The paper has tried to analyse how incentive competition is increasing regional instability in the fabrication and service sector growing. The paper has found that the inducements have increased the already bing instability in both the sectors. The FDI is fluxing into provinces where there was already investing. Thus provinces should concentrate on bettering the necessary conditions to pull private investing along with offering inducements which is merely a sufficient status.
India liberalized its economic system in the twelvemonth 1991. Prior to this the chief push of the Indian economic policy was to convey about a balanced regional development and India relied upon Five Year Plans to accomplish this aim. But some of the political economic developments inside and outside the state pushed India on the throes of terrible economic crisis which made Indian policy shapers to rethink on the policy being pursued hitherto. There were brushing reforms to pass the full economic construction. There was alteration in the federal power construction with province authoritiess going more powerful vis-a-vis cardinal authorities which finally gave rise to the construct of incentive competition. Incentive competition has impact on regional growing by impacting private investing. The paper is organized as follows: In the following subdivision we have looked into the policy prior to the economic reforms. In the 3rd subdivision we have examined policy after the reforms. In the 4th subdivision we have seen how the construct of incentive competition got evolved and what are the economic principles behind it. In the 5th subdivision literature reappraisal has been done. In the 6th subdivision analysis has been undertaken to see how incentive competition is worsening regional instability of fabrication and service sector growing. Then some of the restrictions of the survey have been examined. Finally, some policy deductions have been drawn as to what should be done to pull private investing and to accomplish balanced growing.
Policy prior to 1991 Economic Reforms
Immediately after independency India embarked upon the program government. Probably India is the first non-communist state to implement a fully fledged industrial policy and the purpose of this policy was to convey about a balanced regional development by directing the resources to backward and developing parts. This policy was greatly influenced by Indian top leaders association with the Fabian Socialism and Labor Party leaders of UK like Harold Laski. It has besides drawn inspiration from what was so regarded as extremely successful Soviet Planning theoretical account. The intent of the policy was to co-ordinate investing determinations both in the populace and the private sectors and to prehend the ‘commanding highs ‘ of the economic system by conveying certain strategic industries and houses under public ownership ( Ajit Singh, 2008 ) .
Successive Five Year Plans were designed to convey about a balanced economic and societal development. The aims of the program were to accomplish balanced industrialisation, increased economic growing and just distribution of the additions achieved through high growing. In the words of First Plan:
It is no longer possible to believe of development as a procedure simply of increasing the available supplies of material goods ; it is necessary to guarantee that at the same time a steady progress is made towards realisation of wider aims such as full employment and remotion of inequalities.
The Indian contrivers relied upon public sector investing, import permutation industrialisation policy and modulating the private sector to accomplish these aims. There were policies to make up one’s mind upon the magnitude, composing and way of investing. There were controls on monetary values. The policies that were aimed at act uponing the inter-state distribution of industries were industrial licensing, the location of public sector industries, location policies for metropolitan metropoliss, small-scale industries location policies, the distribution and pricing policies for intermediate industrial inputs, and other authorities location inducements ( Sekhar, 1983 ) .
Some of the of import features of the Indian planning government before 1991 can be summed up as follows.
The Indian contrivers emphasized the function of heavy industries and sought to develop capital goods industry every bit early as possible.
The program envisaged primary function to the populace sector in transporting out the economic activities.
The private sector will play a function in the economic system non by the trial of private profitableness but in conformity with the demands of the national program.
There was inward orientation in the sense that whatever can be produced within the state should be produced regard less of cost factor. The technological autonomy was emphasized.
