industries catering largely to what was earlier considered non-essen- tial consumption. ...... one more instrument in the government's overall tax-cum-subsidy regime. ...... laboration, NovartisâTorrent agreement, and NovoâNordiskâDr. Reddy's ...... cable to enterprises and to workers. 7 ...... Vaitsos, Constantine. 1972.
ECONOMICS VOLUME 1 INDIAN INDUSTRIALIZATION
ICSSR Research Surveys and Explorations
ECONOMICS VOLUME 1 INDIAN INDUSTRIALIZATION
edited by C.P. CHANDRASEKHAR
1
1 Oxford University Press is a department of the University of Oxford. It furthers the University’s objective of excellence in research, scholarship, and education by publishing worldwide. Oxford is a registered trademark of Oxford University Press in the UK and in certain other countries Published in India by Oxford University Press YMCA Library Building, 1 Jai Singh Road, New Delhi 110 001, India © Indian Council of Social Science Research 2015 The moral rights of the authors have been asserted First Edition published in 2014 All rights reserved. No part of this publication may be reproduced, stored in a retrieval system, or transmitted, in any form or by any means, without the prior permission in writing of Oxford University Press, or as expressly permitted by law, by licence, or under terms agreed with the appropriate reprographics rights organization. Enquiries concerning reproduction outside the scope of the above should be sent to the Rights Department, Oxford University Press, at the address above You must not circulate this work in any other form and you must impose this same condition on any acquirer ISBN-13: 978-0-19-945896-7 ISBN-10: 0-19-945896-0 Typeset in Minion Pro 10.5/12.7 by The Graphics Solution, New Delhi 110 092 Printed in India by …
Contents
List of Figures and Tables List of Abbreviations Preface 1.
2. 3. 4.
5.
6. 7.
Promise Belied: India’s Post-Independence Industrialization Experience C.P. Chandrasekhar Regional Aspects of Indian Industrialization Jayan Jose Thomas Monopoly and Indian Industry Surajit Mazumdar Role of Foreign Direct Investment in India’s Industrial Development Rajiv Jha and R avinder Jha Indigenous Technological Development and Intellectual Property Rights in India’s Industrial Development Sudip Chaudhuri Informal Sector Industry in India: A Brief Review Jesim Pais Employment and Industrial Development in India Jeemol Unni
vii xi xv
1 48 94
126
164 203 229
VI
8.
9.
CONTENTS
A Survey on Corporate Saving, Corporate Tax and Surplus Atulan Guha Trends and Patterns in Industrial Growth: A Review of Evidence and Explanations R. Nagaraj
259
274
Figures and Tables
FIGURES 2.1 Log Gross Value Added, Log Fixed Capital Stock, and Employment in Numbers in India’s Factory Sector, 1959–60 to 2007–8 2.2 Shares of Different Regions in Total Gross Value Added by India’s Factory Sector, 1959–60 to 2007–08 (in per cent) 2.3 Shares of Different Regions in Total Investment into India’s Factory Sector, 1960–5 to 2003–8 (in per cent) 2.4 Shares of Western States and Southern States in Total Employment and Gross Value Added by India’s Factory Sector 2.5 Changes in Percentage Points of the Shares of Western States in Gross Value Added, Employment and Fixed Capital Stock in India’s Factory Sector, over the Decades 2.6 Rates of Growth of Gross Value Added and Fixed Capital Stock in the Factory Sectors of Indian States, 1998–9 to 2007–8 2.7 Contribution of Indian States to the Growth of Gross Value Added and Fixed Capital Stock in India’s Factory Sector, 1998–9 to 2007–8 2.8 Log of Investment and Net Increase in Employment, Factory Sectors of Major States and Union Territories, 1998–9 to 2007–8
49
54 54
56
56
70
70
81
viii
FIGURES AND TABLES
2.9 Shares of West Bengal and Tamil Nadu in Total Employment and Investment in India, 1960–5 to 2003–8
82
4.1 Share of Mergers and Acquisitions in FDI 4.2 Sales of Drugs and Pharmaceuticals
138 149
8.1 India’s Private Corporate Saving to GDP Ratio 8.2 Profit, Savings, and Dividend Payment of India’s Private Corporate Sector
260
9.1 India’s Share in World Exports: 1948 to 2010 9.2 Import Intensity of Capital Goods: 1971 to 2008 9.3 Public Sector’s Share in Total Industrial Output, 1961 to 2008 9.4 Share of Foreign Firms in Manufacturing and Private Corporate Sectors 9.5 Average Factory Size in Factory Sector: 1960 to 2009 9.6 Size Distribution of Registered Factories: 1959 to 2007–8 9.7 Share of Top 100 Firms in GVA 9.8 Share of Top 100 Firms in Net Worth 9.9 Share of Top 100 Firms in Assets 9.10 Share of Top 50 Business Houses in GVA of the Private Corporate Sector 9.11 Mean Hourly Compensation in the Manufacturing Sector as a Per Cent of Corresponding Costs in the United States: 2002 to 2005
261 278 282 285 285 289 290 294 294 295 295
305
TABLES 2.1 Annual Rates of Growth in Gross Value Added, Fixed Capital Stock, and Employment in India’s Factory Sector, 1959–60 to 2007–8 2.2 Shares of Different Regions in India’s Factory Sector for Various Years (in per cent) 2.3 Workers in India’s Manufacturing Sector, State-wise, 2009–10 2.4 Manufacturing Enterprises and Workers in Indian States, 2005–6
49 52 58 59
FIGURES AND TABLES
2.5 Industrial Structures of Selected States: Shares of Industries in Gross Value Added by the Factory Sectors of the States (structure) and Shares of States in Gross Value Added by the Industry in India (share), 2005–6 2.6 Industry-wise Unorganized Manufacturing Enterprises in Selected States: Shares of Industries in the Total Number of Enterprises in the States (structure) and Shares of States in the Total Number of Enterprises in the Industry in India (share), 2005–6 2.7 Shares of Selected Indian States in Total FDI Approvals, Total IT Software and Services Exports, and Total Population of India 2.8 Net Increase in Factory-sector Employment in Indian States over the Decades 2.9 Net Increase in Employment across Indian States, 1993–4 to 2009–10 2.10 Per capita Income, Wages of Factory Workers, and Wages of Rural Male Casual Workers in Indian States in 2009–10, as Indices with Index for India as a whole = 100 2.11 Contract Workers, Man-days Lost due to Industrial Disputes, and Registered Trade Unions, across Indian States, 2006–7 3.1 Share of Large Enterprises in the Aggregate Assets of the Private Corporate Sector, 1964 and 1966 3.2 Share of Large Enterprises by Different Criteria in Size Aggregates of Private Corporate Sector, 1990 3.3 R&D Intensity of Indian Business Groups and Independent Companies, 2008–9 4.1 Foreign Investment Inflows 4.2 India and China: Shares in the FDI Flows to Developing Economies 4.3 India and China: FDI Inflows as a Proportion of Gross Fixed Capital Formation 4.4 Sectoral Allocation of FDI 4.5 Foreign Collaboration Approvals (1948–90)
ix
61
64
71 75 76
77
78
105 106 115 128 129 129 131 131
x
FIGURES AND TABLES
4.6 Total Foreign Technology Agreements and Foreign Direct (Equity) Investment Approvals 4.7 Composition of FDI 4.8 India and China: Shares of M&As in the FDI Inflows 4.9 Changes in Sectoral Composition of FDI Stock in 1990s 4.10 Sectoral Allocation of FDI, August 1991 to December 1999 4.11 Sectoral Allocation of FDI, January 2000 to December 2010 4.12 Trends in Foreign Inflows for Select FDICs 4.13 Drugs and Pharmaceuticals, 1991–2010 4.14 Production (P), Export Intensity (X/P), and FDI of the Indian Car and Auto Component Industry 4.15 Shares of Major Firms in the Car Market 4.16 The Auto Components and Machine Tool Industries: Net Exports, Imports, and Import Penetration 9.1 Long-term Growth Rates of Indian Economy and Its Principal Sectors: 1951 to 2010 9.2 Distribution of Employment in Manufacturing Sector 9.3 Sectoral Distribution of Labour Force: 1951 to 2009–10 9.4 Composition of Manufacturing Value Added: 1960–1 to 2008–9 9.5 Weighting Diagram of Index of Industrial Production (IIP): 1956 to 2004–5 9.6 Unregistered Sector’s Share in GDP in Manufacturing, 1960–1 and 2008–9 9.7 Industry Groups with Above Average Share in Unregistered Manufacturing 9.8 Export Composition according to Factor Intensity
133 136 137 140 141 141 145 150 152 155 156
275 278 279 281 282 283 284 286
ABBREVIATIONS
API ARV ASI CKD CMIE CRRI CSIR CSO DGCI&S EPWRF FCRC FDI FDIC FERA FIPB FRBM GCC HAL ICLS ICT IDA IDPL ILO
Active Pharmaceutical Ingredients Antiretroviral Medicines Annual Survey of Industries Completely Knocked Down Centre for Monitoring Indian Economy Central Drug Research Institute Council of Scientific and Industrial Research Central Statistical Organization Directorate General of Commercial Intelligence and Statistics Economics and Political Weekly Research Foundation Foreign Controlled Rupee Companies Foreign Direct Investment Foreign Direct Investment Companies Foreign Exchange Regulation Act Foreign Investment Promotion Board Fiscal Responsibility and Budget Management Global Commodity Chains Hindustan Antibiotics Limited International Conference of Labour Statisticians Information and Communications Technology Industrial Disputes Act Indian Drugs and Pharmaceuticals Limited International Labour Organization
xii ABBREVIATIONS
ILPIC IMF IPCL IPR KIS LDC MDA MIC MNC MoU MRTP MSE MSF NABARD NAS NCE NCEUS NGO NRI NSIC NSS NSSO OECD OEM PSU PDS RBI RCL R&D SET SEZ SFC SIDBI SIDC SIL SKD SNA
Industrial Licensing Policy Inquiry Committee International Monetary Fund Indian Petrochemical Corporation Limited Intellectual Property Rights Knowledge-intensive Services Less-Developed Countries Marketing Development Assistance Scheme Monopolies Inquiry Commission Multinational Corporation Memorandum of Understanding Monopolies and Restrictive Trade Practices Micro and Small Enterprises Médecins Sans Frontières National Bank for Agriculture and Rural Development National Account Statistics New Chemical Entities National Commission for Enterprises in the Informal and Unorganized Sector Non-governmental Organization Non-Resident Indian National Small Industries Corporation National Sample Survey National Sample Survey Office Organisation for Economic Co-operation and Development Original Equipment Manufacturers Public Sector Unit Public Distribution of Food Reserve Bank of India Royal Commission on Labour Research and Development Skill Enhancing Trade Special Economic Zone State Financial Corporations Small Industries Development Bank of India Small Industries Development Corporations Special Import Licence Semi-Knocked Down System of National Accounts
ABBREVIATIONS xiii
SOE SSI TFC TFP TRIPS UPTECH WTO
State-Owned Enterprises Small-Scale Industries Twelfth Finance Commission Total Factor Productivity Agreement on Trade Related Aspects of Intellectual Property Rights Technology Upgradation and Management Programme World Trade Organization
Preface
India’s industrialization experience is, in many senses, an outlier. Initial conditions seemed to promise a successful journey to an economy anchored on a strong and broad-based industrial structure, if navigated by a state that had the national interest in mind. But despite the presence of a State committed to rapid industrialization, after more than six and a half years post its Independence, the outcomes are such that the record is nothing short of disappointing. This book, which is part of an ICSSR-sponsored set of volumes surveying the state of knowledge on themes relating to Indian economic analysis, attempts to examine and explain the record as reflected in different aspects of the industrialisation experience. The volume begins with an overview of the conceptual canvas that underlies the choice of subjects for the chapters in the volume and the broad perspective from which they have been approached. It argues that given the opportunities that a reasonably large domestic market (when compared with other similarly placed countries) and almost a century of experience with factory production offered, the subsequent record of industrialization is one of failure to realize the original promise. This, in turn, was, in the early years, the result of the failure of the government to introduce the institutional and structural changes it had recognised as essential prerequisites for successful industrialisation and implement in full the policies it had formulated to traverse the trajectory it had planned for Indian industry.
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This is followed by an analysis by Jayan Jose Thomas of discussion around the evidence on India’s industrial growth experience, with special emphasis on regional variations in industrial growth. Those variations, though inevitable in a geographically large and diverse country like India, are still quite stark. The evidence on regional concentration and differential dispersion of different categories of industries are the elements that are the focus of Thomas’ analysis. Concentration in spatial distribution is, however, the least of the structural deficiencies of the industrial sector in India. More important is the domination of the structure by big domestic and foreign firms and groups, thriving in the midst of a large mass of small enterprises, which are often characterized by primitive technologies and backward forms of organization. The chapters by Surajit Mazumdar, Rajiv Jha and Ravinder Jha, and Jessim Pais examine the aspects of these three sectors of the industrial sector defined by ownership or organizational characteristics. Mazumdar surveys and takes forward the discussion on the nature of Indian monopoly that began in the early 1960s, and assesses the impact that monopoly in India had not just on investment, output and pricing behaviour, but also on the ability of the state to implement its declared policies and, therefore, on the legitimacy of those policies. This was not just because of dominance over markets in individual industries but the result of the power that unchallenged aggregate industrial concentration gave private capital. The chapter goes on to argue that liberalization has not neutralised this power of domestic monopoly capital, despite the increased competition that the liberalization of trade and foreign investment rules implies. This obviously has significant implications for the distribution of the benefits from industrial growth, especially in a period when state policy was geared towards facilitating the private sector and incentivizing private investment. An element of continuity is present even with regard to the position and play of foreign direct investors in the Indian economy after liberalization. There were many who argued that liberalization would result in a change in the nature of foreign direct investment, with a greater role for ‘relocative investment’. Post-liberalization, foreign direct investors were expected to invest in new greenfield projects that would not expressly target the domestic market, as they had done during the import-substitution years, but use India as a base for world market production. Such investment was expected to be associated
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with significant technological spillovers as well. Jha and Jha survey the evidence on post-liberalization foreign direct investment and use more detailed case studies of the pharmaceutical and automobile sectors to argue that such outcomes though present are marginal in significance. Jessim Pais’ analysis focuses on the large and employment-wise significant unorganised or informal sector that persists despite the power exercised by big domestic and foreign capital. After surveying debates on what constitutes the informal sector and how its presence is to be identified and measured, the chapter briefly discusses State policy to the informal sector in India and the actual size and growth of the informal sector. It then identifies the challenges and constraints facing small enterprises engaged in manufacture, given their role in the manufacturing value chain. The chapters by Sudip Chaudhuri, Jeemol Unni, and Atulan Guha move on to analyse specific outcomes of the nature of industrial policy and the industrialization process. Chaudhuri’s concern is with how the impact of India’s changing engagement with the global patent regime affected the growth, development and availability of technology, and pricing in the pharmaceuticals sector. As has been widely argued, the period when India recognised only process and not product patents, delivered remarkable results when compared with other similarly placed economies that accepted in full the global patent regime. However, even when, after the TRIPs agreement, India revised its patent law and recognised product patents, the indigenous pharmaceutical industry registered significant advances in both the domestic and export markets, though it was the larger firms that performed well. Interestingly these firms are attempting to exploit the patent regime by developing new drugs for ‘global diseases’ such as diabetes, cancer and heart disease. But the evidence seems to be that the relative positions and strengths of domestic and foreign firms is changing in favour of the latter with multinational pharmaceutical firms not only gaining ground in the domestic market but acquiring some of the larger domestic pharmaceutical firms. Jeemol Unni addresses a crucial shortcoming of industrialization in India—its limited contribution to employment growth. Her analysis surveys the literature to assess how growth and technological change in formal manufacturing and the associated growth of the informal-sector-affected employment trends. This is then used as the
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PREFACE
basis for assessing arguments emphasizing the role of flexibility and, therefore, labour market ‘reforms’ in driving employment growth in the manufacturing sector. Atulan Guha, in his chapter, discusses the factors responsible for the remarkable rise in corporate savings and investment in the ‘second phase’ of post-liberalization growth, which is after 2003. He attributes that rise to the spike in corporate profitability associated with the post-liberalization policy regime, though the factors responsible for that increase in profitability in the years between 2003–4 and 2009–10 still need to be fully explained. Finally, the last contribution to this volume by R. Nagaraj revisits these different aspects of the industrialization experience and adding to them provides an empirical overview of the trends and patterns of industrial growth in India since Independence and the varied explanations offered for them. Touching on many different aspects of growth and structural change the chapter provides great empirical support for the positions emerging from the different themes surveyed through the volume. While there are still many issues relating to Indian industrialization that have not been covered here and many others that have not been adequately addressed, the papers in this volume hopefully provides a perspective on Indian industrialisation that is wide-ranging and critical. The chapters in this volume were written and revised some years before the final publication. However the arguments developed on the basis of analyses of the data for the period covered still remain relevant.
1 Promise Belied India’s Post-Independence Industrialisation Experience C.P. CHANDRASEKHAR
At the time of Independence in 1947, India was a country that showed much promise as a potential candidate for successful industrial development. With the first successful factory established within the country in 1854, it already had considerable experience in factory production. Though cotton and jute textiles dominated the industrial sector for long, a process of diversification began with the First World War and gathered momentum after the British government adopted a policy of discriminating protection1 in the 1920s. In the event, after the Second World War, India was among the better industrialized of the underdeveloped countries, especially those that had had just come out of colonial domination. Though numerically small, India’s industrial capitalists were by no means infants, and they were in a position to sit together just before Independence and formulate their version of a plan for post-Independence development (Thakurdas 1945). This confidence came from close to a century of experience with factory-based industrialization. Since there are strong elements of learning by doing associated with manufacturing technology and production, this historical experience favoured India (as compared to many other developing countries), which launched on a strategy of rapid industrialization in the post-World War II, decolonization years. It was not just this legacy that seemed to give India an edge relative to other low income, late industrializers in the post-War period.
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INDIAN INDUSTRIALIZATION
Despite the low level of its per capita income at that time, the sheer size of the country as defined by its geographical area and its population meant that it had a reasonably large sized market for manufactured goods. Even by the beginning of the twentieth century, British investment in roads and railways had integrated this home market. As evidence, Bagchi (1972) refers to the fact that though the market for imported manufactured goods was dispersed, much of it entered the country through the port of Bombay to find its way to different parts of the country. Within this market, while the low level of per capita income did constrain the size of the market, the substantially unequal distribution of income ensured that there existed a significant number of people with income levels that implied a rather diversified demand for manufactured goods. Even though this section was proportionately small, the large size of the population made their numbers significant. These factors provided the foundation for a reasonably large and diversified domestic market. Access to a reasonably large domestic market would have assisted the effort to industrialize. Technologically, factory production, which relies on scale to reduce costs, involves locational concentration of production meant for dispersed markets. Over time, technological change raises the minimum efficient scale in a number of industries substantially. Establishing these industries based on imported bestpractice technologies is predicated on access to a market large enough to sustain these plants. Since firms, from whom the technology is being imported, occupy potential export markets, establishing a presence in such markets is difficult. On the other hand, if domestic markets are small, they cannot provide the base for large-scale production. This makes the prior existence of an adequately sized domestic market an advantageous initial condition for a country choosing to industrialize. India had that advantage. Finally, at the time of Independence, India saw the accession to power of a government that was not only capable of formulating and implementing a national development strategy, but also had the social sanction needed for the purpose. Its emergence out of a national movement against colonial rule gave it that sanction. Hence, as elsewhere in the underdeveloped part of the world at that time, the Indian government had chosen and declared industrialization as the centrepiece of its development strategy (Ghosh 1995).
PROMISE BELIED
3
UNREALIZED PROMISE Assessed merely in terms of rates of growth, the success of India’s post-Independence industrialization effort is partial at best. The initial dynamism, displayed during the decade and a half after 1951, gave way to a period of secular stagnation that stretched between 1965 and the late 1970s. But after that, the country has recorded a rise in the trend rate of industrial growth, although the volatility in annual growth rates seems to have increased substantially in the 1990s. On the other hand, even after six and a half decades, the promise of successful industrial development has remained unrealized. The most obvious indicators of that are the inadequate diversification of India’s production structure away from agriculture to manufacturing, and the rather premature and rapid diversification into services that has occurred in recent decades. The share of manufacturing in Gross Domestic Product (GDP) rose from around 9 per cent in 1950–1 to 13 per cent in 1966–7. But it did not cross the 14 per cent mark for a little more than a decade after that, and touched 16.4 per cent at its peak in 1996–7.2 The contribution of manufacturing to employment was even more dismal (see Thomas [Chapter 2], Unni [Chapter 7], and Nagaraj [Chapter 9]). India’s experience contrasted with that of other similarly placed developing countries. In 1960, industry contributed to 37 per cent of GDP in Brazil, 45 per cent in China, 19 per cent in India, 19 per cent in Indonesia, around 25 per cent in South Korea, 19 per cent in Malaysia, and 19 per cent in Thailand. By 1985, the figures were 45 per cent in Brazil, 43 per cent in China, 26 per cent in India, 36 per cent in Indonesia, 39 per cent in South Korea, 39 per cent in Malaysia, and 32 per cent in Thailand.3 Thus, the period between 1960 and 1985 was one where, in most developing countries, rapid diversification in favour of manufacturing was occurring, but India had not shown the same tendency. By 2010, industry’s share fell in some (due to the rise of services), but increased further in others. The figures were: 28 per cent in Brazil, 47 per cent in China, 27 per cent in India, 47 per cent in Indonesia, 39 per cent in South Korea, 44 per cent in Malaysia, and 45 per cent in Thailand. Thus, the long-term slow growth and subsequent near-stagnation of the share of industry in GDP in India was more the exception than the rule among developing countries.
4
INDIAN INDUSTRIALIZATION
The absence of structural change was even starker when assessed in terms of shares in employment. The share of the agriculture in GDP declined from 55 per cent in 1960 to only 18 per cent in 2010. But employment in the primary activities continued to dominate total employment. In the three decades after 1965, the share of the primary sector workers fell only marginally, that is, from 71 per cent to 64 per cent. But even in the period of dynamic growth 1995 onwards, such employment remained very high and, in 2010, it still accounted for around 54 per cent of total employment. This absence of structural change cannot be attributed to the relatively low rate of growth of per capita income. The evidence tells a different story. As output growth accelerated from the mid-1990s, per capita incomes increased quite sharply. Despite this, the desired changes in manufacturing output and employment did not take place. Thus, India’s development has been characterized by a long-term failure, that is visible from the mid-1960s, to make an expanding and technologically dynamic industrial sector an important, as also the principal, driver of growth. Over time there were two other ways in which failure on the industrialization front was visible. The first was the inability to sustain acceptable rates of industrial growth, with evidence of a secular deceleration in growth over the period 1966–80. The second was the failure to reduce dependence on imports of manufactured goods from the international market and expand exports of Indian goods so as to reduce balance of vulnerability of payments. As a result of the latter, current account deficits tended to be high and the economy was plagued by periodic balance of payments crises. Moreover, as noted earlier, industrial growth, to the extent it occurred, delivered little by way of productive employment. According to National Sample Surveys (NSS) data (see Thomas [Chapter 2]), India’s employment in the manufacturing sector increased by 6.4 million between 1983 and 1993–4, 4.4 million between 1993–4 and 1999–2000, and by 9.1 million between 1999–2000 and 2004–5, before falling by 3.7 million between 2004–5 and 2009–10 (from 56 million to 52 million manufacturing workers in the country). These absolute changes showed that the responsiveness of employment to output increases tended to be low. Following Mazumdar and Sarkar (2006), Unni (Chapter 7) divides the period since the
PROMISE BELIED
5
mid-1970s into five sub-periods: (i) 1974–80, when employment elasticity was relatively high at 0.99; (ii) 1980–6, the period of jobless growth, when employment elasticity turned negative and measured minus 0.16; (iii) 1986–96, the beginning of the economic reforms, which saw a recovery with positive elasticity of 0.33; (iv) 1996–2001, the post-reform period, which showed a sharp decline in employment elasticity to minus 1.42; and (v) the period between 2001 and 2005, when elasticity turned positive again at 0.28. To this can be added the more recent period, 2004–5 to 2009–10, when there was a return to jobless growth. According to Thomas (Chapter 2), the expansion of India’s employment in manufacturing sector during the first half of the 2000s was largely on account of export-oriented industries such as garments, textiles, leather, and diamond cutting, as well as industries linked to construction. On the other hand, jobs lost during the five years ending 2009–10 were also largely in the country’s export-oriented industries including garments, textiles, and diamond cutting—the very industries that triggered the employment expansion during the first half of the 2000s. Thus, the long-term trend was one of inadequate employment generation in manufacturing. Associated with this was a high level of ‘informal employment,’ increased outsourcing to the informal sector and enhanced and changed linkages between the formal and the informal (see Unni [Chapter 2] and Pais [Chapter 5]). Given these tendencies, little credence can be given to the argument that policy-induced inflexibility in the labour market explains many of the problems characterizing the Indian manufacturing sector. The failure implicit in all these features is all the more surprising because the Indian government had a clearly defined strategy for the country’s industrialization. That strategy was based on the assumptions that the possibilities of transformation through trade were limited and that the ‘capital goods constraint’, or the inadequate availability of capital stock to productively employ labour was the principal barrier to growth. Given the first of these assumptions, the capital goods constraint could not be overcome by resorting to imports without running into balance of payments difficulties. Hence, the strategy emphasized the need to allocate a larger share of investment to the capital goods sector so as to raise the investment ratio and achieve a higher rate of growth, without running into balance of payments difficulties.
6
INDIAN INDUSTRIALIZATION
ROLE FOR GOVERNMENT P.C. Mahalanobis, whose model influenced the choice of this trajectory, implicitly assumed that the government could and will do the needful to successfully implement this strategy (Patnaik 1995a). Since the strategy was being adopted within a mixed economy framework with an important role for private decision makers, the assumption was that the government was in a position to use a range of instruments varying from taxes and subsidies to licensing and selective allocation of foreign exchange, to restrict consumption, encourage savings, and to ensure the allocation of this savings in ways necessary for generating the composition of output that would maximize growth. This was expected to work on both the demand and supply sides. Appropriate taxes would, for example, influence the structure of demand. Measures such as licensing would restrict production of non-essential commodities while encouraging production of others that were prioritized. In addition, the strategy required the government to engage in production. Since the private sector may be unwilling to move investments in directions the government considers appropriate, it would be necessary for the state to undertake part of the required production in the public sector. This was not the only reason the state needed to engage in production. Given the nature of modern economies, there exist activities characterized by economy-wide externalities, in the sense that their presence facilitates and supports production in other areas, and their absence would limit such production (Dobb 1960). Typical examples of such activities include the infrastructural industries such as roads, ports, telecommunications, and energy. Many of these are activities that involve lumpy setup costs, and are characterized by long gestation lags, high risks, and relatively low profits. As a result, the private sector would not be willing to invest in these activities, and if the state does not enter these activities, they are unlikely to expand adequately, thereby creating obstacles for industrial growth. Thus, besides intervention aimed at influencing private consumption, savings, and investment decisions, the state had also to undertake a significant share of aggregate investment in the economy, which it needed to finance. Moreover, as is true of most market-driven economies, public expenditure was a crucial inducement and stimulus for private investment. This meant the tax-cum-subsidy regime and fiscal
PROMISE BELIED
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policy stance of the government were crucial for growth. Intervention of this kind needs to be largely financed with revenues, especially tax revenues. In practice, however, the government failed to mobilize a part of the potential surplus in the system through direct taxation, resulting in its dependence on inflationary means of finance (such as indirect taxation or borrowing from the central bank and the open market) or on borrowing from abroad (Patnaik 1995b). Since access to foreign borrowing was essentially through the development aid network, its volume was determined from the supply side. Thus the financing of autonomous expenditures came to depend on indirect taxation and domestic borrowing, or on inflationary forms of finance. AGRICULTURE–INDUSTRY RELATIONSHIP Needless to say, deficit financing, or the dependence on borrowing, does not necessarily result in inflation. But if there are supply-side constraints that are persistent or even periodic, the overhang of liquidity that such borrowing generates can result in inflation. In India, as in many other developing countries, the supply of wage goods from the agricultural sector was constrained, especially because of the failure to implement land reforms and distribute the surplus land to actual cultivators. If that had been carried out and if land monopoly had been broken, not only would it have undermined the barriers to investment and productivity increase resulting from such monopoly and high rents, but the actual cultivator (rescued from being subject to rack renting) would have had both the means and the incentive to invest (Patnaik 1986). This would have helped relax the supplyside constraints on the availability of a marketed surplus of food. So there were institutionally given constraints on expanding the supply of wage goods. This, together with the continued dependence on the monsoon, resulted in slow growth and high volatility of agricultural production. To compound the problem, the view that agriculture was a ‘bargain sector’ (Chakravarty 1988), from which much could be garnered with little investment and effort, resulted in a neglect of agriculture. This meant that the demand, which the debt-financed public expenditure generates, could trigger price increases, as, till the mid1960s, agricultural prices were demand determined (Raj 1966). The result was a built-in tendency to agricultural price inflation, whenever industrial growth accelerated.
8
INDIAN INDUSTRIALIZATION
Food price inflation had two consequences that had important implications for industrial performance. First, it put pressure on the government to adopt measures to control inflation, and thereby forced a contraction in government expenditure. Second, by pushing poorer households to allocate a lager share of their income for food, it reduced the demand for manufactured mass consumption goods and, through the decisions of firms producing them, the demand for a wider range of goods (Chakravarty 1974; Mitra 1977; Patnaik 1972). In sum, food price inflation tended to slow the pace of industrial growth or precipitate an industrial recession. In itself, this interaction between the agricultural and non-agricultural sectors should have resulted in cyclical movements in industrial production around a trend influenced by other factors (Patnaik 1972). High and disproportionate non-agricultural growth, which results in excess demand for agricultural wage goods and inflation in their prices, would slow non-agricultural growth through the mechanisms described earlier. But that very slowdown would reduce the demand for agricultural commodities and rein in inflation, creating the conditions for another bout of non-agricultural growth. Till about the mid-1960s, this was true for India. However, the extent of the price rise when demand exceeded domestic production was dampened by India’s access to imported wheat under the PL 480 programme of the US government. This programme encouraged import of surplus American grain against rupee payments with no strain on the balance of payments. This gave the government some flexibility at the margin to manage supplies of food to control inflation and allow for a greater disproportionality in growth between the non-agricultural and agricultural sectors. But the reduced access to imported supplies and the severe agricultural crisis of the mid-1960s changed matters. It forced the government to rethink its light-touch policy with respect to the agricultural sector and encouraged adoption of an agricultural growth strategy centred on the higher-productivity hybrid varieties associated with the Green Revolution. To encourage adoption of those varieties, the government put together a package that, besides increased input of irrigation, fertilizers, and pesticides, provided for government-guaranteed purchases of grain at a minimum support price that covered costs and included a reasonable profit margin. As was to be expected, this minimum support price ensured a rising floor price for crops cultivated by
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politically influential farmers (Mitra 1977), and marked a departure from an environment in which food prices were demand determined, and not cost determined. The Green Revolution, while raising yields in some crops and regions, did not free the Indian agriculture from its dependence on the monsoon, by any means. This kept the system vulnerable to periodic bouts of inflation. In these circumstances, the cost-plus floor (or the minimum price at which food could be sold to government that covered costs and included a margin) guaranteed by the government had another consequence. It encouraged speculation in foodgrain markets. Large farmers and traders in bad, indifferent, and even normal monsoon years chose to hold on to their supplies with the expectation that prices would rise. If the price of food did rise they would gain; if it did not, they would not lose much since they could hand over stocks to the official procurement agencies at the specified cost-plus price. In practice, their actions ensured that expectations were realized and prices tended to rise even more than the rise in the government guaranteed floor (Patnaik et al. 1976). This meant that food prices were no longer driven by mere supplydemand imbalances and that they displayed a secular tendency to rise, resulting in the much-discussed shift in the terms of trade in favour of agriculture after the mid-1960s. The impact that this had on government expenditure and on the allocation of incomes to the consumption of food and non-food items was also long term rather than being cyclical in nature. As a result, cyclical movements were now superimposed on a secular deceleration in growth, and it appeared that India’s industrial development had hit an impasse (Patnaik and Rao 1977). THE 1980S’ RECOVERY Surprisingly, however, the industrial sector recorded a remarkable recovery and high growth during the 1980s. On the surface, nothing much had changed. Land reforms still remained unimplemented across much of the country, constricting the mass market for goods as before. The supply constraint in agriculture persisted and the minimum support price policy was in place, imparting upward buoyancy and ensuring the downward inflexibility of food prices. And India had not transformed to being a successful exporter rather
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than a predominant importer of manufactured goods. In addition, the 1980s saw an intensification of the tendency of the government to rely on inflationary forms of finance, with the government budget now reflecting revenue deficits and large and widening fiscal deficits. In fact, it was clear to all that the acceleration in industrial growth was the result of enhanced government spending. The puzzle was that, unlike in the 15 years after the mid-1960s, this deficit-spending splurge was not resulting in inflation, especially food price inflation. The solution to the puzzle did not lie in India (Chandrasekhar and Ghosh 2002). The government’s ability to manage inflation was the result of the huge expansion of liquidity in the private international financial system, which, in its search for profitable investment opportunities, was knocking on the doors of the developing countries that had hitherto been shunned. Foreign exchange, being a fully fungible asset, allowed the government to import the commodities that were needed to reduce inflation in particular sectors. In a macroeconomic sense, excess domestic absorption was being allowed to spill over in the form of a rising current account deficit onto the balance of payments, and was financed with foreign capital inflows, thereby preventing it from precipitating inflation. This was the period when the government also began diluting its licensing policy and liberalizing the imports of capital equipment, intermediates, and components (especially from the mid-1980s). This allowed for the expansion of existing, or creation of new, capacities in industries catering largely to what was earlier considered non-essential consumption. Since these industries were more import-intensive in character, the import bill and current account deficit rose with the growth of these industries. That incremental deficit too was financed with borrowing from abroad. Thus, the 1980s were a period when the government returned to the policy of pump-priming the system by increasing debt-financed expenditure, liberalizing licensing, and borrowing from abroad to finance imports that both helped rein in prices as well as facilitate investments aimed at catering to the upper-income market for nonessential manufactured goods consumption. The consequence was a widening of the current account deficit and the doubling of the external debt–GDP ratio that precipitated the balance of payments crisis of July 1991.
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GROWTH UNDER THE NEW POLICY REGIME The balance of payments crisis, which saw the government turning to the International Monetary Fund (IMF) for emergency finance, provided the grounds for a policy shift that involved not just the liberalization of regulations relating to trade and foreign direct investment and portfolio investment flows, but also a process of fiscal reform that required the government to curb expenditures in order to reduce its fiscal deficit. While the opening up of the economy to capital flows would have helped finance the current account deficit, and thereby keep inflation under control, fiscal reform would have weakened what was the principal stimulus to growth during the 1980s: debt-financed public expenditure. Combined with the competition unleashed by trade liberalization, this should have dampened industrial growth. Although, in the course of the crisis and its immediate aftermath, industrial growth fell sharply, it soon recovered and India experienced a mini boom during the period 1994–7. A number of factors were pertinent in generating and sustaining this short boom. To start with, the government did not curtail its fiscal deficit to the extent it had declared it would. Nor did it face much pressure to do so since it chose to only partially utilize the standby line of credit from the IMF, and hence released itself from the conditionalities attached to the loan. On the other hand, direct tax concessions and the so-called ‘rationalization’ of the indirect tax system resulted in a decline in the tax–GDP ratio, as a result of which any given level of the fiscal deficit implied a smaller fiscal stimulus. The fiscal stimulus continued, though it would not have been as strong a growth driver as in the 1980s. Industrial growth was also stimulated during the mid-1990s by the release of the pent-up demand in the upper-income groups for a range of import-intensive consumption goods. Such demand had been limited for long because of restrictions on the imports of both such commodities themselves and of the technology, capital equipment, and intermediates needed to produce them domestically. Liberalization of trade and foreign collaboration rules removed restrictions on the imports of technology, equipment, and intermediates while maintaining restrictions on imports of the final product. As a result, domestic production of these commodities registered a spurt to cater to the pre-existing demand. This, however, like import substitution, was a
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once-for-all market. Once the requirements generated by the release of pent-up demand were exhausted, the market had to expand if growth had to be sustained. This required the percolation of this demand to new segments of the income spectrum. That did not occur, and so the boom came to an end in the late 1990s, accompanied by the fear that the Indian industry was experiencing a recession. Though this slowdown was reversed during the first decade of the twenty-first century, the remarkable growth spurt that India experienced between 2003 and 2008 was largely focused on the services sector with manufacturing industry making a marginal contribution. Only 17 per cent of the increase in GDP between 2000–1 and 2007–8 was contributed by manufacturing as compared with the 61 per cent contributed by services. The contribution of registered manufacturing was just 12 per cent. Yet, the rate of industrial growth during the five years starting from 2003–4 was indeed creditable, amounting to a trend rate of growth at 9.5 per cent per annum. Moreover, a feature of economic performance during the 2000s was that high growth was accompanied by a significant rise in savings and investment rates with a rise, in particular, of private corporate savings and investment. Driving this trend was a rise in corporate profitability, with some role for a reduction in the effective rates of taxation of those profits (see Guha [Chapter 8]). Clearly then, a structural break of sorts had occurred even within the post-liberalization period, pointing to a change in the factors driving the growth. One such change could have been the percolation of the demand for manufactured goods to those with incomes below the sections whose pent-up demand had sustained the mid-1990s mini boom. While increases in incomes in the upper-middle-income groups may provide part of the explanation, the boom was principally the result of a credit-financed boom in housing investments, automobile purchases, and demand for consumer durables. During much of the 1990s, the ratio of scheduled commercial bank credit to GDP had fluctuated between 20 and 22 per cent of GDP. However, over the next decade, the ratio more than doubled to reach levels above 50 per cent by the end of March 2008. Simultaneously, there occurred a sharp increase in the retail credit exposure of banks. The share of personal loans increased from slightly more than 9 per cent of total outstanding commercial bank credit by the end of March 1996 to around 23 per cent by the end of March 2008. The resulting demand
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for construction materials, automobiles, and durables is one factor that seems to explain the return to high industrial growth. There appears to be a second factor as well. While the shift of bank lending in favour of the retail sector and to ‘sensitive’ sectors such as the stock market and commercial real estate had resulted in a significant fall in the share of lending to industry (from 49 to 40 per cent), the credit boom reflected in a sharp rise in the bank credit to GDP ratio during a period when GDP growth was also high meant that lending to industry remained substantial. However, a change did occur during these years in the structure of lending to industry. The share of infrastructural lending in the total advances of scheduled commercial banks to the industrial sector rose sharply, from less than 2 per cent at the end of March 1998 to 16.4 per cent at the end of March 2004 and as much as 31.5 per cent at the end of March 2012. That is, while the share (though not volume) of lending to industry in the total advances of the banking system has fallen, the importance of lending to infrastructure within industry has increased greatly. Four sectors have been the most important here: power, roads and ports, and telecommunications, and more recently, a residual ‘other’ category, reflecting, in all probability, the lending to civil aviation. Normally, banks do not lend to these sectors because of their large resource requirements, and the higher risks and lower liquidity that characterized such lending. However, as part of its effort to attract private investors into infrastructure, the government was encouraging banks to lend to them. Not surprisingly, the public sector banks accounted for a large proportion of such lending. Needless to say, infrastructural investments supported by bank lending stimulate industrial demand. Thus, the demand generated by credit financed private consumption and housing investment was enhanced by the demand resulting from credit-financed private infrastructural investment. Thus industrial growth remained high from 2003–4 to 2007–8, despite a significant fall in the central fiscal deficit to GDP ratio, since credit-financed private expenditure was substituting for creditfinanced public expenditure as an important stimulus for growth. This boom was, in turn, facilitated by the increase in liquidity associated with the surge in capital inflows into India between 2003–4 and 2007–8. This inflow helped in two ways: it generated the liquidity needed to sustain the credit-financed boom; it also provided the foreign exchange to finance imports of goods needed to dampen price
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inflation. However, a growth strategy that combines increased liabilities to the rest of the world with an increase in private sector indebtedness cannot be sustained in the long run. Just as the growth recorded in the 1980s ended with the crisis in 1991, the growth during 2003–8 was fragile. Not surprisingly, starting with the downturn induced by the global crisis in 2008–9, Indian industry seemed to be once again slipping into a low-growth phase. REGIONAL VARIATIONS These inter-temporal shifts in industrial growth, relating largely to the registered manufacturing sector, were accompanied by substantial inter-regional variations that are inevitable in a large, quasi-federal country such as India. More so because, as noted earlier, factory production by its very nature involves concentrated production for dispersed markets, and unequally delivers the infrastructural and employment benefits of such production. As Chapter 2 by Jayan Jose Thomas, which is on regional aspects of industrialization, points out, a persistent feature of post-Independence industrial development has been the concentration of organized manufacturing in the states of Maharashtra and Gujarat. The combined share of these two states in the total value added by India’s factory sector averaged 36 per cent during 1959–62 and 37 per cent during 2005–8. As for the rest of the country, while the southern states of Tamil Nadu, Andhra Pradesh,4 and Karnataka and the northern states of Uttar Pradesh, Punjab, and Haryana increased their share in manufacturing value added, the eastern states of West Bengal and Bihar recorded a decline in shares. The decline was particularly sharp in West Bengal—from 20 per cent in 1959–62 to just 3 per cent in 2005–8. Much of this regional variation can be attributed to the effects of colonial rule—in the form of different land settlements systems and differential deindustrialization, which resulted in differences in regional entrepreneurship (Bagchi 2010). There followed a phase of greater regional dispersal of factory industry across states during the three decades between 1959–62 and 1989–92. But that process was reversed during the next two decades when state regulation was diluted or dismantled. This was important because in the absence of strong state intervention, market forces tend to increase inequalities
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between regions. Moreover, as Thomas (Chapter 2) argues, states like Maharashtra and Gujarat, which realized the potential economies of scale in sectors like the chemical industry rather early, were the gainers in a cumulative cycle of regional growth differences in India’s factory sector between 1959–60 and 1997–8. Regional differences in the growth of factory production were accompanied by growing differences in the presence and role of more primitive forms of industrial production. Regional variations in production and employment in the unorganized or informal manufacturing sector mirrored those observed with respect to registered manufacturing. West Bengal tops the charts relating to the number of unorganized manufacturing enterprises and workers in unorganized enterprises in the country, followed by Uttar Pradesh and Andhra Pradesh. The inadequate progress of factory production at the national level was associated with significant variations in the level of such production in different states and regions. STRUCTURE OF INDUSTRIAL GROWTH Implicit in the previous discussion is a periodization of post-Independence industrial growth along two lines: one based on the record of growth or deceleration; and the other based on the policy regime in place. When an interventionist, state-led strategy was adopted during 1951–91, Indian industry experienced two phases of creditable growth (1951–65 and 1980–90) and a phase of secular deceleration or stagnation (1965–80). After liberalization in 1991, growth has been more volatile: reasonable through the 1990s, with a mini boom during 1994–7; and creditable during the 2000s, especially 2003–8. Through all of this, important changes have taken place in the structure of the industry as well. There are multiple ways in which structure has been analysed in the literature. The most obvious is in terms of the commodity composition of output, with focus on both the relative role of investment goods, intermediates, and consumption goods; and the relative importance of the essential and non-essential consumption goods industries. The second form of structure that has received attention is the organizational basis of industry, with some overlap in size variations. The industrial sector has been broken up into the dominant, large monopoly segment and the medium and small components; the small component consisting of modern
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small-scale industries as well as traditional and cottage industries. A third way of looking at structure has been the ownership basis of industry, with emphasis on the relative role of the domestic private sector, the foreign controlled sector, and the public sector. An essential feature of the immediate post-Independence industrialization strategy was an effort to influence the commodity composition of output, for two different but related reasons. The first was to deal with the problem of external vulnerability, which resulted from the limited and uneven development of factory production during the colonial period. This meant that the degree of diversification of modern industry was limited with development of the investment and basic goods industries lagging behind, as compared with the development of the consumption goods sector. The consequence of the ‘open production cycle’ implied by this structure was that imports accounted for anywhere between 60 and 100 per cent of the domestic (productive and final) consumption of manufactured goods (Shirokov 1973). If this inadequacy was not addressed, a rising import bill would accompany the economic growth. India was, at that time, dependent on the exports of primary products and traditional manufactures for its export revenues. This meant that changes in the pattern of demand associated with income growth and shifts in the relative prices of primary products and modern manufactured goods, against the former, adversely affected India’s export earnings. Hence, a rising import bill would worsen the country’s balance of payments. The response to this external vulnerability was a structure of protection, which, by limiting the consumption of ‘non-essential’ imports and encouraging the domestic production of ‘essential’ goods, would reduce the import intensity of domestic production and consumption, and bring down the import to availability ratios of a range of manufactured goods. The problem, however, was that a mere reduction in the import availability ratios associated with a given production structure or a set of commodities being consumed at some initial date was not enough to reduce import dependence. Economic development meant that: (i) the volume of consumption of different manufactured goods would increase, so that even a rise in the ratio of domestic production to availability may not mean significant or any reduction in the absolute volume of imports; (iii) demand would diversify and therefore a number of new commodities would be consumed without any associated emergence of domestic production of those commodities;
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and (iii) larger domestic production of the originally produced and newer commodities would be accompanied by increased imports of the capital goods, intermediates, and raw materials required for such production. As a result of these factors, unless special attention is paid to the structure of production and imports, even a process of importsubstituting industrialization behind protectionist walls can run into balance of payments difficulties. What was needed was a strategy of industrialization that not only encouraged the production of both old and new manufactured goods being consumed in the economy, but also ensured that the rate of increase in the production of ‘early-stage’ goods was faster than that of ‘final-stage’ goods, so that increased imports of capital goods and intermediates did not result in excess demand for foreign exchange (Desai 1971). The second reason why the post-Independence industrialization strategy paid attention to the commodity composition of output was the perceived need to overcome the investment goods bottleneck. Once it is recognized that there are limits to material production that is unassisted by machines, underdevelopment appears, in part, to be the result of a lack of adequate capital stock to employ surplus labour productively. If, then, there are limited possibilities for transformation through trade and limited flexibilities in terms of technology choices, there is a case even in labour surplus economies to allocate a large share of investment to investment goods production. This allows for the production of the capital goods needed to support a higher level of investment. Since this strategy, by increasing capital goods production, pulls the economy up by its own bootstraps, higher growth does not lead to balance of payments difficulties because of large imports of capital equipment. This was what the Mahalanobis model (Mahalanobis 1955), on which India’s Second Five Year Plan (1956–61) was based, had implicitly recommended. Realizing the appropriate allocation of investment and composition of output in a mixed economy requires a combination of demand- and supply-side policies. Tax and subsidy measures must constrain consumption and release saving, and ensure that saved output is allocated as planned. On the supply side, the level and pattern of production of commodities should be restricted with controls on capacity creation and production, so as to realize the appropriate pattern of production and ensure that intermediate and basic goods are not diverted away from priority areas to facilitate non-essential goods production.
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Unfortunately, a host of factors combined to prevent the realization of this allocation of investment and composition of output recommended by the Mahalanobis model (1955) and Second Five Year Plan (1956–61) strategy in India. To start with, the failure to redress extreme inequalities in asset and income distribution and the worsening of that inequality as a result of the inflationary financing strategy adopted by the government led to demands for import intensive non-essential consumption goods. On the other hand, despite adopting a plethora of measures—from licensing to allocation of foreign exchange—the government could not prevent private investors from creating capacities in industries that were profitable but non-essential as per the plan priorities. This, in turn, resulted in the absorption of essential basic and intermediate goods by sectors producing non-essentials. In the event, not only was the rate of investment and the rate of growth lower than originally envisaged, but early into the post-Independence development process, India began experiencing balance of payments difficulties leading to balance of payments crises in 1957 and 1965. STATE AND MONOPOLY CAPITAL The failure to realize the planned pattern of development was partly the result of the failure of the state to discipline domestic capital by using a combination of regulation, penalties, and rewards, so that the latter abjured behaviour that went contrary to plan priorities in the pursuit of private profit. The pursuit of profit is to be expected of private capital. But this tendency took on particularly detrimental forms because of the character of the dominant segment of the private corporate sector, which was characterized by two kinds of concentration, as Surajit Mazumdar elaborates in Chapter 3. Late industrializers have to accept and manage an unavoidable structural feature of their industrial sectors, resulting from the fact that they rely on technology available currently in the international market. Once a late industrializing country opts for a protectionist, import-substituting industrialization strategy, it is confronted by the problem of the 'inappropriateness' of this imported technology relative to the size of its markets. Technologies in the more developed industrial nations evolved in the context of a combination of rapidly growing markets (domestically and internationally) and
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labour shortages or situations that warranted reduced labour use. Not surprisingly, the trajectory of modern technology is characterized by increasing economies of scale and rising capital intensity. As compared with this, the developing late industrializers are not only endowed with substantial surplus labour, but also with relatively small markets for most manufactured commodities. Hence, in many areas, a developing country can accommodate only one or a few units targeting the domestic market. Thus, the introduction of technologies with high minimum scales of production (which helped reduce costs of production) in countries with relatively small markets leads to the premature emergence of monopolistic or oligopolistic structures of production. This rather early emergence of 'monopoly' in late industrializers who do not pass through the usual trajectory of development—from handicraft through manufactory enterprises and finally to technologies typical of different stages of factory production—has a number of implications. Firstly, it results in the early emergence of forms of semi-oligopolistic, cost-plus pricing, with margins over prime costs tending to be sticky downward. That is, price competition in these economies tends to be rare even in the early stages of industrialization. Second, while there are many forms of non-price competition, the mismatch between market size and scale of technology tends to make competition through innovation far less important than other forms of competitive interaction between oligopolistic firms. That is, while in a static sense, oligopoly is inevitable because of technological economies of scale and small markets, oligopolistic competition does not result in the same dynamic gains through innovation that it shows in other environments. But the problem does not end here since. The developing late industrializers also include a few capitalists who have accumulated adequate sums of capital to enter the industrial sector. This is of significance because of the need to make relatively lumpy investments, since it is pointless and even impossible for the late entrant to adopt anything except near-best practice techniques involving extremely large capital costs. Since access to such large sums of capital, whether from own capital or other sources, is likely to be limited, the number of producers in each sector would be small to start with, providing an additional basis for the emergence of monopoly or oligopoly in the industrial sector.
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STRUCTURE OF TRADITIONAL OLIGOPOLY In India, this process of premature monopolization had resulted in the emergence and consolidation of the business ‘group’ or ‘house’ as the representative unit of oligopoly in the industrial sector. Based on a shareholding pattern that often resulted in the core of an extended joint family becoming the decision-making authority, the group was constituted of a number of legally independent firms that were controlled or ‘influenced’ by a single, central decision-making authority (Hazari 1966). That was not all. There were a number of other features that rendered the representative unit of capital a highly centralized unit of decision making. Firms belonging to particular business groups were: (i) spread across a range of industrial segments, with the same groups reappearing as dominant producers as we move across the industrial sector; (ii) highly integrated, both vertically and horizontally, within that diversified structure; (iii) enjoying the benefits of ‘product monopoly’ in many areas, albeit with differing market shares in each of them; and (iv) present in the financial sector as well, where they controlled many of the principal financial intermediaries of the time, viz., the commercial banks (Chandra 1979; Ghose 1972 and 1974; Hazari 1966). This extremely centralized structure, which combined product monopoly with a high degree of concentration of overall industrial assets and sales, had a number of implications for business behaviour and strategy and therefore the stability of oligopoly itself. Most business groups, given their structure, pursued a strategy of obtaining licences in a large number of areas. In some areas, these licences were implemented to consolidate existing or develop new bases of monopoly, in others they were held unimplemented with the intention of pre-empting new capacity in traditional or potential bases for monopoly power. The business groups were successful in implementing this combination of ‘offensive’ and ‘defensive’ strategies despite the government’s stated desire to reduce concentration by distributing more widely a given quantum of licensed capacity. This was because the government also needed to provide its licences to those who were seen as capable of implementing them. The traditional monopoly houses had a clear edge over newer competitors given their influence, their access to information, their lobbying power, their financial strength, and their track record. In
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addition, foreign collaborators preferred established, influential, and financially strong domestic business partners. Therefore, the benefits of a relaxation of licensing norms for units with access to foreign finance, in the wake of the foreign exchange crisis of the late 1950s, tended to go in favour of existing oligopolistic producers. That is, not only did the conventional terms of the game restrict new entry, but the government’s policy of licensing also served as an external barrier to entry. Potential entrants not only had to have accumulated capital of a ‘critical minimum size’ outside the domain of oligopoly (say in agriculture, trade, real estate, or abroad) and be in a position to face up to the staying power requirements for successful entry, but they also had to persuade the government into providing them licenses. The latter however proved difficult during the initial years. It is these circumstances that rendered the traditional oligopolistic structure relatively stable till the time the environment that ‘protected’ it remained in place. Mazumdar argues that one consequence of this context was the stability of the oligopolistic structure with little change in the high level of concentration. This was despite the fact that beginning with the mid-1960s and prior to the 1990s liberalization, there were policies required to be put in place to curb concentration. However, since the intensification of efforts to curb concentration in the late 1960s came after the time when planning had begun to lose its legitimacy, the effectiveness of these measures was substantially undermined. However, there were two fundamental weaknesses in the strategic behaviour of the business groups that ensured the stability of the traditional oligopolistic structure. First, the existence of an external barrier to entry made diversification into new areas—often completely unrelated to existing activities—as one of the principal forms of expansion of the group. This often resulted in inadequate investment in renovation and modernization of 'older' companies, which were therefore characterized by low levels of productivity. Second, even with regard to new investment, the intention was to create some capacity in as many areas as possible, resulting in a failure to achieve the minimum-efficient scales of production. This kept costs well above the international norms. CHANGE IN ENVIRONMENT The weaknesses discussed in the previous paragraph were immaterial so long as the domestic market remained protected and new domestic
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entrants were discouraged by the barriers to entry created by minimum investment requirements, incumbent firm advantages, and state intervention. However, the period since the late 1970s has seen a substantial change in the context in which Indian monopoly capital operates. To start with, four decades of operation of processes of accumulation outside the terrain of traditional oligopoly had resulted in the emergence of a significant number of investors with the potential for and an inclination towards investment in industry. Such processes occurred in agriculture; in the services sector, including domestic and foreign trade; and outside the economy, involving individuals of Indian origin living abroad. While some of these new sources of capital themselves had the wherewithal to outlay the capital needed for large investments, others had to seek out additional sources of equity that, together with own capital, could be matched with credit from the financial institutions at the prevailing debt–equity norm. Till the late 1970s, obtaining such financial support required collaboration between individual capitalists who often shared control. However, two kinds of changes in the financial sector have substantially altered the scenario over the last few decades: (1) the gradual emergence of the domestic stock market as a source of capital for a few big players, and (2) the ability of domestic capital to directly access private sources of international finance. DELICENSING AND DEREGULATION The opportunity for potential entrants from outside the pre-existing oligopolistic structure would have had little significance if external barriers to entry, such as licensing, access to foreign exchange for technology import, and restrictions on technical collaboration, discriminated against the potential entrant. However, the years of capital market growth were also the years of liberalization and deregulation. Delicensing, or the removal of constraints on capacity creation in all but a few industries, the dismantling of controls on production, and easy access to technology and capital goods import, have done away with barriers to entry outside of product and capital markets. This not only undermined the strategy of pre-empting capacity to maintain or reproduce monopoly power, but also allowed potential entrants to use the advantages of newer technology and larger scales both in existing areas and for production in areas hitherto discouraged by the
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state. Needless to say, producing new products at the margin, while adversely affecting expansion opportunities for traditional monopolies, does not directly challenge them. However, potential entrants with resources cannot restrict themselves only to such new areas, since the accumulation drive would soon take them into territory hitherto held by the traditional oligopolistic structure. As is to be expected, even with the dismantling of external barriers, entry into such areas is not easy because of the inherent advantages of the incumbent firms. But potential entrants do have advantages as well: First, as is always the case with late entry, there is no outdated capital stock to deal with when choosing technology as the basis for competition. Second, given the tendency towards uneconomic scales that are characteristic of oligopolistic investment behaviour in the past, most incumbent firms operated at well below the minimum efficient scales of production, which burdened them with excess costs. If the new entrant invests in large and efficient scale plants, costs would be much lower than that of incumbent firms. Hence, even if a new entrant has to initially operate large plants at low capacity utilization levels, the prevailing price covers costs to a substantial degree. Once goodwill has been earned and capacity utilization has begun to rise, the entrant may prove competitive in price terms as well. Finally, traditional oligopolists are handicapped by the other aspect of their strategic behaviour, viz., unhindered diversification. Having created a diversified group that straddles large segments of the industrial sector, it is difficult to concentrate investment of the ‘pool of surpluses’ from all parts of the group in a few specific areas. This makes it difficult to meet the challenge of the use of economic scales and best-practice techniques, which new entrants are able to fulfil. The consequence of these advantages is that the 1970s and especially the 1980s have seen the emergence and/or growth of the tillthen-relatively-unknown business groups. According to Mazumdar (Chapter 3), while 49 firms that had been in the list of the largest firms during the mid-1960s were not in the list of 210 largest firms of 1990, and as many as 71 of the latter had not figured in the list generated by the Monopolies Inquiry Commission in 1965. Some among the new groups, such as the Ambani’s, grew to find a place among the top few groups in the country. But that is not all. Liberalization generates a challenge not only from domestic entrepreneurs that are outside the traditional
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oligopolistic structure, but also from international producers, since it involves a change in the trade regime, involving the removal of quantitative restrictions on imports and the reduction of tariff barriers, and, in the foreign investment regime, that permits easy entry at better terms. Interested international producers are not only technological leaders who can access technology and capital equipment at lower costs, but also have a near-unlimited access to the international capital market where interest rates are much lower than in India. New domestic producers that are setting up internationally competitive scales of production may be in a position to face up to the consequent competition. However, if the process of liberalization is adequately gradual, the older groups would find themselves unable to compete at the prices at which imports become available. This intensifies the process of restructuring that occurs in the new phase of industrial transition. How stable domestic oligopoly would finally be depends on the onslaught from international capital, which has also become a major player in a liberalized domestic environment. THE FOREIGN SECTOR With a colonial history, India had for long been home to foreign investment. However, there were some defining features of foreign investment during the colonial period that are of relevance to the discussion here. The first is that foreign investments during those years were clearly linked to the requirements of colonial trade, and therefore tended to be concentrated in areas like plantations, the extractive industries, and the jute industry (Kidron 1965). Production in these areas was largely meant for export either to Britain as part of enforced and largely bilateral trade or to third countries (countries other than Britain and India) with whom Britain had a deficit that required squaring through multilateral trade in which the colonies played a pivotal role. Given the nature and motivation of colonial trade, it was to be expected that little of the investment was in manufacturing and the link between trade and investment though strong, was by no means virtuous. Specifically, despite the fact that under colonial rule, the Indian economy was an open economy, few British investors chose to invest in manufacturing in India to use it as a base for production for the metropolis or third country markets.
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Finally, the relatively small and medium investors who were patronized by the colonial state or the East India Company undertook much of this investment. They exploited the benefits of that patronage and extracted and repatriated surpluses because of the control they exercised by way of equity ownership. This, however, did not mean that the large manufacturing companies, which consolidated themselves in the third quarter of the nineteenth century, did not have an interest in India. Despite India’s low per capita income, it was a country that, because of substantial inequality and its large population, offered a reasonably sized market for manufactures. But large firms from the metropolitan countries chose to serve this market with exports from abroad rather than through production in India. The net result was that imports accounted for a large share of India’s consumption of manufactured goods, while manufacturing capacity remained substantially underdeveloped. Little of the benefits of the domestic market for manufactures accrued to domestic interests, except in isolated cases such as textiles. Given this colonial experience with foreign capital, it was to be expected that the post-Independence government would adopt a hostile policy vis-à-vis foreign capital. However, the policy could only be partially hostile since as a late industrializing developing country, with little industrial infrastructure and experience, India was dependent on international producers for both foreign capital and technology. The Indian government recognized that political freedom could be real only if economic freedom—especially freedom from foreign capital—was won. It, therefore, chose to intervene and mediate the relationship between foreign investors, with access to and control over technology and capital equipment, and a fledgling Indian capitalist class with significant industrial experience but little industrial strength. Mediation involved setting the terms for technology transfer by specifying domestic equity partnership requirements, capping payment in the form of technical fees and royalty, and ensuring that the licensing agreements for technology use did not incorporate terms that were completely damaging to India. Implementing this initial resolve was not easy because the kind of foreign capital that came into India after Independence was very different from the investments made by the ‘older’ investors linked to colonialism. With the end of colonialism these investors and their activities lost their basis and exited the country in some cases, sold
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out to Indians in others, or just faded into oblivion with the passage of time. The new investors consisted of those large, transnational firms that were technological leaders in their fields and many of whom had serviced the Indian market with exports from abroad during the colonial period. But, with the protection that accompanied the launch of the post-Independence development strategy, this was no more possible. If foreign firms were to retain the market that they had earlier serviced or cater to the newly emerging and growing demand, they had to jump these protectionist barriers and establish capacities in the domestic market area. This they sought to do. But since the firms involved were large international firms with control over technology, they were interested in establishing capacities not geared to trade, but as a substitute for the trade that was now curtailed. Their investments were geared to producing for the domestic market. What was noteworthy was that the flow of this capital was large despite the restrictions that domestic policy placed on their operations, especially the requirement that they invest in joint ventures with large or majority domestic share ownership. The reason as to why they did not object beyond a point (though some firms like IBM and Coca-Cola did) is because the control they exercised over the domestic joint venture was not essentially through share ownership, but largely through the control of technology. Written into technology collaboration agreements were a set of clauses that were aimed at subordinating the domestic joint venture, circumscribing its behaviour in the larger global interest of the transnational parent, and ensuring ways of maximizing returns from the unequal partnership. As Rajiv Jha and Ravinder Jha (Chapter 4) note in their analysis focused on the post-liberalization experience, these clauses were varied. Some related to technology, and prohibited the local joint venture from unbundling, tinkering with, or improving on the technology, so as to ensure long-run dependence. Others restricted exports either completely or to specified destinations to prevent competition with the parent firm or third country subsidiary of the parent firm, which produces for that market. Yet others specified sources from which equipment and intermediate imports would occur to ensure the use of transfer pricing to extract profits concealed as costs. Because of these possibilities that could be exploited, foreign firms by and large remained interested in producing for India’s reasonably large and
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growing market for a range of manufactured goods. Their effort was to push the boundary so that they could choose to enter the lucrative areas and could obtain the best and most flexible terms that would enable them to control the domestic joint venture, ensure continued dependence, and extract the maximum profit. Not having the option of denying domestic industrialists access to foreign technology, the government had to devise ways of regulating and containing the power of foreign firms. Regulation had three broad and principal objectives: (a) to restrict foreign presence by limiting entry to areas in which such access was essential; (b) to reduce the costs of technology transfer, ensuring in the process substantial savings of scarce foreign exchange as well (Subrahmanian 1986); and, (c) to strengthen the capabilities of domestic capital so that, in the long run, they would become independent of foreign capital and be in a position to compete in both domestic and external markets on their own. By the late 1960s it was clear that the government had substantially failed in its effort, despite significant and noteworthy successes in some areas (which included industries such as power equipment, fertilizers, and drugs and pharmaceuticals, besides nuclear energy and space technology). Estimates place the share of assets in the nonfinancial, private corporate sector that was accounted for by firms identified as foreign controlled as varying between 35 and 45 per cent, depending on the definition of control used (Chandra 1991; Patnaik 1973). Inflow of foreign technology and capital had not been restricted to only ‘essential’ areas, and, even in non-essential ones, there were imports of the same generation of technology from multiple sources by different local firms. Failing to absorb the technology, firms entering into collaborations remained dependent on foreign technology suppliers, renewing or entering into new collaboration agreements when earlier ones expired. Net foreign exchange flows on account of all foreign firms together were negative each year, and in the case of most joint venture firms, turned cumulatively negative within a short period after launch of commercial production. There were many factors that resulted in this substantial failure. The State could only circumscribe the terms within which a foreign firm could seek to enter, and the exact terms chosen within that field were left to the domestic collaborator. Moreover, the State was under pressure to allow foreign financial collaboration inasmuch as
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investment was most often dependent on access to foreign exchange for importing capital and technology, and the foreign exchange available to be allocated by the state was limited. This generated pressure to grant licences and permit collaboration in areas where foreign finance was shown as available, though the area was in the ‘non-essential’ list. Such pressures increased after the emergence of balance of payments difficulties in 1957, when investment was suffering because of inadequate access to foreign exchange. Given these circumstances, the ease of entry of foreign capital and the flexibility it had depended substantially on the stance adopted by domestic capital. In areas where private investment dominated, the choice was clear. Many of them were areas in which technology could be imported from multiple sources, allowing the domestic firm to shop around, negotiate, and obtain the technology at a relatively cheap cost. In a short-run sense, this may appear the better option than that of finding ways of collaborating with the state to develop a domestic alternative, based on a combination of the learning derived from the initial import and operation of the technology, the knowledge available in the public domain, and the R&D support offered by the state. The sunk costs and risks associated with the latter trajectory are substantial and the returns come only in the long run, if technological leadership is established in dynamic areas of manufacturing such as automobiles (such as Hyundai and Daewoo in South Korea) and electronics (for instance, Samsung and LG). But domestic firms have the advantage of the strong protection that was being afforded by the state in the interim. However, left to themselves, private capitalists are likely to focus on short-term returns with the hope that renewed technology import would allow them to earn significant (even if lower) shared returns in the long run. Moreover, as noted earlier, one form that the oligopolistic competition takes is access to technology and brands from leading international firms, so that if other firms have the option of settling for imports of technology, competitors may be under pressure to choose the same route. For these and other reasons, unless the state disciplines domestic capital and requires it to deliver in return for protection and promotional support evidence of efforts to develop technological capability, the latter option may not occur. In practice, the substantial failure to realize goals with regard to gaining independence from foreign capital was not just due to the context in which state policy had to operate, but also because of the failure
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of the state to discipline domestic private capital. This was reflected most sharply in areas like the automobile industry where few players were given an oligopoly for long but this failed miserably to strengthen their technological capabilities and innovate, resulting in the Indian industry relatively falling behind its global peers in the 1950s. The net result of all this was that India did reflect two of the adverse consequences that can result from the relatively unregulated dependence on foreign capital and technology: a negative effect on the balance of payments and inadequate development of indigenous technological capability in areas where foreign technology was easily available and relatively cheap to import. A major component of the economic reform initiated in the 1990s was, and still remains, the liberalization of regulations relating to the inflow and operation of foreign direct investment. An important reason for seeking to attract such capital is the belief that such inflows, besides enhancing the level of foreign exchange reserves in the short run, would use India as a base for world market production, improve the competitiveness of Indian industry, increase exports, and render the balance of payments sustainable in medium and long term. As a result, successive governments have sought to better past records in terms of the annual inflow of such investment. The contribution of Rajiv Jha and Ravinder Jha (Chapter 4) assesses how successful India has been in attracting foreign investment of this ‘new’ kind, and whether the promised benefits are being realized. It cannot be denied that these efforts have been successful at attracting inflows. While there is reason to be wary about treating all recorded foreign direct investments (FDI) as consisting of capital entering the country with a long-term, productive interest, especially since it requires just 10 per cent equity by a single foreign investor for a firm to be treated as an FDI company, a substantial inflow of capital under this head cannot be denied. Foreign direct investment inflows, which stood at about US$ 2 billion in the middle of the 1990s and touched US$ 4 billion in 2000–1, rose sharply to US$ 6 billion in 2004–5, and then registered a sharp spike to touch US$ 22.7 billion in 2006–7, US$ 34.7 billion in 2007–8, and US$ 41.7 billion in 2008–9 (Reserve Bank of India [RBI], 2012: Table 155). Not all of this, it must be noted, is investment in greenfield projects. In the wake of liberalization of ceilings on foreign shareholding, from the 40 per cent level required for national treatment under the
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Foreign Exchange Regulation Act, 1973 (FERA) to as much as 100 per cent in some industries, a number of companies already in operation in the country raised the foreign stake in their paid-up capital through issue of new shares to the foreign investor. Further, there have been a large number of cases of foreign firms acquiring wholly Indian ones. Data relating to inflows on account of acquisition of shares of Indian companies by non-residents under section 29 of FERA and section 6 of the Foreign Exchange Management Act, 1999 (FEMA) is available from January 1996 and onwards. While the share of FDI inflows on this account has been substantial in some years, accounting for 23 per cent of the total in 2006–7 for example, the figure is usually around 15 per cent of the total. The fact that FDI inflows do not always reflect investments in greenfield projects is not without significance. Both foreign firms set up during the years when FERA limited foreign shareholding to 40 per cent and Indian companies established during the import substitution phase of Indian industrialization were created with the domestic market as their primary targets. In case of foreign firms, as noted earlier, quantitative restrictions and high tariffs forced those firms that could earlier service the Indian market with exports from the parent or third-country subsidiaries to jump tariff barriers and set up capacity within the domestic tariff area in defence of existing markets. On the other hand, the policy of across-the-board protection, by restricting imports, ‘opened up’ the domestic market to indigenous producers. That market was expanding because of enhanced state investment and expenditure, providing the stimulus for the creation of new firms by Indian industrialists. The net result was that even when the world market for manufactures was expanding quite rapidly in the 1950s and 1960s, both foreign and domestic firms from India were conspicuous by their absence in international markets. Given the evolution of these firms, it should be expected that any increase in the equity stake of the foreign investors in the existing joint ventures or purchase of a share of equity by them in domestic firms does not automatically change the orientation of the target firm away from production for the domestic market. As a result, in such cases, FDI inflows need not be accompanied by any substantial increase in exports, whether such investment leads to the modernization of domestic capacity or not. Moreover, if the domestic market is attractive for these firms, there is no reason to believe that when the market
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is expanding and diversifying rapidly, foreign investors in greenfield projects too (such as in automobiles or telecommunications) would not target the domestic market. The available evidence suggests that this is precisely what is happening in India. RBI has been periodically publishing figures on the finances of Foreign Direct Investment Companies (FDICs), or companies in which a single non-resident investor has 10 per cent or more shares, for different year groups since the 1990s. These firms are those with requisite foreign equity holding and are included in RBI’s studies of the finances of a larger sample of public and private limited companies. It must be mentioned that neither do these data sets amount to a comprehensive census of FDICs nor are they a consistent sample, in the sense that the firms covered remain the same in all years. The number of firms covered in each year’s selective survey, which provides data for two or three consecutive years for a common set of firms, varies over time. So the series is not strictly comparable over a long period. However, the numbers are indicative. The RBI provides details on movements in the exports–sales ratio for these sets of firms for the period. What the numbers indicate is that in the period when FDI inflows into India have been rising rapidly, the export intensity of FDICs has been more or less stable. This fact counters the presumption of many who argue that, in the context of globalization, FDI flows reflect the need of large international firms to seek out the best locations for world market production, resulting in a virtuous nexus between FDI and exports. But this is not all. Since the relaxation of controls on FDI inflows under reform is accompanied by the liberalization of the rules governing the operation of foreign firms and is accompanied by substantial trade liberalization, we can expect two tendencies: (a) there could be greater expenditure of foreign exchange by these firms on imported inputs, and (b) there could be greater expenditure of foreign exchange because of the larger payments on account of royalties and technical fees and larger repatriation of profits as dividends, encouraged by the more liberalized environment. The first of these is most likely. To start with, foreign firms would seek to use trade liberalization and the liberalization of regulations with regard to use of international brand names, to cash in on the pent-up demand in the domestic economy among well-to-do consumers for a range of product innovations available in the international
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market place, access to which was restricted in the protectionist phase. Even if the market for this range of ‘new’ products is small, they can be manufactured/produced and sold in the domestic market with relatively small investments at the penultimate stages of production, based on imported intermediates and components. Not surprisingly, therefore, the ratio of imports to exports of the FDICs has been rising rapidly. This trend could also reflect the possibility that reduced restrictions on imports are intensifying the practice of ‘transfer pricing’, or imports from the parent or a third-country subsidiary located in a tax haven at inflated prices, so that profits are ‘transferred’ to firms in low tax locations. This obviously implies that the foreign exchange cost of domestic production is inflated further. Together with the tendency to extract larger payments in the form of more ‘open’ transfers such as royalties and technical fees, the operations of foreign firms can, for these reasons, result in a significant drain of foreign exchange. To the extent that these tendencies are associated with investments focused on exploiting the domestic market, there would be little by way of enhanced foreign exchange earnings to neutralize their adverse balance of payments consequences. In such an event, the net balance of payments impact of FDI inflows can be negative. The evidence collated by Rajiv Jha and Ravinder Jha (Chapter 4) suggests that there has been a sharp increase in the net outflow of foreign exchange (or a negative value for total foreign exchange earnings minus foreign exchange expenditures) on account of the operation of FDICs in the country. It could, of course, be argued that the drain of foreign exchange on account of the operations of these firms is more than matched by the additional inflow in the form of equity capital. This argument, however, confuses the immediate inflow on account of foreign investment and the long-term impact of the operation of an FDIC. It is well known that foreign capital inflows into joint ventures in developing countries are in the nature of large one-time flows for establishing or substantially expanding an enterprise accompanied by smaller ‘in effect’ inflows on account of retention of part of the profits due to the foreign partner, which are not paid out as dividends. Once established, much of the expansion of the firm occurs on the basis of borrowing from the domestic market. Such expansion results in an increase in the fixed assets, sales and profits of the company concerned, which, in turn, increases outflows on account of imports
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and non-import foreign exchange expenditures like royalties that are tied to sales volumes. Further, inasmuch as the size of the firm is independent of equity, to the extent that investment is financed with domestically borrowed capital, even profit repatriation is large relative to the inflow of capital. Thus, unless export revenues increase significantly and bring in additional foreign exchange revenues, net inflows (that are positive at the time when equity is flowing in) soon turn negative, and within a short period, cumulative inflows are negative. Contrary to this evidence, it has been argued that with the rise to dominance of the international firm, the reduction in transport and communication costs associated with the post-War technological revolution and the wave of liberalization that permits easy and low-taxed cross-border flows of capital, goods, and services, the nature of foreign direct investment must change. Firms would invest abroad not only to produce for local, host country markets (because they can be accessed with exports from a parent- or third-country production facility), but also to use a location with specific competitive advantages as the base for world market production. This, it is argued, would establish a virtuous nexus between foreign investment and exports, leading to a positive impact on the balance of payments. Jha and Jha (Chapter 4) argue that such expectations have been belied. Post-reform FDI has come into India for reasons that vary from the objective of benefiting from the relaxation of ceilings on foreign equity holding in pre-existing joint ventures by increasing their equity, and therefore, profit share, to buying up local market shares by acquiring dominant firms (such as Parle Exports by Coca-Cola, which gave the latter 75 per cent of the soft drinks market in the country), or to investing in new markets for private capital in infrastructural services such as power and telecommunications. All of these have little by way of export revenues associated with them. Very little of the inflow was actually in export-oriented units or sectors. What the liberalization of FDI rules did was to change the nature of the relationship between foreign and Indian firms and increased the control exercised by the former over corporate assets in India. TECHNOLOGICAL CAPABILITY While the reliance on foreign firms in India’s industrialization did adversely affect India’s technological capability, there were some
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areas in which the regulatory regime worked to strengthen India’s technological prowess. One in particular—drugs and pharmaceuticals—benefited from the patent regime that was put in place in 1972, which did not provide for product patents in the country. This, argues Sudip Chaudhuri (Chapter 6), resulted in significant process innovations that generated an indigenous industry using internationally comparable technologies to produce cheap imitation drugs. The change in this policy, through the TRIPS-compliant amendment5 of India’s patent law that provided for product patents, has led to substantial changes. International monopoly in the patented drug market has increased, drug prices have risen, leading Indian firms have been acquired by foreign multinationals, and the indigenous industry is increasingly focusing on the production of off-patent drugs for the domestic and export markets. All this goes to show that the introduction of product patents has not worked to India’s advantage. In addition to the pharmaceuticals sector there is a complex picture with respect to technological capability development in the face of international pressure. With hindsight, it is clear that innovation in India has been largely geared to meeting the problems flowing from the character of imported technology. Techniques that save costs without reducing labour input, innovations aimed at accommodating the poorer quality of locally available raw materials, and indigenous imitations of foreign processes and products that offer cheap, sturdy, and qualitatively inferior alternatives to products based on imported techniques—all of these appear to have been the main aims of the local innovative effort. The last one has been important because of demand for lower-cost products from a large section of India’s middle class. Cheap drugs and detergents are examples of local imitations outcompeting well-known brands produced with foreign technology and collaboration. Examples of this kind also exist in that segment of the capital goods sector providing equipment, either to agriculture or to indigenous firms, catering to highly price-sensitive markets. According to Desai (1985), small firms imitating the products of large (including foreign) firms ‘have been highly successful in consumer goods, machinery for sugar, chemical, and textile industries, machine tools and irrigation pumps’. Speculating on the factors accounting for this success, Desai notes: Small firms, which are often situated in smaller towns, pay lower wages. They often use cheaper materials. In some industries they are protected by government controls on the expansion of large firms.
