CHAPTER 1: THE NATURE AND CONTEXT OF INDIAN MONOPOLY CAPITALISM

One of the disiinctive features of the second half of the twentieth century was a degree of diffusion of capitalist industrialization to the underdeveloped world. The

analysis of any such Third World capitalist development process must recognize the influence of the co-existence and mutual interaction of monopoly capitalism at two different levels, international and domestic, in shaping its course.

In the aftern1ath of the Second World War, capitalism's world history entered a new

phase that nevertheless belonged to what has been called the monopoly or imperialist stage of capitalism, characterized by a 'capitalist world economy' in which the commanding heights were occupied by international monopolies. While the large

colonial empires were replaced by a number of formally independent Third World nations, it remained a world where a handful of leading capitalist powers occupied a

dominant position. For the Third World, the end of colonialism did not mean thus the end of imperialism. The new context however did alter the scope for capitalist

development in the Third World, but not because these countries could disengage themselves from the capitalist world economy. Never in history had capitalist industrialization in any nation taken place in a state of isolation. Rather, a co­existence of national and international dimensions of capitalism and their mutual

interaction has always marked the epoch of capitalism 1•

Third World industrialization itself required these nations to maintain international economic connections in particular with the advanced capitalist nations2

• But political independence also meant in many cases that such capitalist development for the first

time could benefit from the essential complement of its own state. The new geo­political realities also afforded some scope for the play of the autonomous interests of Third World capital, despite their unequal position in the international structure of capitalism. The diffusion of industrialization to the Third World that took place in such a background is not easily amenable to simple generalized characterizations like dependent, or independent, capitalist developmene. Third World industrializations

were always conditioned by the relative position of these economies in the international monopoly capitalist system, and that significantly influenced their course and pattern. But the actual record of Third World industrialization cannot be

1 This however does not amount to conceiving capitalism as a 'world-system', a notion that belongs to a perspective which denies the specificity of precisely that relationship which gives the capitalist epoch its distinctive characteristics and dynamics [Wallerstein ( 1979), Frank ( 1969), A min ( 1979)] For a critique of this school of thought, see Brenner ( 1982/ 1977) and Patnaik, U. ( 1986a). 2 See Sobhan ( 1989) 3 The concept of dependence has been given varying interpretations. The common essence of these, however presume that the expansion of Third World economies can be only a responsive expansion to the expansion through 'self-impulsion' of the advanced economies (DosSantos (1978)]. Warren (1973) took a sharply opposite view, seeing international economic ties not as a barrier to independent capitalist development in the Third World, but rather as becoming increasingly conducive for it. For him, the only real barriers were internal to these economies. Bernstein ( 1982) argued that both these sets of views, despite their opposite conclusions, remained within the same kind of theoretical framework and failed to identify the status and content of the categories "national economy" and 'world economy" and their mutual interrelationship.

7

explained as being derived entirely from a dynamic that existed outside these economies, in the advanced capitalist world. A specifically Third World variety of a

relatively independent process of capitalist development under conditions of technological dependence is probably a inore apt general description for the· post­Second World War industrialization in the Third World4

•

It is the existence and role of the autonomous interests of Third World capital that point towards the significance of the internal capitalist structures in Third World economies in also shaping tl1eir dynamic. The phenomenon of aggregate

concemration5 in their industrial structures meant that within these economies was a domestic monopoly capital occupying a dominant position in their national spheres but not at the international level. Third world capitalisms were thus also monopoly

capital isms but of a specific kind - belonging to the monopoly stage of capitalism but reflecting its backward and not advanced component.

Indian capitalism is a particular case of such Third World monopoly capitalisms, and

it is through such a prism that this study looks at the process of capitalist development

in India after independence, with this chapter providing the background context.

Section I. I of the chapter discusses the emergence of monopoly capital in India in a colonial context, the peculiar composition that it acquired in such a context, and the distinctive institutional features associated with it - all of which left a legacy that was

inherited by independent India.

Section 1.2 outlines the general historical context, marked by the existence and mutual interaction of internal and external constraints, within which capitalist development and industrialization had to take place after independence.

Section 1.3 traces the evolution of State economic policy in India from independence till the advent of liberalization in the 1990s, arguing that the shift in policy from 1991 represented a decisive break with the post-independence strategy.

Finally, Section 1.4. provides a brief overview of the corporate sector after independence. Its main components and the corresponding forms of monopoly capital in India, the position of the private corporate sector in the structure of the Indian

economy, and the stability of this position over the period till the end of the 1980s, are the aspects highlighted.

4 Technology is one sphere where the expression 'dependence' does appear to have a meaningful application. Technological dependence of underdeveloped economies has been defined as a "structural incapacity to produce the capital goods required for growth" (Merhav (1969), p. 30]. This narrow definition of technological dependence may not }lave been strictly applicable to every stage of the industrialization process in Third World economies. But in the era of the scientific and technological revolution, where technical change has been a continuous process taking place on the international plane, a combination of partial dependence on imports of capital goods, and substantive dependence on transfer of know-how in general, was a necessity for Third World industrialization. 5 Aggregate concentration means concentration in the size distribution of business enterprises at the level of the economy as a whole [Hannah and Kay (1977)]. In practice however it has also meant such concentration in a broad sector of the economy, like the industrial sector, though an alternative expression, general concentration, too has been used to describe concentration in an intermediate domain [Sylos-Labini (I 969)]. A situation of aggregate concentration would thus be said to exist if an absolutely few number of firms accounted for a large proportion of the total aggregate size of all capitalist firms.

8

1.1 COLONIALISM AND THE ORIGINS OF INDIAN MONOPOLY CAPITALISM

Capitalist enterprise in· India made its. first tentative appearances in modem factory production in the first halfofthe l9th·century. The venture~ ofthis periodwere however

largely unsuccessful, and it was only from the 1850s that a relatively consistent process of expansion of modern industry took place. Thus the beginnings of capitalist production in India, and its development for nearly a century, took place under ·a colonial dispensation. That made for certain defining features being associated with its early history.

Firstly, capitalist production was more or less synonymous with modern factory production, with the agrarian sector being completely outside its ambit. Neither was

anything like an agrarian revolution the initiator of capitalism, nor did such a revolution follow the emergence of capitalist industry. Although the agrarian structure of a region as vast as the Indian sub-continent, and over such a long period, may not be easily

amenable to generalizations, an accurate enough general description of it would be that it was primarily a peasant agriculture, from which a hierarchy of landed interests and the state extracted a substantial surplus. Transformation in the agrarian economy was

not accompanied by any changes in this6•

Peasant pauperization and land alienation, along with the destruction of non-agricultural employment and a decline in the Iand-man ratio, contributed to creating a significant

class of agricultural wage-workers, without this indicating development of capitalism in Indian agriculture7

• The substantial part of the surplus accrued to groups not directly involved with organizing cultivation. Little was left with the actual cultivators for

investing in improvements in agricultural productivity. Nor was large-scale cultivation possible. Other measures taken by the state, such as the development of irrigation, were too limited in scale to substantially affect productivity except in some regions like the North-West. While agriculture supported an extremely wealthy class of landowners, and provided a significant part of the state revenue for a long time, much of the agrarian population remained in extreme poverty8

.

Secondly, capitalist development in the colonial context was severely handicapped by

the absence of any consistent state support to a process of industrialization. The colonial state was not an instrument of any indigenous class but a representative of foreign

6 "If we were to try to think of the most outstanding developments in the agrarian sphere during the nearly two centuries of British rule in India, we are likely to come up with, firstly, changes in the production structure following the commerci?lization of agriculture, and secondly, changes in the property rights of the different groups of persons connected with agriculture. It would be difficult to show, however, that there are any major changes in the way production was organized, or in the level of techniques." [Patnaik, u. (1999b), p. 252] 7 These agricultural wage-workers essentially provided supplementary labour to that of the cultivating peasantry and suffered from a high degree of underemployment They thus performed a similar role as the pre-capitalist traditional agricultural labour, consisting of castes customarily deprived of proprietary interests in land, did in the pre-colonial period [ Patnaik, U. ( 1999/1985)]. 8 It was true that the land revenue, which accounted for over half the total revenue of the state till the end of the 19111 century, did decline over time as a proportion of the value of agricultural output [Kumar, D. ( 1984b)]. This however mainly increased the wealth of the landed classes rather than benefiting the cultivating peasantry.

9

interests. The imperatives on which it acted were not coincidental, and often also in conflict, with the interests of capitalist industrialization in India. Insofar as the capitalist class in India did not in this period become the dominant class commanding state power, this was in a -sense a stage of transition to· capitalisin in India rather than its ultimate arrival.

The development of modern industry, with the exception to an extent in the case of the railways, took place entirely under the aegis of private enterprise utilizing whatever spaces were available to it. With the emergence of capitalist enterprise of course came

new social classes and interests, which reflected themselves in the political arena. Capitalist enterprise could therefore extract some concessions from the state for promoting its development, depending on specific political situations. But as long as

colonial rule remained, the interests of capitalist development in India could never become decisive in shaping the actions of the colonial state.

One factor that reinforced this was a third characteristic feature of capitalist development under colonial conditions. This was that the capitalist class that emerged had a peculiarly fractured composition, having two distinct components - a foreign and a native one. "These two 'halves' of the capitalist mode of production evolved in

different forms, at different speed.:> and in different branches of the economy, and each had an entirely different significance for India's future"9

. There were in fact even two

different kinds of foreign capitalist enterprise that made their appearance in India during this period. But the one which expressed more the peculiarity of a capitalism born under colonial conditions was the one that emerged earlier, and was fundamentally different from the multinational corporation which entered the scene only in the twentieth

century. This foreign capitalist enterprise was that initiated by an expatriate European (mainly British) business community. The presence of such a community in India was more a by-product of the colonial context rather than of the overseas expansion of British capital. The capital commanded by these European controlled enterprises was largely accumulated from India, so that they were not really the agents of a flow of British capital to India. In fact their role was quite the opposite, with their foreign

character expressing itself through their repatriation of profits to Britain 10• They

constituted the dominant component of capitalist enterprise in India till the very end of colonial rule.

European enterprise in India had its independent interests, which did not necessarily

coincide with those of British capital proper. But it was too tied to the colonial context, and dependent on it, to be able to shed its foreign character and express itself as an

independent force against the shackles imposed on capitalist development by that very

context. Its dominance in fact contributed to impeding the development of indigenous capital, which had a greater potential to play that role.

Fourthly, the unilateral transfer of colonial tribute from India to Britain through different mechanisms took place over a period of nearly two centuries. This continuous

9 Levkovsky ( 1966), pp. 44-45 10 Bagchi ( 1980)

10

Withdrawal from India was, as lrfan Habib has pointed out, a continuing process of

primitive accumulation of capital that existed concurrently with the capitalist

accumulation in Britain 11• The period, over which it oecurred, could be roughly divided

into two equal parts, with the emergence of capitalist enterprise in India being midway

between its beginning and end. In other words, both preceding and following the advent

of capitalist enterprise in India, it was British capitalism that was the major beneficiary

of a primitive accumulation of capital whose source was the Indian economy.

Capitalist production in modem industry had established its stable presence in India at a

time when most of the world, barring Britain, did not qualify to be called industrialized.

The industrial take-offs of many of the major industrial powers of the twentieth century

were either in their relatively incipient stages or had not even begun12• But unlike in the

case of the others with a similarly long history of modem industry behind them, the

expansion of modem industry in India never succeeded in bringing about the kind of

transformation associated with the expression 'industrial revolution'. On the contrary,

the impact of the rise of modem industry on India was more of a story of the

displacement of India from its position of being one of the major manufacturing regions

of the world, which it was in the pre-industrial revolution era 13. This impact began

before the initiation of the phase of stable presence of a modem factory sector in India,

through the destructive effects on India's traditional manufacturing sector initiated by

the major entry of British manufactures into India from 1813, which continued till the

end of the 19th century14• In comparison to that destruction, the growth of the modem

industrial sector remained limited. Yet India's backward capitalism came to acquire in

its own specific way some of the features of advanced capitalism.

1.1.1 The Corporate Sector, Managing Agencies and Managing Agency Houses

Capitalist industrial enterprise from its very birth in the second half of the 19th century

had a pronounced corporate character in the sense that extensive use was made of the

joint-stock company15• But while it exhibited this feature characteristic of advanced

capitalism from its beginnings, corporate enterprise in India never possessed that other

singular feature associated with the expression 'corporate system', namely a wide

11 Habib (2001/1975, 2001/1988) 12 There has been a debate on whether France ever experienced a take-off that in Rostow's contention took place between 1830-60. But many identified the mid-19th century as the critical period [Fohlen ( 1976)]. For Germany, the beginning of the spurt is dated anywhere between 1834 and 1850 [Borckhardt ( 1976)], and in ltaiy's cases late into the second half of the 19th century [Cafagna ( 1976)]. In the United States, modern manufacturing started emerging in a big way only in the decade and a half preceding the American Civil War of 1861-5 [Hacker (1947)]. Japan had to wait for the Meiji Restoration of 1881 to succeed before beginning its march along the path of industrialization [Norman ( 1940), Halliday ( 1978)]. The data for the sectoral distribution of national product and labour force clearly demonstrates that in the mid-19th century, France, Germany, Sweden, Italy, USA, Japan were more agrarian than industrial economies [Kuznets (I 972), pp. 88-93 and I 06-1 07]. 13 In 1750, India accounted for a quarter of world production of manufactured goods [Tomlinson (1993)]. Even as late as 1870, India ranked only behind Britain, USA and Germany in industrial output, accounting for over II% of the world total. This share slipped to little over I% by 1913 [League of Nations, cited in the Internet Modern History Sourcebook]. 1 ~ This has-of course been a hotly debated subject [Morris, Matsui, Chandra, and Raychaudhuri ( 1969). See also Bagchi ( 1976)] 15 Though not all capitalist property was corporate owned, in most major industries that was the case throughout [Lokanathan ( 1935)]

II

dispersion of the ownership of shares amongst a ·large number of individuals. The class

of shareholders in India remained relatively sm~l even·. though it widened somewhat

over time, and the share-ownership pattern of individual companies was usually narrow

in spread.

