considerable rise in the standard of living of the people.
  • Several substitutes in consumer goods are available. The customer gets a wide variety of choices.
  • Industrialization creates new job opportunities and a poverty reduction.
  • Industrialization has also resulted in f new modes of transport making, quick export, and import possible. The world has become a small place.

The Major industrial and manufacturing sector in India

Traditionally, India had six primary industries:

  •  Iron and Steel industry Textiles
  •  Jute industry
  •  Sugar industry
  •  Cement industry 
  •  Paper industry.

 Four new industries joined this list, these are:

  •  Petrochemical
  •  Automobile
  •  Information Technology (IT)
  • Banking & Insurance.

These industries are predominant for India’s economy. Understanding the growth of these industries can offer a good insight into the relationship between growth and government policies required to develop them further.

The leading names in India’s manufacturing sector are

  • Larsen and Toubro
  • Maruti Suzuki
  • Ranbaxy Laboratories
  • Mahindra and Mahindra
  • Apollo Tyres
  • Asian Paints
  • Hindustan Lever Network
  • Jindal Steel & Power
  • Bombay Dyeing
  • Videocon Industries

How much industrialization has helped India to prosper?

The contribution of the manufacturing sector to India’s Real Gross Domestic Product has increased over the years. However, the rate of growth has not been as we expected. A lot of emphases was put upon the heavy industries and, it led to greater expectations.

An enormous amount of investment made in the industrial sector of our country gives a great impetus to the growth rate of our country. It is perhaps the reason for the Industrial growth rate in India’s GDP and helped this sector to grow. The rise of the Growth Rate of the Industrial Sector in India took place due to increased consumption of industrial goods, which has boosted the industrial sector. A prodigious amount of our industrial goods gets exported to the international market, which further enriches the GDP figure.

In 2007, the manufacturing sector contributed 34 percent to China’s GDP while its Indian counterpart accounted for 16.1% in 2009-10 fiscal. In the last few years, the registered manufacturing sector has made better contributions than the unregistered sector. Industry Growth Rate in India GDP has been following steady growth rate path over last years. It gave a significant boost to the Indian economy.

Industrialization Table 1

The following table shows data on total GDP, the share of industry, and manufacture of aggregate GDP:

yearsTotal GDPIndustrial share to GDPManufacture share to GDP
1999-2K22,46,27626.8715.07
2000-0123,42,77427.3215.50
2001-0224,72,05226.5715.02
2002-0325,70,69027.3915.44
2003-0427,77,81327.2015.19
2004-0529,71,46427.9315.25
2005-0632,53,07327.9915.34
2006-0735,64,36428.6516.00
2007-0838,96,63628.7416.14
2008-0941,58,67628.1315.78
2009-1045,16,07128.2716.17
2010-1149,37,00628.2316.23
2011-1252,43,58227.5115.70
2012-1355,03,47627.0315.24
Share of the industrial and manufacturing sector in total GDP

Source: RBI bulletin

GDP From Manufacturing in India increased to 6315.03 INR Billion in the first quarter of 2021 from 5558.84 INR Billion in the fourth quarter of 2020. The graph is showing an upward trend all over the years with minor fluctuations. The graph has descended severely after 2020 due to COVID-19. But it has managed to gather its pace is evident from the figure.

industrialization
Increasing graph of industrial performance

A econometrics approach to industrialization

We shall now construct a regression model to investigate whether there is an association between the GDP growth and the Industrial sector growth rate of our economy.

industrialization Model 1

The regression model is represented as GDPGROWTH= β0+β1agriculturegrowth+β2industrygrowth+e

Where:

  • gdpgrowth = GDP growth rate over the given period
  • Agriculturegrowth= agriculture growth rate
  • Industrygrowth= industrial growth rate

Let the null hypothesis be represented as 

H(0)= β1=β2=0

Against H(1)=β1≠0 and β2≠0

Observation

Here, we have carried out a regression on a data set on a period 1950-2013, setting 2004-2005 as the base. In the above regression model, we have regressed the GDP growth rate over the share of each of the agricultural, industrial, and manufacturing sectors (growth rate) of our country. The coefficients represent the degree of influence of the regressor on the regressand. GDP growth of industry shows the highest value of .4525896.

