A Bombay cum Kamaraj plan for the 21st century
In mid-92, Rahul Bajaj, Chairperson of Bajaj Auto, leading a CII team made an important statement in London. India could not, in the collective view of the team, continue indefinitely to depend on deposits by non-resident Indians and loans from international financial agencies to bridge the gap in its balance of payments. To become truly self-reliant, India had to learn to produce and export manufactured goods of high quality at low cost.
It would require 2-8 years to modernise Indian industry, during which imports of technology would be necessary. To pay for these imports, in turn, exports had to be promoted. The components critical to export expansion were, therefore, identified as the access to advanced technology and the soonest possible improvement in the international competitiveness of existing manufactured items.
The industrialists forum’s comments raised obvious questions: namely, why after 45 years of support through protection from competitive imports and the provision of government subsidised infrastructure, Indian firms needed another 2-8 years to become technologically competitive. The Indian effort to ‘learn to industrialise’ had evidently failed in developing the ability to ‘learn to innovate’. Knowing how to make something did not automatically imply the capability of producing better things.
One issue, however, was clear. The missing linkages between the knowledge of how-to-make and the knowledge of how-to-make better, could not be identified merely with the Indian firms’ earlier insulation from the competitive pressures exerted by international market forces. The ‘lessons from Japan’ (and from Korea) had provided evidence against the identification of the technological deficiencies of Indian industry wholly with market-related issues, such as economies of scale, or the absence of effective competition.
An analysis of the Japanese experience had highlighted both the historical nature of the problem of technological dynamism and the historically determined context in which the solution had evolved there. The problem lay in the nature of contemporary technology and the forms in which innovation was currently expressed. These factors determined the technical aspects of the public interventions appropriate for their encouragement and, quite clearly, in India the interventions had not been suitable.
However, the problem (and its solution) was composed of two more elements. The first was the way in which the industrialists themselves had evolved as a social group, principally through two forms of contestation. These were with competing industrialists (in the Indian context, this was primarily in relation to British capitalists) and, second, in relationship to the working class. In more familiar terms, the ‘making of the working class’ was also the process of the making of industrialists.
The second problem had also evolved historically. This related to the specific forms in which workers’ subordination to the power of industrial managers congealed in the course of the highly contested change from handicraft production to the factory form of organisation. This subordination was expressed both in the organisation of work and authority (management practices) within the firm, and in the structure of industrial relations legislation. The legislation, in particular, represented in a legal form the society-wide resolution of the contestation. These ingrained features, of firm-level management practices and industry-level industrial relations, set limits to the effect that market competition alone could have on building pressures for technologically productive change, unless the historically determined issues were simultaneously addressed.
The effect of 19th century working-class struggles in Britain in spurring technological advances in manufacturing is now a familiar story. Although the struggles were intended to improve working conditions in general and to shorten the working hours in particular, their effect was also to intensify competitive pressures on individual firms. Adoption of better machinery and management practices was the most creative, even if not the most widespread, response to these pressures.
In the Indian context, the diffusion of reforms in managerial practices, initiated in isolated cases as a result of pressures from below, were inevitably long drawn out processes. Although the Mumbai textile industry had completed the transition from managerial commission on the basis of production to a system of commission on profits by the 1920s, Ahmedabad textile interests continued with the old system for a much longer period. In the textile industry, the jobber’s role as a recruiting/disciplining agent remained largely unchanged, though subject to intense workers’ opposition during periods of heightened class struggle up to the late 1940s. The attempt to shorten the working day lasted from 1875 to 1948 when the Factories Act granted recognition of the eight-hour day. Finally, and most crucially, the Managing Agency, the organisational form in which most Indian business groups incubated, continued until as late as 1969.
This was the context in which the Indian business groups had evolved, and the attitudes towards technology was shaped by their experiences in the 100 years since the first cotton textile mill emerged in Mumbai. They were used to a situation where they bought capital goods from England or Japan, so for them technology implied the acquisition of capital goods. This was the knowledge required of how-to-make. They were also familiar with dealing with a working class movement, which was largely unorganised, and their objective here was to ensure that labour remained cheap. A philosophy of learning-to-make-better necessitated changes in their attitudes to their workers and to shop floor management.
These issues lay in the domain of political economy and could only be satisfactorily settled by initiatives taken at the political level of the state executive. Interestingly, all the three components of the official Indian perception of technology capability creation (the ‘National System of Innovation’) were the result of political initiatives. Most significant here, was the proposal for the public ownership of specific industries where technology acquisition was perceived to require the evaluation of a range of non-commercial considerations; as a result, manufacturing capabilities were established in industries identified as representing critical additions to the stock of technological knowledge.
The second prong of the strategy consisted of import substituting industrialisation, embodied in the phased manufacturing programme (PMP). This programme, which envisaged the systematic increase in the proportion of components manufactured indigenously, was an essential part of all foreign technological collaboration agreements in large-scale industries. Finally, there was encouragement of reverse engineering, of copying and improvisation, principally through support to the small-scale industrial sector.