The Companies Act of 1850, following the English Act. of 1844, and the subsequent

easing of some of its restrictive provisions facilitated the early association of industrial

enterprise with the joint-stock company16• Prior to that no legislation existed for general

incorporation in India. Corporate status could be obtained only through individual

legislation's in India or Britain, and only five such incorporations were granted before

1850. three of which were to the Presidency banks which were arms of government

policy. Joint-stock companies before 1850 were primarily adaptations of the partnership

form of the enterprise, and many of the early unsuccessful ventures in manufacturing

were initiated through joint-stock companies.

The growth of the corporate sector following the 1850 Act was rapid though also

anarchic and unstable, with a high rate of company failures accompanying it, and its

time pattern reflected the operation of temporary factors like manias or fads, as well as

fraud, behind company formation 17• Table 1.1 however does not provide a complete

picture of the corporate sector because both the Indian and English Acts served to

provide the legal fran1ework for companies operating in India. There were thus two

main kinds of such companies - sterling companies and rupee companies. The former

were those that were incorporated in Britain but operated in India, or whose registration

was ultimately transferred to Britain. The rupee companies were registered in India, and

the table refers to only these companies. Sterling companies built the first railways in

India, and sterling capital accounted for the larger part of the paid-up capital of the

corporate sector in India up to indepcndence18•

Table 1.1: Companies at Work and their Paid-Up Capital

Year No. of companies Paid-up capital Year No. of companies Paid-up capital at work (Rs.crores) at work (Rs. crores)

1860 48 0.28 1920-21 4708 164.5 1881-82 505 15.68 1930-31 7328 282.7 1890-01 928 24.46 1938-39 11114 290.4 1900-01 1366 37.06 1944-45 14859 389 1913-14 2744 76.6 1946-47 21853 478.7

Source: Rungta ( 1970) up to 1900-0 I, and Dar ( 1973a) thereafter.

The sterling companies were entirely under the control of Europeans. But incorporation

in Britain was often merely a matter of convenience and did not mean that the share

capital of sterling companies came from incomes originating in Britain19• On the other

16 In 1857, companies other than banking and insurance companies were permitted to be organized on the basis of limited liability, and this facility was extended to banking and insurance companies in 1860 and 1866 respectively. [Rungta (I 970)] 17 Rungta ( 1970), Das (1938) 18 Ray ( 1985) 19 Bagchi (1980)

12

han<L rupee share capital also came from European· residents in India, but more importantly, many rupee companies were under the control ofEuropeans20

•

The popularity of the joint-stock company despite ·the underdeveloped nature of capitalism in India was not surprising, once it was an available institution through its transmission from a more advanced capitalism. The limited liability associated with share capital would have made it the more attractive mode of advancing capital for undertaking risky industrial ventures. At a time when no specialized financial institutions existed to perform that function, banks largely concentrating on short-term

finance, share capital issues became one of the major means for financing fixed investment. Though such capital was typically raised from a relatively small circle of people21

, that centralization of capital was an important function performed by joint­

stock company is indicated by the fact that public companies were in greater number

than private ones right through the period22•

A second prominent feature of industrial organization m India during the colonial period was however the prevalence of an institution in· the corporate sector that was

perhaps unique to India. This was the institution of the managing agency. Both European and Indian controlled companies that developed in the second half of the l91

h

century had this particular form of management from the very begirming. The origins of this peculiar institution are somewhat obscure, though it is generally believed to have originated in the first half of the 19th century23

• It involved the contractual vesting of

the responsibility for managing the affairs of a company to a managing agency, which could be a proprietorship/partnership firm or even a narrowly held joint-stock company. In return, the managing agency would receive a remuneration or commission, which

were fixed in different ways. The period of this contract could vary but in most cases, once a managing agent can1e to be appointed it appeared to have been very difficult for shareholders to dislodge it24

•

The combination of these two institutions in the form of a joint-stock company under the virtually perpetual control of a managing agency firm represented an interesting

20 In 1914-15, the rupee companies controlled by Europeans accounted for 65.35% of the capital of rupee companies while companies under mixed control accounted for 13.73%. The share of European controlled companies did decline thereafter but was still 47.98% in 1944 falling thereafter to 26.31% in 1947. The share of Indian controlled companies in rupee capital did not come level with the European share till 1942, and c_rossed the 50% mark only at the very end. [Ray ( 1985), pp. 49-53] 21 Das (1938), Lokanathan (1935). See particularly Table on p. 8 in Das, which also appears in Lokanathan on p. 182 22 In 1916-17, there were 2306 public companies and only 207 private companies with respective paid­up capitals of Rs. 85 crores and Rs. 5.8 crores. Even as late as 1945-46, the number of public companies at I 0129 was more than that of the 7214 private companies, and they accounted for over three quarters ofthe total paid-up capital [Dar 1973a)] 23 According to Rungta, this institution evolved out of the solution of the problem posed by the high establishment costs of the life insurance business which was all India in scope but limited in scale, since at that times only Europeans were insured. The agency houses therefore ran the insurance companies out of their existing establishments and received a small remuneration for their services. For other parts of the country and the Far East, other agency houses were appointed as sub-agents of the principal agency house.[ Rungta (1970), p.223]. A slightly different view is that of Kling, who attributes the origins of the managing agency, in the period 1834-47, to the mercantile houses that replaced the old agency houses after the latter collapsed.[Kiing ( 1994)] 24 Rungta ( 1970), Lokanathan ( 1935), Das ( 1938), Basu (1958)

13

instance of corporate enterprises having a strong proprietary character based not on the combination of ownership and control, but potentially on their complete separation. As in the case of the joint-stock comJJany, the managing agency too was not a universal feature of capitalist enterprise in India. But by the 1870s; the predominance of the · combined presence of the two in most of the major sectors was clearly visible.

A third feature of the industrial organization of colonial India was one that represented a second level or tier of centralization of control over capital, over and above that achieved through the joint-stock company. The original form of this was the 'Managing

Agency House', wherein a number of companies were managed by a single managing agency firm25

• Though instances of a managing agency firm managing a single company were quite common, such was the overwhelming presence of the phenomenon

of a single managing agency controlling a number of companies that the managing agency system came to be treated as being synonymous with it.

The combination of centralization of capital by joint-stock companies and that of control of companies, and that too on a very narrow base of capitalist development,

gave capitalism in India a highly concentrated character that remained its stable feature from its inception to the end of colonial rule. Thus capitalism in India was

born with a pronounced monopoly feature. This monopoly capital was different from that which emerged in the advanced capitalist economies because it was not associated with large-scale integrated production processes and technological sophistication and innovation. It reflected not an advanced stage of capitalist development but rather was a

product of a backwardness of Indian capitalism in a colonial context.

Concentration, the prevalence of the managing agency mode of management, and

multiple-company enterprise, were distinct phenomena that did not, logically speaking, have to necessarily go along with each other and therefore have to be explained independently. Unfortunately most available explanations tend to ignore these distinctions between them and treat them as a composite whole.

The main reason, according to Kling, that the managing agency system emerged was the problem that the investing public faced in finding the expertise for managing

enterprises; it "was the only sub-system in the economy with the capital, business experience and continuity to provide the entrepreneurial and managerial talent. "26 This argument, premised on the presumption of a shortage of entrepreneurial talent and the

difficulties in raising finance, is in fact the typical explanation in the literature on the

subject for the prominence of the managing agency system in the industrial scene after the 1850s, and the emergence of managing agency h~uses27 • While echoing these,

Tripathi and Mehta added another dimension to it relevant for native enterprises, arguing that the popularity of the managing agency system was also due to the fact that

25 The Managing Agency house became first the typical shape that the dominant European enterprise took in the pre-1914 period, and subsequently also served as the model for the large Indian business groups. The latter however, sometimes used more than one managing agency firm to control separate combinations of companies [Lokanathan ( 1935)]. 26 Kling ( 1994), p.87 27 See for example, Lokanathan ( 1935), pp. 20-24; Das ( 1938), p. 50; and Basu ( 1958), pp. 1-5.

14

it was in tune with the prevalent social realities of the country like the joint-family­system28

•

Scarcity of capital and entrepreneurial ability. even if true, can at best ser-Ve to explain concentration in general, and the predominance of European enterprise. That a few possessed entrepreneurial ability and could command capital may explain why a few dominated the industrial scene and were responsible for most industrial ventures. But it

neither explains why they chose to undertake industrial ventures through numerous companies nor why they chose to take recourse to the managing agency institution for managing these companies. The attributes that enabled a few to dominate were attributes of particular managing agents only, but not of the managing agency system

as such. Moreover, the centralizing of control over large amounts of capital by these particular managing agents, and even the 'economizing of entrepreneurial resources'29

possessed by them, did not necessariiy require integration of the activities of different companies through the control of a single managing agency. The same could have been

achieved by unifying the diverse activities under a single corporation that in turn could have been controlled by the same managing agency as was the case with many managing agencies that managed a single company 30

. After all, it was not the case that

the many companies that constituted a managing agency house first came up independently and only afterwards was the centralized management established over them31

•

Rungta offered a somewhat different explanation for the early association of the managing agency with industrial enterprise, even though unlike the original life insurance business to which according to him it owed its birth, industrial concerns were

large enough to sustain independent establislunents and in fact required them32• For

him, since both the capital for, and the management of, industria! concerns had to come at that time from the merchant communities who also had other businesses as sources of making money, some of them would have been willing to take on the specialized function of managing industrial concerns only if it assured long term possibilities of adequate returns. The managing agency system served therefore as the mechanism

allowing some degree of division of labour in the management of businesses. Some merchants became managing agents who managed industrial ventures financed by

merchants who were preoccupied ~ith other businesses.

Rungta's hypothesis too would however seem to apply at best only to Indian enterprises of the early period, and still does not explain the phenomenon of centralized control

28 Tripathi and Mehta (1990), pp. 194-195 29 This expression is attributable to Lokanathan. 30 The centralization of management control of a number of companies in the same industry, and those operating in interrelated industries, as Lokanathan pointed out, resulted in the administrative, financial, and marketing integration of different companies, within the constraints of their independent legal statuses. They thus enjoyed many of the economies of large organisation, and had a loose oligopolistic and/or vertically integrated character. But these advantages were associated with a common control rather than the .separation ofthe sphere of control into different companies alternative. 31 "Unlike in other countries, the concentration of ownership and control has grown mainly through expansion and not so much through absorption, for it is the Managing Agents, who pioneered, nurtured, financed and manned the destinies of new concerns from their very inception." [Mehta, ( l952b) pp.I-2] 32 Rungta ( 1970)

15

over many companies. As he himself indicated, the phenomenon of one managing agency managing more than one company did not develop in Indian controlled enterprises to any significant extent in the nineteenth century. It was more pronounced in the case of European enterprise, particularly in Calcutta, where the horizontal and vertical combinations of companies under European managing agency houses had emerged in the 1870s. And these houses had by no means moved out of mercantile activities33• .

The possible actual reasons for the prevalence of the managmg agency system, understood simply as a system of management control over one or more companies, is however hinted at by Rungta's explanation. It comes out a little more clearly in Sengupta's description of the evolution of the managing agency system from the old agency houses:

"Traditionally, the agency houses had been doing business on behalf of others .... They had been receiving money in deposits from others, and with that doing banking business. This money was also invested by them in business ventures in the normal course. Thus it was easier for them, while promoting joint-stock companies, to turn to a known institutional form like the managing agency for maintaining control over companies."34

The combination of three things taken together then provides a credible explanation for the ubiquity of the managing agency. These are firstly, the desire of the promoter of an industrial venture to have secure control even when having to depend on external finance. The question of how to secure control arises whenever external finance has to be raised through the issue of shares, as was the case in colonial India. Secondly, the availability in the form of a managing agency contract of a relatively foolproof mechanism for achieving such secure control; and thirdly, the absence of any countervailing forces to the use ofthat mechanism. The potential restraints on the use of the managing agency form could have been either legal restrictions, or the possible adverse effects of its use on the ability of the enterprise to secure finance from others. The former restraint was virtually absent, since a managing agency contract was not a legal compulsion. It must have been also true that it did not typically act as a disincentive to the advancers of finance. This would have been the case if the advancers of finance other than the promoter were themselves not interested in management control but what particular management a company had was a relevant factor in determining whether an advance would be made or not. Indeed as long as the limits to the external finance an enterprise could mobilize depended primarily on its particular management, their secure control should have helped rather than impeded that mobilization. This would tend to acquire greater significance in the absence of an organized financial system, and in particular institutional sources of finance. The

33 "The managing agency in its classic fonn ·in India was the European import-export house based on Calcutta which took up the initiation and management of tea, jute and coal companies and later on branched out into some other industries as well .... But import-export trade continued to be a very crucial element in their business." [Ray (1985) pp. 262-3] 34 Sengupta (1983 ), p. 8

16

widespread use of the managing agency system in fact indicates the importance of external finance in the form of share capital for industrial enterprises in that period.

