Small business and India’s elitist political economy
Narendra Modi’s government came into power in 2014 with promises of replicating ‘the Gujarat model’ of rapid economic growth throughout India. The government has taken unparalleled steps in centralizing policy formulation and implementation, for the purposes of streamlining regulation and eliminating corruption. In reaction to the coronavirus crisis, they have promised an unprecedented fiscal stimulus in the form of collateral-free loans and the relaxation of labour regulations to support small and medium enterprises. But the promises of supporting small and medium enterprises have remained unfulfilled.
Even before the crisis, most enterprises in India’s economy have seen relatively few tangible benefits from the Modi government’s approach to the promotion of economic activity. The government has prioritized certain large-scale public and private enterprises to stimulate growth, while largely ignoring the many others that manufacture, trade and provide services – and crucially, employ much of the workforce – at smaller scale and thus considerable distance from the dizzying heights of the formal corporate sector. Further, the government’s anti-corruption efforts – including the dramatic demonetization in November 2016 – have done little to create a level playing field and have actually damaged small business.
Given the rhetorical importance of the Modi government on development and the Bharatiya Janata Party (BJP)’s traditional reliance on small entrepreneurs as a key vote-base, how might we understand the government’s relative failures in supporting small and medium enterprises, in the context of unprecedented shocks to domestic and international markets?
In this essay, I argue that the government’s current difficulties are nested within a long-term dissonance between elite bureaucratic and small entrepreneurial actors in the Indian economy, which has reached an apotheosis during the present government. Small businesses who truck and barter goods and services in the market are not at the centre of India’s complex and pervasive patronage politics, thus bureaucrats do not usually receive the same level of pressure from their elected masters to do them policy favours. To the extent that the Modi government has targeted corruption and centralized authority, this gives bureaucratic actors even more autonomy in managing, regulating and disciplining business without a sense of their concerns and interests.
Further, many of the small businesses in post-liberalization India arose when entrepreneurial actors from agrarian or trading backgrounds, many from the lower classes invested their savings in their own enterprises; this has heightened the social cleavage between the business community and elite bureaucrats, due to differences in experience and worldview. Thus the Modi government’s bureaucratic-authoritarian mindset does not easily fit with a fissiparous and distinct commercial society. As Stanley Kochanek and Peter Evans have separately noted, the Indian bureaucracy has maintained autonomy and domination over the bourgeoisie.1
Moreover, after liberalization, the state’s role in the economy has been focused on the elite processes of the creation and dispersion of economic rents: factors and assets that provide their owners with monopoly profits. Politicians and their capitalist allies – almost exclusively large-scale actors concentrated in particular sectors – have received huge benefits. Those with small and medium businesses are increasingly disadvantaged in competition for capital, regulatory favour and tangible support from governments at state and Union levels.
The Modi sarkar’s approach to transforming the governance of the economy has only further alienated small business by empowering elite technocrats. In doing so, the government has inadvertently focused resources and policy priorities on large-scale and rentier actors, to the exclusion of smaller and less well connected enterprises. The government’s theory of the case – that stronger rules and institutions are necessary and sufficient for growth – has thus ignored many of the specific, everyday challenges facing small entrepreneurs. This neglect has replicated the actual practices of the Gujarat model at the national scale, which favoured rentier industries and treated smaller entrepreneurs with neglect.
While small-scale enterprises have formulated long-term strategies for dealing with the lack of support or active disadvantage from the state, the current crisis has revealed the necessity of targeted and specific government intervention. The mechanisms of fiscal support are unlikely to be successful given the ways that fiscal stimulus is channeled through a financial system naturally hostile to small business. Further, benefits from the relaxation of labour laws – not an urgent priority even in the best of times – pales in comparison to the costs from enforced labour migration due to nationwide quarantine. In short, the Modi government has been seeing like the (neoliberal) state, rather than engaging with the complexities and unevenness of the domestic economy. In so doing, it is critically hampering its response to supporting small business in the time of coronavirus.
