It was the economic reforms initiated in 1991 that led to growth in outsourcing manufacturing among the Indian corporates, says a joint study by the Indian Institute of Management, Ahmedabad (IIM-A) and Indian Institute of Technology, Kharagpur (IIT-KGP).
Titled 'How the Indian corporate sector responded to two decades of economic reforms in India? An exploration of patterns and trends', the study is jointly conducted by Rakesh Basant and Pulak Mishra, faculty members at IIM-A and IIT-KGP, respectively. The study also states how the deregulatory policy measures led to increased reliance on imports and rise in import-based competition.
According to the study, while foreign exchange saw an increased influx thanks to the reforms, foreign technology couldn't find many takers. Rather, the last two decades post economic reforms have resulted in significance of in-house R&D. Also, vigorous restructuring by firms in the post-reform era also saw a significant increase in the number of mergers and acquisitions (M&A) in India Inc.
"While reliance on mergers and acquisitions (M&A) has increased to restructure business and grow, the role of embodied and disembodied technology purchase has declined with firms relying somewhat more on in-house R&D," the study further states.
However, industry experts think India's reliance on foreign technology is almost ubiquitous. "Industry is now significantly investing, not so much in research but in product development. If you look at R&D i.e. research and development, India is only doing D and not R. Our reliance on foreign technology is very significant. New regime of globalisation has made this technology flow seamlessly available. India needs to grow in the R and our reliance on foreign technology is higher than indigenous," opines Sunil Parekh, strategic advisor to several major corporates including Cadila Healthcare (Zydus Cadila) and Jubilant Life Sciences.
The study also states that competitive pressures unleashed by the introduction of deregulatory policy measures resulted in growing importance of sub-contracting and outsourcing manufacturing. "Consequently, the degrees of vertical integration have declined. Besides, removal of restrictions on imports has increased reliance on imports and the degree of import-based competition in the market," finds the study.
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In the context of various policy initiatives made during the last two decades to reform the Indian economy in general and corporate sector in particular, the study attempts to assess how firms have responded to these policy measures and resultant changes in the business conditions in a long run perspective. In its findings, the paper states that although the rate of growth of the Indian industry sector has not accelerated following economic reforms probably due to slow growth in agriculture and industrial productivity, investment in general and FDI in particular have shown considerable increase.
Further, the economic reforms have also forced Indian firms to use capital or assets more efficiently.
"Profitability of the firms measured as the ratio of PBIT to sales, rate of return on capital employed, and rate of return on assets showed a declining tendency till the initial years of the last decade and an increasing tendency thereafter. When the entire post-reform period is taken together, all indicators show increasing trend, though the rate of growth has been only marginal for PBIT to sales ratio. This means that reforms have forced the firms towards more efficient use of capital or assets."