Industrialisation Hai? (1)

You hear a lot about liberalization, India Shining, etc. This is at best a simplified and overly ideological (Americanized) version of the story of how India is changing, and is probably more reflective of the ideological predilections of the Indian elite class--which includes the so-called "middle class" that is, at best, around 20% of the population and probably much closer to 8 to 10 million people among over 1 billion.

Since the conversation about the broad topic of Indian industrialization and its history has come up in the comments thread for another post, I'm going to use blogger's prerogative and boost it to the main page since it's an important and current issue. Please feel free to offer in-depth critiques and simple questions, because this series of posts will be in-depth and I'm too caught up in jargon a this point to remember that not everyone has spent too much time reading debates about class structure in India in the 1960s.

To lay my cards out on the table, the trajectory of Indian development as I have been taught it is as follows:

1. minimal indigenous business sector prior to independence--> broad-based multiclass nationalist movement that prioritizes political sovereignty first (see Francine Frankel, Political Economy of India for details; Partha Chatterjee on the planning period for the dynamic of "accumulation" vs. "legitimacy" for the new government)

2. --> state capitalism/minimal social democracy (however you want to describe the planning period--the more important point is that it was moderate or minimal reform of the social structure, and geared towards a vision of industrialization) (see Partha Chatterjee and Sudipta Kaviraj on the 'passive revolution' vs. Michal Kalecki, K.N. Raj and others on the 'Intermediate Regime')

3. support and perhaps building of certain segments of an indigenous capitalist sector (did you think the steel plants were for self-sustaining Gandhian villages? :)) and a higher rate of growth than under the colonial period (maybe 5-6% GDP from @1951 until @1965 and then 2% or so until @1980--forgive me if the numbers are slightly off, but it's about right, I think). The real numbers we need, though, I don't have at my finger tips -- the growth of capital from 1947 to 1980.

This period descends into what is largely described as a period of state paralysis by authors like Bardhan (read this if you don't read anything else) and many others due to conflicts among the ruling classes--the bureaucracy, the capitalists, the rural elite--that disallow any one of them to control the state. Other authors describe the composition of the ruling classes differently, but it's ultimately the notion of a roadblock that's most important, probably.

4. at the same time, the Indian capitalist sector is strong enough that it could take over the state starting @1980 under Indira Gandhi's and Rajiv Gandhi's Congress and eventually everyone from CPI(M) to BJP. At this point there's another economic structural break (i.e. growth achieves higher rates). See Atul Kohli (pdf) on the role of class politics in determining economic policy, the role of pro-business policies in facilitating communalism.

5. liberalization policies--which are distinct from pro-business policies and are probably an ideological manifestation of pro-rich policies / world trends (the same way "planning" and state-led development were reflective of global trends). Although there were previous attempts as early as 1966, there's a building trend from post-emergency Indira Gandhi through Rajiv Gandhi (the great hero of the Indian elite) through the 1991 reforms, which you could call a political structural break away from the previous regime towards ever-increasing liberalization (though it's distinctly modified to allow Indian policymakers to retain some autonomy--it's not the kind of liberalization that's been imposed on smaller countries with much less international economic and political clout).

Next post covers some of the major debates in which this particular interpretation is embedded.

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Comments

Manvantara, I'd like you to

Manvantara,

I'd like you to step back a moment and tell me which other countries in the developing world have active programmes in new drug discovery research. It's phenomenally expensive, it takes a hugely long time, and the end-goals are uncertain. Even big pharma have hardly any products in the pipeline right now. So the fact that several India pharma companies are in the process of testing original molecules is a testament to enormous growth and development, none of which would've been possible if MNCs still had 70% market share, as was the case before product patent withdrawal. The backward integration to APIs is part of the story, which has led to tremendous export advantages and thus more revenue. In this, I'm just reporting what the heads of several top 10 pharma companies have said.

In terms of pharma industry integration, quite a few of the pharma companies here are involved in Contract Research and Manufacturing Systems (CRAMS), I was just passing Glenmark's facility yesterday, out by Vashi. Cynics say that this is just big pharma doing clinical trials on the cheap. I'm not sure what I think about this yet, but again wouldn't have happened if R&D capacities hadn't started to be generated.

