A simulation model of paper industry in India

Abstract

The role of information in planning process is two-fold. On the one hand, information serves as an input to planning and on the other, it serves as a bench-mark for the evaluation of planning or policy decisions. The policy decisions have a direct impact on the performance of an industry; hence availability of correct information is very crucial for the policy makers. Bad information input can affect in bad policy decisions which, in turn, can affect an industry adversely. This is what seems to have happened in case of paper industry in India. In end-1984, about 9 large and small firms had ceased production affecting 40 percent of the capacity due to a huge glut of inventories. Apparently, in this was surprising as in mid – sixties, government and other research bodies had estimated a 7 percent or more growth of demand which should have resulted in excess demand in 1984 of the order of 7-8 lakh tonnes. It is important to see why the glut took place when a shortfall was expected. Whether estimates were wrong or unexpected events happened which escaped the notice of planners? What was the role of central policies in bringing about such a situation? There are conflicting claims by the industry and the government which cannot be settled in the absence of information. The performance and growth of paper industry has been bad in seventies. The industry maintains that the cause of malaise is shortage of inputs due to lopsided policies and shrinking markets due to mini plants. The profitability has been going down due to which it is not possible to invest in growth or modernize. The government, on the other hand, maintains that the cause of malaise is deliberate profiteering and management inefficiencies. In the light of such recrimination, availability of right information is very important. Hardly any studies exist which explain the economic relationships in the industry. For example, the cost and price estimates used by the government, in imposing price and output controls differs from those used by the industry. It was in this setting that this study was planned. The main objective of the study to provide an information system i.e. a decision support system (DSS) for national planning which should not only provide the basic understanding of the industry which should also elucidate the behaviour of the industry with and without central policies and under different environmental circumstances. A model was estimated and validated based on data collected from 25 paper companies covering about 70 percent of the total capacity. The findings of the study in relation to the basic knowledge of the industry were: - Central policies were based on certain demand estimates but in an excess demand situation from the available data, it is not possible to estimate demand. It is possible that estimates of demand. It is possible that the estimates of demand used by policy makers were actually estimates of supply. - The capacity utilization has been going down not because of shortages as thought of by the industry but because of shrinking market as a result of proliferation of mini plants. Hence, even though there is excess demand for paper, but for the industry in question it is excess supply situation. - However, because of shortages the industries could not achieve more than 70 percent of the targeted production. - The profitability, contrary to industries beliefs, has been very high in spite of rising costs but it has not affected investment or growth due to idle capacity.

The main findings in relation to central policies were: - Policy changes desired by the industry in the form of excise concessions and subsidized loans though increase the profitability but do not affect capacity utilization or growth. - The most effective policy is decontrol of output and prices which is expected to raise market offtake as well as capacity utilization. - The policy of promoting mini plants is beneficial from the societies as well as industries point of view only if implemented along with total decontrol. The study has not been able to encompass all the issues related to paper industry, a task left for future researchers but it does show the utility of DSS for national planning.