Industrial Location under Globalization in India: Evidence from Unorganized Manufacturing Industries

Full text

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Industrial Location under Globalisation in India:
Evidence from Unorganised Manufacturing
Industries








Dilip Saikia
M. Phil Dissertation
Jawaharlal Nehru University, New Delhi



M. Phil Programme in Applied Economics
2008-10




Centre for Development Studies
Trivandrum-695011

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Industrial Location under Globalisation in India:
Evidence from Unorganised Manufacturing
Industries

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Industrial Location under Globalisation in India:
Evidence from Unorganised Manufacturing
Industries
Dissertation submitted in partial fulfillment of the requirements for the
degree of Master of Philosophy in Applied Economics of the Jawaharlal
Nehru University, New Delhi
Dilip Saikia
M. Phil Programme in Applied Economics
2008-10
Centre for Development Studies
Trivandrum-695011
June, 2010

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I hereby affirm that the work for the dissertation “Industrial Location under
Globalisation in India: Evidence from Unorganised Manufacturing Industries” being
submitted as a part of the requirements of the M. Phil Programme in Applied Economics
of the Jawaharlal Nehru University was carried out entirely by myself. I also affirm that it
was not part of any other programme of study and has not been submitted to any other
university for the award of any degree.
June, 2010Dilip Saikia
Certified that this study is the bona fide work of Dilip Saikia, carried out under our
supervision at the Centre for Development Studies.
Dr. K. J. Joseph
Professor
Dr. Vinoj Abraham
Assistant Professor
Dr. K. Narayanan Nair
(Director)
Centre for Development Studies

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ABSTRACT OF THE DISSERTATION
Industrial Location under Globalisation in India: Evidence from
Unorganised Manufacturing Industries
Dilip Saikia
M. Phil Programme in Applied Economics, Jawaharlal Nehru University, 2008-10
Centre for Development Studies
Notwithstanding various policies to address regional disparities in industrial
development, the issue of balanced regional industrial development still remains in India.
The issue acquired renewed interest in the post-reform period as the spatial inequality
has been widening and many argued that this is owing to the increasing spatial
concentration of industrial growth during this period. In principle, the post-reform
increase in spatial concentration of industries can be viewed in terms of the changing
role of the State and the emergence of the market forces in shaping the economic
landscape of a region. The existing studies dealing with the problem, however, mainly
focused on the organised industries. In spite of the fact that the unorganised
manufacturing sector occupies a dominant position compared to the organised sector, is
quite diversified and recognised as the most potential sector for rapid employment
creation; no attempt has been made so far to examine the regional pattern of the sector.
The major objectives of the study are to analyse the trends and patterns of spatial
concentration of unorganised manufacturing industries at different geographical scales
in India in the pre- and post-reform periods and to identify the factors that influence the
location decisions of unorganised industries.
The household (or enterprise) level data from the 51st(1994-95) and 62nd(2005-
06) rounds of NSS survey on unorganised manufacturing have been used in the present
study. These data sets have been supplemented by the ASI data on organised industries
and sector wise NSDP series of national accounts provided by the CSO. Three
approaches have been followed to address the objectives at hand: first, we have analysed
the spatial distribution of unorganised industries at three geographical scales-districts,
states and beyond states (regions); second, we have computed spatial concentration
measures to determine the degree of spatial concentration of industries at three scales-
inter-state, inter-district and intra-state; and finally, we have identified the factors
influencing location of unorganised industries by estimating a model of industry location
through OLS regression models.
The study has shown that unorganised industries are concentrated in few
advanced states and within the states in few advanced districts. More precisely, biasness
towards the metropolises and advanced districts on the one hand, and clustering of
backward districts/states on the other are the emerging trends of location of unorganised
industries in India. Spatial concentration is found to be high for the high and medium-
high technology industries. Spatial concentration has declined, both across districts and
states, for all and most of the two-digit industries in the post-reform period. We have also
found considerable evidences for co-location of unorganised industries at the two-digit
level. Our econometric analysis has shown that existing location of industry, industrial
diversity, labour productivity, capital productivity, level of development and market size
play significant role in location of unorganised industries at the district level in the post-
reform period.

