Dialogue January - March, 2009 , Volume 10 No. 3
Industry in the Development Perspective of North East India
Amiya Sarma & M P Bezbaruah*
Most debates on development prospect of Northeast India focus on the relation between economic development on one side and unrest, conflict and insurgency on the other. Volumes have been written on whether peace must precede development or prosperity brought by development is the best antidote for conflict. As a predominant section of the population of the region is still directly dependent on agriculture, it is often stated that economic development of the region would critically depend on improved productivity of agriculture. Arguments for the prospects of industries in the region appear to be less forceful. Though it is conceded that the region is endowed with abundance of natural resources for industrial exploitation, opinions seem to be less enthusiastic about the possibilities of industries sprouting up to take advantage of these resources. The policy measures by the central and the state governments for promotion of industries in the region arrive mostly in the forms of offering of subsidies and concessions rather than as strategic interventions for addressing the fundamental constraint on industrial growth in the region. The present paper reviews the prospects for industrial development in the region with the goal of identifying critical areas for strategic policy interventions.
The paper has been organised in six sections. Section two provides the conceptual and theoretical backdrop for posing the core issue. Section three draws the status of industrial progress of the region. An analysis of strengths and weaknesses of the region as a bed for thriving industrial activities has been taken up in section four. In light of that analysis, a strategy for dealing with the fundamental constraint to industrial development in the region has been discussed in section five. The role of local governments and civil society in facilitating industrial development in the region is commented upon in the final section.
II. Industrial Expansion in the overall Growth Perspective
In economic literature, connotation of the term industry is not entirely unambiguous. In the context of perfect competition, an industry comprises of all firms producing a homogenous product. In input-output parlance, an industry corresponds to production of a particular commodity as per classification of total domestic product into various categories. In more common usage the term is used to mean a manufacturing based production unit as distinct from agriculture and services. However, these days tourism, IT and IT enabled activities, which essentially fall in the service sector are also referred to as industries. In the present paper, following Krishna (2004), denotation of the term ‘industry’ is limited to manufacturing, mining and quarrying, electricity, gas and water supply.
In this context it is worth pointing out that industrial development and industrialisation do not necessarily mean the same thing. Industrial development means growth in the number and/or size of industrial units resulting in growth in the volume of value addition by these units and also increases in the number of persons employed in industrial activities. Industrialisation of an economy, on the other hand, means that the industrial sector grows faster than the rest of the economy resulting in increases in its share in gross domestic product and percentage of work force engaged in the sector. In other words industrialization means structural change of the economy in favour of the industrial sectors.
Kuznets’s Nobel Prize winning work (Kuznets 1966) on modern economic growth identified structural change of the economy from agriculture to industry in terms of share in national income and work force as a major component of development process. It is often misunderstood that such structural transformation of the economy in the process of development amounts to emergence of industries at the expense of shrinkage of agriculture. As per Kuznets’s study, during this structural transformation agriculture does not decay and instead experience productivity growth. But industrial sector expands far more rapidly with faster growth of both production and productivity thereby enhancing its share in national income and the workforce. Kuznets further found that at a later stage service sector replaces industrial sector by increasing its share in national income and workforce. In more recent times there are instances of services occupying a dominant position in an economy without industries ever becoming dominant as observed by Kuznets in the transitional history of the developed economies of the west. India itself is a glaring example of such occurrence where services have come to contribute more than a half of the domestic income without industry ever contributing more than a quarter of the same (Kapila 2004: pp765-770). This however should not be interpreted as reduced instrumental value of industrial growth for expediting the development process. While it may be possible to have a service centric paradigm of economic growth, a paradigm of development which includes industries as a strategic component besides the growth of other sectors can be of advantage, especially for a region rich in natural resources, to impart momentum to the process through industry. China’s phenomenal rate of growth is spurred by growth of industries as much as by the growth of other sectors. The same is the case with newly emerging economies of Southeast Asia too. In the Indian context too, there is a growing realisation of the need for expanding the industrial base of the economy. With the ability of agriculture to absorb additional labour force being exhausted and the emphasis on mechanisation of agriculture to improve productivity, expansion of industries has become an imperative. Indeed the last two years of the 10th Plan (2002-07) witnessed growth of industrial sector in India which was as rapid as that of the services.
