By Aniket Baksy

Edited by Shambhavi Singh, Senior Editor, The Indian Economist

There is little argument regarding the fact that in India manufacturing led growth would be superior to status quo, both from the point of equity and efficiency in resource utilisation[i]. The potential of India’s manufacturing has been underscored time and again by studies conducted by nearly every major consulting company in the world. India has some key advantages favouring the development of a robust manufacturing sector, should constraints on it be removed. Its geographical position at the head of the Indian Ocean and a coastline of nearly 6,000 kilometres, as well as its location along key African and Asian sea routes give it a natural advantage in developing an export-based economy. India is a Labour surplus economy where the returns to capital remain high even after taxes and transaction costs can be accounted for. The nation possesses one of the largest stocks of unskilled and semi-skilled labour globally, whose skills could be upgraded at a relatively minimal cost[ii]. It has vast stocks of iron ore and coal, conducive to the development of heavy industry.

While Narendra Modi puts forth an impressive pitch for India as an attractive destination for industrial investments, it is worthwhile to look into the constraints surrounding Indian Manufacturing. Traditional arguments for the failure of Indian manufacturing to take off focus on the key shortcomings of an underdeveloped nation- poor infrastructure, low stocks of human capital and policy frameworks seeking to penalise any manner of profit making. In this article, I argue that these constraints arise, by and large, out of an attitudinal deficit in the national discourse, seeing the industrialist as an unambiguous villain, an attitude fuelled by intellectuals lacking the ability to accept the lessons that support for and freedom of enterprise can bring.

A legacy of nationalists in pre-Independence India forming broad coalitions with nascent worker Unions implies that the general policy framework towards industry in India has always viewed private enterprise with a good deal of suspicion[iii]. This was the aegis behind the creation of the initial State-led development model of Mahalanobis, which catalysed a nearly catastrophic collapse of the Indian Agricultural sector, and the guiding principle behind India’s industrial policies. A fear of monopolisation of markets was behind the imposition of production quotas and permits and industrial licensing- or so the justification was made.

The rise of coalition politics and the consequent delay in legislative decision making has ensured that even post liberalisation, these barriers exist. They encompass a vast variety of issues: oppressive labour laws, land laws making it nearly impossible to acquire land for industrial development, power and transport infrastructure deficits and labyrinthine tax codes, to name a few. These represent, political pandering to the interests of labour over capital in the name of votes, favouring capital instead via underhanded dealings- visible in the legislations of directed credit, for instance. The choking off of any manner of private enterprise- other than the politically connected- represented a supply shock of potentially fatal dimensions to nascent Indian industry, which had failed to achieve any manner of balanced growth under the British Rule and was now in essence, forbidden to attain even the inputs it required- FERA and FEMA ensured this.

Worse still, was and is the absence of nuance in Indian academia and Indian policy discourse. The majority of India’s highly educated (by and large in Foreign Universities, a result of the sorry state of domestic higher education) intellectual elites lean to the left and refuse to accept even the basic minimum of pro-market reform as prudential[iv]. The moral training imparted in many Indian Universities regarding the notion of “giving to society” as having direct equivalence to being anti-establishment, anti-corporate and essentially Gandhian, has further contributed to the inability of India to provide adequate support to large scale manufacturing[v]. The vilification of the industrialist is supported by pop culture references to an entire era of Bollywood movies tracing the collusion between the evil businessman and the cruel politician (The hero, of course, is usually a mine worker or similar.) Curiously, few mention how this state of affairs was entirely the by-product of the License-Raj built bureaucracy, which denied competitors entry and enriched incumbents who could afford to engage in this nexus[vi].

While a contrarian attitude is welcome- democracy, after all, thrives on dissent- it is harmful when the attitude in question is held for the sake of the attitude, and not for the merits of arguments themselves. Take labour laws. DSE HOD Aditya Bhattacharjea has repeatedly written passionate defences of the Industrial Disputes Act, 1947 and its amendments (1976 and 1982); on the grounds that their impacts on labour market rigidity have not been “statistically significant.” The analysis ignores the number of firms and enterprises that may have existed in the counterfactual where labour markets were made relatively more flexible. Research which does take these factors into account is unequivocal- India’s labour laws have led to job loss, and those states which insist on regulations that are excessively pro-worker- an oft cited example being West Bengal, a Left Wing Bastion until recently- have had their manufacturing sectors expand the least in the post-liberalisation world[vii].