The economic power was to a great extent concentrated in the custodies of the Cardinal Government. The determination to put up an industry, what industry should be established, where it should be located etc. , issues were used to be entirely decided by the Cardinal Government. State authoritiess did n’t hold any state on these issues. Industrial Policy Resolution 1948, Industrial Policy Resolution 1956 and Industrial Development and Regulation Act 1951 etc. , signals the fact that the cardinal authorities had an absolute sway over affairs refering to the induction and ordinance of development in one of the cardinal sectors of the economic system. The Industrial Development and Regulation ( IDR ) Act, 1951 was the chief instrument for imparting the investing in the industrial sector in socially coveted waies. The act controlled non merely entry to an industry and enlargement of capacity, but besides engineering and import content ( Ahluwalia, 1991 ) . In implementing its balanced industrial scheme the authorities used a broad assortment of steps like industrial licensing, rigorous government of import control, administered monetary values, MRTP Act etc. , But all these controls, limitations had an inauspicious impact on the entrepreneurial zealousness which in bend had a bad effect on the general economic public presentation of the state. Thus the efficiency standard was overlooked for the interest of equity. Isher Ahluwalia ( 1991 ) has listed out some of the inauspicious effects of this policy government which are as follows.
Barriers to entry into single industries limited the range for competition.
Indiscriminate and indefinite protection of domestic industries resulted in the genteelness of inefficiency.
The inauspicious impact of protecting small-scale industries and advancing regional dispersion of growing on the pick of the optimum graduated table of production.
Administrative hurdlings nurtured red-tapism, nepotism, and corruptness.
All these resulted in stifling entrepreneurship and there was small or no inducement for up step of engineering.
The constitution of a big figure of major industrial undertakings in less developed parts has non had any important impact on the industrial or overall economic growing of these parts ( Ramadhyani, 1984 ) . Therefore the state did n’t derive much in footings of growing.
Policy after 1991 economic reforms
Year 1991 is major turning point in the Indian economic history as the state witnessed sweeping reforms in that twelvemonth. Gulf war and the dislocation of Soviet Union in the 1990s had a major impact on the economic occurrences of the state. These developments coupled with our restrictive economic patterns intensified the economic crisis. There was terrible balance of payment crisis and inflationary rush which made our policy shapers to rethink on the development scheme being pursued since its independency. Neo broad economic experts blamed inordinate control of private investing by the authorities, inward looking industrialisation scheme, over protection of public sector industries and predomination of public sector in county ‘s economic activities for the economic crisis of 1991 ( Singh and Ghosh, 1998 ) . The present reforms were based on clear acknowledgment of the demand to incorporate the domestic economic system with the planetary economic system through trade, investing and engineering.
The country where extremist alterations were brought in during the reforms was in the country of industrial licensing. Earlier it was indispensable to obtain licence for new investing every bit good as for the enlargement of the bing capacity. Now licencing is required merely to a little figure of industries, most of which topic to environmental and pollution considerations. The controls over investing and enlargement through Monopoly and Restrictive Trade Practices Act have besides been removed. Some reforms were done in the revenue enhancement construction excessively. It was decided to travel towards a simpler system of direct revenue enhancement with moderate rates and fewer freedoms. In the country of public sector the authorities started the procedure of disinvestment with authorities retaining 51 percent equity and besides direction controls. Similar pro market reforms were undertaken in the countries of banking, insurance and exchange rate policy ( Ahluwalia,2000 ) .
Concept of Incentive Competition
Striking characteristic of the reform is that it brought about a thorough alteration in the federal set up of the state. Though India is a federal state much of the determination doing power was concentrated with the Cardinal Government. It was Cardinal Government which used to make up one’s mind upon the magnitude, composing and way of investing thereby go forthing small room for the province authoritiess to make up one’s mind upon the policies best suited for the socio-economic, socio-cultural profile of each province. With the moderation of cardinal authorities ‘s control over investing determinations, province authoritiess were given considerable freedom to prosecute the policies which are best suited them. The reforms brought about a displacement in the power construction with province authoritiess geting more power vis-a-vis Cardinal Government in determination devising procedure. There was an effort towards deconcentrating the determination devising procedure. There was degeneration of power from Cardinal Government to State Governments if non wholly but to a certain extent ( Shand and Bhide, 2004 ) . With the reforms the cardinal authorities started retreating from major economic activities and there was a diminution in the importance of public investing which made the province authoritiess to experience the demand to pull more and more private investing. Since so provinces have started viing against each other for pulling investing by making investing and concern friendly environment. And the mechanism they have relied upon to make this is inducements. It is through inducements they are viing to pull more private investing. And this tendency came to be known as “ incentive competition ” .