During the era of statism in the Indian economy, the government’s compact with the private sector – in which the former would provide the latter with industrial licenses and preferential access to credit and foreign exchange in return for compliance with production priorities – provided stability for large firms. Smaller businesses were supported in other ways, not least the Gandhian impulse to protect craft manufacturing from industrial production. By the 1980s, the institutions surrounding statism were declining, and were dismantled by neoliberal economic reform starting in 1991.
Economic liberalization in the 1990s and early 2000s provided significant growth. But it also led to rising and increasingly structural inequality, as marketizing reforms benefitted some sectors and areas of the country to the exclusion of others. The imperfect and uneven nature of the reforms has led Atul Kohli to characterize the post-liberalization political economy as ‘pro-business’ rather than ‘pro-market’.2
But while Kohli’s characterization is not incorrect, it is incomplete: India’s new political economy benefits only some businesses and not others. Particularly beyond the handful of well known technology-intensive multi-nationals, India’s neoliberal political economy has privileged certain economic enterprises, largely large-scale in nature, that have greater access to economic rents of various kinds. Gandhi and Walton have argued that India’s dollar billionaires are largely concentrated in rent-thick sectors.3
There are several different types of rent-thick endeavours that create winners in the economy. As the state has meaningfully less power over the direction of capital in the economy, neo-liberal policies have benefitted banks, insurance, real estate and financial services concerns, allowing short-term profit maximization over developmental priorities. Relatedly, the state’s opening up of areas of the economy, from utilities to telecommunications, has meant fortunes for the (often-politically connected) firms that secured licenses for these new activities. The extraction of minerals and the refining of oil especially represent phenomenally lucrative rent-thick activities that required close relationships with politicians and with bureaucrats. Rent-seeking and rent exchange, far from disappearing with greater market competition, has proliferated in rarefied sectors of the economy where rents are concentrated.
For those small to moderately large economic concerns that are located far away from those rents, however, liberalization has actually meant significant barriers to opportunity. While companies can now operate and expand without industrial licenses, they are substantially at the mercy of markets for capital and for energy that do not prioritize the activities of small-scale businesses; profits are higher and risks collectively lower when providing loans or gas or electricity to consumers. Labour markets are complex, but government underinvestments in education and skills training have meant that skilled workers across different industries are scarce and footloose.
More generally, the bureaucrats who have control and thus discretion over promoting business are often technocratically inclined or subject to other motives, and thus often favour rent-implicated or more technology intensive activities, while looking upon the dusty, dirty operations of small-scale business in the Indian economy with some distaste.
In previous research, I posed these deep discontents of neoliberal political economy in terms of the challenges facing manufacturers in the textile, garments, pharmaceutical and automotive industries in northern, western and southern India.4 I argue that these manufacturers respond to the challenges of neoliberalism into distinctly different strategies of industrial governance, based on the backgrounds, perspectives and worldviews of particular manufacturers.
Those with mercantile or agrarian backgrounds, or those who served as workers or supervisors within larger industrial firms, are likely to govern their activities by means of personal networks and traditional norms: relying on community finance and reinvestment, traditional practices of worker recruitment and retention. Those with more technical backgrounds, with long-term experience with multinationals and those who represent younger generations of old nationalist companies tend to govern their investments with reference to formal norms: taking on institutional debt or engaging with capital markets, formal human resource institutions.
Both forms of firm-level industrial governance have allowed manufacturers some increased certainty in managing the risks and hazards of the neoliberal economy. But they do so at the expense of national coherence normally provided by state institutions in contexts of promising developmentalism. Manufacturing, with its relatively small share of rents, is disadvantaged in the economy. Businesses that are not particularly favoured by politicians and technocrats, particularly those at the small scale, have struggled in an environment that is both chaotic and adverse, despite claims of some politicians – particularly those in Narendra Modi’s government – to create governance structures that might aid and support small actors in the economy.