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CONTENTS
TitlePage No.
Chapter 1Introduction
1-14
1.1 Introduction1
1.2 Statement of the Problem3
1.3 Unorganised Manufacturing Sector in India6
1.4 Objectives of the Study10
1.5 Data Source and Methodology10
1.6 Chapter Scheme
Industrial Location: Theoretical perspectives and Empirical
Evidences
2.1 Introduction
13
Chapter 2
15-43
15
2.2 Theoretical Framework16
2.3 Empirical Evidences from India 24
2.4 Limits of Existing Studies
Spatial Distribution of Unorganised Manufacturing Industries
in India
3.1 Introduction
41
Chapter 3
44-88
44
3.2 Data Source and Aggregation 45
3.3 Regional Pattern of Overall Manufacturing Sector 47
3.4 Spatial Distribution of Unorganised Manufacturing Industries51
3.5 Spatial Disparity in Productivity of Unorganised Industries65
3.6 Concluding Observations71
Annexure 3.1: Tables
Annexure 3.2: A Comparison of the Location of Unorganised and
Organised Manufacturing Industries
SpatialConcentration of
Industries in India
4.1 Introduction
74
80
Chapter 4Unorganised Manufacturing
89-123
89
4.2 Spatial Concentration: Concept and Measures
4.3 Inter-State and Inter-District Concentration of Unorganised
Industries
4.4 Intra-State Concentration of Unorganised Industries
90
95
102
4.5 Regional Industrial Base of Unorganised Industries107
4.6 Regional Diversification Pattern 111

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4.7 Co-location of Unorganised Manufacturing Industries 116
4.8 Concluding Observations 118
Annexure 4.1: Tables
120
Chapter 5 Determinants of Location of Unorganised Industries in India
124-157
5.1 Introduction124
5.2 A Framework of Analysis 126
5.3 Existing Empirical Evidences130
5.4 Model Specification and Choice of Variables135
5.5 Data Source 141
5.6 A Note on Model Estimation 142
5.7 Empirical Results 144
5.8 Concluding Observations 152
Annexure 5.1: Tables
155
Chapter 6 Conclusion
158-165
6.1 Summary of Findings
6.2 Relevance in the context of Regional Development
160
161
6.3 Limitations of the Study and Scope for Further Research 164
References
166
Appendix
Appendix-IA Note on the Database
180
Appendix-IIName of the Industry Groups and their NIC codes
Adjustment of Districts for Boundary changes between 1994-95 and
2005-06
185
Appendix-III
188