Assertions of the absence of statistical significance in the impact of restrictive labour laws are intellectually, therefore, at best, dishonest. Indian Labour Markets may be becoming more flexible, but this misses the point: such studies rely on what incumbent firms can do in terms of labour adjustments[viii]. The reasons for restrictiveness are evident from even a cursory overview of the Industrial Disputes Act. The Act provides labour courts the authority to enforce the reinstatement of retrenched workers, even if retrenchment was on grounds of severe disciplinary action. It requires any firm hiring over 100 workers[ix] to apply for permission before any worker may be retrenched, and requires that workers hired last be fired first, a move which places incumbent workers at a significant job security advantage and disincentivises technical upgradation of the workforce by hiring new workers with additional skills. It prohibits firms from closing down their operations without applying for adequate permission to do so. Forcing a firm to continue producing in the face of losses made is evidently tantamount to a breach of the most fundamental freedoms that should be enjoyed by entrepreneurs. Unsurprisingly, firms in India prefer to stick to conventional high-return sectors, as exit is so costly that the expected reward to most risks undertaken is probably negative. Labour laws have also contributed to the dualism in Indian manufacturing: firms employing more than a hundred workers are excessively penalised for their expansion beyond the state’s own perceived optimal scale of industrial production, retarding the mega-factory approach to economies of scale that makes Chinese manufacturing so successful.

Consider next, the pattern of infrastructure development in India. Infrastructure development involves a constant trade-off between environment and the interests of the voiceless in Indian development, versus the pressing need for industrial transformation. However, Indian politics has not played the arbitrative role it should have, balancing the interests of the two parties while guaranteeing fairness in the bargaining process; instead, the politics of appeasement have erected complex bureaucratic hurdles over environment regulation and land acquisition which defy sense and prove counterproductive for the poor.

Land Acquisition legislation requires that compensation paid to original owners of land acquired for industrial purposes are paid four times the market value of the land acquired- but only if there exists adequate proof of ownership. The Act in itself does not make it easier to register property in India- the result being the creation of an entire class of rent-seeking farmer elites who have suddenly graduated into India’s highest income brackets and currently drive Land Rovers, while the agricultural labour classes and the small and marginal farmers, unable to justify their land ownership, observe the evaporation of their livelihoods under a corporate juggernaut. Policies favouring the development of Special Economic Zones are held up owing to laws prohibiting industrial development on arable land, and more conspicuously by self-appointed protectors of Indian democracy whose entire contribution to the surrounding discourse is essentially the extraction of rents from corporate in the form of litigation expenditure and further expenditures on arbitration. The tragedy is that such agitation occurs with individuals uncomprehending of the long-run benefits of Industrial growth in terms of employment and livelihood creation[x]. Witness the degree of underdevelopment in States most unwelcoming towards the creative energy of industrial development- Uttar Pradesh, West Bengal and Orissa remain woefully poor. Witness even more starkly, the close correlation between infrastructure and real NSDP per capita.

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Source: The ASEPI report[xi].

In India today, industry has expanded largely as a result of the efforts of major conglomerates, which are able to access sufficient resources to overcome the rents they must pay[xii]. This has contributed to industrial concentration and ironically, the creation of oligopolies in the vast majority of India’s industrially vibrant sectors- Oil and natural gas and cement being prominent examples. India’s manufacturing sector concentration (as measured by the Herfindahl Index, for instance) is among the worst in the world- and this breeds cronyism of the worst kind, allowing Indian firms to get away with blatant violations of existing regulation and to engage in criminal abuses of human rights[xiii]. Fixing such cronyism is, of course, in the eyes of the intellectual elite, possible only through the device of additional regulation. The irony inherent in regulations designed to solve problems generated through regulations, and of capacity restrictions to promote competition which has already been choked off by regulations seeking to protect other interests, must be evident. It’s the ultimate egg-chicken problem, all the more tragic since we know that the egg (here, excess regulation) did come first.