I don't know if you know this about the auto industry, but the OEMs have never produced most of the car themselves -- there has been an active auto component industry in India since before there were cars made in India, because of the peculiar circumstances of the after-market (Indian roads, need for spare parts). It's been a very long time since any parts of indigenous vehicles were imported. The real indigenisation efforts have been in design, where again, licensing spurred domestic R&D and innovations. The thing about Maruti Suzukis or the Hero Hondas, let alone the VWs and the Hyundais, is that the technology all comes from abroad and doesn't get dispersed, and there's no stopping any of the MNCs from starting to source from abroad... South East Asia, Africa, etc. TELCO, M&M, etc have more at stake in producing in India, having vendors be from India, having Tier III suppliers from here... and so on down. The fact that there is this much MNC investment in the Mumbai-Pune belt is first and foremost because of the indigenous manufacturers setting up here, making their own vehicles.

And again, if you think only about passenger cars, you're ignoring the vast majority of the market in India.

On Bajaj, of course there's going to be generational friction, especially in that industry.

Look, it's not like I want licensing to come back, or that it was the healthiest thing for investment, esp after the 1970s. But the whole 'get the government out of the market' rhetoric is too easy for the complexities of India's industrial history, and changes in the international economy.

What do you mean by “Indian

What do you mean by “Indian Capital”. For instance does Sarath Babu the IIM-A whizkid son of a single mom idli-seller who is now running a food service operation qualify as a part of Indian Capital?

Definitional questions are really important in this issue, actually. I don't have a clear definition of capital here, which was a mistake on my part, but something along the lines of enterprises or assets that are intended to generate income through control of the production process. So yes, I would include the person you're talking about as a capitalist, though it's more complicated than I've laid out because India is a postcolonial country (e.g. there is obviously 'capital' in a broader sense in the informal sector).

Unfortunately in India, and the now thankfully dead communist/socialist economies, the orivate corporate sector was characterised as almost a malcontent, and its role was sought to be severely curtailed. Rather than rewards there was only the prospect of punishment or its absence. Before Indu’s 2nd administration in 1979 relaxed industrial licensing, companies were penalised for exceeding their licensed capacity! Even as late as 1985 when Rajiv Gandhi published his much anticipated “computer policy” the maximum licensed capacity for a computer manufacturing firm was increased from a ridiculously low Rs.2 crore/year to something like 20! And that was around the time several IT professionals, even ones who had come up in hardware decided there was no future in it and had already moved into software, bypassing controls!

Well this is a familiar story :) If the private sector was so thoroughly "curtailed" in India why were both its absolute and relative shares of gross fixed capital so high from 1950 to 1980? And why did both increase from 1965 on rather than decrease? If liberalization policies were initially and substantially responsible for its growth, how did it increase around 9-13% per year through the 1980s? Moreover, why have you not taken account of the direct and indirect subsidies that were given to business in the form of state investment in infrastructure and capital intensive industries, protection from foreign competition, etc.?

More to the point though--why emphasize private (or public) ownership of any particular thing, rather than looking at what the effects are? The problem with state policy through 1980 the way I have heard it described is not that the private sector was hemmed in too much but that, in fact, the private sector was not pushed enough in economically productive directions--as opposed to the way that Kohli describes South Korea, where capital was subordinated to state policy that was developmental in nature. And there are countless explanations for why this is the case (of which ineffective policy is probably one of several factors--but so is social/political structure of the state/society, the political breakdown of the 1960s/70s, the series of bad luck factors of the 1960s, political needs in a process of state-building, etc.). But I'm open to hearing a strong argument for any of them, since I have to take exams on this in a few weeks :)

Kawaa, Suspending product

Kawaa,

Suspending product patents - a good thing, no great thing - helped us build a competitive world class formulation industry, but did little to build our capacity to develop new molecules. The earliest re-investment forays were in bulk drugs and intermediates. And at one time, not long ago, Dr.Reddy was very seriously considering backward integration fazed by the high costs of basic molecule research. Molecule work is very very hard and the international pharma industry is dependent on an inefficient do-everything-yourself-model. But over the last two decades there have been too many developments in the life sciences for the pharma companies to keep pace with. It is is simply not possible for even a giant to span the entire spectrum of life sciences. GM and Ford stopped making or developing everything themselves 50 years ago. The pharma industry is getting used to it only now.