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LIST OF TABLES
Table No.Title Page No.
Table 3.1
Table 3.2
Number of NSS Districts and Districts Selected for Analysis
Percentage Share of Value Added Generated in the Manufacturing
Sector as proportion of Net State Domestic Product (NSDP) at
factor cost
Per Capita Value Added Generated in the Manufacturing Sector by
States
Shares of the States in All-India: Enterprises, Employment, GVA
and Fixed Assets
Share of Metro & Non-metro Districts and Inland & Coastal
Districts
Inter-State Disparities in Productivity of Unorganised Industries-
1994-95 and 2005-06
Inter-district Disparities in Productivity and Factor Intensity- 1994-
95
Inter-district Disparities in Productivity and Factor Intensity -
2005-06
Rank Correlation Coefficient between Productivity and Location of
Unorganised Industries across States and Districts- 1994-95 and
2005-06
Share of the States in Employment and GVA by Sectors and
Enterprise type- 1994-95
Share of the States in Employment and GVA by Sectors and
Enterprise type- 2005-06
Share of the states in Unorganised Manufacturing Gross Value
Added (GVA) by two-digit industry sectors- 1994-95
Share of the states in Unorganised Manufacturing Gross Value
Added (GVA) by two-digit industry sectors-2005-06
Share of the top 20 Districts in No. of Enterprises, Employment,
GVA and Fixed Assets- 1994-95
Share of the top 20 Districts in No. of Enterprises, Employment,
GVA and Fixed Assets- 2005-06
Share of the States in Organised Manufacturing Industry- 1994-95
and 2005-06
Relative Ranks of the States in Organised and Unorganised
Industries- 2005-06
Relationship between location of Organised and Unorganised
Manufacturing Industries across the States during 1994/95-2005/06
Extent of Contract in Unorganised Manufacturing- 2005-06
46
48
Table 3.3 50
Table 3.454
Table 3.5 64
Table 3.667
Table 3.7 68
Table 3.869
Table 3.970
Table 3.1.A74
Table 3.2.A 75
Table 3.3.A76
Table 3.4.A77
Table 3.5.A 78
Table 3.6.A79
Table 3.7.A82
Table 3.8.A85
Table 3.9.A86
Table 3.10.A 88
Table 4.1
Table 4.2
Inter-State Concentration of Unorganised Manufacturing Industries
Inter-State Concentration of Unorganised Industries by 3-digit
Industries
Classification of the 3-digit Industries according to Technology
Intensity and Degree of Inter-State Concentration
Classification of 3 digit Industries according to Degree and changes
95
98
Table 4.3100
Table 4.4100

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in Inter-State Concentration
Table 4.5
Table 4.6
Intra-State Concentration of Industries- 1994-95 and 2005-06
Classification of States according to the Degree and Changes in
Intra-State Concentration
Share of the Leading Four Districts in the States-1994-95 and
2005-06
Location Quotient of the States by Industry Sectors- 1994-95 and
2005-06
Diversification Measures for the States-1994-95 and 2005-06
Measures of Inter-State Concentration of Unorganised
Manufacturing Industries by the two digit industries- 1994-95 and
2005-06
Inter-district Concentration of Unorganised Manufacturing
Industries by 2 digit Industry Sectors- 1994-95 and 2005-06
Correlation Coefficients for Industry Pairs- 1994-95 and 2005-06
Determinants of Location of Unorganised Industries: Dependent
Variable=logPCGVA
Determinants of Location of Unorganised Industries: Dependent
Variable=logPCFA
Determinants of Location of Unorganised Industries: Dependent
Variable=logEMP
Specification of the Variables and Expected Sign
103
104
Table 4.7 105
Table 4.8109 -110
Table 4.9
Table 4.1 A
114
120
Table 4.2 A122
Table 4.3 A
Table 5.1
123
146
Table 5.2 147
Table 5.3148
Table 5.1.A 155
Table 5.2.ASummary Statistics of the Variables156-57

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LIST OF FIGURES
Figure No.TitlePage No.
Figure 3.1Region wise Distribution of per capita FA (in Rs)55
Figure 3.2Region wise Distribution of per capita GVA (in Rs) 55
Figure 3.3State-wise Per Capita FA (in Rs) of Unorganised Manufacturing 57
Figure 3.4State-wise Per Capita GVA (in Rs) of Unorganised Manufacturing 57
Figure 3.1.AState-wise Per Capita FA (in Rs) of Organised Manufacturing 83
Figure 3.2.AState-wise Per Capita GVA (in Rs) of Organised Manufacturing 83
Figure 4.1Intra-state concentration and Log of Per capita NSDP, 1994-95 106
Figure 4.2Intra-state concentration and Log of Per capita NSDP, 2005-06 107
Figure 6.1 Transport Costs and Spatial Concentration of Economic Activity128