1.1.2 Industrial Concentration and Multiple-Company Enterprises in Colonial India

Concentration in the corporate sector at first expressed itself promi~ently in the form of the large European managing agency houses. The phenomenon of concentration could of course not be a result of that form since the managing agency house structure in principle was open to anybody to adopt, and in itself did not therefore constitute a barrier to entry. But even the contention that there was a scarcity of capital and entrepreneurial ability does not serve as a proper explanation of the high degree of industrial concentration.

There is no doubt that a high level of overall or aggregate concentration of: the industrial sector was in-built into the very limited development of capitalist enterprise in India. Given this limited and slow development of the industrial sector, there was inevitable natural association of it with a restricted size of the class of industrial capitalists35

• The real question then is the following. Was the limited development and European dominance a consequence of capital scarcity and a relative concentration of entrepreneurial ability with European managing agents, or were these the result of other factors that in tum limited the number of industrial capitalist enterprises and gave European enterprise a dominant position?

The base from which the capital was drawn for financing industry was undoubtedly small, and the sources were mainly domestic. But as many have stressed, given the scale at which industrial development took place, there was no overall shortage of capital right up to 194736

• On the contrary, the demand for industrial capital was inadequate in relation to supply. If that was indeed the case, then the available capital did not set the operative limit to the pace of industrial development. But it could still have been possible that the available capital could not be fully utilized because of an entrepreneurial constraint, so that its concentration in a few hands actually maximized the capital that could be used. That is, only a few had the 'reputations' necessary to command that capital.

But a reputation has to be founded on some basis. The fact that the advancers of capital considered the European Managing Agency Houses to be the most reputable did not necessarily have to be based on them possessing any inherently greater entrepreneurial ability. There is nothing to suggest any innate differences in the entrepreneurial ability of Europeans and Indians. Both the successful European and Indian enterprise entered industry from a mercantile background, and the indigenous mercantile community was

35 It is worthwhile getting a sense of this by highlighting the growth of the number of mills in the two major manufacturing industries before the First World War. In 1883-84, nearly three decades after the beginnings of these industries, there were only 23 jute mills and 79 cotton mills in India - and their numbers increased to 64 and 271 respectively over the next three decades till 1913-14. [Morris (1984), Table 7.1 on p. 569 and Table 7.2 on p. 576). This was the case in the two industries that accounted for a major share of large-scale industrial output and employment, and the total number of large-scale establishments was a little over 1300 in 1915. [Levkovsky ( 1966), Table Ill on p. 58) 36 Rungta ( 1970), Bagchi ( 1980), Ray ( 1985)

17

much larger in size. Moreover, Indians or Europeans with a professional and technical background who entered industry in fact tended to be generally unsuccessful37

• British

merchants therefore had no advantage over Indians on account of an industrial background. Additionally, though European enterprises dominated because of their larger individual sizes, the number of large-scale establishments initiated by Indian

enterprise even before World War I appears to have been greater. The number of European enterprises was actually not very large. Entrepreneurial ability amongst Europeans therefore was apparently scarcer!

It should also be noted that Rungta highlighted a number of instances of "share manias", and the duping of investors by unsavory managing agents in the l91

h century. This would mean that finance was in certain circumstances forthcoming for industrial

investments by even untried and untested entrepreneurs, but not all recipients of this finance were able to build a stable reputation of being successful 'industrial leaders'. On the other hand, amongst the native entrepreneurs, even those who were successful were

unable to build on their experience as well as consequently acquired 'reputations' to

break into the sectors where European enterprise dominated before the First World War.

These would indicate that it was the colonial context, and not the scarcity of capital and entrepreneurial ability, that inhibited industrial development in general and also gave European enterprise a decisive advantage, the latter especially in those spheres within

which the development was mainly restricted. Underlying the success and 'reputations' of European enterprise, and their ability to concentrate the command over capital were the following: their monopoly over foreign trade and the profits from it, the patronage

of government, the racial attitudes of European investors, bankers, and officials, and the monopoly power in tum that all of these engendered38

• These mutually reinforcing monopolies were critical ingredients of success in industrial ventures in a backward economy. They not only favoured European enterprise, but also did so in a manner that restricted the number of even European enterprises. The 'collective monopoly' of the European managing agency houses and their individual monopoly positions went hand

in hand. The exercising of the monopoly power implied in the collective monopoly also necessarily involved relatively large individual spheres of operation. Their relative small numbers also made their collusion relatively easier. The prevalence of int~r­

locking directorates between companies managed by different managing agencies and industry associations and chambers of commerce with restricted entry reflected this39

•

Though European dominance receded somewhat in the period after the First World War

and Indian capital grew in prominence, neither the pace nor the nature of the processes underlying this shift were such as to undo completely the high levels of concentration. The scope for the expansion of industrial enterprise in general and Indian enterprise in

particular still remained constrained. Th~ pre-existiQg domination of European monopoly houses also meant that the Indian capital that could challenge it also had to

37 Bagchi (1980), Ray (1994b) 38 Bagchi (1980) 39 Mehta ( 1955), Bag chi ( 1980)

18

acquire large proportions. It was thus those small sections within the mercantile communities, who could in a sense take advantage of factors similar in nature to those that facilitated the rise of European dominance, which were the ones who made the major entry into industry. The command over finance based on their own individual large accumulation and their connections with the money market associated with the internal trade; their connections with the domestic market through the control of the internal trade by the traditional mercantile communities; their prominent position and connections within these communities; and their ability to extract some concessions from the state - provided the springboard for their entry into the industrial sphere.

Indian capital too therefore very rapidly acquired a pronounced monopoly character though the tendency of expanding wherever opportunity presented itself probably gave them a more conglomerate character. One of the instruments of increased relative Indian prominence in the sphere of capitalist enterprise, acquisitions of European concerns, also facilitated the reproduction of concentration. Like European enterprise, cultural and community affinities, including that provided by the overarching category of "Swadeshi" enterprise, formed the basis for the collective unity of Indian capitalists. Finally, just as the prominent European managing agencies enjoyed the privilege of state patronage, after independence these large Indian industrial houses were to use a similar kind of patronage. The change that was taking place in the years leading to independence was thus the gradual replacement of the combination of the collective monopoly of Europeans and their individual monopolies by an Indian equivalent, and not the erosion of monopoly and concentration itself.

It is worthwhile remembering that even as Indian enterprise closed the gap between itself and European enterprise, it also simultaneously distanced itself from not only the mass of the Indian populace, but even the members of the communities from which they originated. The fact that this distancing may not have involved social distancing of the kind that was practiced by European businessmen only serves to partially obscure another fact - that relatively few Indian industrial houses carne to occupy the centrestage of Indian industrial enterprise before independence. Even a large part of the business communities from which this enterprise emerged remained confined to mercantile activities. The difference was simply that the division of functions between all of them and European enterprise was replaced by a similar division between most of them and the few amongst them who had graduated to a higher level.

That still leaves us with the question as to why 'industrial combinations', as they were also called40

, assumed this particular form of a number of companies being under a common centralized control rather than taking the form of a large multi-plant and multi­divisional corporation. There seems to be no clear explanation for this in the literature. But an explanation there must be because it was a typical pattern without being essential to concentration, and therefore not an accidental. occurrence. Not only the early European Managing Agency Houses, but even the Indian big capital of the post­War period, adopted this system, though they often used more than one managing

40 Mehta ( 1952b ), Kothari ( 1967)

19

agency. A definitive anS\\'er to the question why they did so is not possible here. But perhaps the following can serve as a tentative hypothesis.

The reasons why the limited liability associated with investments through joint-stock companies was attractive for the financers also provided for promoters a possible rationale for dividing the enterprise into different companies for undertaking potentially

separable ventures. Since legally the property owning entity would be the individual

company and not the combination, any failure of a particular venture or part would not threaten the other assets of the combine held through other companies. Insofar as

technological economies did not dictate that production be concentrated in one unit, and centralized control could still allow many of the other economies and advantages of combination, it would seem rational to divide the enterprise into different companies.

Certainly, the industries that were predominant during the colonial period, and the

nature of technology they involved, were such as to afford such possibilities. And the uncertain nature of success of any industrial venture in that period would have provided

a strong incentive to take advantage of these. The multiple company structure of monopoly enterprises was perhaps therefore related to the emergence of monopoly capital in a backward context. But once it had emerged, there were reasons why the

structure itself came to outlive the circumstances of its birth, and the original managing

agency houses became the precursors of the business group41•

1.2. INDEPENDENCE AND THE NEW CONTEXT OF INDIAN CAPITALISM

With the end of British rule in 1947, and the accompanying partition of the country, one chapter in the history of development of capitalism in India came to a close and a new one began. Insofar as its subjugation to foreign interests had impeded its development, independence was a political transformation of immense significance in shaping the

subsequent historical course of the Indian economy. But the transfer of power associated with independence was unlike that of a typical social revolution that represents a decisive episode in the transition from one social formation to another.

Foreign rule ended in 1947, but it left behind the economic and social structure that had been created under its aegis.

Indian society's unification within a single political and administrative structure with a

centralized state, and the creation of social classes with a 'national' character, was itself a part of colonialism's legacy42

• But the Indian nation that emerged from it, with it's corresponding 'national economy', was beset with internal contradictions in particular

those emanating from its variegated class structure.

The economic structure of Indian society at independence did possess an important capitalist segment with its corresponding class divisions. Despite the interests of both being objectively pitted against foreign rule the contradictions between indigenous

41 These are discussed in the next chapter 42 Desai (2002). The political and administrative unification under British rule had however been somewhat restricted by the division between British India and the Indian states formally under the rule of native princes, and was further partially undone by the partition which accompanied independence.

20

capitalists and workers had surfaced much before independence·13• The growth of Indian

nationalism and the Russian Revolution of 1917 inevitably also contributed to the working-class and its movement going beyond mere economic struggles and acquiring an increased political orientation. It became a significant enough political force in Indian society for the ideas of'socialism' to penetrate even into the mainstream national movement, and for Indian capitalists to become self-conscious of the need to politically meet this challenge. 44

•

Notwithstanding all of these, however, the process never went far enough till independence for that political transformation to threaten in any fundamental way the elimination of the capitalist class or its dominant monopoly part. On the contrary, independence provided the opportunity for this class to promote its own development with the support of the state. While there still was a remnant of the old foreign

-···:..eomponent connected with the empire in the capitalist class in India, the balance of power between them decisively shifted in favour of the indigenous one.

However, the class structure of Indian society at independence was not that of a primarily capitalist one. Co-existing with capitalist relations was the widespread prevalence of pre-capitalist relations that had survived in modified forms through the transition brought about by colonialism. Particularly in the agrarian economy an entrenched pre-capitalist structure prevailed. There were many features integral to or associated with the agrarian structure, and it was not one homogenous structure but rather, as P.C. Joshi said, 'a sum-total of regional structures'45

• Nevertheless there was a common essence to these different structures, which was captured by Daniel Thorner through his concept of the "built-in- depressor" in the agrarian structure46

• Though based on a highly oversimplified picture of the division of agrarian society into three main classes- maliks (landlords), kisans (peasants), and mazdoors (agricultural labourers) - it nevertheless served to highlight three important inter-related features associated with the agrarian structure47

• Firstly, the dominant position within that structure of a parasitic class of landed interests who, though they were only a small minority of the agrarian population, monopolized a major part of land ownership and extracted a significant part of the produce from tenant farmers in the form of rent and usurious interest. Secondly, that such a structure was inimical to investments in agricultural productivity and gave rise to a prevalence of small-scale agriculture. Thirdly, even as it kept agricultural productivity low, it gave rise to a highly

43 lntennittent strikes by industrial workers began in the 19th century, and a modem organized trade union movement came into being in the period after the First World War. For a detailed history of the development of the working class and its movement, see Sen, Sukomal (1997). Also see Dutt ( 1983 ), Ch. XII, pp. 382-435. 44 At one point of time, some Indian capitalists even considered fonning a separate political fonnation to represent the interests of both European and Indian capitalists. For a discussion of this, see Ray (1985), Ch.6 45 Joshi (I 9J5), pp. 200 46 Thorner (1956) 47 Thorner's three-class typology ignored the divisions within each of the groups, in particular the first two. Proprietary rights in land on the basis of which rent was extracted were often characterized by a hierarchy of such rights because of sub-infeu~;:::::an~ the peasantry too was significantly differentiated. /..f(~P-

!l~'l>r--'"' THESIS . 'f 338.6440954 .:'.~~lit M4584 Bu

;." .. 21

lllllllllllllllllllllllllllllll "T"I lA ,..,,...1"\,...

concentrated distribution of agricultural income meaning that the vast majority of the rural population had barely subsistence levels ofincome-'8•

The inordinate complexities of Indian society however are incompletely captured by what has been said above, and not merely because no detailed description has been made of its variegated classes. There were also other dimensions to that complexity -

· in particular the continued survival of the institution of caste and the tremendous religious, linguistic, and cultural diversity of the Indian people.