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But, by and large, they have gained ground on the basis of their lower prices and in markets which are sensitive to prices and insensitive to quality. These are markets in which three types of buyers predominate: (a) those which are relatively poor; (b) producers who suffer from illiquidity like farmers and small manufacturers; and (c) the government with its schemes and tendering procedures.’
Thus imitative and adaptive innovation, though often neglected in analyses, has had a successful track record in India. In more quality-conscious markets, the case for frontline innovation based on domestic R&D is weak, partly because, the sunk costs needed for such innovation would have rendered the product too expensive for the purpose at hand. This, however, is not to argue that there is no market where frontline innovation can occur. In fact, the demands placed by the narrow but well-endowed upper-income market, in what is a highly protected luxury consumer goods sector, has resulted in substantial frontline product innovation. However, such innovation has been largely based on imported technologies for a variety of reasons as discussed further. First, given the option of shopping around the world for technology—which Indian producers have been adept at, given their own technological capability—the cost of technology import to India has not been too excessive. In a set of 211 collaborations studied by the National Council of Applied Economic Research (NCAER) (cited in Desai 1985), 64 out of 92 respondent firms said they had approached more than one foreign firm before concluding an agreement. The same study found that, in more than 50 per cent of the cases, the profits earned by foreign suppliers of technology was not too high. Second, while the cost of technology import was relatively low, upper-income demand in India has been extremely sensitive to the brand names associated with the products offered. In fact, demand in this segment is less sensitive to price but extremely sensitive to perceived qualities and brand images. Hence, competition between firms has often taken the form of obtaining competing brand names by resorting to repetitive imports of technology in what are inessential areas. On the whole, while India appears to have a successful track record with regard to imitative and adaptive R&D, its performance with regard to R&D aimed at frontline innovation has been extremely poor. This has meant two things: (i) the science and technology intensity
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of Indian innovation has been relatively low, leading to a disjunction between state-funded R&D establishments and innovation in industry (with exceptions such as textiles and pharmaceuticals), and (ii) Indian industry reflects the paradoxical coexistence of a creditable technological capability record that has made it a technology exporter to other developing countries, on one hand, and has led it to a slow pace of frontline innovation and average productivity growth, on the other. Matters have changed since liberalization, but this has not been accompanied by any significant enhancement of the technological capability of indigenous firms. THE PUBLIC SECTOR Organizationally speaking, therefore, both before and after liberalization, the only potential ‘countervailing power’, which could be instrumental in the pursuit of the government’s social objectives, was the public sector (Bagchi 1993). Given the leading role taken on by the state in the Indian industrialization process, it was inevitable that it would invest in productive capacities. There were a number of reasons why the state would undertake such investment. To start with, since late industrialization inevitably implied an element of ‘discontinuity’ in the sense of a large sum of industrial investment in multiple industries, the fledgling capitalist class would not have the wherewithal (even with state support) to undertake the task on it own. The ‘big push’ needed for industrial ‘take-off ’ required the supportive arm of the state. Second, as noted earlier, there were a number of areas into which private investors were unlikely to venture because of lumpy investments, long gestation lags, higher risks, and inadequate returns associated with such areas. On the other hand, some of these industries are characterized by economy-wide externalities, in the sense that their emergence and growth is crucial for the industrialization process, and their absence can constitute a drag on industrial growth. Thus, the state was required to invest in these areas to ensure their presence and, thereby, facilitate industrialization. Third, there were a host of socio-economic objectives that the postIndependence state had set itself, such as restriction of concentration of economic power (which required state investment in areas characterized by natural monopoly) and reducing regional inequality (which required public investment in less developed and backward areas).
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Fourth, there were strategic areas, varying from petroleum and nuclear energy to the railways and steel, where private control was either not advisable or public presence was crucial to move the mixed economy in directions embodied in an overall plan. It was this motivation for public sector investment that explained the division of the industrial sector into three broad areas—one reserved for the state, a second open for simultaneous operation of public and private sector units, and a third left to the private sector. Finally, there were some ‘sunset industries’6 with lower relative profitability, epitomized by textiles, where the exit of private capital through the extraction and transfer of surpluses and the neglect of replacement and modernization of equipment resulted in sickness7. Since private capital chose to close down units in these areas, and put the jobs of thousands of workers at risk, the state had to intervene to take over the sick units and nationalize them. While the National Textile Corporation was a typical example of the outcome of this process, the problem affected other industries as well. It should be noted that in most of these cases, the state sector emerged because the private sector would not have been willing to undertake the activity, and would not deliver on larger objectives such as reducing regional inequalities in development or had forced the state (through ‘engineered sickness’8 for example) to engage in production. However, as a result of the investments undertaken for all the above reasons, there emerged a large public sector that served as a countervailing force to the private corporate sector. Since much of the private sector could not perform without the activity of the public sector, the state by engaging in production in these areas was an indirect influence on the private sector. Moreover, being an autonomous agent not driven by the profit motive, the state could behave in ways that would have set standards with regard to wages, salaries, and conditions of employment, for example, that puts pressure on the private sector to follow. There were few areas, such as bread production, bicycle production, or the production of watches, in which the state’s entry could not be explained by any of these motivations. But they were so small that they could hardly constitute the basis for an attack on the public sector, on the grounds that it was not the business of the government to be in business. Much of the public sector was not in business in the commercial sense.
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This was reflected in the industrial composition of public sector activity. The state, at one time, owned more than 60 per cent of all productive capital, accounted for 8 of the top 10 units, and employed two-thirds of the workers in the organized sector. At the end of the financial year 1966, which could be seen as the end of the first phase of public investment–led growth, steel (40.62 per cent), engineering (20.29 per cent), chemicals (9.11 per cent), petroleum (12.22 per cent), mining and minerals (7.49 per cent), and aviation and shipping (4.97 per cent) accounted for more than 90 per cent of the cumulated investment in public sector projects (Chaudhuri 1978). This composition of public sector output endowed it with a high capital–output ratio. Not surprisingly, while the public sector's share in total physical assets increased quite sharply over the years, its share in production increased from around 2.5 per cent in 1950–1 to only around 26 per cent by 1965–6. In addition, this output was till recently sold at prices that indicated the government's concern for offering infrastructural and other crucial inputs at relatively low prices to the private sector. Having been set up for the reasons outlined above, it was to be expected that the public sector was never intended to function like a typical private corporation would. This affected the pricing principles adopted for the public sector. They were obviously different from the one typical of the private sector which added on a margin above costs determined by, say ‘what the market can bear’ or by the need to prevent the entry of competitors attracted by the promise of high profits. Rather, the public sector price had to be treated as one more instrument in the government’s overall tax-cum-subsidy regime. If it wanted to keep prices of crucial inputs low to facilitate the growth of a particular downstream industry or support the small-scale sector, it would do so and cover the losses, if any, and/or support investment in the units concerned with revenues garnered from taxation or dividends accruing from public sector units in other industries. The fact that the public sector’s finances were seen as part of the government’s overall finances was also established by the division of the central public sector undertakings into: (a) departmental enterprises that were part of the central budget (such as posts and telegraphs and telecommunications, for example), or had a separate budget presented to the Parliament (like the railways) and; (b) public
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sector corporations often established by acts of the Parliament with separate accounts of their own, presented to the nodal ministries. The combination of the areas into which the public sector entered and the pricing policy it followed meant that it would be segmented into various kinds of units: those that were bound to suffer losses, such as many units under the National Textile Corporation; others that would suffer losses or earn low profits because of the pricing principles adopted (steel and fertilizers); and yet others, which made significant profits, because of being natural monopolies (telecommunications) or deriving administered pricing benefits (petroleum). However, on average, through multiple means—taxes contributed, dividends paid out, and disinvestment receipts—the public sector as a whole has provided more to the government than it has received in return. It needs to be noted, however, that despite these outcomes, and though the early Industrial Policy Resolutions and statements of the government suggested that the public sector should occupy ‘commanding heights’, in practice, the state merely adjusted to an inevitable residual role in an industrialization process where market signals and private decision making determined the direction of growth. Even if investments in the public sector were tailored to the requirements of the Mahalanobis Plan, so long as the private sector could not be either guided or disciplined to meet the requirements set for it, such investments would either remain unutilized or their fruits diverted to areas that were ‘non-priority’ in the perspective of the time. In such a case, the role of the public sector would be that of providing certain crucial infrastructural inputs which otherwise would have either constrained the pace of industrialization or had to be imported, since it would have been unwilling to invest in the production of such inputs. The government's own realization of the supportive role to be played by the public sector was reflected in the Third Five Year Plan (1961–6), which stated that such investment was required since ‘a number of basic industries which require large investments and extensive collaboration with foreign firms or governments and which could be undertaken only on the assurance of future prospects, with no immediate gain in sight, would not normally be started if reliance was to be placed entirely on private enterprise’ (Planning Commission 1961). But it was not this feature of the public sector that drew attention when the turn to liberalization occurred. Rather, the claim was that,
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the public sector was inefficient, in the sense that most units were earning low profits or incurring losses resulting in them constituting a source of drain from an already stretched exchequer. This led up to the assertion that the very idea of having a public sector engaged in industrial production was largely mistaken, and that it was not the business of government to be in business. The evidence here is largely to the contrary. As R. Nagaraj notes (Chapter 9), a close, disaggregated examination of the fiscal deficit reveals that the contribution of public sector enterprises (PSEs) to that deficit is small and declining, thereby suggesting that they are not the principle cause of growing deficits. Moreover, although there is evidence of improved physical performance of PSEs over a long period, it does not translate into significantly improved financial indicators because of underpricing. As noted earlier, the burden of losses argument was true only of some sections of the public sector and, even in many of those cases, either the burden was taken over from the private sector or those losses reflected the non-profit logic of investment, production, and pricing in sections of the public sector. Yet, the ‘inefficiency’ argument was used as the justification to pursue a completely different agenda: that of divesting equity in profit-making public sector firms in order to garner resources to cover the deficit on the central government’s budget, which resulted from a combination of poor resource mobilization through taxation and unwarranted transfers, especially to the corporate sector. However, the disinvestment strategy has proved difficult to implement. Even its partial success is attributable to the emphasis on the sale of equity in some of the most profitable public sector units, on undertaking such sale at prices that considerably undervalue the real assets and surpluses of these enterprises, and in resorting to ‘strategic sales’ or the handing over of complete managerial and financial control to a private investor who commits to acquiring a block of 26 per cent of equity held by the state. Through the provision of such concessions, the government’s equity stake in profitable investments has been substantially diluted over time, resulting not just in the erosion of the revenues of the state but also of its ability to use the public sector and its surpluses as a countercyclical instrument in times when growth slows.
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THE SMALL AND THE UNORGANIZED Since most studies on India’s industrial development focus on the modern, organized industrial sector, there is considerable neglect of the large majority of small scale and unorganized sector units in the country. Despite more than five decades of state-led industrial development, dualism, or even multi-structuralism, has been an abiding characteristic of India’s industrial sector. Early analyses of the structure of industry, at the time of Independence, had pointed to the domination of ‘lower forms of production’ or production characterized by the use of non-power-driven techniques and the absence of hired labour located predominantly in rural and semi-urban areas. Thus, according to national income data relating to 1948–9, ‘factory establishments’ accounted for just 6.34 per cent of national income and 37 per cent of the national income was generated in the mining and manufacturing sectors.9 Further, going by the Census for 1951, factory establishments accounted for just 26 per cent of the employment in mining and manufacturing, which itself amounted to just 9.3 per cent of total employment (Shirokov 1973). While organized sector units, or those that correspond with the criteria set by sections for registration, that is sections 2m(i) and 2m(ii) of the Factories Act, 1948, are not always units that meet the attributes expected of modern industrial establishments, this is the closest one can get to making a division between the unorganized and organized or between informal and formal that must necessarily be arbitrary. Moreover, since in law these units have to tally with the requirements of labour legislation in the country, there is at least one sense in which they could be termed formal or organized. As Jesim Pais (Chapter 5) notes, conventional wisdom would have it that the process of industrialization is one in which an economy witnesses the gradual demise of excessively small units and units that are based on more primitive techniques and primitive forms of organization, which give way to large or larger units that work with hired labour and more advanced techniques and increasingly adopt the impersonal joint stock company form of organization. It barely bears stating that state’s intervention to ensure minimum wage payments, a ‘normal’ working day, and reasonable conditions of work, by encouraging productivity enhancing technical change, would contribute to the above-described transition.
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This would imply, as a corollary, that the implicit ‘exemption’ from regulation of units, which do not meet the criteria set by sections 2m(i) and 2m(ii) of the Factories Act, would itself slow the pace of ‘modernization’ and contribute to some degree of persistence of dualism. This is a factor that favours the use of the definition provided by the Factories Act to draw the dividing line between the organized and unorganized sectors. In addition, since the statistical system has historically sought to cover registered units through the Annual Survey of Industries (ASI) and unregistered units through the Economic Censuses and the follow-up surveys undertaken by the National Sample Survey Office (NSSO), a body of statistical evidence to assess the structure and evolution of the unregistered sector based on this definition of the unorganized sector exists. Needless to say, dualism is not a function of just the implementation of the Factories Act, allowing for wage differentials between the organized and unorganized sector. Rather, as analysts have often pointed out, a number of other factors on the demand side such as the persistence of traditional ‘tastes’ that can be catered to only by more primitive techniques and the existence of poverty and inadequate market integration, which generate a different kind of ‘niche’ market for cheap but primitive products, have also encouraged dualism. Further, inasmuch as poverty-related factors—like unemployment and underemployment—result in a constant search by the poor for supplementary work and since there are few barriers to entry into many areas of unorganized production, the supply of commodities from these kinds of units tends to be elastic, with production at extremely low wages and prices that reflect small or negligible ‘margins’, occurring as and when these demands manifest themselves (Kurien 1973). In the event, the unregistered manufacturing sector would be characterized by three kinds of ‘instability’—(i) that stemming from the fact that some of its activities are seasonal, (ii) that resulting from the high rate of mortality of unregistered units given the low wages, small margins, and extreme competition characteristic of this sector, and (iii) that resulting from the precariousness of the demands they cater to. Besides all this, backward techniques and backward forms of organization also survive because of the subordination of these activities by merchant or trading capital, which is able to earn a suitable margin for itself even while remaining competitive with production based on modern techniques, because of its ability to exploit the benefits of low
PROMISE BELIED 43
wages associated with production in the unorganized or unregistered sector. This is particularly true of primitive production units that cater to national markets like handloom, bidi,,or match production. In fact, the irrational concentration of match production in a few contiguous districts of Tamil Nadu—which account for an overwhelming share of the matches produced in the country and cater to markets nationwide—can only be explained by the evolution of a trading chain dominated by merchant capital that controls a complex, historically evolved production system involving home- and unit-based female and child labour that keeps cost of production extremely low. Finally, as Pais (Chapter 9) stresses, the assessment that the linkages between the formal and informal sector are almost non-existent, and where existent weak, is not necessarily true. The sectors are linked either as providers of inputs to the other or through relationships in which the formal sector brands and markets output produced in the informal sector. Three kinds of activities seem to preponderate in the unorganized manufacturing sector (defined in terms of enterprises). One is the production of cheap, labour-intensive, and medium- to low-quality inputs for supply to formal industry. The second is the production of labour-intensive markets for niche domestic and export markets. And, the third is the production and sale of cheap, lowquality, and labour-intensive final goods to meet the demands of the poor or lower-middle class in India. Moreover, while there was an earlier understanding that, especially in manufacturing, the informal sector would be increasingly urban, the experience in India and elsewhere is otherwise. The lack of access to employment in agriculture is resulting in a sharp growth in rural non-farm activities including in manufacturing (Ghosh 2004). ‘These rural non-farm activities, largely or mainly home- or householdbased small-scale manufactures, but also including manufactories or karkhanas independent of households are very similar to the “urban informal sector”’ (Ghosh 2004). Thus dualism or multi-structuralism is not a phenomenon determined primarily by the incidence or not of factory legislation, but the consequence of the larger socio-economic context and its evolution. The Factories Act merely provides one arbitrary dividing line that must be drawn between the organized and unorganized sectors, and provides an ambiguous contribution to difference between the two sectors. Ambiguous because evidence on the implementation of
44
INDIAN INDUSTRIALIZATION
the Factories Act does not generate confidence in the ability of the implementing mechanism to ensure minimum wages and reasonable conditions of work even in the factories that are formally registered with the Chief Inspector of Factories. *** Structural changes in the industrial sector over time, often engineered by the state rather than driven by market forces, have in different ways added to the macroeconomic factors that contributed to the failure to realize the industrial promise that India showed at the time of Independence. In this process, the interaction between the state and private capital has been characterized by much complexity. India’s ‘infant’ capitalists needed and obtained much support from the state. But the failure of the state to impose corresponding obligations on the private corporate sector and the ability of the latter to undermine the efficacy of various forms of public intervention (such as licensing), resulted in the loss of social confidence in and sanction for intervention, and its subsequent dilution and collapse. This does weaken domestic capital. But it also seemed to offer it an opportunity, in the form of entry into areas that were hitherto reserved for or were largely populated by public sector units, especially in the infrastructure sector. But the subsequent experience has made clear that private Indian capital is not in a position to do this on its own. The pursuit of that strategy required new forms of state intervention to incentivize private investment. Credit from the public banking system, access to cheap land and resources provided by or acquired on its behalf by the state, changes in pricing rules and norms, viability gap funding, and implicit and explicit subsidies have been used to prop up a private sector in pursuit of a new and enhanced role. But as yet, there are no signs that the long-term failure of India’s industrialization project has been, or is likely to be, reversed. NOTES 1. The British government in India agreed to provide protection through imposition of tariffs on a few select commodities imported into India. However, there were differential duties imposed on imports from Britain and from other markets,
PROMISE BELIED 45
with the former being lower. This preferential policy with respect to British imports was termed a policy ‘discriminating protection’. 2. Figures computed from National Account Statistics with 2004–5 as base. Data available at http://mospi.nic.in/Mospi_New/upload/back_series_2011. htm and http://mospi.nic.in/Mospi_New/upload/NAS12.htm, last accessed on 1 November 2012. 3. Figures from World Bank, World Development Indicators Online, available at http://data.worldbank.org/data-catalog/world-development-indicators, last accessed on 10 December 2012. 4. Andhra Pradesh was divided into two states, Andhra Pradesh and Telangana, in 2014. Howver, unless otherwise indicated, all chapters in this volume refer to the state of Andhra Pradesh before the division. 5. TRIPS refers to the Agreement on Trade-Related Aspects of Intellectual Property Rights (also known as the TRIPS Agreement). 6. A sunset industry is one for which the market is saturated, leading to sluggish demand and/or in which opportunities for innovation and technological change have faded. 7. India’s Sick Industrial Companies Act, 1985, defines a sick industrial unit as ‘a unit or a company (having been in existence for not less than five years) which is found at the end of any financial year to have incurred accumulated losses equal to or exceeding its entire net worth’, where net worth is calculated as the sum of paid-up capital and free reserves minus provisions and expenses. 8. Sickness is most often engineered by siphoning off surpluses generated in units in a sunset industry, without investment in renovation or modernization of equipment. Those surpluses are diverted to sectors where demand is strong and profits higher. In time, the source unit is burdened with high costs, shrinking markets, and losses. 9. Computed from figures provided by Central Statistical Organization (CSO) quoted in RBI (1956).
REFERENCES Bagchi, Amiya Kumar. 1972. Private Investment in India: 1900–1939. Cambridge: Cambridge University Press. ———. 1993. ‘Public Sector Industry and the Political Economy of Indian Development’, in Terence J Byres (ed.), The State and Development Planning in India. New Delhi: Oxford University Press. ———. 2010. ‘Reflections on Patterns of Regional Growth in India under British Rule’, in Amiya Kumar Bagchi (ed.), Colonialism and Indian Economy, Chapter 2, pp. 13–56. New Delhi: Oxford University Press. Chakravarty, Sukhamoy. 1974. Reflections on the Growth Process in the Indian Economy. Hyderabad: Administrative Staff College of India. Reprinted in, Selected Economic Writings. New Delhi: Oxford University Press, 1993.
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———. 1988. Development Planning: The Indian Experience. Delhi: Oxford University Press. Chandra, Nirmal Kumar. 1979. ‘Monopoly Capital, Private Corporate Sector and the Indian economy’, Economic and Political Weekly, Special Number, 14(30, 31, 32): 1243–72. ———. 1991. ‘Growth of Foreign Capital and Its Importance in Indian Manufacturing’, Economic and Political Weekly, Annual Number, 26(11/12): 679–90. Chandrasekhar, C.P. and Jayati Ghosh. 2002. The Market that Failed: A Decade of Neoliberal Economic Reforms in India. New Delhi: Leftword Books. Chaudhuri, Pramit. 1978. Indian Economy: Poverty and Development. London: Palgrave Macmillan. Desai, Ashok V. 1985. ‘Indigenous and Foreign Determinants of Technological Change in Indian Industry’, Economic and Political Weekly, Special Number, 20(45/47): 2081–94. Desai, V.V. 1971. ‘Pursuit of Industrial Self-Sufficiency: A Critique of the First Three Plans, Economic and Political Weekly, 1 May, 6(18): 913–16. Dobb, Maurice. 1960. An Essay on Economic Growth and Planning. New York: Monthly Review Press. Ghose, Aurobindo. 1972. ‘Monopoly in Indian Industry: An Approach’, Economic and Political Weekly, Annual Number, February. ———. 1974. ‘Investment Behaviour of Monopoly Houses’, Economic and Political Weekly, 26 October, 2 and 9 November, 9(43/44/45/46): 1813–24, 1868–76, and 1911–15. Ghosh, Jayati. 1995. ‘State Intervention in the Macroeconomy’, in Prabhat Patnaik (ed.), Macroeconomics. New Delhi: Oxford University Press. ———. 2004. ‘Changes in the World of Work’, Indian Journal of Labour Economic Conference, 46(4): 503–14. Government of India, Planning Commission. 1961. Third Five Year Plan. New Delhi: Planning Commission. Hazari, R.K. 1966. The Structure of the Corporate Private Sector: A Study of Concentration Ownership and Control. Bombay: Asia Publishing House. Kidron, Michael. 1965. Foreign Investments in India. New Delhi: Oxford University Press. Kurien, C.T. 1973. ‘Small Sector in New Industrial Policy’, Economic and Political Weekly, 14(9): 455–61. Mahalanobis, P.C. 1955. ‘The Approach of Operational Research to Planning in India’, Sankhya, December. Mazumdar, Dipak and Sandip Sarkar. 2006. ‘Employment Elasticity in Organized Manufacturing’, conference papers of, ‘India: Meeting the Employment Challenge’, Conference on Labour and Employment Issues in India, organized by the Institute for Human Development, 27–9 July, New Delhi. Mitra, Ashok. 1977. Terms of Trade and Class Relations: An Essay in Political Economy. London: Frank Cass and Co.
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Patnaik, Prabhat. 1972. ‘Disproportionality Crisis and Cyclical Growth’, Economic and Political Weekly, 7(5/7): 329–36. ———. 1973. Private Corporate Industrial Investment in India, 1947–67: Factors Affecting its Size, Cyclical Fluctuation and Sectoral Distribution, Unpublished D. Phil. Thesis, University of Oxford. ———. 1995a. ‘P.C. Mahalanobis and Development Planning in India’, in Prabhat Patnaik (ed.), Whatever Happened to Imperialism and Other Essays, Chapter 6, pp. 107–19. New Delhi: Tulika. ———. 1995b. ‘Some Problems of Financing Public Investment in India’, in Prabhat Patnaik (ed.), Whatever Happened to Imperialism and Other Essays, Chapter 7, pp. 120–34. New Delhi: Tulika. Patnaik, Prabhat and S.K. Rao. 1977. ‘Towards and Explanation of Crisis in a Mixed Underdeveloped Economy’, Economic and Political Weekly, 7 (6-7-8), February 9. Patnaik, Prabhat, S.K. Rao, and Amal Sanyal. 1976. ‘The Inflationary Process: Some Theoretical Comments’, Economic and Political Weekly, 11(43): 696–701. Patnaik, U. 1986. ‘The Agrarian Question and the Development of Capitalism in India’, Economic and Political Weekly, 21(18): 781–93. Raj, K N. 1966. ‘Price Behaviour in India, 1949–66: An Explanatory Hypothesis’, Indian Economic Review, New Series, 1(2, October): 56–78. RBI (1956), Report on Currency and Finance, RBI: Bombay, p. 127 Reserve Bank of India. 2012. Handbook of Statistics on the Indian Economy: 2011–12. Mumbai: Reserve Bank of India. Shirokov, G.K. 1973. Industrialisation of India. Moscow: Progress Publishers. Subrahmanian. K K. 1986. ‘Technology Import: Regulation Reduces Cost’, Economic and Political Weekly, 21(32): 1412–16. Thakurdas, Purushottamdas. (ed.). 1945. A Brief Memorandum Outlining a Plan of Economic Development for India. 2 vols. London: Penguin. Originally published as, The ‘Bombay Plan’ for India's Economic Development. Bombay: The Commercial Printing Press, 1944.
2 Regional Aspects of Indian Industrialization JAYAN JOSE THOMAS
India is a federation of 28 states and 7 union territories (UTs). In terms of population, many Indian states are similar to individual countries (Manipur, a small state, is as populous as Jamaica; Uttar Pradesh, the largest state, is as populous as Brazil).1 Given such size and diversity, balanced development of the various regions is a key development goal for India. This chapter is an examination of the regional aspects of India’s industrial and, particularly, manufacturing, growth. In 2009–10, manufacturing had a 16 per cent share in India’s gross domestic product (GDP), and the sector employed 52 million workers, or 11.4 per cent of the country’s total workforce (National Accounts Statistics and National Sample Survey Organization [NSSO] 2011). In comparison, China’s manufacturing sector contributed a share of 31 per cent in GDP (in 2006) and generated 104 million ‘regular’ jobs (in 2005).2 In 2009–10, the factory sector, or broadly, the organized manufacturing sector employed 11.8 million persons in India while the remaining 40.2 million manufacturing workers in the country were in the unorganized sector.3 Scholars have identified distinct phases in India’s industrial growth after Independence. These include the relatively fast industrial growth during the first 15 years of Indian planning (from the early 1950s to the mid-1960s), the industrial growth deceleration between the mid-1960s and late 1970s, and the revival of industrial growth since the 1980s. The performance of Indian industry from the start of economic reforms in the country in 1991–2 presents a mixed picture. The data from the
REGIONAL ASPECTS OF INDIAN INDUSTRIALIZATION
49
Annual Survey of Industries (ASI) on India’s factory sector shows fast rates of growth during the initial years of reforms. Subsequently, however, output growth decelerated and jobs were lost in most industries in India during the six years between 1996–7 and 2001–2 (See Figure 2.1 and Table 2.1). While the country’s industrial growth has Table 2.1 Annual Rates of Growth in Gross Value Added, Fixed Capital Stock, and Employment in India’s Factory Sector, 1959–60 to 2007–8 Period 1959–60 to 1964–5 1965–6 to 1972–3 1973–4 to 1978–9 1981–2 to 1990–1 1991–2 to 1997–8 1998–9 to 2001–2 2002–3 to 2007–8
No. of Years
Gross Value Added
Fixed Capital
Employment
6 8 6 10 7 4 6
8.7 5.8 9.4 7.3 10.8 –1.5* 15.8
13.0 8.0 7.6 7.8 9.4 4.2 7.4
4.8 2.7 4.7 0.3 3.4 –3.5 6.6
log GVA/FC
9.5
log Gross Value added log Fixed Capial Employment in millions
8.5 7.5 6.5 5.5 4.5 3.5
11.5 10.5 9.5 8.5 7.5 6.5 5.5 4.5 3.5
employment in millions
Source: Calculated using ASI, various issues. * Not statistically significant even at 10 per cent level. Note: Rates of growth calculated using semi-logarithmic regressions. The years 1979–80 and 1980–1 witnessed exceptionally slow growth and are therefore excluded from this analysis. The industrial growth deceleration during the 1990s began in 1996–7, but the period considered for analysis here begins in 1998–9. This is because of a change in the definition of the factory sector since 1998–9, which makes it difficult to compare the preand post-1998–9 data.
0 3 6 9 2 5 8 1 4 7 0 3 6 9 2 5 8 -6 -6 -6 -6 -7 -7 -7 -8 -8 -8 -9 -9 -9 -9 -0 -0 -0 59 962 965 968 971 974 977 980 983 986 989 992 995 998 001 004 007 9 1 1 1 1 1 1 1 1 1 1 1 1 1 1 2 2 2
Figure 2.1 Log Gross Value Added, Log Fixed Capital Stock, and Employment in Numbers in India’s Factory Sector, 1959–60 to 2007–8 Source: Calculated using ASI, various issues.
50
INDIAN INDUSTRIALIZATION
accelerated again from 2002–3, the onset of the global financial and economic crisis in 2007–8 has clearly affected the Indian industry. National Sample Surveys (NSS) provide information on total manufacturing employment in India, which includes employment in both the factory and the unorganized sectors. According to estimates using NSS, India’s manufacturing employment increased by 6.4 million between 1983 and 1993–4, by 4.4 million between 1993–4 and 1999–2000, and by 9.1 million between 1999–2000 and 2004–5. The impressive increase in manufacturing employment during the first half of the 2000s was largely on account of export-oriented industries such as garments, textiles, leather, and diamond cutting, as well as industries linked to construction (Thomas 2011). The report of the NSS for 2009–10 on employment and unemployment show a massive decline in manufacturing employment in India: a fall of 3.7 million jobs between 2004–5 and 2009–10 (from 564 million to 52 million manufacturing workers in the country). Jobs were lost in large numbers in the country’s export-oriented industries including garments, textiles, and diamond cutting—the very industries that triggered the employment expansion during the first half of the 2000s. These industries had been hit by the slowdown of demand in the wake of the global financial crisis.5 This chapter aims to understand the regional dimension of the industrial growth trends outlined above. An important feature of Indian industry is the relatively high concentration of its organized segment in the Maharashtra–Gujarat region. Historical factors have played a role in such regional concentration of Indian industry (this is examined in the third section of this chapter). At the same time, there had been a reduction in the regional concentration of India’s industrial growth from the mid-1960s onwards. Some of the steps initiated by the Indian state towards regional dispersal of industries as also the Green Revolution, which began in the countryside, aided this process (discussed in the fourth section). However, there appears to be a reversal of the regional concentration of the growth of factory sector output and investment during the 1990s and 2000s, the reasons for which are examined in the fifth section. The sixth section of this chapter studies the regional dimension of the debates on labour and industrial growth in India, while the seventh section discusses the political economy of industrial investments in India’s federal polity. The eighth section concludes the chapter.
REGIONAL ASPECTS OF INDIAN INDUSTRIALIZATION
51
TRENDS IN REGIONAL VARIATIONS OF INDUSTRIAL GROWTH Changes in Region-wise Shares in Value Added by, Investment by, and Employment in Factory Sector A feature that stands out in India’s industrial growth trends is the continued dominance of the western region of the country in factory production. The combined share of Maharashtra and Gujarat in the total value added by India’s factory sector was 36 per cent in 1959–62 and 37 per cent in 2005–8. These shares are much more than the combined share of these states in India’s population, which was only 14 per cent in 2004–5. Further, it appears that the concentration of industrial activities in Maharashtra and Gujarat is having increasingly strong spillover effects on the industrial sectors of neighbouring regions, including Goa and the union territories of Daman and Diu, and Dadra and Nagar Haveli (see Table 2.2 and Figure 2.2). The southern states of Tamil Nadu, Andhra Pradesh, and Karnataka have recorded marked improvements in industrial activity during the five decades covered by this study. The combined share of the four southern states in the total value added by the factory sector in India increased from only 17 per cent in 1959–62 to 25 per cent in 2005–8. The northern states, including Uttar Pradesh, Punjab, and Haryana, also increased their relative importance in Indian industry as their combined share in India’s total value added by the factory sector reached 19 per cent by 2005–8 (see Table 2.2 and Figure 2.2). However, during the same period, the eastern states of West Bengal and Bihar suffered a sharp decline in factory production. West Bengal’s share in the total value added by the factory sector fell from 20 per cent in 1959–62 to only 3 per cent in 2005–8 (see Table 2.2 and Figure 2.2). A broadly similar picture is obtained if we analyse the regionwise shares of investment (increment to fixed capital stock) over the years. The eastern and central-eastern regions, comprising Bihar, Jharkhand, West Bengal, Orissa, Madhya Pradesh, and Chhattisgarh, together received more than 40 per cent of the total investments into India’s factory sector until the mid-1960s (see Figure 2.3). A substantially large part of these investments were directed to heavy industries such as the manufacture of iron and steel during the early Five Year Plan periods, given the rich availability of minerals in this part of the
21.5 8.5 – 30.0 10.9 6.0 5.5 2.7 0 25.1 10.0 4.1 3.1 3.0 0.7 0.1 1.7 22.7 5.6 5.9 11.5
35.9 7.8 3.1 3.5 2.7 0 17.1 6.1 2.6 1.0 0.0 0.1 0.1 1.9 11.8 8.0 20.0 28.0
1989–92
25.7 10.2 –
1959–62
40.2 9.2 6.4 7.2 1.2 0.7 24.7 6.9 2.6 2.8 4.0 1.9 0.4 0.8 19.4 3.7 3.1 6.8
22.8 14.1 3.3
2005–8
Share in Gross Value Added
31.3 8.1 5.9 3.8 4.4 – 22.2 7.7 2.8 1.5 0.0 0.0 0.3 1.7 14.0 5.3 20.2 25.5
21.3 10.0 –
1959–62
23.4 11.8 10.2 5.1 3.3 – 30.4 9.6 4.8 3.1 3.1 0.7 0.2 1.7 23.2 4.4 9.2 13.6
14.9 8.5 –
1989–92
25.2 16.1 10.1 7.0 3.5 0.5 37.2 8.0 5.0 3.2 3.6 0.7 0.5 1.3 22.3 2.2 5.2 7.4
13.4 9.8 2.0
2005–8
Share in Employment
Shares of Different Regions in India’s Factory Sector for Various Years (in per cent)
Maharashtra Gujarat Goa, Daman & Diu, and Dadra & Nagar Haveli West Total Tamil Nadu Andhra Pradesh Karnataka Kerala Puducherry South Total Uttar Pradesh and Uttarakhand Punjab Rajasthan Haryana Himachal Pradesh Jammu and Kashmir Delhi North Total Bihar and Jharkhand West Bengal East Total
Table 2.2
14.44 5.9 7.3 5.1 3 0.1 21.4 17.2 2.3 5.6 2.1 0.6 1 1.4 30.2 10.8 7.7 18.5
9.4 4.9 0.14
2004–5
Share in Population
2.3 1.2 3.5 3.2 100
5.6 2.6 8.2 1.5 100
5.5 2.5 8 1.0 100
3.3 0.8 4.1 2.3 100
4.9 2.0 6.9 1.4 100
3.7 1.6 5.3 1.6 100
8 3.5 11.5 3.5 100
Source: Calculated using Annual Survey of Industries, various issues. Note: The decimals have been rounded off to the nearest tenth. Hence the sum total of shares for states may not exactly add up to the shares for the corresponding region.
Madhya Pradesh and Chhattisgarh Odisha Central-east Total North-east Total India
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INDIAN INDUSTRIALIZATION
45
West South North
Central-East East North-east
40
West
35 shares in %
30 South
25 20
North
15
East
10 Central-East North-east
5 0
5 2 8 9 2 6 9 6 3 0 8 0 3 7 1 4 5 -6 -6 -6 -6 -7 -7 -7 -8 -8 -8 -9 -9 -9 -9 -0 -0 -0 59 962 965 968 971 974 977 980 983 986 989 992 995 998 001 004 007 9 2 2 2 1 1 1 1 1 1 1 1 1 1 1 1 1 1
Figure 2.2 Shares of Different Regions in Total Gross Value Added by India’s Factory Sector, 1959–60 to 2007–08 (in per cent) Source: Calculated using Annual Survey of Industries, various issues.
West South North East + Central-east
50 45
shares in %
40
East+Central-East West
35 30 25 20
South North
15 10 5
19 60 -6 19 5 63 -6 19 8 66 -7 19 1 69 -7 19 4 72 -7 19 7 75 -8 19 0 78 -8 19 3 81 -8 19 6 84 -8 19 9 87 -9 19 2 90 -9 19 5 93 -9 19 8 96 -0 19 1 99 -0 20 4 02 -0 7
0
Figure 2.3 Shares of Different Regions in Total Investment into India’s Factory Sector, 1960–5 to 2003–8 (in per cent) Source: Calculated using Annual Survey of Industries, various issues.
REGIONAL ASPECTS OF INDIAN INDUSTRIALIZATION
55
country. However, industrial investments directed to the eastern and central-eastern regions were on a steep downhill since the early 1970s. West Bengal received a share of 18.1 per cent of the total investment in India’s factory sector during 1960–5, but this share declined to only 4 per cent during 1970–5. Investments received by the eastern and central-eastern regions were particularly low during the 1990s, their combined share dropping to less than 6 per cent during 1996–2001. At the same time, over the five decades since 1960, the western, southern, and northern states have noticeably increased their shares in overall factory sector investment in the country. Investments received by the western states, notably Gujarat, rose to very high levels during the 1990s. Gains by the Southern States in Factory Employment With respect to the growth in factory employment, the southern states have clearly overtaken the western states over the years. Between 1959–62 and 2005–8, while the combined share of the western states in total factory employment in India fell from 31 per cent to 25 per cent, the combined share of the southern states increased from 22 per cent to 37 per cent. During these five decades, Tamil Nadu has overtaken Maharashtra as the largest employer of factory workers; Andhra Pradesh, Karnataka, Haryana, and Punjab also registered significant expansion in factory employment. On the other hand, factory employment in the eastern states declined as drastically as they incurred losses in the output and investment of the factory sector (see Table 2.2 and Figure 2.4). Reversal to Greater Regional Concentration since the 1990s There is some evidence of dispersal of industrial activities during the three decades between 1959–62 and 1989–92. During these years, the western states’ shares in the value added by the factory sector and employment fell by 6 and 8 per cent points respectively. The shares of the eastern states, which too were dominant in Indian industry in the late 1950s, fell even more sharply. Correspondingly, the southern and northern states increased their relative importance in Indian industry (see Figure 2.5). In 1959–62, the three leading states, Maharashtra, West Bengal, and Gujarat, had a combined share of 56 per cent in
56
INDIAN INDUSTRIALIZATION
West-GVA South-GVA West-EMP South-EMP
45
shares in %
40 West-GVA
35
South-EMP
30
South-GVA 25 West-EMP
20 15
8 5 1 4 77 80 83 86 89 92 95 98 03 06 -6 -6 -7 -7 62 965 68 971 974 977 980 983 986 989 992 995 000 003 9 9 1 1 1 1 1 1 2 1 1 1 1 1 2 1
62
9-
5 19
Figure 2.4 Shares of western states and southern states in total employment and gross value added by India’s factory sector Source: Calculated using Annual Survey of Industries, various issues.
GVA
6
Employment Fixed Capit
in percentage points
4 2 0 –2 –4 1960s
1970s
1980s
1990s
2000s
–6
Figure 2.5 Changes in Percentage Points of the Shares of Western States in Gross Value Added, Employment and Fixed Capital Stock in India’s Factory Sector, over the Decades Source: Calculated using Annual Survey of Industries, various issues. Note: 1960s refer to 1959–62 to 1970–3; 1970s refer to 1970–3 to 1980–3; 1980s refer to 1980–3 to 1989–92; 1990s refer to 1989–92 to 1995–8; and 2000s refer to 1998–2001 to 2005–8
REGIONAL ASPECTS OF INDIAN INDUSTRIALIZATION
57
the total value added by India’s factory sector. By 1989–92, the top three states in the value added by the factory sector were Maharashtra, Tamil Nadu, and Uttar Pradesh, and their combined share was 42 per cent. During the 1960s, 1970s, and the 1980s, Tamil Nadu, Uttar Pradesh, Punjab, Haryana, Andhra Pradesh, and Karnataka emerged as major locations of industrial activity, thus reducing the dominance of the western region. The process of regional industrial dispersal appears to have reversed during the next two decades, the 1990s and 2000s, when the shares of Maharashtra and Gujarat in India’s value added by and investment in the factory sector registered sharp improvements (see Figure 2.5). Correspondingly, the shares of the eastern, northern, and southern states suffered a decline or, at least, remained stagnant. However, this process of regional concentration is limited to the output and investment of the factory sector. The picture is different in factory employment, as is the case in the unorganized sector. Region-level Dissociation between Output and Employment and between the Organized and the Unorganized Sectors The contribution of the southern states to India’s factory employment continued to rise through the 1990s and 2000s, even as they lost out to the western states in factory investment and output. This indicates that there is some degree of dissociation, at the regional level, between investment/output growth and employment generation in India’s factory sector. Regions that received large investments were not the ones that recorded fast expansion in employment. This dissociation has been observed to be even greater in the unorganized manufacturing sector. State-wise data on total manufacturing employment, which includes employment in both the organized and unorganized sectors, presents a picture of relatively high regional dispersal (see Table 2.3). The combined share of the eastern states in total manufacturing employment in India was 17.1 per cent (in 2009–10), much higher than these states’ contribution to the country’s value added by the factory sector (which was only 6.8 per cent in 2005–8). Despite the spectacular decline in factory production, West Bengal still recorded 6.6 million manufacturing workers in 2009–10, or 13 per cent of the total worker population of the country. Notably, West Bengal is ahead
58
INDIAN INDUSTRIALIZATION
Table 2.3
Workers in India’s Manufacturing Sector, State-wise, 2009–10
Maharashtra Gujarat Goa West Total Tamil Nadu Andhra Pradesh Karnataka Kerala Puducherry South Total Uttar Pradesh Rajasthan Delhi Haryana Punjab Jammu & Kashmir Uttarakhand Himachal Pradesh North Total Madhya Pradesh Odisha Chhattisgarh Central-east Total West Bengal Bihar Jharkhand East Total North-east, Total India Total
Numbers (in lakhs)
Share of Rural Workers (%)
Share of Manufacturing in Total Employment in the State (%)
State’s Share Manufacturing Sector Employment in India (%)
57.2 34.6 1.0 92.8 53.8 46.4 27.9 16.8 1.0 145.9 72.1 17.3 15.8 15.4 14.1 5.0 2.7 1.4 143.8 18.8 14.8 6.5 40.1 66.1 15.5 7.8 89.4 7.0 512
23.8 26.4 34.2 84.4 32.9 59.0 39.1 67.9 30.4 229.3 54.6 46.7 2.3 39.8 35.5 55.2 39.7 76.6 350.4 38.6 70.3 40.9 149.8 62.3 80.8 76.1 219.2
11.8 14.1 16.2 42.1 18.3 11.6 10.5 12.8 17.6 70.8 10.8 6.4 27.5 16.0 13.4 10.4 6.9 4.3 95.7 6.7 9.1 6.6 22.4 19.6 5.8 7.8 33.2
46.1
11.4
11.0 6.6 0.2 17.8 10.3 8.9 5.4 3.2 0.2 28.0 13.8 3.3 3.0 3.0 2.7 1.0 0.5 0.3 27.6 3.6 2.8 1.2 7.6 12.7 3.0 1.5 17.2 1.3 99.5
Source: Estimates based on NSSO (2011). Note: The decimals have been rounded off to the nearest tenth. Hence the sum total of shares for states may not exactly add up to the shares for the corresponding region.
of Maharashtra and Gujarat in terms of the number of manufacturing workers. Uttar Pradesh, with 7.2 million manufacturing workers, tops the list of Indian states on this count. It is to be noted here that compared to Maharashtra and Gujarat, a much higher proportion of manufacturing workers in West Bengal and Uttar Pradesh are rural
REGIONAL ASPECTS OF INDIAN INDUSTRIALIZATION
59
(and, therefore, are likely to be employed in less productive and more traditional activities) (Table 2.3). The NSS report on the unorganized manufacturing sector provides a clearer indication of the continued importance of West Bengal in India’s small-scale manufacturing. In 2005–6, the estimated numbers of unorganized manufacturing enterprises and workers in West Bengal—2.8 million and 5.5 million respectively—were the highest among all states in India. Uttar Pradesh comes second with 2.4 million unorganized manufacturing enterprises and 5.3 million unorganized manufacturing sector workers (see Table 2.4). Other states that recorded 2 million or more workers in the unorganized manufacturing sector were Tamil Nadu, Andhra Pradesh, Maharashtra, Odisha, and Karnataka.
Table 2.4
Manufacturing Enterprises and Workers in Indian States, 2005–6
States West Bengal Uttar Pradesh Andhra Pradesh Tamil Nadu Maharashtra Karnataka Odisha Madhya Pradesh Bihar Kerala Gujarat Rajasthan Jharkhand Assam Punjab Haryana Chhattisgarh Jammu & Kashmir Himachal Pradesh Delhi Uttaranchal India Total
No. of Enterprises (in ’000)
% Share in India
No. of Workers (in ’ 000)
% Share in India
2753 2359 1533 1482 1127 962 957 855 772 659 654 637 586 371 293 230 208 173 107 98 69 17071
16.1 13.8 9 8.7 6.6 5.6 5.6 5 4.5 3.9 3.8 3.7 3.4 2.2 1.7 1.3 1.2 1 0.6 0.6 0.4 100
5494 5288 2939 3370 2901 1974 2024 1741 1453 1391 1852 1295 949 632 601 544 458 319 165 457 148 36443
15.1 14.5 8.1 9.2 8.0 5.4 5.6 4.8 4.0 3.8 5.1 3.6 2.6 1.7 1.6 1.5 1.3 0.9 0.5 1.3 0.4 100.0
Source: Estimates based on NSSO (2007). Note: Statistics for some states and UTs are not given in this Table.
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INDIAN INDUSTRIALIZATION
Industrial Structures of Indian States For the discussion on industrial structures, groups of related twodigit industries are categorized into ‘industry groups’ (see Table 2.5). Chemicals, petroleum, and rubber products form the leading industry group in India with respect to the value added by the factory sector. Minerals, metals, and metal products—which include bricks, cement, glass, asbestos, iron, steel, and metal products ranging from bridges to cutlery—form the second largest group. With respect to factory employment, the industrial group comprising textiles, garments, and leather is the largest, followed by food and tobacco products (Table 2.5). India’s chemicals, petroleum, and rubber industries are highly concentrated in the western region. Maharashtra and Gujarat have a combined share of 64 per cent in the total value added by these industries in the country. Tamil Nadu is the leading region in India in the factory production of textiles, garments, and leather goods. In fact, these industries account for 43 per cent of Tamil Nadu’s factory employment. Automobiles and auto component industries in India are largely concentrated in Maharashtra, Haryana, and Tamil Nadu. Pune and Nashik in Maharashtra, Gurgaon in Haryana, and Chennai in Tamil Nadu have emerged as important automobile manufacturing clusters. Uttar Pradesh, Karnataka, Andhra Pradesh, and Maharashtra are the major producers of food and tobacco products in the country. In the mineral-rich states of Jharkhand and Chhattisgarh, the production of metals and non-metallic minerals is the most important industrial activity, accounting for 78 per cent and 93 per cent respectively of the total value added by these states’ factory sectors (see Table 2.5). Differences in Manufacturing Structures between the Organized and the Unorganized Sectors There are significant differences between the structures of the organized and the unorganized manufacturing sectors—in the country as a whole as well as in the individual states. In the total number of unorganized manufacturing sector enterprises in India, the combined share of three industry groups—food and tobacco products; textiles,
Structure Share in India Structure Share in India Structure Share in India Structure Share in India Structure Share in India Structure Share in India Structure Share in India Structure Share in India Structure Share in India
Maharashtra
Jharkhand
Chhattisgarh
Haryana
Uttar Pradesh
Andhra Pradesh
Karnataka
Tamil Nadu
Gujarat
Structure/ Share
States
100 23.0 100 15.8 100 9.3 100 6.7 100 5.7 100 5.4 100 4.3 100 2.2 100 3.9
All
5.8 14.7 3.1 5.4 7.9 8.0 17.9 13.2 19.9 12.5 25.7 15.3 6.1 2.9 2.1 0.5 0.9 0.4
Food and Tobacco
3.5 9.2 6.7 12.0 23.2 24.5 8.9 6.8 4.3 2.8 8.4 5.2 13.8 6.8 0.2 0.1 0.0 0.0
Textiles, Garments, and Leather 2.5 38.4 1.9 19.8 1.5 9.2 0.9 3.9 0.7 2.6 1.0 3.8 0.5 1.5 0.0 0.0 0.0 0.0
Wood and Furniture
2.9 23.0 1.4 7.5 3.9 12.4 2.8 6.5 4.7 9.2 3.2 6.0 1.4 2.1 0.4 0.3 0.1 0.1
Paper
41.6 30.5 65.4 33.0 13.1 3.9 14.6 3.1 24.7 4.5 17.4 3.0 4.3 0.6 1.7 0.1 8.7 1.1
Chemicals, Petroleum, Rubber, and Plastic 10.9 11.9 12.4 9.3 14.4 6.3 25.8 8.2 27.4 7.4 16.3 4.2 11.6 2.4 93.3 9.7 77.7 14.2
Minerals, and Metals
12.5 23.1 5.6 7.1 14.4 10.6 19.9 10.6 13.9 6.4 17.3 7.5 15.1 5.2 1.2 0.2 2.9 0.9
Machinery
(Continued)
19.3 43.2 1.4 2.1 18.9 17.0 7.0 4.5 1.5 0.8 7.1 3.7 46.9 19.6 0.2 0.1 5.3 2.0
Transport Equipment
Table 2.5 Industrial Structures of Selected States: Shares of Industries in Gross Value Added by the Factory Sectors of the States (structure) and Shares of States in Gross Value Added by the Industry in India (share), 2005–6 (in per cent)
Structure Share in India Structure
West Bengal
100.0 3.2 100
All
10.9 3.8 9.1
Food and Tobacco
16.1 5.9 8.8
1.2 2.5 1.5
Textiles, Wood and Garments, Furniture and Leather 3.3 3.7 2.9
Paper
25.2 2.6 31.4
Chemicals, Petroleum, Rubber, and Plastic 26.8 4.1 21.1
Minerals, and Metals
8.5 2.2 12.5
Machinery
3.0 0.9 10.3
Transport Equipment
Source: Calculated using Annual Survey of Industries Note: The two-digit industries (according to National Industrial Classification, 2004) that constitute each industry group are: food and tobacco: 15 and 16; textiles, garments, and leather: 17, 18, and 19; wood, wood products, furniture, and jewellery: 20 and 36; paper products, publishing, and printing: 21 and 22; chemicals, petroleum, rubber, and plastic: 23, 24, and 25; minerals, metals, and metal products: 26, 27, and 28; machinery and equipment: 29, 30, 31, 32, and 33; and transport equipment: 34 and 35.
India Total
Structure/ Share
(Continued)
States
Table 2.5
REGIONAL ASPECTS OF INDIAN INDUSTRIALIZATION
63
garments, and leather; and wood products and furniture—was 86 per cent in 2005–6. Notably, these three industry groups only had a 46 per cent share in India’s factory employment and 19 per cent share in the value added by the factory sector in 2005–8. Such differences in structures are crucial to understanding the dissociation, at the regional level, between the organized and the unorganized manufacturing sectors in India (see Table 2.6). West Bengal and Uttar Pradesh are the clear leaders in India in terms of the number of unorganized manufacturing enterprises, especially in food and tobacco products; textiles, garments, and leather; and wood products and furniture. Gujarat and Maharashtra account for the largest production of chemicals, petroleum, and rubber products in the factory sector; yet, the unorganized sector production of chemical industry has only a marginal presence in these states. At the same time, there is a heavy concentration of unorganized enterprises producing chemicals, rubber, and paper products in Tamil Nadu. The unorganized sector production of metals and minerals is highly concentrated in Odisha. Uttar Pradesh, Maharashtra, and Tamil Nadu are the major states in the unorganized sector production of machinery and transport equipment (see Table 2.6). THE HISTORICAL CONTEXT6 At the time of India’s Independence in 1947, factory-based industrial production in the country had been limited mainly to Bombay and Calcutta, and also to a few smaller centres including Madras and Ahmedabad (Morris 1983). Calcutta had been the capital of British India until 1911, and a major entrepôt for imperial trade. Yet many aspects of colonial domination did depress the conditions for industrial capitalism in Calcutta’s vast hinterland. On the other hand, the emergence and growth of Bombay during the colonial period followed quite a different trajectory. Such historical differences explain, to a large extent, the lead enjoyed by the western region relative to the eastern states in economic growth even today. Some of these differences are elaborated below. First, the system of land tenure relations that came to be established in eastern India due to the intervention of British colonialism was called the zamindari system, in which agricultural surplus was appropriated by the landlords (zamindars) and a parasitic set of
Structure/ Share
All
20.7 4.3 18.1 2.2 23.2 6.3 34.9 9.9 44.3 7.9 28.0 12.2 36.2 6.4 38.5 19.6 5421
Food and Tobacco
42.7 8.1 46.3 5.1 37.1 9.3 40.7 10.5 29.6 4.8 40.8 16.3 16.2 2.6 31.9 14.8 5926
Textiles, Garments, and Leather 18.8 6.4 20.1 4.0 14.0 6.3 17.0 7.9 10.4 3.0 17.8 12.8 37.0 10.8 20.7 17.4 3290
Wood and Furniture
1.7 6.6 0.9 2.0 7.1 36.5 1.1 6.0 1.0 3.4 0.9 7.5 0.7 2.4 1.7 16.8 286
Paper
1.7 3.8 2.5 3.3 12.1 36.2 0.8 2.4 8.2 15.9 0.4 1.9 0.2 0.3 2.2 12.1 496
Chemicals, Petroleum, Rubber, and Plastic 10.0 8.7 6.8 3.4 5.0 5.7 4.7 5.6 5.3 3.9 9.1 16.5 68.7 50.7 3.7 7.8 1297
Minerals, and Metals
3.8 14.1 5.2 11.4 1.3 6.2 0.6 3.1 1.1 3.5 2.3 17.8 0.5 1.7 1.1 9.8 301
Machinery
0.6 16.3 0.1 1.6 0.3 9.6 0.1 3.3 0.1 3.2 0.5 29.2 0.1 2.7 0.1 5.2 40
Transport Equipment Equipment
Source: Estimates based on NSSO (2007). Note: The two-digit industries (according to National Industrial Classification, 2004) that constitute each industry group are: food and tobacco: 15 and 16; textiles, garments, and leather: 17, 18, and 19; wood, wood products, furniture, and jewellery: 20 and 36; paper products, publishing, and printing: 21 and 22; chemicals, petroleum, rubber, and plastic: 23, 24, and 25; minerals, metals, and metal products: 26, 27, and 28; machinery and equipment: 29, 30, 31, 32, and 33; and transport equipment: 34 and 35.
Structure 100 Share in India 6.6 Gujarat Structure 100 Share in India 3.8 Tamil Nadu Structure 100 Share in India 8.7 Andhra Structure 100 Share in India 9.0 Karnataka Structure 100 Share in India 5.6 Uttar Pradesh Structure 100 Share in India 13.8 Orissa Structure 100 Share in India 5.6 West Bengal Structure 100 Share in India 16.1 All enterprises in India, 17071 numbers in thousands
Maharashtra
States
Table 2.6 Industry-wise Unorganized Manufacturing Enterprises in Selected States: Shares of Industries in the Total Number of Enterprises in the States (structure) and Shares of States in the Total Number of Enterprises in the Industry in India (share), 2005–6 (in per cent)
REGIONAL ASPECTS OF INDIAN INDUSTRIALIZATION
65
intermediaries, leaving the tenant cultivators with bare subsistence.7 Such a system impeded yield-enhancing investments and slowed down the growth of agricultural productivity in Bengal, Bihar, Orissa, and Uttar Pradesh. On the other hand, the ryotwari or mahalwari system of land settlement that existed in Bombay and Madras (covering the country’s western and southern regions), as well as in Punjab, was less exploitative of the cultivators, and hence more conducive to the growth of agricultural productivity (Bharadwaj 1982).8 Second, the ‘deindustrialization’ of India during the colonial period was particularly marked in the country’s eastern region.9 Habib (1975: 38–9) shows that there was a sharp decline in urban population in a number of towns in eastern India including Patna, Dacca, Murshidabad, and Lucknow. Third, there are crucial differences in the nature of entrepreneurship that emerged in the western and eastern regions of the country from the nineteenth century. During the colonial period, industry and commerce in eastern India was largely under the control of the Europeans (Bagchi 1972: 174–81).10 Industrial development of Bengal, since the middle of the nineteenth century, was more of a port-enclave type with export-oriented industries in Calcutta having little economic impact on Bengal’s hinterlands (Bharadwaj 1982). By the end of World War II, the Indian business community known as Marwari, which had migrated from Rajasthan to Calcutta, became dominant in Bengal’s business. However, as Banerjee and Ghosh (1988) note, Marwari businessmen remained isolated from the politics of Bengal, and developed few organic links with the region. On the other hand, Indian business groups had been important players in Bombay’s commerce of the nineteenth century, including shipbuilding and cotton and opium trade. These merchant communities later ventured into manufacturing, beginning with the setting up of the cotton textile mill industry in Bombay in the 1850s (Tripathi and Jumani 2007).11 Business communities that first emerged during the nineteenth century continue to own many of the large business houses in India even today. Historical evidence suggests that the whole of south India lagged far behind Bombay and Bengal in the development of factory industry until 1914 (See Bagchi 1972: 188–91; Baker 1984: 334–420; Tyabji 1991: 239).
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INDIAN INDUSTRIALIZATION
REGIONAL DISPARITIES UNDER STATE-LED DEVELOPMENT Indian Planning and Measures for Balanced Growth of Regions Indian planning tried to address the issue of regional disparities in industrial growth, but its success was only partial. As Bhagwati and Chakravarty (1969: 28) note, early Indian planning models did not, in fact, devote sufficient attention to questions of spatial planning. However, since the late 1960s (or the Fourth Five Year Plan period), India’s planners took some concrete steps towards regional dispersal of industrial development. For instance, based on the recommendations of the Pandey and Wanchoo committees set up in 1968, the government devised central investment subsidy and concessional finance schemes to selected backward districts in the country (Das 1993; Srivastava 1994). But the nature of private investments in India worked against the goal of balanced regional growth. It is well known that during the planning era, a few oligarchic business houses could distort the licensing regime, as they managed to acquire a large share of licenses issued, and thus even prevent the entry of smaller entrepreneurs (Chandrasekhar 1988; Ghosh 1974; Hazari 1966). Investments by these large business houses were regionally concentrated. Gujarati business houses invested largely in Maharashtra and Gujarat; Punjabi entrepreneurs invested in Punjab and Delhi; Parsi investments were directed mainly towards Maharashtra and Bihar; and investments by the southern business houses were primarily in the southern region. Further, the Marwari business houses were redirecting their investments from West Bengal to Maharashtra, Gujarat, and Uttar Pradesh (Banerjee and Ghosh 1988). Further, there were severe drawbacks in the implementation of government policies for regional industrial dispersal. Banerjee and Ghosh (1988) show evidence for discrimination shown by the licensing authorities against investment proposals in the eastern region.12 There were regional imbalances in the assistance disbursed by financial institutions. Four advanced states—Tamil Nadu, Gujarat, Maharashtra, and Gujarat—received 42 per cent of the total disbursements made under the Central Investment Subsidy Scheme until 1978–9. Most of the districts which received investment under the scheme were either close to existing industrial centres or were located
REGIONAL ASPECTS OF INDIAN INDUSTRIALIZATION
67
in the major roads connecting industrial centres (Das 1993; Srivastava 1994). Green Revolution, New Capitalist Classes, and Regional Growth in India A number of policy-level and political changes in India from the mid-1960s triggered the emergence of new capitalist classes in the country, with important implications for regional growth. The foremost among these changes was the Green Revolution—the use of high yielding varieties of crops and other supportive measures to accelerate foodgrain production in the country. The impact of the Green Revolution was highly uneven across regions and crops. During the early Green Revolution period (roughly between the mid-1960s and the late 1970s), the wheat-growing regions of Punjab, Haryana, and western Uttar Pradesh prospered. During the later Green Revolution period (the 1980s), there was greater regional and crop-wise spread of the new agricultural technologies. The rice-cultivating regions of West Bengal, Tamil Nadu, and Andhra Pradesh were among the major beneficiaries of this phase (Rao and Storm 1998). The agricultural surplus generated during the Green Revolution was the catalyst for the creation of a new class of regional capitalists in several regions of the country by the 1980s (Baru 2000). In fact, such successful entrepreneurs with a farming background form the ranks of India’s new capitalists, writes Damodaran (2008). In Andhra Pradesh, rural capitalists ventured into diverse industrial areas including cement, sugar, pharmaceuticals, and electronics since the 1970s (Baru 2000).13 In Tamil Nadu, the ‘pump-set revolution’ (extremely rapid growth of private lift irrigation) that began in the 1970s brought about a positive transformation to that state’s agriculture (Harris-White and Janakarajan 2004; Jayaraj and Nagaraj 2006).14 In turn, faster agricultural growth provided the stimulus to the manufacture of a range of products, from pump-sets to garments (Vijayabaskar 2001; Chari 2000). The facilitative roles played by the state governments and publicsector banks in the emergence of the new capitalist classes need to be highlighted here. The policy of ‘social banking’ in India, which followed the nationalization of large commercial banks in 1969, directed credit to priority sectors, including agriculture and small-scale industries
68
INDIAN INDUSTRIALIZATION
(see Ramachandran and Swaminathan 2005). Although its benefits have been uneven, subsidized credit did contribute to the growth of new industrial clusters—as in the case of the garment industry in Tiruppur and the power looms in Surat (see Chari 2000; Patel 2006). Further, several state governments began taking active interest in promoting regional capitalists, especially with the increasing importance gained by regional political parties in Indian politics.15 ECONOMIES OF SCALE AND REGIONAL CONCENTRATION SINCE THE 1990S A notable feature observed in the section, ‘Trends in Regional Variations in Industrial Growth,’ has been the reversal of the greater regional concentration in Indian factory sector’s output (value added) since the 1990s. To a large extent, this feature can be explained as an outcome of the forces of economies of scale. According to Myrdal (1957: 26), in the absence of strong state intervention, ‘the play of forces in the market normally tends to increase rather than to decrease the inequalities between regions’. Once growth has started in certain regions, ‘the ever increasing internal and external economies…fortified and sustained their growth at the expense of other localities and regions’ (Myrdal 1957: 26), setting off what has been described in literature as a ‘cumulative cycle of growth differences’ (Kaldor 1981). The size of the market is an important determinant of the realization of economies of scale. This suggests a positive association between rate of growth of labour productivity and rate of growth of output (as has formally been stated in Verdoorn’s law) (Kaldor 1966). Further, according to Kaldor (1972: 392), ‘capital accumulation can always be speeded up—or rather it automatically gets speeded up, with a faster growth of production’. Therefore, regions that achieve faster expansion of output—possibly due to favourable historical factors—are also the very regions that gain the lead in productivity and investment. These regions, thus, build advantages in a cumulative cycle of regional growth differences. The theories of cumulative causation pioneered by Kaldor and Myrdal have reappeared in the recent research on spatial agglomeration advanced by Paul Krugman, Michael Porter, and W. Brain Arthur (Martin 1999). According to this literature, the forces of increasing returns that lead to spatial agglomeration of economic activities
REGIONAL ASPECTS OF INDIAN INDUSTRIALIZATION
69
include externalities due to labour market pooling, specialist suppliers of intermediate goods, and technological spillovers (Krugman 1991). Empirical Evidence from Indian States The industrial sectors of Maharashtra and Gujarat have benefited from favourable historical factors and from well-directed public and private investments after Independence. From the 1980s, chemicals and petrochemicals emerged as the fastest-growing industrial group in the country, and Maharashtra and Gujarat were the front runners in this chemicals-led industrial growth.16 Thomas (2003) showed that Maharashtra and Gujarat, which realized the potential economies of scale in the chemical industry, were the gainers in a cumulative cycle of regional growth differences in India’s factory sector between 1959–60 and 1997–8. This chapter shows further evidence of the cumulative cycle of regional growth differences in India’s factory sector during the period 1998–9 to 2007–8. As Figure 2.6 shows, states that have large and rapidly growing industrial sectors are also the ones that receive very large investments. With the combination of large size (in terms of shares at the national level) and fast growth, the factory sectors of Maharashtra and Gujarat are clearly the leaders in the cumulative cycle of regional growth differences in India during 1998–2008. Their contribution to overall factory sector’s growth at the national level is far bigger than that of any other Indian state (see Figure 2.7). On the other hand, the performance of the eastern states fell below the Indian average. During 1998–2008, rates of growth in the value added by the factory sector and fixed capital have been lower than the national average in West Bengal and Jharkhand, while in Bihar the growth of value added by the factory sector has been statistically insignificant (see Figure 2.6). The direction of foreign direct investment (FDI) in India since 1991 indicates that FDI shows a high preference for the better-developed regions or regions that are rich in mineral or other resources.17 There is a high degree of regional concentration in high-technology industries as well. Karnataka, Maharashtra, and Tamil Nadu lead the country in information technology exports (Table 2.7). In fact, the literature too suggests the possibility of geographical clustering of related firms in knowledge-intensive industries because such
70
INDIAN INDUSTRIALIZATION
Growth of FC, in %
9 8
Bihar
7
TN
6
Daman Gujarat Goa Maharashtra INDIA
5
Karnataka
WB
4 3
UP
2 0
2
4
6
8
10
12
14
16
18
20
Growth of GVA, in %
contr. to FC growth, %
Figure 2.6 Rates of Growth of Gross Value Added and Fixed Capital Stock in the Factory Sectors of Indian States, 1998–9 to 2007–8 (in per cent) Source: Calculated using Annual Survey of Industries, various issues. Notes: TN = Tamil Nadu, WB = West Bengal, and UP = Uttar Pradesh. The names of only selected states (especially those that show some interesting trends with respect to the analysis in this chapter) are given in this figure. This figure contains data relating to 22 Indian states or UTs. Please also see Appendix 2A.
20 18 16 14 12 10 8 6 4 2 0
MAH
GUJ
TN AP UP WB HAR
0
5
KAR
10
15
20
contr. to GVA growth, %
Figure 2.7 Contribution of Indian States to the Growth of Gross Value Added and Fixed Capital Stock in India’s Factory Sector, 1998–9 to 2007–8 (in per cent) Source: Calculated using Annual Survey of Industries, various issues. Notes: Contribution of State to Growth in India = Share of State in India × Rate of Growth of the Particular Variable in the State. The names of only selected states (especially those that show some interesting trends with respect to the analysis in this chapter) are given in this figure. This figure contains data relating to 25 Indian states or UTs. Please also see Appendix 2A.
