State and capital in India today
SUCCESSFUL 20th century economic transitions are all about the elites in societies having a realistic idea of the way forward to drive to industrialization while overcoming the political and social pressures, coming from both the past and in reaction to the very process. Even as it is the modern among the elites who drive the process, only a successful economic transition can usher in modernity among the masses, to relegate obscurantism and much that is irrational in society, at least in its public aspect, to the wayside. Using the state, even reforming the same to suit the purpose of the transformation is very much part of the story.
The role demands exercise of a certain degree of persuasion, or sometimes even force, in overcoming the early hurdles, especially in convincing other sections of the elites that resist such movement – usually those with obscurantist ideologies. But the core ingredient of success has always been the strategy: Getting the economic (along with the social policies that are intertwined with the economic) strategy right has been the key. This is true not just of 20th century successes (Japan, Korea, Soviet Union – now Russia and several other countries; Singapore, Taiwan, and now China and Vietnam), but also of the 19th century industrializations (Germany, the US, Nordic countries, and Australia, Canada and New Zealand whose transformation straddled the two centuries), not to speak of England, the First Industrial nation where the process was not so self-conscious as in the case of all others that followed it.
Different sections of the elite could have driven the process at different times, but an indispensable milestone was the creation of an autonomous engine of growth within the country, which could never falter for long. The capitalist class (bourgeoisie) may not have started the process, but at a crucial stage they had to either continue to drive or accept the changes that made for an expanding and inclusive economy. While dogma and ideology would have been part of the process, a correct reading of the experiences of other countries just ahead and successful was crucial to success. So also was the ability of the elite to craft solutions to the country’s unique problems.
The ability of the leading section of the elite to be creative, to design a state mechanism that was competent, and to consciously pursue the goal of transformation have been central to the process. The capitalist class may not have in many cases been the leader, but in all cases once they came into existence in strength, much of the further progress depended on their ability to lead, to influence, to include other sections, and to find workable solutions that enhanced the value to people at large. And this, as said before, depended on having an unwavering engine of growth that was able to include all. Another aspect of inclusion was the reconstruction and interpretation of history in inclusive terms even if there was sanitization of the past.
It is ironic that modern Indian capital, despite having started far earlier than in the rest of Asia, even including Japan, and having had influence over the state from at least 1860, the country that it nurtured and was nurtured by remains woefully backward. Its prospects look a lot weaker than those of the Asian Tigers. The latest entrant to the club, Vietnam, is in many ways ahead and unflaggingly on its path to economic transformation. Moreover, unlike China or Vietnam its capitalists were never subjugated to the point of elimination by ‘socialistic’ regimes. Therein capital had been eliminated for periods as long as 30 years. It is interesting though that these ‘socialist’ or ‘communist’ regimes were also driven inter alia by the very same objective of economic transition even when they had other goals as well.
Many scholars have contended that the long years of colonial rule stunted and maimed Indian capital to a point that even when freed of the yoke of the colonial state, and even after a modern political system was set in motion since independence, its collective behaviour was dysfunctional. And hence little of the creative effort that is required to push all the way through to the completion of the transformation can be expected from the capitalist class.
While such a perspective may have merit in understanding some of the elements of backwardness, that capital would be trapped for as long as 70 years since independence, requires an explanation. Otherwise we would fall into the trap of believing the evolution of societies to be largely deterministic. Moreover, the stupendous political change brought about by the far-sighted founding fathers – the thoughtful democracy, and a state system that was in many ways charged with the role of inclusion and development, should have had its effects on the nature of capital. Similarly, and closer to the present, the far-reaching changes that happened in the wake of the Great Reforms of 1991-92 and 1992-93 (hereinafter GR), would go against this thesis of a permanently retarded capitalist class in India.
While the past (history) is important, societies do change, and especially when in crisis, to set out to explore and pursue new avenues and possibilities, sometimes even reversing what they have had been doing. This may not be a conscious process for all the elements of society and for the masses as such. But for small sections of the elite within the ruling classes, for the state itself it is a conscious process. Conceivably from a situation of stasis, the challengers to the ruling classes, and for challenging new groups, it is a conscious process. Even if there is little pressure to change from within the ruling elites, other sections could pose challenges. Such drivers of change are often able to persuade others to their agenda, sometimes fairly and squarely by argument and demonstration, sometimes by ‘deceit’ and sometimes even by force.