Two centuries of colonialism bequeathed as its legacy to independent India a peculiar underdeveloped structure characterized by the co-existence of pre-capitalist and capitalist relations of production, of widespread poverty and the firm existence of a mode of production that had brought about a dramatic expansion in world production in the pr~ceding two centuries. India's. peL_capita production and income levels were amongst the lowest in the world, and only a small fraction of the levels attained by the advanced nations. It was still a primarily agrarian economy, with the agrarian sector accounting for over half the output and three-quarters of total employment. Yet it included a capitalist industrial sector of a size and diversity rare amongst Third World economies of that time, a capitalist sector which shared with advanced capitalism the feature of being dominated by a monopoly segment. This modem industrial sector still co-existed in tum with a surviving traditional manufacturing sector (or its modified version) that was as large in terms of its contribution to national output and accounted for a larger share in employment.

Table 1.2: Structure oflndia's GDP, 1948-49 (Percentage to Total GDP)

Primary Agriculture Secondary Manufacturing Registered Unregistered Teritary Manufacturin~ Manufacturing

53.7 50.4 16.4 12.5 6.0 6.4 29.9

Source: Sivasubramonian (2000), Appendix Table 9 (d).

1.2.1 Historical Constraints on Capitalist Development

There are at least three interrelated and yet distinct senses, not collapsible into each other, in which one can talk about the constraints facing, or the potentialities of, capitalist development in India at the time of independence. These are related to three different meanings that may be attached, in the Indian context of that time, to the expression capitalist development. In one sense it could simply mean the quantitative growth of the capitalist sector of the economy, i.e. the play of the expansionary nature of the capitalist accumulation process. In a second sense it could mean a qualitative expansion, the greater penetration of capitalist. relations of production into other spheres of the social economy. Finally it could refer to an elimination of economic backwardness through the agency of the capitalist mode.

48 The figures given in Bettelheim (1977), pp. 25-26, would illustrate this: The average annual income per person in 1950-51 was Rs. 3200 for maliks who constituted 17% of rural households, Rs. 130 for kisans whose share in households was 45%, and Rs. I 04 for the 38% of mazdoors. At the same time, the per capita national income was Rs. 265.2, which was in any case amongst the lowest in the world.

22

Historical constraints existed in relation to all three senses. But the ones we are concerned with here are those in relation to capitalist development in the first sense, but on which the other two sets of constraints had a definite bearing. Creating the appropriate conditions for such capitalist development was the direct and immediate interest of the capitalist class that emerged as the leading class at independence. It could not have been otherwise since that class was driven by its own objective interest and not by any social mission to radically transform India.

Capitalist industrialization had to be quite clearly the key factor in facilitating capitalist expansion. The limited extent of industrial development in the colonial period expressed itself in a lop-sided development where there existed important gaps in the production structure, particularly in the case of capital goods and key infrastructure sectors. Notwithstanding the relatively diverse nature of India's industrial sector at independence, it was still dominated by technologically unsophisticated light

industries.

Table 1.3: Factory Sector in India (29 Major Industries), 1947: Distribution of Factories, Fixed Capital, Total Value of Products and Value Added(% to Total)

Broad Group No. of Percentage Share in Aggregate for 29 Industries In: Industries in Factories Fixed Value of Value the Group - capital Output Added

Food, Beverages, Edible Oils, etc. 8 49.42 18.87 30.58 15.16 Cotton, Wool and Jute Textiles 3 12.50 41.22 49.65 59.80 Plywood, Paper and Matches 3 1.94 3.47 1.85 2.09 Leather I 1.26 0.35 0.55 0.42 Cement,G lass, Ceramics 3 3.76 4.32 1.34 1.74 Chemicals, etc. 3 4.75 6.43 4.34 5.12 Metals 2 4.68 16.42 7.18 9.38 Machinery, Appliances, etc. 6 21.69 8.93 4.50 6.28

TOTAL 29 100.00 100.00 100.00 100.00

Source: Third Census of Manufactures, 1948, Vol. I.

This however represented the starting point of independent capitalist industrialization, and therefore was potentially changeable through it. However, as in the case of the adverse effects of two centuries of tribute transfer on the potential capital, limited industrialization had left some irreversible effects of significance for any subsequent industrial expansion. In the long transition from where it was before the beginning of capitalist development to where it was at independence, there did emerge historical moments where some critical elements for a 'take-off were present49

. But the very context of that transition meant that other crucial elements were missing. Indian capitalism after independence therefore had to contend with what Gerschenkron had termed the 'accumulated disadvantages ofbackwardness'50

•

One important expression of this was that the scope for industrial expansion based on the existing ·domestic market had been virtually already exhausted by the time of

49 Ray pointed out that the phase of railway construction in the 191h century, and that leading up to, and

during, the second world war, as two major occasions "when India payed a heavy price for the policies of her colonial government". [Ray (1994b) p. 69]. 50 Gerschenkron (1962)

23

independence. This market had been in any case a narrow and stagnant one. though by no means of insignificant size. The fact that the industrial expansion on the basis of the domestic market was spread over a long time rather than being concentrated in a short span had weakened the potential linkage effects that could have contributed to the widening of the industrial structure. The high degree of leakage through imports of similar linkage effects of railway construction, and the limited public expenditure in general, only aggravated this. The industrial sector's own contribution to the domestic ~arket and its growth had therefore also remained limited. Since history could not be reversed, a "big push" that could alter this situation could no longer be of the kind that may have been possible earlier.

The limitations of the Indian industrial structure were sharply accentuated by the rapid changes in the global technological context of industry after the Second World War51

•

The incongruence of the narrow domestic market in Jndia with the scales of production that the prevalent technology and the process o·- continuous innovation in it involved became more pronounced than might have been the case earlier. So too was the case with the gap between the structure and the technological package of the industrial complex in India and that in the industrialized world. Essentially too little had changed in India over its industrialization process under colonialism while the change outside had been rapid.

While the end of colonialism had enhanced the possibilities for the advance of indi ~enous capitalism in India under monopoly dominance, such an advance had to cor . ..!nd with the existing internal and external constraints, and their complex interaction. Monopoly capital in India after independence was faced with a dual challenge. Internally it had to deal with an entrenched pre-capitalist agrarian structure and externally it had to confront its more advanced international counterparts, and the inevitable interaction with the economies from which they originated and their respective states. An element of mutually reinforcing compromise characterized the meeting of both these challenges.

1.2.2 The Agrarian Constraint

The existence of a pre-capitalist agriculture also means the existence of a dominant class, or classes, within that sector, and an extremely narrow social base of Indian capitalism. That in tum meant that the capitalist class had to share state power with these landed interests, which precluded any possibility of the state in independent India becoming an instrument for radically restructuring the property relations in the agrarian sector. The consequence of this was the existence of an enduring agrarian constraint on industrialization, and therefore on capitalist development, in independent India52

•

Relevant to the Indian context were two different broad mechanisms through which the agrarian constraint operated.

51 Ray(l994b) 52 For a discussion of the meaning of the agrarian question, particularly in relation to Asia, see Byres (1986)

24

Once a capitalist industrial sector was present in the Indian economy, it had an internal

potential for accumulation or reproducing on an enlarged scale. But insofar as the sector

was not self-sufficient, it had to necessarily rely on exchange with the agricultural sector or international exchange to realize this potential. A backward and slowly growing agriculture could then restrain industrial expansion below its maximum

internal potential by its adverse effects on the supply of agricultural prod.ucts ·for the

industrial sector, that on the market for industrial products, and on the availability of foreign exchange for imports of industrial products. The last of these could be due to

the restricted ability of the agricultural sector to be a net foreign exchange earner, or because of imports of agricultural products being .necessitated by shortages in their

availability.

The focus of much of the literature on the effects of the agrarian sector on Indian industrialization has been on the operation of this kind of a broad mechanism. Supply

constraints (of agricultural raw materials and wage-goods), demand constraints and a weak inducement to invest, a squeeze on the savings in the industrial sector due to the

tilting of terms of trade between industry and agriculture towards the latter, and the inflationary barrier on public investment, have been highlighted as the various potential

expressions of how a slow growth of agriculture can and has acted as a drag on industrialization53

•

The second mechanism of the agrarian constraint was through the effects of a pre­capitalist agriculture on the availability of surplus for the industrial sector's expansion 54

•

The surplus generated in both the industrial and the agricultural sectors could potentially have been utilized for investment in industry. A backward agriculture not only limited the magnitude of the agrarian surplus below its potential levels55

, it also inhibited the transfer of that surplus to industry directly or through the state. Indeed, in the Indian case the participation of the dominant landed classes in the ruling alliance and the low consumption levels of the mass of the agricultural population did not only

limit the ability of the state to draw resources from the agricultural sector. The same reasons also resulted in demands on the state's resources.

It is also worthwhile noting that the delay that had already occurred in the resolution of the agrarian question also made its effects more severe. In the colonial period, the

agrarian sector had been the principal base for India's exports, which financed not

merely its imports of industrial products but helped maintain a recurrent export surplus. The agrarian sector had also provided a substantial part of the state revenue for a long time and financed the unilateral transfer of tribute. The potential that had then existed for utilizing such exports and the surplus for expanding capitalist industry was no

53 Chakravarty (1997/1973, 1997/1979), Patnaik, P (1972, 1995/1984), Raj (1976), Nayyar (1983), Bagchi (1970, 1981), Mitra (1979), and Patnaik and Rao (1977), The mainstream opinion however shifted in the 1980s towards a thinking that the agricultural constraint had ceased to operate after the mid 1970s. For a contemporary contestation of such a view, see Sen, A. ( 1986). The question of the importance of agricultural growth for industry however made its reappearance in in the late 1990s. 54 Surplus means surplus over and above consumption requirements 55 In the short-run however this may not happen even when production is below potential levels if pre­capitalist agriculture also squeezes consumption within that sector correspondingly, though there would be a long-run implication for the surplus of restrained agricultural growth

25

longer available after independence. In the post-independence context, let alone the

limited ability of agriculture to be a foreign exchange earner, the domestic supply

situation of agricultural products also acquired a greater significance. The population

was larger and increasing and this was happening in the wake of the trend of declining

per capita food production. The political implications of food scarcity were also rather

different than those that prevailed in the 19th century, when the colonial rulers could

permit exports of foodgrains even when millions died in the recurrent famines that

characterized that period. Moreover, by independence very little surplus land was left to

which cultivation could be extended.

It is not that the Indian State after independence did nothing to deal with the agrarian

constraint on industrialization. That would have been out of character for a state that

after all did represent capitalist interests. But the measures so taken had to be naturally

also constrained by the necessary political arrangements on which such representation

had to be founded, viz. an alliance with the dominant interests in agriculture, interests

which in tum themselves independently called forth state intervention on their behalf.

For reasons of maintaining a minimum political stability, considerations of the impact

of agriculture on other classes and sections of Indian society outside the ruling alliance

had also to be taken into account. Both what the state had to do, and what it could not

do, were conditioned by these.

Given the constellation of forces acting on the Indian State, it is not surprising therefore

that it came to be actually very deeply involved in the agrarian economy of independent

India56• The significance of this in creating the economic and political conditions for an

accelerated process of capitalist industrialization after independence should not be

underestimated. But neither should they be exaggerated. Even in the sphere where their

impact was greatest, that of agricultural productivity, the success was rather modest,

resulting in what can at best be described as an arresting of the trend in decline in per

capita production. It was not the replacement of a slow agricultural growth trend by

consistent rapid growth, but by a fluctuating growth of a slightly higher order marked

by a high degree of regional unevenness57•

The agrarian structure too did not remain completely static in the post-independence

period. As a result of the cumulative effects of the impetuses provided by state

intervention, the spontaneous influences arising from within the agrarian structure and

its interaction with capitalist development in the non-agricultural sector, agrarian

movements, and the operation of demographic factors, the agrarian structure did

experience some modifications over time. Though it might be difficult to describe

56 The key areas of the State's intervention in agriculture after independence have been the following: legislative measures for 'land reform' which were mainly enacted on an all-India scale in the 1950s and 1960s; public investment in agriculture and rural development in general; promotion of introduction of technological change involving shift to high-yielding varieties of seeds and increased use of inputs and some element of mechanization - including through subsidization of inputs and the facilitating of increased flow of subsidized credit to the rural sector; promotion of credit and marketing co-opertives, and intervention in trade in agricultural products, and particularly food - encompassing imports, government purchases as part of a price-support mechanism, a limited public-distribution system, and maintenance of stocks. 57 Rao, J.M. (1994) and. Patnaik, U (1994).