Based on fieldwork conducted in 2007 and 2008, Development After Statism was published in late 2016, 18 months into the first Modi government, but it was mostly written and revised before the election. As a result, Modi’s style of governing the economy, especially as the long-time chief minister of Gujarat, largely figured as a possible regional alternative to firm-level governance, or in other words, a sub-national developmental state.5 Yet a closer examination of Modi’s policies suggests that there is nothing exemplary in Modi’s efforts to support small and medium enterprises in the state.
Gujarati mercantile and banking communities were both prominent and successful during the period of colonial rule, and served as a major impetus for nationalist industrialization both before and after independence, with venerable, regionally specific institutions like the Bank of Baroda closely connected to firms and individual manufacturers as well as manufacturers’ associations.
When the BJP came to power in the state in 2002, the government largely inherited and maintained this successful business community; while the government eased some regulatory approval processes, they did not transform the environment for small and medium enterprises. Instead, the government emphasized ‘law and order’ and otherwise facilitated large-scale domestic and international investment, particularly in the energy field, based on close cooperation between BJP politicians, technocrats and rentier capitalists. The ‘Gujarat model’ thus constituted active patronage of large-scale, rent-based enterprises and otherwise benign neglect for the provincial bourgeoisie.6
For this reason, Modi’s electoral promises for extending the Gujarat success story to all of India was predicated on the incorrect assumption that disciplinary governance and the elimination of corruption was necessary and sufficient to unleash the ‘animal spirits’ of Indian capitalism. The political conditions for such an approach to governance were firmly grounded in the discontents of the multiple scandals plaguing the second UPA government (2009-2014) and Anna Hazare’s mass movement for a Jana Lokpal bill targeting corruption.
In power, Modi has continually emphasized corruption as the single most significant limitation on India’s growth, and has increasingly centralized authority in the hands of technocrats reporting directly to the Prime Minister’s Office. Some of the practices of disciplinary governance have been disastrous for small and medium enterprises. The 2016 Demonetization especially hurt shopkeepers and small manufacturers by depressing demand, while not disadvantaging the elite service and retail economy. Further, the focus on technology to end corrupt practices and solve governance problems reflects a deeply elitist worldview that is out of step with the struggles of those at further remove from the heights of India’s political economy.7
Asecond consequence of this centralization of authority is that capital has increasingly been channeled from the public sector dominated banking sector to particular large-scale infrastructure projects, in part to make up for shortfalls in private investment in the second Modi government.8 In addition, major corporate groups increasingly take up these public projects, and the government has allowed, through licensing, increasingly oligopolistic practices in sectors like telecommunications. While the state has acted to eliminate egregiously corrupt practices of the UPA era, relationships between the governance and certain corporate groups (Adani, Reliance) reflect rent circulation and exchange.
More broadly, such patterns of lending and contracting reflects an elective affinity between public sector banks, state owned enterprises and the biggest conglomerates in the Indian economy. This in turn reflects the exclusionary elitism that is shared between the Modi government, senior technocratic civil servants and the cream of the capitalist class. In such a closed game, small and medium enterprises lose out, both from the lack of attention by capital and from policies that are designed and implemented with big rather than small business in mind.
Given the ways that the neoliberal Indian state looks upon giant conglomerates with favour and largely ignores small and medium enterprise, it is not particularly surprising that the government’s response to the crisis has not particularly helped small and medium enterprises. The government’s rescue programme, the Aatma Nirbhar Bharat Abhiyan, has pledged Rs 3 lakh crore to supporting small and medium enterprises with collateral free loans. But this credit flows through the formal banking sector, which does not have close institutional relationships with small and medium enterprises. There is evidence that even with the substantial flow of credit and guarantees from the state, banks are still not interested in lending to small businesses.9 This reticence may be more of a function of pre-existing contempt on the part of the banking sector toward small enterprises, as an enduring feature of elitism in India’s political economy, rather than institutional design.
Another measure that the Modi government has undertaken to help small business is the relaxation of restrictive labour laws and regulations, thought to be a major impediment to employment, investment and growth. Labour regulation has long been a bugbear of the elite corporate sector seeking more flexible terms of hiring and firing among their white-collar workforce in order to maximize efficiency and minimize ongoing obligations, reflecting technocratic worldviews that highlight rules over resources.