Interesting you should talk about Bajaj. Rajiv had to fire his father to take the company out of scooters and had to begin from scratch on motorcycles. Telco today thanks to the liberalised regime can put together a supply web and license what it can't make like any other auto maker in the world. There is a difference of course in licensing a CKD operation against licensing select sub-systems.

If you're looking for that

If you're looking for that theory, look no further than comparative political economy in my discipline. Polanyi is the classic here, in terms of how states create markets through historically situated struggles over commodification (all I've heard about migrant labour in the last two months really brings to mind the Great Transformation). And if you want stuff that's more contemporary: Kathleen Thelen, Wolfgang Streeck, Hall and Soskice, Zysman... a good book to start with is Steve Vogel's 'Freer Markets, More Rules'.

Manvantara, So fighting

Manvantara,

So fighting examples by examples, eh? 'I'll take your Indian Drugs and raise you Cipla...'. I really hate the moniker social scientist, but I will defend at least one practice, that of trying to sort out what is the rule and what is the exception. And at this point, I don't think anyone knows which is which in this context.

And of course managerial skill plays a big role, as well as sheer dumb luck. That's how business works. But I'm not sure any one of us is defending complete state ownership of private enterprise. And that has never been on the table, ever since the collaboration of industrialists with the conservative wing of the Congress Party (Bagchi has some essays on this, as does Chandavarkar).

But here is what I meant to say, and apologies for not laying this out clearly: the fact that we have strong indigenous manufacturing companies set to become major exporters and world leaders is in no small part because of import-substitution and allied policies. Here's what that looks like for pharma and auto.

1) the Indian indigenous pharma industry exists as it does today because Indira Gandhi's government suspended product patent protection in 1971, hoping to stimulate Indian industry to reverse engineer imported drugs and produce them domestically. It worked -- almost all the big players in the field are where they are because a) they established R&D capacity for the reverse engineering process, and b) they were able to achieve massive amounts of growth in both APIs and formulations at the expense of bigger, bulkier MNCs.

2) for autos, the licensing regime brought scope for foreign collaboration but also limited it, forcing companies to develop R&D capacity by themselves. The reason why Tata and Bajaj, to take two examples, established the levels of R&D geared for indigenous design exactly because licensing was long, laborious and uncertain. An official of one of these companies actually said that if licensing were easier in the 1980s, they would have entered into a technical collaboration / JV with an MNC and ended up almost exactly like Maruti Suzuki or Hero Honda -- successful, yes, but hardly innovative or pursuing growth up the value chain.

So that's what I meant. And honestly, I don't think you'll get many industrialists at this scale talking about the LPQ era as being the dark ages for India. At least that isn't the impression I get when I talk to them.

Was liberalisation necessary? Probably, given radical changes in the global economy (although I don't think the direction it's followed has been the best possible one to follow). But I choose to see it as a response to a changing world economy and broader context, rather than as a 'theology', as Stanley Kochanek calls it.

Doc, What do you mean by

Doc,

What do you mean by "Indian Capital". For instance does Sarath Babu the IIM-A whizkid son of a single mom idli-seller who is now running a food service operation qualify as a part of Indian Capital?

The whole point is that the successes of development are when incentives/coercion are provided by whatever means (state pressure, market pressure, a combination, whatever) that allow for upgrading to happen.

Unfortunately in India, and the now thankfully dead communist/socialist economies, the orivate corporate sector was characterised as almost a malcontent, and its role was sought to be severely curtailed. Rather than rewards there was only the prospect of punishment or its absence. Before Indu's 2nd administration in 1979 relaxed industrial licensing, companies were penalised for exceeding their licensed capacity! Even as late as 1985 when Rajiv Gandhi published his much anticipated "computer policy" the maximum licensed capacity for a computer manufacturing firm was increased from a ridiculously low Rs.2 crore/year to something like 20! And that was around the time several IT professionals, even ones who had come up in hardware decided there was no future in it and had already moved into software, bypassing controls!