Are there processes with sufficient dynamism to take the economy and society to its transformation? After all, though much slower than in East Asia, India’s growth rate had been increasing after the bout of slow growth from 1964-79. The ’80s saw an improvement without major structural reforms. And the ’90s saw the great reforms (GR), and acceleration to a modestly high growth of 6.7% till the same petered off from 1997-98 onwards. However, when the recovery did take place from 2003-04, the growth rate was even higher at about 8.5%, which was maintained till 2011-12. This raised the possibility that finally India was on the way to its transition.
But it is the rather poor performance and the involution of the discussions since then raises the possibility that perhaps India is not unambiguously on to its transformation. After all, successful late industrializers have grown rapidly – the later they started the process the faster they grew. Successful transformations have also witnessed a greater role for the state in the economy – the later the engine started the greater has been the role of the state, even if after the transformation the role of the state has reduced.
Another disturbing aspect of India’s growth is that even the growth thus far achieved owes much to the factor and neo-factor side – i.e. the spending multiplier effects of the earnings on IT and related services, besides remittances. Also, success in competitive manufacturing has eluded India, with much of the export earnings coming from ‘absolute advantage’ industries like polished stones, jewellery and the like. Textiles, electronics, general engineering, processed foods have been major failures, with auto and pharmaceutical being modest successes.
Inclusion in growth and development is at an incomparably lower level than in the East Asian economies. Inequality, which was always very high has continued to grow, and human development very much below its income peers, and at a vastly lower level than in East Asia. Public delivery of services like water, sanitation, education and health care, and delivery of sovereign services like police and justice, are highly destructive of value.
Even more worrying is that the link of politics to economic and human development has been weakened, and perhaps replaced by the identity aspect and the emotions that go with it. Unfortunately, that identity when cast in terms of religion is an assured recipe to not ever make the break into a modern nation, since no country with a state that has been burdened by religion has been successful. Today, economic performance does not carry the weight that it did in the past in electoral success, the rhetoric apart. Labour participation is ridiculously low and the journey has only just begun. Yet the middle classes in India seem to have a sense of having arrived.
While there are many factors that have led to this situation, here we are more concerned about the role and behavioural propensities of the capitalist groups that exist in India.
Capital in India is highly differentiated, perhaps even more than labour. While the schism in the labor market is well recognized, with the interests of the organized and unorganized labour often being in opposition, the divergence in capital has not been systematically considered.
There is a thin crust of modern and mature capital with its ethos being on par with capital in the West. The Tatas, Mahindra, HDFC, Infosys, Biocon, WIPRO, ICICI, RPG, or Bajaj are examples. Some of these are technology based and have come up recently but nevertheless hold on to modern values and are value generating rather than being dependent upon rent opportunities in interactions with the state.
A class of regional capital arose in the eighties, not necessarily from the traditional trading and business communities, which used the state governments to rise to national levels. Some examples would be Camlin, Apollo Tyres, Cadilla, and Arvind, which are among the ones that have grown to become indistinguishable from the first type. The set of technology based and highly skilled labour based capital like Infosys, HCL, WIPRO, TCS, Biocon, Zensar (RPG) can be considered as variants of the first type. (Type A)
The very numerous tiny sector (represented in India as the non-‘large’ factory sector) constitutes the bottom layer of capital in India. These units do not have any autonomy and are entirely subject to their environment. However, their large numbers, along with the even more numerous shopkeepers (who largely come from the traditional trading communities), hardly hold modern values. They still think in very local terms and imagine business and the economy to be a zero sum game. So they are ever willing to support politicians and parties who promise to procure for them advantages and stoke their identity. A miniscule few among them do generate rents out of petty construction contracts and small procurement by the state. Poor consumer laws, and their ability to get away with violations, help them to survive despite low productivity. (Type B)
Most distinct and recent of all would be the groups that emerged out of the vacation of the state since the GR (Great Reforms), of areas till then reserved for the public sector. Besides the infrastructure sectors, which have been the important domain of activity, education, healthcare and now defence have become attractors. Examples would be Adani, Indigo, Reliance (some portions), GMR, GVK, IRB, JP Group, and Airtel (Mittal). They have grown rapidly in a variety of ways. It is not only high profits, but also rents that would have contributed to their growth.