Sometimes an issue is raised as to the choice between small scale industry and large scale industry. Large scale industries require large investment. But such industries do not generate much employment. With same amount of investment many small scale units can be started which employ more labour per capital. However the argument is misleading. Though direct employment may not be much, establishment of large scale units leads to positive externalities for other activities and employment growth. Small scale industries can grow through anciliarisation and development of downstream industries. In fact without emergence of large scale ones, small scale industries tend to stagnate or at best grow as a distress/push factor. For rapid growth, development of large scale units is needed. How to counter the negative effects of large scale units and make the most of the opportunities associated with them should be the matter of debate.
III. The Present Status and the Past History of the Industrial Sector in North East India
That Northeast India has remained industrially underdeveloped can be understood from a glance at the table 1 showing the shares of industrial sectors in domestic products. While the share of industries taken together is lower in each state of the region than the all India share, in case of manufacturing the share is even less than half of the all India share. Even for Assam, which has a long history of modern manufacturing, the share was below 10% in 1999-2000 - much less than 14.78%, the share for the country as a whole. The relatively small share of manufacturing sector in the NDP of the region indicates that the region has not made much progress in industrialisation during the post-independence period.
Percentage Share of Industry in GDP at Current Prices in 1999-2000
State/ Region/ Mining and Manufac- Electricity, Industry
Country Quarrying turing Gas & Water Total
Arunachal Pradesh 0.86 2.50 2.88 6.24
Assam 7.67 9.04 1.41 18.12
Manipur 0.00 8.22 3.83 12.05
Meghalaya 6.86 2.10 3.58 12.54
Mizoram 0.52 1.24 0.71 2.47
Nagaland 0.00 1.34 1.77 3.11
Tripura 1.08 2.18 1.98 5.24
The Northeast Region 5.57 6.94 1.84 14.35
India 2.33 14.78 2.49 19.60
Note: Basic data taken from National Income Statistics, Centre for Monitoring Indian Economy, January 2004 for the States and Economic Survey 2002-03, Ministry of Finance, Government of India.
At the time of independence, there was a small but significant modern industrial sector in Assam developed and dominated almost entirely by colonial capitalists. This sector consisted of plantation and manufacturing of tea, mining of coal and oil, refining of oil, manufacturing of plywood and other forest resources based products and railways developed to facilitate the transportation of output of these industries (Sarma 1993). But in the changed circumstances after independence, industrialisation process in Assam received a serious setback. Partition of the country at independence cut off the region’s approach routes to the rest of the country and the world through East Bengal. Consequently the narrow corridor of North Bengal remained the only link of the region with the rest of the country and the region got burdened with a transport bottleneck and high cost of movement of man and material to and from it. This in turn has hindered economic integration of the region with the rest of the country and reduced the attractiveness of the region as a destination of investment. While foreign colonial interest in taking up new industrial ventures waned, there was no significant step up of investment by domestic private or public sector for sustaining the growth of industries.
As independent India embarked upon a public sector dominated programme of industrialisation, political considerations came to have bearing on the decisions regarding location of major industrial units. This development did not help the already disadvantaged Northeast region in getting due share of investments in industries, at least in the first two decades of economic planning. Goswami (1981: p954) narrates a glaring instance of the region losing out due to politically influenced decisions.
“Thanks to extensive oil exploration in the post-independence period, the estimate of Assam’s recoverable crude increased several fold. This necessitated the setting up of additional refining capacity. In addition to Indian experts, a team of Soviet experts was invited by the Government of India to advise them on the site for the proposed refinery in the public sector. The Soviet consultants unequivocally gave their opinion in favour of Silghat near Nowgong as the technically superior site. They also suggested linking Silghat with the main consuming centres outside Assam with a product pipeline. But the Central Government flouting all expert opinion for reasons anything but economic decided to set up the refinery at Barauni in Bihar and to transport crude from Assam through 1151 kms. long pipeline costing Rs. 75 crores as against the estimated cost of Rs. 35 crores only for the product pipeline”.