25
REGIONAL ASPECTS OF INDIAN INDUSTRIALIZATION
71
Table 2.7 Shares of Selected Indian States in Total FDI Approvals, Total IT Software and Services Exports, and Total Population of India Indian States
Maharashtra Delhi Tamil Nadu Karnataka Gujarat Andhra Pradesh Madhya Pradesh Odisha West Bengal Uttar Pradesh Haryana Rajasthan Punjab Kerala Himachal Pradesh Bihar Chhattisgarh Assam India
% share in India in: FDI Approvals
IT Software and Services Exports
Population
Aug. 1991 to Dec. 2007
2003–4
2001
19.3 11.7 8.4 8.3 4.3 5.3 3.1 2.8 2.7 1.6 1.4 1.0 1.9 0.6 0.4 0.25 0.8 0.01 100.0
17.2 6.0 14.0 33.4 0.3 9.7 0.2 0.6 2.8 6.1 8.6 0.3 0.3 0.5 0.0 – 0.0 – 100.0
9.4 1.4 6.1 5.1 4.9 7.4 5.9 3.6 7.8 16.2 2.1 5.5 2.4 3.1 0.6 8.1 2.0 2.6 100.0
Source: Ministry of Commerce and Industry, Department of Industrial Policy and Promotion; Lok Sabha Unstarred Question No. 3136, dated 13 August 2004, cited in www. indiastat.com.
clustering offers opportunities for exchange of tacit knowledge and for collective learning (Maskell and Malnberg 1999). In sum, there are very strong trends towards regional concentration of industrial and economic activities in India since the 1990s. Such trends arise as a consequence of economies of scale, both due to the nature of private and foreign capital that show a preference for advanced regions, as well as due to the tendency shown by technologically advanced industries for clustering.
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INDIAN INDUSTRIALIZATION
LABOUR AND INDUSTRIAL GROWTH: A REGIONAL DIMENSION India’s state-led industrialization did face a serious limitation in absorbing the large labour reserves in the country. The growth of India’s factory sector since the 1980s has been described as jobless. This is because even though the growth of output and investment has been relatively fast, employment growth has been meagre in the country’s factory sector during a good part of the 1980s, 1990s, and even the 2000s. The total number of persons employed by India’s factory sector remained almost unchanged for two decades—7.77 million in 1980–1 and 7.75 million in 2001–2. This section discusses labour and industrialization in India, thereby bringing in a regional dimension to the important debates on this topic. Jobless Growth: Whether Due to Labour Market Rigidity or the Restructuring of the Textile Industry A view that has gained much popular acceptance is that the ‘jobless’ nature of India’s factory sector growth is due to the rigidity in the country’s labour market, which, in turn, is because of labour laws that restrict employers’ ability to hire and fire workers at will (Besley and Burgess 2004; Fallon and Lucas 1993). Studies have, in particular, identified Industrial Disputes Act (IDA), 1947 and its amendments in 1972, 1976, and 1982 as the sources of labour market rigidity in the country. However, some scholars have contested the above-referred link between labour laws and India’s manufacturing growth. Papola and Pais (2007) point out that IDA is applicable to only 2.6 per cent of the total workforce and 5.7 per cent of all hired workers in India. As they further argue, more than 90 per cent of India’s working population in the unorganized or informal sector is not protected by any labour regulations, nor are these workers covered by any provision for social security (Papola and Pais 2007). This chapter raises further questions on the arguments linking labour market rigidity and the jobless growth in India’s factory sector. To begin with, job losses in the factory sector in India during the 1980s occurred mainly in two industries (textiles and food products) and in three states (West Bengal, Maharashtra, and Gujarat). Despite the introduction of labour laws, factory sector jobs were generated
REGIONAL ASPECTS OF INDIAN INDUSTRIALIZATION
73
in fairly large numbers in states such as Tamil Nadu, Punjab, and Andhra Pradesh, and in industries such as chemicals (see Kannan and Raveendran 2009; Thomas 2002). In fact, the sharp slowdown in growth of factory employment in India during the 1980s is closely linked to the stagnation in cotton and jute textile industries. The organized sector cotton textile industry in India was on a path of gradual decline since the 1960s, and this is attributed to a number of reasons, including the absence of technological modernization in the industry and the slow expansion in domestic demand (Chandrasekhar 1984). During the early 1980s, workers’ unions carried out major strikes in Bombay, Ahmedabad, and other centres of textile production, demanding higher wages and better working conditions. Employers responded to these strikes by closing down textile mills in these cities in large numbers (D’Monte 2002).18 A similar crisis hit the jute industry in West Bengal, leading to severe job losses in that state (Gooptu 2007). However, the cotton textile industry in India did not just die out, but continued to survive by restructuring itself. Weaving activity shifted almost entirely to the unorganized sector, with significant expansion of power looms across the country. The spinning-mill industry continued to grow in the organized sector, with the southern states— especially Coimbatore in Tamil Nadu—becoming its new growth-pole (Leadbeater 1993; RoyChowdhury 1995). A garments-manufacturing industry, largely targeting the export markets, emerged in a big way since the 1980s in a few centres, notably in Tiruppur in Tamil Nadu and Ludhiana in Punjab. Weakening Position of Labour in India since the 1990s A major feature observed in India’s labour–capital relations since the 1980s is the growing dominance of capital over labour. The big losers in the 18-month-long strike in the Mumbai cotton textile industry during 1982–3 were the mill workers who had to pay for the strike with their jobs and livelihoods (Chandravarkar 2004; D’Monte 2002). From the 1990s, with the onset of economic reforms, labour in India has been pushed to an even more subordinate position. Trends in the growth of factory employment in the country indicate the growing flexibility in India’s labour market during these years. Employment in almost all constituent two-digit industries in India’s factory sector fell
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between 1996–7 and 2001–2, a period of industrial recession in the country.19 There are two possible reasons for such observed increase in flexibility in India’s labour market. First, beginning with the 1990s, the central and state governments in India, eager as they are to project a business-friendly image, have been rather lax in the implementation of labour regulations (D’Souza 2006; Harris-White 2003; Papola and Pais 2007). Second, contract workers as a share of all workers in India’s factory sector increased from 20.4 per cent in 2000–1 to 30 per cent in 2006–7 (data from the Labour Bureau, Annual Survey of Industries). Another important change that had occurred since 1991 is the growing informalization of the labour force. The estimates of National Commission for Enterprises in the Unorganized Sector (NCEUS) (2007: 4, Table 1.1) using NSS data showed that in 2004–5, out of India’s 458 million workers, 423 million (92.4 per cent) were informal workers—394 million from these were employed as informal workers in the informal sector and 29 million were employed as informal workers in the formal sector. Virtually the entire increase of 60.5 million new jobs in India between 1999–2000 and 2004–5 were of informal workers. This included 52 million new workers in the informal sector and 8.6 million new informal workers in the formal sector (NCEUS 2007: 4, Table 1.1). State-wise Trends in Employment Growth and Labour Conditions An analysis of state-wise data on various aspects of industrial labour confirms the tendencies discussed above (see Tables 2.8, 2.9, 2.10, and 2.11). Across the Indian states, a vast majority of the workforce comprising casual workers in urban and rural areas, contract workers, and female workers are paid extremely low wages. In Maharashtra, the wages of female casual labourers in rural areas are approximately one-tenth of the wages of directly employed male workers in the factory sector (2004–5 data based on NSSO [2006] and Annual Survey of Industries). Female wages are much lower than male wages across states and across various segments of the labour force. Employing workers on a contract basis, employing workers who are poor migrants from other, distant states, and farming out labour-intensive operations to the unorganized sector are some of the strategies
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Table 2.8 Net Increase in Factory-sector Employment in Indian States over the Decades (numbers in thousands) State Gujarat Maharashtra West Total Tamil Nadu Andhra Pradesh Karnataka Kerala South Total Uttar Pradesh and Uttarakhand Punjab Rajasthan Himachal Pradesh Jammu & Kashmir Haryana Delhi North Total Madhya Pradesh and Chhattisgarh Odisha Central-east, Total West Bengal Bihar and Jharkhand East Total North-east, Total India
1960s
1970s
1980s
1990s
2000s
124 256 380 277 126 130 57 590 126 42 58 13 7 – 45 291 94 64 158 131 77 208 9 1763
223 279 502 237 373 115 62 787 376 110 89 9 12 85 31 712 127 43 170 51 102 153 27 2407
–21 –96 –117 154 116 36 –10 296 –5 142 49 29 –15 57 2 259 61 24 85 –175 –14 –189 –2 332
202 261 463 284 303 152 68 807 14 74 47 15 16 78 17 261 88 25 113 60 –49 11 29 1726
175 73 248 480 113 184 45 822 178 159 87 36 22 13 2 497 –1 30 29 –100 –40 –140 39 1714
Source: Calculations using Annual Survey of Industries, various issues. Notes: 1960s: 1959–62 to 1970–3; 1970s: 1970–3 to 1980–3; 1980s: 1980–3 to 1989–92; 1990s: 1989–92 to 1995–8; 2000s: 1998–2001 to 2005–8. The decimals have been rounded off and statistics for some states and UTs are not given in this Table. Hence the sum total of shares for states may not exactly add up to the shares for the corresponding region.
adopted by employers to cut labour costs. There are many similarities as well as differences across Indian states in labour conditions. Tamil Nadu tops the list of Indian states with respect to the creation of new factory employment during the 1990s and 2000s—an increase of 0.76 million new factory jobs in this state during this period. Newly added manufacturing employment in Tamil Nadu is overwhelmingly in the organized sector, and in a wide range of industries, including automobiles, machinery, textiles, and garments. The share of contract
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Table 2.9 Net Increase in Employment across Indian States, 1993–4 to 2009–10 (amounts in lakhs [0.1 million]) State
1993–4 to 2009–10 Nonagricultural
Uttar Pradesh and Uttarakhand Maharashtra West Bengal Andhra Pradesh Haryana Madhya Pradesh and Chhattisgarh Bihar and Jharkhand Delhi Punjab Gujarat Karnataka Odisha Rajasthan Jammu & Kashmir Tamil Nadu Assam Kerala Himachal Pradesh Goa Seven Northeastern states India
2004–5 to 2009–10
Manufacturing Manufacturing
1979–82 to 2005–8 Factory Sector
148
24.9
–10.4
1.9
93 59 60 27 54
14.9 13.7 13.2 9.6 8.1
–2.1 9.9 2.5 3.1 –3.5
3.3 –0.4 4.2 0.9 0.9
85
8
–4.8
–0.9 0.2 2.3 3.8 3.4 0.6 1.3 0.4 7.6
23 26 38 42 29 63 12 42 18 33 7.1 2 11.8
6.4 5.9 5.5 4.3 4.3 3.9 3.4 3.3 1.1 0.5 0.5 0.4 0.6
2.9 –0.4 –8 –0.5 –4.3 –6.7 –0.4 –11 0.4 –1.9 –0.5 0.4 –0.2
875
127
–37
1.1 0.5
34.4
Source: Calculated using NSSO (1997, 2006, 2011).
workers in Tamil Nadu’s factory sector workforce was only 14 per cent in 2006–7. Tamil Nadu has a well-functioning system of public distribution system (PDS) for food and the state government intervenes effectively in health and other social sectors. The combination of these factors provides some degree of bargaining power to workers in this state, as can be seen, for instance, in the relatively high rural wages (see Tables 2.8, 2.9, 2.10, and 2.11). But the experience is very different in most of the other Indian states including, notably, Maharashtra and Gujarat. Despite attracting large
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Table 2.10 Per capita Income, Wages of Factory Workers, and Wages of Rural Male Casual Workers in Indian States in 2009–10, as Indices with Index for India as a whole = 100 State
Maharashtra Gujarat Goa Tamil Nadu Kerala Karnataka Andhra Pradesh Haryana Punjab Uttarakhand Himachal Pradesh Jammu & Kashmir Rajasthan Uttar Pradesh Chhattisgarh Odisha Madhya Pradesh West Bengal Jharkhand Bihar Sikkim Tripura Meghalaya Assam India
Per Capita Income
Wages of Factory Workers
Wages of Casual Workers, Rural Males
170 145 293 139 138 111 108 164 129 122 121 79 70 48 77 71 59 90 68 34 107 99 88 60 100
137 101 168 91 73 111 81 120 79 104 87 76 88 90 110 122 110 95 199 57 78 30 97 66 100
85 86 118 130 223 95 114 144 132 120 139 155 130 96 70 80 73 87 102 80 123 106 119 93 100
Source: Calculated using NSSO (2011), Annual Survey of Industries, and data on per capita incomes of states from Reserve Bank of India website, www.rbi.org.in/scripts/ publications.aspx?publication=Annual, last accessed on 5 June 2012. How to read the table: The indices for Maharashtra, for instance, given in this table show that if the average per capita income for the country as a whole had been Rs 100, then the per capita income of Maharashtra would be Rs 170 in 2009–10. Also wages of rural male casual workers in Maharashtra would be Rs 85 if the corresponding average wages in the country as a whole had been Rs 100.
industrial investments, the generation of manufacturing employment has been rather modest in these states. This is possibly because of the highly capital-intensive nature of their industrial sectors.20 The share of contract workers within factory workers is relatively high in the two
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Table 2.11 Contract Workers, Man-days Lost due to Industrial Disputes, and Registered Trade Unions, across Indian States, 2006–7
Andhra Pradesh Assam Bihar Gujarat Haryana Himachal Pradesh Karnataka Kerala Madhya Pradesh Maharashtra Nagaland Odisha Punjab Rajasthan Tamil Nadu Tripura Uttar Pradesh West Bengal Pondicherry India
Ratio of Contract Workers to Total Factory Workers, 2006–7 (in per cent)
Man-days Lost due to Industrial Disputes and Other Reasons, 2007 (in ’000)
Registered Trade Unions, 2006 (in numbers)
53.6 20.9 55.9 34.9 45.8 23.5 16.0 14.5 27.5 34.1 74.8 36.2 31.2 33.9 14.2 67.2 34.9 22.3 25.6 30.0
342 29 131 97 48 9 94 1708 12 1 – 10 49 970 1428 – 51 29730 – 34763
– 1244 – 3048 1545 745 1811 9879 – 8043 47 2382 4942 6782 282 – – 1059 42917
Source: Government of India (2010a: 40, 2010b: 38–9, 2010c: 14).
states. The extremely low number of man-days lost due to industrial disputes recorded in Maharashtra in 2007 is perhaps an indication of the high degree of control exerted by capital over labour. Finally, despite being two of the richest states in the country, Maharashtra and Gujarat are in the bottom league among Indian states in respect to the wages of casual workers in rural areas (See Tables 2.8, 2.9, 2.10, and 2.11). Uttar Pradesh and Uttarakhand combined together accounted for 2.5 million of the 12.7 million new jobs generated in the manufacturing sector in India between 1993–4 and 2009–10. However, only a small fraction of these new jobs (0.2 million) were in the factory sector.21
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Chhattisgarh and Odisha have received large investments in recent years on account of their mineral wealth. The meagre employment generation from such investments is a major factor behind the continued underdevelopment of this region. Eastern Region: Fall in Factory Jobs, Rise in Unorganized Sector Jobs The eastern and central-eastern states, including West Bengal, Bihar, Jharkhand, Madhya Pradesh, Chhattisgarh, and Odisha, recorded negative or very low rates of employment growth in the factory sector during the 2000s. Yet, these very states have been in the top league among other Indian states with respect to the expansion in overall manufacturing employment between 1993–4 and 2009–10. Thus, in terms of manufacturing employment growth, there is dissociation in these states between the organized and unorganized sectors. By way of illustrating this point further, it has to be noted that West Bengal lost 0.1 million factory jobs between 1998–2001 and 2005–8, the worst record for any Indian state during the 2000s. Despite this, West Bengal added one million new manufacturing jobs between 2004–5 and 2009–10, and this was the best performance among Indian states during this half-decade (see Tables 2.8 and 2.9). Such dissociation in employment growth is possibly on account of vastly different structures of the organized and unorganized manufacturing sectors in these states—a point referred to in the second section of the chapter. West Bengal’s unorganized manufacturing sector, which is dominated by food products, textiles, and food and furniture products, provided most of the new jobs in this state (see Raychaudhuri and Sarkar 2005). It is notable that the new manufacturing jobs added in West Bengal since the 1990s is overwhelmingly in the rural areas.22 However, in West Bengal’s factory sector, which has a predominance of chemicals, minerals, and metal industries, workers lost jobs during the 2000s. The share of rural workers in the increase in manufacturing employment is very high in the case of Bihar and Odisha. A large part of such increase in rural manufacturing employment in these states could possibly be due to the extremely low wages of the workers that use traditional technologies (See Tables 2.8 and 2.9).
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Fall in Manufacturing Employment during the Second half of the 2000s The NSS reports of 2009–10 on employment and unemployment show a massive decline in manufacturing employment in India—a fall of 3.7 million jobs between 2004–5 and 2009–10. Export-oriented industries in India such as garments, textiles, and diamond cutting had been hit by the slowdown in demand in the wake of the global financial crisis of 2008–9. Tamil Nadu and Gujarat were among the worst to suffer from the downward swing in manufacturing employment. Manufacturing employment in these states declined by 1.1 million and 0.8 million respectively during the second half of the 2000s. Other states that recorded significant losses in manufacturing employment during this period are Uttar Pradesh, Rajasthan, Madhya Pradesh, Jharkhand, Maharashtra, and Bihar. Relation between Investment and Employment Growth It is worth examining why a state like West Bengal, which has a large and growing unorganized-manufacturing sector, has a poor record in the growth of factory employment. It is seen that investment accounts for a considerable part of the large variations across Indian states in the generation of factory employment during 1998–9 to 2007–8 (see Figure 2.8). This relation is further illustrated in Figure 2.9. It shows that, in total factory employment in India, there had been a steady growth in Tamil Nadu’s share since the 1960s, and an equally steady decline in West Bengal’s share during the same period. Parallel to this, of the total investment in India, Tamil Nadu’s share was consistently rising while West Bengal’s share was falling (see Figure 2.9). It is often argued that West Bengal lost out in attracting investments because of the high incidence of labour disputes and the activist role of labour unions in that state. Such an argument appears plausible too. However, state-level differences in investments must be seen in the larger context of the political economy of central–state government relations in India—an aspect we turn to in the next section. THE POLITICAL ECONOMY OF UNBALANCED GROWTH In India’s federal constitutional framework, the central government shoulders the larger responsibility and commands greater resources
REGIONAL ASPECTS OF INDIAN INDUSTRIALIZATION
net increase in employment in ’000
500
81
Tamil Nadu
400 300 200 Punjab 100 J&K
0 11 −100 −200
12
45 15 20
10 2 13
89
14
87 30 36 13
Karnataka UP Andhra
−1 15 West Bengal Bihar
Gujarat Maharashtra
16
17
log of investment
Figure 2.8 Log of Investment and Net Increase in Employment, Factory Sectors of Major States and Union Territories, 1998–9 to 2007–8 (numbers in thousands) Source: Calculated using Annual Survey of Industries, various years. Notes: Regression analysis yielded the following results: EMP = –569.7745 + 45.25 log INV; Significance level of the coefficient of log INV = 0.029; Adjusted R-squared = 0.1855; No. of observations = 21. The names of only selected states (especially those that show some interesting trends with respect to the analysis in this chapter) are given in this figure.
for industrial development, especially so during the planning era. During the first three decades after Independence, the central government invested directly in public-sector industrial units; it also influenced private sector investments through the licensing regime and through its control over public sector financial institutions. State governments’ investments in industry were constrained by the financial resources devolved to them by the centre and also by their commitments to investments in sectors (such as irrigation, power, and social development) that fall under the state list.23 The powers of tax revenue collection in India are vested largely with the central government, although the greater responsibility in terms of revenue spending lies with the states. To meet the imbalances between revenues and expenditures, state governments depend on the fiscal transfers from the centre, which are channelled through the Finance Commission, Planning Commission, and the various central government ministries. With the dismantling of the licensing regime and the wide-ranging economic reforms since 1991, state governments now have greater
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WB_emp WB-inv TN_emp TN_inv
25.0 20.0 15.0 10.0 5.0
2002–07
1999–04
1996–01
1993–98
1990–95
1987–92
1984–89
1981–86
1978–83
1975–80
1972–77
1969–74
1966–71
1963–68
−5.0
1960–65
0.0
Figure 2.9 Shares of West Bengal and Tamil Nadu in Total Employment and Investment in India, 1960–5 to 2003–8 Source: Calculated using Annual Survey of Industries, various years.
functional autonomy with respect to, for instance, giving clearances to industrial projects. However, this has not been accompanied with greater financial autonomy for the states. In fact, there has been a worsening of the position of states vis-à-vis the centre in centre–state financial relations. Fiscal transfers from the centre to the states as a proportion of the country’s GDP declined from 5.07 per cent in 1993–4 to 4.02 per cent in 2002–3 (Twelfth Finance Commission [TFC] 2004: 39). The fiscal situation in a majority of Indian states began deteriorating from the 1980s. State governments’ revenue deficits bulged during the 1990s particularly with the implementation of the Fifth Pay Commission recommendations and the rise in nominal interest rates towards the second half of the 1990s. The interest rates on state governments’ borrowing (to meet their expenditure deficits) soared from the second half of the 1990s, which in turn, worsened the state finances (Rao 2002; TFC 2004). The debt–GDP ratio of Indian states increased from 21 per cent in 1996–7 to 31.2 per cent in 2002–3 (TFC 2004: 41).
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The reduction of fiscal deficits of the state governments is an important plank of the ongoing reform programme in India. Since the early 2000s, most state governments have legislated the Fiscal Responsibility and Budget Management (FRBM) Act. Starting with the Eleventh Finance Commission, the fiscal transfers from the central government to the states are also linked to the states’ achievements in fiscal deficit reduction (Chakraborty 2011; Isaac and Ramakumar 2006). All these have imposed further stress on the ability of the state governments to spend on social development and capital expenditures. It is shown that the share of capital outlay in fiscal deficit declined from 50 to 60 per cent during the early 1990s to 30 to 35 per cent during 1998–9 to 2001–2 (EPW Research Foundation 2004). Competition between States to Attract Private Sector Investments Given the context discussed above, Indian states today compete with each other to attract private investments—investments by foreign and large Indian corporations. Private sector investments in India in recent years have largely been directed to relatively advanced regions/ cities or to regions that are rich in minerals or other natural resources. Such a pattern of investments by the private sector during a period of stagnant investments by the public sector has intensified regional inequalities in industrial growth. ‘Investor-friendly’ policies pursued by the state and central governments include large tax and other concessions to private industrialists, as well as greater laxity in adhering to environmental and labour regulations. Recent trends point out that the competition between states to attract private investments has largely bypassed the interests of small-scale industrial units, labour, and environment. Reports suggest that the state government of Gujarat had offered a range of tax and other concessions to Tata Motors to bring the Nano car project to Gujarat.24 Tamil Nadu has been suffering from acute power shortages since 2008, and these have hit small-scale industrial units in that state. Reports indicated that many small-scale textile and engineering units in Coimbatore were operating at 50 per cent or even lesser than their production capacities during 2008–9 due to power shortages. During the same period, the production facilities of multinational companies, such as Hyundai located in Chennai, were
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offered uninterrupted power supply at cheaper rates as part of the Memorandum of Understanding (MoU) signed by these companies with the Tamil Nadu government (Thomas 2009). Hirway and Shah (2011) argue that some of the recent changes in labour laws and their enforcement have considerably weakened the bargaining power of labour. They point to, for instance, a recent Supreme Court judgement that deprived workers of wages for the days for which they were terminated even in cases when the termination was later adjudged as illegal.25 Further, referring to the case of Gujarat, they note that, during the last two decades, there has been a substantial weakening of the capabilities of the Labour Department of the state to enforce labour regulations (Hirway and Shah 2011). Singh and Sawhney (2011) write about how the workers at the Maruti Suzuki’s plant in Manesar, Haryana, were prevented from forming a union by the Labour Department of the state and by the Maruti management (which eventually led to a major strike by the workers). Reports and studies point out that the largely unregulated expansion of mining activities in states such as Chhattisgarh, Odisha, Andhra Pradesh, and Jharkhand, during the last few years, has contributed to the destruction of natural environment.26 Such plunder of natural wealth has affected the livelihoods of the tribal population and the poor in these states. *** There are considerable regional variations in industrial development in India. In terms of factory (or broadly organized manufacturing) sector investment and output, the western states of Maharashtra and Gujarat have been the clear leaders. But in terms of factory employment, the growth has been the fastest in the southern states, and particularly in Tamil Nadu. The eastern states, especially West Bengal, suffered a sharp decline in the growth of factory sector output, investment, and employment over the decades. The regional distribution pattern, as referred above, is almost dramatically altered if we consider the case of the unorganized manufacturing sector. West Bengal tops the chart with respect to the number of unorganized manufacturing enterprises and workers in the country, followed by Uttar Pradesh and Andhra Pradesh.
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Some degree of regional dispersal in the factory sector’s output and investment was achieved during the 1960s, 1970s, and 1980s. However, this trend was reversed during the 1990s and 2000s, when regional concentration (in the western region) increased in India’s factory sector. According to the latest NSS survey (2009–10), there was a massive decline of 3.7 million manufacturing jobs in India during the second half of the 2000s, and this decline was particularly marked in industrially advanced states such as Tamil Nadu and Gujarat. The roots of regional inequalities in India’s industrial development can be traced to the colonial era. The eastern region suffered the worst impact of the imperial domination of India, while a class of indigenous entrepreneurs did emerge in the western region during the nineteenth century itself. After the Independence, India’s planners took a few measures to reduce regional inequalities, but these steps had been only partially successful. A major drawback was the distortion of the licensing system—which was intended as a tool to regulate private investments to achieve development goals—by the large, oligopoly business houses to their advantage. Yet, new entrepreneurial classes and new locations of industrial activity emerged during the 1970s and 1980s, especially in Tamil Nadu, Andhra Pradesh, and Punjab. The Green Revolution in agriculture and favourable policy steps such as subsidized credit for small industries provided the stimulus for this positive transformation. This chapter shows that the jobless growth of India’s factory sector during the 1980s was on account of the decline and restructuring of the cotton and jute textile industries, which led to massive job losses in West Bengal, Maharashtra, and Gujarat. In recent decades, with rising capital intensity of the organized manufacturing, India’s labour force is increasingly informalized and labour is pushed into a subordinate position relative to capital. The economic reforms that began in 1991 have provided state governments much greater functional autonomy than before in giving clearances to industrial projects. On the other hand, states continue to have rather limited financial autonomy, with little change in the share of financial resources devolved to them by the central government. Given this context, today, Indian states compete with each other to attract investments by foreign and large Indian corporations. At the same time, private sector investments in India in recent years have
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largely been directed to relatively advanced regions, mainly to reap the benefits of economies of scale, as well as to regions that are rich in minerals or other natural resources. To appear as ‘investor friendly’, state governments are compelled to give away tax and other concessions to private industrialists and to show greater laxity in enforcing environmental and labour regulations. It is clear that the current pattern of competition between the states to attract investments is hurting rather than helping the cause of development. The central and state governments in India should display the political will to regulate and guide private sector investments towards larger development objectives. Also, there is a need for new policies to revitalize small-scale and traditional industries, which is the source of livelihoods to millions of poor Indians, especially in populous states such as Uttar Pradesh and West Bengal. APPENDIX 2A Note on Indian States and Union Territories There are 29 states and 7 UTs in India today. The 29th state, Telangana, was carved out of the erstwhile state of Andhra Pradesh in June 2014. The analysis in this chapter covers the period before the bifurcation of Andhra Pradesh. Therefore, data and discussion relating to the state of Andhra Pradesh in this chapter actually pertains to the states of Andhra Pradesh and Telengana combined. In the year 2000, three new states—Jharkhand, Uttarakhand, and Chhattisgarh—were carved out of the states of Bihar, Uttar Pradesh, and Madhya Pradesh. Therefore, the pre-2000 data relating to Bihar, Uttar Pradesh, and Madhya Pradesh are comparable to the post2000 data for Bihar and Jharkhand combined, Uttar Pradesh and Uttarakhand combined, and Madhya Pradesh and Chhattisgarh combined, respectively. Here is the list of the 28 states and 4 UTs that are covered in the analysis in this chapter. The names of states and UTs are given against the geographical region (as defined in this chapter) to which they belong. (a) Western region: States: Goa, Gujarat, and Maharashtra; Union territories: Daman and Diu, and Dadra and Nagar Haveli.
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(b) Southern region: States: Andhra Pradesh, Karnataka, Kerala, and Tamil Nadu; Union territory: Puducherry. (c) Northern region: States: Haryana, Himachal Pradesh, Jammu and Kashmir, Punjab, Rajasthan, Uttarakhand and Uttar Pradesh; Union territory: Delhi . (d) Central-east region: Chhattisgarh, Odisha, and Madhya Pradesh. (e) Eastern region: Bihar, Jharkhand, and West Bengal (f) North-east region: Arunachal Pradesh, Assam, Manipur, Meghalaya, Mizoram, Nagaland, Sikkim, and Tripura. Data relating to individual North-east states and the UTs of Chandigarh, Andaman and Nicobar Islands, and Lakshadweep are not reported in this chapter because of the relatively low industrial output in these states. NOTES 1. Data available at www.economist.com/content/indian-summary, last accessed on 25 January 2015. 2. World Development Indicators, World Bank, and National Bureau of Statistics, China Statistical Yearbook, 2006, cited in Ghose (2008). 3. In India, the factory sector consists of all factories employing 10 or more workers using electricity, as well as factories employing 20 or more workers without using electricity. 4. Values have been rounded off from the actuals for the sake of brevity. 5. Calculations based on NSSO (2011). 6. This section uses the old names of the regions as per the context. Bombay is now Mumbai, Calcutta is now Kolkata, and so on. 7. An elaborate system of land revenue collection was at the root of the ‘drain of wealth’ from India to England that began during the early phase of British colonialism in India from the 1750s and onwards. See Habib (1975). 8. Investment in irrigation was markedly less in the zamindari regions of the east as compared to the western region (Bharadwaj 1982). 9. From the early nineteenth century, the mechanized cotton textile industry in Britain began to displace India’s hand-woven cloth from the export as well as domestic markets. See Habib (1975). 10. During the 1840s, after the decline in business fortunes suffered by Dwarakanath Tagore—the most prominent Bengali businessman of his times— Bengali entrepreneurship failed to take off in a big way ever again. See Tripathi and Jumani (2007).
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11. Bagchi (1972: 184) showed that a few Indian communities, including the Vanis (banias), Parsis, and Bohras, were prominent in terms of ownership of factories in the Bombay Presidency in 1911. 12. Based on the data on applied for and approved licensed investments during 1959–66. 13. There are many examples of successful businesses in Andhra Pradesh that were originally set up with the funds mobilized by the entrepreneurs from the rich peasants belonging to their kinship circle. 14. Agricultural growth in Tamil Nadu was remarkable for its regional spread and for the gains it brought to the communities belonging to the lower and middle rungs of the caste hierarchy. See Jayaraj and Nagraj (2006). See also Harris (2006: ch. 4). 15. On the important role played by the state government in the growth of Ludhiana’s manufacturing industry, see Tewari (1998). 16. India’s major foray into the petrochemical industry began with the setting up of the public sector unit, Indian Petrochemical Corporation Limited (IPCL), in Vadodara in Gujarat in 1969. Later, petrochemical complexes were set up in Nagothane and Hazira in Gujarat in association with IPCL. 17. Also see Rao et al. (1999) and Ahluwalia (2000), which show that in India, the relatively richer states received larger investments and recorded faster growth during the 1990s. 18. Patel (2006) notes that 17 of the 60 cotton textile mills in Ahmedabad were closed down in 1985, displacing 40,000 workers and affecting 1.2 lakh people of the city out of the population of 27 lakh. 19. Calculated using data obtained from the Labour Bureau, Government of India, Annual Survey of Industries. 20. Chemicals, rubber, and petroleum products account for 65 per cent of the total value added by Gujarat’s factory sector. See Table 2.5. 21. Damodaran and Singh (2007) showed that there was a revival in both sugarcane cultivation and the sugar-mill industry in Uttar Pradesh since the 1990s and particularly after 2004–5. After the formation of the state in 2000, there has been a significant increase in investments into Uttarakhand. These factors may have contributed to the massive expansion of manufacturing employment in these two states. 22. Based on an analysis of National Sample Survey data for 1993–4, 2004–5 and 2009–10. 23. See Bagchi (2001) for a review of fiscal federalism in India over a period of five decades since Independence. See Thomas (2005) on the constraints faced by state governments in promoting industrialization during India’s planned development. 24. See the report in the Hindu: http://www.hindu.com/2008/11/12/stories/ 2008111261651700.htm, last accessed on 5 June 2012. 25. Hirway and Shah (2011) also point out that the rules regarding the retrenchment of workers have been liberalized in the case of special economic zones. 26. See Lama (2011); Ramakrishnan (2010); and relevant articles in the 3–16 July 2010 issue of the Frontline.
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REFERENCES Ahluwalia, Montek Singh. 2000. ‘Economic Performance in States in PostReforms Period’, Economic and Political Weekly, 35(19): 1637–48. Bagchi, Amaresh. 2001. ‘Fifty Years of Fiscal Federalism in India: An Appraisal’, Working Paper 81, National Institute of Public Finance and Policy, New Delhi. Bagchi, Amiya Kumar. 1972. Private Investment in India: 1900–1939. London: Cambridge University Press. Baker, Christopher John. 1984. An Indian Rural Economy, 1980-1955. New Delhi: Oxford University Press. Banerjee, Debdas and Anjan Ghosh. 1988. ‘Indian Planning and Regional Disparity in Growth’, in Amiya Kumar Bagchi (ed.), Economy, Society and Polity: Essays in the Political Economy of Indian Planning, pp. 104–65. Calcutta: Oxford University Press. Baru, Sanjaya. 2000. ‘Economic Policy and the Development of Capitalism in India: The Role of Regional Capitalists and Political Parties’, in Francine R. Frankel, Zoya Hasan, Rajeev Bhargava, and Balveer Arora (eds), Transforming India: Social and Political Dynamics of Democracy, pp. 207–30. New Delhi: Oxford University Press. Besley, Timothy and Robin Burgess. 2004. ‘Can Labour Regulation Hinder Economic Performance? Evidence from India’, Quarterly Journal of Economics, 119 (1), February: 91–134. Bhagwati, Jagdish N. and Chakravarty, Sukhamoy. 1969. ‘Contributions to Indian Economic Analysis: A Survey’, The American Economic Review, 59 (4), Part 2 (Supplement), September. Bharadwaj, Krishna. 1982. ‘Regional Differentiation in India: A Note’, Economic and Political Weekly, 18 (14, 15 & 16), Annual Number, April. Chakraborty, Pinaki. 2011. ‘Deficit Fundamentalism vs Fiscal Federalism: Implications of 13th Finance Commission’s Recommendations’, Working Paper 81, National Institute of Public Finance and Policy, New Delhi. Chandavarkar, Rajnarayan. 2004. ‘From Neighbourhood to Nation’, in Meena Menon and Neera Adarkar (eds), One Hundred Years, One Hundred Voices: The Mill Workers of Girangaon: An Oral History, pp. 7–80. Calcutta: Seagull Books. Chandrasekhar, C.P. 1984. ‘Growth and Technical Change in Indian Cotton-Mill Industry’, Economic and Political Weekly, 19(4): PE22–PE39. ———. 1988. ‘Aspects of Growth and Structural Change in Indian Industry’, Economic and Political Weekly, Special Number, November, 23 (45–7): 2359–70. Chari, Sharad. 2000. ‘The Agrarian Origins of the Knitwear Industrial Cluster in Tiruppur, India’, World Development, 28(3): 579–99. D’Monte, Darryl. 2002. Ripping the Fabric: The Decline of Mumbai and Its Mills. New Delhi: Oxford University Press. D’Souza, Errol. 2006. ‘Labour Market Institutions in India: Their Impact on Growth and Employment’. Geneva: International Labour Organization.
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Damodaran, Harish. 2008. India’s New Capitalists: Caste, Business, and Industry in a Modern Nation. Ranikhet: Permanent Black. Damodaran, Harish and Harvir Singh. 2007. ‘Sugar Industry in Uttar Pradesh: Rise, Decline and Revival’, Economic and Political Weekly, 42 (39), 29 September : 3952–57. Das, Keshabananda. 1993. ‘Planning and Regional Differentiation in India: Strategies and Practices’, Journal of Indian School of Political Economy, 5(4), October–December. EPW Research Foundation (EPWRF). 2004. ‘Finances of State Governments: Deteriorating Fiscal Management’, Economic and Political Weekly, 1 May: 1841–57. Fallon, Peter R. and Robert E.B. Lucas. 1993. ‘Job Security Regulations and the Dynamic Demand for Industrial Labor in India and Zimbabwe’, Journal of Development Economics, 40(2): 241–75. Ghose, Ajit K. 2008. ‘The Growth Miracle, Institutional Reforms and Employment in China’, Economic and Political Weekly, 43(22): 47–56. Ghose, Aurobindo. 1974. ‘Investment Behaviour of Monopoly Houses-I’, Economic and Political Weekly, 9(43). Gooptu, Nandini. 2007. ‘Economic Liberalization, Work and Democracy: Industrial Decline and Urban Politics in Kolkata’, Economic and Political Weekly, 42(21): 1922–33. Government of India. 2010a. Annual Survey of Industries: 2006–7, Vol II, Report on Absenteeism, Labour Turnover, Employment & Labour Cost, Ministry of Labour & Employment, Labour Bureau, Chandigarh/Shimla. ———. 2010b. Pocket Book of Labour Statistics: 2009, Ministry of Labour & Employment, Labour Bureau, Chandigarh/Shimla. ———. 2010c. Trade Unions in India: 2006, Ministry of Labour & Employment, Labour Bureau, Chandigarh/Shimla. Habib, Irfan. 1975. ‘Colonization of the Indian Economy: 1757–1900’, Social Scientist, 3 (8): 23–53. Harris, John. 2006. Power Matters: Essays on Institutions, Politics, and Society in India. New Delhi: Oxford University Press. Harris-White, Barbara. 2003. India Working: Essays on Society and Economy. Cambridge, U.K.: Cambridge University Press. Harris-White, Barbara and S. Janakarajan. 2004. Rural India Facing the 21st Century: Essays on Long-Term Village Change and Recent Development Policy. London: Anthem Press. Hazari, R.K. 1966. The Structure of the Corporate Private Sector: A Study of Concentration, Ownership, and Control. Bombay: Asia Publishing House. Hiraway, Indira and Neha Shah. 2011. ‘Labour and Employment under Globalization: The Case of Gujarat’, Economic and Political Weekly, 46 (22), 28 May 28: 57–65. Isaac, T.M. Thomas and R. Ramakumar. 2006. ‘Why do the States Not Spend? An Exploration into the Phenomenon of Cash Balance Surplus of States and the FRBM Acts’, Economic and Political Weekly, 41 (48), 2 December.
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Jayaraj, D. and K. Nagaraj. 2006. ‘Socio-Economic Factors Underlying the Growth of Silk-Weaving in the Arni Region: A Preliminary Study’, Monograph 5, June, Madras Institute of Development Studies. Kaldor Nicholas. 1966. Causes of the Slow Rate of Growth in the UK. Cambridge: Cambridge University Press. ———. 1972. ‘The Irrelevance of Equilibrium Economics’, Economic Journal,82(327): 1237–55. ———. 1981. ‘The Role of Increasing Returns, Technical Progress and Cumulative Causation in the Theory of International Trade and Economic Growth’, Economie Appliquee, 34(4): 593–617. Kannan, K.P. and G. Raveendran. 2009. ‘Growth sans Employment: A Quarter Century of Jobless Growth in India’s Organized Manufacturing’, Economic and Political Weekly, 44(10): 80–91. Krugman, Paul. 1991. ‘Increasing Returns and Economic Geography’, Journal of Political Economy, 99(3): 483–99. Lama, Laysang Angmu. 2011. ‘The Evolving Pattern of India’s Iron and Steel Trade: 1991–2007’, MPhil Dissertation, submitted to Jawaharlal Nehru University, New Delhi. Leadbeater, S.R.B. 1993. The Politics of Textiles: The Indian Cotton-Mill Industry and the Legacy of Swadeshi, 1900–1985: New Delhi: Sage Publications. Martin, Ron. 1999. ‘The New “Geographical Turn” in Economics: Some Critical Reflections’, Cambridge Journal of Economics, 23(1): 65–91. Maskell, Peter and Anders Malnberg. 1999. ‘Localised Learning and Industrial Competitiveness’, Cambridge Journal of Economics, 23(2): 167–85. Morris, Morris D. 1983. ‘The Growth of Large-Scale Industry to 1947’, in Dharma Kumar (ed.), The Cambridge Economic History of India, Volume II: c. 1757– 2003, pp. 553–676.New Delhi: Orient Longman. Myrdal, Gunnar. 1957. Economic Theory and Underdeveloped Regions. London: Gerald Duckworth and Co.. National Commission for Enterprises in the Unorganized Sector (NCEUS). 2007. Report on Condition of Work and Promotion of Livelihoods in the Unorganized Sector, New Delhi. National Sample Survey Organization (NSSO). 1997. Employment and Unemployment in India, 1993–4, 50th Round (July 1993–June 1994), Report No. 409, NSSO, Department of Statistics, Government of India. ———. 2001. Employment and Unemployment Situation in India, 1999–2000, Parts I and II, 55th Round (July 1999–June 2000), Report No. 458, NSSO, Ministry of Statistics and Programme Implementation, Government of India. ———. 2006. Employment and Unemployment Situation in India, 2004–5, Parts I and II, 61st Round (July 2004–June 2005), Report No. 515, NSSO, Ministry of Statistics and Programme Implementation, Government of India. ———. 2007. Operational Characteristics of Unorganized Manufacturing Enterprises in India, 2005–06, 62nd Round (July 2005–June 2006), Report No. 524, NSSO, Ministry of Statistics and Programme Implementation, Government of India.
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———.2011. Employment and Unemployment Situation in India, 2009–10, 66th Round (July 2009–June 2010), Report No. 537, NSSO, Ministry of Statistics and Programme Implementation, Government of India. Papola, T.S. and Jesim Pais. 2007. ‘Debate on Labour Market Reforms in India: A Case of Misplaced Focus’ Indian Journal of Labour Economics, 50 (2): 183–200. Patel, Sujata. 2006. ‘City Conflicts and Communal Politics: Ahmedabad 1985–86’, in Sujata Patel and Kushal Deb (eds), Urban Studies, pp. 318–39. New Delhi: Oxford University Press. Ramachandran, V.K. and M. Swaminathan (eds). 2005. Financial Liberalization and Rural Credit in India. New Delhi: Tulika. Ramakrishnan, Venkitesh. 2010. ‘Plunder and Profit’, Frontline, 27 (14), 3–16 July. Rao, J. Mohan and Servaas Storm. 1998. ‘Distribution and Growth in Indian Agriculture’, in T.J. Byres (ed.), The Indian Economy: Major Debates Since Independence, pp. 193–248. New Delhi: Oxford University Press. Rao, M. Govinda. 2002. ‘State Finances in India: Issues and Challenges’, Economic and Political Weekly,37(31): 3261–71. Rao, M. Govinda, Ric Shand, and K.P. Kalirajan. 1999. ‘Convergence of Income Across Indian States: A Divergent View’, Economic and Political Weekly, 34(13): 769–78. Raychaudhuri, Ajitava and Sarbari Sarkar. 2005. ‘The Pattern of Growth of SmallScale Industries in West Bengal: An Analysis’, in Ajitava Raychaudhuri and Tuhin Kumar Das (eds), West Bengal Economy: Some Contemporary Issues, pp. 214–54. Kolkata: Allied Publishers and Jadavpur University,. RoyChowdhury, Supriya. 1995. ‘Political Economy of India’s Textile Industry: The Case of Maharashtra, 1984–89’, Pacific Affairs, 68 (2): 231–50. Singh, Jyotsna and Nakul Sawhney.2011. ‘Maruti Workers Speak about their Strike’, Economic and Political Weekly, 46 (33), 13 August: 12–13. Srivastava, Ravi. 1994. ‘Planning and Regional Disparities in India’, in T.J. Byres (ed.), The State and Development Planning in India, pp. 147–219. New Delhi: Oxford University Press. Streefkerk, Hein. 2002. ‘Casualisation of the Workforce: Thirty Years of Industrial Labour in South Gujarat’, in Ghanshyam Shah, Mario Rutten, and Hein Streetfkerk (eds), Development and Deprivation in Gujarat, pp. 133–49. New Delhi: Sage Publications. Tewari, Meenu. 1998. ‘Intersectoral Linkages and the Role of the State in Shaping the Conditions of Industrial Accumulation: A Study of Ludhiana’s Manufacturing Industry’, World Development, 26 (8): 1387–411. Thomas, Jayan Jose. 2002. ‘A Review of Indian Manufacturing’, in Kirit Parikh and R. Radhakrishna (eds), India Development Report, pp. 84–101. Delhi: Oxford University Press. ———. 2003a. ‘Economies of Scale, Technical Progress and Regional Growth Disparities: Indian Industry, 1959–98’, presented at the conference on ‘Economics for the Future’, organized by the Cambridge Journal of Economics, Cambridge, UK, September 2003, downloadable from, http://www.econ.cam. ac.uk/cjeconf/delegates/thomasj.pdf.
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———. 2005. ‘Kerala’s Industrial Backwardness: A Case of Path Dependence in Industrialization?’, World Development, 33 (5): 763–83. ———. 2009. ‘Industry: Hurdles to Growth’, Frontline, 23 October. http://www. hinduonnet.com/fline/fl2621/stories/20091023262104700.htm. ———. 2011. ‘Locked in a Low-Skill Equilibrium? Trends in Labour Supply and Demand in India’, The Indian Journal of Labour Economics, 54 (2): 195–218. Tripathi, Dwijendra and Jyoti Jumani.2007. The Concise Oxford History of Indian Business. New Delhi: Oxford University Press. Twelfth Finance Commission (TFC). 2004. Report of the Twelfth Finance Commission: 2005–2010, Finance Commission, India, downloadable from, http://fincomindia.nic.in/. Tyabji, Nasir (1991), Industrial development in South India: 1880- 1947, 1991, Working Paper No.98, Madras Institute of Development Studies, Chennai. Vijayabaskar, M. 2001. ‘Industrial Formation under Conditions of Flexible Accumulation: The Case of a Global Knitwear Node in Southern India’, PhD Thesis, submitted to the Jawaharlal Nehru University, Centre for Development Studies, Thiruvananthapuram.
3 Monopoly and Indian Industry SURAJIT MAZUMDAR
The expressions ‘monopoly’, ‘monopoly capital’, or ‘concentration of economic power’, are rarely used these days in the academic literature on India’s industrial and corporate sectors, and they also find no mention in mainstream political or official discourse. This is a far cry from the situation till the 1970s, and to a lesser extent the 1980s, when these terms appeared frequently in policy discussions and debates in academia, as well in the political sphere. The high point in the academic and policy focus on monopolies and concentration was perhaps reached further back in time, in the 1960s. Qualitatively, and to a lesser extent quantitatively, a major share of the contributions to the corpus of studies on this subject appeared in this decade. One part of this was made up of academic studies.1 The other extremely important component included the reports of as many as five official committees or commissions of inquiry that were concerned with the issues of monopoly and concentration (Government of India [GoI] 1964, 1965, 1966, 1969; Hazari 1967a). The 1960s also closed with the enactment of the Monopolies and Restrictive Trade Practices (MRTP) Act with the stated objective of curbing monopolies and concentration of economic power and parallel developments that were also expected to deal a major blow to concentration—the abolition of the managing agency system, nationalization of major banks, and the adoption of the policy of reservation of sectors for smallscale industry. There were some dissenting voices in the subsequent emerging discussions. The broad conceptualization of the monopoly problem that emerged in the 1960s was however retained in the core literature on the subject. This later literature served to further clarify the nature
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of the problem, or to assess the impact of the measures taken to deal with it, but did not depart in any significant way from the framework that had already taken shape. It also partially updated or revised some of the relevant data and information, though nothing has been put together for any later period which comes even remotely close to matching what is available for the 1960s. The one additional official committee constituted later (GoI 1978) also mainly reviewed the state of affairs with regard to the MRTP Act. On the policy front, additional measures with some anti-monopoly content like the Foreign Exchange Regulation Act (FERA) and nationalization of some strategic sectors (general insurance, coal, oil, gas, etc.) came up in the early 1970s, out of the momentum generated in the late 1960s. The revisions of the MRTP Act in the 1980s were more in the direction of its dilution than strengthening. The flagging interest in the issues of monopoly and concentration observable to an extent in the 1980s disappeared completely after the liberalization of the 1990s. Of course the Indian context, two decades later, is also quite different from the setting with reference to which the old debates and discussions took place. The system of planning and its associated set of controls like industrial licensing that prevailed at that time have now been replaced by greater freedom for private capital and for the operation of market forces. The protectionism associated with the import-substituting industrialization strategy has also gone and the economy opened up to inflows of products and capital. However, while some aspects of the older monopoly discussion may have lost their significance on account of these changes, the fundamental issues that had emerged out of it remain important even in the contemporary context, some even more so than earlier. The ‘monopoly problem’ has by no means disappeared with liberalization, and some current controversies are a reflection of this. Yet the shift in the intellectual climate has been such that acknowledgement and analysis of the problem in relation to liberalized India is conspicuous by its virtual absence. All that survives is a very limited and narrow concern with competition policy. At the international level, there is also a growing literature on the institution which had been central to Indian discussions on monopoly and concentration—the business group (Khanna and Yafeh 2007). This however does not really concern itself with the issues that engaged the earlier Indian literature, and has a very different flavour to it.
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MONOPOLY PROBLEM IN THE PLANNING ERA AND ITS ANALYSIS What then was the monopoly problem in the Indian context? In conceptualizing it, Indian thinking clearly drew on ideas that had emerged out of the analysis of the new features that capitalism in the developed countries acquired in the twentieth century. Terms like ‘monopoly capital’ or ‘concentration of economic power’ had first been used in relation to these contexts. These were, however, not just borrowed, but also adapted to the specific Indian context of a backward, underdeveloped economy which was attempting to industrialize and was being characterized by its own distinctive institutional features. Types of Concentration At the heart of the monopoly problem were two kinds of concentration characteristic of advanced capitalism, but which were also found to be prematurely embedded in the industrial structure of the Indian economy. In standard industrial organization literature, these two would be distinguished as oligopolistic concentration and aggregate concentration. The former refers to seller concentration in individual industries and the latter refers to firm-size concentration at the level of the economy as a whole.2 The latter of these was seen to also express itself in a specific way in the Indian context, whereby a variety of even unrelated industrial activities could often be subjected to the centralized control of a single authority, typically a business family. In either case, concentration implied the dominant position of few firms, and not merely, or even necessarily, inequality in the distribution between firms. The monopolization by a small number of firms, of the production and sales of specific products or of control over production in general, was what gave rise to the monopoly problem. Namjoshi (1966: 4–5) discusses the concept of monopoly as: We shall recognize two senses of the word ‘monopoly’. One will be the narrower sense of monopoly in a definite market as leading to a pattern of allocation of resources and costs different from what we would expect under perfect competition. The other sense in which we will use the word is that of a general closure of opportunity. In this latter sense we shall refer to a large business as a monopoly, or to large businesses as monopolies. The reference here is to the broad phenomenon of social
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monopoly or control over a large aggregate of economic opportunities and not to monopoly in any definite product market.
This quotation clearly indicates that the attachment of the term monopoly to each of the two kinds of concentration was derived from two different sources. The second kind of use of the term monopoly, in relation to aggregate concentration and the phenomenon of big business, clearly resembles its usage in the Marxist political economy tradition. The conception of monopoly associated with seller concentration at the level of individual industries, on the other hand, was derived from the analysis of market structures in mainstream economic theory. Of course, strictly speaking, an oligopoly situation is different from that of a pure monopoly, and ‘monopolistic’ competition implies product differentiation rather than seller concentration. Nevertheless, the general presumption, shared by the Indian literature, was that, the extent of monopoly power enjoyed by firms in product markets was a function of the degree of concentration. Such power put them in a position of being able to ‘exploit’ the market by extracting higher prices for a lower output than would prevail under competitive conditions. While Namjoshi used the word monopoly for both kinds of concentration, others preferred different terms for one or both of them. Some specifically stressed at the need for distinguishing between them. The Monopolies Inquiry Commission (MIC), notwithstanding its name, described both kinds of concentration as instances of ‘concentration of economic power’, but separated them into ‘product-wise’ and ‘country-wise’ concentration (GoI 1965). In his note of dissent to the MIC report, however, R.C. Dutt argued (GoI 1965) that ‘concentration of economic power’ could only describe the result of the latter kind of concentration, for which his preferred expression was ‘inter-industry concentration’. This view was also echoed by Hazari (1966) and Goyal (1970); the former also considered the problem to be related mainly to aggregate concentration. Ghose (1972), on the other hand, explicitly used the term ‘monopoly capital’, but in a sense that signified the coexistence and fusion of the two kinds of concentration. Partially, the underlying basis for some of these terminological disagreements was the fact that while the two kinds of concentration are logically distinct there can be, and often is, a significant overlap between them. There is no automatic correspondence between
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aggregate concentration and oligopolistic concentration (Adelman 1951; Davies et al. 1988; Hannah and Kay 1977) because oligopoly can characterize a small industry without any of the firms in it being large in the aggregate sense while a large industry with lesser concentration may be dominated by large firms. A firm might also be large on the basis of a simultaneous presence in many industries even if its share in each may not be exceptionally high, although, a high level of diversification is not again an essential accompaniment of the large firm. Moreover, the magnitude of a ‘small number of firms’ is considerably greater in the case of aggregate concentration than the concentration in individual industries. In capitalism’s history, however, both kinds of concentration acquired prominence simultaneously and are often taken to be joint features of modern capitalism. As regards the Indian situation in the 1960s, the information base put together by, particularly, the MIC showed two things. First, while many large business enterprises were highly diversified, there were also some which were not so. Second, while most industries reflected high degree of concentration, large firms were not the dominant firms in many of them, whereas they invariably had a prominent presence in the least concentrated industries. Thus, although the intersection between diversification, concentration in individual industries, and aggregate concentration was not insignificant, it was far from being complete. Two Facets of the Monopoly Problem The issue, however, was not merely one of differences in the two kinds of concentration. The monopoly problem itself had two different, mutually reinforcing facets that were not collapsible into each other. The significance of the two types of concentration for these was not the same. Both kinds of concentration had potential implications for the market competition between firms, to the extent that large size and oligopolistic dominance could act in tandem to deter competition.3 In other words, industrial concentration provided a setting for firms to adopt undesirable monopolistic market practices. This was however a problem located in the specific industry where such a situation arose, even if many industries were characterized by it. The other more significant implication of industrial concentration, for which concentration at the aggregate level was the most important causal factor, on the other hand, operated at the larger social level. An industrial structure
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characterized by such concentration gave a few business firms, and the small segment of society controlling them, a disproportionate influence in the determination of society’s economic affairs, including through its influence on government policy. Its implications were not only economic but also political, with it carrying the potential of undermining Indian democracy. As Hazari (1967b: viii) had put it: The strongest argument against concentration of private economic power in a mixed economy is that, in the absence of checks and balances with which a political democracy safeguards itself against the powers of Government, it can and is likely to act to the common detriment. On purely economic reckoning by the strength of its power, big business can influence both the market and the Government to secure large resources for ends which are either of low priority in terms of planning or earn lower returns than would have been earned by other businesses, or both.
R.C. Dutt, in his previously mentioned note of dissent (GoI 1965: 193), similarly argued that an indirect influence on economic policy was in-built into the economic structure: Concentrated economic power involves control of large resources, and also of large areas of production and of the economy as a whole. Those who have this control are in a position to influence the economic policy in a large measure, irrespective entirely of their relationship with political parties, whether in opposition or in power, or even their relationship with individuals in authority. A programme for industrial expansion, for instance, must depend to a large extent on the willingness of the corporate sector to invest their savings for such expansion. Those who control the savings can influence the ‘incentives’ required for investment, and, therefore, the whole set of economic decisions which relate to this problem.
Of course the Indian economy in the 1950s and 1960s was one in which the agrarian sector was significantly bigger than the industrial sector. The industrial sector too was divided between an expanding state or public sector, a significant unorganized segment, and the private corporate sector. The private corporate sector was also not limited to industrial activities and it included an Indian as well as a foreign component. The degree of concentration in the private corporate sector, therefore, was obviously not the same as the concentration in either the industry or in the economy as a whole. This was well recognized and sections of the literature did actually highlight this
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lack of strict coincidence between corporate concentration and that of economic power (Bajpai 1952; Bose 1952; GoI 1964, 1965; Hazari 1967b; Kothari 1967; Mohnot 1962). Yet it is corporate concentration that was treated as the principal indicator of concentration of private economic power. This was because of the country’s attempt to industrialize through a strategy in which the private sector was expected to play an important part in the development of large-scale industry. The large private business firms of the industrial sector were to be found in the corporate sector, and industrialization also held the key for the growth of these firms. Unlike concentration in individual industries, which was often seen as inevitable in several industries, if economies of scale had to be taken advantage of, the functional value of concentrated control over diverse industrial activities was seen to be less clear. Some, in fact, emphasized that concentration could not be attributed to any inherent efficiency-related competitive strength of large Indian groups, given the character of the Indian business class of having emerged from mainly a mercantile background in a backward economy (Chandra 1979; Chaudhuri 1975, 1984; Roy 1976). On the other hand, excessive control of industry in the hands of foreign-controlled firms, who enjoyed monopoly power status precisely on the basis of such strengths and global presence (GoI 1965; Kumar 1982), was not considered desirable for various reasons. Concentration in the hands of domestic and foreign monopolies was seen to be symptomatic of tendencies inimical to the development of a dynamic industrial sector—like inhibiting the development of a wider base of domestic entrepreneurship and the managerial skills and technological dynamism that could accrue from firm specialization. It was felt that the process of planned industrialization was getting distorted and undermined by the manipulation of the regime of industrial controls by dominant, large business firms. These firms, it was argued, pre-empted licenses and erected artificial barriers to entry of new firms, but did not always necessarily implement these licenses.4 This at least partly explained the central empirical fact that appeared to have emerged in the 1960s, namely that a handful of these large groups had been able to perpetuate their dominant position in India’s industrial sector despite the rapid expansion and diversification it had experienced over the first three Five Year Plan periods.
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Business Group A characteristic feature of the Indian corporate scene noted from the earliest studies onwards was the existence of interconnections between legally independent companies. Initially these interconnections were described as reflections of the tendency towards ‘industrial combination’, which was defined as a system where ‘individual units organize themselves into some kind of association or organization, either loose or well-integrated’ (Mehta 1952a: 2). Alternatively, it was ‘a method of economic organization by which a common control, of greater or less completeness, is exercised over a number of firms which either have operated hitherto, or could operate, independently. This control may be either temporary or permanent, for all or only for some purposes’ (Joshi 1962: 1–2). Considerable evidence was collected to show a variety of interconnections between companies (Basu 1958; Kothari 1967; Mehta 1952a; Nigam 1959; Nigam and Chaudhuri 1960; Nigam and Joshi 1963). These included: 1. Concentration of the management of many companies operating within the same industry or in different industries under a single managing agency firm, which was the classic managing agency house that had emerged in the colonial era 2. System of multiple directorships through which a few individuals and families dominated in the directorships of a number of companies, again, operating within the same industry or in different industries 3. System of interlocutory directorships which further interlinked otherwise separate or autonomous units 4. Financial integration between companies characterized by regular flows of finance between them Eventually, it was recognized that there were not merely interconnections between different companies but that the individual business firm in India itself was often a collection of companies based on such interconnections. This kind of firm was termed by Hazari (1966) as the ‘business group,’ and he demonstrated that this was the typical form of big business enterprise in India. The group, rather than the individual company, was therefore the unit of decision making in the private corporate sector. ‘A corporate group may be defined as consisting of units which are subject to the decision-making power of a
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common authority.… The group functions as a single organisation, nevertheless, though each of the corporate units under its control is a separate legal entity’ (Hazari 1966: 5). A similar concept of the group based on centralized control being exercised over multiple companies was also employed by the MIC and the Industrial Licensing Policy Inquiry Committee (ILPIC). The latter described big groups as ‘large industrial houses’, the nomenclature used in the terms of reference of the Committee. The Companies Act, 1956, had also referred to ‘companies under the same management’ and ‘companies under the same group’. These were subsequently incorporated into the MRTP Act as a means of identifying what the act termed as ‘inter-connected undertakings’. The ILPIC, however, had also highlighted that not all large business firms were groups and identified a number of what it called ‘large independent companies’. The MRTP Act also had a corresponding category of ‘single large undertakings’. While most business groups were family controlled, this did not mean that the capital commanded by the group companies was owned by these families. Funds were in fact mobilized mainly from outside, and the control over companies was exercised either through managing agencies, or by recourse to the device of inter-corporate investments or group companies holding equity shares in each other. Corporate concentration, the concentration of control over assets, was therefore not based on concentration in income but was based on concentration in command over capital. One of the implications of the prevalence of the business group, a source of persistent difficulty while measuring concentration, was the lack of identity between the degree of either kind of concentration and in the size-structure of companies in the relevant domain. State and the Monopoly Problem The State was central to the conceptualization of the existence as well as the resolution of the monopoly problem. Concentration of economic power worked through the influence on government policy and decision making. The State’s planned industrialization strategy also provided the setting that could be manipulated by large businesses to perpetuate their dominance. Apart from deliberate manipulation of it, the planning and the desire to avoid excess capacity and wastage
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of scarce capital resources were also seen as working in favour of concentration. In individual industries, this happened by restricting free entry of firms. At the aggregate level, it spontaneously created a selection bias in favour of large established firms in matters of granting licenses for large capital-intensive industrial projects. Finally, the state’s role in the industrialization process also meant concentration of economic power in its own hands. However, as indicated by Hazari (1966: 360), there was still a difference between the concentration in private hands and that of the state: ‘The rapid expansion of the public sector, whatever its merits on other grounds, does not really dilute concentration. It only opposes the massive economic power of the state against the economic power of large groups’. This implied that the State also had to act as the principal countervailing force to private economic or monopoly power of either kind. This it could do by limiting the extent of such power to what was consistent with the objective of building an efficient and dynamic industrial economy and where concentration was ‘inevitable,’ ensuring that the power associated with it was not misused against the ‘general good’. These objectives could be achieved through a variety of methods. The State could replace the private sector in sectors with which monopoly power of either kind tended to have a strong association, an important example being the banking and financial sector on which industrial financing depended. It could use its regulatory powers to restrain the expansion of large groups, restrict mergers and acquisitions, or it could support the dispersion of the private sector of the economy so as to reduce concentration of private economic power. In individual industries too, it could use regulation to curb monopolistic practices and maintain competitive conditions. The package of actions that the State actually took from the late 1960s to the early or mid-1970s involved the use of all these methods, though considerations other than checking monopoly power were also, almost certainly, behind many of them. The effectiveness with which the State could play a countervailing role to private monopoly power of course depended on its ability to insulate itself from the effects of the concentration of economic power. The fact that this was necessary and yet not assured followed from the very analysis of that concentration, and had been borne out even by the experience till the 1960s. In the words of R.C. Dutt (GoI 1969: 192–3):
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As far as planning and controls are concerned, they are by themselves neutral in this respect. They can certainly be utilized to increase concentration. At the same time they can equally effectively be utilized to reduce or prevent further concentration. …the influence which those who control large sectors of the economy have on the economic policies and decisions of Government…can to some extent determine the manner in which economic controls are exercised by Government, and account for the fact that these controls have not been actively utilized to prevent increase of concentration.
Be that as it may, there was no real alternative to the State’s role in disciplining private capital. Therefore, the fact of industrial concentration did not constitute a case against state intervention in the economy. It only meant that the intervention had to be designed to curb concentration and its adverse effects. In contrast to this was the alternative understanding of concentration of economic power which was to gain ascendancy later. In this view, monopoly power was not taken to be an underlying feature of the industrial structure that then generated the tendencies for manipulation of the planning and regulatory regime. Rather, the problem was located in the system of industrial controls itself, with the monopoly element in the industrial structure and its aggravation being seen as the result (Bhagwati and Desai 1970; Bhatt 1970; Ghosh 1975; Lal 1971). Protectionism and domestic regulation, it was contended, protected Indian business firms from both external and internal competition. They prevented the deconcentration that industrial expansion would tend to have, and allowed a segment of private capital to monopolize expansion opportunities. The assumption therefore was that the monopoly problem would disappear if the controls that gave rise to it were removed. Jalan (1970), even while criticizing the idea that industrial licensing may be used to curb concentration, pointed out that nobody had established that concentration would, in fact, have been lower in the absence of industrial licensing. Concentration after the MRTP Act How did the pre-liberalization picture of concentration in India’s industrial structure change subsequently from what had been brought out by the studies in the 1960s? This is a question that is difficult to answer precisely. Limitations of the MRTP data which became
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available after the act mean that it lacked the comprehensiveness of the compilations for the 1960s. MRTP data, in any case, provided not even an indication of what happened to concentration in individual industries. An additional practical difficulty in measuring even aggregate concentration, which afflicted even the earlier studies, has been the absence of proper measures of the size aggregates for the private corporate sector. Estimates made by different researchers for the same years have varied considerably. There are in fact few studies which have looked at inter-temporal trends in corporate concentration. Chandra (1979) and Oza (as cited in Sandesara 1992), the two studies that have done so, have major limitations and cover only the periods 1951–75 and 1951–79, respectively. Amongst published studies, only the MIC and ILPIC reports put together comprehensive listings of all large business firms, whether they are group companies or single companies. These were firms which had assets of at least Rs 5 crore in 1964 and 1966 respectively. The MIC identified 75 such group companies and 57 individual companies,5 while the corresponding numbers in the ILPIC were 72 and 60 respectively. Combining these with the estimates of aggregate assets in these two years from two other studies, alternative measures of corporate concentration can be derived for the mid-1960s (see Table 3.1). From an unpublished study (Mazumdar 2006), a listing of the 210 largest firms of 1990, virtually the end point of the regime of industrial controls, is also available along with estimates of size aggregates for the private corporate sector. This can be used to make a broad comparison with the 1960s situation (see Table 3.2). Each of these 210 large firms had either assets or income of at least Rs 100 crore.6 This threshold Table 3.1 Share of Large Enterprises in the Aggregate Assets of the Private Corporate Sector, 1964 and 1966 (in percentages) Based on N.K. Chandra’s Estimates of Aggregate Assets
Based on S.K. Goyal’s Estimates of Aggregate Assets
Year (Study)
Large Groups
Large Independent Companies
All Large Firms
Large Groups
Large Independent Companies
All Large Firms
1964 (MIC) 1966 (ILPIC)
37.30 40.06
9.89 10.37
47.19 50.43
40.58 49.25
10.76 12.75
51.34 62.01
Source: Chandra 1979; GoI 1965, 1969; Goyal 1979.
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Table 3.2 Share of Large Enterprises by Different Criteria in Size Aggregates of Private Corporate Sector, 1990 Criteria for Identifying Large Firms (Rs Crores)
A1. B1. C1. A2 B2. C2. A3. B3. C3.
Income/Assets > 100 Income/Assets > 200 B1/A1 Income > 100 Income > 200 B2/A2 Assets > 100 Assets > 200 B3/A3
No. of Firms
210 134 0.64 190 116 0.61 181 101 0.56
Percentage Share in Aggregates for Private Corporate Sector Cos.
PUC
Assets
NFA
Inc/Tur
2.10 1.72 0.82 2.00 1.63 0.81 2.00 1.61 0.81
47.35 42.56 0.90 45.01 39.13 0.87 45.96 39.68 0.86
57.44 52.23 0.91 55.28 48.76 0.88 56.09 49.46 0.88
57.05 52.31 0.92 54.71 48.92 0.89 56.10 49.97 0.89
72.40 65.62 0.91 71.46 63.93 0.89 69.48 59.40 0.85
Source: Mazumdar 2006. Note: PUC = Paid-up Capital; NFA = Net Fixed Assets; Inc/Tur = Income/Turnover
size could be considered comparable to that used by the MIC and ILPIC for the mid-1960s, given the increase in India’s gross domestic product (GDP) in between. The absolute number of large firms above the threshold size was clearly larger in 1990. However, the level of concentration would not change significantly if the threshold size was doubled and the number of large firms reduced to similar numbers as in Table 3.1. This in fact reflects the presence of great size diversity even within large firms in 1990, a feature also present in the 1960s. In both cases, much of the concentration ratios are actually attributable to a much smaller number of firms which stood tall even amongst large firms. In 1990, there were 42 firms that had incomes or assets exceeding Rs 500 crore, which was five times the threshold size. The same number of firms had assets greater than Rs 25 crore in 1966, which was five times the threshold size used by the MIC and the ILPIC.7 In terms of the existence of a high degree of aggregate concentration and its basic pattern, therefore, the structure of the private corporate sector in 1990 was not very different from that depicted by the earlier studies. This, when combined with the empirical results for the interim period from the other studies mentioned, indicates that, notwithstanding fluctuations in its degree from time to time, concentration in the private corporate sector exhibited a strong tendency to
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reproduce itself despite the anti-monopoly measures, just as it had before them. The uncertainties are more about how high the degree of concentration has been at different points of time and not about whether it was high or low. The industrial patterns of the 210 large enterprises also show that many of the large firms continued to exhibit a conglomerate diversification pattern. What did change was that big business and oligopolistic dominance came into closer correspondence with each other. This happened not because individual industries became more concentrated, but because the industrial structure and the industrial spread of big business changed in favour of the more concentrated industries. There had, however, hardly been any significant advancement in the capacity for the self-development of technology of Indian business firms (Alam 1985; Tyabji 2000). The stability of corporate concentration would seem to confirm the general impression that the monopoly control measures proved to be a failure. Several reasons have been identified as to why this was the case. The measures came in the background of the general devaluation of planning from the mid‐1960s and onwards and the onset of a trend of increasing corruptibility of the decision-making process (Kochanek 1987). In such a climate, the ability of the State to discipline private capital was eroded further, and this was reflected in what the monopoly control measures turned out to be in practice. From the stage of the framing of the laws themselves to their actual enforcement, undermining of the objectives of the MRTP Act has been extensively described in the literature (Agarwal 1987; Chandra 1977; Chaudhuri 1973; Goyal 1979; Gupta and Thavaraj 1974; Khurana 1981; Oza 1971, 1973; Paranjpe 1991; Rao 1985). The abolition of the managing agency system proved to be no impediment to centralized control over companies as business groups simply came to rely more on inter‐corporate investments for this purpose (Goyal 1988; Sengupta 1983; Singhania 1980). The firm establishment of public sector dominance in the field of institutional finance also had no visible adverse impact on large groups because they could still influence the decisions in their favour. Public sector institutions, in fact, helped large groups maintain control over their companies by following a policy of non-interference in management despite their large share in the finances and equity of private sector companies (Goyal 1983, 1988).
