Measuring the Efficiency of Resource Use in Indian Manufacturing Industries in Pre and Post-Reform Periods

Economists have come to believe that using resources efficiently can lead to differences in the growth rates of economies. Efficient use of resources is known to improve the standard of living of the people thereby increasing their welfare. However, initially 'capital' and later on 'labour' attracted the attention of the economists. The need for the efficient use of resources was only recognized as an important determinant in the growth of economies in the fifties. Economists believe that the developing countries in particular need to concentrate on improving the efficiency of their use of resources, since these economies have an increasing number of people to feed and proportionally little resources at their disposal. Whenever there is talk of efficiency regarding the use of resources it means that all the resources that are used in the process of production should be used efficiently. These resources are: capital, labour, raw materials, power, fuel and the skills of the entrepreneur. Efficiency is reflected in the unit or average cost of production and in the quality of goods. Before the introduction of the reforms, the Indian industrial sector was characterized by numerous controls, which restricted internal as well as external competition. However, after the reforms such controls were loosened and it is now simply expected that the Indian industrial sector uses its resources efficiently. The present study examines whether there have been significant reductions in the components of the average variable cost in the post-reform period as compared to the pre-reform period. Furthermore, it analyses whether there has been any noticeable increase in advertising expenditure of the firms in the post-reform period.

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Section I Industrial Policy in the Pre Reform Period:
The Indian planners were swayed by the idea of controlling the private initiative, private investment, markets, industry and guiding the growth and the direction of the economy for the betterment of all the sections of the society. This thinking was evident even in the pre-independence period as the role of the state in the country's industrial development was discussed intensively among the dominant socio political leadership and the business class. The result of such discussions was the 'Bombay Plan', which argued in favour of the state interventions not merely to develop the physical and the social infrastructure but also to lead and guide the development of the private industrial sector (Degnbol-Martinussen, 2001). Although the signatories of the plan did not envisage a planned economy but what followed after independence i.e. the centralized planned economy, virtually controlled all the areas/sectors for diverting the resources and the initiative towards social good. Various factors like the inclination of the dominant political leadership of the day towards the socialistic pattern of growth, the success of the Soviet model of the centralized industrial development, the rejection of the market mechanism by majority of the economists and many other factors led to the adoption of a strategy in which 'state' was the leader (Kansra, 1999). This belief was further strengthened by the reports of the various committees like the report of the Monopolies Enquiry Commission (1964), the Mahalanobis report, and the report of the Dutt committee (1969). These reports conclusively proved that there was something rotten in the state of industrial administration (Eliot, 1971). Thus, the planners intended to build a system where all the sections of the society contribute to the development of the economy by placing the needs of the economy on top and their own needs on the bottom. For this purpose various restrictions were levied on the functioning of the private industrial sector in order to achieve the following objectives: to achieve self-reliance and to promote social justice (Ahluwalia, 1991 and Srivastava, 1996). Self-reliance, as an objective, gained ground due to export pessimism and import substitution (the infant industry argument), which will be discussed in detail later. The social objective led to the creation of a wide and huge public sector and the support for the small-scale industries (which was finally changed to protection). And for the attainment of these two, the creation of the wide industrial base was indispensable. For realizing these objectives various kinds of policies and instruments were framed. These policies succeeded quite fairly as it led to the creation of the wide industrial base and the success of the import substitution policy increased our self-reliance. But the success was quite short lived as after the late sixties the industrial progress slackened down and thus, adversely affected the growth of the whole economy. Various studies revealed that in the course of achieving these objectives, such policies were framed that were unduly restrictive and led to the creation of an industrial sector that was not competitive, inefficient and under the pretext of protecting our industries, rampant oligopolies were created. Although some changes were introduced in the industrial policy in the eighties but it did not improve ist performance significantly. Discussed below, is the detailed analysis of these policies that restricted competition and their impact on efficiency of resource use.
Policies that Restricted Internal Competition:
Industrial policy resolution of 1948 was the first definite statement of the government towards industry. This resolution made it clear that both the public and the private sectors are going to play an important role in ist development. This resolution reserved industries like the arms and ammunition, energy, railwa