This does not bode well for Modi’s vision. Make in India will work only when India puts forth a credible pitch that it actually wants industry to set up shop here. This will happen only when two sets of mind-sets change. Firstly, the view of the state as a guarantor of all goods and services must be replaced by a healthy dose of optimism regarding the ability of markets to, however imperfectly, provide most classes of products if constructively augmented by the state. This will require a rethink of legislation like the Right to Education Act, which shuts down private schools on input-based indicators alone, while ignoring public schools which perform far worse on educational outcomes[xiv]. Instead, it will require an approach whereby the constructive roles of both the market and the state are tapped- the market in providing private goods for which people can pay, and the state, public services defining a basic standard of living that must rise over time. This is how education and healthcare systems have developed globally, even in Kerala, the academics’ darling.[xv]

Secondly, this will require a massive change in the outlook of intellectuals. They must realise that Indians will not be swayed by ill-bodied warnings of communal conflagration and the politics of appeasement- a rejection of the same was evident 100 days back. They will have to realise that the Indian masses no longer wish to outright reject efficiency for equity. Rather, awareness appears in sight regarding the need for both to complement one another in any development strategy. Elites must realise that their duty lies in promoting the best, easiest and quickest route to economic renewal available- and as of yet, apart from industrial development, no constructive solution appears in sight. For all the struggles to secure farmer livelihoods in the Narmada Valley, it’s difficult to recall a single instance where the Narmada Bachao Aandolan has given a constructive solution to farmer poverty in Gujarat and Maharashtra. Fighting for the voiceless, and getting on primetime TV slots, is great and morally laudable. However, it does little for the poor and their livelihoods[xvi].

Correcting these attitudinal imbalances can go a long way in tackling the issues we address here: labour laws and infrastructure. Labour law liberalisation combined with unemployment insurance and provisions for social security can be achieved- Brazil has a functional system which does it. Infrastructure development can occur with local communities taken on board- this requires local communities to be directly addressed and the benefits of industrial development be explained to them.

Modi’s speech in Madison Square Garden is a welcome follow-up to the Make in India vision. The ideas of reducing restrictive legislation and developing a pool of skilled labour deployable across the globe are laudable in themselves. However, getting the act together will require Modi to target the root of the issue- a hatred for private enterprise. It is not going to be easy, and will require measures such as aggressive marketing, building a culture of supreme respect for entrepreneurial talent and also creating an ecosystem for start-ups, much like the real Silicon Valley. The Right[xvii] steps are being taken- financial inclusion, skill development missions and massive industrial complexes developed with foreign partners are all going to be essential in this strategy. Most importantly, Modi gets the importance of getting people on board- in his speech, he agreed that development is not the prerogative of the state; rather, it is the outcome of a partnership with the nation’s people. In this vein, the ability to execute reform could take Modi to reach a stature few global leaders have achieved. It could take him to be the first right-wing leader to be loved by the people.

[i] For example, see page 19 of this recent working paper by Ajit K Ghose. http://www.ihdindia.org/Working%20Ppaers/2014/Ajit%20K.%20Ghosh.pdf

[ii] Among the Manufacturing-friendly measures Modi is undertaking include the creation of a National level skill development mission, dedicated towards skill-intensive training.