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The lax attitude towards the private sector meant that there was no serious effort to implement the plan targets where private sector investment was involved. Private sector firms were systematically allowed deviations of actual capacities from licensed capacities, either by under‐utilization of licenses secured or by creating capacities larger than what was approved, which were either hidden or for whom approvals were secured ex post. A study had found such co‐existence of under‐utilization and over‐utilization of licences and of actual production levels both significantly below as well as above the stated installed capacity levels (Corporate Studies Group 1983a, 1983b). Big business houses were also allowed to take advantage of incentives and concessions that were actually meant to encourage small businesses (Goyal et al. 1984). The onset of the 1980s saw the State developing an increasingly permissive attitude towards the large private sector, which only reinforced the tendencies described above. However, two qualifications should be made to the assessment of a general failure of monopoly control measures in the 1970s and 1980s. These developments may not have been entirely by design but their significance lies in the fact that they reflected tendencies that became so much more unlikely after 1991. First, while the aggregate picture of corporate concentration may have remained stable, the details did change in significant ways. Individual monopolies or segments of them were clearly affected by some of the measures taken by the State. The nationalization of industries, such as banking and mining, meant loss of assets for major Indian groups. The takeover by the government of major companies also hit some groups like Martin Burn, which was virtually wiped out in the process, and Soorajmull Nagarmull. The foreign presence in the Indian private corporate sector also came down. To a large extent, this was due to the demise of the last-surviving European managing agency houses such as Andrew Yule, Balmer Lawrie, and Gillanders Arbuthnot, with their concerns being acquired by the government or private Indian capital. In addition, foreign oil companies and multinational corporations (MNCs) like IBM and The Coca-Cola Company had also quit India. At the same time, contrary to the general perception, many new monopoly groups had also emerged by the end of the 1980s (Mazumdar 2006, 2008a). While 49 firms that had been amongst the largest in the mid-1960s were not in the list of 210 largest ones in 1990, as many as 71 of the latter were those that had not
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figured in the MIC in any form (even as small dominant firms in some industries or with companies with assets greater than Rs 1 crore). Of these 71, 6 were amongst the top 42 in 1990. Second, in the relevant period, while the private corporate sector share in the economy did not increase, that of the public sector did. One side of this was that the public sector component even in the corporate sector became larger, with the share of government companies in the total paid-up capital being nearly 73 per cent in 1990–1. The more pronounced presence of the big enterprise in the Indian economy and its industrial sector at the end of the 1980s expressed itself more through this than through any change within the private corporate sector or in its relative importance in the economy. THE MONOPOLY PROBLEM: AN ANACHRONISTIC CONCEPT IN THE AGE OF LIBERALIZATION? With the change in the policy paradigm after 1991, the curbing of the concentration of economic power ceased to be an explicit policy objective. The understanding behind this was that the objective had lost its significance in the new context of a more open economy. The amendment of the MRTP Act to narrow down its focus to simply the regulation of monopolistic, restrictive, and unfair trade practices was in fact part of the very first round of elimination of the system of controls. In time, the Act was repealed and replaced by a new legislation, the Competition Act, 2002, whose stated objective is to primarily maintain competitive conditions in markets. While the process of putting in place an effective competition regulation regime has been somewhat half-hearted (Bhattacharjea 2010), there is at least some acknowledgment of the need for such regulation. The larger issue of monopoly does not attract even such limited interest. However, despite the silence on the subject, questions similar to those that arose in the 1960s from the experience with planned industrialization can also be asked about the results of two decades of liberalization. Liberalization and Monopoly Power in Markets Proponents of liberalization would of course argue that the elimination of controls and trade liberalization in themselves have rid the system of many of the anti-competitive elements which existed earlier.
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Insofar as entry barriers for domestic and foreign firms have been removed, a reduction in the degree of concentration in individual industries should be expected. At the same time, the threat of competition from imports should mean that domestic concentration in individual industries is losing some of their anti-competitive significance. The validity of these propositions may, however, be challenged. The elimination of regulatory controls on entry has also been accompanied by an easing of controls that restricted spontaneous tendencies towards concentration. The creation of a more permissive regime for mergers and acquisitions (M&A) is an example of the latter. With heightened competition itself also acting as an inducement, many firms have taken advantage of this permissiveness to consolidate their positions. A dramatic rise in M&A activity after liberalization, particularly of the horizontal variety across a range of industries, was the result (Basant 2000; Beena 2008; Khanna 1999; Roy 1999). In several industries—polyester, aluminium, tyres, cement, pharmaceuticals, consumer electronics, non-durable consumer goods, paints, ceramics, batteries, etc.—there have been such acquisitions. The privatization of some public enterprises has also had similar consequences. Consequently, there is no evidence of any general decline in concentration levels in Indian industries after liberalization (Alfaro and Chari 2009; Athreye and Kapur 2006; Basant 2000; Ramaswamy 2005). It should also be pointed out that the phenomenon of business groups consisting of more than one company in the same industry has not disappeared and, consequently, actual concentration levels in many industries are much higher than what conventional measures show (Mazumdar 2008b). Even if induced by the threat of competition, once it has emerged, concentration can have anti-competitive effects. Import competition need not always be an effective antidote. For one, they may not be entirely free. It is also not as if international trade is carried out under competitive conditions with no monopoly element in it. Indeed, the elimination of barriers to trade and capital flows across countries does not by itself eliminate the monopoly phenomenon in markets, it only internationalizes its plane. A few firms can occupy a dominant position in the worldwide market of an industry, of which each national market is only a segment. Global and cross-border M&A, which have been significant over the last two decades, are facilitators of such concentration. India, under liberalization, too has witnessed a number of
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acquisitions by MNCs, largely of a horizontal nature (Kumar 2000). Their ‘entry’ through such acquisitions, or even otherwise, can be part of a process of increasing concentration internationally. The more dominant multinational presence in certain industries since liberalization—such as automobiles, some segments of automobile components, consumer appliances (particularly the higher end), soft drinks, paints and varnishes, and some capital goods industries—should be seen from such a perspective. From this discussion, it follows that the monopoly problem, understood even in its narrow terms, may have become a more complex one after liberalization (Basant and Morris 2000; Bhattacharjea 2003). There is, however, no case for presuming that regulation required for that has lost its basis because of the opening of the economy. Reinforcing this is the fact of opening up to the private sector of many sectors which were earlier in the public sector domain, since many of them tend to have non-competitive market structures. Corporate Growth and Corporate Concentration Reversing the pattern observed earlier, while the public sector’s share in the Indian economy has been declining, the private corporate sector has grown significantly faster than the rest of the economy after liberalization. This is indicated by the fact that share of the private organized sector in aggregate net domestic product (NDP) has increased from a little over 14 per cent in 1990–1 to nearly a quarter. This entire increase has gone into surplus incomes, with the share of compensation of employees in the private organized sector in even aggregate NDP being lower after 1991 than in the 1980s. The rapid increase of corporate profits is also reflected in the quite dramatic increase in private corporate savings that has happened. In the four decades before liberalization, such savings were generally below two per cent of GDP. In 2007–8, this figure stood at 8.8 per cent. The private corporate sector’s share in the economy’s net fixed capital stock has also increased significantly from a little over 8 per cent in 1991 to over 26 per cent (from around 11 to nearly 31 per cent in the stock excluding real estate). Thus, the weight of the corporate sector in the Indian economy has increased to levels way beyond those that prevailed when the initial concerns about concentration of economic power in the corporate sector arose. The corporate sector is naturally
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happy with this situation and has come to put its weight behind the liberalization programme. Has the rapid growth of the corporate sector facilitated a reduction in corporate concentration? One bit of evidence would quite clearly indicate that this has not been the case. Of the over 4 lakh companies filing income tax returns in 2007–8, a mere 190 accounted for nearly 55 per cent of the total profits before tax reported by all of them. Some of these were of course public sector companies, but, however, since all 1808 public sector units (PSUs) amongst them together accounted for less than 22 per cent of the total profits, private corporate profits were clearly highly concentrated. Moreover, the number of groups controlling the private sector companies amongst the 190 would have been lesser in number, and many would also have had additional group companies outside that set. The actual level of concentration in corporate profits, therefore, would be even higher than the figures given would indicate. In fact, the profits of the top 20 firms (groups/ individual companies) as available from the Prowess database would suggest that they alone accounted for over a quarter of private corporate profits. In the 1960s the question had been: why did concentration not come down despite rapid industrial expansion of a decade and a half? Should the current high levels of corporate concentration not prompt a similar question today after a period of extremely rapid corporate growth? Has Liberalization Led to a Flowering of Entrepreneurship? Conglomerate diversification has certainly not ceased to be a feature of many Indian business groups after liberalization. On the contrary, just as it had been in the early stages of post-Independence industrialization, after liberalization, leading business groups have shown a tendency to grab opportunities for expansion that have arisen even without possessing any special competence in them. The difference is that, while earlier most such diversification was in manufacturing, the tendency after liberalization has been for big business groups to move into an array of non-manufacturing activities, such as mining, power, construction (real estate and infrastructure), financial services, trade, information technology and telecom, and other services. The expression ‘industrial house’ is no longer, therefore, an appropriate description for many Indian business groups. There has in fact been a marked
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process of deindustrialization of the Indian private corporate sector after liberalization, with manufacturing ceasing to be the principal sphere of private corporate activity (Mazumdar 2008a). The entire increase in the share of the private organized sector in the Indian economy’s production is on account of growth in non-manufacturing activities. In other words, concentrated, rapid corporate expansion has been much less linked to industrialization than was the case in the early post-Independence period. Liberalization has also not dislodged the older groups from their dominant position. Many of India’s leading groups today come from the ranks of those who constituted that set towards the end of the 1980s. Some of them may not have belonged to the traditional old groups who were still dominant in the 1960s. Their rise, however, had happened before liberalization. Here too there is a difference between the liberalization era and the period before that. Most of those who might today be considered as the newer element among the leading lights of corporate India, like Bharti or Infosys—those whose rise to prominence has been mainly a post-liberalization phenomenon— have emerged through services rather than manufacturing. The evidence in fact indicates that, contrary to what was expected to follow from removal of controls, the easing of entry conditions in individual industries has not eased the general barriers to entry into the class of those who control industrial assets and markets. One study by Alfaro and Chari (2009) found that incumbents continued to dominate in many industries. Another study, covering 126 large manufacturing industries (Mazumdar 2008b), found that the stability of leading firms after liberalization in these industries was a widespread phenomenon. Even where the pre-liberalization incumbents have been displaced, they have been replaced more by old, large groups or MNCs rather than by new Indian players. In the few industries where new Indian firms have made some mark, they are generally overshadowed by the older incumbents or large groups. Companies controlled by the top 40 Indian families/family groups, from a ranking based on sales in these 126 industries, accounted for 42.64 per cent of the total sales, and the top 10 MNC-controlled companies had a share of 8.46 per cent. In other words, sales in the 126 sample products were highly concentrated in a few hands. Of the top 40 Indian families/family groups, only 5 did not originate from the large Indian groups, as at the end of the 1980s.
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Even the ‘newness’ of the new Indian business houses or firms we have been talking about is only in the limited sense, in that they did not have a prominence—of the kind they acquired subsequently—at the end of the 1980s. The overwhelming majority, however, were already in existence before liberalization and were often incumbent firms in the sectors in which they acquired their subsequent prominence, or in related ones. This reinforces the conclusion that the entrepreneurial base from which the major Indian firms of today have been mainly drawn was one that was largely already in existence before the initiation of liberalization. What happened to Technological Dynamism? Opening up of the economy has not meant that foreign capital has overrun Indian big business. Instead many Indian groups have themselves taken major strides towards internationalization. This success of Indian firms at home and abroad, however, has not been achieved by eliminating their old weakness in the technological sphere. The evidence suggests that with the possible exception of the pharmaceutical industry, there has been no significant increase in the innovative capacity of the Indian private sector (Mani 2009). Table 3.3 confirms this by showing that Indian firms have typically very low levels of R&D expenditure. Without exception, all the 16 groups with R&D expenditure to net income ratio of above 3 per cent are pharmaceutical firms. Even in pharmaceuticals, however, Indian firms lack drug development capabilities. They have, therefore, basically relied on their established strength in generics due to India’s earlier protective patent regime, and licensing of molecules developed by their own R&D efforts (Chaudhuri 2008; Jha 2007). Generally, however, Indian firms have circumvented their limited technology development capabilities in a variety of other ways: sourcing technology from specialized technology suppliers, outsourcing to foreign firms, and, wherever possible, through the older traditional routes of technological collaboration and joint ventures with multinational firms. It can also be posited that there is some relationship between the failure of Indian business groups to develop any significant technological capacity and their pattern of expansion being oriented towards non-manufacturing activities. In a number of services and construction activities, the role of self-development of technology tends to be
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Table 3.3 R&D Intensity of Indian Business Groups and Independent Companies, 2008–9 R&D Expenditure to Net Income Ratio Range (%) > 10 5–10 3–5 2–3 1–2 0.5–1 0–0.5 0 All groups Other companies TOTAL
No. of Groups
No. of Average R&D Share in Share in Companies Expenditure Total Total R&D to Net Income Expenditure Income (%) (%) Ratio (%)
4 7 5 3 25 31 146 211 432
6 21 12 8 154 155 639 441 1436 2854 4290
11.87 6.87 4.56 2.33 1.67 0.73 0.15 0 0.64 0.36 0.56
0.42 1.33 0.53 1.06 10.48 4.76 44.1 9.64 72.31 27.69 100
8.79 16.17 4.25 4.39 30.97 6.16 11.59 0 82.32 17.68 100
Source: CMIE, Prowess database.
limited, and increased technological sophistication is mainly facilitated by technical equipment suppliers and software service providers. In the other highly internationalized sector apart from pharmaceuticals, that is information technology (IT), Indian business has no presence in the hardware segment. Even in software, innovative activity in India has been mainly by foreign R&D units (Mani 2009) and Indian firms have found their niche in a relatively subordinate position to the internationally dominant firms (D’Costa 2004). It has also been suggested that the foreign acquisitions by Indian firms reflect attempts at acquiring missing competitive strengths, such as innovative capacity, rather than being based on these (Nayyar 2008). Big Business and Government Policy One of the automatic consequences of the post-1991 economic policy paradigm has been that the scope for the operation of the kind of influence over government policy Hazari and Dutt had talked about has increased. The underlying philosophy of the liberalization strategy and the fiscal constraints inherent in it have mutually rein-
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forced their common effect of placing private corporate capital in the position of being the prime driver of the growth and development process. If public investment cannot be used to play this role, as was in principle possible in the past, then policy has to be necessarily oriented towards encouraging private investment through ‘concessions’ and ‘incentives’ to those in a position to control that investment. In a federal setup like India’s, this leverage of private capital over the state has been enhanced by the competition for investment between states that liberalization has forced them into. The exercising of this leverage often has adverse fiscal implications, involving extraction of tax concessions and other costs, further reinforcing the dependence on private capital. The retreat from public sector monopoly in many key sectors has also had a dual effect. On the one hand, this has reinforced the occupancy of the commanding heights of the economy by private corporate capital, and specifically their clout and influence on regulatory policy in many of these sectors. The latter acquires an additional significance because the major sectors that have been de-reserved and/or opened up for increased participation of the private sector— telecom, power, mining, petroleum and gas, banking and finance, insurance, airlines, etc.—are the sectors that necessarily require specific, and not just general, regulation. Real estate and public–private partnership in infrastructure also have a similar character insofar as private capital’s gains do depend on securing favourable decisions of public authorities in these areas. This has meant that the scope for big business manipulation of the regulatory regime has not gone with the elimination of earlier controls like industrial licensing. Only its sphere may have shifted somewhat, but alongside a shift in the relative importance of these for private capital too. Indeed the incentive for corrupting the public decision-making process has increased rather than come down, and liberalization has consequently failed to be the panacea for corruption that it was touted as. Thus, as private capital’s role in the economy became larger and more dominant, its influence over policymaking also increased. Liberalization has not meant that the state has become irrelevant to the working of the economy. The grip of big business over determining what the government would or would not do has however increased as the weight of the countervailing element has come down. This potentially undermines India’s democracy as the capacity of the
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state to be autonomous from private capitalist interests and accommodate the interests of other sections of society has come down. Erosion or Intensification of Private Monopoly Power The features of India’s economic and industrial structure that made for the original concern with the monopoly problem are clearly still present, two decades after the changeover to the liberal economic strategy. Private corporate concentration has not disappeared and has, instead, become more pronounced in India after liberalization. With the quantitative increase in the weight of the private corporate sector and its spread over a wider range of activities, the influence of the corporate sector over the economy’s trajectory and on government policy making has increased. Liberalization has structurally increased the social power of big business or the concentration of economic power. If, therefore, it has to be said that the monopoly problem is absent in contemporary India, then it has to be argued that corporate concentration has become benign in terms of its consequences because of the competitive environment created by liberalization and economic openness. There are, however, several reasons as to why it is difficult to see how domestic and global competition can prevent concentration from being the common detriment—something that Hazari had warned about decades ago.8 Competition and monopoly are less antagonistic than may appear at first sight. It can be argued that as the Indian market and economic space have become less segregated from the international economy, the natural logic of competition has dictated that international firms and big domestic players should come to dominate major industries. Global competition, thus, has had a concentration-enhancing effect. Liberalization of financial sector has also contributed by opening up greater access to domestic and foreign financial markets for big firms. Global competition also provides the context for corporate interests and priorities to press down to a greater extent on an already constrained state. The state is expected to support the ‘competitiveness’ of its firms and of its economy as a location for production. These can lead to tax concessions and particular public expenditure priorities, for which the costs may be borne in the form of squeezing of socially important public expenditures.9 Similarly, it can be the driver behind making labour markets more amenable to
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compressed wages. Successful business firms also become the symbols and instruments of national economic achievement in the competitive global economy, making it harder for discipline to be imposed on them. In many sectors, as already indicated, the state’s role in determining the winners and losers still remains important. Competition in such cases strengthens the incentive to corrupt the public decisionmaking system. All these acquire significance on account of the fact that there are a number of disturbing features of corporate-led growth in India which clearly need to be addressed, and corporate power can be an impediment for this. The highly iniquitous nature of that growth, the sorry state of employment expansion, and indeed even the lack of industrialization are some such features that represent the other side of the increasing prominence of the corporate sector. Alongside the directly economic factors, concentrated corporate power can also be considered as one of the self-reinforcing elements that have contributed to locking the Indian economy into such a trajectory. That policymaking is unable to recognize this or address it may therefore reflect not the non-existence of a monopoly problem, but precisely its opposite. NOTES 1. Some of these studies are Hazari (1966); Indian Economic Association (1967); Joshi (1965); Kothari (1967); Mohnot (1962); Namjoshi (1966); Nigam and Joshi (1963). Earlier studies include Mehta (1952a); Roy (1953); Sharma (1955); Nigam (1959); Nigam and Chaudhuri 1960. 2. Aggregate concentration, in practice, has also meant concentration in the size distribution of enterprises in a broad sector of the economy (like the industrial sector), though an alternative expression, general concentration, too has been used to refer to such concentration in an intermediate domain (Sylos-Labini 1969). 3. Mainstream industrial organization theory has been found to be somewhat wanting in this regard, its framework tending to make for a neglect of the effect of aggregate concentration on market functioning (Davies et al. 1988). 4. Described as the Hazari-Dutt perspective (Chandrasekhar 1999), the most systematic exposition of this can be found in Ghose (1974a; 1974b; 1974c). 5. The MIC did not specially list out the large independent companies, but they can be identified from the longer list of companies with assets of Rs 1 crore or above that it put together. 6. This was the asset limit for registration under MRTP Act applicable in 1990. 7. The actual number of groups in 1966 was 43 including the ACC group. This group had been treated as an independent group by the MIC and the ILPIC
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because four otherwise distinct groups jointly controlled the ACC companies. One of these was the Tata group, and the ACC group of companies has been included in the Tata group in 1990. Therefore, for making the compositions at the two points of time comparable, the ACC group has been treated as part of the Tata group even in 1966. 8. ‘[C]ompetition cannot, in any event, be an effective remedy against the concentration of economic power in India’ (Hazari 1966: 359). 9. In the Indian scenario, the extended tax holiday enjoyed by the highly profitable IT sector is a case in point (Chandrasekhar 2003).
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Kumar, Nagesh. 1982. ‘Regulating Multinational Monopolies in India’, Economic and Political Weekly, 17(22): 909–17. ———. 1988. ‘Place of Foreign Controlled Enterprises in Indian Manufacturing’ Working Paper (mimeo), Institute for Studies in Industrial Development, New Delhi. ———. 2000. ‘Mergers and Acquisitions by MNE’s, Patterns and Implications’, Economic and Political Weekly, 35(32, August 5–11): 2851–8. Lal, Deepak. 1971. ‘Planning and Concentration of Economic Power’, Economic and Political Weekly, 6(30/32):1693–6. Lynch, David. 1949. The Concentration of Economic Power. Third Printing. New York: Columbia University Press. Mani, Sunil. 2009. ‘Is India Becoming More Innovative since 1991? Some Disquieting Features’, Economic and Political Weekly, 44(46): 41–51. Mazumdar, Surajit. 2006. ‘Business Groups and Concentration in the Private Corporate Sector in India’, unpublished thesis, Jawaharlal Nehru University, New Delhi. ———. 2008a. ‘Crony Capitalism and India: Before and After Liberalization’, Working Paper No. 2008/04, Institute for Studies in industrial Development, New Delhi. ———. 2008b. ‘The Corporate Sector and Indian Industrialization: A Historical Perspective’, in S.R. Hashim, K.S. Chalapati Rao, K.V.K. Ranganathan, and M.R. Murthy (eds), Industrial Development and Globalisation, pp. 193–236. New Delhi: Academic Foundation. Mehta, M.M. 1952a. Combination Movement in Indian Industry: A Study of Concentration of Ownership, Control and Management in Indian Industries. Allahabad: Friends’ Book Depot. ———. 1952b. ‘Industrial Concentration in India’, Indian Journal of Economics, 32(126): 297–304. Mehta, Pradeep S. 2005. Towards a Functional Competition Policy for India: An Overview. New Delhi, Academic Foundation. Melman, Sofia. 1963. Foreign Monopoly Capital in Indian Economy. New Delhi: People’s Publishing House. Merhav, Meir. 1969. Technological Dependence, Monopoly, and Growth. Oxford: Pergamon Press. Mohnot, S.R. 1962. Concentration of Economic Power in India: A Statistical Study of Concentration and Diffusion of Economic Power in India. Allahabad: Chaitanya Publishing House. Namjoshi, M.A. 1966. Monopolies in India: Policy Proposals for a Mixed Economy. Bombay: Lalvani Publishing House. Nayyar, Deepak. 2008. ‘The Internationalization of Firms From India: Investment, Mergers and Acquisitions’, Oxford Development Studies, 36(1): 111–31. Nigam, Raj K. 1959. ‘First Round: Basic Facts’, in Managing Agencies in India, New Delhi: Department of Company Law Administration, Ministry of Commerce and Industry.
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4 Role of Foreign Direct Investment in India’s Industrial Development RAJIV JHA AND RAVINDER JHA
India has been somewhat reluctant and late in joining the ‘new’ foreign direct investment (FDI) bandwagon. The ‘old’ FDI of the period between the 1950s and the 1970s was a legacy of import substitution. As domestic markets in developing economies were barricaded against imports through high tariffs, foreign capital scaled the tariff walls to set up production capacities, partly to neutralize the fall in exports. This tariff-hopping investment was obviously driven by, and catered to, the domestic market. The inducement to export was thwarted not only because profit margins were higher in a home market sheltered from import competition through tariffs and quotas but also because its size was rapidly increasing because of state-led investments. Inhibiting exports further were restrictions placed by the parent foreign company on exports from its subsidiaries (or other firms where it held a controlling stake) that encroached upon its home base. The ‘old’ FDI, in the eyes of its critics, was nothing but a form of ‘rent seeking’ mechanism. The 1980s heralded a ‘new’ form of foreign investment, which, unlike its rent-seeking counterpart, was supposed to be efficiency seeking. Following the collapse of the Bretton Woods system in the early 1970s and the dismantling of tariff barriers in the 1980s, the nature and texture of FDI changed. According to this view, a new international division of labour was emerging as capital from the core relocated to low-wage sites in the periphery. This dispersion of industry was aided by the revolution in transport and communications technologies: The former entailed a ‘death of distance’ by shrinking the share of transport cost in the cost of a product; the latter simplified
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managerial control across geographical boundaries. The reduction in tariffs provided easy access, within developing economies, not only to final consumer goods but also intermediate goods that could be assembled into final goods. Marx’s insight about ‘heterogeneous manufacture’ found new applications: Changes in technology split the production process into independent sub-processes, such as design, material extraction, component production, and assembly, and it was possible to relocate the sub-processes in developing economies that would now cater to global demand. Through ‘offshoring’ or otherwise, FDI would transform developing economies into export platforms and thus redraw the global industrial map. While new economic geography cautioned that the ‘spread effects’ of FDI could be balanced by centripetal forces which could lead to ‘clustering’ of industry at the core (because of the size and sophistication of product markets, the existence of thick labour markets, and the presence of specialized input suppliers), it appears that the proponents of the new foreign investment found a more receptive audience. In 2004, the Asian Development Bank reported that while multinational corporations (MNCs) contributed to 24 per cent of the total manufactured exports from developing countries in about 1980, this figure had increased to 36 per cent by 1990 (Asian Development Outlook, 2004: 224). In more general terms, foreign capital permits domestic investment not to be hemmed in by domestic savings as it drives a wedge between domestic saving and domestic investment. Not only that, should the economy be constrained by foreign exchange because domestic savings cannot be transformed into exports, foreign capital can widen the import bottleneck. As a form of foreign capital, FDI is held as superior to external commercial borrowing because it does not create debt; among the two forms of non-debt-creating capital, it is not subject to the volatile mood swings of foreign portfolio investment (see Table 4.1). Among the more common forms of FDI are acquisitions of, and mergers with, domestic firms (by acquiring majority equity stake or just a controlling block) and ‘greenfield investment’, which entails the construction of a new plant. The latter is particularly attractive because it is supposed to be an important channel of technology transfer for production for global markets. It was only in 1991 that India revamped its FDI policy as a part of the radical restructuring of its industrial policy. The hope was that, as in China, FDI would use India’s cheap but skilled labour force to
6,130 2,021
2001–2 5,035 979
2002–3 4,322 11,377
2003–4
Source: Reserve Bank of India (RBI) Bulletin, December 2010.
4,029 2,760
2000–1
Foreign Investment Inflows (in US$ million)
Direct Invt Portfolio Invt
Table 4.1
6,051 9,315
2004–5 8,961 12,492
2005–6 22,826 7,003
2006–7
34,835 27,271
2007–8
35,180 –13,855
2008–9 (P)
37,182 32,375
2009–10 (P)
ROLE OF FOREIGN DIRECT INVESTMENT
Table 4.2
India China
129
India and China: Shares in the FDI Flows to Developing Economies 1990
1995
2001
2005
2006
2007
2008
2009
0.7 9.9
1.9 32.4
2.6 21.8
2.3 21.9
4.7 16.7
4.4 14.8
6.4 17.2
7.2 19.9
Source: UNCTAD, FDI/TNC database, available at www.unctad.org/fdistatistics, last accessed on 20 January 2011.
Table 4.3 India and China: FDI Inflows as a Proportion of Gross Fixed Capital Formation 1990 1995 2000 2005 2006 2007 2008 2009 Developing Economies China India
4.0 3.5 0.3
8.1 15.0 2.2
15.9 10.0 3.4
11.8 7.7 3.0
13.0 6.4 6.8
14.0 6.0 6.3
12.5 5.3 9.6
9.3 4.0 8.4
Source: UNCTAD, FDI/TNC database, available at www.unctad.org/fdistatistics, last accessed on 20 January 2011.
augment its lacklustre export performance and enhance its indigenous technological capabilities. Tables 4.2 and 4.3, which compare FDI flows into India and China along two dimensions, provide a yardstick to judge India’s efforts in this regard. A BRIEF HISTORY OF FDI IN INDIA TILL THE 1990S At the time of Independence, there was an explicit association of foreign capital with colonial subjugation. Before 1947, much of the FDI that flowed into India catered to the British need for’ raw materials, food, and markets’ (Kidron 1965: 28): Tea, jute, and cotton were typical outlets for British investment and allied to their exports were investments in shipping and railways. ‘In 1946, despite war time developments, cotton and jute textiles accounted for 45% of the fixed capital in 29 major industries’ (Kidron 1965: 21). The Second Five Year Plan (1956–61) not only created space for domestic capital through import substitution but also sought to transform the extant economic structure through a state-led thrust on heavy industries and capital goods. Though foreign investment was sought to augment savings
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and promised ‘national treatment’, there was on the whole, a degree of scepticism that pervaded Indian foreign investment policy. As the economy hobbled through the foreign exchange crisis of 1958, policy priorities were reshuffled to welcome foreign investment. Foreign capital straddled tariff barriers, enticed by the lucrative profit margins in an economy that was expanding because of state investment. Foreign subsidiaries and joint ventures were encouraged, and by the end of 1961, foreign controlled assets constituted slightly more than two-fifths of the total assets of the organized private sector (Kidron 1965: 186). The bulk of this investment went into manufacturing (almost 40 per cent), tea plantations absorbed about a fifth, and petroleum refining a shade more than a quarter. Though there were some variations, government policy till the early 1980s could be characterized as an attempt to encourage technology transfer and restrict equity investment by foreign firms. Informing this policy was, perhaps, the view that late industrializers do not have to constantly reinvent the wheel, and there exists a shelf of foreign technology that they can draw upon, and thus it is the ‘transfer of technology’ which should be the real objective of government policy. The Foreign Exchange Regulation Act (FERA), 1973, which placed a ceiling of 40 per cent on equity participation, unless a firm exported a substantial share of its output, ‘became the most important tool in the hands of the government for regulating foreign firms,’ as Chandra (1991: 679) emphasizes. The control exercised by foreign capital was obviously not eclipsed by the form it took—enticed by the high-profit margins offered by the protected Indian market or as a strategic weapon against other MNCs which had set up operations in India, there was an increase in foreign investment through the 1970s. This increase occurred despite a decline in the number of foreign subsidiaries and an increase in the number of Foreign Controlled Rupee Companies (FCRCs).1 The control manifested itself in several forms, including the share of foreign controlled firms in the gross sales of the organized manufacturing sector (excluding the public sector units): This share, despite FERA, remained close to 31 per cent right through the 1970s and dropped to 25.4 per cent only by 1989–90 (Athreye and Kapur 1999). In terms of sectoral allocation of FDI, the ascent of manufacturing coincided with the waning importance of the plantations and petroleum sectors. Within manufacturing, industrial chemicals, pharmaceuticals, and
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electrical goods and machinery remained the three primary recipients of foreign investment, although their share remained stuck at about 40 per cent through the seventies (see Table 4.4). Perhaps, the single most effective instrument of control in the hands of foreign capital till the ‘structural break’ in policy occurred in 1991 was technical collaboration. Latecomers to industrialization do not have to always reinvent the wheel as they have access to a shelf of disembodied technology that they can draw upon through licensing or joint ventures with foreign firms: joint ventures without equity participation by foreign capital became the significant mode of technology transfer in India till the mid-1980s (see Table 4.5). In this, India was simply following in the footsteps of another successful late industrializer, Japan. The intent of technology policy has always been the creation of indigenous technological capability. The latter has often involved a process of technological ‘catch-up’, imbibing products and diffusing processes that do not constitute the cutting edge of technology at the Table 4.4
I. II. III. IV.
V.
Sectoral Allocation of FDI (shares in percentage)
Sector
1961
1969
1972
1974
1978
1980
Plantations Mining Petroleum Manufacturing Industrial Chemicals Pharmaceuticals Electrical Goods Services Total (Rs million)
17.9 … 25.6 37.8 … … … …
16.6 0.5 17.8 53.2 10.9 10.8 10.5 11.9 7,377
14.8 0.8 15.0 64.2 11.7 11.3 11.2 5.1 8,149
11.7 0.8 14.7 68.4 12.1 11.1 10.9 4.3 9,134
6.3 0.9 3.9 84.3 16.6 11.6 11.3 4.7 8,760
4.1 0.8 3.9 87.0 16.1 13.0 12.0 3.4 9,332
Source: Kidron (1965: 186); RBI Bulletins (July 1975: 440, 443, March 1978: 183, April 1985: 287, 291).
Table 4.5
Foreign Collaboration Approvals (1948–90)
Period No. of Collaborations Proportion of Collaborations with Foreign Equity (%) Source: Kumar (1994: 44).
1948–58
1959–66
500 NA
2,079 36
1967–79 1980–90 2,904 16
6,587 24
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core. India not only showed a distinct preference for purely technical agreements, but also chose to regulate the pecuniary and non-pecuniary aspects of these technical collaborations—the former consisted of direct costs such as royalties and lump sum payments, the latter comprised several other aspects of technical agreements such as duration, the right to sub-license, the right to export, etc. It has been pointed out that the stringency of the regulatory regime, by strengthening the bargaining position of the Indian buyers, was inversely related to the costs of technology transfer (Subrahmanian1986). Relying on various rounds of RBI surveys, Subrahmanian reaches two important conclusions: first, the costs of technology transfer, particularly the royalty sales ratio, were lower between 1964–5 and 1969–70 when compared with an earlier period of lax regulations. Further, if we change our lens from examining periods of strict regulation to the kind of firms which bore the brunt of regulation, the conclusion that ‘regulation reduces cost’ is further strengthened. Not only were costs incurred by foreign subsidiaries higher than foreign controlled firms with minority equity participation (which, in turn, performed worse than firms with simple technical collaborations) but they also registered relatively poor performance as exporters. Critics of India’s technology policy have raised two questions. First, did the suppliers of technology tailor their supplies according to the payments received? In other words, did India receive somewhat obsolete technology because regulation trimmed payments? Second, did technical collaborations lead to repetitive imports of technology? Despite repeated imports of technology [particularly significant examples include Bharat Heavy Electricals Limited (BHEL) and Hindustan Machine Tools(HMT)] through licensing or joint ventures, Indian firms proved somewhat incapable of going beyond simple imitation to creative adaptation. The abysmal record of Indian firms at adapting and further developing the acquired technology cast its shadow on the nature of the regulatory regime itself. FDI IN THE 1990S AND BEYOND: TRENDS AND IMPACT The government adopted a more liberal foreign investment policy as a part of industrial reforms of 1991. Instead of a case-by-case consideration of each foreign investment proposal, the RBI was authorized to grant automatic approval to foreign investment up to 51 per cent in
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34 high-priority industries, provided that a kind of foreign exchange neutrality was maintained: The foreign equity inflow was to finance the import requirement of capital goods and outflows on account of dividend remittances were to be balanced by export earnings over a period of seven years from the commencement of production. The existing FERA companies were permitted to increase their stake from 40 per cent to 51 per cent; as a result, proposals of 2,154 foreign collaborations were approved, including 894 proposals with foreign equity participation, equivalent to Rs 42.9 billion in 1991–2, which was more than three times the foreign investment approved in the previous decade (Economic Survey 1992–3: 109–10). In the 1990s, the number of foreign technology collaborations was much lower than the foreign equity investment as a result of removal of FERA restrictions (see Table 4.5 in comparison with Table 4.6). The Data The data on FDI will be discussed along the various axes as given in the following paragraphs. Magnitude of FDI Flows Though the FDI flows to India rose in the 1990s and in the 2000s, the jump in the total foreign investment from US$ 4.9 billion in 1995–6 to US$ 62 billion in 2007–8 (almost a thirteen-fold increase) merits a closer look. The increase in FDI from 1995–6 to 2000–1 was roughly US$ 300 million, but the increase 2000–1 onwards has been of a much greater magnitude. As FDI was redefined in 1991 (FCRCs to Foreign
Table 4.6 Total Foreign Technology Agreements and Foreign Direct (Equity) Investment Approvals Year No. of FDIs Approved No. of FTCs Approved
1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 289
692
785
661
828
691
1,062 1,355 1,559 1,665 1,191 1,726 1,550 792
Source: Economic Survey (2000–1: 133). Note: FTC – Foreign Technical Collaboration.
982
744
660
595
498
365
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Direct Investment Companies [FDICs]), following the criterion laid out by Organisation for Economic Co-operation and Development (OECD) that a 10 per cent share in equity capital qualifies an enterprise as FDI, the distinction between pure financial speculators and FDI has gone blurred. The former, supposedly, had bet on shortterm capital gains, while the latter hoped to reap long-term returns through involvement in the actual process of production. Fulfilling the OECD’s FDI criterion in equity terms does not necessarily ensure that the attributes of FDI sought by the host countries (for instance, modern technology-induced export enhancement) also flow in. Chandrasekhar (2007) was perhaps the first to underscore the importance of private equity funds (venture and non-venture capital) as a form of FDI in the Indian context. Private equity funds are really in the business of acquiring equity in firms to make a windfall gain through resale to foreign firms which have a more lasting interest in that sector. The involvement of private equity funds in mergers and acquisitions (M&As) rose from US$ 1.1 billion in 2004 to a remarkable US$ 7.9 billion in 2006, with more than 29 M&A deals valued at over US$ 50 million in 2006 (Chandrasekhar 2007: 1143). Rao and Dhar (2011) build on Chandrasekhar’s work to analyse the nature of FDI inflows in the recent past. Using data from the various issues of the Secretariat of Industrial Assistance (SIA) newsletter, SIA Newsletter, on 1,832 equity flows, each accounting for at least US$ 5 million between 2004 and 2008, Rao and Dhar find that a little less than half of the flows could be considered as foreign investment with a long-term interest in terms of technology transfer, building production capability, etc. Further, in their opinion, only 8 per cent of the total inflows in the manufacturing sector can be regarded as genuine FDI flows in terms of bringing in new facilities, etc. Most of the private equity/venture capital firms have routed investments through tax havens and have taken the automatic route, like foreign institutional investors: surely one more example of the ‘antinomies of transnationalism’. Routes Taken by FDI: Automatic, Government, and M&As There are two routes that FDI can take: the automatic route and the government-administered route. Under the automatic route, the non-resident investor or the Indian company does not require any
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approval from the Reserve Bank of India (RBI) or the government to make an investment. Under the government route, the prior approval of the government through the Foreign Investment Promotion Board (FIPB) is necessary. The third route, viz., the acquisition of shares of Indian companies by non-residents under section 5 of the Foreign Exchange Management Act (FEMA), 1999, has been included as a part of FDI since January 1996. The bulk of FDI inflows are through the automatic route; the acquisitions route has, of late, gained in importance with its share peaking to 27.5 per cent in 2006–7. In the second half of the 1990s, as the FDI flows picked up, there was a corresponding decline in the importance of non-resident Indian (NRI) inflows (see Table 4.7). Source of FDI: Reinvested Earnings vs Equity The change in reporting method of data on FDI, keeping in line with the international best practices, also resulted in a steep increase in the FDI flows. The data from 2000–1 and onwards was revised to include reinvested earnings of incorporated entities and unincorporated entities, and other capital, which includes short-term and long-term inter-corporate borrowings along with direct equity. As can be seen from Table 4.7, reinvested earnings and acquisition of shares contributed more than half of FDI inflows in 2005–6 and 2006–7, though their share has declined in more recent years. Conceptually, these categories do not constitute fresh greenfield investments despite their inclusion in FDI. Mode of Entry: Greenfield vs M&As If the market size is not growing, acquisitions of established firms are an important way of controlling the market and eliminating competition. The MNCs, with their financial strength and well-known brands, find it easier to take this ‘inorganic’ path to growth. Before the reforms, firms had to make an offer to acquire 25 per cent equity in the case of takeovers. Not only was this limit reduced to 10 per cent in 1991 but the earlier restriction under the Monopolies and Restrictive Trade Practices (MRTP) Act, 1969, where the government could prevent an acquisition by a foreign firm if it felt that the acquisition would result in an increase in concentration, was also removed.
– 1,314 2,144 2,821 3,557 2,462 2,155 2,400 4,095 2,764 2,229 3,778 5,975 16,481 26,864 32,066 27,146
I Equity* (a + b + c + d)
66 701 1,249 1,922 2,754 1,821 1,410 1,456 2,221 919 928 1,062 1,126 2,156 2,298 5,400 3,471
Government (SIA/FIPB) (a)
Composition of FDI (US$ million)
– 171 169 135 202 179 171 454 767 739 534 1,258 2,233 7,151 17,127 213,321 18,987
RBI (b)
63 442 726 764 601(26.6) 462(10.6) 574(14.9) 429(9.0) 916(14.4) 916 (18.2) 735 (17.0) 930 (15.4) 2,181 (24.3) 6,278 (27.5) 5,148 (14.8) 4,632 (11.1) 3,148 (8.3)
Acquisition of shares* (c) – – – – – – – 61 191 190 32 528 435 896 2,291 702 1,540
Equity Capital of Unincorporated Bodies# (d) – – – – – – 1,350 1,645 1,833 1,460 1,904 2,760 5,828 7,679 9,032 8,668
II Reinvested Earnings+ – – – – – – – 279 390 438 633 369 226 517 292 776 1,931
III Other capital++ 129 1,314 2,144 2,821 3,557 2,462 2,155 4,029 6,130 5,035 4,322 6,051 8,961 22,826 34,835 41,874 37,745
IV Direct Investment (I + II + III)
Source: RBI Bulletins, January 1999 (Table 47) and January 2012 (Table 44). Notes: The proportion of acquisitions of shares as a proportion of direct investment is reported in parenthesis from 1997–8. Before that, NRI investment constituted a large fraction of ‘acquisition of shares’. *Includes NRI investments between 1994–5 and 2000–1 # Figures for equity capital of unincorporated bodies for 2009–10 are estimated as the average of previous two years. + Data for 2009–10 are estimated as the average of previous two years. ++ Data pertain to inter-company debt transactions of FDI entities. Data from 2000–1 has been revised and cannot be compared with the data for previous years.
1991-92 1994–5 1995–6 1996–7 1997–8 1998–9 1999–2000 2000–1 2001–2 2002–3 2003–4 2004–5 2005–6 2006–7 2007–8 2008–9 (P) 2009–10 (P)
Table 4.7
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As government approval for M&As was no longer required and 100 per cent foreign equity was permitted in most sectors, a wave of M&As occurred, resulting in a restructuring of both firms and industries (Khanna 1999). The United Nations Centre for Trade and Development (UNCTAD) data shows an increase in the share of M&As since 1990, peaking at the end of 1990s, with a drop in 2005, and again in 2009 following the collapse of financial markets in 2008. In benchmarking India with China, we observe the lower share of M&As for China, reflecting a higher share of greenfield investments entering China (see Table 4.8). Though no official data is available on M&As in India, Kumar (2000) studied the trend of M&As for the period 1993–2000 using a database prepared by Research and Information Systems (RIS). The total number of M&As had risen to 256 in cumulative terms by 2000, from a meagre 13 in 1993. Several of these M&As of the 1990s, took the form of horizontal acquisitions, particularly in the consumer goods industries. These acquisitions, without augmenting the technological base of the economy, merely result in an increase in market concentration in these segments. Typifying these acquisitions were Coca-Cola’s takeover of Parle Agro, Hindustan Lever’s acquisition of a few ice-cream companies, Gillette’s takeovers of Wilkinson and Malhotra, amongst others. In the automobile industry, a typical mode of entry was setting up a joint venture with an established local group to acquire assets, existing facilities, and the distribution network of the local partner. Ford formed a joint venture with Mahindra and Mahindra, General Motors with Hindustan Motors, and Mercedes Benz with Telco to reap these benefits. Not only that, a substantive fraction of the upsurge in the late 1990s did not go into establishing greenfield capacities but into raising the foreign stake in the paidup capital of FCRCs, through the issue of new shares to the foreign Table 4.8
India and China: Shares of M&As in the FDI Inflows
Country
1990
1995
2001
2005
2006
2007
2008
2009
2.1 0.0
9.7 1.1
12.5 4.4
6.9 10.0
21.8 15.5
17.6 11.2
25.8 5.0
17.5 11.5
India China
Source: UNCTAD, FDI/TNC database, available at www.unctad.org/fdistatistics, last accessed on 20 January 2011. Note: TNC – Transnational Corporation.
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investor. Often, this took the form of delisting from the stock exchange as the foreign company decided to raise its stake to 100 per cent.2 In the decade of 2000–10, some important acquisitions took place in the financial sector: Hongkong and Shanghai Banking Corporation (HSBC) acquired a minority stake in India’s Unit Trust of India (UTI) Bank in 2004; in 2006, the mutual funds industry faced a major takeover when Franklin Templeton gobbled up a giant like Kothari Pioneer. Other sectors also saw M&As like never before—in the telecom industry, the world’s largest mobile phone company, Vodafone, acquired Hutchison Essar in 2007. The domestic pharmaceutical industry, which has been a major export earner for the manufacturing sector, witnessed several acquisitions as a result of reintroduction of product patents. The leading pharmaceutical company, Ranbaxy, was acquired by the second-largest Japanese drug company, Daiichi Sankyo, in 2008 to gain a foothold in the global generic drug market, keeping in view the due expiry of many patented molecules. Given the new product patent regime of the mid-1990s, large Indian pharmaceutical firms gave in, because they would be run over in the race for the discovery of new molecules. The trend of M&As in India followed the global pattern, as shown in Figure 4.1.
70
percent share
60 50 40 India 30
World
20
Developing economies
10
19
90 19 92 19 94 19 96 19 98 20 00 20 02 20 04 20 06 20 08
0
Figure 4.1 Share of Mergers and Acquisitions in FDI Source: UNCTAD, FDI/TNC database, available at www.unctad.org/fdistatistics, last accessed on 20 January 2011.
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After a sustained rise from 30 per cent of global FDI flows in 1992 to over 60 per cent of global FDI flows in 2000, the collapse of financial markets in 2008 led to a drop in the number of M&As from 7,018 in 2007 to 1,802 in 2010. As a form of FDI, M&As are more sensitive to the state of the financial markets. This was witnessed in India too: after reaching a high of 27.5 per cent in 2006–7, the travails of the global financial order diminished the importance of M&As in Indian FDI flows. Sectoral Allocation of FDI We have seen that if FDI consists of greenfield investments by multinational firms which are attracted because of cheap labour—skilled and unskilled—then the developing economy may well be a host to the virtuous nexus between FDI and exports. In India, the debate over the orientation of FDI was encapsulated in the phrase ‘potato chips vs computer chips’. In 1991, Foreign Exchange Regulation Act (FERA), 1973, which was passed in 1973 was virtually abandoned. It was finally repealed in 1999 and replaced by a milder FEMA, the Foreign Exchange Management Act. Foreign companies with more than 40 per cent stake were to be treated at par with Indian companies and 34 priority industries, including chemicals, fertilizers, automobiles and software, and metallurgical industries, were permitted to transfer technology without prior approval of the government on the terms of transfer. In terms of sectoral composition, the policy driven ten-fold increase in FDI from the early 1990s to 1997 yielded only one surprise: not only was there an expected drop in the share of FDI catering to the plantations sector, but the share of the manufacturing sector in FDI inflows also almost halved in 1996 vis-à-vis the 1992 levels (see Table 4.9). As the combined share of chemicals, transport equipment, machinery and machine tools, and electricals in FDI dropped from 65 per cent to just 30 per cent by 1998, that of the ‘other’ sector rose from a miniscule 3 per cent at the beginning of the decade to 35 per cent by March 1997. The power sector, starved of domestic investment due to the fiscal bind facing the government, was an important constituent of the ‘other’ sector (though foreign equity up to 100 per cent was permitted in electricity generation, transmission, and distribution in 1998). The year 1998 also witnessed the opening up of roads, ports,
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Table 4.9 Changes in Sectoral Composition of FDI Stock in 1990s (share in percentage) Industry
I. II. III. IV.
V. VI
Plantations Mining Petroleum Manufacturing Transport Equipment Machinery and Machine Tools Electrical Goods and Machinery Chemicals and Allied Products Services* Others Total (Rs Million)
End-March 1992
1996
1997
8.5 0.6 2 83.2 14.9 15.1 13.2 33.7 2.3 3.3 38,400
1.7 0.2 1.2 47.1 14.2 12.7 11 23 10.9 38.8 240,200
1.2 0.1 0.9 48 14 11 16.8 18.6 14.9 34.8 365,100
*Services include trading, construction and turnkey projects, transport, utilities, and financial and non-financial services. Source: RBI Bulletin, October (2000: 1008).
and harbours to 100 per cent FDI under the automatic route, subject to the condition that the foreign equity in projects of these industries would not exceed Rs 1,500 crore (Economic Survey 1998–9). In 2000, the dividend balancing and export obligation conditions, which applied to 22 consumer goods industries, were withdrawn. The more significant change in 2000–1 was the opening up of foreign investment to a host of sectors, barring a small negative list. The financial services sector was the primary beneficiary of regulatory largesse: in the private banking sector, FDI (including foreign institutional investor [FII] inflows) up to 49 per cent was permitted under the automatic route and up to 74 per cent under the FIPB route; in 1999, FDI up to 26 per cent was permitted in the insurance sector through the automatic route; and finally, venture capital funds/companies were allowed to invest in domestic venture capital undertakings as well as other companies through the automatic route, subject only to Securities and Exchange Board of India (SEBI) regulations and sectorspecific caps. Thus, there was a dramatic swing in FDI flows in favour of the services sector between 2000 and 2010. In the first decade of the
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141
twenty-first century, FDI inflows fanned across a range of financial services such as banking, information technology services, and construction. Manufacturing had lost its suzerainty to services as far as FDI inflows were concerned, perhaps as a response to the lack of adequate physical infrastructure and the abundant availability of skilled services labour (compare Tables 4.10 and 4.11).
Table 4.10 Sectoral Allocation of FDI (shares in percentage) Sector
August 1991 to December 1999
Transportation Industry Electrical Equipment (Including Hardware, Software and Electricals) Service Sector Telecommunications Chemicals (Other than Fertilizers) Fuels (Power and Oil Refinery) Food Processing Industries Total (Rs million)
8.93 8.05 7.01 6.99 6.91 6.31 4.10 576,821
Source: SIA Newsletter, January 2005.
Table 4.11 Sectoral Allocation of FDI (shares in percentage) Sector Service Sector Housing and Real Estate Construction (Including Roads and Highways) Telecommunications Computers (Hardware and Software) Power Automobiles Metallurgical Industries Petroleum and Natural Gas Chemicals (Other than Fertilizers) Total (Rs million) Source: SIA Newsletter, January 2011.
Jan. 2000 to Dec. 2010
Jan. 2000 to Dec. 2007
Jan. 2008 to Dec. 2010
20.82 7.39 7.00
19.70 4.15 5.25
21.43 9.18 7.96
8.22 8.31 4.55 4.62 3.16 2.39 2.27 5,688,353.4
7.81 15.45 3.39 4.53 2.29 1.84 2.98 2,021,150.6
8.44 4.38 5.19 4.67 3.64 2.69 1.88 3,667,202.8
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In 2005, 100 per cent FDI for development of township, housing, built-up infrastructure and construction development projects was permitted under the automatic route instead of the route regulated by FIPB. The minimum area requirement was reduced for constructiondevelopment projects. The increasing importance of the housing and real estate sector as a recipient of FDI flows is, however, somewhat perturbing. This sector attracted no FDI till 2005; in the three years (2008–10), its share in the total FDI inflows rose to more than 9 per cent, second only to services (see Table 4.11). Apart from being nontradable, the housing market is a prototype of an asset market that is notoriously prone to asset price bubbles. If the world demand for a country’s exports is perfectly price elastic, the price of the nontradables will rise relative to the price of the tradables. As markets for high-quality housing created through FDI are ‘thin’, there are wild swings in demand for such housing as the returns on investing in housing are compared with returns from other asset classes. The housing market is thus prone to intense speculative pressures and sudden booms and busts that could lead to sudden outflows of FDI. Impact of FDI It is often argued that for the acceleration of the rate of economic growth of the developing countries, transfer of technology is absolutely necessary and that the best mode of transfer is through investments by the large international enterprises that not only bring technology but also serve as powerful agents of export growth. In terms of innovation and product differentiation, MNCs are generally the world leaders; they have the managerial, entrepreneurial, and financial resources to seek out and commercially exploit viable production bases in the developing world. It is not clear whether MNCs have a comparative advantage over domestic firms in all industries or whether they can use low-cost segments to locate export bases in all sectors. Many times, the technologies transferred are inappropriate as regards factor use and product type. The host country has to pay direct costs for what they buy (dividends, royalties, technical fees, etc.) and they may be subjected to various types of indirect costs (in forms such as restrictive clauses, transfer pricing and monopolistic pricing practices, and use of predatory market tactics to suppress local competition). Moreover, the net contribution made by MNCs to the capital
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stock of the developing economy and balance of payments is also a matter of concern. The simple view of foreign investment as capital arbitrage contrasts sharply with observations that foreign affiliates borrow appreciable amounts of their capital locally, earn high profits, and take away more capital than they brought in. The foreign investments might gradually drain the economy of its foreign exchange on account of high expenditure on imports as these firms have a greater propensity to import than the domestic firms. Subramanian and Pillai (1979) found that the average import intensity directly varied with the degree of foreign association. The impact of foreign investment on the balance of payments was found to be negative since there were high levels of imports and large quantum of other remittances as against exports. The low export performance of firms with foreign control may have to be explained in terms of the global strategy of a multinational corporation that allocates the world market amongst its subsidiaries rather than allow their domains to overlap. Thus it might cater to the domestic market through its subsidiary and not create its competitor from within. In order to assess the performance of MNCs, the data for the period from 2000 and onwards has been collated from surveys covering finances of FDICs in various issues of the RBI Bulletin, which provide financial performance indicators of non-government, non-financial FDICs. These companies form a very small proportion of the total FDI inflow (for instance, 524 companies selected in 2006–7 composed only 5.5 per cent of total FDI inflows for the period 1991–2006), but due to lack of any comparable data, one is using this data to analyse the behaviour of these firms in terms of exports and imports. Also, the data is not consistent as the same firms do not form the data set for all years. Balance of Payments It would be churlish to deny that a small fraction of the FDI in India is oriented towards exports. Lured by low-skilled labour costs, greenfield investment in software projects in Bangalore by Intel and Texas Instruments for instance, seeks to use India as a base for global exports. In the pre-1991 phase, the bulk of tariff-hopping foreign investment in India was oriented towards India’s domestic market because the profit margins within ‘protected’ Indian markets were much higher than that on exports. Even as the Indian economy opened up to
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trade in the 1990s, the tariffs on consumer goods remained at relatively high levels: Tendulkar and Bhavani (2007: 121) report that the weighted average nominal import duty rate on consumer goods had fallen to 40.1 per cent in 1998–9 (from 83.2 per cent in 1992–3) but had increased to 50.4 per cent in 2004–5. These tariffs were higher than those on intermediate and capital goods and together with the insatiate demand for ‘foreign’ goods, provided a strong inducement to ‘assemble’ and sell consumer durables in the domestic market itself (Chandrasekhar and Ghosh 2002). To the extent that this tendency was reinforced through transfer pricing and enhanced lump sum fees and royalties for technology transfer and the use of foreign brand names, the medium-run impact of balance of payments of such FDI could well be negative. This proposition can be empirically corroborated through the RBI surveys of a small sample of FDICs, profiling their contribution to net foreign exchange inflows. Chandrasekhar and Ghosh (2002) have analysed the RBI data for the 1990s; we extend their analysis to the next decade (see Table 4.12). To begin with, in a classic confirmation of the accelerator theory of investment, the rate of growth capital formation (gross fixed assets) lags the growth of domestic sales by one period. The boom of 2004–5 to 2008–9 witnessed a rapid increase in sales and a lagged increase in capital formation. The most preferred industries for FDI for the entire set of data were chemicals and chemical products and machinery and machine tools. However their performance in terms of export earnings showed improvement only for the last two sets of years, 2006–7 and 2007–8, along with computers. Before that, tea plantations, rubber and plastic products, and wholesale and retail trade were the major exporters. Tea plantations used almost zero per cent of imported raw materials. However, the import–export ratio has been very high for the industries which were the main recipients of FDI, namely, chemicals and chemical products and machinery and machine tools, along with other engineering sectors. Computers and related activities had limited exports with a high import component in their foreign exchange expenditures. The FDI in India seems to be more oriented towards domestic markets than export seeking. Overall, the import intensity of production outpaced the export intensity of production of FDICs, albeit both increased over time. This is partially explained by a pronounced switch in the sourcing of raw materials and components from the domestic economy to imports. Not only that, the increase in
490 490 508 501 524 502 502
No. of Firms
4.2 7.5 12.7 19.3 18.2 27.8 20.2
ROG of Sales
9.7 7.0 6.5 7.7 6.9 16.5 24.5
ROG of GFA
14.06 14.79 14.96 11.12 15.54 13.80 15.42
Export Intensity X/S
Trends in Foreign Inflows for Select FDICs
11.23 11.49 14.53 16.68 20.05 23.89 27.50
Import Intensity M/S
16.09 17.05 21.05 23.91 29.73 21.18 32.93
Sources of Raw Materials, Components, and Stores (Imports/Total) 2,5437.3 3,0256.7 –8163.9 –94910.0 –130500.0 –250070.0 –448940.0
Net Inflow (+/–) (Rs mn)
51.9 61.7 –16.1 –189.4 –249.0 –498.1 –894.3
Net flow/firm (+/–) (Rs mn)
Source: ‘Finances of Foreign Direct Investment Companies’, RBI Bulletins (April 2005, April 2006, May 2008, February 2009, and February 2010). Notes: All ratios are in per cent. ROG: Rate of Growth; GFA: Gross Fixed Assets; X/S: Export Sales Ratio; M/S: Import Sales Ratio.
2001–2 2002–3 2003–4 2004–5 2005–6 2006–7 2007–8
Year
Table 4.12
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INDIAN INDUSTRIALIZATION
sales during the boom also increased the royalty payments on technology transfer and brand names to FDICs, resulting in an increase in the net outflow per FDIC. It has been argued that MNCs cannot be indicted for the parlous state of India’s balance of payments because of the persistence of fresh equity inflows every year. The argument would hold if a new set of MNCs were to bet on India every year. Any given set of MNCs, as the RBI surveys confirm, after bringing in equity once for establishing or expanding an enterprise, use the profits they make on domestic sales to fuel further expansion. If this expansion does not cater to export markets and, further, is based on final stage assembly of imported components and intermediates (for the sale of, say, consumer electronics, domestic appliances, computers, and so on), the domestic economy would be vulnerable to net foreign exchange outflows. Technological Spillovers from Foreign to Domestic Firms Historically, FDI (through equity participation) has not been a channel favoured by developing economies for technology transfer. Of the three channels of market-mediated technology transfer—imports of capital goods, licensing, and FDI—both Japan and South Korea favoured imports of capital goods and licensing in the incipient stages of their development. The potential for significant productivity gains through technology transfer obviously exists when the technology gap between the firms at the centre and at the periphery is large; by the same token, the ability to imbibe cutting-edge technologies is probably very low when the technology gap is very large. Markets for technology, by definition, are characterized by asymmetric information and the buyer is often handicapped in ascertaining the vintage of technology transferred. In that, technology transfer through affiliates of multinational enterprises may have a slight edge over arm’s length licensing arrangements as far as developing countries are concerned (Glass and Saggi 2008), because technology transfer appears to be an intra-firm concern. There are three forms of technological spillovers associated with FDI: first, firms within an industry are often spurred into emulating best practice techniques as a survival strategy. Optimism about this form of horizontal spillover is often balanced by the ‘business stealing’ effect of increased competition, which often leads to a loss of
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economies of scale as domestic firms lose market shares or are ‘weeded’ out. On the other hand, vertical technological spillovers, which occur because of backward linkages with local component suppliers (typical in the automobile industry), arouse less controversy. Multinational corporations (or joint ventures) have an incentive to supply technologies to local subcontractor networks as this enables them to source high quality intermediate inputs at low prices (Keller 2010). If the suppliers get integrated with global parents of multinational affiliates in this process, the technological externality is often greater. Domestic firms, which also source from these suppliers, are obviously free riders in this process. Finally, technological diffusion also occurs because of labour turnover as workers trained by multinational affiliates switch over to domestic firms. There is some controversy about the empirical significance of these externalities. Further, it is not clear whether policy-induced performance requirements increase the magnitude of these spillovers. Instead of entering these nebulous debates, we examine the technological impact of FDI through case studies of two sectors in India— that of the automobile and the pharmaceutical sectors. CASE STUDIES OF TECHNOLOGY TRANSFER Indian Pharmaceutical Industry The pharmaceutical sector saw its share in FDI rise steadily through the 1960s and the 1970s: from 4.1 per cent of the total FDI in 1964 to 9.8 per cent in 1978, and further to 11.35 per cent in 1980 (RBI Bulletin 1975, 1985). The Hathi Committee in the year 1975 and the Drug Policy of 1978 sought to restrict the role of foreign investment in the pharmaceutical sector. However, despite greater restrictions on the activities of foreign companies, the increase in foreign investment in the pharmaceutical sector (after 1975) can be explained by the stipulations of the Drug Policy of 1978. The government granted production licenses to FERA companies only if they were involved in the production of high-technology bulk drugs and related ‘formulations’,3 provided half of the bulk drug manufacture was sold to other formulators. They were required to produce bulk drugs and formulations in the ratio of 1:5; the Drug Policy of 1986 was even more stringent as it changed the ratio requirement to 1:4. While no new MNCs entered the
148
INDIAN INDUSTRIALIZATION
Indian pharmaceutical sector, many big companies like Ciba-Geigy (acquired by Novartis), Pfizer, Glaxo (now GlaxoSmithKline), and Johnson & Johnson increased their manufacturing activities. Since 1991, FDI was permitted up to 100 per cent through the automatic route for manufacture of drugs and pharmaceuticals, provided the activity did not attract compulsory licensing or involve the use of recombinant DNA technology, and specific cell-/tissue-targeted formulations.4 The opening up on the FDI front coincided with the dilution of the ratio-requirement of bulk drugs–formulations production in 1994—this led to the winding up of the less profitable, but critical, bulk drug manufacturing plants by the foreign firms. Earlier, in a regime of process patents, the domestic firms with their chemistry skills could re-engineer the patented molecules with alternative processes, and not only serve the domestic economy with low-priced drugs but also cater to the needs of many countries, which did not recognize product patents but didn’t have the requisite manufacturing capabilities. With liberal FDI policies and the subsequent tighter patent regime, one would have expected massive technology spillovers in the pharmaceutical industry. Though initially licensing and collaborations emerged as the favoured mechanism to carry out research and development (R&D), many partnerships between domestic firms and MNCs have fallen through (GSK–Ranbaxy collaboration, Novartis–Torrent agreement, and Novo–Nordisk–Dr. Reddy’s partnership, to name a few). The MNCs simply want to bring in their patented molecules (which domestic firms are no longer permitted to manufacture because of product patents), to sell them at high prices, without investing in R&D. Due to stricter patent laws, the domestic firms have to compete with MNCs which are entering the country with the latest drugs in many therapeutic segments. In the face of a shrinking domestic market, the domestic firms have begun to focus on global markets for the export of generic drugs. In order to use the established network advantages of the foreign firms, several large Indian firms have sold their stakes to foreign firms apart from collaborating with them to develop new chemical entities (Chaudhuri 2008). The structural bottlenecks facing the industry, in terms of capital investment required for R&D and technical expertise to regulate clinical trials that are a major component of research, have forced the domestic industry to seek support from the global giants. Even earlier, only a handful of domestic firms like Ranbaxy,
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149
Dr. Reddy’s, Glenmark, and Lupin were involved in research on new molecules. Most of the companies are continuing with either process re-engineering or somewhat less-risky projects like new drug delivery systems or improving the already existing molecules. In order to assess the impact of the presence of MNCs in the industry, a comparative analysis of domestic and foreign firms has been undertaken for the pharmaceutical industry, using Prowess Data (CMIE Database) for the period 1991 to 2010 (see Figure 4.2). It can be seen from Figure 4.2 that the sales of domestic firms have been higher and have been growing at a relatively faster rate than MNCs throughout the period. However, the sales–assets ratio is much higher for the MNCs, which implies that capital formation has not been a high proportion of total sales for them (see Table 4.13). The production of formulations is more of a marketing process and does not require real technological capability; further, the focus of MNCs has been more on marketing and not bulk drugs manufacture. Their profit margins (profit–sales ratio) also appear to be much higher, but they have not shown any interest in using India as an export platform for their products. They have not used the cost-effective domestic base to tap international markets. On the other hand, the average export intensity of domestic firms has been continuously rising and their export earnings have taken care of their import expenditures. Somewhat surprisingly, for the year 2010, the export–sales ratio for both MNCs and domestic firms is identical: this is a consequence of a spurt of acquisitions by foreign firms FOREIGN DOMESTIC
1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010
800000 700000 600000 500000 400000 300000 200000 100000 0
Figure 4.2
Sales of Drugs and Pharmaceuticals (Rs Million)
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INDIAN INDUSTRIALIZATION
Table 4.13 Drugs and Pharmaceuticals, 1991 Firm Type 1991 Foreign Domestic 1995 Foreign Domestic 2000 Foreign Domestic 2005 Foreign Domestic 2010 Foreign Domestic
Sales/ Profits/ Assets Sales
Exports/ Sales
Imports/ R&D/ Sales Sales
Imports/ Exports
Foreign Exchange/ Sales
4.92 3.32
0.08 0.04
0.05 0.11
0.07 0.11
0.00 0.00
1.33 1.02
-1.73 -0.20
5.82 2.56
0.09 0.08
0.03 0.16
0.07 0.14
0.01 0.01
2.76 0.91
-4.59 1.51
3.42 1.96
0.10 0.02
0.07 0.20
0.13 0.14
0.01 0.01
1.83 0.69
-5.83 6.20
3.65 1.88
0.16 0.10
0.12 0.33
0.11 0.13
0.01 0.04
0.91 0.41
1.09 19.25
2.44 1.67
0.06 0.11
0.41 0.40
0.16 0.17
0.07 0.05
0.40 0.42
24.30 22.76
in the last four years (including Ranbaxy Laboratories (acquired by Sun Pharma in 2014), Dabur Pharma, Shantha Biotech (acquired by Sanofi Pasteur in 2009), Piramal Healthcare, Matrix Laboratories, and Orchid Chemicals). A similar trend was observed for imports: the import–export ratio for foreign firms was more than one for the entire period except in 2010. Indian industries, in general, spend a relatively small proportion of their sales on R&D, and foreign subsidiaries are reluctant to undertake in-house R&D, as they can use the technology from the parent firm. The RBI survey (1974) found that companies which had foreign financial collaboration were less active in setting up R&D than those that had purely technical collaboration. Quite apart from the fact that continuous import of foreign technology in a particular sector may dampen the initiative to create or replicate technology, there is evidence that affiliates of MNCs may even hamper the research activity carried out by local firms. Desai (1980) demonstrated how foreign firms attempted to use the vague provisions of the Patents Act to thwart successful innovations made by Haffkine Institute in the 1960s. Chaudhuri (2005: 128–32) cites several instances where MNCs filed legal cases against Indian firms
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whenever they used indigenous processes to manufacture a drug or tried importing a drug. In the pharmaceutical industry, in the 1990s, the research efforts of foreign firms have been limited, barring Pfizer and AstraZeneca. There appears to be a striking similarity between the pre-1970s patent regime and the WTO-mandated patent regime of 1995 (which became effective from 2005). The Indian Patents and Design Act of 1911 (effective till 1972) virtually provided a product patent for 16 years (apart from a process patent), extendable by 10 years if the returns were not remunerative enough. The new product regime of 1995 has narrowed the options available to the domestic pharmaceutical firms: survival through exports of generics or as ‘junior partners’ through mergers with foreign firms. Automobile Sector The Broad Picture Ostensibly, the automobile sector showcases the impact of deregulation and FDI like no other. After a long period of policy-induced stagnation starting from the late 1960s, the passenger car industry got a new lease of life through the entry of Maruti in 1983. The real transformation, however, has occurred only in the last two decades after the sector was delicensed in 1993. The 2000–10 period saw a maturing of both the automobile and the auto component industry: the policy changes had worked their way through the system and long-term trends could be more easily discerned. In volume terms, car production jumped up almost three times between 2001–2 and 2007–8, from 564,052 to 1,416,480 while the performance of auto components, an allied sector, was equally spectacular: its output virtually trebled in value from US$ 3 billion in 1997–8 to cross US$ 10 billion in 2005–6. The year 2003–4 is often regarded as a watershed as exports of cars hit the hundred thousand mark, while that of auto components crossed US$1 billion. The government’s attempts at transforming India into a global hub for small cars were ushered in the budget of 2006 through the reduction of excise duty on small cars (not exceeding 3.8 metres) to 8 per cent. Not only did the production of small cars soar by 28 per cent in 2009–10, but 2010 also saw the launch of compact cars by all the major assemblers (including Ford, General Motors, Volkswagen, Toyota, and
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Nissan). There was a parallel boom in the auto component industry: in the 1990s, the bulk (about 70 per cent) of the auto component exports were targeted at the low-value-added replacement markets; this ratio had reversed by 2007 when the original equipment manufacturers (OEMs) accounted for 75 per cent of the exports. The cumulative FDI in the transport sector (primarily automobiles) between August 1991 and October 2002 was US$ 1,984 million, which is about 10.8 per cent of the cumulative stock of FDI in the same period. This led to a surge in capital employed in this sector from US$ 3,646 million in 1993–4 to US$ 10,463 million in 1999–2000. A Brief History of Auto Policy We present a brief history of the policies in the automobile sector in the 1990s, which signalled a shift from the dirigiste regime of the
Table 4.14 Production (P), Export Intensity (X/P), and FDI of the Indian Car and Auto Component Industry Year
Cars (P) Volume
Compon (P) (US$ mn)
Cars (X/P)
Compon (X/P)
FDI (US$ mn)
1996–7 1997–8 1998–9 1999–2000 2000–1 2001–2 2002–3 2003–4 2004–5 2005–6 2006–7 2007–8
407,539 401,002 390,355 574,369 517,907 564,052 608,851 842,437 960,505 1,046,133 1,238,021 1,426,212
3,278 3,008 3,249 3,894 3,695 4,470 5,430 6,730 7,008 15,930* 19,350* 22,700*
9.1 7.4 6.5 4.1 4.4 8.9 11.6 15 16.7 16.2 15.6 14.8
9.0 11.0 10.8 11.7 16.9 12.9 14.0 18.9 19.4 18.8 18.6 19.8
122 143 276 675
Notes: All ratios are in percentage. The FDI inflows are for the automobile sector. P: Production; X/P: Export Production Ratio; Autocomp: Autocomponents *: ACMA changed its methodology of calculating production in 2005–6. Sources: ACMA (Automotive Component Manufacturers’ Association of India): Facts and Figures, Various issues. SIAM (Society of Indian Automobile Manufacturers): Monthly Flash Report of Motor Vehicle Production,Sales and Exports (Various Issues) DIPP (Department of Industrial Policy and Promotion): Fact Sheet on Foreign Direct Investment, 2010.
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1980s and before. Deregulation in the automobile sector occurred in two phases—though the sector was not delicensed till 1993, 51 per cent foreign equity was permitted through the automatic route in 1991 to facilitate the entry of foreign players. This phase of liberalization, following the foreign exchange crisis of 1991, had a well-defined policy focus: foreign firms would be provided access to the Indian market if they aided India’s efforts to upgrade technology and augment its exports. To that end, 11 foreign firms were issued licences in 1995 to import components in completely knocked down (CKD) or semi-knocked down (SKD) forms after they executed a memorandum of understanding with the Director General of Foreign Trade. The memorandum stipulated that majority in foreign-equity ownership in a joint venture would be permitted only if the foreign firm brought in a ‘minimum investment’ of US$ 50 million over a three-year period; after the first lot of imports were cleared, foreign firms had to indigenize 50 per cent of the components by the third year and 70 per cent of the components by the fifth year (these were the minimal limits); and finally, a form of ‘foreign exchange neutrality’ had to be maintained—the outgo on imports had to be balanced by exports, starting from the third year of production. These performance requirements were jettisoned in the second phase of liberalization that was signalled by the new auto policy which came into effect in 2002. Till 2000, foreign equity participation through the automatic route, in the automobile sector, was limited to 51 per cent. Besides rescinding the foreign exchange neutrality and indigenization requirements because of a World Trade Organization (WTO) ruling, the new auto policy of 2002 permitted 100 per cent FDI in the automobile and auto component sectors under the automatic route. Quantitative restrictions were replaced by tariffs of 60 per cent on car imports [completely built units (CBU)] and 25 per cent on CKD/SKD kits and components. The auto policy of 2002, as mentioned earlier, also sought to transform India into a hub for compact cars—this was implemented by reducing the excise duty to 8 per cent on cars not exceeding 3.8 metres in length in the budget of 2006. More stringent emission norms were enforced, nudging vehicle assemblers into incorporating more fuelefficient technologies in their engines. Meanwhile, India signed a Free Trade Agreement (FTA) with Thailand in 2004, which, under the Early Harvest Programme, would reduce the average most favoured nation (MFN) customs tariff on a host of auto components from 17
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per cent in 2007 to 7.9 per cent in 2010. This was a cause of some heartburn because both Toyota and Honda had set up capacities in Thailand in the early 1980s, and it was felt that they would import completely built units from Thailand, handicapping the development of the Indian car and auto component industry. Long-term Trends Buoyed by cheap consumer finance and a latent demand for foreign brands, the automobile sector (particularly cars) was witness to explosive growth between 1993–4 and 1999–2000. As FDI surged, new capacities were set up. Till the entry of Suzuki in the early 1980s, government policy saw cars as wasteful luxuries—the entry of Maruti Suzuki (known as Maruti Udyog Limited before the joint venture with Suzuki; and henceforth referred to as Maruti) infused a new momentum into a small volume, duopolistic, and technologically stagnant industry. However, the real transformation wrought by Maruti was in terms of vendor relations: Instead of treating suppliers as component and parts suppliers who could be browbeaten into reducing prices, Maruti created a new breed of suppliers whose fortunes were tied to Maruti’s own frenetic pace of growth (Tewari 2001). Key suppliers were ‘tierised’, located close to the Maruti factory in Gurgaon and those in the first tier (Bharat Seats for seats, Jai Bharat Maruti for sheet metal components, etc.) were forced into technological and training tie-ups with Suzuki’s original equipment suppliers from Japan. Chennai and Pune, the other two centres of the auto industry, did not witness similar vendor development: suppliers in Chennai were largely dependent on Ashok Leyland and those in Pune on Premier Automobiles Limited, Telco, and Bajaj. Despite conceding market share to Hyundai and Telco, in an industry consisting of almost 10 players, Maruti remained the undisputed market leader through the 1990s and beyond (see Table 4.15). By the end of the 1990s, multinational vehicle assemblers (MVAs), which had sought entry as joint ventures with Indian firms, had become fully owned subsidiaries of their parent firms: General Motors–Hindustan Motors became General Motors (India), Ford– Mahindra became Ford (India), Honda–Siel became Honda (India). This initial foray was accompanied by the entry of not only tier 1 original equipment suppliers like Delphi, Visteon, Denso, Dana,
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Table 4.15 Shares of Major Firms in the Car Market (share in per cent) Firm Maruti Suzuki Hyundai Tata Others
1997–8
1999–2000
2001–2
2003–4
2007–8
83.1 – – –
61.5 12.3 8.9 17.3
62.2 16.5 11.5 9.8
51.4 18.6 15.5 14.5
47.3 25.5 12.7 14.5
Source: Automotive Components Manufacturers Association of India (ACMA) (2008).