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Chapter 1
Introduction
1.1 Introduction
The Indian economy has been experiencing a spectacular growth in the post-
reform period, especially in the most recent five years (2003-04 to 2007-08) with gross
domestic product (GDP) growth averaging an annual rate of 8.8 percent.1However, this
impressive post-reform growth is accompanied by increased inequality in all its
dimensions. The distribution of income has been unequal and the gains of the rapid
growth have not reached all parts of the country and all sections of the people in an
equitable manner.2That disparity among states and regions within states, between urban
and rural areas and between various sections of the community has been steadily
increasing in the past few years not only in terms of income distribution, but also in other
health, education, socio-economic infrastructure and any other development indicators.3
Interestingly, it is the natural resource-rich states that have been continuously lagging
behind, which in turn tightened the stranglehold of the Naxalite movement and demands
for division of states in these areas (GOI, 2008). Of late, the steep rise in inter- and intra-
state inequality has been recognised in the policy sphere and the Eleventh Five-Year Plan
has emphasised the urgency for “Bridging the gaps” through providing “an opportunity
to restructure policies to achieve a new vision based on faster, more broad-based and
inclusive growth” (GOI, 2006).
The problem of regional inequality, however, is not a new phenomenon. It exists
in all economies irrespective of the level of development, though more acute in
developing economies. It is well known that regional growth is essentially an
inequilibriating phenomenon owing to locational and structural variations and historical
1The growth of the economy in the post-reform period (1991-92 to 2007-08) recorded an average annual
rate of 6.45 percent, which is better than ever since independence. At the same time aggregate investment
rate stood at above 37 percent of GDP by 2007-08 (Economic Survey, 2008-09).
2Inequality in per capita gross state domestic products (GSDP) as measured by population weighted
coefficient of variation (CV) and Gini coefficient among 28 states has increased from 34.55 to 38.44 and
0.192 to 0.241 respectively during 1993-94 and 2004-05 (GOI, 2008). Ramaswamy (2007) found that the
Gini coefficient of per capita GSDP among 14 states has increased from 0.28 to 0.36 during the same.
Similarly, Bhattacharya and Sakthivel (2004) found that the CV of growth rates of GSDP and per capita
GSDP among 17 states has increased from 0.14 to 0.29 and 0.22 to 0.43 respectively during 1980-2000.
3It should be noted that inter-state inequality in terms of human development indicators has found to be
declined in recent years (Dholakia, 2003). However, this could be because of the fact that most human
development indicators have a value cap (GOI, 2008).

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advantages between regions, for what Myrdal (1958) remarked “naturally geography sets
the stage”. There are several overlapping factors such as history, natural resources,
human capital, local political economy, culture and other region specific factors
responsible for the existence of disparity between and within the nations. Yet, it is argued
that as economic development precedes the major source of regional variation in income
distribution will be from industrial sector rather than agriculture (Heston, 1967; cited in
Awasthi, 1991). Supporting such an argument several recent studies have observed that
spatial inequality in industrial development is one of the major causes of spatial income
inequality in most of the developing countries (see Puga, 1999; Kim, 2008; Fujita et al,
1999; Fujita and Thisse, 2002 and Kanbur and Vanables, 2005a).
The importance of industrialisation in economic development is well documented
in the literature. Traditionally, industrialisation is considered as a critical factor for
raising per capita income (Kuznets 1955, 1957; Kaldor, 1967) and transformation of the
economy through backward and forward linkages (Hirschman, 1958), and thus, sine qua
non for economic growth. In a modern view, economic growth is a story of dynamic
cities, which are highly industrialised (World Bank, 1999).4Put differently, the regions
which have industrialised are more productive and have higher level of incomes,
standards of living and other development indicators such as literacy rate, longevity,
infant mortality rate etc. than the regions that have not industrialised or less industrialised
(Chakravorty and Lall, 2007).
Though the role of industrial sector in economic transformation in India has been
a debated issue and studies observed that the sector has not played any significant role on
the growth of domestic income (GDP) over the years (Balakrishnan and Parameswaran,
2007; Dholakia, 2007),5the sector found to have significant role on regional economic
development in India (see Das & Barua, 1996; Rao et al., 1999; Dasgupta et al., 2000;
Kar and Sakthivel, 2007; Khomiakova, 2008; Chakravorty, 2003a, 2003b, Lall and
Chakravorty, 2005). These studies have observed that the growing regional disparity in
industrial development is the primary cause of widening regional income disparity in the
post-reform period. Put differently, the growing regional disparity in the post-reform
4For instance, the urban areas generate approximately 55 percent of gross national product in low-income
countries, 73 percent in middle-income countries, and 85 percent in high income countries (World Bank,
1999).
5Contrary to the industry sector, these studies have observed significant impact from the primary and
tertiary sectors in the pre- and post-1980s respectively.

