Foreseeing the future
The manufacturing industry in India
is emerging as the major contributor
in the overall growth of the country,
says KV Ramaswamy
Aconstructive effort is being
made that could transform
the overall picture of the
manufacturing sector in India. The
concept of competition can be
defined in many ways. Here
competition refers to rivalry
between firms in a market for
certain things such as market share
and profits. Market power is the
ability to raise market prices above
competitive levels and exclude
competition.
We need to distinguish
between competition in, and
competition for, a market.
Competition in a market refers to
actions of incumbents in an
established market and those
potential entrants who would like
to sell the same product. The
instruments of competition would
be price or capacity (quantity
competition) and other non-price
instruments such as new products
and advertising. This involves
erecting entry barriers, product
differentiation, research and
development, vertical integration
and so on.
Competition for a market is
defined as a process of creating a
new market, based on innovative
technologies and/or new standards
(for example, new operating
system for Windows). This involves
challenging the sellers of existing
products through introduction of
new products or creating potential
competition by upfront investment
in facilities to supply a new
product. Here, the instrument of
competition is not the price or
capacity.
Measurement of competition
for a market is much more difficult
than the measurement of
competition in a market. Here, our
focus is on assessment of the
extent of competition in the
markets of the Indian
manufacturing sector. We examine
the existing recent evidence on the
state of market structure, market
conduct and market performance
to understand the extent of
competition in Indian
manufacturing.
Manufacturing sector in India:
size and structure
The manufacturing sector in India
is still relatively small. The share of
the manufacturing sector in GDP
has remained more or less
stagnant in 1990s (Table 1).
Trade and industrial policy:
liberalisation in 1990s
The industrial and trade policy
reforms initiated in 1990s have
substantially altered the state of
competition in Indian
manufacturing industries. Some of
the changes made are as follows:
# Removal of legal barriers
to entry
The foremost instrument of
industrial policy was the industrial
licensing for private entrepreneurs, based on the Industries
(Development & Regulation) Act of
1956. The new industrial policy of
1991 abolished industrial licensing,
except in 18 industries. In 1993, the
passenger-car industry was delicensed,
followed by white goods,
and the entertainment electronics
industry in 1996. The sugar
industry was de-licensed in 1999.
At present, only six industries
require compulsory licensing. They
are potable alcohol, tobacco
products, electronic aerospace,
defence equipment and drugs and
pharmaceuticals.
#
Removal of capacity
expansion, takeovers and
merger restrictions on large
firms
The barriers towards the entry in
larger firms put in place by the
Monopolies and Restrictive Trade
Practices Act of 1969 and the
Foreign Exchange Regulation Act
of 1973 have been removed.
#
Raising foreign equity
participation
Equity participation greater than
51 per cent is permitted on a caseby-
case basis and the nature of
production activity. This was later
liberalised to enable setting up of
100 per cent subsidiaries in the
manufacturing sector, without any
restriction on the number of such
subsidiaries.
....CONTD