In two matters of critical significance, however, the design of the Indian innovation system was silent: first, on the conditions of existence of industrial workers, even from the point of view of improving the ‘efficiency’ of the worker, and second, on the modernisation of the system of industrial relations in order to introduce true collective bargaining. Consequently, the innovation system, by ignoring the ‘labour’ process, denoted an exclusively ‘engineering’ conception of technology.
This was a surprising lapse. From the very beginnings of modern industry in India in the pre-Independence period, Indians were acutely aware of the obstacles facing the development of a machine building industry in the country. By default, Indian industry could advance technologically only through the route of improvements to the labour process, whether this followed a capitalist or a philanthropic imperative.
There was thus in India the possibility of an early recognition that both the labour process and the ‘engineering’ process were organic components of technology, and of this comprehension becoming generalised as the common sense of Indian industrialists. Had this taken place, Indian industry might have developed its own version of the link between the knowledge-to-make and the know-ledge-to-make-better, currently seen as the hallmarks of the Japanese National System of Innovation. All these issues were, in fact, recognised in the early stages of planned development in India. However, the app-roach to their individual resolution did not take adequate account of the necessity of integrating these solutions into the substantive technological features of the National System of Innovation.
For example, there is a telling comment made in the introductory paragraphs of the 1952 Committee on the Company Law: ‘A further limitation to the scope of our enquiry arises from the fact that, although we are concerned with the efficient working of the corporate form of organisation, the problems of industrial management and industrial relations which closely affect it are outside our scope.... Structural and procedural improvements can only create conditions; the efficiency and vigorous working of private enterprise must primarily depend upon the initiative and drive of the management, the organisational and directing ability of managers and the other supervisory staff who are in day-to-day charge of a business undertaking; the technical efficiency of all grades of labour and last but not the least on sound and harmonious relations between labour and management. No reform of company law can secure these desiderata and to that extent the contribution of a sound system of company law to the efficient and economic management of companies or the development of Indian trade and industry must be necessarily limited.’
In this context, it is significant that a year after Rahul Bajaj’s statement, in 1993 a senior manager of Bajaj Auto wrote an article in The Economic Times, that was unusual in the range of issues it raised, relevant to the argument presented here. It started with the general proposition that an enterprise required not only production technology, but also regular technological upgradation in order to continue to survive in business. In the normal economic environment, the knowledge base for technological upgradation was generated by those in managerial control of the firm. It was only in relatively closed economies such as those of India, China, Japan and Korea, that technology was brought from outside, disassociated from management control by the technology supplier. Otherwise, only in those cases where the technology supplier did not wish to incur the risks and costs of developing the market potential, was technology available for sale.
With the structural adjustment programme facilitating the entry of trans-national corporations into India, there had been a marked increase in their range of operations. Not only were they gaining management control in existing joint ventures, but were also insisting on majority holdings in all new ventures. While this was an inevitable part of the adjustment programme, there was a danger of Indian companies being hollowed out, or even failing to survive the competitive pressure. This would leave the entire development programme in the hands of trans-national corporations, who had no particular reason to make India a centre for technology creation.
From the point of view of trans-national corporations, it was financially sound to keep the technology creation centres in their own countries. It was also politically wise for them to keep the high skill and, therefore, high-income jobs in their home countries. Britain was a case where, due to the infirmities of its own industrial ventures, hollowing out had led to its conspicuous economic malaise. Industrial policy should be geared to making Indian industry competitive, and not blandly permit its extinction!
Technology based competition would affect different sectors of Indian industry in distinct ways. Firms in the process industries and those with medium levels of turnover would be relatively more secure. In fact, the latter might experience greater growth opportunities. It was in the large-scale product-manufacturing sector where the greatest upheavals could be expected.
In process sector industries such as steel, cement, power, metals, oil-refining and fertilisers, competition was largely on costs. Products were not clearly brandmarked and the processes did not undergo frequent, radical changes. Over time, of course, competition was still technology based, with the changes from wet to dry processes in cement, from batch to continuous casting in steel, and so on. Another feature of the process industries was that internationally there was a degree of disassociation between the technology suppliers and the commodity producers. Technology in these cases could be acquired by an Indian company without it coming into conflict with the technology supplier. However, here too there could be problems as the NOCIL-Shell controversy had made clear.
In the product sector the rate of obsolescence was much greater, and the basis for consumer acceptability had to be continually recreated. This was apparent from the decline of some trans-national companies, even though they were clearly capable of creating technology.
However, the key problem for Indian firms lay in the possibilities of accessing changes in technology without conceding managerial control. The process technology markets, as mentioned earlier, were relatively more open, though here too some caution about future trends was necessary. In product technology markets, Indian firms were unlikely to gain access. Even the small chance that might exist would depend on major changes in the management styles within most Indian companies. The dominant form here was what could be termed ‘proprietary’. The situation in family dominated managements, even where the families had marginal shareholdings, was a much more severe form of the proprietary style. Even the political system operated in this mould. While the proprietary form had some relevance in smaller firms, it was a soul-destroying milieu for large organisations. It had survived because the operation of the economy had not required the organisation to develop a technology creating capability.