While frameworks of labour legislation are creaky and outmoded, they do not represent a principal barrier for small businesses, for two reasons. First, much of the workforce is in practice exempt from regulations due to their small size or the use of strategies such as labour contracting. Second, the actual capacity to implement these regulations is woefully insufficient, with one labour inspector responsible for thousands of units. While there are good arguments for reimagining a new framework for labour regulation that can balance protections for workers with flexibility for employers, present laws are not among the main reasons why small enterprises are struggling, even before the crisis, let alone after it.10
National quarantine policies, by contrast, represent a mortal threat to small enterprises reliant on migrant labour. Tens of millions of workers have had to travel home, often by foot; they risk starvation. Small businesses, with no workers, cannot produce, and face a decimation of demand for goods and services. ‘Flattening the curve’ through nationwide quarantine and systemic suspension of economic activity represents a set of policies formulated by transnational technocrats and for elites who have access to critical care and could continue to work from home. It is thus the product of an elitist technocratic mentality that ignores the livelihoods of workers and employers.
Small and medium enterprises have always been disadvantaged in the political economy of business-government relations in India. This advantage is not particularly salient in political economy scholarship, as researchers have tended to focus on policy relationships between elite bureaucrats and the heads of corporate groups at the heights of the neoliberal economy. The Modi government, following but also increasing an emphasis on these elite connections from previous governments, has formulated and executed policies of technocratic centralization and disciplinary governance that excludes the perspectives of small and medium entrepreneurs. The government’s responses to the crisis have continued along this elite technocratic, and thus exclusionary, trajectory.
This is, of course, not inevitable. In earlier periods with regard to crises facing particular sectors, the Indian government has productively engaged with helping entrepreneurs address particular roadblocks to their development by means of mobilizing specific responses to challenges. Aseema Sinha indicated how the government’s deployment of the Textile Upgradation Fund Scheme in the mid-2000s helped textile businesses upgrade obsolete technology by subsidizing credit at a time of high interest rates, in order to compete in the global market after the end of the Mulitfiber Agreement quota system.11 Such sector-specific support is more likely to encourage investment and stimulate the economy than leaving decisions in the allocation of resources to banks.
The government’s response to the Covid-19 crisis can be generally more effective by bringing economic actors – including labour – to the table and collectively formulating not just policies but institutional procedures for their implementation, working together with bureaucrats to coordinate responses in particular markets and industries. This however, stands against the general political approach and instincts of the government, which emphasizes universality over specificity.
1. Stanley Kochanek, Business and Politics in India. University of California Press, Berkeley, 1974; Peter Evans, Embedded Autonomy. Princeton University Press, Princeton, 1995.
2. Atul Kohli, Poverty Amidst Plenty in the New India. Cambridge University Press, Cambridge, 2012.
3. Aditi Gandhi and Michael Walton, ‘Where Do India’s Billionaires Get Their Wealth?’ Economic and Political Weekly 47(40), 2012, pp. 10-14.
4. Adnan Naseemullah, Development After Statism. Cambridge University Press, Cambridge, 2017.
5. Aseema Sinha, The Regional Roots of Developmental Politics in India. Indiana University Press, Bloomington, 2005.
6. See Christophe Jaffrelot, ‘What "Gujarat Model"?’ South Asia 38(4), 2015, pp. 820-838.
7. See Jennifer Bussell, Corruption and Reform in India. Cambridge University Press, Cambridge, 2012.
8. Rohit Chandra and Michael Walton, ‘Big Potential, Big Risks?’ India Review 19(2), 2020, pp. 176-205.
9. Sandeep Soni, ‘Banks Reluctant to Lend Despite Government Guarantee Under Collateral-Free Loan Scheme, MSMEs Tell Nitin Gadkari’, Financial Express, 26 May 2020.
10. Suresh Seshadri, ‘Are India’s Labour Laws Too Restrictive?’ The Hindu, 15 May 2020.
11. Aseema Sinha, Globalizing India. Cambridge University Press, Cambridge, 2016, pp. 191-198.