Subsequently of course, responding to the growing public discontentment in the region, the Central Government started paying greater attention to the problems of industrial and overall economic backwardness of the region. Several public sector industrial units were then set up and fiscal transfers to the States of the region have also since been enhanced. As a result there was a revival of industrial activity in the region in the 1970s. However the upswing did not survive very long and in the liberalised environment of the 1990s the industrialisation process took some fresh beating in the North-East. Flow of foreign direct investment (FDI) is also not much encouraging. Realising the increased difficulty of the region in attracting industrial investment in post-reform environment, the central government made provision for fiscal and other concessions for newly established industrial units. According to a press release dated March 21, 2007 of the Department of Commerce, Government of India, Rs 1067 crores were invested to set up 681 industrial units in the region during 1999 – 2004. Many of these units in reality were little more than packaging units of goods manufactured outside. Such units were obviously set up only to take advantage of the fiscal and other incentives and they cannot contribute significantly to real industrial development in the region. The fiscal and other incentives have been further strengthened in the North East Industrial and Investment Promotion Policy (NEIIPP), 20071. The impact of the new policy, if any, will be visible in the coming years only.
IV. Strengths and Weaknesses of the Region as a Location of Industries
The theories of industrial location suggest that development of industries in a region may depend on a variety of factors. Narayan (1997) enlists these factors as (a) availability of efficient and economic labour, (b) availability of raw materials and their proximity, (c) cheap and quick credit supply, (d) a network of transport system, (e) marketing facilities, (f) conducive natural and economic climate, (g) availability of efficient and effective management personnel, (h) presence of scientific and technological know-how, (i) sound and stable and well consolidated political atmosphere, (j) existence of complementary industries and (k) historical and regional importance. Though the list of factors appears to be exhaustive, all of them are usually not available in any location. All the factors are also not equally important for each and every industry. Hence the net impact of the favourable factors over the unfavourable factors in a specific location compared to the same in other competing location become decisive for industries to come up and get established in a region or place. Moreover some of the above listed factors having bearing on location of industries can be dealt with relatively easily with suitable policy instruments. Cheap and quick credit supply and political atmosphere are some such factors. For factors such as technological know-how and management personnel, a region can rely on imports when and till they are not locally available. The most critical of the factors from the list for establishment of industries and consolidation of industrial base in the region appears to be market access, transportation network and the quantity and quality of natural resources for industrial exploitation.
The main strength of the region for industrial development comes from its natural resource base. The huge hydro-electric potential has been assessed. Minerals like oil, gas and limestone have long been used to feed various industries and there is scope for further use of such resources for industrial use. The potentials of other minerals including uranium are yet to be fully investigated and established. Forest based industrial units have been on decline following the ban on felling of trees by the honourable Supreme Court of India in 1995. Forest and bio-diversity can yet be the resource base for developing industries in the region in the future. Besides the present crisis faced by it, the tea industry continues to be a major strand in the region’s industrial set up. Processing of rubber and high value horticulture crops can also emerge as important industrial activity once the agriculture sector of the region gets commercialised and diversified. Traditional handicrafts skills of the people of the region is yet another resource with potential for supporting considerable industrial employment once the highly acclaimed tourism potential of the region is harnessed.
Against the advantage of natural resource base, the major hindrances for industrial development of the region appear to be (a) dearth of local capital and entrepreneurship, and (b) marketing and transport bottlenecks.
In this age of globally mobile capital flows, non-availability of local capital of course need not be a binding constraint. Capital can flow in from outside the region if the business environment can be made conducive to industrial investment.
The deficiency in local entrepreneurship may be traced to the factors that the local population has traditionally not being business oriented and white collar jobs are commonly preferred to entrepreneurial ventures by the educated youth. However the recent trends show a change in social attitude especially among the youth, as public sector job opportunities have not been expanding to keep pace with the growing educated section. Indeed economic census data reveal abundance of enterprises emerging at the grassroots. This budding local entrepreneur class may not yet be ready to spearhead the industrialisation process of the region. Yet the emergence of the pool of local entrepreneurial talent is significant development for taking advantage of the positive externalities arising from establishment of large scale industrial units.
This leaves marketing and transport bottleneck as the most serious constraint on industrial progress of the region. With the region lagging behind the country in the pace of economic growth for decades, the local market is not a large one. To look for markets beyond the region, weak connectivity with the rest of the country and lack of access to bordering countries are serious deterrents.
V. A Two Pronged Approach to Adress the Fundamental Constraint on Industrial Development of the Region
Two possible solutions, not necessarily alternatives, can be thought of to address the problem. These are (a) simultaneous development of several activities with mutual linkages and (b) opening out to the neighbouring countries.