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period is owing to the differentiated growth pattern between more and less industrialised
regions (Bhattacharya and Sakthivel, 2004).
It is speculated that if spatial disparity in industrial development continues to
widen it will impede the achievement of the strategy of “inclusive growth” adopted in the
Eleventh Five-Year Plan. Inclusive growth refers to an equitable allocation of resources
with benefits accruing to every section of the society, no matter where they live
(Suryanarayana, 2008; World Bank, 2006) in such a way that it reduces inequality.6As it
is clear from the definition that it (inclusive growth) refers the need to make growth
“more inclusive” by providing more benefits through more employment and income to
those sections of society and regions of the country which have been bypassed by higher
rates of economic growth (Nampoothiry, 2006). As the World Bank (2006) remarked,
inclusive growth can be achieved by expanding access to assets and thriving markets,
expanding equity in the opportunities to every section of the society and expanding the
regional scope of economic growth.
Thus, if the economic activities, especially industrial activities tend to concentrate
in a few already developed regions the achievement of inclusive growth will be impeded.
The emphasis of the location of industrial activities over other activities is mainly due to
the greater prospects of the sector for capital accumulation, its locational mobility unlike
agriculture sector and its inter-sectoral forward and backward linkages, which could
produce dynamic outcomes of growth, productivity and higher wages. Hence, the
question of industrial location is very important to understand the development of the
sub-national regions in India.7
1.2 Statement of the Problem
India, as in most other developing countries, has been experiencing a high
concentration of industries in few locations since her independence. Faced with such
situation the government has adapted a series of measures in order to achieve balanced
regional industrial development and guided the industrialisation process by highly
regulated policies, with many industries reserved for the public sector. The state has
given preferential treatment to the less developed states in distribution of public sector
6There are several definitional and methodological problems relating to the concept “inclusive growth”
and different authors have provided their own definition of the concept (see Suryanarayana, 2008 for a
discussion). However, this is beyond the subject matter of our study.
7Note that our concern is not to examine the impact of regional variation in industrial development on the
aggregate regional (income) inequality. The issue is well examined in sources like Rao et al. (1999),
Dasgupta et al. (2000), Kar and Sakthivel (2007) and Khomiakova (2008) among others.