It signifies that industrial growth influences GDP growth the most. The t value of 0.000 represents that the null hypothesis gets rejected at a 1% level of significance, hence it can be concluded that there is a significant association. We know that the value of t the greater is the evidence against the null hypothesis. Here the t value for industry growth is 18.00, which undoubtedly goes against the null hypothesis

A scatter plot of GDP growth on industrial growth

Here we have shown a scatter diagram to get a graphical synopsis of the above model. Most of the scatter points cluster around the line, with minimum outlier representing a good fit.

industrialization Model 2

Now,
Here the regression model is represented as, totalgdp= β0+β1agriculture+β2industry+β3manufacture+e    

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Here is the scatter plot of total GDP on industry share which, shows a good fit.

Make in India

MAKE IN INDIA

India needs a strong manufacturing and industrial sector so that it can accommodate the large employable force. It needs to become self-sufficient in several sectors to bring down the trade deficit. Manufacturing is urgently needed to provide livelihood opportunities to a huge chunk of the population outside of agriculture. The manufacturing sector supplies quality products across the supply chain, thereby fueling growth and productivity.

Shri Narendra Modi, honorable Prime Minister of India, launched the visionary Make in India program in September 2014. The program aimed at transforming India into a global hub for manufacturing, research & innovation, and an integral part of the global supply chain. The program aimed at building confidence in India’s strengths and potential as a manufacturing hub across internal and external stakeholders. It has led to a major rehaul of processes and policies to enhance the ease of doing business in India. Indeed, this is the single largest manufacturing initiative by any country in the recent past.

Key features

  1. Make in India took 25 sectors under its consideration. Domestic and international audiences are kept constantly updated with the latest information on opportunities, reform measures, etc.
  2. Liberalization in some key sectors such as Defence Manufacturing, Food Processing, Telecommunications, Agriculture, Pharmaceuticals, Civil Aviation, Space, Private Security Agencies, Railways, Insurance and Pensions, and Medical Devices introduced as the primary policy.
  3. The government considered many reforms to enhance ease of doing business and enhance FDI.
  4. Intellectual Property Rights (IPRs) registrations are accelerated and, measures are needed to cater to the training needs of the skilled workforce.

We expect that The manufacturing sector will reach US$ 1 trillion by 2025 and contribute about 25% to India’s GDP. Under the Make in India program, indigenous manufacturing will increase by 12-14% per annum over the medium term. As per the World Bank, manufacturing contributed about 16% to the country’s GDP in 2016. It is on the higher side when compared with the global average of about 15% in 2015.

We expect that manufacturing and industry will create 100 million additional jobs by 2025. India is now one of the most attractive destinations for investments in industrialization and will lead to increased job opportunities in our economy.

Conclusion

One of the crucial components of economic development is industrialization. Countries like India should give positive encouragement to rapid industrialization. In 2007- 08, India’s secondary sector’s share in GDP stood at 24.9 p.c. Industrialization can shape India in a developed form.

  • Industrialization brings about a favorable change in the country’s occupational pattern.
  •  Employment opportunities in the agricultural sector in underdeveloped countries are rather slim. On the contrary, agriculture is highly overcrowded. So industrialization can reduce involuntary unemployment and make our labor force more productive and skilled.
  •  For security consideration, no one denies the role of industrialization in an economy. Dependence on foreign countries for defense goods is a risky proposition. Thus, defense items should be produced domestically.
Anwesha Podder, Intern Eco-Fun-Omics
Anwesha Podder, Intern Eco-Fun-Omics

Ms. Podder is a research intern in the economics department of Eco-Fun-Omics. She is currently pursuing M.Sc. in Economics, Calcutta University.

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