26

accurately what has happened in the agrarian sector in its totality, no ambivalence is required for making the assertion that the agrarian transition that could have enabled the

unleashing even within the confines of capitalism the fullest growth of productive forces has not yet happened in India. The processes of change have been largely slow and gradual not marked by any abrupt changes in relative positions of different sections

of rural society. Land ownership concentration has been essentially preserved again

without drastic changes of ownership distribution between different segments of village society. Yet large-scale classic capitalist agriculture has not become prevalent, and with

increasing population the proportion of area covered by large holdings has in fact declined 58

.

As the capitalist accumulation process through industrialization unfolded over time in

India, it may not have faced in every particular period an operative constraint working through the first of the broad mechanisms mentioned earlier; But the reason why that

was sometimes the case is that the extent of realizable expansion in that period had been limited by the past operation of the agrarian constraint. And until a situation is reached

wherein the two mechanisms largely cease to operate so that their only effects on the future course of industrialization can be attributable to their operation before that point,

an agrarian constraint would continue to exist. Any suggestion that capitalist development in India has crossed that point would be patently absurd.

1 It is also necessary to appreciate the significance of the agrarian constraint in relation to

its historical context. It is not any process of capitalist development in any period of history that one is talking about, but that of a Third World capitalism taking place in the capitalist world economy since the mid-20th century. It was a particular world context,

and one that also did not stand still. The difference between a relatively slow and a more rapid process of capitalist development, and of their respective cumulative effects over time, could not in that situation have been merely quantitative in character. It also

mattered in determining the extent of the transformational impact of Indian capitalist development on its own context and correspondingly that of the world capitalist economy. With a large population and a high proportion of its vast land mass being arable, agrarian transformation in India offered immense possibilities for enabling

Indian capitalism to overcome all other historical limitations associated with a colonial past and late industrialization. But its inability to decisively deal with the agrarian question meant that it was unable to take advantage of these.

1.2.3 Indian Capitalism and the Capitalist World Economy

The general international situation confronting Third World capitalist industrialization at the beginning of the second half of the 20th century obviously applied to the

specific case of Indian capitalism. The relatively more favourable conditions for the advance of the Indian monopoly capital that emerged with the transfer of power lay in

the scope for an accelerated process of national capitalist development within its domestic economic space. The realization of that however in tum necessarily required

58 Sharma (1994). See also Table 12, p. A-69, in Nadkarni (1996). As has been said," ... you cannot have full-blown capitalist relations in agriculture until a major portion of the released labour-force can be employed in capitalist enterprises in other sectors". [Bagchi, ( 1981 ), p. 38]

27

a continued interaction with the international economy, albeit of a modified nature. That objective position of Indian capital after independence thus made for a duality in its relationship with international monopoly capitalism - with there being both a competitive as well as a collaborative aspect to it59

• This dual nature of the relationship in no way depended on any 'choice' being exercised by Indian monopoly capital with regard to the industrialization strategy or the degree of . internationalization of its own operation. Indian monopoly capital had historically developed its autonomous interests vis-a-vis international monopoly capital, interests which it was in a position to assert within limits through the Indian state. But these limits existed in the form of, and also because, the only possible sphere of pursuing those autonomous interests having to be within the capitalist world economy, that is within the sphere where international monopoly capital was both present and dominant. Indian capital could thus not have completely 'exclusive rights' over its sphere of operation even if that was to be entirely restricted to its domestic economic space and certainly not if it had to extend it to the larger international economy. Even the necessary but not sufficient condition for such exclusive rights, namely the ability of Indian capital to be completely self-sufficient within any possible sphere of operation in meeting the requirements for its advance, simply did not exist.

Indian monopoly capital's advance thus had to involve competition with the . assistance of its state with international monopoly capital as well as collaboration with it. The respective interests of the two were not coincidental but at the same time dictated their mutual interaction in unequal but not completely one-sided circumstances. The continued and permanent existence of foreign capital and capital flows, and foreign trade, integral components in the past subjugation of the Indian economy, were symptomatic of this. The difference that independence resulted in was that the orientation of the international interaction of the Indian economy came to be shaped by the state, within the constraints of circumstances, in accordance with the interests of Indian monopoly capital, and the capital operating in India became largely Indian controlled.

Working through various channels created by the international connections of Indian capitalism; the character and trends of the capitalist world economy exerted a significant influence on the course of Indian capitalist development after independence. The extent of that influence cannot be measured by simply the quantitative magnitudes of India's external transactions. Indian capitalism's post-independence journey under such circumstances was never really headed towards 'self-reliance', nor was it able to eliminate its unequal position in the capitalist world order from which that journey began.

I.3. CAPITALIST DEVELOPMENT IN INDEPENDENT INDIA: FROM AUTONOMY TO INTEGRATION

The historical context of Indian capitalism at independence shaped the strategy of capitalist industrialization that the Indian State adopted immediately after

59 Patnaik, P.(l975).

28

independence. This strategy had two main elements. Firstly, that the State would take measures to regulate the external interaction of the Indian economy in order to promote a national process of industrialization. The consequent restrictions on the inflow of commodities, foreign investment, and even technology from the rest of the world, were however for reasons outlined previously not to be absolute. The second and associated element was the. key role assigned to the state as an active agent of intervention in the economy as both producer as well as regulator. The state had to make critical investments in the infrastructure and industrial sectors where the configuration of the magnitude of required investments, gestation periods, and the associated risks and potential. returns, made private investments virtually impossible, but were also often the investment segments with the greatest potential linkage effects60

•

The role of the State as an investor again was relative in the sense that private capital too h{ld . .fl.:rok, in the 'planned' process of expansion, and it consequently also had ·to come within the ambit of regulation. For this, a system of licensing of industrial capacity creation and eXpansion and of imports, and approvals of foreign collaboration, were put in place. The State also took on the responsibility for developing the financial system so as to facilitate the financing of private investment. Public investment and public expenditure in general had to also play a key role in market expansion that was necessary to induce private investment.

Many commentators have noted that hardly any discordant voice existed at that time on the 'need for planning'61

• The existence of such a mood has been partly attributed to its international backdrop, the climate created by the contrasting experiences associated with Soviet planning and the Great Depression. But more importantly the idea of planning and its associated features of controls had been developing in tandem with the national movement and the increased assertiveness of the Indian capitalist class, and towards the closing years of British rule even the colonial administration had started talking about it62

. Tomlinson further also stressed that the extensive system of controls that Indian planning inherited was a direct outgrowth of the objective circumstances of the immediately preceding period, characterized by the dislocating effects of war and the transfer of power63

•

The leading role of the state and planning in independent India, and its attendant system of controls, was however not simply a result of the solidification of some ideas and systems whose origins lay in the past circumstances of Indian capitalism. Those circumstances had not only held back capitalist development but continued to do so, and without some kind of development those circumstances could never be effectively eliminated. The object of planning and state intervention, its raison d'etre, was accelerating that development and in particular capitalist industrialization.

60 Whether one looks at it from the balanced, or the unbalanced, growth perspectives, the crucial role of public investment follows. [Nurkse (1973), Hirschman (1961)] 61 See, for example, Patnaik P. (1999) 62 Chattopadhyay, R. (1991), Ray (1985), Chaudhuri, Sudip (1999), Srinivasan (2002/1994) 63 Tomlinson ( 1992)

29

Notwithstanding the rhetoric of the ·socialistic pattern of society• that accompanied it, it actually heralded the advent of State capitalism in lndiaf>-4.

At the level of detail the entire system appeared in many ways to be restrictive for private capital - the reservation of some sectors for the public sector, and the existence of multiple controls over, and the restrictions on, the decisions of private capital. At the individual level such controls, and the manner of exercising them, often evoked opposition from private capital. That was natural insofar as the manipulation of such controls became an integral element of the competition between capitals. Sometimes the opposition was also at the level of the class, but that reflected no more than the fact that the class and its state always approach an issue from somewhat different angles. But as the strategy was put into practice in the 1950s, Indian big business offered no significant resistance to it and presented no alternative to it65

• Indeed, the basic blueprint of the strategy that came to be adopted had already been outlined by leading representatives of Indian capital even before independence in their Bombay Plan and an accompanying second document - inclusive of the extensive system of controls66

• In what they said in it, and in the absence of any marked hostility to post-independence planning, Indian big business not only reflected its self-consciousness of being the leading ruling class after independence, but also revealed its monopoly character.

1.3.1 Instabilities and Shifts in State Policy from Independence to 1991

State economic policy after independence was however marked by periodic changes. The career of the post-independence strategy up to 1991 was marked by frequent adjustments in response to, or forced by, contingent circumstances that emerged as a result of the inherent contradictions within that strategy. State expenditures had to play an important role but the State always confronted political constraints that restricted its ability to gamer adequate resources for this purpose and imposed limits to its freedom in taking recourse to deficit financing. The fiscal difficulties of the state were compounded by the agrarian constraint, and despite the regulation of international interaction foreign exchange difficulties regularly plagued the industrialization process. The inherent difficulties of capitalist planning expressed themselves in a rather acute form in India as private enterprises themselves further undermined the in any case limited effectivity of licensing as an instrument for channeling private investment in 'planned' directions.

These contradictions meant that the capitalist industrialization process in India after independence was crisis-prone and beset with instability, though the pace of expansion of the Indian economy was more rapid than before independence. Apart from the year to year fluctuations, there were also different trends in different phases, and capitalist industrialization in India was marked by an inability to achieve prolonged spells of rapid growth.

64 Patnaik. P. (1975), Chattopadhyay, P. (1992); Levkovsky (1966), Bettelheim (1977). 65 Patnaik, P.(l999) 66 For a discussion ofthis, see Ray (1985), pp. 332-338

30

Table 1. 4: Trend Rates of Growth Rnl GDP in India

Sector 19~01 to 1946-47 19~51 to 19~65 1965-66 to 1979-80 1980-81 to 1989-90 Primary 0.4 2.6 2.7 3.0 Secondary 1.5 6.8 4.3 6.9 Tertiary 1.7 4.5 4.3 6.4 GOP 0.9 4.0 3.6 5.4 Per capita GOP 0.1 1.9 1.3 3.1

Source: Sivasubramonian (2000), Tables 9.3, 9.4, and 9.35

The initial flush of industrialization induced by the post-independence strategy was rudely halted in the mid-1960s as the three sets of constraints reared their heads in a rather dramatic fashion, in the background of two successive droughts and military conflict. The two long-term effects of this crisis on the State's strategy were a slipping of the rate of growth of aggregate public investment and the erosion of planning. The

-"'Hi~ othe~ effect, not all of whose,components were to last beyond a decade or so, was the increased emphasis on the agricultural sector. The mid-60s crisis also triggered a brief interlude of external sector liberalization from 1966 to 1968 from which however there was a quick and rapid retreat into one of the most restrictive phases of trade and foreign investment policy.

The growth of public investment may have slipped after 1965 but the period immediately succeeding its deceleration also saw the high tide of nationalization - of . banks, general insurance, the mining industries, and the oil sector which enlarged the state's significance in the economy. This was a new element insofar as the public sector had originally emerged in India as part of the process of building up economic and social overheads, and not out of any nationalization of industries67

• But even this nationalization was largely limited to spheres where the state had already been earmarked to play an important role in the post-independence strategy. The nationalization of general insurance (1973) and banking (1969 and 1980) was similar in nature to those of life insurance and the erstwhile Imperial Bank of India in the 1950s, and came in the wake of the state promotion of many new financial institutions before the mid-60s crisis. Even the nationalization of a few key basic industries was mostly in those sectors the responsibility for whose expansion had been already vested in the public sector. Manufacturing activity was largely excluded from the ambit of nationalization. Though there were government takeovers of private companies in many such sectors, this was mainly of those that had turned chronically sick, a process that continued up to the early 1980s.

The oil shocks of the 1970s, the collapse of the Bretton Woods system, another military conflict in 1971, and recurrent agricultural failures maintained the unstable environment for the next decade and a half. But even as these difficulties continued, culminating in India taking its first structural adjustment loan from the IMF in 1981, the position actually started moving towards an easing of pressures from the mid-1970s to the early 1980s due to a combination of the following factors. Firstly, the emergence of surplus foodgrain stocks from the mid-1970s and a rise in savings, and financial savings of the household sector, in the 1970s. Both of these were a result of

67 Habib, S.( 1975).

31

adverse income distribution trends associated with the crisis. The large foodgrain stocks emerged despite the fact that agricultural production growth was laggard, and

rise in the savings rate of the Indian economy happened in a background of virtual stagnation in per capita income. Secondly, the beginning of a major inflow of

remittances from Indians working in the Gulf, the fortuitous side effect of the oil

shocks. And finally,. the discovery of oil reserves at Bombay High that dramatically reduced petroleum import requirements in the early 1980s.