Mico, etc., but also a host of tier 2 and tier 3 foreign suppliers, which formed alliances with domestic firms. The differential specifications of the auto industry in the 1990s vis-à-vis the 1980s and earlier was a hierarchic reorganization of the auto component industry into layers or ‘tiers’ where each tier supplied to the one above it. Thus, MVAs leveraged the low design or labour costs of large, wholly Indian OEMs or medium-sized Indian firms, which have formed joint ventures with foreign firms to upgrade their technology. These firms, operating at the technological frontiers and with global ambitions (such as Bharat Forge, Amtek, Shriram Pistons and Rings, or Sundaram Fasteners), together with some medium-sized joint ventures (such as India Nippon Electric, IP Rings, etc.), are now a part of global production networks and major contributors to the foreign exchange earnings of the Indian auto-component industry. What has often been ignored are two other facets of the Indian auto component industry’s story: The first has to do with the global sourcing of critical high-valueadded components by MVAs (including Maruti Suzuki). Thus, while forgings could be sourced from Bharat Forge, sophisticated fuel injection systems for engines or anti-lock braking system would be sourced from MNCs or imported. It is ironic, but still true, that as the technological sophistication and exports of cars has increased, so has the import dependence in auto-components. Table 4.16 corroborates this fact. The other element of the new FDI regime which needs to be reappraised is technology transfer. Even if we were to believe that joint ventures with foreign firms have facilitated the continuous upgrading of design and technical capabilities in the more successful medium-sized suppliers, questions have been raised regarding vertical technological spillovers into the machine-tool industry. Even in the 1980s, Telco and
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Table 4.16 The Auto Components and Machine Tool Industries: Net Exports, Imports, and Import Penetration (Rs billion) Year 1997–8 1998–9 1999–2000 2000–1 2001–2 2002–3 2003–4 2004–5 2005–6 2006–7 2007–8 2008–9
Autocomponents (NX) (Rs Billion)
Autocomponents [M/(P + M – X)]
MT (M) (Rs Billion)
MT [M/(P + M – X)]
–9.4 –8.9 –16.0 –4.1 –4.0 3.6 –7.0 –15.7 –27.0 –54.0 –104.0 –142.0
18.8 17.7 19.1 17.1 14.6 16.9 20.7 23.7 24.2 26.7 28.1 37.1
8.0 8.9 5.1 3.4 3.1 4.5 9.7 18.2 28.9 46.6 64.2 62.7
53.0 59.9 46.3 38.1 39.7 46.9 56.5 63.7 69.0 73.8 78.5 82.4
Notes: MT: Machine Tools; NX: Net Exports; M: Imports; C: Apparent Consumption, [C = (P + M – X)]; M/C: Import Penetration Ratio; P: Production. All ratios are in percentage terms. ACMA changed the methodology of calculating production figures in 2005–6. Source: Indian Machine Tools Manufacturers’ Association (IMTMA) Production data CD 2012 ; ACMA: Facts and Figures (2008) and Annual Reports.
Premier Automobiles Limited, which had in-house machine-building divisions dedicated to their automobiles, showed a much lower degree of import dependence on machine tools than Maruti Suzuki. One cannot quibble about the imports of metal-forming machine tools that were not available in India, such as high tonnage presses, foundry equipment, and large complex dies for pressing sheet-metal parts. However, through the 1980s and the 1990s, Suzuki also imported sophisticated metal-cutting machine tools like computer numerically controlled (CNC) machining centres, which were well within the technological reach of the Indian machine-tool industry. Despite the fact that machine tools constitute the building blocks of a vehicle assembler’s plant and equipment, Suzuki made no attempt at nurturing and fostering a reasonably competent machine-tool industry. Even after seven years of entry, Suzuki still imported 40 per cent of its machinetool requirements between 1985–6 and 1989–90 (Rao 1993: Table 7). Complete self-reliance in the machine-tool industry, the kind encouraged in the import-substitution era, is almost a non sequitur: Given the
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sheer heterogeneity which characterizes this mother machine industry, economies of scale can be exploited only through intra-industry international trade. India could have been a part of this international division of labour, specializing in those segments where the car and the automobile industry registered large demands. A secular rise in the import penetration ratio—the proportion of domestic consumption met by imports—has stigmatized the automobile industry as the pallbearers of the domestic machine-tool industry (see Table 4.16). Rising import dependence, in the case of machine tools, has become a badge of technological dependence for India. Finally, what about the 6,000 small firms that are a part of the auto component sector? In Chennai, for instance, till 1995, most small and medium auto component manufacturers were largely catering to the spares or replacement market, but maintained a foothold in Ashok Leyland. These small firms, often started by workers, with limited working capital and primitive production facilities, accounted for a substantive portion of auto component production. The entry of Ford and Hyundai, in the late 1990s, unleashed centralizing tendencies through a structural reorganization of the auto component firms into tiers. As tier 1 suppliers bore the responsibility of delivering systems, smaller firms lost access to vehicle assemblers. As quality control became the responsibility of tier 1 suppliers, who often did not want to make investments in fixed capital for non-critical components, these orders were passed lower down the supply chain. Sometimes, the onus of supply fell on medium-sized firms, which were forced to buy labour-displacing CNC machines to survive. Often, these orders were passed to lower, intermediary firms, which further subcontracted to tiny and small firms, pocketing large fractions of the price paid by the OEMs. As in agriculture, the price received by the small firms was often much less than the price paid by the OEMs. Further, payments were often delayed, thereby pushing these capital-scarce firms towards the margins of survival. The absence of access to the original equipment suppliers, an artifact of the new FDI regime, has led to these firms being ‘excluded’ from the boom in the auto-component industry (Suresh 2010). A COMPARISON OF FDI FLOWS IN CHINA AND INDIA In lieu of a conclusion, we briefly compare the nature and impact of FDI inflows into India and China. There is an element of truth in
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the conventional wisdom that the Chinese experience with FDI is unique in the sense that a large fraction of the inflows originates in the Chinese diaspora; it is also true that a part of these huge inflows are simply domestic Chinese savings re-routed through Hong Kong (termed ‘round-tripping’) to capitalize on the incentives offered to FDI in China. It cannot be denied, however, that as wage rates rose in Taiwan and Hong Kong, it induced entrepreneurs of Chinese ethnic origin to utilize China’s large labour reserves and transform it into the global source of a wide spectrum of labour-intensive commodities. China’s transformation into an export hub of labour-intensive commodities was achieved through combining labour with capitalembodying simple technologies and exploiting Hong Kong’s pivotal position in global supply chains (Wei 2004). On the other hand, investments by the OECD countries have been concentrated in the asset-rich, low-profit, state-owned enterprises (SOEs) that formed the lynchpin of China’s exports between 1995 and 2000. Huang (2004) has added an institutional twist to this story by suggesting that that the severe liquidity and credit constraints faced by labour-intensive private Chinese enterprises coerced them into joint ventures with ethnic Chinese capital from Hong Kong and Taiwan, while the SOEs escaped insolvency by joining hands with private enterprise from the core capitalist countries. In part, China’s exporting prowess has been achieved through its rapid integration within global production networks. India and China shared a similar structure of imports and exports as regards parts and components in 1992: Imports of parts and components constituted 15 per cent of the non-fuel imports of both China and India, while exports of parts and components accounted for 5 per cent of their total nonfuel exports. By 2004, parts and components constituted 31 per cent of China’s non-fuel imports, while they had decreased to 12 per cent for India. To some, these statistics merely reinforce the presumption of China being a giant assembly house (‘the world’s factory’); ignored is the fact that China’s share of parts and components exports had also jumped to 17 per cent by 2004, while India’s share had merely inched up to 6 per cent by 2004 (Dimaranan et al. 2007: 7). China’s exports of high technology products at US$ 45 billion in 2004 were as large as India’s total merchandise exports. At any given point of time, vertical intra-industry trade is an opportunity that latecomers to industrialization simply cannot afford to forsake in their transition to development.
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Be that as it may, this picture is incomplete. The structure of Chinese exports has rapidly shifted to high technology products, and China may soon emerge as the developing world’s largest exporter of high technology products (Lall 2004). The image of China flooding the world with garments, toys, and cheap consumer electronics is enduring but must be qualified: In 2009, more than a third of the global exports of Information and Communications Technology (ICT) goods originated in China and Hong Kong (UNCTAD 2011). Not only that, at US$ 356 billion, ICT exports accounted for about 30 per cent of China’s total exports (excluding Hong Kong). To sustain its competitive edge as an exporter, China has rapidly moved up the ladder of comparative advantage. In that, FDI has had a distinct role to play: The share of foreign subsidiaries and joint ventures in Chinese exports has increased from 31 per cent in 1995 to more than 58 per cent in 2006 (Wang and Wei 2010, 71). This trend was visible earlier too: As foreign invested firms (FIEs) gained importance, there was an increase in the capital intensity and the knowledge intensity of Chinese exports. In 2002 itself, the FIEs accounted for almost 70 per cent of the total export earnings of the top 15 industries within the manufacturing sector (which, in turn, contributed to three quarters of China’s manufacturing exports). Reinforcing the importance of FIE-led Chinese manufacturing exports are two further statistics of 2002: of the total exports of the electronics and telecommunications sector and the electrical equipment and machinery sector, the FIE contribution was 91 per cent and 82 per cent respectively (Brandt et al. 2008: Table 15.1). It is true that much of FDI in China has been focused on the eastern seaboard leaving an arid inland struggling to catch up with new technologies. Further, it is plausible that FDI was initially drawn to China because of cheap labour and abundant infrastructure: production and assembly were prioritized over R&D and design. However, the commodity composition of recent exports buttress the fact that recent foreign investment seeks to knit China into global production networks and ‘to tap China’s abundant supplies of skilled workers, technicians, and engineers’ (Brandt et al. 2008: 623). Why has India not been co-opted into global production networks in manufacturing? Through the 1990s, the high effective rates of protection enjoyed by consumer goods made serving the domestic Indian market a more attractive option (Balasubramanyam 2004). The
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claim that Indian labour laws or reservation policies for small-scale industries thwart the abilities of firms to respond to market conditions appears as invidious; more important, perhaps, is the paucity of physical infrastructure (we could single out power and ports), and the somewhat limited skills of a workforce with limited years of schooling. India needs a well-defined FDI policy through which it can be a base for global sourcing for the new production networks in manufacturing, while not relinquishing the advantages conferred because of a prolonged emphasis on tertiary education. The provision of education (primary, secondary, and vocational) and the provision of infrastructure would rank high in attracting FDI to labour-intensive as well as technology-intensive spheres. Finally, it would seem apposite to point out that the study of multinational investment in developing countries is now wedged between what UNCTAD (2011) has termed as ‘cross-border nonequity modes’ of control by transnational enterprises and foreign investments by firms from developing countries. It is obviously facile to imagine that direct foreign investment through equity participation (in any form) is the only mode of interaction of transnational corporations with developing countries. While outsourcing final manufactured products (as well as services) constitute the most significant element of a wide band of activities through which transnationals exercise control over developing economies, it is also exercised through contracting out low-value parts and components in what constitute global commodity chains, licensing patents, and franchising brand names. Radical theorists have long recognized that MNCs perpetuate an unequal world, a world created in their ‘own image’. Yet, in the post-War world, developing countries courted FDI to assist their own fledgling efforts at industrialization: multinational corporations were sought primarily to accelerate the technological transformation of late industrializers. In India, the attempt to regulate the costs of technology transfer was epitomized in the Foreign Exchange Regulation Act (FERA) of 1974. The post-1991 turn in economic policy, while leading to an upsurge in FDI, has not only blurred the distinction between portfolio and direct foreign investment but also accentuated the dependent nature of India’s industrialization.
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NOTES 1. A firm registered in India in which 25 per cent of the equity was held by a single foreign investor or 40 per cent of the equity was held by investors from one foreign country. 2. However, recently, growing participation of minority shareholders in the delisting process thwarted the attempts of drug maker AstraZeneca’s and the US-based industrial toolmaker Kennametal’s proposals to delist their Indian subsidiaries. 3. Bulk drug production involves the production of active ingredients present in the drug. Formulations involve the processing of bulk drugs into finished dosage forms such as tablets, capsules, injections, etc. 4. Press Note No. 4 (2001 Series), Department of Industrial Policy & Promotion, Secretariat for Industrial Assistance.
REFERENCES Automotive Components Manufacturers Association of India (ACMA). 2008. Status of Indian Automotive and Autocomponents Industry: Status Report, New Delhi. Asian Development Outlook. 2004. Asian Development Bank. Athreye, S. and S. Kapur. 1999. ‘Foreign Controlled Manufacturing firms in India’, Economic and Political Weekly, 34(48): M149–M151. Balasubramanyam, V.N and V. Mahambare. 2004. ‘Foreign Direct Investment in India’, in Y.A. Wei and V.N. Balasubramanyam (eds), Foreign Direct Investment, pp. 47–68. Cheltenham: Edward Elgar. Brandt, L., T. Rawski, and J. Sutton. 2008. ‘China’s Industrial Development’, in L. Brandt and T. Rawski (eds), China’s Great Economic Transformation, pp. 569–632. Cambridge: Cambridge University Press. Chalapati Rao, K.S. and B. Dhar (2011),‘India’s FDI Inflows—Trends and Concepts’, Working Paper No. 2011/01, Institute for Industrial Development, New Delhi. Chandra, N.K. 1991. ‘Growth of Foreign Capital and Its Importance in Indian Manufacturing’, Economic and Political Weekly, Annual Number, 26(11–12): 679–90. Chandrasekhar, C.P. 2007. ‘Private Equity: A New Role for Finance?’, Economic and Political Weekly, 42(13): 1136–45. Chandrasekhar, C.P. and J. Ghosh. 2002. A Decade of Neoliberal Economic Reforms in India. New Delhi: Leftword Books. Chaudhuri, S. 2005. The WTO and India’s Pharmaceuticals Industry Patent Protection, TRIPS and Developing Countries. New Delhi: Oxford University Press. ———. 2008. ‘Ranbaxy Sell-Out: Reversal of Fortunes’, Economic and Political Weekly, 43(29): 11–13.
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Desai, Ashok V. 1980. ‘The Origin and Direction of Industrial R&D in India’, Research Policy, 9: 74–96, Department of Industrial Policy and Promotion (DIPP), Factsheet on FDI, various issues, New Delhi. Dimaraman, B. et al. 2007. ‘China, India and the Future of the World Economy: Fierce Competition or Shared Growth’, Policy Research, Working Paper No. 4304, World Bank, Washington, DC. Economic Survey, various issues, Government of India. Glass, A. and K. Saggi. 2008. ‘International Technology Transfer: The Role of Foreign Direct Investment’, in A.K. Dutt and Jaime Ros (eds), International Handbook of Development Economics, Vol 2. UK: Edward Elgar. Huang, Y. 2004. ‘Comment’, in Y.A. Wei and V.N. Balasubramanyam (eds), Foreign Direct Investment, pp. 137–49. Cheltenham: Edward Elgar. Indian Machine Tools Manufacturers’ Association (IMTMA). Annual Report, various years. Keller, W. 2010. ‘International Trade, Foreign Direct Investment and Technology Spillovers’, in B. Hall and N. Rosenberg (eds), Economics of Innovation, pp. 794–829. Amsterdam, North Holland. Khanna, S. 1999. ‘Financial Reforms and Industrial Sector in India’, Economic and Political Weekly, 34(45): 3231–41. Kidron, M. 1965. Foreign Investments in India. London: Oxford University Press. Kumar, N. 1994. Multinational Enterprises and Industrial Organisation: The Case of India. New Delhi: Sage. ———. 2000. ‘Mergers and Acquisitions by MNEs: Pattern and Implications’, Economic and Political Weekly, 35(32): 2851–8. Lall, S. 2004. ‘Comment’, in Y. A. Wei and V.N. Balasubramanyam (eds), Foreign Direct Investment, pp. 69–72. Cheltenham: Edward Elgar. Rao, C. Bhaktavatsala. 1993. ‘Structural Configuration and Strategic Investments Indian Automobile Industry’, Economic and Political Weekly, 28(8–9): M21–M32. Rao, K.S. Chalapati and B. Dhar. 2011. ‘India’s FDI Inflows—Trends and Concepts’, Working Paper No. 2011/01, Institute for Industrial Development. RBI Survey. 1974. Foreign Collaboration in Indian Industry, Second Survey Report, Bombay. RBI Bulletin, various issues. New Delhi: Reserve Bank of India. Society of Indian Automobile Manufacturers (SIAM). 2009. Flash Report on Production and Sales, 12 January, New Delhi. ———. Monthly Flash Report of Motor Vehicle Production, Sales and Exports, various issues. New Delhi: Society of Indian Automobile Manufacturers. Subramanian, K.K. 1986. ‘Technology Imports: Regulation Reduces Cost’, Economic and Political Weekly, 21(32): 1412–16. Subramanian, K.K. and P.M. Pillai. 1979. Multinationals and Indian Exports. New Delhi: Allied Publishers. Suresh, T.G. 2010. ‘Cost Cutting Pressures and Labour Relations in Tamil Nadu’s Automobile Components Supply Chain’, in A. Posthuma and D. Nathan
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(eds), Labour in Global Production Networks in India, pp. 251–71. New Delhi: Oxford University Press. Tendulkar, S.D and T.A. Bhavani. 2007. Understanding Reforms: Post-1991 India. New Delhi: Oxford University Press. Tewari, Meenu. 2001. ‘Engaging the New Global Interlocutors: Foreign Direct Investment and the Transformation of Tamil Nadu’s Automotive Supply Base’. Available at: http://www.cid.harvard.edu/archive/india/papers.html. United Nations Conference on Trade and Development (UNCTAD). 2011. FDI/ TNC database. Available at: www.untad.org/fdistatistics, last accessed on 20 January 2011 ———. 2010. ‘Investing in a Low Carbon Economy’, World Investment Report. Geneva: United Nations Conference on Trade and Development ———. 2011. UNCTAD press note, UNCTAD/Press/Pr /2001/004. ———. 2011. World Investment Report. Geneva: United Nations Conference on Trade and Development Wang, Z and Wei, S.J. 2010. ‘The Chinese Export Bundles: Patterns, Puzzles and Possible Explanations’, in B. Eichengreen, P. Gupta, and R. Kumar (eds), Emerging Giants: China and India in the World Economy, pp. 62–84. New York: Oxford University Press. Wei, Y. A.. 2004. ‘Foreign Direct Investment in China’, in Y.A. Wei and V.N. Balasubramanyam (eds), Foreign Direct Investment, pp. 9–37. Cheltenham: Edward Elgar.
5 Informal Sector Industry in India An Overview JESIM PAIS
The informal sector is important as it is large and has been recognized to be non-transitory in nature. In fact it is all pervasive, manifesting its presence in economic activities from agriculture to services, covering rural and urban areas, and ranging from less-developed nations to some of the most industrialized nations. Understanding the functioning of the informal sector is, therefore, necessary for understanding the economic structures of countries such as India. And, since informal sector forms a substantial share of industry, no study of Indian industry or the process of industrialization in India can be complete without understanding informal sector industry. This sector is large; its size in terms of employment is formidable in several developing countries, including India. Estimates of the size of the informal sector vary depending on the operational definition used. However, by every definition, the informal sector is substantial. According to recent estimates for India, the informal sector employment was as high as 92.8 per cent of the total employment in 2009‒10 (Mehrotra et al. 2012). Similarly, nearly half the national output measured as gross domestic product (GDP) has been estimated to originate from the informal sector. Further, the predominance of the informal sector is not restricted to the rural agriculture or the low wage services sector. A substantial part of manufacturing activity in India is undertaken in the informal sector. Thus, estimates for 2004‒5 show that about 70 per cent of workers and 29 per cent of the value added by the Indian manufacture formed part of the informal sector
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(estimates from the National Commission for Enterprises in the Unorganized Sector [NCEUS] 2008a: Tables 3.1 and 5.2). An often-noted feature of the informal sector is that it is not a transitory phenomenon. It has formed part of the economies of several less developed countries for several decades now, despite the fact that some of these countries (including India and China) have experienced high rates of economic growth and achieved notable levels of industrialization. In other words, the study of the informal sector is necessitated by the fact that it is here to stay. The activities of the informal sector form a complex maze of linkages and inter-linkages—horizontal, vertical, forward, and backward. Any understanding of development and industrialization in present circumstances would be incomplete without understanding the informal sector. This chapter briefly discusses the emergence of the concept of the informal sector, the refining of its definition over time, changes in the way it has been measured, and finally some estimates of its magnitude. One of the challenges with regard to the study of the informal sector has been the difficulty in conceptualizing the informal sector and arriving at a manageable definition. Further, for the concept to be useful as a policy instrument, an appropriate operational definition has to be arrived at. Thus, while the construction of the concept and, therefore, the conceptual definition can be universal and applicable to all situations, economies, and societies, the operational definition may vary from situation to situation, country to country, and even sector to sector. Given that the informal sector involves a large number of economic activities and that the boundaries between them are not as well defined as in the formal sector, this chapter often discusses activities that may not be strictly construed as industrial activities for those who may instead classify them as being part of the tertiary sector or services sector. Further, it has been long recognized that the informal sector forms the lower end or lower part of the continuum of economic activities, the upper part constituting the formal sector. And the cut-off point not only varies depending on the definition used, but often, it is not possible to identify a precise cut-off point to differentiate the informal sector from the formal sector. The cut-off point is rather a segment on the continuum where the economic activities exhibit features of both the formal and informal sectors.
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The organization of the rest of this chapter is as follows. The next section traces the origin of the concept of the informal sector and the debates related to it. The third section deals with the definition and issues of identification. In the fourth section we briefly discuss the approach of the State towards the informal sector in India. The fifth section presents some estimates of the magnitude and the growth of the informal sector. An overview of the challenges and constraints faced by small enterprises engaged in manufacturing is presented in the sixth section. The last section concludes with some policy recommendations. ORIGIN OF THE CONCEPT OF THE INFORMAL SECTOR The conceptualization of the informal sector can be traced back to the early proponents of dualist models of the economy in the 1950s and the 1960s.1 Arthur Lewis and other scholars modelled the economies of less-developed countries (LDCs) as comprising two sectors which were distinct in terms of production organization, technology, and output (Lewis 1954). In this approach, the two sectors were characterized variously as traditional as opposed to modern, primitive as opposed to advanced, subsistent or pre-capitalist as opposed to capitalist, agricultural as opposed to industrial, rural as opposed to urban, and, finally, unorganized as opposed to organized. Broadly speaking, the traditional or unorganized sector was identified as labourintensive, using simple technology and having a relatively lower productivity, and the modern or organized sector was identified as capital-intensive, having higher levels of technology and productivity. The two sectors used different production processes and technology and produced different goods. There was no overlap in the products of the two sectors; in most early versions of the dualist model, there were also no linkages between the two sectors other than with respect to labour. A major underlying factor behind the traditional dualist model of development was the assumption that, in the course of development of the economy, importance of the traditional or unorganized sector would decline and that of the modern or organized sector would increase. It was also assumed that employment in the modern or organized sector would be formal wage employment.2 On one hand, the rural economy was characterized as having surplus labour and
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low levels of productivity. On the other hand, urban industry was seen as being productive and as being endowed with an increasing capacity to absorb labour. Rural‒urban migration played a major role in the traditional dualist models. Wage differentials and a multiplicity of income-earning and employment opportunities in the urban formal sector were seen as impelling rural‒urban migration (Harriss and Todaro 1970; Lewis 1954; Todaro 1969). The dualist structure was seen in the literature to be a transitory phenomenon, soon to disappear once the economic transition from a predominantly agriculturebased economy to a predominantly industrial society was completed. The critics of the traditional dualist model provided evidence of links between the two sectors. The formal sector was linked to the informal sector either because it provided inputs to the formal sector or because it obtained intermediary goods from the informal sector, or both (Birbeck 1978; Breman 1976b; Bromley 1978b; Bromley and Gerry 1979; Gerry 1978; Moser 1978). The two sectors were also linked through subcontracting relationships, with large firms in the formal sector subcontracting work to smaller firms in the informal sector. Thus, the nature of the output of the two sectors was not necessarily different, although the process of manufacture, the technology used, and the organization of production in the two sectors differed. In some industries, even the technology used in the formal and informal segments of the industry were said to be similar. The formal sector was seen as obtaining cheap material and labour inputs from the informal sector. Similarly, informal small sector used inputs such as metals, plastics, and leather that were manufactured in the large-scale formal sector (Gerry 1978). The term ‘informal sector’ was apparently first introduced by anthropologist Keith Hart while describing the informal income opportunities in urban Ghana from his field study of Accra in 1965‒8 (Hart 1973). By the late 1960s and the early 1970s, it was clear that the dualist model had failed to explain the lack of growth of industrial sectors and modern employment in less-developed economics. Migration had continued but the rural poor were increasingly getting employed in what was later called by Hart as the urban informal sector. What was considered until then to be a rural‒urban problem had now another dimension, that of the urban informal sector.3 Thus, a further criticism of the traditional dualist model was that the informal sector was not a transitory phenomenon at all (Lubell
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1991; Lubell and Zarour 1990; Portes and Sassen-Koob 1987; Tokman 1978). Studies on various countries in Latin America and elsewhere noted that the size of the informal sector continued to remain large. Lubell (1991) argued that, given the dynamics of the world economy, the informal sector acts like a sponge absorbing the otherwise unemployed and it was therefore ‘here to stay’ (p. 111). ILO Intervention of the 1970s In the early 1970s, the International Labour Organization (ILO) undertook several country and city studies in the LDCs. These were aimed at designing policies for employment generation for the unemployed and the underemployed in these countries. The ILO explicitly recognized the existence and importance of the urban informal sector. The characterization of the informal sector was such that it was seen as that part of the urban economy, generally involving manufacturing enterprises and enterprises in services. The main characteristics of the informal sector enterprises that were identified were small scale operation, family ownership, reliance on indigenous resources, labour intensity, and technology being adapted to local conditions. It was also thought that skills were acquired from outside the formal education system, there was ease of entry, the operations were unregulated, and the product markets were competitive. The ILO’s emphasis was, at that time, in looking for avenues of productive employment for the urban workforce, and not so much on the quality of jobs. The focus was on the constraints and problems faced by urban informal enterprises and on ways in which these could be solved (lack of access to credit, technology, forward and backward linkages with the formal sector, marketing support, and so on). The basic assumption of the ILO approach was that the formal and the informal sectors differed from each other in production organization and technology. Unlike the early dualist models, the ILO guidelines provided for same or similar goods and services being produced in both the formal and the informal sectors, although using differing technologies and processes. A major achievement of the ILO country studies was to shift the focus of development strategies away from those in which employment was obtained as a residual to a strategy in which employment was the prime objective (Bangasser 2000; Mehta 1985; Swaminathan 1991).4
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In the years that followed, many studies used the ILO guidelines to identify and study the informal sector.5 There were, however, criticisms of the ILO’s approach (Breman 1976b; Bromley 1978a; Bromley & Gerry 1979; Gerry 1978; Moser 1978). First, case studies of the informal sector found ‘important exceptions’ to each of the seven characteristics put forward by the ILO (Swaminathan 1991). For example, the ease of entry characteristic of the informal sector was questioned by Gerry, who found that entry could be selective and competitive rather than easy (Gerry 1974, quoted in Swaminathan 1991). Similarly, in his study of employment and mobility in south Gujarat, Breman found that a major factor in who gets employed, for how long, and in what type of employment depends entirely on personal contacts (Breman 1976b). Scholars studying rural‒urban migration and the employment of migrants in the informal sector found that labour markets in the informal sector were highly segmented and that there was no ‘ease of entry’ (Nakanishi 1990). Jan Breman (1976b: 1905) argued that it was easy to identify the distinct categories at the extremes of the two poles of the labour force, but between the two extremes there were ‘gradations’, and not ‘watertight’ compartments. He also criticized the multiplicity of criteria used to identify the two sectors. These criteria, he said, do not run parallel to ‘cumulate in a clear and consistent stratification’ (Breman 1976b: 1906). Bromley pointed to the ‘wide variety of activities’ that could not be fitted into two mutually exclusive sectors. These activities had some characteristics attributed to informal sector and others to formal sector by the ILO (Bromley 1978a). Thus, the informal sector came to be recognized to include a wide variety of economic activities, some of them having relatively lower levels of productivity/technology when compared with the formal industrial sector, providing employment to those in the urban sector who were unable to be employed in formal industry. The informal sector still continued to be viewed as a predominantly urban phenomenon. Along with the fact that the urban informal sector persists and is even growing in some parts, there are two other phenomena that are now clear in the case of India. First, there is a transition, although gradual, from agriculture to other activities in industry and services, and second, the rural‒urban transition or large-scale urbanization has not occurred in India to the extent that was expected. This is
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partly due to the fact that the transition out of agriculture is mainly in terms incomes and output and not in terms of employment. In terms of employment, a significant proportion of workers continue to be associated with rural agriculture, though agriculture has, over time, become less and less remunerative. Thus, there is a burgeoning of what has been termed by scholars as ‘rural non-farm economic activities’ (Chadha 2002; Jatav and Sen 2013; Lanjouw and Shariff 2004). These rural non-farm activities are mainly home- or householdbased small-scale manufactures. However, they also include manufactories, or karkhanas, that are independent of households and similar to the urban informal sector discussed earlier. However, due to various reasons, including the fact that the ILO’s focus has been urban employment, and that the significance of the rural non-agricultural informal sector is restricted to some relatively larger agrarian economies such as India, China, Viet Nam, and so on, the rural informal sector has not received the attention it deserves both in academic and policy circles. In more recent years, with the setting up in India of the National Commission for Enterprises in the Unorganized/Informal Sector (NCEUIS),6 the informal sector in India has been defined to include economic activities in both rural and urban areas. Credit also goes to the NCEUS for including agriculture, while formulating and conceptualizing the informal sector. DEFINING THE INFORMAL SECTOR A number of scholars attempting to understand the informal sector and its empirical attributes have questioned the possibility of conceptual clarity and its usefulness, especially for policy. Bromley (1978a) notes that the formal‒informal division is not applicable to neighbourhoods, activities, households, and industries. All these can have a mix of both formal and informal sectors in them. Only enterprises and individuals (workers) can be categorically placed in the formal or the informal sectors (Bromley 1978a). Sinclair (1976) criticized traditional research on the informal sector as it tended to obscure differences between workers and enterprises (quoted in Mehta 1985). In the words of Papola (1980), ‘there is a need to distinguish, therefore, between the informal sector labour market and informal labour markets’, as formal enterprises also employ workers informally. In other
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words, some clarity in the conceptual definition of the informal sector can be attained by making a distinction between the concept as applicable to enterprises and to workers.7 Swaminathan (1991) identified three features of an activity that were frequently used in the literature to identify the informal sector. They are: (1) regulation by the state, (2) forms of ownership, and (3) the nature of employment. Examining these three features, she concluded that ‘in analytical terms, the only approach to defining informal-sector enterprises and employment that stands up to close scrutiny is one based on certain types of regulation’ (Swaminathan 1991: 30).8 In 1993, the International Conference of Labour Statisticians (ICLS) adopted a definition of the informal sector that was based on regulation by the state. The ICLS (1993) definition is, however, enterprise-based. The informal sector is specifically defined by the ICLS as made up of ‘household enterprises’ and ‘unincorporated enterprises owned by households’ (Bangasser 2000; ILO 2002). The ICLS deliberately took an enterprise-based view while arriving at the definition of the informal sector in order to be consistent with the System of National Accounts (SNA) (ILO 2002). This was recognized by the ICLS, and it has recommended that ‘further work was needed on the employment-based dimensions of informality’ (ILO 2002: 11). India and scholars from India have been active participants in the international debates and discussions on the concept and definition of the informal sector. India has made its presence felt at the successive ICLS, and the concept of the informal sector and the definition and identification of the informal sector enterprises proposed by the ICLS have been tested by India in its household and enterprise surveys. Besides, the United Nations Expert Group on Statistics on the Informal Sector is called the ‘Delhi Group’ and its ‘point of contact’ is the Central Statistical Organization (CSO) in Delhi. India was one of the five countries that tested the ICLS framework for collecting data on the informal sector surveys through the NSS surveys on the informal sector in 1999‒2000. In recent times, scholars, including those working at the ILO, have expanded the ICLS definition of informal sector to include both enterprises and employment relations. Under the expanded concept, ‘the informal economy consists of a wide range of informal enterprises and informal jobs; informal employment includes all remunerative
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work, self-employed and wage employment that are not recognised, regulated or protected by existing legal or regulatory frameworks’ (ILO 2002: 12). Informal employment also includes non-remunerative work undertaken in an income-producing enterprise (ILO 2002: 12). Thus, the ILO and ICLS now define the informal sector as the sector comprising all economic activities that are not regulated by the state or public authority. A distinction is now made between informal sector enterprises and informal sector employment. This is necessary in order to clarify the status of informal sector workers who are employed in otherwise formal sector enterprises. Employment that is not covered by labour and other regulations is informal sector employment (ILO 2002). When an enterprise is in the informal sector, it is unlikely that the employment within that enterprise will be covered by labour and other regulations. Hence, all workers employed by an informal sector enterprise are generally informal sector workers. However, a segment of the workforce of formal sector enterprises may well be informal sector workers. This definition of the informal sector has depth, in that it allows the classification of all forms of employment and all types of enterprises as belonging to either the formal or the informal sector. The definition is, however, heavily dependent on the existence of a set of regulations that govern economic activities in a country. Separate and clear labour regulations are required to classify employment. In this context, it has been argued that informal employment is relatively easy to conceptualize and define, as opposed to informal enterprises or informal activities in countries such as India, which have well-laid labour regulations in place (Papola 1980). Where regulations are absent, or where a complexity of overlapping or ambiguous regulations exist, the border between the formal and the informal sector will be blurred.9 Identifying the Informal Sector Empirically Regulation-based Criteria In order to identify the informal sector, many empirical studies have, in fact, used a criterion that embodies regulation by the state. For example, Breman (1976b) distinguished formal employment from informal employment on the basis of criteria that included whether
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or not a work situation was officially registered in economic statistics and whether or not working conditions are protected by law. Guerguil (1988) argued that an ‘illegality-based approach’, that is, identifying the informal sector on the basis of non-compliance with regulations, ‘retains its analytical potential as regards the developing economies’ (p. 63). With regard to the identification of informal sector enterprises, Sethuraman (1974) included all unregistered enterprises in the category of informal sector enterprises; Bennett (1995) included all enterprises not covered by tax regulations in this category; and Unni (2000) included all enterprises not registered with government agencies in this category. The 55th round of the National Sample Survey, conducted in 1999‒2000, used a state-regulation-based criterion to identify informal sector enterprises. Now, the National Sample Survey Office (NSSO) specifically identifies the informal sector as being made up of unincorporated enterprises owned either as a proprietorship or a partnership (NSSO 2001a, 2001b). Other studies have discussed and used various regulation-based criteria for the identification of informal sector employment. Cinar (1994) identified workers who were not covered by certain specific labour regulations—including minimum wages legislation, health and insurance regulation, and retirement benefits—as being part of the informal sector. Benton (1990) identifies the informal sector in Spain as ‘the unregulated economy’ and the informal-sector workers as ‘unregulated labour’. In a seven-country study of informal sector enterprises, Mead and Morrisson (1996) looked for statistical relationships between three different regulation-based variables and the size of the enterprises. The three variables were: (1) registration of an enterprise, (2) whether or not the enterprise abided by labour regulations, and (3) payment of taxes. They found that, in general, in the absence of data on the status of an enterprise with respect to state regulation, employment size appears to be a reasonable way of classifying enterprises that are within or beyond the pale of state regulations. Unni (2000) classified workers by work-related benefits enjoyed by them, including employment assurance, paid leave, provident fund contributions, pension benefits, medical benefits, and a written employment contract.10 In her study, she categorized all those who did not receive one of more of these benefits as informal sector workers.
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Other Criteria When data on the regulation-based status of enterprises are not available, scholars often use proxy measures to identify the informal sector. The criteria used to distinguish the formal sector from the informal sector include the size of the enterprises, the nature of the production organization, the location of the enterprises, and so on. Joshi and Joshi (1976) and Deshpande (1979), in their studies on the city of Mumbai, classified firms with less than 25 workers as belonging to the unorganized sector. Papola (1981) classified enterprises with less than 10 workers as belonging to the informal sector. In a study of Guatemala, Funkhouser (1997a, 1997b) classified firms employing four workers or less as belonging to the informal sector. In its surveys of the unorganized sector in India, the NSSO classifies all enterprises employing 10 workers and less as belonging to the unorganized sector (NSSO 2002). In the absence of data on the regulation-based status of enterprises, the list of the types of enterprises that the scholars have used as a proxy for the informal sector enterprises includes the following: small-scale enterprises (SSEs), household and home-based enterprises, familyowned enterprises, own-account enterprises, and enterprises without a fixed location (such as street vendors) (House 1984; Mazumdar 1979; Nattrass 1987; Sethuraman 1974; Unni and Bali 2001; Visaria and Jacob 1995). In other scholarly works, informal sector employment has been identified as being made up of the self-employed, unpaid family workers, and casual workers (Castells and Portes 1989; Diaz 1993; Evers and Mehmet 1994; Funkhouser 1996). Identification of the Informal Sector: The Indian Experience India has a long history of identifying and studying the informal sector, though prior to the 1990s, official Indian documents did not specifically use this term. This long association with the informal sector was, however, restricted to the manufacturing sector. Occasional references were made to the informal sector in urban services (domestic services, and so on). However, the core of the data and discussion on the informal sector in India remained within the industrial sector. In this discussion, the informal sector was alternately referred to as the unorganized sector, the unorganized industry, the unregulated factories, the unregulated industry, and so on.
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In fact, the origins of the concept of informal sector or the unorganized sector in India were linked to the concept of regulation. The first Factories Act was introduced in colonial India in 1881. This act regulated the conditions of work in factories, such as the hours of work, minimum age for child labour, conditions of employment of women workers, days of rest and holidays, and so on. It defined factories as all enterprises that engaged in manufacture, employed 100 or more workers and used power machinery.. This gave rise, immediately, to a sector within Indian industry that was referred to as the ‘unregulated industry’ or ‘unregulated factories’. These included all manufacturing enterprises that employed less than 100 workers and in addition other manufacturing enterprises that employed more than 100 workers but not use electricity for production purposes. Examples of the latter are carpet weaving, mica splitting, beedi, manufacturing of shellac, glass, and so on. More manufacturing activities, and therefore workers, were gradually brought under the ambit of the factories regulation when the Factories Act was amended in 1891 and again in 1922. In 1891, the definition of a factory was amended to include all manufacturing enterprises that used power and employed 50 or more workers.11 Again, in 1922, the threshold level was further lowered to 20 or more workers and use of power machinery.12 Thus, even after the amendment of 1922, large enterprises, such as in carpet weaving, beedi, and mica splitting, sometimes employing between 700 and 800 workers were not covered under the Factories Act as their operations were mainly manual and did not involve the use of power (Royal Commission on Labour [RCL] 1929). The RCL (1929) used the terms organized and unorganized industry. It also used the term regulated factories for manufacturing enterprises that were covered under the Factories Act and called the others unregulated factories. In its study of the situation of labour in India, the RCL dedicated an entire chapter to the study of unregulated factories and, in the end, made recommendations that certain provisions of the Factories Act should be made applicable to the unregulated factories. For example, the RCL recommended that the unregulated factories be examined in the first instance with a view to the need and possibility of instituting minimum wage–fixing machinery, using the minimum wage to prevent the exploitation of juvenile labour and the consequent undercutting of adult wages, and that a weekly day of rest be introduced in unregulated factories. It is interesting to note
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that, even in the colonial period, the Royal Commission, while recommending a variety of new labour-regulatory measures, expressed fear that on introduction of regulation, certain forms of labour such as children ‘may seek work in unregulated factories’, moving away from regulated factories (RCL 1929: 53). The other subsequent and important document from the colonial government of India is the Report of the Labour Investigation Committee (1946), a fact-finding committee that was set up to ‘investigate questions of wages and earnings, employment, housing and factory conditions, and housing and social conditions’. In its report, the committee used the terms organized and unorganized industries. It used the terms unregulated factories and unorganized industry interchangeably, referring to the manufacturing enterprises to which the Factories Act was not applicable. In the independent India, the informal sector has been viewed, defined, and identified differently at different times, and by different agencies of the State. In the 1960s and 1970s, informal sector industry was referred to as small-scale industry (SSI); its counterparts in the rural areas were called ‘village industry’ and ‘cottage industry’. And, the influence of Gandhi on the industrial policies led to the creation of separate bodies that would handle the Khadi and allied rural industries. While the category of SSI was based on a criterion of size (of investment), village industries, cottage industries, and Khadi were identified by their location, and later on, a size criterion was added in the case of village industries. In general, the dual organized and unorganized sectors have been used in India to identify output and employment. While the identification of the unorganized sector in other sectors was more complicated, in the manufacturing sector, all activities that were undertaken and regulated under the Factories Act were included in the organized sector. The unorganized sector, then, formed the residual when the total (output or employment) was measurable through other means (employment was a measure, for example, through household surveys either by the Census or the NSS). Operational Definition of Informal Sector in India In India, there has been no single agreed-upon definition of the informal sector. Different government agencies have used different
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definitions depending on the purpose for which it was required. For example, in the manufacturing sector, the NSSO’s conducts surveys only of unorganised sector enterprises. In other words, the NSS surveys on unorganised manufacture, by definition, exclude all enterprises that are covered by the Annual Survey of Industries. In the estimation of the value added or GDP of the economy, the contribution of the unorganized sector is the residual of the national GDP minus the value added by the organized sector, which is more easily measurable. Even by the criteria of application of different regulations, the definition of the formal or regulated and the informal or unregulated sector is also not specifically defined, and this varies from regulation to regulation. Most labour and industry regulations in the country are applicable only to enterprises that have a certain threshold size. This threshold, often measured in terms of the size of employment, varies from regulation to regulation. For example, the Factories Act is applicable to manufacturing enterprises that employ 10 workers or more (and use power), while the Mines Act applies to mines where 20 or more workers are employed. Similarly, the Payment of Bonus Act and the Workmen’s Compensation Act apply only to enterprises that employ 20 or more workers. The department of small-scale industries, and later the ministry of small-scale industries set up in the early years after India’s Independence, has its own operational definition for identifying small and informal enterprises for the purposes of protection and promotional support that the ministry extends to these enterprises. This definition is based on the historical value of investment by the enterprises in plant and machinery. And within the SSEs, yet another categorization was undertaken, and the ‘smaller’ among the small enterprises with a lower threshold of investment were called tiny enterprises.13 We discuss this concept a little further. Otherwise, depending on the industry and the technology involved, some or a large number of enterprises that qualify to be identified as SSEs based on their investment in plant and machinery, may have an employment size that is relatively high. For example, in industries that are relatively labour-intensive (textiles, garments, beedi, food processing, and so on) the number of workers employed in a SSE could be in multiples of tens or even in hundreds. Besides, if a SSE engaged in manufacturing employs more than 10 workers and uses power for manufacturing purposes, then it is obliged to be registered under the
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Factories Act. Thus, a significant proportion of the small-scale enterprises would belong to the formal industrial category. Besides this, due to inflation and for other reasons, the threshold level of investment for a manufacturing enterprise to qualify as the SSE has been revised and enhanced over time. This threshold level has increased from Rs 0.5 million in 1950 to Rs 50 million in 2006. Besides the category of SSIs, policy of preferential treatment for small enterprises has had other subcategories for focused attention, such as the tiny enterprises, defined as those with investment less than Rs 0.1 million (as per 1977, which was revised to 2.5 million in 1997). Enterprises with women entrepreneurs were defined in 1988 as enterprises that are owned and administered by women entrepreneurs, the share of the woman entrepreneur being at least 51 per cent of the financial capital, and having a workforce which has at least 50 per cent women. Ancillary Industrial Undertakings are those smallscale enterprises that supply at least 50 per cent of production or services to other undertakings. A small enterprise providing services was recognized, and in 1982 a category called the Small-scale Service Establishment with an investment ceiling of Rs 0.2 million and locational restriction to rural and small towns was introduced. In 2006, a revamp of the categorization of small enterprises was undertaken with the passage of the Micro, Small, and Medium Enterprises Development Act (MSMED Act). Since 2006, the small manufacturing enterprises are categorized as micro, small, and medium enterprises, or MSMEs. Besides this, and as noted earlier, the investment ceiling for different categories was enhanced. Thus in 2010, in the manufacturing sector, micro enterprises are those with an investment ceiling of Rs 2.5 million. The small enterprises are those with an investment between Rs 2.5 million and Rs 50 million. And the medium enterprises are those with an investment ceiling between Rs 50 million and Rs 100 million.14 The NCEUS was set up by the Government of India (GoI) in 2004 to ‘review the status of unorganized/informal sector in India including the nature of enterprises, their size, spread and scope, and magnitude of employment’. The commission, in turn, began by reviewing the existing definitions and criteria in use in India to identify the unorganized and informal sector. It then proposed a definition of the informal sector and informal employment. The definitions proposed by the NCEUS are in line with the international definitions proposed
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by the ICLS that were discussed earlier in this chapter. In the definitions adopted by the NCEUS, the terms ‘unorganized sector’ and ‘informal sector’ are interchangeable. Thus, according to the NCEUS, the unorganized or informal sector ‘consists of all unincorporated private enterprises owned by individuals or households engaged in the sale and production of goods and services operated on a proprietary or partnership basis and with less than ten total workers’ (NCEUS 2007: 3, 2008: 24). Unorganized or informal workers are defined as ‘those working in the unorganised enterprises or households, excluding regular workers with social security benefits, and the workers in the formal sector without any employment/social security benefits provided by the employers’ (NCEUS 2007: 3, 2008: 27). The definition of informal sector provided by the NCEUS, though being latest in a series of definitions and in a sense more comprehensive, has not been used till date in any policy intervention by the government, including industrial policy. MAIN ELEMENTS OF THE STATE POLICY ON SMALL ENTERPRISES There is no explicit state policy of support or any other form of intervention for the informal sector industry in India. Most of the state interventions were towards the small-scale sector described earlier. The main elements of the state policy on small enterprises are briefly discussed in this section. Reservation Policy The most prominent policy intervention on SSEs is the policy of protection of SSIs from domestic and international competition through a system of reservation of product lines. The reservation policy was initiated in 1967, and over time a large number of product groups, defined at a fairly detailed level, were reserved for production in the SSEs. The product lines to be reserved were chosen such that they were ‘techno-economically’ suited for production in the small-scale sector. The degree and spread of the system of reservation makes India unique in its adopting this policy. Once a product was reserved, enterprises that have investment limit larger than the investment ceiling for SSIs were restricted from producing these goods. The policy of
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reservation was sought to be continuous with products getting added and deleted from the list from time to time. The reservation policy received statutory status with the amendment in 1984 (section 29B of the Industries [Development and Regulation] Act, 1951). By the time the reservation policy was sought to be revised in 1995, a total of about 836 products were reserved for production in the small-scale segment. With the introduction of economic reforms, which included delicensing of industry and import liberalization including lowering of duties, the relevance of the programme of reservation became less and less important, and consequently was reversed. The gradual reversal of the reservation policy began with the setting up of and on the recommendations of the Abid Hussain Committee (1997). Thus, the first set of 15 items was de-reserved in 1997. The process of de-reservation has been gradual, and over 10 years—from 1997 to 2010—nearly all items have been de-reserved. As on 30 July 2010, there were only 20 items on the reservation list. Fiscal Policy Incentives Fiscal incentives have been provided from time to time to the smallscale sector, including micro enterprises, in the form of tax exemptions, refunds, and postponement of direct and indirect taxes, besides special tax concessions. Tax holidays from income tax are provided to SSEs set up in certain backward and rural areas for a period of 10 years. Exporting enterprises are given incentives in the form of duty drawbacks. Exemptions are given to SSIs from customs duties on imported capital goods and imported intermediary goods that are exported. A long-standing and consistent policy of the government has been the exemption of SSEs from excise duties. Goods produced under the supervision of the Khadi and Village Industries Commission (KVIC) in rural areas, and goods that are produced without the power (handicraft, handloom, and so on) are exempted from excise duties irrespective of the scale of production. Credit Policy and Financial Incentives All studies attempting to understand the problems faced by informal sector enterprises invariably identify the availability of capital as a
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major constraint faced by them. A number of studies have clearly established that the major cause for the large-scale incidence of stagnation and of sickness in the SSI sector is the non-availability of adequate and timely working capital from the banking sector (Chadha 2001; GoI 2004; Sahu 2007). Small enterprises require long-term credit for purchase of fixed assets such as land, building, and machinery, and short-term credit for working capital. Informal sector enterprises engaged in low-technology production activities have a relatively larger requirement of the latter for the purchase of raw materials, to meet wage costs, power and fuel, and so on. In other words, credit is a prime input for sustained growth of small-scale sector and its access to the sector remains a major concern. The policy of providing priority sector credit in India has its origins in the study group constituted by the Reserve Bank of India (RBI) in 1971. Though the priority sector lending programme for agriculture and small-scale sector began without any specific targets being set for the banks, in 1974, the RBI set a target of 33.33 per cent of the gross credit as the target for priority sector lending, and commercial banks were asked to target the figure by 1979. In 1985, the priority sector credit was set at 40 per cent of the aggregate credit, and specific targets were set for agriculture and for weaker sections, while the remaining was for the small-scale sector. Further, it was set that the share of micro enterprises in the advances to the SSI sector should be at least 40 per cent. Institutional Arrangement for Credit to Small Enterprises Small-scale industrial sector is provided with working capital by commercial banks, and in some cases by cooperative banks and regional rural banks. Long-term credit for purchase of plant and machinery are provided by the State Financial Corporations (SFCs), Small Industries Development Corporations (SIDCs), National Small Industries Corporation (NSIC), and National Bank for Agriculture and Rural Development (NABARD). Financial assistance from NSIC, and to some extent from SIDCs, is available in the form of supply of machinery on hire purchase basis/deferred payment basis. Micro enterprises can also avail a combination of long-term and short-term credit in the form of composite loans. Long-term loans are provided to the small-scale industrial units by SFCs mainly through Single
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Window Scheme and National Equity Fund. Direct assistance is provided to State Financial Corporations to support its credit to the small enterprise sector in the form of refinance. The Small Industries Development Bank of India (SIDBI) is charged with the responsibility of refinancing these institutions. In case of rural non-farm enterprises, credit is provided by scheduled commercial banks and the refinancing is undertaken by NABARD. Despite all efforts on this front, the outcome of the priority sector lending to the small-enterprises sector has not be credible. The share of the small-scale sector in gross bank credit stagnated at around 15 per cent in the 1980s, reduced marginally to an average of 14 per cent in 1990s, and further reduced drastically to an average of 8 per cent between 2000 and 2007. In 2006 and 2007, the share of SSI in bank credit was as low as 6 per cent. The share of MSMEs in gross public sector bank credit was about 13.1 per cent. However, a large proportion of this credit was to medium-scale enterprises and not small or micro enterprises. The period since the beginning of economic reforms appear to have been less favourable to small and informal sector industry. The decline in the share of credit to this group means availability of a larger share to the bigger enterprises. This should be viewed along with the fact that the gross bank credit itself increased by 15 times between 1991 and 2007. Thus, the availability of cheap and timely credit to the informal sector industry continues to remain an area of concern. Infrastructure Assistance: Industrial Estate Policy, Promotion of Clusters The provision of specialized and focused infrastructure for the small enterprises began with the industrial estate programme in India. The first industrial estate under this scheme was established in Maharashtra in 1952. From the time of its inception, the industrial estate programme is perhaps the biggest such programme undertaken a developing country. The programme of developing industrial estates was continued till 1979 with the support of the central government, and 796 industrial estates were established throughout the country. The programme was then taken over by state governments. Its main objectives were to encourage and support the creation, expansion, and modernization of the small-scale sector through the provision
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of infrastructure such as factory sheds, common facility centres, and power. The programme envisaged that small entrepreneurs would set up enterprises in the industrial estates and those already existing would shift to the industrial estate to benefit from common infrastructural facilities available in such industrial estates—power, water, roads, banks, canteens, communication facilities, and so on. The programme also was to provide these infrastructural facilities at a subsidized rate to small enterprises. Through the industrial estate programme, small-scale enterprises engaged in manufacture, and ancillary units in particular, were encouraged to build sub-contractual relationships with large industries. More recent policy initiative for the provision of infrastructure to the small-scale sector is in the form of support for development of industrial clusters. In 1998, the Technology Upgradation and Management Programme (UPTECH) was initiated as a move to promote clusters. The UPTECH programme was mainly technology focused, comprising diagnostic studies, setting-up of demonstration plants, and organizing workshops, seminars, and so on for greater and quicker diffusion of technology across the cluster of small enterprises. There are different estimates for the presence of clusters in India. The United Nations Industrial Development Organization (UNIDO) estimates that there are about 388 clusters, the SSI Census estimates about 1,200 clusters, the NCEUS estimates that, besides the SSI clusters, there are over two thousand artisan-based clusters. Policies to Promote Marketing of Products by Small Enterprises The need for providing marketing support for micro and small enterprises was realized as early as the 1960s, and it led to two sets of policies that aimed to promote marketing directly in this sector. Marketing support is often necessary for the small and micro enterprises as, unlike the larger enterprises, their smallness prevents them from individually setting up separate and focused marketing structures within the enterprises for accessing distant and newer markets.15 The first is the ‘store purchase policy’ (later purchase preference policy), and the second is the ‘price preference policy’. Under the store purchase policy, product lines were categorized into six groups depending on their production in the small-scale sector. For example, a type of group set was as follows: items not produced in
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the small-scale sector, items produced in both large- and small-scale sectors but marketed mainly by the large-scale sector, items produced and marketed by both large- and small-scale sectors, items reserved for production in small-scale sector, and so on. The store purchase policy obliged government departments to give small-scale units preference for purchase of goods produced by them. The Director General of Supplies and Disposals, which is the central purchasing organization of GoI, provides a number of facilities to SSIs under its government stores purchase programmes. Marketing assistance under the government stores purchase programme in the form of reservation of products for exclusive purchase from small-scale sector is accompanied by a policy of price preference to support small-scale industries. The items purchased by the government are given a price preference of up to 15 per cent in case of selected items which are produced in both large-scale as well as small-scale units. This benefit is available to compensate them on account of non-availability of economies of scale, poor resource base, poor access to raw-materials, and so on, when compared with the large-scale sector. The National Small Industries Corporation Limited (NSIC) is responsible for the implementation of the preferential purchase programme. A Single Point Registration Scheme of NSIC was launched as a measure of market support for the SSI sector. Under this scheme, SSI units registered with the NSIC are provided tender sets free of cost, exemption from payment of earnest money deposit, exemption from payment of security deposit, and they receive a price preference up to 15 per cent over the lowest quotation of the largescale units. Apart from this, the Coir Board, the Handicraft Board, the Handloom Board, the KVIC, the state-level Khadi Boards, and the Export Promotion Councils provide crucial marketing assistance to the micro and small enterprises through fairs and exhibitions, sales outlets, marketing training programmes, and quality control initiatives. Export Promotion Policies and Schemes Exports from the small enterprises sector have always been highlighted by the GoI. From time to time, measures to promote exports from the sector have been announced. The government came up with
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a comprehensive set of export incentives for the small-scale sector in its Export–Import Policy, 1997–2002. The assistance and facilities provided to small enterprises included free import of capital goods, raw materials, and other essential inputs, and in certain cases, the imports are permitted duty free or with concessional rate of custom duty. Incentives provided to the exporters from time to time include refund of duties paid on the raw materials used in export production by a system of duty drawback and pre- and post-shipment credit to exporters at concessional rates. And in the past, when imports were restricted, small enterprises engaged in exports were provided with Special Import Licence (SIL) on a preferential basis. The export promotion schemes include assistance to small entrepreneurs participating in international exhibitions and fairs. Subsidies are provided to entrepreneurs for travel, for shipping for exhibits, and for hiring stalls at the exhibitions through the Marketing Development Assistance Scheme (MDA). Training programmes are regularly held for training entrepreneurs and workers on techniques of packaging for exports, and recently, special efforts have been made to promote bar coding in small enterprises. Similarly, specific programmes are introduced for quality control in recognition of the fact that quality of the products is very important in a competitive international market. Small enterprises going for ISO certification are provided with a onetime subsidy to obtain this certification. National awards for quality of products have been instituted. Export incentive schemes are also undertaken by the KVIC, Coir Board, and Central Silk Board for their respective products. Besides this, export incentives and support are also provided to small enterprises by the respective export promotion councils. There are eight export promotion councils under the ministry of textiles, besides eleven other export promotion councils under the ministry of commerce. Thus, as we have seen in the preceding discussion, India has a sufficiently long history of efforts by the state to promote the small-enterprises sector. These include the small enterprise export promotion policies, marketing support, credit support, and above all the policy of reserving items for production in the small-scale sector. The results of the promotional efforts have been mixed, with a notable drop in performance of the small-scale sector in terms of employment and exports in recent years. And it is also clear from the discussion that the policies and programmes to promote or protect the small-scale
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sector discussed here mainly benefited the larger enterprises among the small-scale sector. The actual informal sector was only affected at the margins, if not completely left excluded in the process. Thus, it is not surprising that a number of studies and surveys on the conditions of the small manufacturing sector continue to show that major constraints and challenges remain in the path of its functioning. The policy interventions, though being well meaning and reasonably well designed, were nevertheless designed for the benefit of small enterprises that had a certain critical minimum size (of investment and employment). The paperwork required to avail the benefits from these policies may appear to be simple when compared with the paperwork undertaken by regular factories and other commercial business companies in their regular large business. However, for the small enterprises, this meant that only those small enterprises, which had sufficiently large-enough surpluses that allowed them to free their owner or ‘manager’ from day-to-day production-related activities, could even attempt to try and benefit from state policies listed above. Most informal sector enterprises have, therefore, not been in a position to benefit from the attempts by the state to protect and promote them. MAGNITUDE AND GROWTH OF THE INFORMAL SECTOR IN INDIA There are three main sources of data on small and informal enterprises in India. They are the economic censuses (1977, 1980, 1990, 1998, 2005), surveys of the unorganized sector by the NSS (1984–5, 1994–5, 2000–1, 2005–6), and the census of small-scale industries (2001–2, 2006–7). Though these surveys do not define the informal sector as defined in this chapter or by the NCEUS, scholars and also the NCEUS have used these surveys to arrive at estimates of the size of the informal sector in terms of number of enterprises. Similarly, although the focus of these surveys is the enterprise, estimates of employment can be obtained from these surveys. Besides these, the NSSO has attempted the first-ever survey of enterprises in the informal sector in 1999–2000. A similar survey was conducted in 2010–11. Data on informal sector employment can also be computed from the NSSO’s surveys on employment and unemployment. Apart from the large national surveys, there are a number of smaller surveys done
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by government agencies and individual scholars, each providing their own estimate of the size of the informal sector. India has a long history of state policy to promote small enterprises (see the section, ‘Main Elements of the State Policy on Small Enterprises’). The ministry of micro, small, and medium enterprises (earlier the ministry of small scale industries) regularly provides data on the small-scale sector. Though small-scale enterprises are not equivalent to informal sector enterprises, there is a significant overlap between the unregistered small-scale enterprises and informal-sector enterprises. The ministry has conducted four censuses of small-scale enterprises in 1973–4, 1990–1, 2001–2, and 2006–7. In the last two censuses, data on unregistered SSIs was also collected. The NCEUS estimates for the number of informal enterprises in industry from the Economic Censuses was 7.3 million enterprises in 2005, up from about 4.93 million enterprises in 1998. As against this, the number of formal enterprises was 0.06 million in 2005 and 0.04 million in 1998. Thus the proportion of informal enterprises in total enterprises is very high, at about 99 per cent. According to the NSSO’s survey of unorganized manufacturing in India, there were, in all, about 12.3 million enterprises in 1994–5, this increased to 16.81 million in 2000–1, and further to 17.07 million in 2005–6 (Sahu 2011). The NSSO’s surveys on informal enterprises in the non-agricultural sector estimate that in 1999–2000, there were about 44.4 million nonagricultural informal-sector enterprises in India (NSSO 2001b). This increased to 57.7 million enterprises in 2006–7 (NSSO 2013). The manufacturing enterprises accounted for about 30 per cent of the total number of enterprises in 2006–7. According to the Census of Smallscale Industries, the number of unregistered SSIs in India was 10.45 million in 2006–7, up from about 3.3 million enterprises in 2001–2. In terms of employment in the entire economy, the NCEUS estimates that in 2009–10 there were 427.2 million informal workers, as compared to 33.0 million formal-sector workers. Thus, the share of informal workers was about 93 per cent of the total workforce. Both informal and formal workers are further classified as being employed in the organized and unorganized sectors. About 385 million informal workers were employed in the unorganized sector, while the remaining 42 million were employed in the formal/organized sector. While the share of informal workers in total remains high, a notable recent trend is the relatively large increase in the share of informal
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employment in the organized sector. The total informal employment in the organized sector increased from 20.5 million in 1999–2000 to 29.1 million in 2004–5, and further to 42.1 million in 2009–10. That is, in 2009–10, about 10 per cent of the informal workers were employed in the organized sector. With regard to industry, using data from the economic census, the NCEUS estimates that informal employment in industry was about 11.19 million workers in 2005, up from about 7.52 million workers in 1998. By these estimates, informal employment in industry accounts for 76 per cent of the total employment in industry in 2005, up from about 61 per cent in 1998. According to the NSSO’s surveys on unorganized manufacture, the total employment in unorganized manufacture in 2005–6 was 36.4 million workers when compared with the employment in the organized manufacture (ASI data), which was about 6.6 million.16 By these estimates, unorganized employment accounted for 85 per cent of total manufacturing sector employment in 2005–6. In terms of the gross value added (GVA), the NCEUS estimates that the informal sector industry contributes about 26.84 per cent of the total GVA in industry. This implies, among others, that the productivity (or labour productivity) in the informal sector is very low when compared with the formal sector. From the data on unorganized manufacturing, the NCEUS has estimated that the GVA per worker in manufacturing in 2005 was as low as Rs 24,034 per year. And within this, the own account enterprises has a GVA per worker of only Rs 11,846. Further, productivity in rural areas is lower than in urban areas. Scholars have estimated the labour productivity and capital–labour ratios in the organized and the unorganized manufacturing sectors. Accordingly to Sahu (2011), the GVA per worker (a measure of labour productivity) in the unorganized manufacture in 1994–5 was Rs 8,657, while the value added per worker in organized manufacture was Rs 162,495.17 The labour productivity per worker in the unorganized sector nearly doubled to Rs 14,022 in 2005–6. However the labour productivity in the organized sector grew at a faster pace. Thus, as of 2005–6, the average labour productivity in organized manufacture was nearly 20 times the labour productivity in the unorganized sector. Similarly, and not surprisingly, the capital–labour ratio in the organized sector was also found to be about 20 times that in the unorganized sector (Sahu 2011).
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Export Performance of Small Industries The export performance of the SSI sector has been remarkable from the 1970s. In the period since 1970 till about 1993–4, the growth in exports from the small-scale sector was always higher than that of total exports. However, since 1993–94, particularly from 1997 onwards, the export performance of the SSI sector has not been as impressive. The ministry of SSIs provided data on the exports from the SSI sector. There, data show that the SSI sector accounted for about 15 per cent of the total exports from India in 1976–7. This share increased to 29 per cent in 1986–7 and further to 35 per cent in 1997–8. Since then, the share of the SSI sector in total exports has been gradually declining. In 2007–8, the last year for which data has been provided by the ministry, the share of SSI in total exports was about 30.8 per cent. After the formation of the ministry of MSME, the ministry has not provided data on exports from the SSI sector post 2008. In the period after 1997–8, the performance of the SSI sector is not remarkable when compared with its own performance in the earlier period, and when compared with the performance of exports for larger enterprises. In globally competitive export market, one would expect that certain sections of SSEs would find it difficult to remain competitive. The export promotion measures that are aimed at countering this do not appear to have succeeded. The share of SSIs in total exports has been falling in recent years. In total, so long as India followed an inward-looking growth strategy, the export performance of the small industries with active export promotion policies was impressive. However, in recent years, with a more open, outwardlooking strategy, allowing for free imports into the country, the export promotion policies do not seem to help in sustaining the position of SSI sector as a major exporter of manufactured goods. CHALLENGES AND CONSTRAINTS FACED BY SMALL ENTERPRISES ENGAGED IN MANUFACTURE The informal sector industry can be categorized into three segments depending on the type of market/product. The first segment provides cheap, labour-intensive and medium- to low-quality inputs or services to formal industry. This includes processes that are hazardous and polluting (for example, painting of small parts and components),
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dealing with scrap, recycling of scrap, and certain machining processes. Among these, some informal enterprises are directly part of a value chain and are at the bottom of a subcontracting arrangement, because of being the 4th or 5th tier subcontractors. The second segment of the informal sector provides labourintensive, but not necessarily cheap, goods to the niche domestic and export markets. The products manufactured in the second segment include handicrafts and leather goods. The third category provides cheap, low-quality, labour-intensive products to the markets of the poor or lower-middle class in India. These include garments, footwear, all kinds of plastic consumables, cosmetics, packaged food products (such as biscuits, bread, and sweetmeats), and beedis. This also includes repackaging for pesticides, acids, and other harmful chemicals for the local markets. In terms of linkages with the formal sector, the first segment is linked to the formal sector and has interactions and exchanges with it. The second sector’s links with the formal sector are limited mainly to the domain of marketing. A large part of the output of this segment (in terms of value) is finally sold in the formal domestic markets and is exported. The third segment functions, more or less, independent of the formal sector. In terms of productivity, the first two segments are likely to have relatively higher levels of productivity than the third segment. And in terms of total employment, the third segment that caters to the poor is likely to be the largest. Small producers face problems of access to credit (working capital), access to markets for finished goods, availability of quality raw materials, and so on. As we have seen earlier, the GoI has appointed committees and working groups from time to time to study the challenges faced by small producers and to suggest measures to extenuate them. We briefly discuss recent findings on constraints and challenges faced by small enterprises further. This is in order to highlight the point that for all the promotional measures taken by the government over the years (and as discussed in this chapter), these constraints remain and are important in not only obstructing the growth of small enterprises, but also in a way leading to lower levels of productivity which results in poor quality jobs. The first set of data relates to the unorganized manufacturing sector (2000–1) and the question asked there was the problems faced in
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day-to-day operation of the enterprises. The second data set relates to the reasons for sickness in small-scale industries (2001–2), and the third data set is from a survey in three states (2000) where entrepreneurs from micro and small enterprises (MSEs) were asked for their expansion plans and related constraints. The Third Census of Small Scale Industries (2001–2) probed into the causes of industrial sickness and eventual closure of micro and small enterprises. The main reasons for sickness were identified as market-related problems (66 per cent), shortage of working capital (46.1 per cent), shortage of power (13 per cent), non-availability of raw material (12 per cent), and problems related to machinery and equipment (11 per cent). Within the small-scale sector, registered enterprises had better market access than the unregistered enterprises. Similarly, in every other sphere the unregistered enterprises faced larger constraints than the registered enterprises. In the unorganized manufacturing sector, only about 27 per cent of the enterprises reported that they did not have any specific problems in the running of the enterprises. Shortage of capital was reported as the largest constraint by nearly half the enterprises. This was followed by the problems related to marketing (19 per cent), non-availability of electric connection (10 per cent), and no regular supply of electricity to those who have an electric connection (16 per cent). Competition from larger enterprises in the form of producing similar quality products at lower costs (due to economies of scale) was reported by about 29 per cent of the enterprises. Labour problems related to regulations and regulatory authorities were also reported as constraints but the magnitude of this problem was very small (2 per cent) when compared with other constraints mentioned above. The policies for promotion of small enterprises was partly driven by the idea that these enterprises, set up with limited capital, apart from providing the much-needed employment, will also provide avenues for entrepreneurship development and eventually lead to creation of larger, efficient enterprises that will provide avenues for large-scale quality jobs. In the Indian case, the phenomenon of small enterprises growing into larger enterprises is not widespread. This is seen from the continued dominance of small enterprises in industry. In fact, within the small enterprises sector, the micro enterprises continue to dominate. Thus, it is obvious that MSEs face constraints in growth and expansion. A survey of MSEs in 2000, in Haryana, Maharashtra, and
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West Bengal attempted to identify the constraints and quantify their magnitude (Chadha 2001). The survey results showed that nearly all the enterprises wished to expand operations. Among the institutional constraints identified are infrastructural weaknesses, constraints of finance, and regulatory constraints. Among the market constraints identified are limitations of market access (local as well as export), inadequate market information (mainly of price), and delayed payments from buyers. About 52 per cent of the respondents felt that infrastructural constraints (power, transportation, and lack of sewerage) came in the way of their expansion. The biggest constraint was availability of electricity (43 per cent), followed by roads (17 per cent) and sewerage (14 per cent). Thus, the main infrastructure bottlenecks are undoubtedly power and transportation networks. Nearly 72 per cent of the MSEs reported the unavailability of adequate credit and about 51 per cent reported inordinate delays in accessing credit. Banking procedures and corruption among bank officials added to this problem. Finally, as institutional constraints, entrepreneurs felt that excessive interference by state’s regulatory functionaries led by inspectors was a strong reason for not expanding. In terms of marketing too, small enterprises that intend to expand face constraints. In this there are two categories of small enterprises. The first category of small enterprises does not have links with the formal economy and with larger enterprises, and therefore does not have access to larger markets that are distant (37 per cent). These are also mainly rural enterprises. These ‘isolated’ enterprises service local markets and access inputs that are also from the local markets. Thus, they are constrained from expanding by the size of the local markets. The second set of enterprises consists of those who have access to markets through links with larger enterprises. Among such enterprises, delayed payments and related problems were a major constraint in expansion (59 per cent). Due to their size, MSEs also do not have access to quality inputs at reasonable price (as is available to larger enterprises). Nearly 51 per cent of the small enterprises reported that they paid a higher price for raw materials as this was a major constraint. The NCEUS (2007b) has compiled the findings on the conditions of work in the informal sector it its report. The major constraints and challenges faced by enterprises in the sector as highlighted by the NCEUS are in its reports (1) Financing of Enterprises in the
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Unorganised Sector & Creation of a National Fund for the Unorganised Sector (NAFUS) (2007c), and (2) Report on Technology Upgradation for Enterprises in the Unorganised Sector (2009c). To sum up, as the data from three different surveys of the small enterprises from the most recent period indicate, the main challenges faced by MSE sector are related to lack of markets for their products, timely availability of credit, adequate infrastructural facilities, low technology, and the absence of modern human resources and management practices. These, in turn, obstruct the growth and expansion of individual firms, growth in their productivity, and result eventually in perpetuating low-quality jobs with poor working conditions. *** Informal sector industry in India is large and important in terms of the employment it provides and also in terms of its output. On the one hand, India has engaged with the concept of informal sector for a sufficiently long period of time and has actively contributed towards arriving at an internationally acceptable definition of the informal sector. And perhaps as a consequence of this, in terms of data, India is one of the few countries to have collected data on the informal sector through its series of surveys on the unorganized sector, and the more recent surveys on the informal sector, besides the small-scale sector censuses. On the other hand, the informal sector has remained excluded from major and minor policy initiatives of the Indian State. There is very little policy that is directly aimed at benefiting the informal sector, though a number of initiatives that were aimed at the smallenterprises sector could have benefited the informal sector industry. However, as this chapter shows, and as the large amount of studies compiled by the NCEUS show, the informal sector has more or less not benefited much from direct state policy. The continuous upward revision in the definition of small enterprises and, finally, the new MSMED act of 2006 have made it clear that the policy of promotion of small enterprises that began in the early 1950s, and that perhaps aimed to cover a part of the informal-sector manufacture, has now completely shifted focus to the enterprises (small or medium sized) in the formal sector. Attempts have been made, starting from the terms of reference of the second labour commission, and finally with the setting up of the
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NCEUS, to protect workers in the informal sector through legislation (rights-based approach). The NCEUS has, in its many reports, besides highlighting the issues with regard to workers in the informal sector, also provided draft bills on social security, conditions of work, and on livelihood. The response of the government to these proposed legislations does not seem to be very enthusiastic. A rather weak Social Security Act for workers in the unorganized sector was passed in 2008. In this situation, and in the background where state policy has seen very limited success in bringing about a change in the functioning of the informal sector, the way forward would be to rethink informal sector strategies including state policies differently.. When arriving at the conceptual clarity and definition on the informal sector, the future direction of policy and state action on informal sector should have two components. The first set of policy effort should be directed towards the enterprise, and the second towards employment. At the enterprises level, state efforts should be towards including all enterprises within the regulatory framework. Either a new and comprehensive law covering the enterprises (not limiting to enterprises with a certain employment or investment threshold) should replace the existing formal sector regulations, or major amendments of existing regulations should be made in order to make them more inclusive in their coverage of informal and smaller enterprises. Along with this, perhaps, there is need for harmonizing various enterprise-level regulations to remove the ambiguity of what is covered (and what is not) under these regulations. In other words, we are not arguing for a new regulation that is designed especially for the informal sector, and will cater solely to the informal sector. The argument is for including the informal sector enterprises into the formal sector regulatory system. At the worker level, given the nature of employee–employer relations, the chapter argues for universal systems of protection, systems that are not based on employment. In other words, policy should be aimed at providing social security for all (not only for workers), health cover for all (not only for workers), food security for all (minimum quantity of food grains be guaranteed), infrastructure for all and not only in special economic zones (SEZs) or other growth poles, and so on. On similar lines, the chapter argues that labour regulations should cover all hired workers (without any threshold size of enterprise). This is similar to the idea of having a minimum wages regulation. This does
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not preclude large enterprises from having relatively greater amount of obligations towards their workers. NOTES 1. For detailed reviews on the informal sector, see Breman (1976a, 1999); Moser (1978, 1994); Roy and Basant (1990); Swaminathan (1991); and Tokman (1978). Rakowski (1994) has a review on literature and debates on the informal sector with special reference to Latin America. 2. Both Marx and the classical economists during his time shared similar views on the nature of capitalist industrialization. Both observed that increasing scale of production and its progressive centralization were central features inherent in capitalist growth (Benton 1990). Later, the process of import-substituting industrialization in the Third-World countries was also largely structured along a model of the creation and expansion of formal wage labour (Wuyts 2001). 3. In India, for a discussion of the role of informal sector in rural–urban migration, see Bhattacharya (1996, 1998). 4. The ILO studies highlighted the ‘neglected part of the economy’ of LDCs and highlighted the ‘diversity of activities and enterprises that come under the general rubric of the term informal sector’ (Swaminathan 1991, 12). 5. For example, Bose (1978); Castells and Portes (1989); House (1984); Joshi and Joshi (1976); and Papola (1981).. 6. The National Commission on Enterprises in the Unorganized (NCEUS) was initially set up as the National Commission on Enterprises in the Unorganized/ Informal Sector (NCEUIS) in September 2004. The name of the organization was changed in May 2005. 7. In a review of the literature on the informal sector and a detailed analysis of the definitional issues involved, Swaminathan (1991) shows that the term ‘informal sector’ had previously been used to refer to enterprises, employment, or both. This had led to some confusion in defining the informal sector. Swaminathan says that ‘a part of the ambiguity in the literature on the informal sector stems from the failure to make a clear distinction between informal-sector enterprises and informal-sector employment.’ 8. Forms of ownership and scale of operation do not withstand rigorous scrutiny as there may be family-owned large businesses and factories that cannot be considered as part of the informal sector. Similarly, there is a possibility of having formal enterprises that are small scale in operation but are fully regulated by the State. For example, in the healthcare sector that is under regulation of different bodies of the State, there may be primary health centres manned by a very small number of workers. 9. This could also happen when regulations exist, but are not enforced (Joshi 1980). 10. A list of legislation covering workers and employment in India is in Sarkar (1995).