[iii] A good example here is the debate over FDI in key sectors of the economy. Nationalist propaganda in this arena has, in the past, gone so far as to argue that FDI, generally agreed to have positive impacts on an economy after controlling for quality of domestic institutions (http://www.oecd.org/investment/investmentfordevelopment/1959815.pdf), augurs poorly for an economy owing to the “loss in Independence” a nation faces when foreigners set up plants in India. These claims are substantiated by the manner in which the necessity of attracting foreign investment leads Governments to implement “neoliberal” policies which limit their ability to alleviate poverty and pursue the nation’s own interests. This argument fails, usually, to perceive the distinction between Long-Term Capital inflow through FDI and Short-term Capital flow through FII. Research has shown that while retaining FII flows post Capital Account Liberalisation leads to an erosion of domestic policymaking capacity, FDI has no major impacts on policies in the presence of sufficient capital account restrictions. See footnotes on page 23, http://www.oit.org/wcmsp5/groups/public/@ed_emp/@emp_elm/documents/publication/wcms_114304.pdf

[iv] Witness the proud assertion by EPW, the premier source of commentary on socio-economic and political affairs, of its “contrarian” and “bold” approach, never “seeking to shy away from providing a conscience for policymakers.”

[v] An example is Calcutta, among the human-capital rich cities of India. Lawlessness and disorder on its streets in the name of protest has been utilised by Political Parties in developing cadres of teenagers and college-going youth through targeted emotional blackmail, evoking images of India’s widely visible poverty and generating the straw man of the oppressive (19th century) robber baron industrialisation. This has deeply affected the City’s capability to alleviate the poverty that is a legacy of the influx of immigrants in 1971.

[vi] The result of this indoctrination is that the brightest minds of a generation who agitate on the streets of Kolkata during their undergraduate days for causes they barely understand will move to Delhi or even travel abroad for their education, preferring to seek employment in computing giants abroad, or, more commonly, in IT and FMCG giants located in Delhi, Mumbai, Bangalore, Hyderabad and Chennai- all state capitols of states which understand the centrality of private enterprise towards development.

[vii] See the work of Aghion, Burgess, Redding and Zilibotti in this regard, as being broadly representative of the literature in this field. http://www.iew.uzh.ch/wp/iewwp345.pdf

[viii] See http://www.hss.iitb.ac.in/FGKS_IITB_2010/papers/Goldar.pdf for an analysis of informal-ization of the Indian market, wherein labour law complexity drives firms to not register as part of organised sector manufacturing. Further analysis is available in a work by Bibek Debroy in 2012. (http://www.cato.org/economic-freedom-india/Economic-Freedom-States-of-India-2012-Chapter-4.pdf).

[ix] This limit was recently liberalised in Rajasthan to 300 workers. This led to the usual hatred and allegations of neoliberal capitalism infiltrating India under Modi, and more significantly, to a significant setback to the BJP in recent by-elections.

[x] On the lack of any measure of nuance in the arguments put forth by alarmist and extremist authors seeking no more than to provoke outrage, an easy enough task in an economy where the majority of individuals lack education and the educated ones, by and large, lack the ability to reason critically, see Ramchandra Guha’s piece here. http://www.thehindu.com/2000/12/17/stories/1317061b.htm

[xi] Baksy, Aniket. 2014. “The Augmented Socio-Economic Progress Index.” Report Prepared in partial fulfilment of the requirements for the course Indian Economic Development After 1947 – I, New Delhi.

[xii] On the nature of rent seeking promoted by Environmental clearances, see http://hillpost.in/2014/07/navigating-the-green-maze-indias-developmental-goals/99695/.

[xiii] Examples here might include evictions of slum dwellers by connected developers, the Reliance KG-D6 Gas Pricing controversy or even the violation of environmental norms in Orissa by corporates including Vedanta.

[xiv] The ASER report studies rural school student performance using a battery of Language and Mathematics skills, and shows that Public School students perform significantly worse than private school students on all parameters. This differential does not vanish even when the possible endogeneity of family income, access to educational aids, after-class tuitions and family education is accounted for.

[xv] Conveniently, most commentators ignore Kerala’s grinding unemployment, massive foreign fund inflow dependence and drinking and drinking-related crime problems.

[xvi] The “preservation of lifestyles and livelihoods” argument is oft repeated, and assumes, of course, that tribal people will fight to protect their way of life- one more often than not characterised by severe poverty. This argument needs to be taken in context with the Cronyism discussed earlier- the reason tribal people protect their life may very well be that oppressive regulation- the Indian Forests Act, for instance- prohibits the development of their own enterprises and their own well-being.

[xvii] Pun intended.

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