Rationale behind Incentive Competition:
With the New Economic Policy of 1991 there was a pro market environment. If non absolute freedom there was a certain sum of flexibleness given to the province authoritiess in their several economic activities. States became independent to certain extent in their economic affairs. Some of the principles behind the inducement competition are as follows.
Principle of comparative advantage: Each province can bring forth a trade good in which its holding comparative advantage
Encourage competition: It encourages competition among provinces which helps to better production efficiency
Economies of graduated table: Now economic systems of graduated table could be operated due to big graduated table of production
Trade is an engine of growing: It leads to increased trade as each province can interact with possible investors
Globalization: In an epoch of globalisation where there is more decentalisation of power, it becomes imperative for provinces to offer inducements to pull private investors
Political economic system facets: With the increased regionalization of political relations, the political relations at the province degree is being driven by province issues than by cardinal issues and the economic public presentation of each province has become an issue of possible electoral importance.
Bajpai and Sachs ( 1996 ) , found in the station reform period the cardinal authorities has freed up provinces which has allowed greater dynamism by furthering greater competition among the province authoritiess. Some have made usage of this chance by conveying in more reforms while some still dawdling behind. For the intent of analysis they have divided the provinces into three classs i.e. , reform oriented provinces ( Andhra Pradesh, Gujarat, Karnataka, Maharashtra, and Tamil Nadu ) , intermediate reformists ( Haryana, Orissa, and West Bengal ) and lagging reformists ( Assam, Bihar, Kerala, Madhya Pradesh, Punjab, Rajasthan, and Uttar Pradesh ) . With the induction of reforms in 1991 the function of private investing has acquired a greater trade of significance. States are now in competition with one another to pull private investing both domestic and foreign. The southern provinces accounted for the 34 per centum of the proposals that have been approved in 1998 and Gujarat and Maharashtra accounted for 21 per centum in the corresponding period. On the other manus, the provinces in the North and the East are far behind, except for investings in Delhi.
Shand and Bhide ( 2004 ) , the economic reforms of 1991 brought to the bow the function of province authoritiess in pulling private investing. In the old government of centralised be aftering the function of province authoritiess was limited to buttonholing for public sector investings. In the new environment of liberalized economic policies the provinces are recognizing the demand for more competitory schemes to pull private investing in their ain provinces. For farther analysis they have divided the 14 provinces into High Performing State Economies ( Karnataka, Maharashtra, Tamil Nadu and Gujarat ) , Medium Performing State Economies ( West Bengal, Andhra Pradesh, Kerala, Haryana, Madhya Pradesh and Rajasthan ) and Low Performing State Economies ( Orissa, Punjab, Uttar Pradesh and Bihar ) . In the industrial sector there was addition in the mean growing rate for HPSE and MPSE whereas diminution for the LPSE. HPSE registered an increased growing in the service sector whereas the growing rate was about steady in the MPSE and fell in the LPSE.
Ahluwalia ( 2000 ) , the liberalisation has eliminated many of the controls before exercised by the cardinal authorities and increased the function of province authoritiess in many countries that are critical for economic development. The co-efficient of fluctuation of growing rates has increased in the station reform period. Growth accelerated aggressively for Gujarat and Maharashtra whereas it decelerated in Orissa, Uttar Pradesh and Bihar. He attributes this fluctuation across provinces to the concern environments in the provinces. States with investing and concern friendly environment performed good than the other provinces.
Rossiter ( 2010 ) , is of the position that in the station 1991 period the centre began the long retreat from its extremely regulative environment. The decrease in fiscal transportations and public investing posed major challenges to the province authoritiess. They have to vie with each other via the investing clime for FDI and domestic investing. The nationalist parties of Tamil Nadu and the Congress-BNP split in Karnataka have produced a strong motion towards liberalisation whereas liberalisation procedure in Kerala has been slower due to ideological factors by communist parties.