To change, Indian capitalists would need to decide between owner, manager or entrepreneur modes of operation. Generally, Indian firms were owner-managed and family dominated. In the long run, if owners wanted their firms to be internationally competitive, they should operate in the owner mode, as large investors. Second, they should encourage the development of an organisational concept by which the culture and philosophy of the organisation, rather than centralised decisions from the apex, would determine employee behaviour. Third, they should align new product development to Indian customers’ requirements. Products, which were made with the Indian mass market in mind, could enjoy a significant cost advantage and provide the basis for a sustainable presence in the market. This would require an increase in R&D expenditure, but more critically, a very different work culture and management style.
Fourth, the groups would need to decide in which product areas they had a chance of becoming competitive, and consolidate their operations through divestment and amalgamation. Finally, the groups would need to review their role as sleeping partners in what nominally were strategic alliances. Unless the Indian company contributed to the core competence of the joint venture, there was little chance of it retaining any control. A strategy of outright technology purchase from medium scale technology suppliers, or permitting such companies a low equity share at best (without conceding managerial control), were the most favourable strategies for retaining control. This would still require better management, or the development of independent technology creation capacity within the firm. The article concluded with the observation that, two years after the adjustment programme began, there were few signs that Indian management had understood the demands of the new situation.
These observations reinforce the unease about the identification of the technological deficiencies of Indian industry wholly with market-related issues, such as economies of scale or the absence of effective competition. Such explanations leave no space for a discussion of the historical evolution of the internal organisation of firms. These historically determined features set limits to the effects that competition may have on building pressures towards the modifications of internal organisations.
Large firms, when confronted by an adverse market situation, do not necessarily respond with greater technological effort. In the Indian context, the response has been to (a) enter into a further technological/financial collaboration, (b) to diversify into a less competitive or technologically demanding area, (c) to amalgamate with sister companies in a path to diversification or, (d) to run down liquid assets until the firm is declared sick.
Studies commissioned by CSIR and the RBI have, in fact, confirmed this prognosis. R&D expenditure by firms has not increased substantially since 1991, nor is there any qualitative evidence of the technological base being strengthened. Following the steps taken in the course of the 1991 structural adjustment programme, significant areas of manufacturing operations have, in fact, been taken over by trans-national corporations, particularly in the consumer durables and non-durables sectors. Imports of capital goods and intermediates have substantially increased though there has been little direct foreign investment in this sector.
The response of Indian manufacturers has not, therefore, been on the lines postulated. Investment in R&D has not risen substantially, nor is there any felt experience that items made in India by Indian firms are now of better quality or cheaper.
However, the period from 1991 to 1998 was unprecedented in terms of the feuds in the stratosphere of the Indian corporate sector. Clearly major upheavals were underway, and it would seem an unexceptionable proposition that there were serious differences of opinion about the appropriate strategy to be followed, which underlay what appeared to be entertaining inter-personal quarrels. Although these differences over strategies are welcome signs of change in Indian business houses, it is clear that intra-sibling rivalries must not be allowed to drive a potentially sound manufacturing enterprise into a sick state, or towards a takeover by hostile financial interests whose intention is to foreclose the possibility of effective competition to imports.
The answer to this problem lies in a wry comment made in October 1991 by the late Aditya Birla. He had foreseen a situation in which, within three years, majority holding in the biggest 50 companies would be held by the government through the FIs and public sector mutual funds. The result would be that everyone like himself would be a government employee, he claimed.
According to a study by the Centre for Monitoring the Indian Economy, the shareholding pattern in 1290 selected companies was as follows: Government of India (with FIs) 32.0%; corporate Bodies 20.8%; foreign Bodies 11.2%; directors/relations 3.6%; biggest 50 shareholders 5.2%; others 27.2%.
It was, in fact, an encouraging organisational phenomenon of the entire 1991-1998 period that the Indian financial institutions played a discernible mediating role in determining the trajectory of events in the more dramatic cases. On balance, the logic of the FIs’ position seemed to be that of preserving entrepreneurial Indian property interests, even to the extent of supporting an operational management against a firm’s promoters, most vividly expressed in the ITC case up to its penultimate stages.
To conclude: almost all Indian firms of any importance belong to a business house. They are in Bhargava’s sense, ‘owner-managed and family-dominated.’ What is required is a strategy, and its forthright pursuit by FIs to persuade/cajole/threaten non performing managements into playing the role of large owners. Peugeot and BMW, among others, have shown that such roles can stimulate technological competitiveness of the highest order. In the interests of Indian industry as a whole, it is the development of a Kamaraj plan for business groups manifestly lacking managerial competence (as opposed to an exit policy for workers) that is the matter of utmost urgency.