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11. In addition, local governments could include enterprises with 20 or more workers under the Factories Act in certain special circumstances, such as dangerous working conditions, and so on. 12. Similar to the amendment in 1891, this amendment provided scope for local governments to include enterprises with 10 or more workers under the Factories Act in certain special circumstances, such as dangerous working conditions, and so on. 13. Some scholars have considered the tiny enterprises to form part of the informal sector, and not the entire small-scale sector. 14. Similarly, taking note of the growing share of services in the informal and small enterprises sector in terms of number of enterprises, employment, and value of services, a similar revamp of the categorization was undertaken for the enterprises engaged in services. The new categories in line with the categorization of manufacturing enterprises are micro, small, and medium enterprises. The investment ceilings for these three categories are lower than the corresponding figures for the manufacturing sector at Rs 1, 2, and 5 million respectively. 15. Marketing cooperatives are seen as a feasible and sustainable option for small and micro enterprises. The KVIC is actively involved in this effort. The cooperative marketing strategy is successful in many sectors such as in dairy, handicraft, coir, and handlooms. 16. The figures for organized manufacture are from the Annual Survey of Industries 17. Estimates are in 1993–4 prices, see Tables 1 and 2 in Sahu (2011).
REFERENCES Bangasser, Paul. 2000. ‘The ILO and the Informal Sector: An Institutional History’, Employment Paper 2000/9, Employment Strategy Department, International Labour Office, Geneva. Bennett, Karl M. 1995. ‘Economic Decline and the Growth of the Informal Sector: The Guyana and Jamaica Experience’, Journal of International Development, 7(2): 229–42. Benton, Lauren. 1990. Invisible Factories: The Informal Economy and Industrial Development in Spain. Albany: State University of New York Press. Bhagat, Manju 1997. ‘Poverty and Minimum Wages’, The Indian Journal of Labour Economics, 40(4): 721–30. Bhattacharya, Prabir C. 1996. ‘The Role of the Informal Sector in Structural Transformation: Some Indian Evidence’, Journal of International Development, 8(1): 83–94. ———. 1998. ‘The Informal Sector and Rural-to-Urban Migration—Some Indian Evidence’, Economic and Political Weekly, 33(21): 1255–62. Birkbeck, C. 1978. ‘Self-employed Proletarians in an Informal Factory: The Case of Cali's Garbage Dump’, World Development, 6(9/10): 1173–85.
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Bose, A. N. 1978. Calcutta and Rural Bengal: Small-Sector Symbiosis. Calcutta: Minerva Publishers. Breman, Jan. 1976a. ‘A Dualistic Labour System: A Critique of the Informal Sector Concept, I: The Informal Sector’, Economic and Political Weekly, 11(48): 1870–6 . ———. 1976b. ‘A Dualistic Labour System: A Critique of the Informal Sector Concept, II: A Fragmented Labour Market’, Economic and Political Weekly, 11(49): 1905–8. ———. 1996. Footloose Labour: Working in India's Informal Economy. Cambridge: Cambridge University Press. ———. 1999. ‘The Study of Industrial Labour in Post-Colonial India—The Informal Sector: A Concluding Review’, Contributions to Indian Sociology, 33(1&2): 407–31. Bromley, Ray. 1978a. ‘Introduction: The Urban Informal Sector, Why is it Worth Discussing?’, World Development, 6(9/10): 1033–9. ———. 1978b. ‘Organisation, Regulations and Exploitation in the So-Called Urban Informal Sector: The Street Traders of Cali’, World Development, 6 (9/10): 1161–71. Bromley, Ray, and Chris Gerry. 1979. ‘Who are the Casual Poor?’, in Bromley and Gerry (eds), Casual Work and Poverty in Third World Cities, pp. 3–26. New York: John Wiley and Sons Brusco, Sebastiano. 1982. ‘The Emilian Model: Productive Decentralisation and Social Integration’, Cambridge Journal of Economics, 6(2): 167–84. Castells, Manuel, and Alejandro Portes. 1989. ‘World Underneath: The Origins, Dynamics and Effects for the Informal Economy’, in Alejandro Portes, Manuel Castells, and Lauren Benton (eds.), The Informal Economy: Studies in Advanced and Less Developed Countries, pp. 11–37. Baltimore: Johns Hopkins University Press. Chadha G.K. 2001. ‘Rural Industry in India and China: Exchanging Technological and Institutional Lessons’, Report Submitted to SSE-NIWL, SWEDEN. Chadha, G.K. 2002. ‘Rural Non-Farm Employment in India: What Does Recent Data Experience Teach Us’, The Indian Journal of Labour Economics, 45(4): 663–94. Cinar, E. Mine. 1994. ‘Unskilled Urban Migrant Women and Disguised Employment: Home-Working Women in Istanbul, Turkey’, World Development, 22(3): 369–80. Deshpande, L.K. 1979. ‘The Bombay Labour Market’, Bombay: University of Bombay (mimeo). Diaz, Alvaro. 1993. ‘Restructuring and the New Working Classes in Chile: Trends in Waged Employment, Informality and Poverty, 1973–1990’, Discussion Paper No. 47, United Nations Research Institute for Social Development (UNRISD), Geneva. Available at http://www.unrisd.org/80256B3C005BCCF9/%28httpA uxPages%29/DC0664D4BEF5731180256B67005B6535/$file/DP47.pdf, last accessed on 19 March 2015..
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Evers, Hans Dieter and Ozay Mehmet. 1994. ‘The Management of Risk: Informal Trade in Indonesia’, World Development, 22 (1): 1–9. Funkhouser, Edward. 1996. ‘The Urban Informal Sector in Central America: Household Survey Evidence’, World Development, 24 (11): 1737–51. ———. 1997a. ‘Demand-side and Supply-side Explanation for Barriers to Labor Market Mobility in Developing Countries: The Case of Guatemala’, Economic Development and Cultural Change, 45 (2): 341–66. ———. 1997b. ‘Mobility and Labour Market Segmentation: The Urban Labour Market in El Salvador’, Economic Development and Cultural Change, 46 (1): 123–153. Gerry, Chris. 1978. ‘Petty Production and Capitalist production in Dakar: The Crisis of the Self-employed’, World Development, 6 (9/10): 1147–60. Government of India (GoI). 2002. Second National Commission on Labour Report, Ministry of Labour. Available at: http://labour.nic.in/lcomm2/nlc_report. html. ———. 2004. Final Results: Third All India Census Of Small Scale Industries, 2001–2, Development Commissioner, MSME, Ministry of Micro, Small, and Medium Enterprises, Government of India, New Delhi. ———. 2012 Final Report: Fourth All India Census of Micro, Small & Medium Enterprises, 2006–7: Unregistered Sector, Development Commissioner, MSME, Ministry of Micro, Small, and Medium Enterprises, Government of India, New Delhi Guerguil, Martine. 1988. ‘Some Thoughts on the Definition of the Informal Sector’, Cepal Review, No. 35(August): 57–65. Harriss, John. R., and Michael P. Todaro. 1970. ‘’Migration, Unemployment and Development: A two Sector Analysis’, American Economic Review, 60(1): 126–42. Hart, Keith. 1973. ‘Informal Income Opportunities and Urban Employment in Ghana’, Journal of Modern African Studies, 11 (1): 61–89. House, William J. 1984. ‘Nairobi’s Informal Sector: Dynamic Entrepreneurs or Surplus Labor?’, Economic Development and Cultural Change, 32 (2): 277–302. ILO. 1970. Towards Full Employment Programme for Columbia, prepared by an Inter-Agency Team, International Labour Office, Geneva. ———. 1971. Matching Employment Opportunities and Expectations: A programme for Action for Ceylon, Report of an inter-agency team, International Labour Office, Geneva. ———. 1972. Employment, Income and Equality: A Strategy for Increasing Productivity in Kenya, International Labour Office, Geneva. ———. 1991. Dilemma of the Informal Sector, Report of the Director General, International Labour Conference, 78th Session, International Labour Office, Geneva. ———. 2002. Women and Men in the Informal Economy: A Statistical Picture, Report, 2nd edition. International Labour Office, Geneva. Jatav, Manoj and Sucharita Sen. 2013. ‘Drivers of Non-Farm Employment in Rural India. Evidence from the 2009–10 NSSO Round’, Economic and Political Weekly, 48(26 and 27): 14–21.
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Joshi, Heather. 1980. ‘The Informal Urban Economy and Its Boundaries’, Economic and Political Weekly, 15 (13): 638–44. Joshi, H, and V. Joshi. 1976. Surplus Labour and the City: A Case Study of Bombay. Delhi: Oxford University Press. Lanjouw, Peter and Abusaleh Shariff. 2004. ‘Rural Non-Farm Employment in India: Access, Incomes and Poverty Impact’, Economic and Political Weekly, 39 (40): 4429–46. Lewis, A. 1954. ‘Economic Development with Unlimited Supplies of Labour’, journal of The Manchester School of Economic & Social Studies, 22(May): 139–91. Labour Investigation Committee (LIC). 1946. ‘Report of the Labour Investigation Committee’, Government of India. Lubell, Harold. 1991. The Informal Sector in the 1980s and 1990s. Paris: OECD. Lubell, Harold and Charbel Zarour. 1990. ‘Resilience amidst Crisis: The Informal Sector of Dakar’, International Labour Review, 129 (3): 387–96. Mazumdar, Dipak. 1976. ‘The Urban Informal Sector’, World Development, 4(8): 655–79. ———. 1979. ‘Paradigms in the Study of Urban Labour Markets in LDCs: A Reassessment in the Light of an Empirical Survey in Bombay City’, World Bank Staff, Working Paper No 366, World Bank, Washington, DC. Mead, Donald C. and Christian Morrisson. 1996. ‘The Informal Sector Elephant’, World Development, 24(10): 1611–19. Mehrotra, Santosh, Ankita Gandhi, Bimal Kishore Sahoo, and Partha Saha. 2012. ‘Creating Employment in the Twelfth Five-Year Plan’, Economic and Political Weekly, 47(19): 63–73. Mehta, Meera. 1985. ‘Urban Informal Sector: Concepts, Indian Evidence and Policy Implications’, Economic and Political Weekly, 20(8): 326–32. Moser, Caroline O.N. 1978. ‘Informal Sector or Petty commodity Production: Dualism or Dependence in Urban Development?’, World Development, 6(9/10): 1041–64. ———. 1994. ‘Informal Sector debate, Part I’, in Cathy Rakowski (ed.), Contrapunto: The Informal Sector Debate in Latin America, pp. 11–29. Albany: State University Press of New York. Nakanishi, Toru. 1990. ‘The Market in the Urban Informal Sector: A Case Study in Metro Manila, the Philippines’, Developing Economies, 28(3): 271–301. National Commission for Enterprises in the Unorganized Sector (NCEUS). 2006. Social Security for Unorganized Workers, National Commission for Enterprises in the Unorganized Sector, Government of India, New Delhi. ———. 2007a. Comprehensive Legislation for Minimum Conditions of Work and Social Security for Unorganized Workers, National Commission for Enterprises in the Unorganized Sector, Government of India, New Delhi. ———. 2007b. Conditions of Work and Promotion of Livelihood in the Unorganized Sector, National Commission for Enterprises in the Unorganized Sector, Government of India, New Delhi. ———. 2007c. Financing of Enterprises in the Unorganized Sector & Creation of a National Fund for the Unorganised Sector (NAFUS), National
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Commission for Enterprises in the Unorganized Sector, Government of India, New Delhi. ———. 2008a. Definitional and Statistical Issues Relating to Informal Economy, National Commission for Enterprises in the Unorganized Sector, Government of India, New Delhi. ———. 2008b. A Special Programme for Marginal and Small Farmers, National Commission for Enterprises in the Unorganized Sector, Government of India, New Delhi. ———. 2009a. Growth Pole programme for Unorganized Sector Enterprise Development, National Commission for Enterprises in the Unorganized Sector, Government of India, New Delhi. ———. 2009b. Skill Formation and Employment Assurance in the Unorganized Sector, National Commission for Enterprises in the Unorganized Sector, Government of India, New Delhi. ———. 2009c. Technology Upgradation for Enterprises in the Unorganized Sector, National Commission for Enterprises in the Unorganised Sector, Government of India, New Delhi. ———. 2009d. The Challenge of Employment in India An Informal Economy Perspective (Vol. I and II), National Commission for Enterprises in the Unorganized Sector, Government of India, New Delhi. National Sample Survey Organisation (NSSO). 2001a. Non-agricultural Enterprises in the Informal Sector in India, 1999–2000: Key Results, Report No. 456, National Sample Survey Organization, Ministry of Statistics and Programme Implementation, Government of India. ———. 2001b. Informal Sector in India, 1999–2000: Salient Features, Report No. 459, National Sample Survey Organization, Ministry of Statistics and Programme Implementation, Government of India. ———. 2002. Unorganised Manufacturing Sector in India, 2000—1: Key results, Report No. 477, National Sample Survey Organisation, Ministry of Statistics and Programme Implementation, Government of India. Nattrass, Nicole Jean. 1987. ‘Street Trading in Transkei: A Struggle Against Poverty, Persecution and Prosecution’, World Development, 15(7): 861–75. Pais, Jesim. 2002. ‘Casualisation of the Urban Labour Force: An Analysis of Recent Trends in Manufacturing’, Economic and Political Weekly, 37(7): 631–52 . Papola, T.S. 1980. ‘Informal Sector: Concept and Policy’, Economic and Political Weekly, 15(18): 817–24. ———. 1981. Urban Informal Sector in Developing Economy. New Delhi: Vikas Publishing House. ———. 1992. ‘Rural Non-Farm Employment: An Assessment of Recent Trends’, Indian Journal of Labour Economics, 35(3): 238–45. Peattie, Lisa. 1987. ‘An Idea in Good Currency and How it Grew: The Informal Sector’, World Development, 15(7): 851–60. Portes, Alejandro and Lauren Benton. 1984. ‘Industrial Development and Labor Absorption: A Reinterpretation’, Population and Development Review, 10(4): 589–611.
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Portes, Alejandro, Manuel Castells, and Lauren Benton (eds). 1989. The Informal Economy: Studies in Advanced and Less Developed Countries. Baltimore: Johns Hopkins University Press. Portes, Alejandro, Manuel Castells, and Lauren Benton. 1989. ‘Conclusion: The Policy Implication of Informality’, in Alejandro Portes, Manuel Castells, and Lauren Benton (eds), The Informal Economy: Studies in Advanced and Less Developed Countries, pp. 298–311. Baltimore: Johns Hopkins University Press. Portes, Alejandro and Saskia Sassen-Koob. 1987. ‘Making it Underground: Comparative Material on the Informal Sector in Western Market Economies’ American Journal of Sociology, 93(1): 30–61. Rakowski, Cathy A. 1994. ‘Convergence and Divergence in the Informal Sector Debate: A Focus on Latin America, 1984–92’, World Development, 22(4): 501–16. Ramanujan, M.S., and I.C. Awasthi. 1994. ‘Wage Working and Living Conditions of Workers in the Informal Sector’, The Indian Journal of Labour Economics, 37(3): 407–21. Ramaswamy, K.V. 2002. ‘Liberalization, Outsourcing and Industrial Labour Markets in India: Some Preliminary Results’, in Shuji Uchikawa (ed.), Labour Market and Institution in India, Institute of Developing Economies Japan External Trade Organisation, Chiba, Japan. Rani, Uma and Jeemol Unni. 2000. Urban Informal Sector: Size and Income Generation Process in Gujarat, Report No 3, National Council of Applied Economic Research, New Delhi. Royal Commission on Labour (RCL). 1929. ‘Report of the Royal Commission on Labour in India’, Government of India. Romatet, Emmanuel. 1983. ‘Calcutta’s Informal Sector: Theory and Reality’, Economic and Political Weekly, 18(50): 2115–28. Roy, Tirthankar and Rakesh Basant. 1990. ‘Urban Informal Sector: A Critical Review’, Working Paper No. 27, The Gujarat Institute of Area Planning, Gota, Ahmedabad. Sahu, P.P. 2007. ‘Expanding Productive Employment Opportunities: Role and Potential of the Micro and Small Enterprises Sector’, ISID Working Paper No. 2007/05, Institute for Studies in Industrial Development, New Delhi. ———. 2011. ‘The Employment Implications of Current Financial Crisis: Challenges, Threats and Coping Strategies in India’, Sanei Working Paper Series No. 11–03, South Asia Network of Economic Research Institutes, Bangladesh Institute of Development Studies (BIDS), Dhaka. Sethuraman, S.V. 1974. ‘Urbanisation and Employment in Jakarta’, World Employment Programme Research, Urbanisation and Employment Research Programme, Working Paper, WEP 2-19/WP 6, International Labour Organization, Geneva. ———. 1976. ‘The Urban Informal Sector: Concept, Measurement and Policy’, International Labour Review, 114 (1): 69–81.
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Shukla, Vibhooti. 1992. ‘Rural Non-Farm Employment in India: Issues and Policy’, Economic and Political Weekly, 27 (28): 1477–88. Sinclair, S.W. 1978. ‘Housing Preferences and the Urban Poor in Less Developed Countries’, in Ekistics, June. Swaminathan, Madhura. 1991. ‘Understanding the “Informal Sector”: A Survey’, Wider Working Papers, WP 95, World Institute for Development Economics Research, UNU-WIDER, Helsinki, Finland. Todaro, Michael P. 1969. ‘A Model of Labour Migration and Urban Unemployment in Less Developed Countries’, American Economics Review, 69(1). Tokman, Victor E. 1978. ‘An Exploration into the Nature of Informal-Formal Sector Relationships’, World Development, 6(9/10): 1065–75. Tripp, Ali Mari. 1988. ‘The Informal Economy and the State in Tanzania’, paper presented at, Anthropology Meeting on Informal Economy, Knoxville, Tennessee. Unni, Jeemol. 2000. ‘Urban Informal Sector: Size and Income Generation Processes in Gujarat, Part I’, Report No. 2, National Council of Applied Economic Research, New Delhi. Unni, Jeemol and Namrata Bali. 2001. ‘Subcontracted Women Workers in the Garments Industry in India’, Working Paper No. 124, Gujarat Institute of Development Research, Ahmedabad. Visaria, Pravin and Paul Jacob. 1995. ‘The Informal Sector in India: Estimates of Its Size, and Needs and Problems of Data Collection’, Working Paper No. 70, Gujarat Institute of Development Research, Ahmedabad. Wuyts, Marc. 2001. ‘Inequality and Poverty as the Condition of Labour’, draft paper prepared for the discussion at the UNRISD meeting on ‘The Need to Rethink Development Economics’, 7–8 September 2001, Cape town.
6 Indigenous Technological Development and Intellectual Property Rights in India’s Industrial Development SUDIP CHAUDHURI
Intellectual property rights (IPRs) give the owners of intellectual property a legally enforceable right to prevent others from using their intellectual creation subject to certain conditions. The IPRs cover a broad range of subjects, including patents, copyrights, trademarks, and trade secrets. Patents give the owners the legal right to prevent others from commercially using the product or process mentioned in the patent for a fixed period of time. Copyrights protect literary, artistic, and scientific works. Computer software too can be protected under copyright laws. Trademarks protect the right to use words, signs, or symbols that are used to identify a certain product or a company. Similar to trademarks, geographical indications identify a product with a certain region and characteristics (for example, Darjeeling tea). Trade secrets are proprietary information about production processes, including organizational methods and customer lists.1 In the economic literature on IPRs, patents have received the most attention. In this chapter also, patents will be the focus. In the first section, the chapter provides a brief review of the arguments for and against patent protection for products. Patent protection has played a very important role in India’s industrial development, particularly in pharmaceuticals. In the second and third sections, we discuss the role of pharmaceutical patents in India’s technological and industrial development.
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BENEFITS AND COSTS OF PATENT PROTECTION As Mazzoleni and Nelson (1998) have discussed, there are at least four broad theories about the principal purposes patents serve: 1. Invention motivation theory: Patents provide motivation for useful invention. 2. Invention dissemination theory: Patents induce inventors to disclose their inventions, which would otherwise be kept secret, leading to quick and wide diffusion of useful knowledge. 3. Induce commercialization theory: Patents induce the investments necessary to commercialize them. 4. Exploration control theory: Patents enable orderly development of broad prospects. Holding of patents on broad prospect inventions or, more generally, inventions that set the stage for a number of follow-on inventions permit the development of the full range of possibilities. In the absence of such a broad patent, the development of the prospect is likely to be wasteful. These theories are not mutually exclusive, for example, the prospect of a patent may induce invention and the holding of the patent may prompt the subsequent commercialization. But the most common is the first theory—the invention motivation theory. The principal economic rationale for granting patents is that it will stimulate investment for research for innovation.2 The basic presumption is that, economically useful knowledge is expensive to generate. It is argued that without patent protection, others may be able to imitate new products or processes, thereby limiting the innovators’ ability to recoup the research and development (R&D) costs. Hence, the innovator will not have any incentive to undertake such R&D or to publicly disclose it. A delay in imitation through patent protection would stimulate R&D for innovation. But the impact on the incentive for R&D for technological development is only one of the economic effects of patent protection. The other major concern relates to competition and technology diffusion. Patent holders are required to disclose the innovation and this may have a positive impact on further innovations. But the fact that patent holders can prevent others from using the innovations may result in a negative impact on further technological development, particularly in
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areas such as medicine, software, and information technology where innovation is a cumulative and collaborative enterprise (Organisation for Economic Co-operation and Development [OECD] 2004). The evidence received by the Royal Society (2003: v) indicates that ‘[P] atenting rarely delays publication significantly, but that it can encourage a climate of secrecy that does limit the free flow of ideas and information that are vital for successful science’. Again, patents may have a positive impact on innovation, for example, the development of new drugs. But, patent rights which exclude others from producing and marketing it, lead to inhibition of competition and hence high prices. In fact, the precise idea of providing patent protection for products is to prevent the prices of the innovators being undercut by others, and thereby provide an incentive and reward for R&D. But the widely quoted empirical study by Taylor and Silberston (1973) for the UK industries, based on interviews with firms, show that except in pharmaceuticals and other fine chemicals industries, patent protection is neither particularly effective nor necessary to appropriate the benefits from R&D. Other empirical studies—for example, by Mansfield (1986), for the US industry—also derive similar conclusions regarding the importance of patent protection for investment in R&D. Mansfield interviewed chief R&D executives of a random sample of a hundred firms from 12 industries and reported that 60 per cent of the inventions developed by pharmaceutical firms during the period 1981 to 1983 would not have been developed in the absence of patent protection. These percentages are much lower in other industries, such as 38 per cent in chemicals, 25 per cent in petroleum, and 17 per cent in machinery. It was found that patents had practically no impact on R&D in 6 industries (0 per cent for office equipment, motor vehicles, rubber, and textiles, and 1 per cent for primary metals and instruments). A number of industries reported that factors such as a head start and rapid movement down the learning curve, reputational advantages, establishment of effective production, and sales and service facilities are more important than patents to financially benefit from R&D (Chang 2001: 295; Mazzoleni and Nelson 1998: 276). In fact, innovations can and do take place even without such incentives. In certain areas such as internet-based computer software, open access has encouraged rather than prevented technological development (Chang 2001: 294).
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The net benefits of the patent system to the society at large have, in fact, remained controversial over the years. Machlup (1958), in his long and famous review, did not find that the benefit of the patent system (that it promotes R&D) outweighs its cost (that it adversely affects diffusion and dissemination). Despite a large number of subsequent studies, what Machlup concluded, remains valid even today:3 If we did not have a patent system, it would be irresponsible, on the basis of our present knowledge of its economic consequences, to recommend instituting one. But since we have had a patent system for a long time, it would be irresponsible, on the basis of present knowledge, to recommend abolishing it. This last statement refers to a country such as the United States of America—not a small country and not a predominantly nonindustrial country, where a different weight of argument might well suggest another conclusion. (p. 80)
In fact, the positive impact on R&D is also being increasingly questioned and alternatives are being talked about as we shall see below.4 The multinational corporations (MNCs) dominate the pharmaceutical industry and they consider patent protection for products as fundamental for their research efforts. It is widely accepted that some incentives may be necessary for R&D for new drug development. But the incentive need not be in the form of a patent monopoly. Arrow (1962), to whom much of the modern economic theorizing on patents is attributed, did not consider patents as the only possible incentive system. In theoretical works, patents have not been found to be necessarily the best option (see, for example, Arrow 1962; Dasgupta and Stoneman 1987; Nordhaus 1969). The desirability of having marketing monopoly on patented invention to finance R&D is being contested even in developed countries. This is not just because of high prices. Doubts have been raised about the nature of R&D spending. Studies have shown that only about 10 per cent of the R&D is spent on developing new drugs. About threefourths of the new drugs approved do not provide any therapeutic benefit over the existing products. The MNCs actually take patents to protect minor developments and delay the entry of generic products after patent expiry.5 In the field of medicines, alternative models have been proposed: For example, Kremer (1998) proposed an auction system in which the government purchases most drug patents and places them in the
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public domain; Hubbard and Love (2004) proposed that a mandatory employer-based research fee should be distributed through intermediaries to researchers; and Hollis (2004) proposed zero-cost compulsory licensing patents, in which the patent holder is compensated based on social value of the drug. A review by Baker (2004) shows that these proposals are superior to the present patent system. Like Machlup’s, most studies on the economic implications of patents have been produced in developed countries, and their direct relevance for developing countries have been doubted.6 For developing countries, the situation is fundamentally different. These countries are net users, not net developers of R&D-intensive products. Developed countries hold 97 per cent of the patents worldwide (United Nations Development Programme [UNDP] 1999: 68). Penrose (1951), as well as some later studies—such as those by Vaitsos (1972) and Greer (1973)—have argued that developing countries lose by granting patent protection; the costs actually outweigh the benefits. The developing countries suffer from higher prices. And the benefits of technological progress which are supposed to follow from patent protection take place in developed countries, not in developing countries. To quote Penrose (1951: 220): [N]on-industrialized countries and countries in the early stages of industrialization gain nothing from granting foreign patents since they themselves do little, if any, patenting abroad. These countries receive nothing in return for the price they pay for the use of foreign inventions or for the monopoly they grant to foreign patentees.
To understand the link between product patents, innovation, and technological and industrial development, India is a good case study. Before 1972, India effectively had a product patent regime in pharmaceuticals. But in 1972, India abolished product patents in pharmaceuticals (and food and those manufactured by chemical processes). In the second section, we compare the situation before and after 1972 to discuss how India benefited from the abolition of product patents in pharmaceuticals. Despite these arguments and doubts about the desirability of product patent-protection in developing countries, the Agreement on Trade Related Aspects of Intellectual Property Rights (TRIPS Agreement, or simply TRIPS) was introduced in 1995 as one of the agreements of the World Trade Organization (WTO). Binding on all member countries
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of WTO, TRIPS basically aims at establishing strong minimum standards for IPRs—patents, copyrights, trademarks, geographical indications, industrial designs, integrated circuits, and trade secrets. Under TRIPS, all the WTO member countries will have to provide patent protection for all products including pharmaceuticals, within the time specified. The TRIPS has been one of the most controversial WTO agreements. It was introduced not because the developing countries wanted it but because the MNCs and the developing countries insisted on it. It is now well documented how the pharmaceutical MNCs organized a very successful campaign to induce the governments of the United States, the European Union member nations, and Japan to insist on an agreement on intellectual property in the Uruguay Round of Multilateral Trade Negotiations.7 Initially led by India and Brazil, developing countries did oppose the inclusion of intellectual property in the Uruguay Round of Multilateral Trade Negotiations. But the developed countries, led by USA, aggressively pursued their agenda. The developing countries were put under tremendous pressure to accept TRIPS (Drahos, with Braithwaite 2003: chapters 6‒9). Before introducing TRIPS, benefits and costs were not properly evaluated. In fact, a survey of the literature conducted under the auspices of the World Bank, came to the following conclusion: Like the costs, most benefits believed to flow from stronger protection in developing countries have not been empirically established, such as the positive impact on domestic R&D activity, the knowledge diffusing effect of patent disclosure, the boost to higher world technological activity resulting from better protection in all countries, and generally, its favourable effects on technology transfer through licensing, and on capital formation, especially through more foreign direct investment. (Primo Braga 1990: 87).
This survey found that the only justification for the developing countries to accept a change in the intellectual property regime was the threat that these countries would otherwise be denied the advantages of having trade ties with the developed countries (Primo Braga 1990: 87). India and Brazil, which led the opposition of the developing countries, capitulated under pressure. The political leadership in both the countries were unable to stand firmly in their positions. The result was that the resistance of the developing countries collapsed (Shukla 2000: 21).
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Though it was self-interest which prompted the developed countries to push through TRIPS, they maintained that developing countries would also gain from it. It was claimed that not only will the developing countries be able to take care of the costs of TRIPS, but that they will also be deriving various benefits from it. To comply with the TRIPS agreement, India has amended its patent laws and has re-introduced patent protection for products in pharmaceuticals from 1 January 2005. In the third section, we discuss whether the post-TRIPS performance of the pharmaceutical industry in India justifies a rethinking of the relationships between patents and technological development in developing countries. To anticipate our discussion, nothing really has changed in India to dispute the conventional wisdom that developing countries should not grant patent protection for pharmaceutical products. But, if the developing countries do not provide patent protection, then, naturally, they can ‘free ride’ on the innovations that take place in the developed countries. Is it not unfair, and hence immoral, for the developing countries to enjoy the fruits of innovations of the developed countries without paying for these? During the TRIPS negotiations, the developed countries actually maintained that the developing countries ought to respect patent protection on such moral grounds (Chin and Grossman 1988: 23). But strong patent protection has traditionally been seen as something not required until a relatively later stage of the development process. The study by Challu (1991) shows that pharmaceutical product patenting followed economic development rather than being a prerequisite for it. Schiff (1971) studied two countries—the Netherlands and Switzerland—which, for several decades in the late nineteenth century and early twentieth century, did not grant any patents at all. No evidence was found to suggest that industrialization suffered because of the lack of patent protection. For two Dutch industries analysed in detail—incandescent lamps and margarine—absence of patent protection furthered rather than hampered expansion. In Switzerland, the progress of industrialization was found to be vigorous when no patent protection was provided. Except for USA,8 most developed countries adopted patent protection for pharmaceutical products after they had reached a high degree of economic development. Among the major pharmaceutical producing countries patent protection for pharmaceutical products was introduced as follows: the
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United Kingdom in 1949, France in 1960, Germany in 1968, Japan in 1976, Switzerland in 1977 (Challu 1991: Table 9). Thus, it is actually morally and historically unfair for the developed countries now to deny the developing countries the privileges which they enjoyed at the corresponding stages of their development (Chang 2001: 300). PATENT PROTECTION OF PRODUCTS AND DEVELOPMENT OF PHARMACEUTICAL INDUSTRY IN INDIA Before 1972 The indigenous sector had a long tradition of entrepreneurship in pharmaceuticals. The first pharmaceutical unit, Bengal Chemicals and Pharmaceutical Works, was set up quite early, in 1892. By the time India became independent, drugs were being produced by several other indigenous firms, including Alembic Chemicals, Bengal Immunity, and East India Pharmaceuticals. In fact, in the early 1950s, the indigenous sector dominated the pharmaceutical industry in India with more than 60 per cent market share.9 With the introduction of sulpha drugs in the mid-1930s and penicillin in the early 1940s, the international pharmaceutical industry went through what is usually referred to as a ‘therapeutic revolution’, which changed the dynamics. Before the 1930s, few drugs were capable of curing diseases. The large number of remaining drugs could only deal with symptoms, reduce pain, and induce sleep. Most of the drugs had been in use for a long time and the industry hardly did any research on new drugs. The success of sulpha drugs and penicillin lured the pharmaceutical companies in the developed countries into the field of research for developing new drugs. Accompanied by several other discoveries and inventions, the pharmaceutical industry was transformed into a vast R&D intensive industry. Meanwhile, the Second World War also tremendously increased the demand for drugs. Production and marketing soon began to be organized by the MNCs on a worldwide basis and on an unprecedented scale. The MNCs started R&D for new drugs during the period between the 1930s and the 1940s. As a result, in the late 1940s and during the 1950s and even after that, the new drugs discovered by MNCs slowly began to be available for medical use.
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The indigenous sector was not influenced in the same way. Research for developing new drugs—that is, developing a new chemical entity—is functionally different from R&D of new processes for manufacturing drugs (whether old or new). While the MNCs had been engaged in both, the activities of the indigenous sector remained confined to the latter. As in the period before the therapeutic revolution, the indigenous sector concentrated on the development of manufacturing processes for drugs in current use.10 But, with new drugs being introduced by the MNCs at a rapid rate, the role of patents became important. Till 1972, when the Patents and Designs Act, 1911, was replaced by the Patents Act, 1970, India effectively provided patent protection for pharmaceutical products. Hence, unlike in the period before the therapeutic revolution, it was not enough to develop manufacturing technologies; the indigenous sector now had to operate within the constraints of the prevailing patent legislation in India. Using the product patent rights, the MNCs prevented the indigenous companies from producing the new drugs. The indigenous sector, as a result, suffered and lost its dominance. In contrast to 62 per cent of the market as in the early 1950s, the market share of the indigenous sector declined to 32 per cent by 1970 (Chaudhuri 2005: 18, Table 2.2). The pharmaceutical industry in India, however, hardly developed. While the MNCs prevented the indigenous companies from producing the new drugs, they themselves were not very keen to invest in manufacturing operations in the country. The MNCs considered the Indian market as too small for setting up separate plants in the country. They were also not keen to lower the prices of drugs and to try to enlarge the market, fearing adverse impact in their home countries. They were content with the small market comprising those who could afford the high prices charged by them. The MNCs preferred importing the drugs into the Indian market than aiming to produce the drugs locally. Even when they started production, they were keen to formulate imported bulk drugs or those bought from others rather than to produce the bulk drugs themselves and develop the basic raw material production base. As a result, on the one hand, because of lack of competition, drug prices in India were very high. On the other hand, India was dependent on imports for many of the essential bulk drugs. The import dependence constricted consumption in a country deficient in foreign exchange and thereby inhibited the growth of the industry. Compared to the present status of the industry, the
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size of the pharmaceutical industry was relatively very small in the early 1970s. High drug prices in India during those days have been documented by several committees. The American Senate Committee (Kefauver Committee), in fact, found India to be among the highest priced nations in the world (cited in Kidron 1965: 251). Thus, the patent protection for products in India before 1972 did not have much positive effect. India had to pay high prices for patented drugs. But technological development did not take place here. The MNCs who held the patents were not keen on manufacturing (and R&D) activities in India and prevented the Indian companies from doing so by using their patent rights. After 1972 The situation underwent a complete transformation after 1972 when the Patents and Designs Act, 1911 was replaced by the Patents Act, 1970. An important feature of the new patent act was the inclusion of special provisions relating to drugs and a few other products. Under the act of 1970, drugs (and food and those manufactured by chemical processes) could be patented only for a new method or process of manufacture, not for the products as such (see section 5 of the Patents Act, 1970). The act of 1970 practically eliminated the monopoly status which the MNCs had enjoyed till then. An MNC inventing/discovering a new drug could, at best, patent the process of manufacturing it, provided it was new. Unlike in the previous patent regime, it could not patent all the processes known to it, even if these were new. For a particular drug, only one method or process—the best known to the applicant—could be patented (see sections 5 and 10 of the Patents Act, 1970). Thus, the indigenous firms could immediately manufacture the new drugs if they could use an old process or develop a new one that is not mentioned in the patent of the innovator company. Complete elimination of patent protection for products and also the provision that only one process could be patented by an applicant,11 brought about significant changes in the pharmaceutical industry in India. It was not patent protection for products but its abolition that operated as an incentive in India. It provided the Indian companies the space of operations and the opportunity to develop and innovate. The indigenous firms were quick to respond to the favourable provisions
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in the act of 1970. The technological skills developed by them, and the public sector laboratories as mentioned further, were used to generate processes for manufacturing the latest drugs. Indian companies were no longer prevented from producing and marketing them. What contributed to the success of the indigenous pharmaceutical sector was, however, not only the revision of the patents act. It is important to note that before the introduction of TRIPS, about 47 other countries did not provide patent protection for pharmaceutical products (Nogues 1990: 83). Despite that, the pharmaceutical industry remained underdeveloped in many of these countries—including in Ghana, Iran, Iraq, Malawi, Pakistan, Uruguay, and Vietnam. These countries lacked the entrepreneurial and technological skills to take advantage of the absence of patent protection for products. India is different not just because of the long tradition of drug manufacturing. The entrepreneurial spirit of the indigenous private sector was actively supported through public investments in R&D and manufacturing. In fact, the latter helped indigenous entrepreneurship to realize its potential. A number of laboratories set up by the Government of India (GoI) under the Council of Scientific and Industrial Research (CSIR)— particularly, Central Drug Research Institute, Indian Institute of Chemical Technology, and National Chemical Laboratory—helped the development of the technological skills necessary for the pharmaceutical industry. In fact, a distinctive feature of the pharmaceutical industry in India has been the close collaboration between the government laboratories and the private sector. The former developed technologies on their own and offered them for sale. They also did research and provided technical consultancy services on problems referred to them by Indian companies. Typically, what they developed were laboratory-scale processes. These were scaled up and manufacturing plants were set up by the companies themselves. Almost all the top pharmaceutical companies in India; for example, Cipla, Ranbaxy, Lupin, Unichem, Torrent, Cadila, Neuland, Sun Pharmaceuticals, have used the services of the CSIR laboratories. The setting up of the public sector plants under Hindustan Antibiotics Limited (HAL) in 1954 and Indian Drugs and Pharmaceuticals Limited (IDPL) in 1961 to produce antibiotics and synthetic drugs was an important factor in the development of the industry. These were set up with help from the erstwhile USSR, at a
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time when MNCs were not very enthusiastic about setting up basic manufacturing facilities themselves and did not want to provide technology to others, and when the Indian private sector was not mature enough to undertake production of many of the bulk drugs. IDPL and HAL created a new climate and confidence that India could also manufacture bulk drugs in a big way. Indian universities did not provide the type of specialized training required by pharmaceutical companies. By creating the demand for and helping the supply of inputs in the form of skilled labour, specialized capital, and other relevant services, both IDPL and HAL sparked industrial development in upstream and downstream businesses. Though foreign technical help was involved in these two companies, Indian technologists played an important role. The technologies provided by the USSR to IDPL could not always be implemented in the form in which these were supplied. Various modifications were necessary due to technological imperfections and due to the different physical and economic environment in which the technology was being implemented. IDPL gave a tremendous boost to indigenous efforts in the private sector. The city of Hyderabad, where the synthetic drug plant of IDPL was located, has developed into the main bulk drug manufacturing centre in the country. The founders of many of the private sector firms that manufactured bulk drugs had, at one time, worked for IDPL's production or R&D departments. This includes K Anji Reddy, the founder of the highly successful company, Dr. Reddy's Laboratories. After the changes in the patent law, large-scale production of bulk drugs was started by the indigenous sector in the late 1970s, particularly in the 1980s. The development of the bulk drugs sector is actually the most important achievement of the pharmaceutical industry in India. This led to the transformation of the industry. As bulk drugs began to be produced in the country on a large scale, on the one hand, imports were replaced, while on the other hand, consumption increased significantly, reflecting in the unprecedented growth in formulations activity. By the late 1980s, imports of formulations accounted for only 1‒2 per cent of the total availability (Chaudhuri 2005: 45, Table 2.5). Exports also started increasing steadily. With the steady growth in domestic production and exports, the country became a net exporter since 1988‒9. The most rapid growth of the pharmaceutical industry has taken place from the 1990s and onwards. Both domestic market and
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exports have grown remarkably fast. The growth was spearheaded by the Indian companies. The result was that, the MNCs lost their market domination. From around 60 per cent market share in the late 1970s, their share declined to less than 25 per cent by the mid-2000s (Chaudhuri 2005: 18, Table 2.2). Because of the rapid growth and the structural transformation in the last three decades or so, India now occupies an important position in the international pharmaceutical industry. The size of India’s pharmaceutical market is estimated at US$ 12.4 billion in 2010. In value terms, India accounts for about 1.5 per cent of the world production. But by volume, India is the fourth largest producer in the world, accounting for about 8 per cent of the global production (Espicom 2010: 48, 52). The indigenous sector has developed tremendous strength in developing cost-efficient processes from basic stages and setting up manufacturing plants for producing drugs that satisfy international quality norms. India produces more than 400 bulk drugs ranging from simple pain killer to sophisticated antibiotics and complex cardiac products. India has received worldwide recognition as a producer of low-cost, high-quality bulk drugs and formulations. Over 40 per cent of the world’s requirements of bulk drugs are met by India (see Indian Drug Manufacturers association [IDMA] 2010). Médecins Sans Frontières (MSF) (Doctors Without Borders), the well-known humanitarian organization that provides emergency aid, describes India as the ‘pharmacy of the developing world’ (MSF 2007). India is the main supplier of essential medicines to developing countries. In Zimbabwe, for example, 75 per cent of public procurement of medicines is from India. Globally, India is the largest source of supply of antiretroviral medicines (ARVs) for human immunodeficiency virus / acquired immune deficiency syndrome (HIV/AIDS) treatment. For example, MSF buys 80 per cent of its requirements of ARVs from India for distribution in over 30 countries (MSF 2007). India is a major exporter not only to developing countries, but nearly 50 per cent of its pharmaceuticals exports go to developed countries. In fact, the USA, which has the strictest regulatory standards, is India’s largest export partner in pharmaceuticals. For a large number of Indian companies, as we note below, exports exceed domestic sales (Chaudhuri 2010: 34‒35). The Indian generic industry has often been depicted as a ‘copycat’ industry, implying that everything has been copied and is the same.12
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Actually, only the molecule is the same. In the patent regime under the act of 1970, India did not provide patent protection for pharmaceutical products, but it did recognize process patents. To produce the drugs developed abroad, Indian generic companies had to develop their own processes and what they developed were often superior to the processes developed by the innovator companies. As was mentioned earlier, India is a major source for supplying bulk drugs globally, and several MNCs also outsource their requirements from India. Even after a product’s patent expires abroad, a generic company cannot enter the market unless it can develop a process of manufacturing which does not infringe on any existing patented process. Innovator companies usually patent a large number of processes to prevent the entry of generics. Unless one is really skilled, it is difficult to develop a new, yet non-infringing process. Eli Lilly, for example, protected the production of cefaclor through 32 patented processes. What earned Ranbaxy, the Indian generic company, international recognition is that it managed to develop a new and superior process. This in fact paved the way for collaboration between Eli Lilly and Ranbaxy.13 RE-INTRODUCTION OF PATENT PROTECTION OF PHARMACEUTICAL PRODUCTS IN INDIA To comply with the TRIPS agreement, India has amended her patent laws and has re-introduced patent protection for pharmaceutical products from 1 January 2005. Earlier, from 1 January 1995, a ‘mailbox’ facility was put in place to receive and hold product patent applications. As per the TRIPS agreement, these applications are being processed since 1 January 2005 for grant of patents. For those drugs on which patents are granted, Indian generic companies would not be able to manufacture them unless a voluntary or compulsory licence is granted. These changes to India’s patent law have led to concerns being expressed in different circles regarding India’s continued ability to supply affordable drugs. It has, however, also been argued that strong patent protection will be beneficial for India. The TRIPS negotiations were driven by specific claims that TRIPS-compliant patent protection would prompt companies from the developing countries to conduct greater R&D for the development of new drugs which are better suited to local needs. How are Indian generic companies responding to this new policy environment? What has been the impact on their
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growth? Are Indian generic companies mature enough to take advantage of stronger patent protection? Does India’s experience suggest a rethink of the relationship between patents, R&D, and innovation in developing countries? Dominance of Indian Companies The dominance of the Indian companies has continued in the postTRIPS period. In fact, their share in the domestic retail formulations market has increased marginally from 77 per cent in December 2004 to 80 per cent in December 2008 (Chaudhuri 2010: 21). The growth of exports has been even more rapid. Exports have been increasing annually in recent years at more than 20 per cent. The export market is larger than the domestic market not only for large companies such as Ranbaxy (61.7 per cent of net sales), Dr. Reddy’s (59.7 per cent), and Orchid Chemicals & Pharmaceuticals (81.5 per cent), but also for smaller companies such as Granules (68.9 per cent), Shilpa Medicare (73.5 per cent), Kopran (60.5 per cent), Transchem (54.6 per cent), and Pure Pharmaceutical (51.9 per cent).14 The Indian pharmaceutical industry has performed well since the beginning of the TRIPS regime, not only in terms of growth in the domestic and export markets, but also in terms of finance. The profit margin of the Indian pharmaceutical industry has increased from 16.13 per cent to 17.65 per cent between 1994‒5 and 2007‒8 and the return on equity from 16.85 per cent to 20.23 per cent during the same period. Return on assets has gone down marginally from 12.21 per cent to 11.22 per cent.15 The profitability of the Indian pharmaceutical industry, in fact, has been substantially higher than in other industries such as textiles, food and beverages, transport equipment, and machinery (Dhar and Gopakumar 2006: 33). But the Indian pharmaceutical industry is very heterogeneous. Whether we take the net profit margin, or return on equity, or return on assets as indicators of financial performance, the larger companies, which dominate the industry, have done much better. The net profit margin of the top 50 companies was 18.39 per cent, and that of the remaining 116 companies was 10.65 per cent during the period 2006‒7 and 2007‒8. The profit margin of the smallest 50 companies is in fact even lower at 9.15 per cent, and that of the top 10 companies is higher at 20.07 per cent. In terms of the other two profitability ratios—return on equity and that on assets—the relative
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performance is basically the same: the larger companies have done much better. MNCs and Patented Products The situation has been changing. There has been a renewal of interest in the Indian domestic market on the part of the MNCs, with some entering India directly by establishing subsidiaries (for example, Bristol-Myers Squibb and Eisai India) or indirectly through licensing arrangements with Indian companies for the marketing of their products (for example, Schering AG and Boehringer Ingelheim) (Ernst & Young, n.d.: 5, 8). MNCs have also started buying up Indian companies—the most notable being the acquisition of India’s largest pharmaceutical company, Ranbaxy, by the Japanese MNC, Daiichi Sankyo, in June 2008. Other acquisitions of Indian companies include Dabur by Fresenius, Matrix by Mylan, Shantha Biotechnics by SanofiAventis, and Piramal Healthcare’s domestic formulations business by Abbott. To some extent, the TRIPS agreement provides some flexibilities to restrict product patenting. For example, under section 3, clause (d) of the , 1970, India does not grant patents for new uses. Patents are also not granted for a new form such as a chemical derivative ‘unless they differ significantly in properties with regard to efficacy’. (section 3(d) of the Patents Act, as cited in Chaudhuri 2013). In a high-profile case, the Supreme Court of India has rejected the patent application of Novartis for its anti-cancer drug, imatinib mesylate (beta crystalline form), sold in the name of Glivec (or Gleevec). It was rejected because Novartis could not demonstrate that the new form (beta crystalline) of the known substance (imatinib mesylate) enhanced the therapeutic efficacy of the drug (see Chaudhuri 2013). But patents can be obtained and are being obtained for new substances. MNCs have started introducing new patented drugs to the Indian market, which the Indian companies can no longer manufacture. By the end of 2010, MNCs were the sole sellers for 33 products (Chaudhuri 2012). More such monopoly drugs are expected to hit the market in the near future. Industry sources16 suggest that considering the lag between the time when a new chemical entity (NCE) is patented and the time by when it is finally marketed, they will really hit the market around 2012‒15. If MNCs charge affordable
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prices for patented drugs in developing countries, access may not be adversely affected. But they are actually charging exorbitant prices. For example, the cost of treatment per person, per year is about Rs 20 lakh for the anti-cancer drug, Dasatinib (generic name: sprycel) of the MNC giant, Bristol-Myers Squibb. Some MNCs are selling drugs at a discount compared to the prices charged in the developed country markets. GlaxoSmithKline is an example: The company has adopted the policy of selling drugs at a discount compared to the US price. But even with a discount, the cost of treatment of the anti-cancer drug, Tykerb (generic name: lapatinib) is about Rs 6 lakh per person, per year (Chaudhuri 2012). Thus, the negative impact of patent protection of products is already being felt and unless mechanisms are put in place to regulate prices through price control measures, compulsory licensing, or by other means, the new patented products that will be introduced in the future will be very expensive. R&D Strategies In the underdeveloped Indian pharmaceutical industry, before 1972, the capacity to conduct R&D was limited. Has the situation changed following the rapid growth of the industry since the 1970s to justify stronger patent protection in India? Is it that patent protection of products may have adverse impact on access by making prices dearer, but can be good for the R&D based pharmaceutical industry in India? What has been the nature of R&D activities and innovation in the Indian pharmaceutical industry? Does India’s experience support the claims of MNCs and their supporters that strong patent protection is needed in India for R&D and innovation?17 During the TRIPS negotiations, it was specifically claimed that TRIPS-compliant patent protection will prompt the companies of the developing countries to conduct more R&D for the development of new drugs that are better suited to local needs.18 Have those claims been borne out in India? These issues are discussed in this section.19 Traditionally, the Indian pharmaceutical industry spent very little on R&D. In the early 1990s, its R&D expenditures amounted to only about 1.5 per cent of sales (Grace 2004: 37). Even the larger companies such as Ranbaxy and Dr. Reddy’s Laboratories spent only 2‒3 per cent of their sales on R&D in 1992‒3.20 Since then, however,
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and particularly since the early 2000s, there has been a substantial increase in research spending in a segment of the industry. While most of the Indian companies continue to be minor R&D spenders, for 38 companies, each with R&D expenditure of more than Rs 100 million in 2010‒11, the R&D expenditure has increased steadily from 1.7 per cent of sales in 1992‒3 to 4.3 per cent in 2001‒2, and then sharply to 8.1 per cent in 2004‒5, and 9.1 per cent in 2005‒6. Thereafter, however, a decline is observed to 7.2 per cent in 2010‒11.21 Here we focus on the more dynamic segment of the Indian pharmaceutical industry for which R&D expenditures have substantially increased. The objectives of R&D conducted by Indian companies can be broadly classified as follows: 1. Development of new chemical entities (NCEs) 2. Modifications of existing chemical entities to develop new formulations, compositions, combinations (also known as incrementally modified drugs) 3. Development of generics (that is, development of processes for manufacturing active pharmaceutical ingredients [APIs] and development of formulations to satisfy quality and regulatory requirements for marketing patent-expired drugs). The development of NCEs is not yet a significant part of the R&D activities of Indian companies, constituting less than a quarter of the total R&D expenditure by the major companies (Chaudhuri 2010: 47). Nor are all the large R&D spenders involved in NCE development; Cipla, for example, is the third largest spender on R&D, but has no NCE portfolio. As seen above, the Indian pharmaceutical industry is highly export oriented. Significant R&D efforts are directed towards developing processes and products to get regulatory approvals for entry and growth in markets of patent-expired generics in developed countries. Development of processes for manufacturing bulk drugs and product development of formulations, process validation, bio-equivalence testing, and generation of other data required for getting international regulatory approvals are specifically highlighted as the areas where R&D is undertaken by the companies that are active in the regulated markets.22 Thus, much of R&D by the Indian pharmaceutical companies has nothing to do with TRIPS. It is the result of increasing export
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orientation of these companies and diversification to the regulated markets, particularly to the US. R&D for NCEs A remarkable feature of pharmaceutical R&D in India is that, though relatively smaller, the Indian private sector has started investing in R&D for NCEs. This began around the time TRIPS came into effect in the mid-1990s.23 R&D investments were initiated by Dr. Reddy’s Laboratories followed by Ranbaxy Laboratories. Since then, 11 other companies—Sun, Cadila Healthcare, Lupin, Nicholas Piramal, Dabur Pharma, Torrent, Wockhardt, Orchid, Glenmark, Biocon, and Seven Lifesciences—have also joined in. These companies are among the major pharmaceutical R&D spenders. Together, they invested Rs 26,032.5 million (US$ 578.2 million) (9.4 per cent of net sales) on R&D in 2010‒11.24 It is important to note that none of these companies is engaged in the entire process of drug development. The reason is simple: Indian pharmaceutical companies are not yet ready for a start-to-finish model in NCE research because of the lack of the skills and funds necessary to develop a drug and put it to the market (see Chaudhuri 2005: chapter 5). If the 13 Indian companies together spent US$ 578.2 million in 2010‒11, Pfizer, the largest MNC, alone spent US$ 7.8 billion in 2009 (Pharmaceutical Executive 2010). The model that the Indian companies have adopted, rather, is to develop new molecules up to a certain stage and then license them out to partners from developed countries, primarily MNCs. There has been a marriage of interests. It is the development of biotechnology companies which has encouraged specialization according to stages of the drug development process. The MNCs seek and contract out specific activities. As the NCE pipeline of the MNCs started drying up, they, in fact, have intensified efforts to license promising compounds developed by others, and most of the major MNCs have opened compound acquisition departments in their companies. There are also specialized companies, which keep track of promising compounds, maintain libraries, catalogue them, and offer them for sale to prospective clients. Even at the pre-clinical stage, Indian companies are not engaged with all the elements of the R&D process. Indian companies are not involved in basic research of target identification for new drugs. They
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rely on the basic research of others and adopt an approach called ‘analogue research’. This entails working on certain pre-identified targets for specific diseases to develop molecules that alter the target’s mechanism in the diseased person.25 But, even this requires medicinal chemistry and biology skills that are still scarce in the Indian pharmaceutical industry. In the pre-TRIPS era, scientists from the Indian pharmaceutical industry primarily acquired and developed organic chemistry skills required for process development. Indian companies are now filling up this gap, primarily, by hiring Indian scientists who worked in MNC laboratories in India and abroad, and in the Indian public sector laboratories.26 The entry of Indian companies into new drug R&D was associated with tremendous optimism. The licensing deals of Dr. Reddy’s, Ranbaxy, and others became major news and aroused the expectation that Indian companies will be recognized not only as successful manufacturers but also as successful innovators of new drugs. About 30 NCEs developed by Indian companies are at various stages of clinical trials.27 But drug development did not progress as anticipated and the prospect of huge licensing revenue through milestone and other payments have failed to materialize.28 Indian companies, particularly Ranbaxy and Dr. Reddy’s, the two Indian companies that have invested most heavily in R&D and served as prime advocates for new drug R&D in India, have each suffered several setbacks. MNCs, such as Novo Nordisk and Novartis, have discontinued further development of the compounds in-licensed from them. The rising R&D expenditure, but lack of adequate returns, has put strains on the profitability of the companies. Several companies— Ranbaxy, Dr. Reddy’s, Sun Pharmaceuticals, Piramal Healthcare—had to cut their R&D budget around 2005‒6/2006‒7. Ranbaxy, Sun, and Piramal have de-merged their NCE business. Such de-risking and reduction of R&D expenditure is an indirect admittance that R&D in NCEs has not been working as expected. Significantly enough, Ranbaxy and Piramal have been taken over by MNCs as noted earlier. Dr. Reddy’s has also changed its R&D strategy. It is experimenting with alternative business models, including setting up a separate drug development company to reduce the risk and the dependence on MNCs. Thus little has changed to dispute the conventional wisdom that developing countries should not grant patent protection for
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pharmaceutical products. They are already paying the cost of high prices of patent-protected products without having seen the supposed concomitant technological benefits. While R&D activities have diversified, efforts in the full development of NCEs are yet to succeed; there have been several setbacks and the partnership model has not always worked properly. What Indian companies have really demonstrated is the ability to develop generics—an ability acquired and improved during the pre-TRIPS period. Contrary to what was claimed during the TRIPS negotiations, the product patent regime has not prompted Indian companies to devote more resources to developing drugs for ‘neglected diseases’. These neglected diseases, which primarily or exclusively affect the developing countries and promise much less financial returns, are absent from the list of NCEs developed by Indian companies, except for two NCEs relating to malaria and tuberculosis. The NCEs being developed by the Indian companies are related primarily to ‘global diseases’, such as diabetes, cancer, heart diseases, asthma, and obesity. These are the diseases that offer a much-larger and more-lucrative market in developed countries (though they are also prevalent in developing countries). In that regard, the primary incentive to invest in R&D has not been the new TRIPS-compliant product patent regime in India, but the product patent regime in developed countries (and the size of the market there) that was in place well before TRIPS. TRIPS may have accelerated the trend towards such R&D because of the anticipated shrinkage of domestic opportunities. But, in the absence of TRIPS, such R&D activities would still have been undertaken. With the larger domestic operations, Indian companies, in fact, would have had access to larger resources and would have been better placed to undertake such R&D. NOTES 1. See Primo Braga et al. (2000: 3‒6) and Falvey and Foster (2006: 6‒8) for a discussion on the different types and instruments of IPRs. 2. For a discussion of the different arguments for patent protection, see also the classic works of Penrose (1951: chapter II) and Machlup (1958: section IV). 3. See the survey of the literature by Kitch (1998). 4. See Chang (2001: 297‒8) for a discussion of some alternative approaches to innovation. 5. See UNCTAD-ICTSD (2003: 97); Hubbard and Love (2004: 148).
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6. See the survey of the literature by Primo Braga (1990). 7. For a detailed analysis, see Drahos with Braithwaite (2003), ‘Chronology of Events’ (pp. xi‒xv) and particularly chapters 1, 8, and 9. 8. But at a critical juncture during the First World War, the US government blocked German drug patents (see Challu 1991: 75). 9. See Chaudhuri (2005: 18, Table 2.2). This section relies extensively on chapters 2 and 4 of Chaudhuri (2005). See also Dhar and Rao (2002) and Kumar (2003). 10. As we will see, it is only since the mid-1990s that the indigenous sector has started investing in R&D for new drugs. 11. If there were no restrictions on the number of processes that could be patented, then as in the past in India and as at present in many countries, for example in the USA, the MNCs could have patented each of the possible processes. In that case, unless Indian companies could develop non-infringing processes, they could not enter the market. That would have made the task much more difficult for them. 12. See the editorial, ‘India’s Choice’, in New York Times, 18 January 2005, available at http://www.nytimes.com/2005/01/18/opinion/18tues2.html?_r=0 and the critical comment on it by K. Weerasuriya, 21 January 2005, in e-drug archives, available at: www.essentialdrugs.org, last accessed on 13 March 2005. 13. Ranbaxy Laboratories Ltd and Management Development Institute, n.d., ‘Ranbaxy Laboratories Ltd: On the Way to Becoming a Research-Based International Pharmaceutical Company’. 14. Calculated from Directorate General of Commercial Intelligence and Statistics (DGCI&S), data obtained from the Centre for Monitoring Indian Economy (CMIE), India Trades database for the year 2007‒8. 15. Based on 166 Indian companies for which sales and other financial data are available for 2007‒8, from the Prowess database of CMIE. 16. See, for example, the interview of Yusuf Hamied, Chairman and Managing Director of Cipla, India Knowledge@Wharton, 7 May 2009, available at: www. cipla.com, last accessed on 10 February 2010. 17. Such claims have resurfaced after an Indian court rejected Novartis’ challenge of India’s patent law (see, for example, the editorial of the Wall Street Journal, ‘Drug Patents in India’, 14 August 2007). Section 3(d) of the Indian Patents Act, 1970, which Novartis challenged, provides for conditional grant of patents for modifications of existing chemical entities. 18. See Velasquez and Boulet (1999: 37), for a reference to such views. 19. This section is a condensed and updated version of Chaudhuri 2010: section IV. 20. Calculated from the CMIE Prowess database. 21. Calculated from the CMIE Prowess database. 22. See, for example, Dr. Reddy’s Laboratories, Annual Report, 2005‒6, p. 85; Ranbaxy, Annual Report, 2005, p. 46. 23. In the Indian private sector, Sarabhai Research Centre was the first one to be set up in the 1960s for developing new drugs. But it was wound up in the 1980s. 24. Calculated from the CMIE prowess database.
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25. Glenmark Pharmaceuticals Ltd, Annual Report, 2003‒4. 26. In the pre-TRIPS regime too, some R&D for new drug development was undertaken in India, primarily by Central Drug Research Institute (CDRI) (public sector), Ciba-Geigy, Hoechst, and Boots (all MNCs). As a result of these efforts, not many drugs have come to the market. But, it generated specialized skills—see Chaudhuri (2005). 27. As per the annual reports of various companies. 28. There are exceptions: Glenmark earned a total of US$ 117 million as licensing revenue during 2004‒7. But, it too has been facing problems (see Corporate presentation, August 2009, available at: www.glenmarkpharma.com, last accessed on 13 March 2010).
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Dhar, Biswajit and C Niranjan Rao. 2002. ‘Transfer of Technology for Successful Integration in the Global Economy: A Case Study of Pharmaceutical Industry in India’, Geneva: United Nations Conference on Trade and Development (UNCTAD). Drahos, Peter, with John Braithwaite. 2003. Information Feudalism: Who Owns the Knowledge Economy?. New Delhi: Oxford University Press. Ernst & Young. n.d. Pharmaceuticals, India Brand Equity Foundation. Available at: www.ibef.org. Espicom. 2010. India: World Pharmaceutical Market, Espicom Business Intelligence. Falvey, Rod and Neil Foster. 2006. ‘The Role of Intellectual Property Rights in Technology Transfer and Economic Growth: Theory and Evidence’, UNIDO Working Paper. Grace, Cheri. 2004. The Effect of Changing Intellectual Property on Pharmaceutical Industry Prospects in India and China Considerations for Access to Medicines. London: DFID Health Systems Resource Centre. Greer, Douglas F. 1973. ‘The Case Against Patent Systems in Less-Developed Countries’, in The Journal of International Law and Economics, 8: 223–39. Hollis, Aidan. 2004. ‘An Efficient Reward System for Pharmaceutical Innovation’, Department of Economics, University of Calgary (mimeo). Hubbard, Tim and James Love. 2004. ‘A New Trade Framework for Global Healthcare R&D’, PLOSBiology, 2(2): 147–50. Indian Drug Manufacturers Association (IDMA). 2010. ‘India—The Generics Pharma Capital of the World’, in 40th Annual Publication 2010, Indian Drug Manufacturers Association, Mumbai. Kidron, Michael. 1965. Foreign Investments in India. London: Oxford University Press. Kitch, Edmund W. 1998. ‘Patents’, in Peter Newman (ed.), The New Palgrave Dictionary of Economics and the Law, Vol 3. London: Macmillan. Reprinted in Ruth Towse and Rudi Holzhauer (eds), The Economics of Intellectual Property,. Cheltenham: Edward Elgar.. Kremer, Michael. 1998. ‘Patent Buyouts: A Mechanism for Encouraging Innovation’, in Quarterly Journal of Economics, 113: 1137–67. Kumar, Nagesh. 2003. ‘Intellectual Property Rights, Technology and Economic Development: Experiences of Asian Countries’, in Economic and Political Weekly, 38(03): 209–26.. Machlup, Fritz. 1958. An Economic Review of the Patent System: Study of the Subcommittee on Patents, Trademarks, and Copyrights of the Committee on the Judiciary, US Senate, 85th Congress, 2nd Session, Study No. 15, Washington: United States Government Printing Office. Reprinted in Ruth Towse and Rudi Holzhauer (eds), The Economics of Intellectual Property, Volume 2. Cheltenham: Edward Elgar. Mansfield, Edwin. 1986. ‘Patents and Innovation: An Empirical Study’, Management Science, 32(2): 173–81.
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Mazzoleni, Roberto and Richard R. Nelson. 1998. ‘The Benefits and Costs of Strong Patent Protection: A Contribution to the Current Debate’, Research Policy, 27: 273–84. Médecins Sans Frontières (MSF). 2007. ‘Examples of the Importance of India as “Pharmacy” for the Developing World’. Available at www.msfaccess.org, last accessed on 29 January 2008. Nogues, Julio. 1990. ‘Patents and Pharmaceutical Drugs: Understanding the Pressures on Developing Countries’, in Journal of World Trade, 24(6): 81–104. Nordhaus, William D. 1969. Invention, Growth and Welfare: A Theoretical Treatment of Technological Change. Cambridge, Massachusetts: The MIT Press. Organisation for Economic Co-operation and Development (OECD). 2004. Patents and Innovation: Trends and Policy Challenges. Paris: OECD. Penrose, Edith Tilton. 1951. The Economics of the International Patent System. Baltimore: The Johns Hopkins Press. Primo Braga, Carlos A. 1990. ‘The Developing Country Case for and against Intellectual Property Protection’, in Wolfgang E. Siebeck (ed.), ‘Strengthening Protection of Intellectual Property in Developing Countries: A Survey of the Literature’, World Bank Discussion Paper 112, Washington, DC: The World Bank. Primo Braga, Carlos A, Carsten Fink, and Claudia Paz Sepulveda. 2000. ‘Intellectual Property Rights and Economic Development’, World Bank Discussion Paper 412, World Bank, Washington, DC. Royal Society. 2003. Keeping Science Open: The Effects of Intellectual Property Policy on the Conduct of Science, (prepared by, Royal Society Working Group on Intellectual Property), London: Royal Society. Schiff, Eric. 1971. Industrialzation Without National Patents: The Netherlands, 1989‒1912; Switzerland, 1950‒1907. Princeton: Princeton University Press. Shukla, S.P. 2000. ‘From GATT to WTO and Beyond’, Working Paper No. 195, Helsinki: UNU World Institute for Development Economic Research. Siebeck, Wolfgang E. (ed.). 1990. ‘Strengthening Protection of Intellectual Property in Developing Countries: A Survey of the Literature’, World Bank Discussion Paper 112, Washington, DC: The World Bank. Taylor, C.T. and Z.A. Silberston. 1973. The Economic Impact of the Patent System: A Study of the British Experience. Cambridge: Cambridge University Press. Towse, Ruth and Rudi Holzhauer. 2002. The Economics of Intellectual Property, 4 vols. Cheltenham: Edward Elgar. UNCTAD-ICTSD. 2003. TRIPS and Development: Resource Book, Part Six, Transitional and Institutional Arrangements, Transitional Periods, Geneva, United Nations Conference on Trade and Development and International Centre for Trade and Sustainable Development, Available at: www.iprsonline. org. United Nations Development Programme (UNDP). 1999. Human Development Report 1999. New York: Oxford University Press.
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Vaitsos, Constantine. 1972. ‘Patents revisited: Their Function in Developing Countries’, Journal of Development Studies, 9(1): 71–97. Velasquez, German and Pascale Boulet. 1999. Globalization and Access to Drugs: Perspectives on the WTO/TRIPS Agreement, Health Economics and Drugs, DAP Series No. 7 (Revised), Geneva: World Health Organization.
7 Employment and Industrial Development in India1 JEEMOL UNNIA
The rate of growth of the Indian economy accelerated from around 6 per cent per annum at the turn of the century to 9.7 per cent per annum in 2006–7. The growth of the service sector outstripped this growth rate in most years during this period. The industrial sector grew less rapidly and was faced with a minor recession during 2001–2. Though the manufacturing sector is traditionally considered the engine of growth, since the 2000s, the service sector has taken over this role. However, the growth of employment, overall and in individual sectors, during this period was a little less impressive. This chapter discusses the trends in and determinants of employment in the manufacturing sector based on a review of the existing literature. The manufacturing sector clearly consists of the formal (organized) and informal (unorganized) sectors. The broad questions covered in the chapter are: 1. What constrains the growth of the formal sector in manufacturing? 2. What are the relative roles of output growth and technological change in constraining the growth of employment in formal manufacturing? 3. How important is the role of informal manufacturing, including subcontracting, as opposed to formal manufacturing, in employment growth? 4. What is the relevance of the flexibility argument in explaining employment trends?