Papola ( 2011 ) , reforms removed cardinal authorities ordinances on investing and industrial location and gave more freedom and chance to provinces to establish their industrial development on specialisation. Swerve towards easing of ordinances and publicity of investment-friendly clime in provinces is one of the factors which explain differential growing rate of fabrication sector across the provinces. States like Gujarat and Maharashtra, Karnataka and Andhra Pradesh have offered ‘best ‘ and Uttar Pradesh and West Bengal ‘poor ‘ investing climes.
Besley and Burgess ( 2004 ) have examined how the industrial dealingss climate in Indian provinces has affected the form of fabricating growing. The provinces which amended the Industrial Disputes Act in a pro-worker way experienced lowered end product, employment, investing and productiveness in registered or formal fabrication. In contrast, end product in unregistered or informal fabrication increased. Some provinces like Andhra Pradesh, Gujarat, Karnataka, Tamil Nadu and Maharashtra show dramatic growing, while provinces like Assam, Jammu and Kashmir and West Bengal stagnate.
The provinces are viing against each other through inducements to pull private investing. Private investing is of two types i.e. , private domestic investing and Foreign Direct Investment. Give the clip skyline Is have looked merely into FDI to analyze how incentive competition is worsening regional instability of fabrication and service sector growing.
Data and Methodology:
The information for the survey is taken from Annual Survey of Industries ( ASI ) , Handbook of Statistics on the Indian Economy, RBI, Department of Industrial Policy and Promotion and EPW Research Foundation ( EPWRF ) .
A policy index has been calculated by delegating “ 1 ” to provinces for each policy they are comprehending. Otherwise the value would be “ 0 ” . The index is simple norm of figure of policies for each province. States with high index value are offering more policies and provinces with low index value are coming out with fewer policies. Median FDI flow has been calculated on the footing of which provinces are divided into High FDI Attracting States ( HFAS ) , Medium FDI Attracting States ( MFAS ) and Low FDI Attracting States ( LFAS ) . Gujarat, Karnataka, Tamil Nadu and Andhra Pradesh semen in the class of HFAS, Goa, Chandigarh, West Bengal, Kerala are in the MFAS class and Bihar, Rajasthan, Uttar Pradesh, Madhya Pradesh, Orissa come under LFAS.
Coefficient of fluctuation has been used to analyze the regional instability of fabrication and service sector growing. It is one of the most normally used steps of fluctuation. It is defined as the standard divergence divided by mean. Symbolically, CVx x / Aµx, where ten is the standard divergence, Aµx is the mean of the variable Ten ( say, employment or end product ) . A higher value of the CV implies higher regional instability of fabrication and service sector.
The survey has been undertaken for a period of 17 old ages from 1993 to 2010. The full period has been divided into two sub periods from 1993-94 to 2000-01 and from 2001-02 to 2010-11 to see the fluctuations go oning in these sectors across the classs as a consequence of province sponsored inducements. It is after 1991 reforms that the construct of incentive competition came into trend. Since so some provinces started offering inducements and the remainder of the provinces started following them in the ulterior old ages. Though the provinces started offering inducements in 1993 the impact of the same could be felt with a slowdown. Keeping this slowdown consequence in position the survey period has been divided into two sub periods.
In the below tabular array an overview of the policies being pursued by major provinces of the state are given. . The policy index which has been estimated for farther analysis has been calculated on the footing of these below mentioned policies.
