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Market Value of Indian Manufacturing Industry

Tuesday, August 21, 2012

The final output is the gross global market value for not of the Indian manufacturing industry which is composed of domestic production (including exports) plus imports of manufactured products. Variations in inventories are assumed to be self-correcting over a medium term although admittedly these will vary from year to year within some limits. The objective is to delineate the trend and to determine the orders of magnitude in short periods.

Market Value of Industrial Output

The value of the manufacturing output calls for a mark-up to reach the consumer price. The price which the consumer pays (which is the final market value) covers governmental levies like excise duty, customs VAT (value added tax), and sales tax, transportation cost from the production centre to the market place, carrying cost of inventory (rentals, interest, loading and unloading), breakages, leakages and rejection spoilage and quantity or quality loss factors, marketing cost of the trade including advertising and exposure cost and the profit of the intermediaries (the distributor, stockist, wholesaler, retailer).

The expansion of the output to obtain the market value has been achieved by introducing two mark-ups, one for the anticipated governmental levies and the other for the marketing costs which include carrying costs. In the projections, adjustments have been made for the likely reductions in the government levies. In sympathy with the lowering of the customs duties in compliance with the WTO requirements, the excise duties would be scaled down to provide a level playing field to the Indian producers. (This is after making adjustment for the reduced multiplier for the exportable goods). This was based on a sample of industrial products with the cost varying from a bare 18% to as high as 85% depending on the chain of distribution network and the size of supplies. In some cases no retailing is involved.

Import Component of Industrial Products and the Aggregation

The market for industrial products in any country is served both by domestic producers and exporters from other countries. It takes special significance in the WTO regime. It is, therefore, necessary to add the market value of imports to the market value of domestic production to arrive at the total market of Indian suppliers. Growth of imports of industrial goods is also extrapolated for the analysis period taking the three different scenarios. The extrapolation is based on the past trend over a decade and adjusting for wild fluctuations in some years.

The Application of the Model

To start with, the forecast of the value addition of manufacturing output was attempted. This was based on an econometric model which consists of four main equations, three of which are behavioural. It was assumed that (i) MVA (value addition from manufacturing) has a positive relation-ship with GDP, given the elasticity higher than one; (ii) MVAR (manufacturing value added of the registered sector) is a function of MVA; (iii) the relationship between MOR (manufacturing output from the registered sector) and MVAR will follow the same trend in the coming years for which projections have been made. In the equations, it was assumed that the total value of manufacturing output (MO) maintains the same proportion to MOR.

Projection of the Aggregate Industry Market

          Based on the projection trajectory, as anticipated, the GDP expands at 1999-2000 prices from Rs 36.25 tn in 2008-09 to Rs 45.45 tn in 2011-12 and to Rs 59.45 tn in 2014-15. By the terminal year of the projections, that is, 2019-20, it reaches the level of Rs 93.34 tn. These are in the nature of probable estimates. The estimates represent an absolute expansion of 142% during the total projection period. Under Scenario II (Sc II), or optimistic estimate, the size of GDP rises from Rs 46.47 tn in 2011-12 to Rs 61.46 tn in 2014-15 and to Rs 98.95 tn in the terminal year, showing an expansion by 153%. Scenario III (Sc III), however, makes that absolute expansion truncated to a little over 120% only between 2007-08 and the terminal year.

Projection of MVA of Domestic Output

The value added of the manufacturing sector (MVA) takes a similar trend. The sector had experienced varying growth trends. It accelerates to a high rate for a brief period and then got subdued. The picture that emerges in the later period of 2008-09 is certainly not reassuring. Nevertheless, the sector has developed a wider base and a robust investment trend. It has also been absorbing advanced technological inputs reinforced by both inward and outward foreign direct investment flows. The recent investments will mature in the years following. The projections show that under Sc I (the probable estimate) MVA expands from Rs 5.17 tn in 2007-08 to Rs 6.94 tn in 2011-12 and Rs 9.08 tn in 2014-15. By the terminal year, it would have reached a staggering level of Rs 14.25 tn. To recall, these estimates are under 

Projection of Market Value of Domestic Output

The estimates of the market value at factor cost are converted into market value of the domestic output. The rationale and methodology and the expansion multipliers were explained earlier.