Initially a response to the crisis, and then subsequently induced by the easing of

pressures, was a process of trade liberalization particularly in the area of capital goods

imports. Beginning in the mid-1970s, this gathered pace from the mid-1980s. The decade of the 1980s also saw a cautious liberalization of FDI policy. The extensive

regulatory regime of internal controls also underwent changes. The extension of such ·- --~'~:- ...

controls in the form of the Monopolies and Restrictive Trade Practices (MRTP) Act in

1970, and the Foreign Exchange Regulation Act (FERA) in 1973, was followed by a

more or less consistent trend of liberalization particularly in licensing policl8• But even

in 1991, there remained still a significant set of controls that were only dismantled after that year. A second singular feature of the 1980s, a stepping up of public expenditure

growth, not so much of public investment as of consumption expenditure, accompanied this liberalization. The 1991 foreign exchange crisis brought this · expansionary phase to an end, and triggered the onset of a new 'liberalization era'.

All the shifts in state policy up to 1991 however retained the essential core of the post­independence strategy and its two key elements.

1.3.2 The State and Capitalist Industrialization Before 1991

The heydays of planning were effectively restricted to the decade of the Second and Third Five-year plans when what has been called the Nehru-Mahalanobis strategy was put into effect. Nevertheless the Indian State's central role in creating the conditions for expansion through its expenditures and direct participation in economic activity remained a key feature of the pre-1991 history oflndian capitalism 69

• T~e share of the. public sector in aggregate GOP, and in the financial and infrastructural sectors

steadily increased, as did the share of public expenditure in total expenditure.

Even in the industrial sector of the economy, the public sector's importance increased steadil/0

• Not just its own growth, but also through its backward and forward

linkages, the expansion of the public sector before 1991 played a major role in both the quantitative expansion as well as the process of structural change in the

68 Chaudhuri, Sudip ( 1999) 69 Chakravarty, while maintaining that despite the structural break in the mid-sixties planning continued to be practiced, also highlighted strategic shifts in the thrust of planning in response to emerging conjunctures. [Chakravarty ( 1987)] 70 In 1989-90, the public sector accounted for nearly 37% of industrial output, and nearly half that of the organized sector industrial net domestic product. Further, more than.61% of the net fixed capital stock in industry was in the public sector. The growth of public sector industry (and its sub-segment manufacturing) was consistently higher than that of the private sector (and private sector registered manufacturing). This was true even in the 1980s, after the major acts of nationalization in industry were done with and when private investment in industry grew faster than public investment.

32

manufacturing sector. Though its aggregate growth may not have recovered after the mid-60s slowdown, public investment nevertheless was of crucial significance in expanding the industrial base. This tends to get hidden if the focus is exclusively on the trends in aggregate public investment. The deceleration after the mid-1960s was mainly due to the collapse of investment in the railways, one of the relatively more

. developed infrastructure sectors. More significantly, the rate of growth of public investment in agriculture, the sector at the heart of the crisis after the mid-60s, virtually remained the same. In the 1980s, when agriculture had ceased to be a constraint in the same way, public investment in that sector slipped sharply but excluding that sector and community, social and personal services, showed a marked acceleration in its growth. The growth of the latter sector in the 1980s however was sustained through a rapid increase in consumption expenditure, and the rural sector was a major recipient of this expenditure.

Table 1.5: Growth of Public Sector Gross Capital Formation at 1980-81 Prices (Percent per annum)

Sector 1960-65 1965-80 1980-90 Industry 12.36 6.59 7.14 Agriculture 7.38 6.68 -3.88 Railways 17.74 -3.06 3.80 Transport byother means and Storage 0.85 8.76 4.45 Communication 30.32 7.72 13.26 Community Social and Personal Services 4.09 4.47 2.79 Total 10.64 5.38 4.95 Excludinf{ Railways 8.97 6.31 Excluding Agriculture and Community Social and 5.40 6.99 Personal Services

Source: CSO, National Accounts Statistics (NAS)

Through an expansion primarily of public investment in the period up to the mid-1960s, and then that of final consumption expenditure (essentially wages and salaries) in the 1980s, public expenditure came to play an increasingly significant role in creating a market for industry. In fact, the ability of the state to maintain rapid growth of its expenditures remained crucial for sustaining a rapid industrial expansion. When it could not, as in the period after the mid-1960s, industrial investment and growth also slipped.

Table 1.6: Annual Average Rates of Growth of Government Final Expenditure, Gross Fixed Capital Formation and GDP in Industry at 1980-81 Prices(%)

Sector 1950-65 1965-80 1980-90 Government Final Expenditure

GFCF Public Sector 11.52 4.05 5.96 Govt. Final Consumption Expenditure 6.4 4.56 8.10

Gross Fixed Capital Formation in Industry GFCF Registered Manufacturing 7.17 3.00 7.44 GFCF Total Manufacturing. 7.79 3.93 7.17 GFCF Industry 9.69 5.11 7.53

GDP of Industrial Sector GOP Registered Manufacturing 8.3 4.8 8.3 GOP Total Manufacturin_g 6.7 4.6 7.3 GOP Secondary 6.8 4.3 6.9

Source: NAS and Chaudhuri, Sudip ( 1999)

33

Thus it is quite clear that right through the period up to 1991, the State's spending and the expansion of the public sector remained critical for sustaining the momentum of capitalist industrialization. And utilizing such expenditures for that purpose to the extent possible remained an important element of State economic policy. It is also under the aegis of the State that there was a development of the financial system. Public sector financial instit~tions and the Government directly accounted for an overwhelming share in the mobilization of the financial savings of the household sector. Public sector financial institutions were also the important instruments of channeling finance to the private sector of the economy.

1.3.3 The External Sector and Indian Capitalist Development tilll991

Trade policy and that towards foreign investment moved between more or less liberal

phases right through the period befor~,l991, and the two did not alway§ move in the same direction and at the same pace71

• But the essential unity to external sector policies before 1991 was imparted by the following characteristics. Firstly, these policies were not focused on exploiting international markets to foster industrialization 72 but rather were always designed to support a protected domestic market based industrialization where Indian capital would dominate. For ensuring this, State mediation of virtually every external interaction and foreign exchange rationing remained a key feature. Additionally, the State became after independence and remained till 1991 the major medium of inflow of external capital to overcome the payments gap. These were characteristic features of even the 1980s external sector liberalization that was the immediate prelude to the more comprehensive liberalization of the 1990s.

The import to GOP ratio, and the trade deficit had always been highly correlated with . industrial growth trends. The deficit to GOP ratio was highest in the periods 1955-65 and 1980-90, both being periods where expanding public expenditure induced relatively rapid growth of industrial output. The interim period on the other hand saw lower ratios despite the oil price hikes. The relationship between the pace of industrial expansion and the levels of imports and trade deficit was due to the fact that imports had to feed directly or indirectly that expansion. A major part of these imports was to

71 For instance, if one were to juxtapose T.N. Srinivasan's phase chronology of the trade policy regime in India with a similar chronology for the policy towards foreign direct investment given by Nagesh Kumar, the picture that emerges is something like the following. In the early 1950s, trade policy was in one of its most liberal phases before 1991, and the policy towards foreign investment was relatively permissive. From 1956, trade policy entered into its most restrictive phase that was to last up to 1962, and with some changes up to 1966, while the foreign exchange crisis of 1957-58 led to a further liberalization of the attitude towards FDI. 1966 to 1968 saw a brief interlude of trade liberalization. The reversal of this liberalization was accompanied by a shift to a restriCtive attitude towards FDI. While some degree of trade liberalization began in the mid-1970s which gathered pace from the mid-1980s, it was only the decade of the 1980s that saw a cautious liberalization of FDI policy. [Srinivasan (2002/1994), Kumar, N. (200211998)] 72 In relation to the expansion of world trade in the post-war years India's exports grew more slowly. Its share in world exports declined steadily from 2.5% in 1947 to 0.5% in the mid-1970s and stayed around that level thereafter. The share of manufactured products in Indian exports did show a steady trend of increase over time, but the relative importance of exports to total domestic production remained at very insignificant levels. Moreover, the extent of diversification of exports was very little relative to that in production. Despite some changes in their commodity composition, manufactured exports remained dominated by light manufactures. Leather manufactures, Textile Products, and Handicrafts accounted for 67% of manufactured exports in 1990-91.

34

fill crucial gaps between domestic demand and production, though the relative importance of different items changed from time to time73

.

The other important component of imports was that of capital goods, the trends in which were correlated with that of industrial investment. The continued dependence on such imports to a significant extent was .a reflection of the persistent technological . dependence of Indian capitalism. Such dependence meant that capital goods imports were not always, as in the 1980s, necessarily domestic production supplementing. In that decade in fact, despite a wider industrial structure being in existence, the quantum index for imports of machinery and transport equipment grew at an annual rate of over I 0% in the 1980s, significantly higher than even the rate of growth experienced in the decade up to the mid-1960s. In the 1980s, it was capital goods imports more than anything else that was responsible for the higher trade deficit lev_els. But while trade liberalization facilitated capital goods imports by the private sector the general level of import restrictions still remained high, and this was in fact reminiscent of the early planning era. Effective protection of the domestic market was preserved or even increased for the sectors that benefited from the capital goods imports enabled by import liberalization.

The increase in the 1980s of India's external liabilities relative to GOP was also not peculiar to that decade, but represented a replication of the trend that had accompanied the earlier period of relatively rapid industrial growth, which had been checked in the 1970s by the combination of slow industrial growth and the enactment of FERA. Increases in official liabilities accounted for over four-fifth of the aggregate increase in foreign liabilities till the mid-1970s. After that there was a slight downward trend in the share of official liabilities, that accelerated in the second half of the 1980s. This decline however is deceptive because in this period accumulation of foreign liabilities by state owned enterprises in the banking sector and also the corporate sector came to largely compensate for the declining share of officialliabilities74

• The 1980s also witnessed a continuation of the consistent trend since independence of the corporate sector's foreign liabilities moving away from the initially dominant foreign investment (mainly direct investment) towards creditor liabilities. Thus foreign direct investment at no stage was a major mode of foreign capital flows into India, and its relative significance tended to decline over time. Indeed, as far as foreign direct investment is concerned, India was not only a minor recipient amongst Third world economies of such investment it became increasingly more so over time75

•

73 Till the mid 1970s food imports were at fairly high levels but declined thereafter. But this was accompanied by an increased significance of fertilizer and edible oil imports. The oil price hikes of the 1970s brought about a level change in the relative proportion of oil imports. However, in the 1980s, a stability of both import quantities as well as prices gradually brought down the share of oil imports. Industrial raw materials and intermediates like chemicals (excluding fertilizers), and iron and steel and non-ferrous metals, maintained a steady share in imports. From the mid-1970s, the share of impo.rts related to export industries, like pearls and precious stones, also increased. But even in export items other than gems and jewelry, the import intensity of exports increased. [Nayyar ( 1994a)] 74 In 1990, for example, the petroleum and financial sectors accounted for over a third of the foreign liabilities of the corporate sector. Combining this with the share of the official sector and that of the largely public sector banking, the state sector's share in total foreign liabilities was still around 80%. 75 In 1990, India accounted for just 0.09% of World Inward FDI stock (0.30% of developing countries).

35

Table 1.7: Distribution oflndia's Outstanding Foreign Liabilities by Sector

1955 1961 1966 1971 1976 1980 Total Foreign Liabilities (Rs. Cores) 716.1 2437 4650.1 9809 14898.8 17351.2 As% ofGDP at current market 6.71 14.20 16.81 21.47 17.89 14.40 prices

Percentaj!e Share in Total Foreign Liabilities Official Sector 28.78 67.95 74.06 80.97 82.28 79.24 Corporate Sector 62.84 27.89 23.17 17.29 15.85 13.02 Banking Sector 8.38 2.39 1.59 0.98 0.99 6.77 Insurance Sector * 1.77 1.18 0.76 0.88 0.98 Total 100 100 100 100 100 100 *Included m corporate sector Source: Reserve Bank of India ( 1966, 1967, 1976, 1984, 1991, and 1993)

Table 1.8: Outstanding Foreign Liabilities of the Corporate Sector

Type of Liability .. 1955, 1961 1966 1971 1976 1980 As% of GOP at current market prices

Total Foreign Liabilities 4.14 3.96 3.89 3.71 2.84 1.87 Total Long-term Liabilities 4.14 3.96 3.87 3.68 2.79 1.84

Percenta2e Share in Lon2-Term Foreign Liabilities Foreign Direct Investment 87.36 77.55 59.17 45.68 41.15 Portfolio Investment 8.86 6.52 6.35 6.63 5.64 Creditor Liabilities 3.77* 15.93* 34.48 47.68 53.21 Total Lon2-term Liabilities 100.00 100.00 100.00 .100.00 100.00

Percentaj!e Share in Total Forei2n Liabilities Foreign Direct Investment 87.36 Portfolio Investment 8.86 Creditor Liabilities 3.77 Total Long-term Liabilities 100.00 Short-term Liabilities 0.00 Total Corporate sector 100.00 *lnclustve of short-term liabilittes. Source: Same as Table 1.7

77.55 6.52 15.93 100.00 0.00

100.00

58.77 45.26 40.54 6.30 6.57 5.55

34.25 47.24 52.42 99.32 99.06 98.51 0.68 0.94 1.49

100.00 100.00 100.00

42.06 6.38 51.56 100.00

41.32 6.27 50.66 98.25 1.75

100.00

1986 44091.7

15.86

73.68 24.39 1.30 0.63 100

1986

3.87 3.55

15.77 3.99

80.25 100.00

14.48 3.66

73.70 91.84 8.16

100.00

1990 110941.9

22.82

51.55 31.19 16.89 0.37 100

1990

7.12 5.68

9.80 4.56 85.64 100.00

7.82 3.64

68.32 79.77 20.23 100.00

If the 1980s were different from earlier periods with regard to external financial transactions it was mainly on account of the changes in the nature of its foreign liabilities. In the corporate sector's foreign liabilities there was an increasing significance of short-term debt in that decade. Moreover, in the 1980s external commercial borrowing and NRI deposits increasingly replaced aid and invisible earnings as major sources of financing the trade deficit.