But the firm/government dichotomy seems a bit overdone.

we don't have much to go by way of theory on this. In the case of firm studies almost all we have is anecdotal, as our "economists" don't understand firms - even the Gujarat school. The policy level theory is highly normative.

What would you attribute to

What would you attribute to managerial capabilities and what would you concede to government policy?

Well this is the key thing, right? The whole point is that the successes of development are when incentives/coercion are provided by whatever means (state pressure, market pressure, a combination, whatever) that allow for upgrading to happen. But the firm/government dichotomy seems a bit overdone. You probably need a combination of the two (and then that balanced with social considerations like massive poverty and unemployment, let alone basic political demands that are always made on any state).

Individual firms have little incentive to engage in long term R&D and technology and organizational/practice improvements that might ultimately be profitable but will cost a lot in terms of risk and low rewards (or negative rewards) in the short term. Which is where government policy (or somme other solution that I have yet to hear articulated) comes in. Government policy also provides protection in the form of subsidies, land, and other items that lower cost for firms (which happens even today).

So to argue that this current regime is a triumph of "liberalization" or "the market" i think is to misunderstand the nature of state-firm relations in india today--i think the government is actively colluding with indian business to promote the interests of Indian capital in a different way than it was prior to 1980, which is what initially resulted in the higher growth. Pro-business does not equal pro-market, and vice-versa. Liberalization policies, to the extent that they've been initiated, may be a part of this, but then they may also be sacrificing long term development goals as kawaa pointed out in the other thread. As my professor has remarked, why is there a huge outflow of FDI from India in addition to the inflow?

I also think that the effect of spillover from the expanding capitalist nucleus in East Asia / South East asia is underestimated in understanding South Asia's economics, but I don't know enough to know how much it's contributed.

And I submit — and this is in

And I submit — and this is in fact based on research — that the auto and pharma sectors in India wouldn’t exist as strong, independent indigenous producers without the policy guidelines of import substitution. Think about Ranbaxy or Tata Motors (or by the original name, the Tata Engineering and Locomotive Company) in this context.

That's easy to refute. Remember Premier Automobiles, Scooters (I) Ltd, Indian Drugs and Pharma Ltd? At the dusk of the many ill-thought out indigenisation constraints (phased manufacturing program etc.) some companies took off, others did not. What would you attribute to managerial capabilities and what would you concede to government policy?

The sad story of the Electronics Commission (long dead and forgotten now) is a sorry case of bureaucrats setting India back by decades. Ashok Parthasarathy (let's ignore his politics for the moment) decreed that electronics manufacturing is a small scale activity, some timee around the early 1970s and all but banned private investment in this sector, just as the chip industry was taking off worldwide, and massive investments became the norm. Koreans entered the business followed by the Malaysia, both agreeing to begin as assemblers. The former assimilated technology and built on it, the latter not so well, but still has built an industr of sorts.

Policies work well when, among other things, they reward and punish behavior as necessary.

As long as we're talking

As long as we're talking about the beginning of the planning period, remember that disciplinary planning was stillborn, according to Vivek Chibber, as industrialists got protection but were not locked into any agreements on the social aspects of their investment.

Best to remember that the environment counts. *Everyone* in the 1960s wanted protection from foreign competition, including the MNCs that were invited in to aid in technology transfer. As is obvious, industrialisation by import-substitution makes sense if you have a huge internal market. Everyone was for that, bar only agriculturalists and traders. And the LPQ regime, as much as we now spit out the name, was simply the policy manifestation of that philosophy.

And I submit -- and this is in fact based on research -- that the auto and pharma sectors in India wouldn't exist as strong, independent indigenous producers without the policy guidelines of import substitution. Think about Ranbaxy or Tata Motors (or by the original name, the Tata Engineering and Locomotive Company) in this context.

(I'm going to dip in and out of this discussion. It happens to be at the very heart of my impending dissertation and on which I've been collecting data for the last 18 months or so. As a result, I'm scared to death of talking about it).

fair enough :) I'm cutting

fair enough :) I'm cutting it into segments.

Doc, Bite sized pieces

Doc,

Bite sized pieces please?

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