Information technology Policy, Infrastructure Policy, Road Policy, Port Policy, Policy for SSE, Tourism policy, Policy on SEZ, Textile Policy, BT Policy, Export Policy
Information technology Policy
Tourism Policy, Agricultural Policy, Food Processing policy,
Information technology Policy, Transportation Policy
Information technology Policy, Infrastructure Policy, Road Policy, Port Policy, Tourism Policy, Agricultural Policy, Policy on SEZ, Interim Policy on gas Distribution, Export Policy, It & amp ; ITES Policy, BT Policy
Information technology Policy, Infrastructure Policy, Food Processing Policy
Information technology Policy, Tourism Policy
Information technology Policy, Infrastructure Policy, Road Policy, Tourism Policy, Agricultural Policy, Policy on SEZ, Export Policy, IT & A ; ITES Policy, Textile Policy, BT Policy, Millenium BPO Policy
Information technology Policy, Tourism Policy, Labor Policy
Information technology Policy, Tourism Policy, Food Processing Policy, Captive Power Generation Policy, Labor Policy
Information technology Policy, Infrastructure Policy, Port Policy, Policy on SEZ, IT & A ; ITES Policy, BT Policy
Information technology Policy, Tourism Policy, Agricultural Policy
Information technology Policy, Road Policy, Tourism Policy, Agricultural Policy, Food Processing Policy, Mineral Policy, Captive Power Generation Policy
Information technology Policy, Port Policy, Tourism Policy, Policy on SEZ, IT & A ; ITES Policy, Textile Policy, Captive Power Geneartaion Policy
Information technology Policy, Road Policy, Agricultural Policy, Mineral Policy
Information technology Policy
The policy index value for each province is as follows. Karnataka, Tamil Nadu, Andhra Pradesh and Gujarat are holding high policy index value whereas provinces like Bihar, Orissa, Kerala and Madhya Pradesh are holding low policy index value.
Policy Indicator ( Simple Average of figure of policies )
In the undermentioned table provinces are ranked harmonizing to the average FDI influx. One can see a correlativity between provinces ‘ policy index value and their ranking on the footing of average FDI flow. States like Andhra Pradesh, Karnataka, Gujarat etc. , which are holding high policy index value are besides exceeding the list of high average flow. And provinces like Madhya Pradesh, Orissa, Bihar which are holding low policy index value are in the underside of the list of ranking of provinces on the footing of average FDI flow. But there are few exclusions like Delhi and Maharashtra. Though their policy index value is low they are the first top two parts in the list of provinces harmonizing to average FDI flow. We will look into the ground behind this in the ulterior portion of this paper.
Median FDI flow from 2000-01 to 2009-10
Beginning: Department of Industrial Policy and Promotion
Now we will look into the class wise part to the state ‘s fabrication and service sector end product. As it is already mentioned the full survey period has been divided into two sub periods from 1993-94 to 2000-01 and from 2001-02 to 2010-11. The per centum class wise part has been given in the tabular array. As one can see from the tabular arraies at that place has been rise in the coefficient of fluctuation from 0.42 in the first period ( 1993-94 to 2000-01 ) to 0.67 in the 2nd period ( 2001-02 to 2010-11 ) in the fabrication sector whereas there has been a continuance of the already bing instability in the service sector with a fringy rise from 0.64 to 0.66 in the corresponding sub-periods. We can associate this fluctuation across the clip periods to the fluctuation in FDI influx in the same corresponding period. The coefficient of fluctuation for part wise FDI influx has increased from 1.22 in 1990s to 1.61 in 2000s. As the instability in the FDI influx is lifting, there is besides a rise in the instability of fabrication and service sector across the parts.
1993-94 to 2000-01
20001-01 to 2010-11
1993-94 to 2000-01
20001-01 to 2010-11
Master of fine arts
Coefficient of Variation
Beginning: Own computation from ASI, EPWRF and Handbook of Statistics on the Indian Economy, RBI.
Spearman rank correlativity has besides been calculated for both the clip periods to see the grade to which FDI influx and fabrication and service sector end product are correlated. The correlativity coefficient for fabrication sector has increased from 0.49 in the first period to 0.60 in the 2nd period whereas for service sector it has increased from 0.08 to 0.21. Here an effort has been made to associate correlativity coefficient with that of the class wise part and coefficient fluctuation of fabrication and service sector. For the fabrication sector whose correlativity coefficient value is higher in both the bomber periods at that place has been a noticeable alteration in the class wise part and coefficient of fluctuation, whereas for service sector whose correlativity coefficient is excessively low, the class wise part and coefficient of fluctuation has more or less remained same. One of the grounds for this low correlativity of service sector with FDI influx may be here that the service sector has non taken into consideration IT/ITeS which are mostly influenced by the FDI and one of the chief major subscribers to the service sector end product of the state.