Table 1.9: Selected Items in India's Balance of Payments as a Percentage of Merchandise Trade Balance

Period lnvisibles, Capital Foreign £~temal Commercial NRI net Account Investment Assistance Borrowings Deposits

1950-55 97.35 -15.19 6.67 10.59 0.00 0.00 1955-60 34.76 34.58 5.71 24.15 0.00 0.00 1960-65 18.38 75.18 5.73 74.54 0.00 0.00 1965-73 -1.43 108.54 5.92 113.62 1.76 0.00 1973-81 91.42 31.27 I./I 31.28 6.49 5.46 1981-90 37.14 57.26 2.12 20.47 15.49 16.92

Source: RBI, Handbook of Statistics on the Indian Economy, 2001

Monetary Movements

17.84 30.66 -6.44 -7.11

-22.69. 5.60

Thus in the 1980s India opted for a foreign debt financed expansion that eventually culminated in the foreign exchange crisis of 1991, forcing a recourse to the IMF's

36

structural adjustment loan. This triggered another shift in state economic policy but one that was fundamentally different from the responses to previous such crises.

1.3.4 The Abandonment of the Post-Independence Strategy

In appearance there is undoubtedly a great deal of continuity between the 1980s and the period after 1991. There has been over this. time-span a continuous process of liberalization, with regard to both the external sector as well as the internal regulatory regime. But this is by no means the complete story, since continuities can also be found between policy in the 1980s and earlier. There is the question of the degree and spread of external sector liberalization in the 1980s, and what it was combined with. A window had always existed for both imports and foreign investment within the framework of restrictions, and in the 1980s this window undoubtedly became a bit larger but did not become an open door. Coupled as it was with a rapid expansion of public expenditure, evoking the comment that this was a period of the steady "dilution of fiscal conservatism"76

, the thrust of the 1980s liberalization was really on enabling Indian capital to take advantage of a domestic demand situation and modernizing its technology. It did not therefore represent a fundamental departure from the past strategy of capitalist development. But liberalization since 1991 does. Not only are the two key elements of the early strategy apparently missing in it, the reversal of any remnants of that appear to be the hallmarks or defining features of the process of 'liberalization' since 1991.

In sharp contrast to the pre-1991 experience, the thrust of economic policy since then has been towards privatisation of public enterprises, opening up of reserved sectors to the private sector, the reigning in of government expenditures, and the dismantling of controls in the internal and external spheres. The opening up of the Indian economy to relatively uncontrolled and unregulated capital and commodity flows is a new feature that has no parallel in the period before 1991. The consequence of this is the erosion of the basic premise of planning and state intervention, namely "that the national economy constitutes the 'control area' of the State"77

. This is the change that in fact completely separates the post-1991 policy from those that characterized the period before. About the changes since 1991, the following has been said:

"Fundamental changes in economic policies have been introduced in India since 1991, which have explicitly reduced the role of the government and has enhanced the role of private economic decision-making."78

This is correct but only partially so. The post-1991 strategy has decisively shifted the source of the impetus for Indian capitalist development to the relatively unfettered mutual interaction of the domestic economy with the international economy. It has integrated to a great extent the capitalist accumulation process on which has to be founded Indian capital's ~dvance with the international process of capitalist . accumulation taking place within the capitalist world economy. It has subjected the

76 Joshi and Little (1994), p. 68 77 Patnaik, P. (1999), p. 184 78 Chaudhuri, Sudip (1999), p. 286

37

trajectory of the Indian economy much more than before to the operation of the forces at work in the international economy. Much more has happened than simply

liberalization, and clearly not of a temporary nature, which makes 1991 a decisive turning point in the history of Indian capitalism.

No doubt there were compulsions that the foreign exchange crisis in 1.991 gave rise to

that in the immediate sense acted as a propellant of the changes in economic policy. This was not however the first such crisis, and nor was it the first one where external

pressure was brought to bear on the Indian State to influence its economic policies.

But the response of the State in 1991 was unlike that in any previous case, initiating a long-term policy shift that continued even after the immediate crisis had passed.

There was no reversal of liberalization as happened after mid-1960s crisis had passed.

It was also"-d.itferent from the 1980s, when the.econ@mic policy package eventually

pursued fell far short of the terms attached to the 1981 IMF loan 79. But the changes

after 1991, despite the fact that they have eroded that which had been the hard won

and precious possession of Indian capitalism since independence, namely its relative autonomy, have proved to be durable ones. The post-1991 liberalization has moved only in on~ direction with time, towards a full and complete abandonment of the

strategy adopted after independence. More deep-seated and long-term changes in Indian capitalism's context, and not just a temporary crisis, must therefore explain it.

1.3.5 Capitalist Development and India in the World Economy

It is however clear that these deep-seated changes did not include any dramatic transformation of Indian capitalism's unequal position in the world capitalist economy.

By its own historical standards, the growth performance of the Indian economy after

independence may have been fairly impressive. But the first two and a half decades after independence was also the period of the 'Golden-Age', in which the world economy and industrial production also experienced a significantly higher rate of expansion than had been the case earlier. It was only subsequent to the end of the Golden Age that the Indian economy grew faster and India's long history of growing at

a slower rate than the world economy eventually came to an end80. But the yawning gap

between India and the advanced world that had emerged by then meant that

notwithstanding the higher growth experienced by India, the gap continued to increase even after the mid-1970s. Even in the phase that emerged after the end of the golden

age, India was only one among a group of Asian economies showing an above­

average growth performance in the world economy. But India was unlike most of the others a late entrant into this category. Many of these economies had been more consistent growth performers than India, and many still did better than India in the

1980s.

79 See Ghosh. Jayati. (1999) 80 The following picture drawn from Maddison (1995), Tables 3-1 and 3-2, would establish this:

Annual Average Rate of Growth of Per Capita GDP 1820-70 1870-1913 1913-50 1950-73 1973-92

India 0.1 0.4 -0.3 1.6 2.4 World 0.6 1.3 0.9 2.9 1.2

38

Table 1.10: Annual Average Growth of Real GDP (Ye)

Period Real GDP Manufacturing Real GDP World India World India Reg. Mfg. India Unreg. Mfg. India Total Mfg.

1950-65 4.58 3.95 6.6 8.3 5.2 6.7 1965-80 4.35 3.62 5.0 4.8 4.4 4.6 1980-90 3.49 5.36 3.8 8.3 5.9 7.3 1950-75 4.92 3.59 6.8 6.7 4.3 5.6 1975-90 3.03 4.61 3.1 6.8 5.1 6.1 1950-90 4.31 3.79 5.4 6.1 4.4 5.3

Source: WTO, World Production Volume (www.wto.org), and NAS

Indeed, over the entire period I 950 to I 990, India's positiOn relative to most economies did not really improve. India's GOP in US dollars and PPP dollars accounted for just 1.33% and 3.6% of World GOP respectively in 1990, though India's share in world. population was over 16%. India· was in'+990 the second largest of the Third World economies after China (in terms of aggregate GOP in PPP dollars), and the eighth largest amongst all countries. But it was still amongst the poorest with one of the lowest per capita GDPs in the world. The gap between India's per capita GOP, and that of the rest of the world including much of the Third world, increased over time in absolute as well as relative terms. India's relative performance is also indicated by the fact that it was even in 1990, like the rest of South Asia, one of the most agrarian and least industrial of the world's economies.

Table 1.11: Sectoral Distribution ofGDP (Percentage Shares) in 1990

Country/Region Agriculture Industry Services India 31 29 40 South Asia (excluding India) 25 21 54 Sub-Saharan Africa 22 35 43 Arab States II 43 46 East Asia 20 41 39 South East Asia 19 37 44 Latin America & the Caribbean 10 36 54 Developing Countries 17 36 47 Industrial Countries 4 37 59 Source: UNDP, Human Development Report (HDR), 1993

1.3.6 Capitalist Industrialization and Structural Change in Industry

The one change that did unambiguously accompany the growth of India's manufacturing sector after independence was that in its structure. The general direction after independence was towards greater diversification in manufacturing

· activities and a decline in the relative importance of relatively simple technology based light manufacturing activities. The registered manufacturing sector reflected these to a greater extent than unregistered manufacturing, and much of the growth of the former after independence was accounted for by industry groups which had just about emerged towards the end of the colonial period. The most dramatic decline in relative importance was in the case of textiles, the largest segment at independence. But this decline of textiles in the registered manufacturing sector actually overstates its overall extent since it was accompanied by an increasing share of textile production taking place in the unregistered manufacturing sector.

39

Table 1.12: Composition of Gross Value Added of Registered Manufacturing in India (Percentages to Total)

Industry Group Share in Total Gross Value Added Contribution to (at 1980-81 prices) Total Growth(%)

1950-51 1989-90 1950-90 Food, Beverage & Tobacco 21.89 12.84 12.01 Textiles 35.47 13.34 11.32 Wood, Paper, Leather 5.36 5.19 5.17 Sub-Total 62.72 31.36 28.51 Chemicals, Rubber, Petroleum 9.56 25.13 26.54 Non-Metallic Mineral Products 3.42 5.02 5.16 Metals and Metal Products 11.29 10.41 10.33 Machinery & Transport Equipment 10.73 21.88 22.89 Others 2.29 6.21 6.57 Sub-Total 37.28 68.64 71.49 Total 100 .,; 100 J O,Q .. , ,i;rz;:.~' Source: NAS

This transformation m India's industrial structure was the typical, and not an exceptional, product of the diffusion of industrialization to' the Third World in the second half of the twentieth century. This brought the industrial structures of Third World economies closer to that of advanced capitalism, though the latter continued to account for a disproportionate share of manufacturing value added, and most so in the case of capital goods.

Table 1.13: Structure of Manufacturing Value Added in 1991 (Percentage Shares)

Branch (ISIC) Developed Developing World India Market Countries

Economies

31 -Food, beverages and tobacco 11.9 17.3 13.3 11.9 32 -Textiles, wearing apparel, leather and footwear 5.5 12.6 7.1 15.9 33 - Wood products including furniture 3.1 2.3 2.9 0.4 34 - Paper, printing and publishing 9.1 4.6 7.9 3.8 35 -Chemicals, petroleum. rubber and plastic products 17.1 23.1 17.7 21.9 36 -Non-metallic mineral products 3.9 5.1 4.1 5.1 3 7 - Basic metals 5.3 7.1 5.8 13.8 38 - Metal products, incl. machine!)' and equipment 43 26.6 39.8 26.8 39- Other manufacturing industries 1.2 1.4 1.4 0.4

Source: UNIDO, Industrial Country Statistics (www.unido.org)

However, the process of structural change in the industrial sector in India was a non­linear one. The relative trends of different segments of the industrial sector were different in the period before the mid:..1960s and in the 1980s, even though their overall growth rates were similar. In the first phase, capital goods industries had by far the highest rates of growth. But it was also the only segment of industry that experienced a lower rate of expansion in the 1980s than in the intermediate phase, primarily on account of the rapid growth of capital goods imports. At the other extreme were the consumer goods industries, in particular consumer dtirables, which represented the only segment whose 1980s growth performance was better than in the first phase.

40

Table 1.14: Trend Rates of Growth of Index of Industrial Production (Use-Based Classification)

Sector 1950-51 to 1964-65 1967-68 to 1981-82 1980-81 to 1989-90 Basic Goods 9.4 6.0 8.0 Capital Goods 14.4 5.3 4.6 lntennediate Goods 7.1 3.6 6.4 Consumer Goods 4.6 3.9 6.5 Consumer Durab/es 9.5 5.2 15.4 Consumer Non-Durables 3.5 3.8 5.0 Index of Industrial Production 7.5 4.8 7.8

Source: Sivasubramoniam (2000), Tables 9.14 and 9.19, and Sundrum ( 1987), Table 5.11

1.4. THE CORPORATE SECTOR IN INDIAN CAPITALISM TILL 1991

The pronounced corporate character of monopoly capital in India from the beginnings

of Indian capitalism, and the narrow spread of th~,.capitalist sector and therefore oLtl)~ ...

corporate sector at independence has been highlighted previously. Over the period after independence, there was continuity in this broad reality along with some important changes.

1.4.1 Types of Monopoly Capital in Indian Capitalism

Indian.capitalism being neither classical in its origin, nor in its context of development

even after independence, the expression monopoly capital did not have a unique . meaning in the Indian context. At least six different types of monopoly capital have existed in the Indian economy after independence, distinguishable by the different

contents and combinations of their foreign and domestic character, their origins, and their relationship to Indian capitalism after independence. The distinctness of each of these however did not mean the absence of their significant inter-mingling.