The first of these two solutions can be seen in the complementarities highlighted by Ray (2004). ‘An expansion in some industries will serve to raise income, and in this way, generate demand for products of other industries…….An expansionary investment in such subset of sectors will increase the incentives of other sectors to follow suit, because there is now a greater demand for their products’. In such a situation, ‘each entrepreneur would invest if he or she were to believe that demand would be high, and if all entrepreneurs harboured such optimism, demand would indeed be high – these expectations would be self-fulfilling.’ Ray further talks about indirect complementarities which ‘do not meet to work through demand alone. Suppose that the expansion of some sectors contributes to the generation of a skilled, reliable, educated workforce. That the supply of labour poll of high quality will stimulate the development of other industries. This is a complementarity that works by facilitating production’ Ray (2004: pp240-241).
A ready illustration is available from within the Northeast region itself. Substantial lime stone deposits are located in the north-eastern belt of Arunachal Pradesh which can feed a cement industry. But the cement factories are unlikely to come up automatically there as transport cost of the produce to the markets outside may be prohibitive. However developing hydro-power plants, for which the state has enormous potentials, will create a ready and large enough local market for a cement industry to thrive. Once power generation picks up, availability of cheap power will make the cement and other industrial units more cost effective cancelling out some of the disadvantages of high transport cost. Meanwhile growth of the lead sectors will impart experience and skill to the workers in handling modern industry oriented production activities. This can address the problem of absence of a ready industrial workforce within the state.
The other way of addressing market-constraint for industrial and economic development of the region is opening up to the neighbouring countries of Bangladesh, China, and Myanmar and through Myanmar to Southeast Asia. India’s decade old ‘Look East Policy’ has induced wide spread discussion of this option. However, a number of problems remain in the path of activation of this option. These problems arise partly from internal conditions in these countries and partly from the state of India’s relation with them. Myanmar for instance has not only remained economically poor but also has anachronistic economic system. With the existing economic regime trading with Myanmar is beset with uncertainty and unpredictability. Though Indo-China trade has been expanding in the recent years, very little of this trade takes place across the Northeast Indian border. Unease between the countries on border related issues stands on the way of opening up of effective Northeast India-China border trade. Greater India-Bangladesh economic co-operation, including transit facility for the Northeast through Bangladesh, can be a major economic boon to the region. But for years, there have been little forward movement in the regard. The prosperous economies of the Southeast Asia, though geographically proximate, are connectivity–wise still quite distant from the region.
There are however several initiatives for improving connectivity within the region as well as from region across to the neighbouring countries. Besides improving connectivity, suitable foreign policy initiatives and active economic diplomacy by the Government of India are required for improving economic relation of the region with these countries.
VI. Role of Local Governments and Civil Society.
As fundamental constraint of connectivity and market access would be addressed, the local governments and the civil society must concomitantly contribute their lot for making the overall business environment in the region conducive to industrial activities to flourish.
Local governments must facilitate capital investment not so much by offering doles and subsidies as by simplifying bureaucratic red tapes and strengthening supportive institutions. As recent experience in West Bengal shows, acquiring land for large industrial complexes can potentially be a major problem. If land has to be acquired from private holders, suitable compensation package will have to be devised so that people giving up land not only get their dues but also acquire stakes in the success of the project (for instance by making displaced people equity holders of the project). In the hill areas where population is space, land may be available in plenty; but the ambiguities regarding land ownership in these areas mean that state government and local communities have to get together for making land available for setting up industries.
The civil society needs to take up the responsibility of shaping public opinion in favour of inflow of industrial investment and countering misinformation about hazards of external capital.
Goswami, Atul (1981) Assam’s Industrial Development: Urgency of New Direction, Economic and Political Weekly, Vol. XVI, No. 21, May 23.
Kapila, Uma (2004) Indian Economy since Independence, Academic Foundation, New Delhi.
Krishna, K. L. (2004) Industrial Growth and Diversification, in Uma Kapila (ed) Indian Economy since Independence, Academic Foundation, New Delhi.
Kuznets, Simon (1966) Modern Economic Growth Rate, Structure and Spread, Yale University Press, New York and London.
Narayan, B. N. (1997) Industrial Economics, Anmol Publications, New Delhi
Ray, Debraj (2004) What’s New in Development Economics? in Michael Szenberg and Lall Ramrattan (ed) New Frontiers in Economics, Cambridge University Press, USA
Sarma, B. K. (1993) Industrial Landscape of North East India, Mittal Publications, New Delhi
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