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The chapter is organized into six sections: the first section discusses the puzzle of jobless growth in the organized manufacturing, examining trends in employment growth and the explanations provided in the debate for this phenomenon. In the second section, issues relating to growth of productivity in organized and unorganized manufacturing are discussed. Explanations put forward in the literature for the rise in demand for a skilled workforce along with rising wage premiums are based on increased trade and technology infusion. These hypotheses and the empirical literature on the importance of skills and wage premiums in the growth of employment are discussed in the third section. The fourth section discusses the role and importance of linkages between organized and unorganized sectors in the growth of employment. The fifth section discusses the relevance of the flexibility argument and the debate on labour reforms. The final section suggests some issues for further research in the area of employment and industrialization. JOBLESS GROWTH IN ORGANIZED MANUFACTURING One theme that has agitated researchers working on employment has been the issue of jobless growth in organized manufacturing. As Mazumdar and Sarkar (2008) put it, this concern was for two reasons. One was that formal manufacturing was expected to take the lead in generating new productive employment and have greater multiplier effects compared to other sectors. Second, given the large differentials in wage earnings in the organized and unorganized sectors, growth of organized manufacturing compared to unorganized manufacturing would generate better standards of living. Employment elasticity is a good measure of the growth of employment as it shows the relative growth of employment with respect to output. Based on breaks in employment elasticity, Mazumdar and Sarkar (2006) identified five distinct periods: 1974–80, when employment elasticity showed a high positive value of 0.99; 1980–6, the period of jobless growth, when employment elasticity turned negative with a value of −0.16; 1986–96, the beginning of the economic reforms, which saw a recovery with positive elasticity of 0.33; 1996–2001, the post-reform period, which showed a sharp decline in employment elasticity to −1.42; and 2001–5, the last period, when elasticity turned positive again at 0.28.
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1974 to 1980 This period can be considered period of ‘benign’ growth when economy grew at around 4 per cent per annum. This moderate growth was accompanied by favorable trend in producer’s price relative to consumer prices and also resulted into significant growth in employment (Mazumdar and Sarkar 2008). 1980 to 1986 A very interesting debate on jobless growth concentrated mainly on the first occurence of negative employment elasticity, 1980 to 1986. This was partly instigated by the World Bank (1989) attributing the stagnation in factory employment to acceleration in product wage due to trade union activities. This was countered by Bhalotra (1998), Kannan (2009), Nagaraj (1994), Papola (1994), and Uchikawa (2002). Papola argued that there was a faster rise in labour productivity than real wages during this period. It was the closure of textile mills due to sickness and obsolescence that led to decline in employment growth since they constituted a large part of factory employment. Nagaraj argued that there was a decline in union strength due to a shift in employment in organized manufacturing to smaller size units. Nagaraj and Bhalotra argued that the reduction in employment occurred due to a shift in industrial composition and increase in the actual hours worked per worker. Uchikawa showed that the increase in man-days lost due to lockouts was much higher than that lost due to strikes in this period of jobless growth. The Industrial Disputes Act (IDA), which was introduced in 1976, was amended in 1986 to increase job security. The employment size limit for enterprises that needed to seek permission for retrenchment of workers was reduced from 300 workers to 100 workers. Falcon and Lucas (1993) used this amendment to explain reduction in employment elasticity. The structure of industry shifted to smaller-size units and to lower labour-intensive industries, such as electrical machinery, chemicals, transport equipment, rubber, plastics, and petroleum. 1986 to 1996 The employment elasticity improved in the period of early reforms. Goldar (2000) attributed this improvement to a change in the size
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structure of industries in favour of small and medium enterprises and a slowdown in the growth of real wages. Nagaraj (2000) countered this and argued that there was an investment boom in the period in response to the deregulation and trade policy reforms. 1996 to 2001 The investment boom and the growth of employment in the early reforms were followed by retrenchment thereafter. Between 1995–6 and 2001–2, 1.3 million jobs were lost (Nagaraj 2004). According to Mazumdar (2008), the drastic fall in employment elasticity in this period was due to a much faster increase in producer price index than consumer price index and wage growth at the expense of employment growth. 2002 to 2005 The last period saw an increase in employment elasticity. The firms decide their ‘stock’ of permanent workers based on expected demand. If the current demand is greater than the expected demand, the firms adjust the labour input by increasing the hours of work or by employing temporary workers. In this last period, with robust growth of the manufacturing sector, the expected demand rose and employment grew faster than wage growth (World Bank 2010). Kannan and Raveendran (2009) disaggregated employment elasticity in the pre-reform period (1981–2 to 1991–2) and the postreform period (1992–3 to 2004–5) in organized manufacturing into 22 industry groups. Overall employment elasticity improved marginally, but mainly due to performance in the terminal year, 2004–5. The interesting point they make is that the process of jobless growth is not uniform across industries. While one set of industries (such as apparel, leather tanning, rubber, and plastics) was able to register employment-creating growth, another set (such as textiles) registered jobless growth in both periods. The number of industries reflecting jobless growth grew from six to ten and accounted for 43 per cent of total employment in 1992–3. In the more recent period 2008–9, a global financial crisis loomed large. This affected the Indian industry to some extent, but mainly in
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sectors that were export oriented. While the Indian industry is slowly limping back to normal growth, it has been hit by rocketing inflation as of date in 2010–11. One of reasons put forth for jobless growth and increasing capital intensity in the post-reform period was that the cost of capital has reduced. Chandrasekhar (2008) computed the cost of capital compared to the cost of labour and concluded that there was a ‘negative shift in price of capital to labour’. He further argued that the central and state governments offered subsidy based on investment, interest subsidy, and exemption from payment of electricity, which encouraged increase in capital intensity. Another explanation of jobless growth in organized manufacturing is the shift in demand towards better quality and branded products, which are characterized by high capital intensity, by the new rich class (Chandrasekhar 2008). It implies that demand for products from labour-intensive segments of the manufacturing sector has been relatively low and hence the lower demand for labour, resulting into jobless growth. This demand is further boosted by banks expanding loans for personal finance. These products are often very import intensive, which is also facilitated by the new trade policies. PRODUCTIVITY IN ORGANIZED AND UNORGANIZED MANUFACTURING Besides trends in the growth of output and employment in organized manufacturing, the relevant question that has been posed is: what are the sources of this growth? The output of an industry is a result of an efficient combination of different factors of production. The productivity of an industry can be measured in terms of productivity of its constituent factors of production, capital, and labour. However, the partial productivity measures have limitations as in situations where capital intensity is increasing over time, labour productivity measure may show an increase, but this would reflect the rising capital intensity. This problem is resolved by analysing the growth of total factor productivity (TFP) which encompasses the effect of technical progress, better utilization of capacities, learning by doing, and improved skill of labour (Unni et al. 2001).
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Total Factor Productivity Growth The debate on trends in TFP was triggered by the observation of decline in TFP in the 1970s followed by a turnaround in the first half of the 1980s (Ahluwalia 1991). This result was countered by Balakrishnan and Pushpangadan (1994) on the grounds that the use of appropriate indices to deflate the value added yielded the opposite result: a slower growth in the 1980s than in the earlier decade. At a disaggregated level, Mitra (1999) noted that TFP had improved in a large number of industries in several states during 1985–6 to 1992–3, as compared to the period 1976–7 to 1984–5. Goldar (2000) provided fresh estimates of TFP growth in the 1980s and commented that the finding of Balakrishnan and Pushpangadan (1994) of deceleration in TFP in the 1980s was due to the choice of base-year price index. Balakrishnan and Pushpangadan (2000) did some retesting of acceleration based on their own estimates of TFP, and those of Trivedi and Sinate (2000), and reaffirmed their conclusion that productivity growth in the 1980s may have been slower than in the earlier decade. They also reaffirmed that double deflation method is the most appropriate and accurate method to deflate the value added in the estimation of TFP. The discussion on TFP growth in the post-reform period has been as inconclusive as can be expected of such a complex measure with diverse methods of computation. Pattanayak and Thangavelu (2005), Unel (2003), and others have found acceleration in TFP growth in the reform period, while Trivedi et al. (2000) and Balakrishnan et al. (2000) find a deceleration in the 1990s. Kathuria et al. (2010) found an increase in TFP in organized manufacturing, from 0.04 per cent in 1994–2001 to 3.1 per cent in 2001–5. The aggregate growth, however, masked the regional differences. Only Kerala and Punjab recorded acceleration in the growth of TFP at the overall average. In 9 of the 15 states, a turnaround in growth of TFP was noted in the second period, that is 2001–5. In unorganized manufacturing, the picture was very different with TFP showing a steady decline during the period. The majority of states were registering decline, with only the two states of Bihar and Madhya Pradesh registering an increase in TFP in the second period after 2001.
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Labour Productivity as a Measure of Standard of Living Balakrishnan (2004) reflects on why labour productivity has been a relatively neglected indicator of productivity growth in the Indian literature. He argues that it is the most acceptable interpretation of a measure of potential consumption. However, it is not true that labour productivity has been neglected in the Indian literature on productivity. Most studies in India that discuss TFP, first give an account of partial productivities. Rao (1996), discussing partial productivities in the 1980s, used the dividing line of 1983–4 and observed that during the first period partial productivity indices—relating to materials, labour, and capital—showed a marked rise in real terms. However, during the second period, material and capital productivity declined sharply, and the rising labour productivity also tapered off. Unni et al. (2001), while comparing partial productivities in organized and unorganized manufacturing, noted that labour productivity grew much faster in the organized sector, both before and after 1991. The growth of labour productivity was much higher in the organized sector perhaps due to the excessive infusion of capital after liberalization. Balakrishnan (2004) argues that labour productivity growth after liberalization along with TFP decline in Indian organized manufacturing implies increase in potential consumption and standard of living. Kathuria et al (2010) noted that in the period between 1994 and 2005, labour productivity in organized manufacturing was, on an average, 4.4 times higher than in the unorganized manufacturing. When this period is split, labour productivity was seen to rise in the organized manufacturing after 2001, while it fell to a negative rate in the unorganized manufacturing. As an indicator of consumption, it indicated the dismal standard of living of workers in unorganized manufacturing. According to Kannan and Raveendran (2009), in the last quarter of the twentieth century, employment elasticity has been close to zero in organized manufacturing, but it is indisputable that there has been a consistent increase in labour productivity. There has been a sustained increase in capital intensity, where capital is substituted for labour, but with increasing labour productivity and no decline in capital productivity, implying technological upgrade. The picture was different in the years after 1992–3. There was a high growth of capital intensity with
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increasing labour productivity, but declining capital productivity. This implied that capital replaced labour without technological upgrade. The cost of labour can be looked at as the wage cost to employers and as income to workers. The cost to employers can be computed as a product wage or share of wages in the value added. Real wage is what is traditionally measured as income to workers. In the post-reform period, stagnancy in the product wage and decline in real wages, particularly to workers, was observed in organized manufacturing (Kannan and Raveendran 2009). Persistence of Dualism in the Manufacturing Industry Dualism in the manufacturing industry has persisted even after 20 years of liberalization: the informal sector having low productivity and low wages as compared to the formal sector. There are alternative views on why there is little change in the size structure of the manufacturing industry. The World Bank (2010) put forth four reasons for the persistence of the dualistic structure: Labour Market Segmentation: This ensures that wage levels, even considering human capital variables such as education and level of experience, increase sharply with firm size.. Further, institutional factors, such as wage boards in some industries, are responsible for setting wage levels; labour laws impact by inducing larger firms with more capital assets to invest in labour-saving technologies, leading to higher labour productivity and wages; wages in public sector enterprises are set above market wages. Capital Market Segmentation: Generous depreciation allowance made the availability and cost of capital significantly favourable to large firms. This also induces firms to adopt capital-using and laboursaving methods, thereby further increasing differentials in labour productivity and wages. Product Market Segmentation: Smaller firms opt for low-quality, labour-intensive sub-categories of products while catering to the needs of low-income groups. This results in strengthening the gap in labour productivity between large and small firms.
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Policy-induced Segmentation: Reservation policy has more or less been abandoned, both by increasing size of investment and by ‘dereserving’ specific sectors. However, there still exists a number of fiscal subsidy programmes and policies that discourage firm growth, such as credit-market benefits to small firms. Further, labour laws on wages, benefits, and job security apply to units above a certain size. This issue of policy-induced segmentation is generally perceived as one of labour regulations being applied to enterprises of a certain size category. However, various forms of regulation of enterprises also induce attempts to avoid or evade regulations that could affect enterprises categorized as formal. Mazumdar and Sarkar (2008) make the case of the ‘missing middle’ or a bipolar structure of the manufacturing industry in India, because enterprises try to avoid the cost of regulation. These arguments give the impression that informality would disappear if these regulations were removed. However, there is a category of enterprises whose natural size is small and would remain small irrespective of any regulation. Kanbur (2009) argues that informality and formality should be seen in direct relation to economic activity in the presence of regulation. One of the central determining factors of the impact of regulation is the nature and impact of enforcement. Kanbur goes on to demarcate four conceptual categories of enterprises based on the impact of regulation and enforcement: Enterprises where (i) regulation is applicable and compliant; (ii) regulation is applicable and non-complaint; (iii) regulation is non-applicable after adjustment of economic activity; and (iv) regulation is non-applicable to the activity. In essence, the informality debate and the reasons for it tend to focus on regulations in various markets as the major determinant of dualism. The major structural constraints under which enterprises and workers may face differences in productivity and earnings are lost in the debate. Workers with low education and skill levels cannot compete for the high-earning formal jobs and self-employed persons might cater to markets for products consumed by the poor. There could be an economic logic as to why enterprises or economic activities remain small. As long as these structural differences remain, dualism will persist with or without labour or enterprise regulation.
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TECHNOLOGY, SKILLS, AND RISING WAGE PREMIUMS2 One explanation for growth of manufacturing that is less researched in India is the role of technological change and demand for skills. In fact there is very little literature on the role of skills and skill premiums on employment, both in terms of jobs and increasing inequality among wage workers in India. The growing gap in earnings between skilled and unskilled labour, first documented in the US, has now been observed in a number of other developed and developing nations. Several hypotheses have been put forth and tested to explain the rising skill premium and demand for skilled workers in developed and developing countries. Chamarbagwala (2006) documents five different hypotheses to explain rising skill premium and increasing wage differentials, which can be clubbed together and called a ‘Skill Enhancing Trade’ hypothesis or SET hypothesis. These include the macro-level hypotheses: (i) trade-related hypotheses, (ii) skill-biased technological change, (iii) combining trade and technology explanations, and (iv) global outsourcing; as well as the micro-level hypothesis: quality upgrading by firms. There are very few studies that directly address the issue of rising skill premium in India, particularly using rigorous empirical and econometric techniques. The section presents empirical evidence testing these hypotheses in the Indian and international literatures. Trade-related Hypothesis Trade economists argue that trade liberalization is the main source for the widening gap in wages of skilled and unskilled workers (Leamer 1996; Thurow 1992). Wood (1994) further argues that both the North and the South3 have access to similar kinds of capital at the same rental price, and also technology to the extent that the technology can be embodied in traded capital and intermediate goods. By making this assumption, he implies that the difference between the North and the South is actually with regard to the skills of the workers. As these skills are improved through the expansion of basic education, developing countries can begin to produce manufactured goods whose production requires such skills. He then attributes the decline in the relative wages of less-skilled workers to two trade-related phenomena: (i) the elimination of manufacturing trade barriers and (ii) increasing relative abundance of workers with certain basic skills.
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Evidence of India’s widening gap between skills and wages or between the wage premium and skilled workers is documented for the period 1983 to 2000 by Chamarbagwala (2006). Using the nonparametric methodology developed by Katz and Murphy (1992), Chamarbagwala tested Hypothesis I on the impact of trade liberalization on the increasing skill levels of the workforce and rising wage premiums. Further, while she was not able to separately test for the other three macro-views of technological change and outsourcing, she noted that the findings of within-sector wage and demand shifts for skilled men and women rejected Hypothesis I on the trade impact, but overall supported the SET hypothesis. There was skill deepening in the Indian economy—in the early reform period (1987–94) for manufacturing and in the later period (1993–2000) for services— which was not solely generated by increased trade-liberalization, but was related to changes other than that of trade-related reforms. Some of these reforms that she lists are domestic sector reforms such as deregulation, delicensing of industries, and privatization. Skill-biased Technological Change A second hypothesis relates to the phenomenon of worldwide skillbiased productivity increase experienced in the 1990s in developed countries with an increase in the proportion of skilled workers as well. Berman et al. (1994), Lawrence and Slaughter (1993), and Machin (1994) decisively favour the technology explanation over the trade explanation for the rising wage differentials. A skill-biased technological change is an exogenous technological change4 in the production function that increases the factor ratio of skilled labour to unskilled labour at the same relative wage. Such technological advances would lead to persistent, relative labour demand shifts in favour of moreexperienced and better-educated workers, resulting in a rising skill premium. The explanations for rising wage inequality have centred on relative demand shifts towards skilled labour (Autor et al. 1998; Berman et al. 1994; Berman et al. 1998; Bound and Johnson 1992). Topel (1997) concluded that the rising wage inequality appears to be related to rising returns to measures of skill such as education, experience, and occupational status. Katz and Autor (1999) show that countries with the largest increases in wage dispersion also had the largest increases in wage differentials by skills. While there is no
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consensus yet in the literature, the discussion seems to employ these two hypotheses as major explanations for decreased demand for unskilled labour, with more support for the skill-biased technological change hypothesis. Berman et al. (2005) (quoted in Harrison 2008) test for Hypothesis II, that is, the possibility of skill-biased technological change in India. They use 3-digit industry-level data on the employment and shares of wage bills of non-manual workers and find that skill-biased technological change did arrive in India in the 1990s, following the falling demand for skills in the late 1980s. They find that increased output and capital-skill complementarity are the best explanations, with increased output alone predicting almost half of the acceleration in skill upgrading between the 1980s and the 1990s. This raises the possibility that adjustment costs in labour or capital prevented significant skill upgrading in sectors where output was not growing. However, they find that skill upgrading did not occur in the same set of industries in India as it did in other countries, suggesting that it might not be due to international diffusion of recent vintages of skillbiased technologies. Following the simple framework provided by Acemoglu (2002) to analyse the impact of technical change on the observed rise in skilled workers and skill premium, Unni and Rani (2008) evaluated the hypothesis of skill-biased technological change in India. Overall they found support for this hypothesis in the period of rapid reforms in the late 1990s. The process was however more pronounced in certain sectors and segments of the workforce. The skill content of the various industrial sectors showed high skill among the service sectors and moderate level of skill among the industrial sectors such as manufacturing. The recent period till 2005 also had high growth of certain professional workers, service sector workers, and some production-related workers. There was an overall inflow of technology in the country as a whole, while services appeared to have greater technical change as measured by the wage bills. However, this has to be weighed against the limitation of skill-based measure of technical change. Technical change was observed in the manufacturing sector in urban areas and in terms of male workers. Activities undertaken by regular workers in manufacturing were more likely to have had skill-biased technical change. The most revealing result was that women were less likely than men to be engaged in activities that had skill-biased technical change.5
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While increasing skill premium in the labour market in India has been attributed to skill-biased technical change, which allows a rapid increase in supply of workers with graduation and above degrees or diplomas to co-exist with increasing skill premium (Unni and Rani 2008), others argue that this rapid increase in skill premium exposes a paradox in India’s labour market (Kapoor and Mehta 2007). They argue that this enormous pool of skilled workers is relatively shallow and the higher education system produces poor-quality graduates, neither serving as a screening or signalling device, nor preparing students to be productive and responsible citizens. A study of the links between higher education and high-technology industries argues that there is indeed a robust link between the two, though the quality of students from this system leaves much to be desired (Basant and Mukhopadhyay 2008). It has been argued that the information technology (IT) labour market has been deepening and thickening (Basant and Rani 2004). Deepening of the labour market occurs through extension and penetration into new areas, when diversity in the demand and supply of skills is enhanced. With increasing specialization and expanding scale, the demand for skills in specific segments grows, which is referred to as thickening. In a recent study, the industry groups, manufacturing and services, were reclassified, based on high technological knowledge intensity (Unni and Sarkar 2011). The service industries showed a greater demand for graduates. Within it, knowledge-intensive services (KIS) and financial and business services showed a deepening of graduate intensity, meaning, the nature of jobs changed to allow for occupations with lower graduate intensity as well. The social KIS, education and medical services, and high-tech KIS, research and development (R&D), and computer services showed a thickening or specialization of occupations, reflected in the sharp increase in very high graduateintense occupations. Further, having a graduate degree had a greater impact on participation in service industry compared to manufacturing. Senior managerial officials and professionals with graduate and higher degrees had a better chance of being employed in knowledgeintensive industry, mainly services. All this points to an increase in demand for higher-educated workers in particular occupations and within the knowledge-intensive industries, more so in the service sector.
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Combining Trade and Technology Explanations A third hypothesis embeds the trade and technology explanations (Hypotheses I and II) together within a unified model (Zeira 2007). Further, skill-biased technical change is modelled in a new way, incorporating innovations that enable replacing unskilled workers by skilled ones. The novelty of this model is that such innovations are not adopted everywhere, but only where the wage rates induce adoption. Hence, wages, trade patterns, and technology adoption are all jointly determined in this model. Interestingly, differences across countries in technology adoption also lead to differences in factor productivity. Rising wage inequality since the economic reforms of 1991 in India is noted by Kijima (2006). The wage inequality in urban India was increasing since 1983 at an increasing rate, especially in the higher (above median) wage groups. While not combining the two hypotheses, that is, Hypotheses I and II, Kijima investigates reasons for the increase in skill wage premium using the Hypothesis II, skill-biased technological change, and the trade liberalization effects, macro trade-related hypotheses (hypothesis I). Following the method provided by Autor et al. (1998), he constructs a demand shift index for skilled and unskilled labour. He finds that the increase in wage of tertiary-educated individuals rose in the post-1991 period, largely due to relative demand shifts rather than supply shifts. He uses the Autor et al. method to decompose the change in skilled workers and their wage bill over time into within and between industry shifts. He finds that the change in skilled workers is primarily accounted for by within industry shifts. He suggests that this implied that skill-biased technological change (Hypothesis II) had a greater impact than trade reforms (Hypothesis I). Global Outsourcing or Production Sharing Global production sharing or outsourcing is a fourth hypothesis to explain the rising skill premium and demand for skilled labour. In recent years, as globalization proceeds, the development of workers’ skills has become a critical strategic issue for both governments and firms, in both developed and developing countries (Organisation for Economic Co-operation and Development [OECD] 1997). With ever-accelerating technological change and innovations, the
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acquisition, accumulation, and diffusion of knowledge and skills have become ever more important in helping firms, and countries, become competitive (World Bank 1998). The globalized production processes change the nature of skills required of the country’s workforce, which, in turn, may generate new demands for continuous upgrade of skills and for acquiring new skills. On similar lines, Feenstra and Hanson (1996, 2003) argue that trade and investment liberalization in the developing countries allows transfer of production of intermediate goods and services from the developed ones. As these activities are skill intensive, they result in a greater demand for and returns to skilled labour in the developing countries. Therefore, trade liberalization and foreign direct investment that promotes trade-in manufactures and services can benefit skilled workers. They provide empirical evidence for this from Mexico. Quality Upgrade by Firms The fifth hypothesis explaining demand for skilled workers and skill premiums is a micro one at the level of the firm. Globalized production processes are making firms de facto institutions for developing necessary skills to improve productivity and competitiveness. This is largely because, the knowledge and skills that are required for today’s production activities are becoming more and more tacit, hard to obtain and costly to transfer between firms, making them more specific, and often even firm-specific (Najmabadi and Lall 1995). So, firms’ investment in training to generate and diffuse knowledge and skills can create ‘competitive assets’ (Amsden 1995). Thus, the role of firms as a place of ‘learning’ may have become critical in receiving knowledge and ideas from abroad, and transferring and diffusing them internally and to other firms (see note #5). Little is known so far about how the processes of globalization have actually changed the pattern of skill development for workers in domestic firms, and small firms in particular, in developing countries, and what factors have motivated firms to help develop their workers skills. A study of the information and communications technology (ICT) industry in India and Brazil using firm-level and individual-level data addresses Hypothesis V (Harrison 2008). It studies the impact of adoption of ICT technology in a firm on the demand for skilled workers and on their wages. The study uses both employment shares
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and the wage bill shares as the dependent variables. Two empirical approaches were adopted. First, detailed information on firms’ adoption of ICT and the educational composition of their workforce at two points in time was used to estimate skill–share equations in levels and log differences. The results are strongly suggestive of skill-biased ICT adoption, with ICT being able to explain up to a third of the average increase in the share of skilled workers in Brazil and up to one half of those in India. These results are robust to differencing in order to eliminate unobserved firm-fixed effects. However, concerns remain over the possible simultaneity of firms’ decisions about technology choice and factor mix, so a second approach used exogenous variation in the relative supply of skilled workers across states within each country to identify the skill bias of ICT. The log-relative wage of skilled workers by state was used as the main measure of the relative supply of skilled workers, supplemented by direct measures of education levels across states. The results are again consistent with skill bias in both countries, and are mainly robust to various methods of controlling for unobserved heterogeneity across states. LINKAGES BETWEEN ORGANIZED AND UNORGANIZED MANUFACTURING One of the outcomes of globalization and liberalization is increasing outsourcing from the larger units to the smaller ones. This process also fosters linkages between the formal and informal sectors (Ramaswamy 2003). The negative features of this process often discussed in the literature are exploitation of the smaller enterprises and workers in them through long working hours, low wages, and poor working conditions, as they are often not in a position to bargain. The positive features are growth of employment, inflow of technology to the smaller enterprises (that can help to improve productivity), and enhancement of skill sets. Three types of linkages between the formal and informal sectors are possible: through the labour market, the product market, and through technology. Besides the transfer of skills, labour market linkages develop through hiring contract labour. Increase in employment opportunities and transfer of skills are some of the possible outcomes of labour market linkages. The product market is linked through various types of subcontracting arrangements. Forward linkages through
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subcontracting of output and backward linkages through input linkages exist. The workers in the informal sector benefit through increased employment opportunities. Market interaction between the sectors also occurs through the transfer of technology. Transfer of technology between firms could take various forms and this could benefit the workers through upgrade of skills (Unni and Rani 2008). Labour Market Linkages Labour market linkages between the formal and informal sectors were established through attempts at increasing labour flexibility in the organized or formal sector firms (Ramaswamy 1999). Contract intensity (percentage of contract labour to total) in export-oriented or import-competing industries peaked in the among the enterprises with employment size of 100–199 workers (Ramaswamy 2006). An overall increase in flexibility in the labour market in organized manufacturing was observed with increase in the hiring of workers through contractors, both among total employees and total workers, including managerial and professional workers (Unni and Rani 2008). This method of recruiting workers implied increasing flexibility for the firm since the contracts of workers were flexible and did not include all the benefits that the permanent workers received. Product Market Linkages The Unorganized Manufacturing Sector Surveys of 1994–5 and 2000–1, conducted by the National Sample Survey Office (NSSO), provided indication of subcontracting of production activities across manufacturing firms in the unorganized sector. Besides subcontracting of production activities, outsourcing of various service activities of the firms was also quite prevalent. The pattern of market interaction between firms was generally that the small firms depended on the large ones for service orders, while the large firms contracted out the services, perhaps to reduce labour, equipment, and administration costs. The smaller firms from the informal sector generated employment and incomes through subcontracting in service activities with the larger firms from the informal and formal sectors. The workers in the informal sector thus benefited from employment created in this process (Unni and Rani 2008).
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Marjit and Maiti (2008) provide a theoretical model that explains such organizational changes in terms of allocation of monitoring effects between marketing and production. Further, evidence is provided from a large-scale survey that formal sector firms concentrate on marketing and shift their production activities to small informal sector firms. The existence of a low-wage informal sector facilitates division of labour and specialization in the formal segment (Maiti 2008). The international literature on global commodity chains (GCC) identifies two kinds of subcontracting chains: producer-driven commodity chains and buyer-driven chains (Gereffi 1994). In a producerdriven chain, large transnational companies play a central role in coordinating the production network, including backward and forward linkages. Such chains operate in the technology-intensive sectors such as automobiles. The profitability of lead firms in producer-driven chains arises from their control over raw materials and technical know-how. There is little scope for subcontracting to households in such chains. In buyer-driven chains, large retail companies and buying agents control the network. Such chains are normally seen in the production of labour-intensive goods such as garments, sports goods, etc. The profitability in these chains arises from unique combinations of high-value research, design, marketing, and financial services. The chains are controlled by lead firms through their ability to shape mass consumption via strong brand names and their reliance on global outsourcing strategies to meet this demand. These chains can extend into the households and engage home workers in the production chain (Mehrotra and Biggeri 2007). A variant on the GCC framework argues that these chains are socially embedded within a social structure of class, caste, gender, and space, which helps to understand the organizational and social linkages in the production network (Rammohan and Sundaresan 2003). It has been observed that there are subtle differences in governance structures and controls used through the production process and social institutions in the export and domestic chains (Unni and Scaria 2009). Technology Transfer Linkages The nature of subcontracting undertaken by the firm could be vertical or horizontal. In vertical subcontracting, the firm is fully dependent
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upon the parent firm, middlemen, and/or contractor to supply the raw material, design, and equipment. While the literature generally regards such vertical linkages as exploitative, a positive feature is that this is a form of transfer of technology between the firms. In horizontal subcontracting, the firm is independent and sources its raw material, design, and equipment by itself (Watanabe 1983). A vertical subcontractor is a dependent producer, while the horizontal subcontractor is an independent producer. A series of questions asked to the entrepreneurs about the type and nature of the contract in the Unorganized Manufacturing Sector Survey, 2000–1, were used to categorize the activities into vertical and horizontal subcontracting. While the proportion of firms engaging in horizontal subtracting was minimal, vertical contracting was the norm that unorganized sector firms engaged in (Unni and Rani 2008). Capital Market Linkages In a very revealing study, Marjit and Karr (2009) showed that trade liberalization in the organized sector could raise wages and employment for workers in the unorganized sector if capital is easily mobile between the organized and unorganized manufacturing sectors. Further, improvement in labour productivity in the labour-intensive segments of the organized sector can improve informal wages even in the short run under free mobility of capital, and with formalization of informal labour. He argues that deregulated economies may benefit informal workers, raising both wages and employment, if there is inter-sectoral mobility of capital. FLEXIBILITY AND THE LABOUR REFORMS DEBATE The flexibility debate centres on the idea that excessive regulation of labour has resulted in inflexibility in the labour market, which has constrained the growth of employment. Fallon and Lucas (1991) argued that employment growth in organized manufacturing would have been higher by 17.5 per cent in the absence of rigid provisions on job security. Labour legislation in India is on the concurrent list, implying that both the state and central governments have the power to legislate. There is excessive targeting of the organized sector, which constitutes
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only about 7 per cent of the workforce, and is seen as a major cause for dualism in industry. An elaborate machinery is set up for enforcement and yet it proves to be inadequate as was discussed earlier under the theme of dualism. There are too many labour laws and yet they focus mainly on direct employer–employee relationships, ignoring other forms of labour relations such as subcontracting, outsourcing, temporary work, or even fixed contract work. The main bone of contention in the flexibility debate is the Industrial Disputes (ID) Act, 1947. In order to restrain capital, it lays down the conditions for layoffs, retrenchment, closure of industry, and level of compensation under what is known as section 25 of its chapters V and VB. In order to restrain labour, it defines illegal strikes and lays down the right to declare an industry as a public utility. It also lays down procedures for settlement of disputes. The major objections regarding labour rigidity arguments are related to Chapter VB of the act, pertaining to permission to layoff, retrench workers, close units with more than hundred workers, and to section 9A, relating to procedures to change conditions of work, work hours, nature of work, etc. Further, section 10 of the Contract Labour Act, 1970,6 that prohibits employment of contract labour in certain industries, operations, or processes is also opposed. The debate is on whether these labour laws actually lead to rigidities through response to change in labour demand or speed of adjustment of labour, etc. Using Annual Survey of Industries (ASI) data of 1959–82 in 36 industries, Fallon and Lucas (1993) argued that after amendments in the ID Act in 1976 and 1984, where the size of establishment coming under the Act was raised to 300 and then reduced to 100 workers, no change in speed of adjustment of labour was found, but they found a drop in labour demand. Bhalotra (1998) contested this and argued that there was a decline in labour demand, computed using 25 industries with negative correlation at 25 per cent significance only. Further, the result of fall in labour demand with no change in speed of adjustment is puzzling. If the labour law had bite, the firms would take longer to adjust their employment levels. Roy (2002) proposed an alternative way to measure firing restrictions. He noted that accession and separation (hiring/firing) rates for the directly employed showed that in the pre-1976 period, flexibility existed, whereas in the post1984 period, the flexibility was reduced.
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Besley and Burgess (2004) took the argument of Falcon and Lucas forward by using state-level amendments to ID Act, during 1958–92. They classified states as pro or neutral towards workers and pro employer. They found that states with pro-worker labour regulation reflect large negative impact on employment, output, and investment in the formal manufacturing sector. For example, if West Bengal did not pass any pro-worker amendments, it would have 23 per cent more employment and 24 per cent more output than if it did. Aghion et al. (2005) updated the index of state-level amendments to ID Act and found higher rates of growth following industrial delicensing in states with more pro-employer labour institutions. Ahsan and Pagés (2009) carried out a full rescoring of the index to measure transaction cost and found at least as detrimental an impact on output and employment as the original study by Besley and Burgess. One puzzling feature of the result of the study by Besley and Burgess was that pro-worker amendments did not show any indication of rising worker wages, which is considered as the main route through which the legislations hamper economic outcomes (Jha 2010). Reading off directly from amendments to measure rigidity could be misleading since, at the state level, the degree of enforcement and culture of governance could deflect/nullify the effects. Bhattacharjea (2009) argued that legislative amendment and judicial decisions in different states in different years were too heterogeneous to be uniformly quantified as unit increments in an index. The governments of Maharashtra and Gujarat are characterized as pro worker, and Kerala was characterized as pro employer, while the fact was that enforcement and inspections were twice as much in Kerala (Anant et al. 2006; Bhattacharjea 2006). Empirical investigation into whether flexibility, through casualization of labour, leads to higher growth of employment and output showed no significant impact in the organized manufacturing sector (Guha 2009). Job security legislation may not have had negative effects on employment, because firms changed their job boundaries as importsubstitution industrialization was dismantled. Firms resorted to voluntary retirement schemes and hiring on flexible contracts, supported by weak enforcement of the law (D’Souza 2010). Studies based on micro data also showed a weak link between labour regulations and industrial outcomes (Deshpande et al. 2004; Sharma 2006; Sundar 2005). The flexibility debate may be overstating the impact of labour legislation and the causes of labour-market rigidity may exist elsewhere.
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For example, the land-related laws may lead to locking up large resources that could have been invested in industry. Large textile mills in Mumbai and Ahmedabad occupied large areas of prime urban land and the urban land ceiling / municipal regulations prevent firms from using this capital resource more effectively. Land is complementary to labour: Rigidities in land market translate into poor- and low-quality demand for labour (Anant et al. 2006). Further, banking laws on insolvency and bankruptcy could prevent companies from closing down, locking up valuable assets that could be used elsewhere. Long-drawn litigations in courts harm workers as their dues are held up, and inability to recover loans raises the cost of lending to enterprises. Lack of infrastructure development and fragmented, localized market for goods could also constrain growth of the organized sector (Anant et al. 2006). The labour reforms argument can be viewed from two sides. First, from the side of the enterprises/industry: to increase flexibility in labour markets following from the neo-classical model of labour markets. As has been discussed so far, these hinge around the wagesetting practices (lowering costs to employers) and regulations affecting hiring and firing. Second, from the side of the worker: to improve earnings per worker, working conditions, and security. These policies would focus on legislation for minimum wages and social security, and better enforcement of them. Labour market regulations should address all employees, and focus on both the organized and unorganized sectors. Labour regulations for large establishments would have more legal reporting regimes, but labour regulations for smaller ones would have fewer and simpler regimes. It should also address issues of outsourcing, temporary workers, etc., which are currently ignored on the score that they might reduce incentives for enterprises to grow. On the enterprise side, the NCEUS had made some recommendations with respect to credit: revision of priority sector guidelines, or penalty to banks for not adhering to it; banks not willing to lend to small or own account enterprises due to perceived risks. Provision of adequate safety net to banks and user-friendly Credit Guarantee Scheme; methods to strengthen the micro-finance initiatives and innovative instruments for new and emerging product lines, and creation of a National Fund for Unorganised Sector Workers (NAFUS): national-level development financial institution
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for the US for credit and development support to the US enterprises (NCEUS 2007). On the worker front, active labour market policies should include skills training (Anant, et al. 2006). A modular approach to vocational training, multiple skills provided over a period of time, allowing entry and re-entry into the education system could improve employability of workers. Direct job creation, as in the National Rural Employment Guarantee Scheme (NREGS), is useful, but not a permanent solution. ISSUES FOR FURTHER RESEARCH This section presents a few issues that could be pursued in future research on employment and industrialization: The issue of what constrains the growth of the formal sector in manufacturing remains unresolved. The factors put forth to explain periods of jobless growth are both supply and demand driven. However, given the changing context, this issue will remain an important point of discussion for some time. It is widely recognized that dualism is a dominant feature of the process of industrialization in India. In fact, the formal sector takes advantage of this to reduce its costs, particularly of labour. The issue of whether dualism occurs due to regulation and if it can be more or less eliminated with deregulation on various markets is again a matter of debate. What could help to improve productivity and earnings of informal workers and small enterprises requires a lot more research and probing. One way to improve productivity in the small enterprises is through adoption of new technology. While technology, diffusion, and R&D are well-researched topics for large enterprises, there is very little on the requirements of small enterprises. The innovations that occur in small enterprises which help to improve productivity need to be recorded. Perhaps, diffusion and scaling up of some of these technologies would help other such small enterprises. A related area is that of skills in the workforce. To begin with, there is no clear definition of a skilled, semi-skilled, and unskilled worker. Also, there is no large-scale survey of skills—formal and informal— among workers. The proxy of education that is generally used for skill is not appropriate in a country with such a high level of illiteracy and a low level of education. Besides measurement of skill, the question that
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needs probing is why is skill at a premium in the globalized world? Is it skill-biased technological growth that determines skill premiums? If this is so, are there economic activities that are under-valued due to use of simple technologies, for example, embroidery work? Are many of these so-called ‘unskilled’ activities done by women? Linkages between formal and informal sector in manufacturing, and the extent to which fostering such linkages may be beneficial for the growth of smaller enterprises was a topic of debate in the early literature. The issue, however, remains relevant, and linkage within the labour, capital, and product markets in the current context of globalization needs further research. How could these linkages between large and small enterprises benefit employment and the growth of output? The issue of flexibility in the labour market should not be restricted to labour reforms alone. The question of whether labour market reforms that are beneficial to the worker can also create growth and increase employment needs to be investigated. Further, labour and small enterprises would also benefit from reforms in commercial and business law. Research on laws that affect growth of the industrial sector and employment is scarce. In the context of the recent ‘scam’ in the micro-finance sector, research is required on the ways for improving the financial inclusion of the poor in a manner that is not exploitative. Financial sector reforms to regulate the financial institutions that absorb the small savings of the poor and can also deliver it back to the poor for economic activities are essential. Innovative research on micro-finance and micro-enterprise development as tools to power industrial growth needs to be encouraged. Overall, the area of employment and industrialization is vast and many issues remain under-researched. In particular, many of the issues highlighted here focus on how industrialization can improve growth, productivity, and earnings of the informal segment of workers and enterprises. This is the crux of the problem of generating decent work and inclusive growth. NOTES 1. The author is grateful to Sudhanshu Gupta for support in reviewing this large and complex literature.
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2. The review of the literature in this section is mainly from Unni and Rani (2008: Chapter 1). 3. The North–South divide is broadly considered a socio-economic and political divide. Generally, definitions of the Global North include North America, Western Europe, and the developed parts of East Asia. The Global South is made up of Africa, Latin America, and developing parts of Asia including the Middle East. 4. Technological change can also be endogenous if one brings in the firm-level perspective. Trade and other liberalization processes force firms to compete on price and non-price parameters. This, in turn, requires adoption of new technologies that are skill biased. 5. A limitation pointed out in the study was that the definition of skilled workers was based on the level of education of the workers, so that persons below higher secondary education were treated as unskilled. This might have affected the results regarding skill-biased technical change, measured by the wage bill, in certain sectors. In the construction sector, for example, skilled workers operating certain machines may be illiterate or have low levels of education, and hence this industry does not show technical change by this measure. 6. Contract Labour (Regulation & Abolition) Act, 1970, Government of India.
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Organisation of Economic Co-operation and Development (OECD). 1997. Industrial Competitiveness in the Knowledge-based Economy: The New Role of Governments. Paris: OECD. Papola, T.S. 1994. ‘Structural Adjustment, Labour Market Flexibility and Employment’, Indian Journal of Labour Economics, 37(1): 3–16. Pattanayak, S.S. and S.M. Thangavelu. 2005. ‘Economic Reforms and Productivity Growth in Indian Manufacturing Industries: An Interaction of Technical Change and Scale Economies’, Economic Modeling, 22(4): 601–15. Ramaswamy, K.V. 1999. ‘The Search for Flexibility in Indian Manufacturing: New Evidence on Outsourcing Activities’, Economic and Political Weekly, 34(6): 363–8. ———. 2003, ‘Liberalization, Outsourcing and Industrial Labour Markets’, in Shuji Uchikawa (ed.), Labour Market and Institution in India: The 1990s and Beyond, pp. 155–78. New Delhi: Manohar Publications. ———. 2006. ‘Employment in Indian Manufacturing and New Services: Impact of Trade and Outsourcing’, conference on Labour and Employment Issues in India, Institute for Human Development. Rammohan, K.T. and R. Sundaresan. 2003. ‘Socially Embedding the Commodity Chain: An Exercise in Relation to Coir Yarn Spinning in Southern India’, World Development, 31 (5): 903–1014. Rao, M.J. 1996. ‘Manufacturing Productivity Growth: Method and Measurement’, Economic and Political Weekly, 31 (44): 2927–36. Roy, Tirthankar. 2002. ‘Social Costs of Reforms: A Study of Job Loss with Special Reference to Declining Industries in 1990–98’, in Shuji Uchikawa (ed.), Labour Market and Institution in India: The 1990s and Beyond, pp. 99–126. New Delhi: Manohar Publications. Sharma. Alakh N. 2006. ‘Flexibility, Employment and Labour Market Reforms in India’, Economic and Political Weekly, 41(24): 2278–85. Sundar, Shyam K.R. 2005. ‘Labour Flexibility Debate in India: A Comprehensive Review and Some Suggestions’, Economic and Political Weekly, 40(24): 2274–85. Thurow, L., 1992, ‘Head to Head: The Coming Economic Battle among Japan, Europe and America’, New York: William Morrow. Topel, R.H. 1997. ‘Factor Proportions and Relative Wages: The Supply Side Determinants of Wages Inequality’, Journal of Economic Perspectives, 11(2): 55–74. Trivedi, Pushpa, Anand Prakash, and David Sinate. 2000. ‘Productivity in Major Manufacturing Industries in India: 1973–74 to 1997–98’, Development Research Group Study No. 20, Reserve Bank of India, Mumbai. Uchikawa, Shuji (ed.). 2002. Economic Reforms and Industrial Structure in India. New Delhi: Manohar Publications. ———. 2003. Labour Market and Institutions in India: 1990s and Beyond. New Delhi: Manohar Publications. Unel, Bulent. 2003. ‘Productivity Trends in India’s Manufacturing Sectors in the Last Two Decades’, International Monetary Fund Working Paper, Washington, DC.
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Unni, J., N. Lalitha, and U. Rani. 2001. ‘Economic Reforms and Productivity Trends in Indian Manufacturing’, Economic and Political Weekly, 36 (41): 3915–22. Unni, J. and Uma Rani. 2008. ‘Flexibility of Labour in Globalising India: The Challenge of Skills and Technology. New Delhi: Tulika. Unni, J. and S. Sarkar. 2011. ‘Employment and Education: An Exploration of the Demand-Side Story’, paper presented at the conference on Higher Education: New Trends and Challenges, Centre for Policy Research, 28–9 July 2011, New Delhi. Unni, J. and S. Scaria. 2009. ‘Governance Structure and Labour Market Outcomes in Garment Embellishment Chains’, Indian Journal of Labour Economics, 52 (4): 631–50. Watanabe, S. (ed.). 1983. Technology, Marketing and Industrialization: Linkages between and Small Enterprises. Delhi: Macmillan. Wood, Adrian. 1994. ‘North South Trade, Employment and Inequality: Changing Fortunes in a Skill Driven World’. New York and Oxford: Clarendon Press and Oxford University Press. World Bank. 1989. India: Poverty, Employment and Social Services: A World Bank Country Study. World Bank: Washington, DC. ———. 1998. ‘World Development Report 1998–99: Knowledge for Development’. New York: Oxford University Press. ———. 2010. India’s Employment Challenge: Creating Jobs, Helping Workers. World Bank and New Delhi: Oxford University Press. Zeira, Joseph. 2007. ‘Wage Inequality, Technology and Trade’, Journal of Economic Theory, 137(1) 79–103.
8 A Survey on Corporate Saving, Corporate Tax, and Surplus ATULAN GUHA
Private corporate saving in India started to show a rising trend from the late 1980s (see Figure 8.1). In the post-1991 period, however, it went up at a much faster rate. Interestingly enough, the rising trend in private corporate saving is similar to the growth pattern of the private corporate sector in the post-1991 period. The rate of saving was higher in the first half of the 1990s, or the first boom period of the private corporate sector in the post-reform phase, as compared to the late 1980s. After that there was a declining trend in the late 1990s, or the period of deceleration of the private corporate sector, followed by a very steep increase in private corporate saving during the period from 2003–4 to 2007–8. This pattern of change in corporate saving in the post-reform period naturally raises the question, as to what is the reason, in comparison to the past, for the relatively high level of saving on the part of the Indian private corporate sector. Under the neo-liberal policy framework, the state handed over the driver’s role for economic growth to big Indian businesses. The latter were supposed to have made most significant contribution to capital formation in the economy. What remains unclear is why the Indian corporate sector should accept this responsibility. One major motivation could be the prospect of earning more profit or surplus. In that case, the private corporate surplus should increase, which would be either retained or distributed as dividends. This leads to the plausible hypothesis that the present nature of growth leads to higher private corporate profit causing an increase in corporate savings or corporate
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1951-52 1953-54 1955-56 1957-58 1959-60 1961-62 1963-64 1965-66 1967-68 1969-70 1971-72 1973-74 1975-76 1977-78 1979-80 1981-82 1983-84 1985-86 1987-88 1989-90 1991-92 1993-94 1995-96 1997-98 1999-00 2001-02 2003-04 2004-05 2006-07 2008-09
10 9 8 7 6 5 4 3 2 1 0
Figure 8.1 India’s Private Corporate Saving to GDP Ratio Source: Reserve Bank of India (RBI) 2010. Notes: The values are in per cent. The corporate saving figure includes both retained profit and depreciation. GDP has been measured at factor cost.
dividends, or both. Alternatively, we can say that two kinds of factors can influence corporate saving: first, the profitability or surplus of the firm, and second, the dividend rate policy that is likely to be influenced by the capital structure decision of the firm. Through a survey of the literature and empirical facts, the chapter tries to figure out which one of the two plays a more prominent role in influencing corporate saving. The discussion in the first section limits itself to answering this question. The instances of direct empirical evidence of dependence of corporate saving on capital structure are weak. Yet a firm’s growth exerts substantive influence in terms of increasing corporate saving. This may be done on the basis of two roots. First, a firm’s growth can increase corporate saving by increasing profit. Second, a higher growth of firm indicates a higher need for investment funds. Since the retaining profit is the least-cost source of funds, the firms tend to retain a larger share of the profit. Our survey in the first section suggests that evidences in support of the second root do not show strong causation between the growth of the firm and the saving. Rather, it appears that the dividend rate policy, the key instrument through which the intentions of capital structure changes are visible, is based upon considerations other than that of capital structure needs. The dividend–payout ratio is substantially stable. So,
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it appears that increase in corporate profit is the prime reason behind the increase in saving. Further, there is evidence that suggests that the corporate tax policy plays an important role in influencing corporate saving. In the second section, the changes in corporate tax policy are discussed. The last section provides the concluding comments for the chapter. PROFITS, SAVINGS, AND DIVIDENDS IN INDIA’S PRIVATE CORPORATE SECTOR The corporate profitability has gone up at a rapid pace during the post-1991 period (Figure 8.2). But there is a variation in the growth of corporate profitability: The first half of the 1990s experienced rapid growth followed by a lean period. From 2002‒3 and onwards, a very rapid increase has been witnessed. During the period post 1991, corporate savings increased significantly. In fact, with the exception of the year 2001‒2, retained profit‒sales ratio looks like a shadow image of corporate profitability. Proportions of dividend in sales were more or less stable during the entire period, except for the year 2001‒2 (see Figure 8.2). Most of the available studies support it. Raghunathan and Dass (1999) found that the top 100 and high net-worth companies maintained a stable dividend payout policy of around 30 per cent 12 10 8 6 4 2
PAT/Sales
Ret_prof/Sales
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Figure 8.2 Profit, Savings, and Dividend Payment of India’s Private Corporate Sector Source: CMIE
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during the period 1990–9. In contrast, Mohanty’s (1999) survey of the dividend payout ratio of 2,535 Indian companies indicates that firms maintain a constant dividend per share and have a fluctuating payout ratio, depending on their profits. The survey by Manoj Anand (2002), with a sample consisting of chief financial officers of 474 large private and 51 public companies, indicates that 81.50 per cent of the respondents ‘strongly agree’/‘agree’ that their firm has a long-run target dividend payout ratio. Nearly 85 per cent of the respondents ‘strongly agree’/‘agree’ that dividend changes in their organization follow shifts in long-run sustainable earnings. So, most studies indicate that dividend payout ratio is stable. The stable dividend payout ratio, coupled with the increase in corporate saving, indicates the increase in corporate profitability, or, to put it in other words, surplus is the prime reason behind increasing corporate saving. This is further supported by Bhole and Mahakud (2005). Using firm-level data and total assets instead of output or sales as indicators of firm growth, for the period 1987‒99, they showed that an increase in both profitability and growth rate of a firm influences private corporate saving positively; but the influence of profitability on savings is much higher than the firm’s growth. The values of coefficients of the explanatory variables indicating capital structure (like external fund ratio,1 cost of borrowing, and cost of equity) are very small and yet statistically significant. The relationship between growth of a firm and its corporate saving is a complex one, because growth environment has an impact on capital structure decision of a firm and the capital structure decision of a firm has its impact on its corporate saving. Theoretically, it has been argued that companies want to invest during a high growth period, and so they try to use the least-cost sources of finance to the maximum. So, the share of retained profit should be higher in high growth periods as compared to low growth periods. For the Indian corporate sector, because of the high concentration of ownership (Rao and Guha 2006), the tendency to give a higher dividend in the low growth period should be higher, primarily to maintain the earning level of promoters. So, the capital structure of the corporate sector should vary between the high growth and low growth periods and the dividend policy of the corporate sector should reflect this variation. But there is another factor that could influence capital structure, and subsequently the dividend policy, that is the need for raising funds
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from the equity market. If the internal source of funds is inadequate for financing the investment plan, the firm may need to raise capital by selling equity. The high dividend payout ratio may have a positive influence in increasing equity price. (This relationship also gets influenced by the institutional structure of the equity market. It is expected that in the post-liberalization period, the attraction of equity funding should be higher.) During high growth periods, therefore, when the need for funds to finance the expansionary investment is greater, the dividend payout ratio may be higher. In a nutshell, the dividend payout ratio should be linked with investment requirements and the adequacy of the internal funds to meet this requirement. Among the above conjectures, the empirical evidence is supportive of the second one. The study by Kamat (2009) shows that during the low growth period of 1996‒2000, when stock market prices were relatively down, the equity dividend payout ratio and preference dividend payout ratio for private and public limited companies were marginally lower compared to the period 2001‒7. So, in the low growth period, the proportion of retained profit in total profit was marginally higher, whereas in the high growth period of 2001‒7, the proportion of retained profit in total profit was marginally lower. This suits with the situation of inadequacy of internal funds to meet the investment requirements. However, as the dividend payout ratio is largely stable, the capital structure decisions have a limited role in deciding on corporate saving. Another interesting question is, how liberalization affected the corporate saving‒profit relationship. For two subperiods, 1987‒91 and 1995‒9, Bhole and Mahakud (2005) found that while an increase in profitability positively influenced the corporate saving rate, the capability to influence was higher in the pre-liberalization period of 1987‒91 compared to the post-liberalisation period of 1995‒9. Despite the lower sensitivity of corporate saving to profit, since profit has increased at a very high rate, corporate saving has also grown at a high rate in the post-liberalization period. Their study does not provide any explanation for the lower sensitivity of corporate saving to profit in the post-liberalization period. One explanation may be that a more developed stock market may have, at least partially, met the finance needs of a big companies; the availability of equity finance may have reduced the sensitivity of corporate saving on profit. The firms, in search of cheaper equity finance, are likely to provide a higher
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dividend to send out positive signals to the stock market for having higher equity price. But changes in the capital structure do not support this explanation. Manoj Kamat (2009), using RBI data, demonstrates that both the equity dividend payout ratio and preference dividend payout ratio declined in the post-reform period (1991–5, or the highgrowth period; 1996–2000, or the low-growth period; and 2001–7, high-growth period), compared to the period 1986‒90 for both private- and public-owned companies. So, despite the development of the stock market, the share of retained profit has actually increased in the post-reform period. This has also been supported by Rajakumar (2005). Using the data of RBI on public limited companies, he has shown that in the 1980s, reserves and surpluses constituted roughly 8 per cent of the total finance and, in the 1990s, they constituted around 13 per cent of the total finance. But the finance companies have shown a different trend: for them, both the equity dividend payout ratio and preference dividend payout ratio have increased to a substantially higher level between the periods 1996‒2000 and 2001‒7. So, excluding the finance companies, greater equity finance availability may not influence the decision of firms regarding the share of retained profit in total profit. A recent article by Jangili and Kumar (2011) finds a positive relationship between corporate profit and saving for the period 1998‒9 to 2006‒7. But, the value of the regression coefficient is very low and not statistically significant even at 15 per cent. As a matter of fact, in this exercise, the values of most coefficients are low and not significant. This raises doubts about the goodness of fit of the equation. As already mentioned, the factors that could influence the rate of corporate saving may be divided into two categories: first, those that affect profitability; and second, those that affect capital structure. The costs and tax expenditure affects the retained profit through undistributed profits. Both the studies—of Jangili and Kumar (2011) as well as of Bhole and Mahakud (2005)—include both profitability and tax expenditure as the explanatory variable in a single econometric equation. So, the impact of profitability on corporate saving does not include the impact of corporate tax expenditure on corporate saving by changing the profitability. These studies carried out by Jangili and Kumar and Bhole and Mahakud treat corporate direct tax as an important factor influencing corporate saving, as it affects profit after tax. In the study by Bhole and Mahakud, the regression coefficient of
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the effective corporate tax rate has the expected negative sign, but it is statistically significant for the post-liberalization period of 1995‒9. It is not significant for the whole period of 1987‒99, as well as for the period before liberalization, i.e., 1987‒91. The study of Jangil and Kumar also found a statistically significant inverse relationship between effective corporate tax rate and savings. Bhole and Mahakud’s finding that there is no statistically significant inverse relationship between effective corporate tax rate and saving is interesting. This is because voluminous literature exists taking the opposite stance. Some of the contributions are by Rajakumar (2001), Rao and Vivekananda (1980), and Roy (1996). They have argued that a higher corporate tax rate has limited the internal generation of funds. The cited evidence suggests that capital structure decisions are not the prime factor behind the high share of corporate saving in total profit. Then, by default, high corporate profit remains the prime factor behind the high corporate saving. The lower effective corporate tax rate in post-liberalization period has increased the corporate profit, and hence, has increased the corporate saving. A major gap in the literature is the non-availability of studies enquiring the reason for high corporate profit during the post-reform period. One reason for high corporate profit may be the structure of growth. The sectoral growth structure could have been included in the study of Bhole and Mahakud (2005), but it was not done. Bhole and Mahakud had stressed at the demand for investment finance as an explanatory factor. Now, the demand for investment funds may be associated with the growth prospect of a firm, which may be related to the nature and extent of GDP growth. But this latter relationship has not been studied. One of the reasons may be that it is easier to study the impact of a firm’s characteristics on its saving based upon firm-level data. The impact of GDP cannot be incorporated directly; but it could have been incorporated as a proxy for time-specific effects. Further, the sectoral growth structure of GDP could also have been a good explanation for the growth potential of the firm. This too could have been included in the model as a proxy for time-specific effect and partial firm-specific effect. This way, both the extent of GDP growth and the sectoral growth structure could have been included in the model to see its impact on corporate saving. A study by Sinha and Sinha (2007) has tried to unearth the direct relationship between corporate saving and growth of GDP. Based on
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macroeconomic data for the period of 1950–2001, they have argued that the growth rate of GDP is a strong determinant of corporate saving in India. However, the study does not provide any mechanism through which GDP growth influences corporate saving. While many studies have explored the present growth structure and its process, like it was already mentioned, we could not find a single study that tries to tap the relationship between corporate profitability and the pace and pattern of GDP growth structure or the growth process. Similarly, with the exception of the discussion by Jha et al. (2009), no study was identified that explores why corporate profitability was going up. Even the discussion of Jha et al. is conjectural in nature. They argue that the increase in corporate profitability may be the reason for high corporate saving. They also claim that a host of factors are responsible for this phenomenon. This includes reduction in the corporate tax rate from 45 per cent in 1992–3 to 30 per cent by 2005–6, a cut in the peak rate of customs duty on non-agricultural goods from 150 per cent in 1991–2 to 10 per cent in 2007–8, and sustained moderation in inflation leading to reduction in nominal interest rates. Firm-level factors include financial restructuring of firms resulting in the reduction of debt– equity ratios in the corporate sector and improved productivity and efficiency owing to new technology. The authors argue this point by citing a study by Rakesh Mohan (2008). But neither of the studies provides much evidence in favour of their claims. The host of reasons, cited by this study (Jha et al. 2009), may be classified into three categories: reduction in the cost of capital, improved productivity (possibly attributable to the rising use of capital-intensive technology), and lowering of taxes applicable to corporations. Unfortunately, no research has looked into the causations between corporate profit and these factors. In summing up, we can say that corporate saving is going up primarily because of increasing corporate profitability. The influence of capital structure decisions by firms on their saving is limited. Reduction in effective corporate tax rate definitely has a positive effect on corporate saving. The findings concerning the relationship between corporate tax and saving has prompted us to look into the changes in corporate tax policies separately after the liberalization period, as both corporate profit and saving have increased rapidly in this period.
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CHANGING CORPORATE TAX POLICIES The taxation of corporate profits has undergone substantive changes in the post-reform period. The tax reform committee, headed by Raja Chelliah, was set up in 1991‒2. The major recommendations concerning the corporate sector were: first, a phased reduction of the corporate tax rate to 40 per cent, with the distinction removed between closely held and widely held companies; second, the abolition of wealth tax on all assets except certain clearly specified ‘unproductive’ assets; and third, the systematic elimination of the numerous prevailing exemptions for the corporate sector. Two other committees were set up, thereafter. According to Acharya (2005), the Shome Report of the Advisory Group on Tax Policy and Tax Administration for the Tenth Plan (Government of India [GoI] 2001) broadly pertained to the report tradition of the Chelliah committee and was useful in terms of highlighting the agenda for the future. The Kelkar reports of the task forces on direct and indirect taxes followed shortly. The Kelkar report on direct tax also followed the same tradition as the Chelliah committee report. This was also reflected in the discussion papers concerning the Direct Taxes Code bill and, finally, the bill itself. In all these reports, the underlying objective has been the dilution of equity and enhancement of the efficiency principle. The argument is that the incentive to earn more for the rich should not be reduced in such a way that it reduces economic activity of the rich. Hence, the scheduled tax rate should be reduced; wealth tax should be eliminated, especially on the productive alias financial wealth.2 The additional reason for reduction in the scheduled tax rate is that the scheduled tax rate is higher than the effective tax rate. Due to various tax exemptions, the effective tax rate is much lower than the scheduled tax rate. So the withdrawal of tax exemptions will, at least, compensate if not more than cover up the loss in tax collection due to reduction in scheduled tax rate. Despite similarities in the basic philosophy behind corporate taxation, the differences between these reports, especially between those of Chelliah and Kelkar, have to do with the extent to which the tax rate and exemptions should be reduced. It appears that the Chelliah committee’s report is marginally more in favour of higher corporate taxes on grounds of greater vertical equity, and higher tax exemptions
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on grounds of some developmental need of the economy, such as, research and development and exports. Further, there has been a difference in merging the Income Tax Act and the Companies Act to reduce the allowance of exemptions on depreciation expenditure. Chelliah (2002) speaks about the difficulties in calculating depreciation, and Bagchi (2002) argues that in the absence of investment tax incentives, higher depreciation expenditure allowance may be seen as an investment incentive. Now, in practice, it is questioned what the government has done while implementing all these reports. It appears that it has reduced the scheduled tax rate but not the tax exemptions to a significant extent. The scheduled tax rate of the corporate sector declined in the post-1991 period from 45 per cent in 1992‒3 to roughly 30 per cent in 2005‒6. Thereafter, it has roughly remained the same with minor changes in surcharge and cess on a year-to-year basis. Has this led to greater tax compliance? Pinaki Chakraborty (1997) argues that the expectation about the Laffer curve phenomenon starting to operate instantaneously with a reduction in tax rate may well prove far too optimistic. On the other hand, the various avenues for tax exemptions have been reduced very marginally. A few instances of tax exemptions that have been reduced are: reduction of the allowance of depreciation expenditure on plant and machinery to 15 per cent in order to remove the disparity between the Companies Act and the Income Tax Act; introduction of fringe benefits tax; and reduction in exemption of profits earned from exports (this remains ineffective as most of our export units are in software parks or are increasingly shifting to special economic zones [SEZs]). As a result, the effective tax rate has not increased much. In fact, according to budget documents for the years 2008‒9 and 2009‒10, the effective tax rate is at around 23 per cent. This suggests a decline in the gap between scheduled and effective tax rates. Compared to the early 1990s, both the effective and scheduled tax rates have declined substantially; but the decline in scheduled tax rate has been much faster (Guha 2007). In 1985‒6, the effective corporate tax rate was roughly around 32 per cent and, in the last years of the 1990s—which are 1998‒9 and 1999‒2000—it was roughly around 21 to 22 per cent. So, the objective of increasing the corporate tax‒GDP ratio (as stated in the Kelkar report) by increasing the effective tax rate has not been a successful one with the decline of the effective tax rate. Guha (2007) argues that one of the statistically significant reasons
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behind the decline in effective tax rate is the reduction in scheduled tax rate. Further, he argues that the gap between scheduled tax and effective tax rate has made the whole corporate income tax structure regressive. Larger companies, having larger resources for designing their sources of profit and attracting lower taxes, thereby pay taxes at lower rates. Not only can they do tax planning better but they also have more resources to influence the tax policy. The debate over the Laffer curve phenomenon, which occurred in the mid-1990s, has resurfaced recently. The share of corporate tax in GDP has gone up in recent years. And the argument is that the reduction in corporate tax rate has led to an increase in tax collection. But there is evidence contradicting this argument. According to the Annual Survey of Industries (ASI), the share of profit in net value addition has increased in the last 17 years from roughly around 15 per cent to around 50 per cent. Since the Indian economy can no longer be termed as a ‘License Raj’ economy, shifting across sectors has become much easier for corporations. So, the increase in profit share is not limited only to the organized manufacturing sector; it has to be the phenomenon for the whole corporate sector in aggregate. Mazumdar (2008) has claimed that from a level where profits before taxes were less than half the value of wages and salaries they have climbed in the short span of five years (2001‒2 to 2006‒7) to become nearly double the value of wages and salaries. Hence, we can conclude that the contribution of corporate profit to GDP has gone up. This probably explains the increase in the corporate tax‒GDP ratio. Another explanation has been forwarded by indicating the improvement in the system of tracking taxable income using information technology. But this applies not only to corporate income tax but also to personal income taxes and indirect taxes. The indirect tax to GDP ratio has remained stable. And personal income tax‒GDP ratio has gone up at a slower rate compared to the corporate tax‒GDP ratio. We are not too sure how increasing income inequality and implementation of the Sixth Pay Commission has impacted the personal income tax‒GDP ratio. Also, there has been a substantive year-to-year change in corporate tax‒GDP ratio. Definitely a gap exists in research on this issue. There is no serious study that has yet been identified that looked into the impact of the two above-stated factors on the corporate tax‒GDP ratio. The Chelliah committee had recommended reduction in wealth tax in the year 1991‒2. In the following year’s budget it was implemented
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by Manmohan Singh, the then finance minister. All financial assets were excluded from the purview of wealth tax and the basic exemption level was raised to 15 lakh with the rate reduced to 1 per cent. This change in wealth tax has virtually abolished the wealth tax burden of all the big business families. There is no study at present that has dealt with the impact of this tax policy on wealth concentration in India. The subsequent committee constituted by Kelkar had recommended a complete abolition of the wealth tax; however, it was not implemented.3 In a connected matter, the whole issue of inheritance tax has been largely ignored by policymakers and researchers. In most advanced capitalist countries, this tax ranges between 40 and 50 per cent to bring more equality amongst the families. No study has been identified that has tried to trace the impact of its absence on both the equity and efficiency aspects of the economy. We came across a significant debate in the literature concerning the abolition of dividend tax and imposition of capital gains tax. The Kelkar report had recommended abolishing taxes on equity capital gains and dividends received by individuals. And it was criticized by Bagchi (2002), Chelliah (2002), and others. There was a separate tax on total company profits, with dividends distributed being taxed in the hands of the shareholder according to his income status. This implied a double taxation on corporate profit, once as company profits and again as income in the shareholder’s hands. P. Chidambaram had removed the dividend tax in the hands of the shareholder for the first time in 1997. And it remained abolished in the proposed Direct Taxes Code. The removal of dividend tax in the hands of the shareholder increases inequality; the tax rate remains the same irrespective of whether the shareholder was in a 10 or 30 per cent marginal income tax bracket. The argument of the Kelkar report in favour of advocating abolition of taxation on long-term capital gains from listed equity is that it represents the capitalization of retained earnings already taxed. It has been widely criticized. The mainstream critiques’ argument has been summarized by Acharya (2005) as follows: (1) It favoured the rich in a generally poor society for no good social reason. (2) It went against the grain of base broadening by removing such capital gains from the income base. (3) It introduced an unjustifiable divergence in the taxation of stock market capital gains versus those on other assets.
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(4) Recourse to taxation of financial transactions, generally deemed inefficient, was particularly incongruous at a time when turnover taxes were being successfully phased out in commodity taxation. While one agrees with the equity concerns of the critiques, the clubbing of the securities transaction tax with long-term capital gains tax is not justified. The main impact of the securities transaction tax should be felt on short-term security transactions and seen as a capital control measure to restrict speculative capital flows that are primarily short term in nature. We have already mentioned the government’s inability to reduce tax exemptions for the corporate sector. As a result, the Direct Taxes Code bill is fundamentally not much different from the existing tax structure, although its initial consultation paper suggested a lot. Three changes in the bill need to be mentioned. First, the corporate income tax is being reduced marginally. Second, the profit-linked exemptions are being replaced by investment links. And third, it continues the policy of non-taxation of long-term capital gains earned on the sale of listed shares. The Direct Taxes code bill has been shelved in 2015 by the Finance Minister Arun Jaitly. So it is not getting implemented. However, the Finance Minister has proposed to reduce corporate income taxes and promised to reduce tax exemptions for corporate sector. Summing up, from the existing literature, we can say that corporate saving is going up primarily because of increasing corporate profitability. The influence of capital structure decisions by firms on their saving is less. Reduction in effective corporate tax rate definitely has a positive effect on corporate saving. While effective corporate tax rate has declined substantially in the post-reform period compared to the mid-1980s, it has been more or less stable over the last 10 years because of the coupling of the government’s inability to substantially reduce tax exemptions with substantial reductions in the scheduled tax rate. As a result, its capacity to influence corporate saving is weak. So, it appears that the increase in corporate profit or surplus is the prime factor behind the increase in corporate saving. But there is almost no study available on why corporate profitability or surplus is going up and how this is linked with the present growth process. But certain tax measures, like the removal of wealth tax on productive alias financial assets, capital gains tax, and dividend tax at the hands of
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the shareholders (since, in our country, small investors are fewer), are definitely helping towards increasing the corporate surplus. NOTES 1. The study by Bhole and Mahakud (2005) defines external fund ratio as the total borrowing plus share capital to total asset ratio. 2. The definition of taxable wealth has been changed. The ownership of equity share is no longer included into taxable wealth. The change was enforced in the government’s budget of 1992–3, when Manmohan Singh was the finance minister. 3. While the Kelkar Committee’s recommendation was not implemented at that time, wealth tax got abolished in the budget of 2015–16.
REFERENCES Acharya, S. 2005. ‘Thirty Years of Tax Reform in India’, Economic and Political Weekly, 40(20): 2061‒9. Anand, Manoj. 2002. ‘Corporate Finance Practices in India: A Survey’, Vikalpa, 27(4): 29–56. Bagchi, A. 2002. ‘Vision of the Kelkar Papers: A Critique’, Economic and Political Weekly, 37(51): 5125‒33. Bhole, L.M. and Jitendra Mahakud. 2005. ‘Trends and Determinants of Private Corporate Sector Savings in India’, Economic and Political Weekly, 40(39): 4243‒50. Chakraborty, Pinaki. 1997. ‘Tax Reductions and their Revenue Implications: How Valid is the Laffer Curve?’, Economic and Political Weekly, 32(17): 887‒90. Chelliah, R.J. 2002. ‘Task Force Recommendations on Direct Taxes’, Economic and Political Weekly, 37(50): 4977‒80. Government of India (GoI). 1991‒3. Reports of the Tax Reform Committee (Interim Report, December 1991; Final Report Part I, August 1992; Final Report Part II, January 1993), Ministry of Finance, Government of India, New Delhi. ———. 2001. Report of the Advisory Group on Tax Policy and Tax Administration for the Tenth Plan, Planning Commission, Government of India, New Delhi. ———. 2002. Report of the Task Force on Direct Taxes, Ministry of Finance, Government of India, New Delhi. ———. 2010, Direct Tax Code Bill, Ministry of Finance, Government of India, New Delhi. Guha A. 2007. ‘Company Size and Effective Corporate Tax Rate in Indian Manufacturing’, Economic and Political Weekly, 42(20): 1869‒74. Jangili, Ramesh and Sharad Kumar. 2011. ‘Determinants of Private Corporate Sector Savings: An Empirical Study’, Economic and Political Weekly, 46(8): 49‒55. Jha, Shikha, Eswar Prasad, and Akiko Terada-Hagiwara. 2009. ‘Saving in Asia: Issues for Rebalancing Growth’, ADB Economics Working Paper Series, No. 162, pp. 17–18.