Correlation coefficient between FDI, fabrication and service sector.
1991-92 to 2000-01
2001-02 to 2010-11
Manufacturing End product
Coming to the inquiry of why some topographic points like Delhi and Maharashtra are having highest sum of FDI even without offering more inducements leads us to another interesting inquiry of can provinces pull FDI without offering any policies or inducements. Answer for this can be found in the way dependence theories. As the industry concentrates geographically participants elsewhere are at a disadvantage, and therefore there will be a inclination to travel into the hub, farther increasing its comparative efficiency. Agglomeration economic systems are one of the grounds for the operation of this way dependence theory arguement. When there are agglomeration economic systems the forward and backward linkages are normally stronger. Thus the investors invest in a topographic point where there is already investing to harvest the benefits of agglomeration economic sciences and frontward and backward linkages. Lall and Chakravorty ( 2005 ) have found that new private sector industrial investings in India are biased toward bing industrial. Subrahmanian ( 2003 ) has found that there has non been a major alteration in the ranks of the provinces under the pro-market liberalised policies from what it was in the pre-reform period, “ the already developed provinces continue to keep the top rank, which implies the continuance of the earlier form of the industrial development under the state-lead policy government ” . Maharashtra was an industrialised province in the pre-independent epoch and therefore given the way dependence arguement there is no admiration in the province pulling high FDI. Factors like administration, security, geographical location, handiness of human resource etc. , besides play a function in pulling investings. This explains why more FDI is fluxing into Delhi despite few policies and inducements.
Restrictions of the Survey:
Some of the major restrictions of the survey are as follows.
Datas jobs: There are some jobs sing the informations used for the intent of survey. Some of the jobs of ASI informations are deserving adverting. First, certain types of constitutions such as package makers and everything in the service sector are left out by the ASI since the definition of industry was set by the Factories Act. Second, the study informations are of course capable to the job of fluctuation in response, and hence, in coverage ( Ahluwalia, 1991 ) .
Exclusion of private domestic investing: The survey has overlooked the function of private domestic investing, which is one of the constituents of private investing along with FDI, in worsening the regional instability of fabrication and service sector.
Disregard of certain factors: The survey has non taken into consideration the function of factors like location factor, administration factor, security factor, etc. , while gauging the policy index. Incentive is non the lone factor which determines FDI sum. Therefore to hold an indifferent and clear cut image of how inducements are worsening regional instability one needs to take into consideration these factors besides.
Effectiveness of the policies are disregarded: All policies are non every bit effectual in pulling the investors.
Cost of incentive competition: The inducements being given by the provinces in the race to pull high FDI involve a cost. Thus it is incorrect to presume that the provinces can accomplish high growing by offering inducements. These costs are of different nature. First, it puts force per unit area on the provinces ‘ treasury. Second, sometimes the competition turns out to unhealthy significance to state intensive competition among the provinces make them also-rans by profiting the foreign enterprisers. Therefore to look into these sorts of costs is really of import. It is besides good to look into the chance cost of offering inducements. In other words alternatively of offering inducements the provinces can put the same sum of money in bettering the quality of human resource, administration, etc. , which besides brings in FDI. Thus a cost-benefit analysis could be a meaningful exercising.
As it is clear from the empirical portion the inducements have increased the already bing regional instability from 0.42 to 0.67 for the fabrication sector and from 0.64 to 0.66 for the service sector. It is seen that inducements are fluxing to the parts where there was already adequate investing. Thus the province authoritiess while bordering their policies to pull private investing should maintain in their head that the inducements are sufficient status non a necessary status to pull private investing. Thus the authoritiess should give attending towards bettering administration, security, human resource development, etc. , which are necessary to pull investing before offering inducements. Therefore inducements have to be accompanied by these necessary conditions if the province has to pull private investing.