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industries and most of the industrial policies such as industrial licensing policy, industrial
location policy, freight equalisation policy etc. were designed to influence industrial
location away from the large cities and towards the backward areas.8Apart from the
policies for influencing inter-state distribution of industries, several policies were also
designed for influencing intra-state distribution of industries.9These public sector
investment policies for dispersal of industrial growth gathered momentum during 1970s,
continued with greater force up to early 1980s and then by the mid-1980s gradually lost
momentum due to its own inefficiency. Faced with strong pressure from the different
political and other interest groups, a series of internal de-regulation policies were
undertaken by the government during the mid-1980s and then in the wake of the severe
fiscal and balance of payment crisis the government formally announced the structural
reforms in July 1991 based on pro-market liberalisation and globalisation.
That the public investment policies were guided by the narrow interest of the
vested groups and the state-led policy regime has failed to achieve the desired goals
(Ramadhyani, 1984; Bhargava, 1995; Mohan, 1997) is a separate issue and need not to
be discussed here. The point need to be considered is that the state-led policy regime has
the potential for industrial development in the backward states, and thereby, reduces
regional inequality in the level of industrial growth and regional development
(Subrahmanian, 2009). However, the structural reforms have made large-scale de-
licensing of industry and changes in the industrial location policies.10On the other hand,
it has provided more emphasis on private sector investment, foreign capital, modern
technology, access to international market and more competitiveness of Indian industries.
As a result, in the new policy regime the role of the state as industrial owner and location
8Chakravorty (2000) has summarised the major policies to influence industrial location: “The industrial
licensing system was used to direct investment into lagging areas, and heavy industry was discouraged
(and eventually forbidden) from locating in metropolitan centres; large public sec-tor projects (steel plants,
for example) were located in lagging States like Bihar, Madhya Pradesh, and Orissa; industrial estates or
growth centres, were identified and received some investment in infra-structure; financial incentives for
private industrial investment in designated lagging districts (about 60 percent of all the districts in India)
were provided; the prices for “essential” items such as coal, steel, and cement were equalised nationwide
by the Freight Equalisation Policy of 1956.”
9These policies include (a) policies to encourage village and cottage industries as well as modern small-
scale enterprises, (b) industrial estate programs; (c) the rural industries project program, (d) metropolitan
planning and (e) incentives to promote industrial development in backward districts (Sekhar, 1983).
10Regarding the changes in policies Mohan (2006) observed, “The obsolete system of capacity licensing of
industries was discontinued, the existing legislative restrictions on the expansion of large companies were
removed, phased manufacturing programmes were terminated, and the reservation of many basic industries
for investment only by the public sector was removed. At the same time, restrictions that existed on the
import of foreign technology were withdrawn, and a new regime welcoming foreign direct investment,
hitherto discouraged with limits on foreign ownership, was introduced.”

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regulator has lessened. The private enterprises, now a days, can establish industries
without facing many restrictions, except a few environmental, pollution and other local
land-use-related restrictions and also up to a certain distance from the metropolitan cities.
Further, with the increasing integration of the economy with the rest of the world, foreign
investment and external trade have become one of the driving forces of industrial growth
in India. With the advent of such policy changes several questions of the contemporary
Indian economy have been raised: What has happened to the regional distribution of
industries in the post-reform period? Has concentration of industries declined in the post-
reform period as suggested by the new economic geography models or the other way
round? What role the combined forces of the State and market have played in shaping the
economic landscape of the country after economic reforms?
Studies attempted to address these issues, however, have provided conflicting
arguments and contradictory findings about the spatial concentration of industries in
India before and after reforms. Some authors argued that under the dominance of the
private sector in industrialisation it is likely that industries will be more spatially
concentrated in the leading industrial regions, since new firms prefer to locate in profit
maximising areas, which in turn, are the areas where industries are already concentrated
owing to tangible benefits from enhance market access, inter- and intra-firm spillovers,
thick labour market, better infrastructure, availability of finance and so on (see
Chakravorty, 2003a, 2003b; Lall et al., 2003; Lall & Chakravorty, 2005). On the other
hand, some others argued for the positive role that liberalised policies can play in
reducing spatial concentration of industries (Subrahmanian, 2003, 2009). It is argued that
though liberalisation has curtailed the role of the State, it has entrusted greater freedom
and scope to the local governments. Accordingly, most of the state governments have
responded by instituting their own industrial policy reforms11and are actively competing
with each other in providing incentives such as relief from sales and income taxes,
providing subsidy, and preferential treatment in government purchases etc. to attract
private investment (including foreign investment) into the state. This will provide
advantage to the industrially backward states to accelerate industrial growth through its
own policies, and thus, reduce inter-regional disparities in industrial development.
11Typically these local reforms have four features: (a) foreign capital and technology is welcomed, (b) at
the State level there is a new “single window” project clearance agency, which coordinates with district
level administrators in matters such as land acquisition; (c) time-bound clearances or sanctions are
promised; and (d) environmental hurdles were lowered (Chakravorty and Lall, 2007).