Rents also occur in contractual dealings with the government, no doubt with great risk at the same time. They continue to be at the mercy of the state (rather the government of the day), and the core skill besides the usual business related skills lies in ensuring that the regulator and government are not on their wrong side. This task should not be taken as a negative in all instances, since there has always been a streak of parasitism in the state, and many have suffered due to regulatory uncertainties. They are also able to manipulate the state in rent-seeking by exploiting the weakness of the state in the design of procurement models and especially PPP contracts. (Type C)
Aset of smaller capitalists has seen a steady decline in their shares as imports of manufactures has increased much more rapidly than exports. Many from type C, which have not grown to a very large size, would be part of this set. Many would have started out as small capital and reached a level beyond which they could not push, e.g. textiles, drug intermediates, light engineering, garments, and auto ancillaries. They are the ‘failures’ having not been able to articulate their interests meaningfully in terms of the national/public interest.
Slow growth and policies that prevented the country from moving in the direction of East Asia hurt them. However, even their collectively understanding continues to be mired by their past, when they were small or faced a hostile state in pre-independence India, or in the controlled period when they were beneficiaries of state created pretention.
Being in highly competitive industries and with hardly any market power, they see their relationship with labour as a zero sum game. They have scarce resources for R&D. Even when some firms emerged out of reverse engineering and adaptive R&D, it is likely that policy debilities would have resulted in low growth. From their ranks, capital of the rent-seeking type could have emerged as the market opened up due to failure of industries and infrastructure. Many here continue to look for opportunities to take advantage of minority shareholders, especially during times of stress. Many here suffer from deep discounting in the capital markets. (Type D)
The success of all groups, except perhaps the first set, depend upon the country being able to pursue aggressive local value embedding policies, although the capitalists themselves may not see their prospects to be so dependent. The first group may have grown out of the home market to have foreign sales and investments, or have significant market power to be able to maintain profitability even under hurtful distortions. But even for them the transition to becoming leading international firms would depend upon the success of India.
Rent-seeking capital (C) is more intimately caught up with the government’s actions and are forever building defences against ‘arbitrary’ action by the government and its officials. They face considerable political risk, especially those in intimate and long-term relationship by way of PPPs, PPAs, contracts and agreements. They must ensure keeping on the right side of governments. When they deal with state governments, as governments change, the risks faced are considerable, and could even threaten survival if such capital was to depend on a single state.
As controls and licenses have faded away, the source of rents have become contracts related to infrastructure services, land and land use changes, and mining contracts. Given the requirement of Non Agricultural Clearance (NAC) in the most industrialized regions, the power to direct infrastructure and change land use on the part of the government that are not constrained by functional policies or approach, capital in these areas is linked to politicians for their support. Indeed, politicians find such businesses, along with those where regulation by government is inevitable (market failure areas like education), or where the state is a major procurer (construction and EPC, defence equipment), a fertile ground in their own transformation into capitalists.
The rise of the urban peripheries of many cities based on the spread of IT and related activities, and the real estate boom as long as it lasted, have allowed much of the rents to be converted into capital through land use changes. The natural growth of such capital, which is highly connected to politicians, would depend on scaling up, and imbibing a different set of skills, viz. understanding complex RFPs, PPPs and financing of such projects that depend on governments over a much longer period. The rise of type C has meant a significant decline in the influence of type A.
There is much difference between the regions in terms of the kind of capital they house. It is only the bigger states with metropolitan cities that house mature capital type A, wherever their plants are located. And types B and C are ubiquitous. More important is the nature of the politics in the state, which can vary considerably as from a dominance of capital (mid-sized and rent seeking) in Gujarat, to the absence of capital in the power base in Kerala. The relationships between capital and labour therefore vary from extreme antagonism to tolerance, and from supportive to exploitative. A unity of vision, given these many dimensions of variation, is therefore difficult without statesmanship on the part of big-capital particularly its the modern segment.
As a result of this vast diversity, both across regions and among the segments, coherence in strategy covering macroeconomic, industrial and trade aspects of the required policies are unlikely to emerge from within capital. This is the case even in countries with far less diversity. It is remarkable that coherence of strategy has emerged only in East Asian economies in recent times, and typically it has emerged from the understanding of the intellectual elite, who thought deeply about their country and did not merely accept the dominant dogmas of the already transformed societies. Nor were they entrapped in the myths and emotive identities of their past. They were willing to be critical of the past, and were constructive and inclusive in their construction of the present. They also did not suffer from the need to back project their current struggles onto the past.