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Kamat, Manoj S. 2009. ‘The Ownership and Industry Effects of Corporate Dividend Policy in India, 1961‒2007’. Available at: http://mpra.ub.unimuenchen.de/12545/, last accessed on . Mazumdar, S. 2008. ‘The Private Corporate Sector’, Alternative Economic Survey, 2007‒08: Decline of the Development State, pp. 111‒117. New Delhi: Daanish Books. Mohan, Rakesh. 2008. ‘Growth Record of the Indian Economy, 1950‒2008: A Story of Sustained Savings and Investment’, Economic and Political Weekly, 10 May: 61‒71. Mohanty. S 1999. ‘Dividend and Bonus Policies of Indian Companies: An Analysis’, Vikalpa, 24 (4): 35‒42. Raghunathan, V. and Prabina Dass. 1999. ‘Corporate Performance: Post Liberalization’, ICFAI Journal of Applied Finance, 5(2): 6‒31. Rajakumar, Dennis J. 2001. ‘Financing Patterns and Investment: A Study of the Private Corporate Sector in India’, Unpublished PhD Thesis, Submitted to Jawaharlal Nehru University, New Delhi. ———. 2005. ‘Corporate Financing and Investment Behaviour in India’, Economic and Political Weekly, 40(38): 4159‒65. Rao, V.G and M. Vivekananda. 1980. ‘The Determinants of Corporate Saving Behaviour’, Margin, 12(3): 38‒50. Rao, K.S.C and A. Guha. 2006. ‘Ownership Pattern of the Indian Corporate Sector: Implications for Corporate Governance’, in Jean-Francois Huchet & Joël Ruet (eds) Globalisation and Opening Markets in Developing Countries and Impact on National Firms and Public Governance: The Case of India, report by CSH, CERNA, LSE, ORF, NCAER, part II, pp. 217–38. New Delhi: Centre de Sciences Humaines. Reserve Bank of India (RBI). 2010. Handbook of Statistics on Indian Economy, 2009-10, Table 10. New Delhi: Reserve Bank of India. Roy Choudhury, U.D. 1996. Private Corporate Sector Generation and Regeneration of Wealth, National Institute of Public Finance and Policy. New Delhi: Vikas Publishing. Sinha, Dipendra and Tapen Sinha. 2007. ‘Public Saving, Corporate Saving and Economic Growth in India’. Available at: http://mpra.ub.uni-muenchen. de/2597/, last accessed on .
9 Trends and Patterns in Industrial Growth A Review of Evidence and Explanations* R. NAGARAJ
Over the six decades between 1950 and 2010, industrial (or manufacturing) sector grew annually at 5.5 per cent, compared to the domestic output growth rate of 4.6 per cent (Table 9.1).1 The growth is accompanied by output diversification, its regional composition, and organizational and ownership pattern. Until the end of the 1970s, the industry was the economy’s leading sector; then it was manufacturing in the 1980s; but the services sector overtook it to become the leading sector since the 1990s. In a comparative perspective, in 1980, the industry’s share in domestic output was a positive outlier among countries with similar income levels. About two decades later, the share became a negative outlier (Kocchar et al. 2006). Between 1980–1 and 2009–10, manufacturing sector’s share in domestic output, for instance, barely inched up by 2 percentage points to 16 per cent in 2009–10, compared to a 6 percentage point rise in GDP during the three decades, 1951–2 to 1979–80. In the mid-twentieth century, based on economic reasoning and historical experience, industrialization was widely accepted as the engine of growth, and was synonymous with national development. Though off to a flying start, industrial growth failed to keep up the * The author is grateful to the participants of the workshop held in May 2011 in Delhi—Atul Kohli and K.L. Krishna—and the publisher’s referees for their detailed comments and suggestions. Andaleeb Rahaman’s help for some of the data analysis reported in this chapter is gratefully acknowledged. However, none of them are responsible for the errors that remain.
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Table 9.1 Long-term Growth Rates of Indian Economy and Its Principal Sectors: 1951 to 2010 (Per cent per year) Sector 1. Agriculture 2. Industry 2.1 Manufacturing 3. Services 4. GDP 5. GNP per capita
1951–80
1981– 2010
1981–91
1992– 2010
1951– 2010
2.2 5.4 5.3 4.6 3.6 1.4
3.0 6.4 6.4 7.6 6.0 4.0
3.1 7.0 7.4 7.0 5.6 3.0
2.7 7.0 7.1 8.5 6.8 5.0
2.6 5.5 5.5 5.8 4.6 2.4
Source: National Accounts Statistics, various issues. Notes:(a) Agriculture includes allied activities such as forestry, fishery, dairying; industry includes (i) mining, (ii) manufacturing, (iii) electricity, gas, and water, and (iv) construction. (b) Services include (i) trade, hotels, and restaurants, (ii) transport, storage, and communications, (iii) banking and insurance, real estate, dwelling and business services, and (iv) community, social, and personal services.
momentum. China, though starting with similar initial conditions, became world’s second largest manufacturing nation by 2009, while India stood at the tenth position (UNIDO 2011).2 India’s share in world merchandise trade barely edged up to 1.5 per cent by 2010, while China became the world’s centre of manufacturing. Evidently, Indian industry has underperformed (relative to its potential), or it has remained undersized, in a comparative perspective. The reasons behind this and policies to reverse the trend have engaged a lot of attention for quite some time now, which also form the main concerns of the present chapter. The Second Five Year Plan (1956–61), based on the Mahalanobis model (1953), sought to create ‘heavy industry’—that is, capital and intermediate goods industries—to speed up the long-term economic growth that is self-reliant and financially self-sustaining in a politically polarized world.3 Kaldor’s stylized fact (Kaldor 1967)—postulating a positive association between industrial productivity and economic growth via positive externalities—would seem to eminently justify such a strategy. At a time when the world economy was witnessing a secular decline in terms of trade against the primary producers, a bleak prospects for world trade, and the world economy polarized into rich and
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industrialized on the one side and the poor and agrarian economies on the other, import-substituting industrialization (ISI) was seen as the obvious choice for a large country like India.4 Moreover, for an economy with diverse natural and human endowments, it is difficult to be sure, a priori, where its comparative advantage lay (Bruton 1989).5 For a poor, sub-continent-sized country, that was seeking to chart an independent path of development, self-reliance in heavy industry was also perhaps a political imperative.6 However, as such a strategy was capital intensive, the Mahalanobis plan advocated protection and promotion of labour-intensive methods of producing consumer goods in cottage and traditional industry, by fiscal and physical measures; a strategy that resonated well with the Gandhian ideology of decentralized development. Thus, operationally, the Mahalanobis Plan had two distinct components: (i) import substitution in capital and intermediate goods, mostly under public sector (what Jawaharlal Nehru termed as ‘temples of modern India’); and (ii) promotion of traditional labour-intensive methods of producing consumer goods. The former objective also restricted the role of foreign capital and enterprise—perhaps partly being a political and economic necessity, tacitly supported by domestic business groups (Thakurdas 1944). From quite early, mainstream economists criticized such a strategy for ignoring the potential gains from international trade and foreign capital, undermining market forces in favour of administrative means of coordinating economic decisions.7, 8 Yet, impressive economic performance during the first 15 years (1951–65) of planned industrialization was grudgingly applauded: For instance, W.W. Rostow (1960) claimed that it was historically unprecedented planned take-off into sustained growth outside the Soviet-style economies. Yet, by the early 1970s, as the industrial growth decelerated after the mid-1960s, a critique levelled against planning, and in favour of dismantling of the output and investment controls (dubbed as the ‘permit-license raj’), to reap the advantages of openness to foreign trade and investment (as the successful East-Asian economies apparently had accomplished).9 As the rich literature of the early decades (known as the ‘stagnation debate’) has been well surveyed—for instance, by Ahluwalia (1985, 1991), Nagaraj (1990), Nayyar (1994), and Shetty (1978)—this chapter focuses on the more recent period, though a few references to the earlier literature have been made. The liberal reforms since 1991, as is widely known, have sought to undermine India’s industrialization strategy.10 The chapter highlights a
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few hypotheses that have a contemporary resonance; for instance, the alleged rigidity of the labour market, and the reportedly peculiar size structure of factories that is said to be inimical to economic efficiency. Anticipating the conclusions, we would contend that while some policy interventions in industry could have induced avoidable friction causing delays and corruption, they probably fail to account for the sustained underperformance after the reforms. Therefore, it is suggested that the economy’s structural constraints, such as modest agriculture performance, shortage of infrastructure, and inadequate institutional credit, are the probable reasons for the observed underperformance. The chapter covers of four sections. The first section summarizes the main features of industrial growth during the period 1950 to 2010 and during its sub-periods, demarcated by statistical trends and policy regimes. The second section describes (i) small-scale sector’s contribution to the industrial growth, (ii) competition in industrial markets and economic concentration (with implications for efficiency, as well as for the political economy), and (iii) public sector performance (a strategic yet contentious aspect of the industrialization strategy). The third section critically assesses the principal strands of analyses and evidence to answer the question of industrial under performance. Any such attempt will necessarily be selective, hopefully representing the prominent ones. The last section summarizes the main findings of the chapter. The copious literature on the total factor productivity growth is excluded from chapter, as many competent surveys are available; for instance Balakrishnan et al. (2000), Goldar (2004), and K.L. Krishna (1987).11 Foreign capital’s role in industry and regional industrialization (barring passing references) are also ignored, as they are dealt with in other contributions in the volume. INDUSTRIAL GROWTH In 1950–1, manufacturing (industry) contributed about 9 per cent (15 per cent) of India’s domestic output, employing 9 per cent (10.7 per cent) of workforce.12 Six decades later, in 2009-10, the share went up by 7 percentage points (13 percentage points), employing an additional 3 percentage points (11.3 percentage points) of the workforce. In 1961, 55 per cent of manufacturing employment was in household-based industries, that is, enterprises mostly using household labour (Table 9.2). By 2001, less than a third of industrial workers were employed in household enterprises. About a fifth (20 per cent)
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Table 9.2
Distribution of Employment in Manufacturing Sector
Sector
1961
1981
1991
2001
Total manufacturing Household manufacturing Non-household manufacturing Factory manufacturing Non-factory non-household manufacturing Employment (’000)
100 55.1 44.9 17.4 27.5 17,523
100 32.2 67.8 29.0 38.7 26,592
100 23.7 76.3 28.5 47.8 28,681
100 31.5 68.5 20.7 47.6 38,642
Source: Decennial census and Annual Survey of Industries, various issues.
of manufacturing workforce was employed in the factory sector producing two-thirds of the value added, the rest was engaged in the non-household non-factory sector (that is, small workshops and enterprises), mostly located in urban areas.13 In other words, while the majority of industrial output originated from the factory sector, the bulk of the employment remained in the informal (or unorganized) sector, outside household enterprises. India’s share of world exports was 2.5 per cent in 1950, mostly contributed by cotton and jute textiles; the share went down to as low a figure as 0.4 per cent in 1980—a result of the domestic-orientated industrialization strategy—before recovering to about 1.5 per cent of world trade in 2010, with manufacturing accounting for about 60 per cent of the exports (Figure 9.1). 2.5 2 1.5 1 0.5
Figure 9.1 India’s Share in World Exports: 1948 to 2010 Source: https://www.wto.org/. Note: C. Veeramani provided Figure 9.1 and Table 9.8, which is gratefully acknowledged.
2008
2004
2000
1996
1992
1988
1984
1980
1976
1972
1968
1964
1960
1956
1952
1948
0
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Output Trends Industry grew at 7 per cent annually during the first 15 years (1951– 65) (which coincided with the first three Five Year Plans), followed by an almost equally long period (1966–80) of relative stagnation, or deceleration, when the annual growth rate dropped to 4.8 per cent per year, mostly on account of a slowdown in capital and intermediate goods industry (Ahluwalia 1985). The 1980s, however, witnessed a broad-based turnaround, taking the annual growth rate to 7.4 per cent—variously attributed to (i) import liberalization, (ii) output and investment de-licensing, (iii) recovery of public investment, and (iv) improved public sector output performance (Ahluwalia 1991; Nagaraj 1990). The revival was, however, widely criticized for being import intensive, catering to luxury consumption. Many others attributed the industrial turnaround (along with the faster GDP growth) to an unsustainable public spending, contributing to macroeconomic crisis by the turn of the decade (Joshi and Little 1994; Nayyar 1996; Panagariya 2008). In 1991, perhaps emboldened by the initial success of the 1980s, policymakers went ahead with the so-called structural reforms—a euphemism for rolling back of the state intervention in the economy— Table 9.3 Year 1951 1961 1971 1981 1983 1987–8 1993–4 1999–2000 2004–5 2009–10
Sectoral Distribution of Labour Force: 1951 to 2009–10(per cent) Agriculture
Industry
Manufacturing
Services
72.4 71.9 72.0 68.8 68.0 64.2 63.3 59.8 56.4 51.8
10.6 11.7 11.5 13.5 15.2 17.8 16.7 18.0 18.8 21.9
9.0 10.6 9.5 11.3 11.5 12.2 11.6 11.1 12.2 11.0
17.0 16.4 16.5 17.7 16.8 18.1 20.1 22.2 24.8 26.3
Source: Anant et al. (2006), Sundaram (2007), Rangarajan et al. (2011). Note: Data for the years 1951 to 1981 is from the decennial population census, and the remaining years from NSS five-yearly sample surveys on employment and unemployment. The data over the census years as well as between the census and NSS estimates are not strictly comparable. However, they are adequate to show the broad pattern of change.
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together with an orthodox macroeconomic stabilization programme to overcome the balance of payments difficulties. That these reforms, sustained over two decades now, despite many positive achievements, have failed to speed up industrial output and export growth has been well documented by now (Nagaraj 2011). While a gradual transformation of the workforce from agriculture to industry is discernible— with the industry’s share in the workforce going up from 13.5 per cent in 1981 to 21.9 per cent 2009–10—the share of manufacturing has stagnated between 11 and 12 per cent of the workforce, with most of the incremental employment accruing to construction sector. Output Composition Much of the Industrial output in the early post-Independence years consisted of consumer goods such as food, beverages, and textiles, with a few notable exceptions such as production of modest quantities of steel, cement factories, and modern machine tools. The heavy industry strategy of the Second Five Year Plan helped diversify the output rapidly into chemicals, metals, machinery, and transport equipment (Table 9.4)—perhaps far more than most other economies with similar levels of development (as noted earlier). Use-based output classification, based on the weighting diagram of the index of industrial production (IIP), captures the compositional change well (Table 9.5). Between 1956 and 2004–5, share of consumer goods in the index has (expectedly) declined from close to one half to less than one third; share of basic goods rose from 22 per cent to 46 per cent. From being negligible, the share of capital goods went up to 15 per cent of the index in 1980, but declined thereafter quite sharply to 9 per cent in 2004–5—a telling reflection of an aborted industrialization strategy. During the same period in China, share of capital goods rose to 30 per cent of industrial output. The relative decline in capital goods is also evident from growing import penetration in the last two decades. The ratio of imports to domestic consumption rose in the 1990s, reversing the trends of the previous two decades (Bhat et al. 2007). Rising import intensity is brought out more sharply in capital goods sector, where the ratios of (i) imports to gross fixed capital formation and (ii) net import of capital goods to gross fixed capital formation have shot up in the last decade (Figure 9.2). Chaudhuri (2013) provides up-to-date trends
Industry Food Beverages Textiles Wood Paper Leather Chemicals Rubber, petroleum Non-metallic minerals Basic metals Metal products and machinery Electrical machinery Transport equipment Other manufacturing Repair services Repair services other than 39
151 + 152 + 153 + 154 155 + 16 171 + 172 + 173 + 181-18105 20 + 361 21 + 22 182 + 19 24 23 + 25 26 271 + 272 + 2731 + 2732 + 371 + 372 28 + 29 + 30 31 + 32 34 + 35 33 + 369 39 97
17.2 1.7 17.6 19.8 2.1 0.8 5.3 8.1 2.3 6.3 1.8 1.9 1.1 4.3 9.6
1960–1 10.2 4.0 12.9 16.4 3.9 2.0 7.0 3.7 3.8 9.6 5.6 4.6 2.9 5.0 4.4 4.0
1970–1
Composition of Manufacturing Value Added: 1960–1 to 2008–9 (Per cent)
NIC-98
Table 9.4
8.1 4.8 16.6 11.0 3.5 1.6 8.2 3.5 4.1 9.1 5.5 5.6 4.1 4.8 5.0 4.6
1980–1 9.7 5.5 13.5 12.2 3.3 2.2 4.1 2.8 4.3 2.6 9.5 3.2 3.9 1.7 12.3 7.9
1990–1 10.3 3.8 13.0 3.8 3.3 1.8 16.0 6.0 5.7 9.5 11.0 0.0 4.7 5.6 5.3
2000–1
10.4 3.0 25.4 6.1 3.2 2.8 5.1 2.4 7.5 4.6 11.8 0.0 3.6 3.9 10.1
2008–9
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Table 9.5 2004–5
Weighting Diagram of Index of Industrial Production (IIP): 1956 to
Industry
1956
1960
1970
1980
1993–4
2004–5
Basic goods Capital goods Intermediate goods Consumer goods Durables Non-durables Total
22.33 4.71 24.59 48.37 – – 100
25.11 11.76 25.88 37.25 5.68 31.57 100
32.28 15.25 20.95 31.52 3.41 28.11 100
33.23 14.95 21.33 30.46 3.81 26.65 100
35.5 9.3 26.5 28.7 5.4 23.3 100
45.7 8.8 15.7 29.8 8.5 21.4 100
Source: Information for 1956 to 1980 is from Sandesara (1992); for 1993–4 from the Economic Survey 2006-07 (Ministry of Finance 2007), and for 2004–5, the press note, ‘Quick Estimates of Industrial Production and use-based index for the month of July (Base 2004–5 = 100), 12 September 2011, CSO.
40 35
Per cent
30 25 20 15 10 5
2007
2005
2003
2001
1999
1997
1995
1993
1991
1989
1987
1985
1983
1981
1979
1977
1975
1973
1971
0
Year ending Import/GFCF in machinary
Net import/GFCF in machinary
Figure 9.2 Import Intensity of Capital Goods: 1971 to 2008 Source: (i) RBI Handbook of Statistics on the Indian Economy and (ii) National Accounts Statistics, various issues.
in industry-wise (direct) import to total consumption ratios, which show sharp rise in import penetration in the 2000s. The flip side of it, however, is the reduced the cost of capital goods, and a potential economy-wide improvement in productivity.
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Output by Type of Institution, Organization, and Ownership Unregistered manufacturing sector’s share in total manufacturing output, expectedly, declined from 46 per cent in 1960–1 to 32 per cent by 2008–9, with considerable variation across major (the twodigit National Industrial Classification) industry groups (Table 9.6). However, production of consumer goods has got diffused into the unregistered sector, reflecting perhaps the labour-intensive nature of these goods (Table 9.7). Correspondingly, the basic, capital, and intermediate goods are increasingly produced in the factory sector. While the registered (or factory) sector contributed an increasing share of output, its employment share declined from about 30 per cent of total manufacturing employment in the early 1960s, to about 20 per cent after three decades. These trends seem consistent with the historical experience during modern economic growth, for the simple reason that as markets get integrated with improvements in transport and communication, modern and cost-effective manufacturing methods replace traditional and household modes of Table 9.6 2008–9
Unregistered Sector’s Share in GDP in Manufacturing, 1960–1 and
NIC-98
Industry group
20–21 22 23–26 27 28 29 30 31 32 33 34 35 36 37 38 39 97 2-3
Food Beverages Textiles Wood Paper Leather Chemicals Rubber, petroleum Non-metallic minerals Basic metals Metal products Non-electrical machinery Electrical machinery Transport equipment Other manufacturing Repair services Repairs other than 39 GDP manufacturing
Source: National Accounts Statistics, various issues.
1960–1
2008–9
61.3 0.0 38.2 95.1 0.0 72.7 35.5 77.6 0.0 0.0 0.0 0.0 0.0 0.0 91.2
45.1 35.2 58.1 92.7 33.9 63.8 13.5 6.7 42.4 12.1 31.1
45.8
32.1
24.4 16.0 55.4
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Table 9.7 Industry Groups with Above Average Share in Unregistered Manufacturing 1960–1 Food Wood Leather Rubber Other manufacturing
2008–9 Food Beverages Textiles Wood Paper Leather Non-metallic minerals Other manufacturing
Source: National Accounts Statistics, various issues.
production (Anderson 1982). However, the declining share of factory manufacturing is perhaps quite at variance with the historical pattern. Moreover, one cannot be sure to what extent the above-mentioned changes represent natural evolution with the expansion of markets and technical change; and if, and what extent, it is the result of the policy of promoting production of consumer goods in traditional and cottage industries. By type of ownership, majority of factory output originates in private corporate sector, most of the output in the non-factory sector comes from proprietary and partnership firms. Clearly as a result of the policy, public sector’s share in industrial output rose from less than 10 per cent in 1960–1 to one third by 1991 or so, declining steeply thereafter due to the policy reversal (Figure 9.3). Foreign capital witnessed an opposite trend: a rising trend in share of foreign-owned firms in total manufacturing GDP as well as in private, non-financial, corporate sector (Figure 9.4).14 Export of Manufactured Goods Export to GDP ratio has increased steadily since the early 1970s; within it, manufacturing sector’s share went up until 2000 to about 80 per cent, declined thereafter to about 60 per cent by 2010.15 Composition of exports has moved away from labour-intensive to capital- and skillintensive goods, spilling over into services sector (Table 9.8). Yet, the exports have remained pro-cyclical, meaning, they have moved in consonance with the world trade (Sinha Roy 2001).
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40 35
Per cent
30 25 20 15 10 5
2006
2003
2000
1997
1994
1991
1988
1985
1982
1979
1976
1973
1970
1967
1964
1961
0
Year ending Industry
Manufacturing
Year ending Share in GDPmfg
Share in GVA in private corporate sector
Figure 9.4 Share of Foreign Firms in Manufacturing and Private Corporate Sectors Source: (i) National Accounts Statistics, various issues; (ii) CMIE’s Corporate sector data.
2005
2004
2003
2002
2001
2000
1999
1998
1997
1996
1995
1994
1993
1992
1991
20 18 16 14 12 10 8 6 4 2 0 1990
Per cent
Figure 9.3 Public Sector’s Share in Total Industrial Output, 1961 to 2008 Source: National Accounts Statistics, various issues.
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Table 9.8
Export Composition according to Factor Intensity
Type of Exports Agriculture Resources Labour intensive Capital intensive
1962 38.1 17.7 41.7 1.8
1972 29.3 15.3 48.6 6.5
1982 26.0 24.3 38.0 11.4
1992 15.9 7.9 60.5 14.1
2002 12.4 8.6 56.6 20.0
2009 7.7 18.8 42.8 26.2
Source: United Nations Commodity Trade Statistics Database. Note: The definition of different categories is as follows: Agriculture intensive = SITC 0 + 1 + 4; Resource intensive = SITC 2 + 3; Labour intensive = SITC 6 + 8; Capital intensive = SITC 5 + 7.
To sum up the section, from 1950 to 2010, the annual industrial growth rate is roughly one percentage point faster than that of GDP, with services overtaking manufacturing to become the leading sector since the early 1990s. Though the industrial growth turned around in the 1980s, after the prolonged relative stagnation, the marketoriented reforms since 1991 (contrary to the expectations) have failed to accelerate the growth rate, and the output composition failed to shift towards labour-intensive manufacturing. Unregistered sector’s share in total manufacturing output has declined; consumer goods production has got diffused into the unregistered sector, and its employment share has increased noticeably. However, with the decline in household manufacturing, non-factory and non-household manufacturing employment has expanded, at the expense of the other two segments. In terms of organization and ownership, private corporate sector accounts for the bulk of factory output; although public sector’s share went up until the market-oriented reforms reversed the trend, the opposite is the case with respect to foreign-owned firms’ share in industrial output. THE PATTERN OF INDUSTRIAL GROWTH As rapid growth with import substitution was the principal aim of industrialization in the early years of planning, distributional considerations were largely ignored. However, the issues came to the fore after the mid-1960s, even as the industrial growth decelerated. Primary among them were (i) the role of modern small-scale
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industries, ii) regional distribution of growth, and (iii) industrial competition and concentration of economic power. Though largely overlooked in recent years, these issues nevertheless have retained their gravity in public and policy discourse. In contrast, public sector got systematically undermined after the liberal reforms were initiated. This section reviews these three aspects of industrial policy. Small Industry Policy As noted earlier (in the introductory section), traditional goods such as handlooms, matches, bidis (traditional cigarettes), handicrafts, and Khadi were initially protected and promoted by fiscal concessions; and, restrictions were imposed on modern large-scale manufacturing of these goods (such as on composite mills). After the mid-1960s, as modern small enterprises acquired technical competence, these measures were extended to include over 800 such products for their exclusive manufacture in the small-scale sector—by prohibiting capacity expansion in large enterprises, known as the ‘reservation policy’. Ancillary development policy was mandated for public sector enterprises (PSEs) to promote dedicated small enterprises to manufacture simple components and sub-assemblies by providing them with technical and financial assistance.16 The small industry policy has remained a highly contested terrain, as it is widely perceived to encourage inefficient modes of production in the name of employment generation, diverting scarce resources from productive investment.17 However, it is arguable that considering the existence of large surplus labour, including household labour, whose opportunity cost is close to zero, promotion of the decentralized methods of production may not only encourage greater use of the abundant resource, but may also contribute to greater equity. Moreover, such a policy could also promote entrepreneurship, lack of which was said to be a reason for inadequate competition in industrial markets. In other words, it is a question of choosing the right technique of production, under private and social profitability considerations (see Kashyap [1988], Raj [1956b], and Subramanian and Kashyap [1975] for a review of the literature). While the policy may have helped protect a few traditional lines of manufacture, studies have demonstrated that small-scale industries (SSIs) are not just labour intensive but capital intensive as well,
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thus grossly wasteful. Moreover, growth of output and export of the reserved items were poorer than the small-scale sector in general.18 Hence, since the mid-1990s, the reforms have sought to whittle down the reservation policy. Moreover, indirect tax reforms, moving towards a unified value-added tax, have probably eroded the detailed and specific fiscal concessions accorded to small-scale manufacturing. Looking back over half a century, one can discern some bold changes on account of the small industry policy. For instance, cotton textile industry, once dominated by the composite textile mills (mostly located in Bombay [now Mumbai] and Ahmedabad) has got decimated, replaced by large-scale spinning mills in the factory sector, and power looms in the decentralized sector (located in cities like Bhiwandi, Surat, and Salem) (Goswami 1990). Large, dominant foreign enterprises like Western India Match Company (WIMCO) practically disappeared from making matchsticks, with the emergence of the decentralized match industry in and around Sivakasi in southern Tamil Nadu. Ironically, the policy intended to encourage handloom weaving, in fact, ended up benefiting the power looms the most, for a simple economic reason: By hiring labour at the wages similar to those in the handloom sector, but by using second-hand looms (with productivity close to that of the mill sector), the power loom industry practically secured the best of the both worlds, thus decimating the other two segments of textile-weaving industry. It is arguable that consumer goods industries would anyway have got diffused into the unorganized sector with the expansion of the markets, and spread of electricity, infrastructure, and access to credit. However, considering the scale of the observed changes, it seems hard to deny—for better or worse—the role of the policy in bring them about. What was the effect of the small industry policy on the structure of manufacturing industries? Satisfactory answer to the question is hard to get for lack of suitable data. There is a mismatch between the industrial statistics, which are mostly classified in terms of employment, while the promotional policies for SSIs are carried out in terms of capital investment limits.19 So, as the next best option, we examine the changing size distribution of registered factories (or plants) by employment size—a widely used measure of the scale of production. For historical reasons, India inherited a unique size distribution from the colonial times, wherein nearly 50 per cent of factory
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employment was concentrated in large-sized factories employing 1,000 workers or more, even as the majority of manufacturing workforce was employed in the household sector (as noted earlier). Thus, the employment structure displayed a bi-modal (or, ‘U’ shaped) distribution (Ishikawa 1962). In contrast, in most Asian economies with surplus labour, predominance of household and non-factory employment was understandably widespread (Ishikawa 1967). Over the last six decades, however, the average factory size—that is, the number of workers per factory—declined perceptibly: from 95 workers in 1960 to 60 workers in 2009, implying the faster growth of smaller sized factories (Figure 9.5). This is continuation of longterm trend noted earlier; and, it is true of two-digit industry groups as well.20 Since the summary measures often hide more than what they reveal, it is instructive to examine the distribution of factories by employment size. Figure 9.6 shows the distribution for three years namely, 1959, 1973–4 and 2007–8. In 1959, large factories employing over 1,000
Employees per factory
120 100 80 60 40 20
2008
2005
2002
1999
1996
1993
1990
1987
1984
1981
1978
1975
1972
1966
1969
1963
1960
0
Year ending 1959–60 to 1971–72
1973–74 to 2008–09
Figure 9.5 Average Factory Size in Factory Sector: 1960 to 2009 Source: Annual Survey of Industries, various issues. Note: Data for 1972–3 is not available, as the survey was not conducted during that year. Since the factory sector also includes electricity, gas, and water, and since power plants tends to be large sized, the average factory size reported here might be slightly overestimated, but unlikely to vitiate the long-term trend reported.
Employmeny share in per cent
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40 35 30 25 20 15 10 5 0 0 to 49
50 to 99
100 to 499
500 to 999
1000 to 4999
5000 and above
Employment size class 1959
1973–74
2007–08
Figure 9.6 Size Distribution of Registered Factories: 1959 to 2007–8 Source: Annual Survey of Industries, various issues.
workers, accounted for nearly 50 per cent of factory employment. Five decades later, in 2007–8, their share in total employment has declined to about a quarter of the employment. The size classes with less than 1,000 factories had gained employment share during this period, with most gains accruing to the size class of 100–499 workers. These trends, combined with the observations made in the previous section, can be summarized as follows that provide a complete picture of the changing production structure of manufacturing industries: 1. Household manufacturing declined in both output and employment shares. 2. Share of the factory sector in total manufacturing employment declined from about 30 per cent in the early 1960s to about 20 per cent in 2007–8, but there was a rise in the share in output, from 50 per cent to 66 per cent. 3. Share of employment in non-household and non-factory enterprises has been growing. In other words, while an increasing share of manufacturing output comes from the factory sector, a growing share of employment is outside the factory sector and outside the household enterprises.
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While the output share of non-factory (unregistered) sector has fallen from one-half in 1950 to less than one-third in six decades, employment share has gone up from about twothirds to four-fifths. 4. Within the factory sector, employment growth in 100–499 size class went up significantly, and it declined in factories with greater than 1000 workers. These changes have serious implications for understanding the output performance, as will be discussed in the next section. Industrial Competition and Concentration Two distinct yet related concerns are discussed here, namely, (i) product- (or firm-) level competition that affects firms’ conduct, and (ii) the dominance of large and diversified industrial houses (or conglomerates) that are said to wield enormous economic power to retain oligopolistic market structures, potentially detrimental to social welfare.21 R.K. Hazari’s (1966) seminal work on the size and structure of business houses in India found that during the 1950s, the size of the big business houses had grown at a faster rate than the economy, leading to economic concentration. Industrial Licensing Policy Investigation Committee (ILPIC), under Hazari’s chairmanship, had demonstrated how big business houses managed to secure a large share of industrial licensing, negating the very purpose of the investment regulation (Hazari 1986). The report also found that the incumbent firms often used licenses as an entry-deterring strategy to retain oligopolistic industrial structures. At the risk of some oversimplification, it could perhaps be said that two opposing policy conclusions were drawn from these findings: (i) to replace the physical licensing with financial controls through financial institutions (Hazari’s own conclusions), guided by economic viability considerations (subject to the plan priorities); (ii) to strengthen the physical licensing regime to prevent its misuse, and to curb the growth of monopoly houses by legal means. Policymakers drew the latter conclusion to legislate the Monopolies and Restrictive Trade Practices (MRTP) Act, 1969 to curb the power of large business houses.22 Various others measures were also initiated to promote
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entrepreneurship, joint ventures between state governments and private firms, and wider public ownership to prevent the abuse of the dominant position of the large business houses. Though widely applauded as a progressive legislation, economics of the anti-monopoly policy was far from unambiguous. Since the big business houses, as Hazari contended, were the principal entrepreneurs with proven technical and managerial capability, it was but natural that they would seize the opportunities thrown up by planned investment. Moreover, bureaucracy, concerned as it is with meeting the plan targets, would have legitimate reasons to grant licenses to entrepreneurs with proven track record, which would necessarily have worked to the advantage of the incumbents. The MRTP Act was thus criticized for throttling domestic entrepreneurship—a scarce intangible resource in a developing country. Further, for securing efficiency, what matters is not the economic power but the structure of industrial markets. Considerable administrative and academic writings have suggested that the MRTP Act retarded investments and domestic competition, resulting in throttling output growth in many industries—for example, scooters, trucks, fertilizers, cement, flat steel products, etc.—that only strengthened the incumbent firms to earn monopoly profits (Marathe 1989). While the critics held the MRTP Act responsible for erecting entry barriers, those in favour of the act attributed poor implementation to the power of big business in thwarting the law, or bureaucratic apathy for the progressive ideals (Paranjape 1985). Interestingly enough, despite much criticism, there is evidence to suggest an increase in industrial competition by the 1980s (Desai 1985; Sandesara 1992). Whether the outcome was the result of the anti-monopoly policy (together with other policy measures), or simply the effect of the expansion of market size, it remains debatable. As the MRTP Act was widely discredited, it got abolished in 1991 as part of the structural reforms, replacing it (about a decade later) with a competition commission to promote market competition—and not to curb growth of business enterprises. The latter, if deemed necessary, was to be addressed by investigating into anti-competitive behaviour of firms. Though industrial output growth has failed to improve (on a trend basis) after the reforms, with low tariffs and free entry for foreign firms in most industries, industrial markets have become undeniably more competitive, though perhaps difficult to capture it
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empirically for lack of fine-grained information on market structures and the extent of import competition.23 However, during the boom of 2003–8, a growing perception is discernible on how the liberal economic policy has favoured big business, neglecting small enterprises, farmers and the poor in general (Bhaduri and Patkar 2009). Private corporate sector’s rising share in savings and investment in the domestic output, overtaking public sector, is seen as emblematic of the growing power of the big business. Political scientist, Atul Kohli (2006), has contended that the liberal reforms, instead of being pro-market (as intended), have, in fact, been pro-business, with potentially grave political and economic consequences. Admittedly, the power of big business has many dimensions: economic, political, legal, and, above all, national governance. The recent surge in reportedly large-scale corruption in granting licenses (for natural resources) involving some prominent business houses has only buttressed the popular perception. While these arguments may have considerable weight, is there economic evidence to support them? As a first approximation, we have asked the following questions: Has the size of the private corporate sector grown faster than the economy after the reforms? Has the economic strength of big industrial houses grown much faster than the growth in industrial or corporate sector output? According to the official estimates, the size of the private corporate sector has nearly doubled in 12 years, close to 20 per cent of GDP in 2004–5. However, the estimate could be faulted for methodological reasons. A more reasonable estimate would put the increase to about 2 percentage points of GDP (Nagaraj 2009). While the corporate sector growth may be broadly in line with the output growth, conceivably, large firms within it may have grown much faster, acquiring economic heft. To examine if such is indeed the case, we have estimated three indicators using CMIE’s corporate sector database, which are: 1. share of the top 100 private non-financial companies in the private corporate sector, in terms of gross value added (GVA), net worth, and assets, for the years 1990, 1995, 2000, 2005, and 2009 (Figures 9.7 to 9.9); 2. share of the top 50 business houses, as defined by CMIE, in GVA of non-financial private corporate sector (Figure 9.10); and
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60 49.5
48.8 50
41.4
43.4
1995
2000
53.0
Per cent
40 30 20 10 0 1990
2005
2009
Year Top100 Share
Figure 9.7 Share of top 100 firms in GVA Source: Prowess, CMIE corporate sector database. Note: The denominator is GVA in non-financial private corporate sector.
70
60.7
60 44.7
Per cent
50
49.4
53.1
54.6
2005
2009
40 30 20 10 0 1990
1995
2000 Year share
Figure 9.8 Share of Top 100 Firms in Net Worth Source: Prowess, CMIE corporate sector database. Note: The denominator is total net worth of non-financial private corporate sector;
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60 49.6
48.0
50 40.9
42.6
43.2
1995
2000
2005
Per cent
40 30 20 10 0 1990
2009
Year share
Figure 9.9 Share of Top 100 Firms in Assets Source: Prowess, CMIE corporate sector database. Note: The denominator is the total asset of non-financial private corporate sector.
50
46.7 42.3
45
41.1
41.0
2000
2005
40
38.8
Per cent
35 30 25 20 15 10 5 0 1990
1995
2009
Year share
Figure 9.10 Share of Top 50 Business Houses in GVA of the Private Corporate Sector Source: Prowess, CMIE corporate sector database. Note: The denominator is the total GVA in non-financial private corporate sector;
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3. mobility of companies among the top 100: to find out if the ranking of the companies remain stable or not, during two decades since 1990. This measure would indicate how entrenched are the position of the large corporate firms. The results of the preliminary inquiry are as follows: 1. There was no evidence of an increase in the share of the top 100 firms in private corporate sector during the last two decades, for all the variables considered. 2. There was no evidence of an increase in the share of the top 50 business houses in GVA in private corporate sector; on the contrary, a modest decline is discernible in their combined share. 3. Out of the top 100 companies in 1990, only 37 managed to remain in the list of the top 100 firms in 2009. Though there is no comparator to draw a definitive conclusion, it seems reasonable to infer that there exists a fair amount of mobility of firms, suggesting considerable churning among the top private corporate companies. If the foregoing evidence is correct, then it suggests that despite the rapid growth of the private corporate sector, economic concentration or the power of large firms or the top business houses has, probably, not gone up after the reforms. While the share of the private corporate sector in the domestic output has increased marginally, competition within the corporate sector has also increased. Further considerable mobility of firms within the top 100 firms seems discernible, indicating greater contestability in industrial markets. These results seem consistent with the findings of Mody et al. (2010), but contradict Alferno and Chari’s (2009) findings, suggesting a potentially fruitful problem for further research. Public Sector Public sector, it is known, was the preferred organizational means to implement the heavy industry strategy. The choice, contrary to the currently popular discourse, was perhaps not so much guided by ideology as much by pragmatic considerations of socializing the risks of large investments in technologically challenging industries,
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when the base of the domestic entrepreneurship was weak and narrow.24 That the Bombay Plan formulated in 1944 (Thakurdas 1944)—a blueprint for economic development drawn up by nationalist businessmen—had, in fact, made a similar recommendation is a testimony to the view that the expansion of public sector was not perceived as a threat to private enterprise, but as a means to facilitate national development, where most of the economy was privately owned and managed. Such a policy was also perhaps intended to limit the scope for foreign private capital and enterprise in the domestic economy. The vision of the development strategy, as conceptualized in the Mahalanobis model, was translated into the Industrial Policy Resolution of 1956 that demarcated the areas of economic activity reserved for public sector, and branches of industry where public sector was expected to play an increasing role.25 Following it, until the mid-1980s or so, public sector’s share in industry—in gross fixed capital formation (or fixed investment) and industrial output—went up steadily, diversifying mostly into infrastructure and capital goods. But how did the public sector really perform? Broadly, three streams of analyses are discernible in the literature: (i) macroeconomic analysis, examining whether public investment crowded-in (or crowded-out) private investment, and hence its influence on aggregate output; (ii) evaluative studies in development perspective investigating into efforts of the public sector projects in acquiring technology, and import substitution (for instance, see Chaudhuri [1984]; Khanna [1984]); and (iii) financial analyses of enterprises (or of projects) that often ignored the economic rationale for their inception, or the social costs incurred in meeting non-financial objectives, or (hard-toquantify) social benefits of such investments. Macroeconomic evidence, as V.L. Pandit’s (1995) review suggested, is the dominance of crowding-in effect of public investment. However, PSEs’ financial analyses have pointed to growing losses, translating into additional fiscal burden (see Jalan [1991], for instance). Though intuitively appealing, such analyses have often failed to locate the reasons for the inefficiencies in the context of the macroeconomic performance. Such criticisms often tend to be naïve, or simplistic, since the genetic public sector enterprises are rarely, if ever, are driven by private profitability considerations; they are most often motivated by macroeconomic or developmental concerns.
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In the context of the growing criticism of public sector’s financial burden on the government budget, Nagaraj (1991) sought to demonstrate that the aggregate public sector output and financial performance had turned around since the mid-1970s. The finding held true even after excluding the financial sector (which generated monopoly profits on account of administered interest rates), and enterprises in the petroleum sector (whose pricing often had an element of taxation). Further, Nagaraj (1993), seeking to quantify the macroeconomic effects of PSEs, demonstrated that the growing deficits of the general government was not on account of the financial losses of the enterprises, but due to the growth in government’s own revenue and expenditure. Moreover, contrary to the widely held view, the share of fiscal deficit of the combined general government contributed by the PSEs had, in fact, declined during the 1980s.26 So, if the fiscal deficit was indeed a problem, it was more so on account of government’s expenditure and tax policies, not due to the financial losses the enterprises. Further, since theoretically, economic performance depended on the market structure and not on ownership, policy reform should focus on improving the market structure in which the PSEs’ operated to secure improved outcome, rather than seek to change their ownership. Regardless, the market-oriented reforms since the early 1990s (as evident from Industrial Policy Statement of 1991) have decisively undermined public sector’s economic role, by rolling back the boundaries of the state, and diluting public ownership (euphemistically called disinvestments)—subject to the political constraint. As shown earlier (Figure 9.3), the change in the policy regime has led to quite a sharp fall in public sector’s share in GDP in industry and manufacturing in the last decade. Yet, public sector financial performance—excluding the financial sector, and petroleum sector enterprises—has, in fact, recorded a sustained improvement (Nagaraj 2009). The study sought to contend that the real causes for the financial losses are under-pricing in electricity, passenger road transport, and railways, despite a steady improvement in their productivity measured in physical terms. Thus, the study concluded, that the real reasons for the continued financial losses lay with poor pricing policies and government’s inability (or unwillingness) to collect the uses chargers. To sum up, we examined the trends and explanation with respect to three major aspects of industrial policy—small-scale industry,
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industrial competition and economic concentration, and public sector performance. The size structure of factories and plants has changed significantly over the last 6 decades: decline in the share of household manufacturing, a fall in the share of factory employment; and, within the factory sector, a steady decline in the average factory size. To what extent the diffusion of industries into non-household and non-factory sector could be attributed to the small-scale industry policy or to the extent it represents the cost of factory regulation, is difficult to ascertain; whether the observed changes in the size structure imply improvement in efficiency (given India’s factor endowment) is perhaps even harder to sure of. Despite the increased competition in industrial markets with the reduced entry barriers and liberal imports, lately concerns are expressed that the power of big business has grown disproportionately, with serious political and economic repercussions. Tentative evidence adduced does not bear out such a proposition, as the share of the top 100 firms or of the top 50 business houses in the non-financial private corporate sector has, in fact, declined since 1990. The pendulum of policy discourse on public sector has swung from one extreme to the other, impervious to the available evidence. Macroeconomic research largely supports the ‘crowding-in’ hypothesis. Disaggregation of fiscal deficit reveals that the contribution of PSEs to fiscal deficit is small and declining, so the PSEs are not the principle cause of the growing deficits. Careful research points to improved physical performance of PSEs over a long period, but it does not fully get translated into financial indicators due to under-pricing of user charges and their under-recovery from the users. Khanna (2015) provides considerable evidence to demonstrate improved financial performance at industry level. The foregoing discussion demonstrates that there is a lot more to India’s industrialization experience that could have considerable bearing on its prospects in the coming years. UNDERSTANDING THE TRENDS AND PATTERNS Though making rapid strides in the first 15 years of planned industrialization (1950–65) when industry’s share in GDP rose steeply, the momentum got lost for a variety of supply- and demand-side factors. Despite overcoming the food and foreign exchange constraints in the
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medium term, the industrial ‘stagnation’ persisted for nearly one and a half decades, before turning around in the 1980s. Arguably the much-derided ‘permit license raj’—could have throttled private initiative. But, considering the more recent experience, one may nevertheless ask: why did industrial growth not accelerate, after the reforms made a bonfire of the controls? Why did exports of labour-intensive goods, consistent with India’s factor endowment, not speed up with the giving up of anti-export bias in the industrial policy?27 More specifically, closer to the present, why did India failed to take advantage of the end of most favoured nation (MFN) agreement in 2005 to improve its world market share in textiles, despite having enormous resources—from the ‘fibre to fashion’ (Ramaswamy and Gereffi 2000)? Surely, exports have performed better in 2000s, but it is mostly on account of capital-intensive goods and skill-intensive services (information technology [IT] and information technology– enabled services [ITeS]) that effectively leveraged the investments made during the earlier policy regime. In other words, as mentioned in the introductory section, why has Indian industry remained under-performing or under-sized? This question, it may be said, is now central to understanding India’s industrialization experience. It is widely believed that market-oriented reforms reduced policyinduced restrictions on supply, resulting in faster growth (Panagariya 2008). Accordingly, India needs to undertake more reforms to reap the full benefits of a liberal economy; for instance, abolition of SSI policy, dismantling of labour laws to reduce the protection for organized labour, lowering of the restrictions on inflow of foreign capital, acceptance of the convertibility of the capital account, and so on. Kocchar et al. (2006) have contended that India’s advantage seem to lay in skill- and capital-intensive industries and services as it has historically invested heavily during the planning era, and because skilled workers and services sector employees are outside the purview of labour laws. Private sector apparently finds it uneconomical to set up large-sized factories, as in China, since the rigid labour laws prevent hiring and firing of workers to quickly respond to market demand. Panagariya’s (2008) advocacy, however, needs to be taken with caution, as his prescription is open to question in both theory and comparative experience. Abundant evidence exists to show that India’s growth acceleration began in the early 1980s, well before the structural reforms
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were initiated. Further, as noted above, despite the reforms, neither the industrial growth rate has accelerated (as anticipated in the literature), nor has there been a re-orientation of industrial production in favour of labour-intensive goods and their exports. Therefore, what is the most appropriate balance between state and market to promote industrialization perhaps remains theoretically ambiguous. Each economy (and the society that embeds it) has to discover a suitable balance in accordance with its history, politics, and institutions. Hence, analytically, the template of structural reforms (with suitable ‘detailed engineering’ for fine tuning) may not be the most appropriate prescription for securing longterm growth, as many believe. The Missing Middle Seeking to explain the modest industrial growth after the reforms, Anne Krueger (2009) contended that industrialization in India is constrained by (i) low agriculture productivity, (ii) labour market rigidity, and (iii) the dominance of large-sized factories, whereas the optimal size structure of factories seems to be in the middle-sized plants (the ‘missing middle’ hypothesis), endorsing a proposition originally put forth by I.M.D. Little (1987). These arguments need to be seriously weighed in to assess the observed trends and patterns, as they are shared widely by the policymakers. Considering the wide currency of the hypothesis, it would be useful to locate it in its context. Little (1987) attributed India’s bi-modal structure of factory size (discussed in the previous section) of the early years to public sector–led import-substitution policy on the one hand, and protection and reservation policy for traditional manufacturing on the other. He contended that most efficient scale of manufacture was a medium-sized factory, employing 200–300 workers. Ishikawa’s (1962) pioneering analysis mentioned earlier, however, had showed that the dominance of large-sized factories was not an evidence of economies of scale in production, but it represented the peculiar institutional features of India, namely, the legacy of managing agency system, lack of inter-firm relationships (due to inadequate development of markets and infrastructure), and lack of institutional credit for newer entrepreneurs. Do the criticisms of Little and of Krueger really hold now? Figure 9.6 displays the size distribution of factories for the years 1959,
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1973–4 and 2007–8, drawn from the Annual Survey of Industries. They unambiguous show a significant shift of the factory size from ‘very large’ (1,000 or more workers per factory) to middle sized (100 to 500 workers per factory)—precisely in the direction which Little and Kruger considered desirable. So, the fact of the matter is: the middle is not missing any more. As discussed in the previous section, this finding is part of the long-term decline in average factory size; and more significantly, decline in the share of manufacturing employment in factory sector, and diffusion of it into non-factory and non-household enterprises. In other words, if anything, the size structure of factories has moved precisely into the size classes that these critics considered efficient. In the unorganized sector, share of household manufacturing employment has declined and moved into non-household sector, as has happened historically during modern economic development (Anderson 1984). What the evidence suggests is that the historical anomaly has got corrected. Does it, however, represent more efficient size distribution of factories remains is a moot point (discussed further in the chapter). Labour Laws Organized sector (mainly the public, factory, and private corporate sectors) constitutes about 8 per cent of the workforce, using about 40 per cent of renewable capital stock—faces institutionally determined wages and working conditions on account of the labour laws protecting them. The organized labour market, therefore, is said to be rigid, as the law, in principle, does not permit retrench workers to adjust labour demand to suit market conditions without the state’s permission. State apparently denies such permissions to protect employment. That such a view is widely shared among policymakers in recent times is evident from repeated reference to it in the Economic Surveys.28 But the evidence supporting the hypothesis is mixed, at best.29 Considering the contentious nature of the evidence, perhaps the litmus test would be to find out if there have been any significant job losses recently. The fact of the matter is that between 1997–8 and 2003– 4, when over a million, or one in six, workers in the organized manufacturing lost their jobs—without a murmur of protect. More recently, in 2008–9, in the wake of the global financial crisis, export-oriented
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industries in the organized sector, such as textiles and gems and jewellery, lost half a million jobs without provoking any industrial unrest (see the report by Ministry of Labour & Employment [MoLE] 2009). How could so many jobs be lost if the workers enjoyed protection by the job security law? The evidence suggests that one should examine the fine print of exemptions and loopholes in the law that renders the bark of the labour laws far louder than its bite. Thus, we are inclined to infer that the labour laws—like much of the legal super structure in a developing economy with its deepening democratic ethos—tend to be aspirational, with a wide chasm between the rhetoric and reality. Yet, one has to contend with Raghuram Rajan’s (2006) question: Why does India not have large-sized factories to produce consumer goods as in China? Yes, India should have these if there are proven technical economies of scale in production. But do these industries really warrant such large-scale production? Probably not. Historically, light manufactured goods are mostly produced in small enterprises that are located in close proximity to the industrial districts (or clusters) with dense inter-firm relationships with considerable specialization among them, often facilitated by social capital of caste and ethnicity, and large trading organizations providing credit, technical assistance, and valuable information about the market demand. If one agrees that in consumer goods industries, or for that matter in much of assembly operations, there are little inherent economies of scale in production, then, the size structure in such industries is probably a matter of the institutional setting that embeds such industries, and not a function of the labour laws. A Discussion on Export Performance Though the Mahalanobis strategy was predicated on ‘elasticity pessimism’,30 research on India’s export performance in the early postIndependence period demonstrated that domestic supply constraints were probably more binding than the external demand constraints in augmenting exportable surplus (Nayyar 1976; Singh 1964). However, export pessimism remained a deeply held belief, until the recent boom in services exports that seriously dented it. The recent experience, however, also changed the perception that liberal imports of intermediate inputs and greater foreign direct investment (FDI) would facilitate exports.
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It was also widely held that the industrial policy’s import-substitution bias precluded efficiency and hence there was lack of international competitiveness (see Ahluwalia [1991] for instance). Such a view is supported by the evidence on poor growth in total factor productivity. But there is equally compelling, yet less appreciated, evidence that pointed to industrial competence by a different measure. Export of technology in machinery-building industry and ability of Indian firms to compete in securing project exports suggested that the country had acquired international competitiveness in industries with mature technologies (Lall 1982). Similarly, the World Bank’s assessment of India’s capability in capital goods showed considerable competitiveness (World Bank 1984). Yet, after two decades of liberal reforms, export growth remains much below the reported potential, especially of labour-intensive goods. Why did the removal of import-substitution bias not augment the efficiency of labour-intensive products? Has it got to do with the domestic production structure, or something else? We have two recent studies that apparently shed some light on this question, as discussed in the following paragraphs. Domestic Resource Cost in Indian Manufacturing Domestic resource cost (DRC) is a widely used measure of assessing an economy’s international competitiveness. In a detailed analysis at the Standard International Trade Classification (SITC at 4-digit level of disaggregation) for about 800 products, from 1962 to 2007, Felipe et al. (2013) find that the competitiveness of Indian industry has gone up from 71 products in 1962 to 254 products in 2007, majority of which belong to chemicals, metals, and machinery manufacturing. A similar diversification is also evident in India’s export basket. Interestingly, the study finds that though the export competitiveness measured by DRCs has expanded substantially, actual exports are mostly restricted to skill- and technology-intensive products, implying that India has the potential to export a much wider range of products than what is realized. In contrast, China with a similar DRCs, exports a much wider range of goods, mostly labour-intensive goods. If the above findings are of any value, it seems to suggest that while India has acquired export competitiveness in a wide range of industries, its actual performance is restricted to a narrow range of goods.
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This is probably because India lacks the complementary domestic factors such as adequate infrastructure, credit, and a conducive macroeconomic environment. A comparison of cost structure with that of China India’s modest exports compared to China’s is widely attributed to latter’s embracing of liberal reforms and its flexible labour markets that give China a significant cost advantage. This raises the question: how much is the Indian manufacturing costlier vis-à-vis Chinese manufacturing? A study by the Bureau of Labour Statistics, the US Department of Commerce seems to offer some clue. Figure 9.11 displays hourly compensation per worker in China and India in manufacturing between 2002 and 2006. The cost in China and India are in the range of 2 to 3 per cent of the same in the US, though the ratio for India is marginally higher than China’s. But the difference could be entirely statistical (as BLS has noted) since the estimates for India excludes unregistered manufacturing (with lower labour costs) that accounts a substantial share of manufactured exports. The evidence seems to have considerable significance as shows that at the production stage, India’s cost structure is not very dissimilar from China’s.
Costs in China as percent of costs in U.S.
3.5
3.5
3.0
3.0
2.5
2.5
2.0
2.0
1.5
1.5
1.0
1.0
0.5
0.5
0.0
Percent of U.S. cost
Percent of U.S. cost
Costs in India as percent of costs in U.S.
0.0 2002
2003
2004
2005
Figure 9.11 Mean Hourly Compensation in the Manufacturing Sector as a Per Cent of Corresponding Costs in the United States: 2002 to 2005. Source: Sincavenge et al. (2009: 18).
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Yet the export outcomes are enormously different. This is probably on account of other factors like exchange rate, cost of credit, infrastructure bottlenecks and so on. If the foregoing evidence, though limited to two pieces of recent research, is credible, then India’s export potential is considerably more than the actual performance, and India’s cost structure—at the level of production—is broadly in line with China’s. Hence, these are the reasons why modest export outcomes seem to lay in the post-production stage like transportation and storage, more generally, the macroeconomic factors. To recapitulate, the foregoing discussion in this section brings out the limitation of the mainstream economic arguments as to why India’s industrial sector has remained under sized, in spite of a gradual reduction of the much-criticized dirigisme. It would therefore suggest that the policy-induced restrictions on supply were probably avoidable irritants causing delays and corruption, but they were perhaps not the binding constraints on growth, as it is often made out to be. If such an inference is reasonable, then the constraints on growth are probably structural (a large, less-productive agriculture and inadequate infrastructure) and from the demand side. This, despite the economy, in the long run, is constrained by meagre capital per head (Chakravarty 1979). An Alternative View It seems useful to reiterate that a poor country is short of capital and yields low output per person; economic development is synonymous with increasing investment rate, as a proportion of the domestic output, to augment aggregate supply. Yet, plausibly under specific conditions, like inequality and a large, less-productive traditional agriculture, that lack of aggregate demand could also plays a role in constraining the speed of industrialization. Admittedly, domestic demand (or home market) constraint could be illusionary, if exports could be stepped up; though not all countries can hope to do it simultaneously as world is a closed economy. Moreover, if the productivity of the export sector—be it commercial crops or labour-intensive goods—grows disproportionately faster than productivity of food crops, then the gains of the productivity will mostly accrue to get passed on to importing country, rather than
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to workers in the exporting nation. This proposition is well demonstrated in the open economy version of Arthur Lewis’s dual economy model.31 Respectable long-term average annual agriculture growth rate of over 2.5 per cent in India, marginally faster than population growth rate, has helped India overcome food shortages. Yet food prices, relative to non-food prices, have not declined as has happened historically, which may be on account of low land productivity. Despite much-acknowledged improvements, it remains low compared to world average, or those attained in many other countries, including China (Nagaraj 2011). If one admits that long-term supply response of food grains depends on non-price factors, such as access to technology, irrigation, and credit and land relations, then there are deep structural factors that need to be addressed (Vaidyanathan 2010). Main proponents of this view are Bhaduri (1993); Nagaraj (2003); and Rakshit (2009). Krueger (2009) has also endorsed the view that poor agriculture growth is now constraining industrial performance in India. However, the one constraint on industrial growth on which there is considerable professional unanimity, it is the inadequacy of infrastructure. Investment in infrastucture is widely acknowledged to release supply constraints as well as create demand for domestic capital and intermediate goods industries. While the mainstream economists have put a greater emphasis on those physical structures that deal with foreign trade (ports, airports, and electricity); structuralists or heterodox scholarship has drawn attention to the creation of irrigation potential, rural roads, and basic needs of the poor that would release the potential of the agrarian economy. But, when it comes to financing infrastructure investment, there is now a great divergence in views. While the structuralists in general point to crowding-in effect of the public investment, mainstream economists believe in crowding-out hypothesis and fiscal burden of such investments, and hence, would favour private and foreign investment. After the reforms, however, as restoring budgetary balance assumed primacy in macroeconomic management, private sector (including foreign capital) is increasingly encouraged to finance and manage infrastructure. The underlying princliple being that the traditional concerns of uniqueness of infrastructure can be addressed by
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(i) financial mechanism to offer incentives to private capital, and (ii) impose regulation to address concerns of externality and equity. Access to credit at low interest rate for agriculture and rural economy, and long-term credit for capital-intensive manufacturing and infrastructure are widely accepted supply-side constraints. Though bank credit has grown phenomenally, its share accruing to agriculture and public infrastructure has shrunk as a result of the financial sector reforms (Nagaraj 2003). Moreover, as the definition of ‘priority sector lending’—a measure of directed lending initiated since bank nationalization in 1969—was diluted after the reforms to include urban housing and gold loans, resulting in dwindling of credit for productive agriculture, in favour of conspicuous consumption (Ramakumar and Chavan 2007). Hence, the reforms are widely held to be responsible for the deceleration in crop production and less-than-satisfactory performance of small enterprises (including labour-intensive exports) (Nagaraj 2003, 2011). *** This chapter, which originated as a review paper, examined the longterm trends in industrial output growth, patterns of development with respect to small-scale sector, industrial competition and economic concentration, and public sector performance. After presenting a (mostly) factual account of the trends and patterns of growth, the chapter looked into the reasons for the industrial underperformance, by examining some of the widely held propositions. Finding many of them to be inadequate to account for the underperformance the chapter suggested an alternative explanation. In 2009, India was world’s tenth largest manufacturing nation. Industrial growth during the six decades from 1950 to 2010 was 5.5 per cent per year—nearly one percentage point faster than the GDP growth rate. Domestic output growth accelerated during the last two decades but industry failed to improve its share in GDP. While the production structure got diversified into basic, intermediate, and consumer durable goods industries, the share of consumer non-durables declined. The share of capital goods—the defining feature of India’s industrialization strategy—rose until the mid-1980s, but declined thereafter under the impact of the liberal reforms. Import penetration, therefore, has increased since the 1990s, reversing the trend until
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then. In 2010, capital goods imports accounted for nearly half of the economy’s fixed investment in machinery and equipment. Exports to GDP ratio that had declined to 0.4 per cent of world trade in 1980, turned around to 1.5 per cent in recent years. While the range of goods produced in the unregistered sector (as a proxy for small-scale industries) now spans the entire manufacturing, its share in total manufacturing value added has, expectedly, declined from more than half in 1951 to less than one-third in 2010. However, unregistered sector’s share in manufacturing employment has gone up. While the decline in household manufacturing is in line with the historical experience, decline in the share of factory employment and the growth in non-household enterprises seems exceptional—perhaps barring Japan. With the spread of electricity, skills, infrastructure, credit, and promotional policies many labour-intensive activities have got diffused into the unregistered sector whose output probably gets underestimated. Trade and industrial reforms have increased effective competition in industrial markets, though it is not possible to get suitable evidence to verify the hypothesis, given that industries tend to have large number of small firms (long-tailed distribution). By most accounts, the quality of products and the variety of goods produced domestically have improved perceptibly after the reforms. Though non-financial private corporate sector’s share in GDP has gone up, the dominance of big firms and business houses has—by a variety of measures—has declined somewhat since the early 1990s. Moreover, a churning in the ranking of firms among the top 100 firms is discernible, suggesting a greater contestability in the corporate sector. Public sector—the strategic instrument of the industrial policy— has witnessed its fortunes swing with the policy regimes. Its share in manufacturing output went up until 1990 or so, but declined sharply thereafter. Surprisingly, public sector lost out in spite of a perceptible improvement in its financial performance by a hardening of the budgetary constraint, thus reducing the burden on the budget. While disinvestments in PSEs have been widespread, outright privatizations (with a change in managerial control) have been, as yet, just a few. A mirror image of fortunes of public sector is found in foreign-owned enterprises, which have witnessed an upswing with the liberal import of capital and technology.
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India’s record of industrial growth, largely domestic oriented and contributed by domestic enterprise and technology, is respectable by comparative historical yardstick. Unlike much of Latin America, the Indian industry has managed to avoid ‘deindustrialization’, modernize its production structure and is gradually spreading its operations overseas. Yet, while the Indian industry’s share in domestic output has stagnated, it has remained under-sized (relative to countries with similar levels if income), or it is under-performing relative to its potential. Why? Such a question implicitly compares India with much of East Asia or more specifically with China, which has surged ahead with export-oriented manufacturing. The question assumes significance since the industry and trade policy reforms were, in fact, intended to emulate the success of the Asian economies by following the market-friendly policies. Simplistic yet popular explanation that completing the reforms agenda holds the key to improved performance does not seem particularly enlightening, without examining as to why the reform undertaken so far have failed to accelerate the industrial growth rate on a sustained basis, or specifying where the reforms should theoretically conclude (and for what reasons). The chapter critically examined a few prominent hypotheses for the under-performance; for instance, the rigidity of the labour market, peculiar size structure of factories that is said to be inimical to efficient use of resources, and so on. Finding the inability of the widely held propositions to offer a satisfactory explanation, the chapter then contends that the reason for the modest growth perhaps lies in the economy’s structural features, such as poor agriculture performance, infrastructure, and lack of adequate credit for agriculture after the reforms. While the export performance has been modest, confined to a limited range of goods, India’s export competitiveness—as measured by DRC—has expanded significantly in recent times, and is comparable to that of China. Moreover, India’s manufacturing costs, as a ratio of the cost of manufacturing in the US is roughly comparable to that of China. This implies that India is not particularly lagging behind China in terms of the level of production. But the record of exports is modest. Why? Probably, because of other factors such as the exchange rate policy, quality of infrastructure, or access to credit and its cost are more serious considerations.
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Undisputedly, inadequate supply infrastructure is adversely affecting industrial growth. Yet, there is no unanimity on how to step up such investment. Citing fiscal imbalance and reportedly poor state capacity, mainstream economists and policymakers seem committed to promote private participation. Given the uncertainties of international capital markets, heterodoxy would favour revival of public infrastructure investment, contending that infrastructure deficit is probably a far greater threat to growth than adhering to fiscal orthodoxy, so long as the public debt is domestically financed and held. The turnaround in public sector’s financial performance demonstrated in this study would suggest revising the pre-conceived notions, and would perhaps call for designing suitable incentives for public sector managers to secure the desired results. NOTES 1. All growth rates reported in the chapter are at constant prices obtained by computing log-linear trend growth rates, unless otherwise mentioned. 2. K.N. Raj (1956a) and Dharma Kumar (1998) have shown that industrial development in the two countries was roughly at similar levels; if anything, India had an edge. 3. Delong and Summers (1991) offers evidence supporting the Mahalanobis strategy. In a cross-country regression analysis, for the period 1960–85, they find countries with a higher investment–GDP ratio in machinery and equipment have witnessed faster growth. 4. To understand how a country’s size influences its policy choices, see Perkins and Syrquin (1989). Reviewing India’s Third Five Year Plan (1961–6), I.M.D. Little, one of bitter critics of India’s industrialization strategy in the later years, in fact, endorsed the emphasis on industry. As per Little (1960: 106): The most common criticism of Indian Planning is that it has been and will be, too much oriented towards heavy industry. It is true that agriculture production failed to rise fast enough in the Second Plan period. But it is being wise after the event to say that more attention should be paid to it. Moreover, it does not follow from the relative failure of output that there should have been more direct investment in it. Probably, the surest way to have increased output more would have been to have had more heavy industry in the shape of more fertilizer plants..
5. To quote Bruton (1989: 1605): The import substitution rationale is also distinct from the traditional infant industry argument for the protection of a particular activity. The argument rests on the assumption that the activity can be identified, which, if given more initial period of protection, will later become able to compete in an unprotected market. In the case of import substitution one
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might speak of infant economy that needs protection while it develops those characteristics it must have to produce rising welfare. (emphasis added).
6. As agriculture had performed pretty well during the First Five Year Plan (1951–6), the planners were perhaps optimistic about meeting the food requirements arising out of heavy investment in industry on account of impending land reforms, and supply of credit through the credit cooperatives; which is why, agriculture was considered as the ‘bargain sector’. 7. Significantly, India was perhaps the pioneer democratic nation formulating the development plans. Ragnar Nurkse (1962: 240), while reviewing the competing Indian plan models for the Second Five Year Plan, came to the conclusion: ‘To secure a perfect balance in any comprehensive development programme is impossible. What matters most is India is progressing – and that she is progressing in an atmosphere which permits unhampered public debate among her experts’. 8. Many a commentator, especially from the advanced countries, alluded to the Soviet influence on early planning exercises. Yet, quite unlike the neo-classical critics of the industrialization strategy, Arthur Lewis (1954), in a less-known and popular contribution, had in fact endorsed the effort at building steel capacity as it would help India export income elastic steel-using goods, and, in turn, to import food grains to feed the growing population. Recollecting the events before the Second Five Year Plan, I.G. Patel, in the introduction to the volume of his selected papers (Patel 1986: 4), said: It was Professor Arthur Lewis who had first planted, during one his visits to India, the thought that it was not contrary to comparative advantage for India to aim at a sizable steel industry. Professor P.C. Mahalanobis borrowed from Soviet Union the idea that a growing proportion of investment as a ratio of national income requires (at least in a closed economy) that the proportion of investment in investment goods industry should also grow.
9. See Bhagwati and Desai (1974). This was part of an international research programme under the leadership of I.M.D. Little to critically examine all major countries that followed the import substituting industrialization, for the Organisation for Economic Co-operation and Development (OECD), Paris. See Little et al. (1970). 10. See the Industrial Policy statement (1991) that formed the part of the statement on structural adjustment programme. 11. Computing total factor productivity (TFP) growth has now become a standard practice in mainstream economics. But its underlying analytical premise and the statistical methods are seriously questioned in the heterodox economic literature. For a detailed critique, see Felipe and Fisher (2003). 12. Industry consists of mining, manufacturing, electricity, gas and water, and construction. Unless otherwise stated, all economic variables are at constant prices. 13. Factory sector consists mostly of all establishments in manufacturing, electricity, and gas and water, employing either 10 workers and above using electricity, or 20 workers and above without using electricity. The Factories Act forms the cornerstone of all labour legislations in India.
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14. The share of foreign owned firms in domestic output reported above could be an underestimate as a growing number of such firms come in as private limited companies or as un-incorporate businesses, whose audited balance sheets are not easily available. 15. For a detailed account of the policies and performance of the external trade since the Independence, see Pursell et al. (2007). 16. For a detailed analysis of working of the ancillary development policy, see Nagaraj (1989). 17. For the earliest critique of the policy of protecting the small industry, see Dhar and Lydall (1962), Mazumdar (1991), and Sandesara (1968),. 18. The Report of the Expert Committee on Small Enterprises (Chaired by Abid Hussain) was a scathing indictment of the reservation policy, which resulted in gradual de-reservation in the 1990s. See also Mohan (2002) for a detailed critique of the small industry policy. 19. Official SSI data—mainly based on the information submitted for the registration to secure official assistance—is restricted to the registered units, leaving out a large cross-section of enterprises that do not get (or want to get) officially registered. Further, when the investment limit (or the cut-off ) to qualify as a SSI unit gets revised upward (which happened periodically), the running units also get registered to qualified for the official assistance; thus, swelling the numbers. For the same reasons, official censuses of registered SSI units (conducted periodically) are not comparable, as they do not represent the universe of enterprises following the same definition. 20. Ramanatham (1958) provided evidence on the decline in average factory size during the colonial period; Nagaraj (1985) for the latter period. But there was very little explanation for the observed sized distribution; perhaps the earliest and perceptive contribution was by Ishikawa (1962). 21. The earliest effort to grapple with this issue was the Mahalanobis committee in 1964. It said, ‘…the working of the planned economy has contributed to the growth of big companies in Indian industry. The growth of the private sector in industry and especially of the big companies has been facilitated by the financial assistance rendered by public institutions like the Industrial Finance Corporation, the National Industrial Development Corporation, etc.’ (As quoted in Hazari [1986]). 22. For a critical review of the act as to how it failed to curb the monopolies, see Paranjape (1985). 23. Ramaswamy (2006) is probably the most recent study on this issue, taking a different view. Mehta (2007) offers a useful set of papers on competition and regulation in India. 24. Leroy Jones and Edward Mason (1982), comparing the size and structure of public sector as a share of domestic output, found that India and South Korea (the Republic of Korea) were very similar, despite their very different political orientations. This demonstrates that growth and structure of public sector in developing countries is largely a function of development imperatives rather than ideology, as widely thought to be. To quote them, ‘As an illustration, India and Korea generate
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virtually identical shares of GDP in public enterprise sector… Major differences in ideology, history and political factors seem to us to play only a minor role in explaining overall publicization propensities, leaving the major role to be played by economic propensities’ (Jones and Mason 1982: 43–4). 25. Industrial policy was followed more in breach than in its letter or true spirit. As Gunnar Myrdal (1968: 842–5) has observed: What in fact happened in India over the last decade and half, it is evident that public and private enterprise have not remained to the categories prescribed by industrial policy resolutions… In sum, the question whether to develop large-scale industry by investment in the public or private sector has been resolved more by ad hoc practical considerations than by ideological commitment to expansion of public sector. Given the initial decision in favour of large investment in heavy industry, public sector will continue to expand since few private entrepreneurs will enter heavy industry. When as an exception, private investors have been forthcoming even in this sector, they have ordinarily been allowed to go ahead. (emphasis added)
26. A few studies have compared TFP growth in public and private manufacturing sectors at varying levels of disaggregation and for different time periods. Dholakia (1978) and Anita Kumari (1993) show public sector’s TFP growth to be better than private sector’s growth. 27. As I.G. Patel (1986) rightly reminded, this was a period of ‘license-permitsubsidy raj’, since domestic industry received subsidized long-term loans from development finance institutions, infrastructure from public sector, and various tax exemptions to promote capital formation. To quote Patel (1986: 173), ‘… the so-called licence-permit Raj should better be characterized as the license-permitsubsidy Raj. The addition is important: it necessitates both frowns and favours from free enterprise. The fact that the prevailing theories of development have sanctioned not only controls but subsidies as well is not generally emphasized’. 28. As per the Ministry of Finance (2006: 209): Various studies indicate that Indian labour laws are highly protective of labour, and labour markets are relatively inflexible. These laws apply only to the organized sector. Consequently, these laws have restricted labour mobility, have led to capital-intensive methods in the organized sector and adversely affected the sector’s long-run demand for labour. Labour being a subject in the concurrent list, State-level labour regulations are also an important determinant of industrial performance. Evidence suggests that States, which have enacted more pro-worker regulations, have lost out on industrial production in general.
29. This hypothesis is one of the keenly contested issues in recent times. For careful surveys of arguments and evidence on the labour market rigidity hypothesis, see Anant et al. (2006); Bhattacharjea (2009); and Kannan and Ravindran (2009). 30. Where exports are not elastic with respect to growth in world trade and income. 31. To quote Lewis (1978: 244) So long as the bulk of tropical people are food farmers with relatively low productivity, tropical products are available to the rest of the world on an essentially low-wage basis,
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except in the few cases where tropics can exercise an effective natural monopoly… . Now we must recognize the opening up of the markets of the industrial countries to import light manufactures from tropics is essentially of the same kind; it is an additional opportunity to sell low-wage labour. These opportunities are not to be despised. …they do offer the tropics a somewhat higher standard of living than would be available if they merely ceased to participate in international trade. The choice is not between trading or not trading. It is between trading on the basis of a constant low productivity, and undergoing one’s own industrial and agrarian revolution.
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