The probable market value of the manufacturing output expands from Rs 39.08 tn in 2007-08 to Rs 52.42 tn in 2011-12 to Rs 65.57 tn in 2014-15, and to Rs 107.65 tn in the terminal year.

Projections of Manufacturing Market Value of Imports

The rationale and inflows for the projections were explained and delineated earlier. While inflators were applied to arrive at the market value, deflators were used to provide for reasons of the trends towards freer trade under the WTO regime.

The projected values rise from Rs 5.03 tn in 2007-08 to Rs 8.71 tn in 2011-12 and to Rs 14.31 tn in 2014-15. In the terminal year of the analysis, it jumps to Rs 34.06 tn.

Projections of the Aggregate Values of Market Value

The aggregation of the manufacturing market value after the computation of the market value of the manufacturing output and the manufacturing imports is a simple summation process. The projections under the three scenarios take the following pattern:

Aggregate Manufacturing Market Value at 1999-00 prices


Year        Sc I Probable (Rs tn)         Sc II Optimistic (Rs tn)            Sc III Pessimistic (Rs bn)

2007-08             44.10                                       44.51                                      43.40

2011-12             61.13                                        63.41                                              56.23

2014-15              82.88                                        88.42                                      71.81

2019-20              141.72                                      165.41                                     109.50


The foregoing computations show the sensitivities of the estimates on both positive and negative sides. Over the size in 2007-08, the probable aggregate manufacturing market value expands ib 2011-12 by 38.60% in 2014-15 by 87.94% and by the terminal year, 2019-20, by 221.36%.

The Potential and Promise

The quantum of expansion in the period ending 2011-12, 2014-15 and 2019-20 are, indeed, large and challenging. These will call for a massive effort by both the domestic industry and the domestic investors, as well as the banking sector and the foreign capital - basically FDI (foreign direct investments) but reinforced by net flows for short periods from FIIs (foreign institutional investors) and supplemented by persons of Indian origin (PIOs) living abroad. While the magnitudes are large by India's present industrial and economic status, they are modest considering the resources which can be released for the second largest and the fourth largest economies in the world. In computing the investment requirements, and three different incremental capital ouput norms have, again been used, namely optimistic 3:1, probable 3.5:1 and pessimistic 4:1.

Given the commitment of those involved and the handsome returns these offer, the goals are achievable and fall within the domain of probability. The inputs, however, are not limited to capital resources, these go far beyond. The two most significant inputs will be efficient allocation and optimal resource management, at both macro and micro levels, which in turn will call for qualitative upgradation of manpower at all levels.

India's economic structural readjustment programme launched in 1991 offered a great promise. The economic growth was accelerated as a result of deregulation, liberalisation and globalisation. There is a renewed vigour in evidence as a result of the economic resurgence. With forex reserves having exceeded at one point in time to over USD 300 bn, market cap of one company exceeding two trillion rupees and total market cap of the stock market having crossed 75 trillion rupees, pointers are propitious, the impact of the global meltdown, not-withstanding. The old cautious and constrained mindsets developed during the four decades of the regulatory regime are changing and are conducive to the expected growth process but these call for a further transformation considerably. The bottlenecks, mainly in the space of public administration and policy, persist. Infrastructure, a major bottleneck, is being attended to with high priority that it calls for. But there again, further acceleration is the need of the hour. Larger infusion of resources to the sector will be conducive also to meet the global downturn.

Armed with the anticipated promises, colossal parameters and positive policies, on the one hand, and the pool of skilled and knowledge-oriented manpower and technology, on the other, India can optimistically look forward to be a global industrial power in the next two decades.

Source: NPCS Team

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