Above all, in discussions and disputes, even violent ones, they refrained from an appeal to religion or an authority beyond present humans. India certainly started out with such a modern elite, and its construction of democracy and the state has brought the country thus far, but not far enough, to make the process irreversible. The failure of the state in the delivery of public services has arrested the process. Now with their retreat, the modernization and hence transformation question remains an open question.
In Germany in the 1840s Fredrick Liszt came out with intellectually convincing arguments against the gospel of laissez-faire, the acceptance of which was crucial to laying the foundation of German industrialization. The thinking of the Indian elite is caught up in the sterile opposing positions of state versus markets, and laissez-faire versus import restrictions. In contrast, the dirigisme of East Asia has avoided any such opposites, with the role of the state and markets being considered functionally and evolving with changes in technology and the nature of global capital itself. This pragmatic and non-doctrinaire approach is entirely missing in India whether it is with the left, the right or even the ‘nationalists’ who swear by their Indianness.
When doctrinaire positions far out of touch with reality are sought to be put into practice, a failure followed by a cacophony of opinion is all that can result, since there are limits to how much can be kept away from the public in a democracy. With one unreal position confronting another, actual change recedes, and becomes incredible and the very ‘objective’ or intention becomes celebratory, never mind that it cannot be achieved. It would be quite exceptional to find consistency between trade, industrial and macroeconomic policy that is absolutely necessary to take the engine of growth any further. The contradictions and uncoordinated initiatives that result in waste and add to the uncertainties have become the order of the day.
The Great Reforms of 1991-92 and ’92-93 brought with it the promise that mature capital (type A) would take charge and incorporate others into a workable strategy for transformation, as gains would accrue to them over the longer term, even as others including labour would make immediate gains. But this has yet to happen as their understanding of reform continues to be that of markets being in opposition to states – the very same myth held by many academic economists. There is little understanding of East Asia with not one worthwhile school or centre in India to study Vietnam, Korea or China. India is remarkable in not having centres or schools to study countries that are ahead of us.
The size of the economy is important in the determination of the stasis. If we consider each of the groupings of capital, they are sufficiently large to form their own ethos and way of thinking around their own experience of the environment, policy and state action. Being large in numbers, it is almost certain that there would be a few success stories in each of these types. Such successes then get highlighted in conferences by the media and become the stuff of legend. And the actions of these enterprises and their founders become gospel for others to follow.
Often policy errors and a non-benign state are negated by rhetorical positions: if a Biocon or a Bajaj could have succeeded, can anything be wrong with the environment? (Never mind that there were so many other start-ups with potential that fell by the wayside. Never mind that today with the necessary state support, Biocon and a few others could have become a producer of new molecules to rival multinationals.) If Arvind could succeed in textiles, then what is wrong with the environment? (Forget that much of India’s garment exporters face an increasingly difficult environment and use other countries like Bangladesh to export from. Or that in textiles, India’s share is nowhere near the 15% that it was in global exports in the early ’50s.) This is digital thinking at its worst. Social questions are never about the individual or the firm but about the ensemble of individuals and firms.
The difference really is that the probability of success rises greatly when the environment is conducive to growth and transformation, while it is low when not. It is not difficult to find examples of individual successes, which actually in no way condones the dysfunctional environment. It is the environment that selects and nurtures firms that perform through a positive feedback process. To managers it would almost always seem that they have made changes in their firms, which is not incorrect, since they are actually asking questions about why the firm did well or badly. Not why the collective or ensemble of firms did badly. In other words, getting the policy and the framework right is key, not parading ad nauseam the few instances of success.
Does all this mean that there is no action space for capital or for the modern segment among the elites? Hardly. They need to keep their powder dry and swords ready for the day when crisis creates the space to question the current wisdom, to drive the economy and its policies on the winner’s path. But that cannot come without a belief in the need to deeply understand the country, something which modern capital in India may have missed, leaving space for motley groups with limited visions, and too many complexes to pander to. Their best allies can be the segment of capital that is currently ‘abandoned’ and languishing, and labour.
Being antagonist to labour would be the surest recipe for sinking further into the quagmire. After all, it is still very much a world where nations have to compete, and labour, like land, can hardly move. And every idle labourer who finds employment creates more for capital and country than she does for herself, perhaps adding as much as a quarter of million dollars to the stock of productive capital over her lifetime. But perhaps ‘modern’ capital would continue to look the other way when people are made to run after cows, and we back-pedal into the abyss.