Three of these types are those that had made their appearance on the Indian scene before independence. The first of these were the large European Managing Agency Houses. This category, which had a strong element of foreign origin in their controlling authorities even though much of the capital was domestic in origin, did not completely

cease to exist with the end of colonial rule. Though the special advantages previously enjoyed by them in the colonial context had mostly ceased to exist with the end of

colonial rule, they still had the weight of that history behind them. Their continued, though truncated presence after independence was essentially a hangover of the colonial

past.

Indian private monopoly capital constituted the second such category. After having expanded particularly after the First World War, this Indian capital further fortified

itself by the widespread acquisition of European concerns in the immediate aftermath of independence. The monopoly status of the constituents of this category was the product of their size relative to the Indian private corporate sector, and it was this capital which became in relation to the State the leading component after independence.

The third category, 'purely' foreign capital, appearing before independence was multinational capital or international monopoly capital. This category was represented in India by the affiliates of multinational firms, though their monopoly status was not

41

based on the size of individual affiliates. Their strength lying in their international size and reach and the command over technology and finance, their ability to operate in India did not critically depend on the colonial context. As mentioned earlier Indian capitalism had to leave some room for this international monopoly capital in the Indian economic space.

In fact, in some ways independence broadened the scope for the presence of MNC capital in India. Given that the requirements of widening the industrial structure imposed requirements of technology as well as the associated one of foreign exchange, opportunities were created for MNCs operating in certain industries which did not exist earlier. Secondly, independence would also likely have made the circumstances relatively more conducive for the entry into India of MNCs of non-British national origin, particularly of those nations with whom Britain had been in conflict.

The other three types of monopoly capital are primarily of post-independence origin, their emergence being linked in varying degrees to state policy and the interests of Indian monopoly capital. The most significant of this was of course State monopoly capital in the form of what have been known in India as 'departmental and non­departmental enterprises' in the public sector. After independence they assumed significant proportions in the infrastructure, financial; and even manufacturing sectors. The second consists of the enterprises linked to the co-operatives that were promoted to· develop the rural sector. The fertiliser and food products (sugar, dairy products, etc.) sectors have been the principal spheres of operation of these enterprises

Finally, migration from the Indian sub-continent over a long period to different parts of the world, particularly of business communities, had also resulted in the accumulation of capital controlled by capitalists of Indian origin outside India. Moreover, particular foreign locations often also gave them access to global or external capital markets. It also made it easier for them to move capital across international borders or to engage in transactions outside India. Even if such capital was in terms of size and geographical spread not in the same category as MNC capital, its historical links with India made the Indian economy a natural area for extending its operations. And just as social factors had given Europeans an advantage earlier, now foreign Indians enjoyed an advantage over other foreigners. These social factors included family and other social links with business families or otherwise influential sections in India. These links have been often so close, and NRI status often so much of a technicality, as to make the distinction between Indian and NRI capital quite blurred.

For Indian capital too, foreign NRI capital represented a lesser threat than MNC capital. For a foreign exchange and investible resources constrained economy it was therefore a more welcome source of foreign investment, though it could not be a substitute for MNC capital as a provider of technology. However, alliances between NRI capital and MNC capital outside India did exist. in state policy therefore a relatively more favourable treatment was accorded to such capital than to oth~r foreign capital. The combination of being both foreign as well as Indian gave such capital a potential competitive edge that could be utilized to acquire a monopoly

42

status. This was particularly because in relation to the size of the Indian private corporate sector, monopoly implied a much smaller size than in the global context.

1.4.2 State Monopoly Capital and Private Capital in the Corporate Sector .

With the exception of one segment of State monopoly capital (departmental ent~rprises), all these different types of monopoly capital operated in India through incorporated entities. However, the entities through which they operated in India have been incorporated under different legislations, Indian as well as foreign. However, registration under the general incorporation legislation in force for much of the post­independence period, the Companies Act, 1956, have been the principal sources of expansion of at least the number of corporate entities after independence. The Foreign Exchange Regulation Act, 1973, further brought into its ambit the bulk of the corporate entities previously registered abroad.

As far as the companies registered under the Companies Act or its predecessor are concerned, this segment of the corporate sector had to begin with an overwhelmingly private character. In addition at independence public companies were larger in number. But over the period from independence to 1991, this character changed drastically and consistently. Private limited companies had exceeded the number of public limited companies even before the Companies Act, 1956, was enacted, and this remained the situation right through. Private limited companies accounted for most of the growth of companies and in 1990-91 they accounted for about nine-tenths of total companies though their share in paid-up capital was only about half.

But the most striking change was that, in terms of paid-up capital, it is government companies that accounted for a large chunk of the growth. As the table below shows, government companies increased their share in paid-up capital of the corporate sector consistently so that by 1990-91, they accounted for over three-quarters of it. In fact, it is their increase that held up the ratio of paid-up capital to GDP, the ratio for non­government companies showing a declining trend.

Table 1.15: Growth of the Companies Registered Under Companies Act; 1956-57 to 1990-91

Year Number of Companies at Work Paid-Up Capital (PUC) (Rs. Crores) Govt. Cos. Non-Govt. Cos. All Cos. Govt. Cos. Non-Govt. Cos. All Cos.

1956-57 74 29283 29357 72.6 1005 1077.6 1960-61 142 26007 26149 477.2 1271.5 1748.7

. 1970-71 314 30008 30322 2064.4 2439.2 4503.6 1980-81 851 64706 65557 11442.6 4914.1 16356.7 1990-91 1167 223285 224452 49424.4 18686.2 68110.6

Year PUC as% ofGDP at market prices PUC as % of Aggregate. PUC. Govt. Cos. Non-Govt. Cos. All Cos. Govt. Cos. Non-Govt. Cos. All Cos.

1956-57 0.59 8.23 8.82 6.74 93.26 100.00 1960-61 2.95 7.85 10.79 27.29 72.71 100.00 1970-71 4.78 5.65 10.43 45.84 54.16 100.00 1980-81 8.41 3.61 12.03 69.96 30.04 100.00 1990-91 9.23 3.49 12.72 72.56 27.44 100.00

Source: Handbook of Industrial Statistics, 1992

43

The distinction between government and non-government companies is of course only a legal one, and the two together have only constituted one segment of the entire

corporate sector. At the same time, the ratios of paid-up capital to GOP do not properly indicate the relative quantitative importance of the corporate sector in the

economy, nor the relative position within it of government and non-government

companies81•

However, the trend in the relative shares of Government and non-Government companies reflected in the above table may be said to reasonably approximate the trend

in the relative importance of both State ownership of corporate share capital as well as State control over corporate assets. This is so for the following reasons. Firstly, private

corporate entities operating in India were virtually all registered under the Companies

Act in 1990-91 though at the time of independence and till FERA many assumed the form of branches of foreign companies. State controlled corporate entities were

however uncommon at independence but many in 1990-91 were not even in fact

registered under the Companies Act. Further while there were some private controlled Government companies in 1990-91 there were also government controlled non­

government companies82• Finally, Government owned or controlled shareholding in

private controlled companies was far more significant than its opposite, many

government companies being 1 00% government owned.

1.4.3 The Private Corporate Sector in the Indian Economy

Neither of the two opposite tendencies, of the rapid growth of non-government companies and the declining ratio of their paid-up capital to GOP, captures the reality of the trend in the private corporate sector's relative quantitative significance in the Indian economy. This trend actually lay somewhere in between these two extremes, reflecting

more stability than change.

India's National Account Statistics do not provide figures for the private corporate sector83 component of the economy for national income aggregates except for savings

and capital formation, and net fixed capital stock only since 1980-81. For obvious reasons, its share in total capital formation is a better indicator of its relative importance

in the economy than that in savings.

Table 1.16: Indicators of the Importance of the Private Corporate Sector in India

Share of Private Corporate Sector in GCF (%) Share of Private Organised Sector in NDP (%)

1950s 1960s 1970s 1980s 1960-61 1970-71 1980-81 1990-91

15.42 16.38 12.43 19.11 14.90 12.97 12.50 12.22

Source: NA S

81 Estimates of the gross and net value added by Government and Non-Government companies for the period 1960-61 to 1977-78 would indicate that the share of the former in aggregate PUC of companies was typically much higher than in aggregate gross and net value added. [Shanker and Nayak ( 1983)] 82 Discussed in Chapter 4 83 Defined to include both private joint-stock companies as well as co-operatives.

44

Table 1.17: Estimates of Private Corporate Contribution to National Income/Product

Estimator Nigam & JB Pillai and Kumar NKChandra Joshi and DCA* I DCA Chaudhuri Gupta* Kohli*

Estimate Corp Sector/ Corp Non-GO\·t. Go\c1. P\1 and Pub P\1 and Pub Pvt Corp Sector/ National off: NDPat Sector/ Joint Stock Cos./ Ltd Non- Ltd Non- Income (excl. banking and

factor cost National Cos. National Financial/ Financial/ ins) Income /National Income NDP NDP

Income Current Constant Year prices prices

1948-49 7 1950-51 8 6.56 7.42 1951-52 7.97 8.16 1952-53 7.81 9.48 1953-54 7.18 8.53 1954-55 8.77 9.53 1955-56 7.1 8 0.2 9.61 10.87 1956-57 II 7.1 7.5 0.4 9.33 10.33 1957-58 12 7.3 7.8 0.5 9.59 10.6 1958-59 7.2 7.9 0.5 9.19 10.49 1959-60 8.1 10.14 11.23 10.1 1960-61 13 10.95 10.95 10.7 1961-62 11.92 12.2 10.8 12.2 1962-63 12.7 13.24 12.9 1963-64 14.12 15.29 12.7 12.6 1964-65 13.69 15.32 1965-66 13.66 15.33 1966-67 11.97 14 10.7 1967-68 10.76 13.3 1968-69 11.57 13.73 1969-70 11.42 13.1 1970-71 10.62 11.67 1971-72 10.97 11.84 1972-73 11.68 12.74 1973-74 10.6 11.48 1974-75 10.99 11.16 1975-76 11.63 10.59

N. Shanta 1982-83 10.2 1983-84 9.2 1984-85 9.3 1985-86 10.6 1986-87 10 1987-88 II 1988-89 II 1989-90 9.5 1990-91 12.3 * Pertams to Calendar Year ( 19 55-56 means 19 55 and so on) Sources: Nigam and Joshi ( 1964), Gupta (1965), Pillai and Kumar (1965), Joshi and Kohli (1964); Chandra (1981/79), Shanta (1999), GOt, DCA (1966), GOI, DCA (1970).

As to the share of the private corporate sector in net domestic product, many attempts have been made to estimate this by using the Reserve Bank of India's studies on company finances. The estimates are not always consistent with each other, but the

· broad picture showing the stability of the private corporate sector's position of

45

constituting a relatively small part of the economy emerges from them. Some of these estimates pertaining to different years are given Table 1.1 784

•

Since it is included in the private organized sector and is the dominant component in it, a rough idea of its relative importance of the private corporate sector in the economy

can be also gauged from the relative share ofthe private organized sector in NDP .. The

picture that emerges is consistent with the previous one. It is sufficient to derive the conclusion that over the entire period from independence, the major part of the economy (over 5/6ths) remained outside the ambit of private corporate sector and there

was no decisive structural change in this regard.

Table 1.18: Share of Private Organised Sector in India's NDP (%)

1960-61 1970-71 1980-81 1990-91 14.90 12.97 12.50 12.22

Source: NAS

Again using the private organized sector as a proxy for the private corporate sector, we

may look at the relative importance of different sectors for private corporate activity.

Table 1.18, which takes into account the four most important sectors for private organized activity, indicates that at least up to the end of the 1980s manufacturing remained the'principal sector of operation for private corporate capital. Additionally, .

manufacturing was also the sector where it had a major presence in both the organised component of it as well as the sector as a whole. Construction was a distancsecond in all these regards.

Table 1.19: The Private Organised Sector: Major Sectoral Features

Sector 1980-81 1990-91 Share of Share of Share of Share of Share of Share of

Pvt Sector Pvt org Sector in Pvt Sector Pvt org Sector in in Sector in Total Pvt in Sector in Total Pvt

Sectoral Total Org Sectoral Total Org NDPof Sectoral Sector NDPof Sectoral Sector

Org NbP NDP Org NDP NDP Sector Sector

Manufacturing 82.15 44.15 59.84 72.65 .. · 43.89 64.48 Construction 69.25 36.02 15.07 63.20 29.05 14.43 Agriculture, Forestry and Fishing 45.80 1.90 6.08 33.55 1.06 2.91 Trade Hotels & Restaurants 44.30 4.42 4.59 12.41 6.38 4.62

Source: NAS

Two additional points however need to be made. Firstly, the degree of concentration of

the private corporate sector in manufacturing increased over time due to increased importance of the public sector in sectors like mining, electricity, and the financial sector, both on account of its leading role in their post-independence growth as well as

nationalization. At the same time that process did not leave manufacturing entirely

84 An indication of the problems in such estimation may be illustrated with reference to two separate estimates by Shanta. In an earlier study, she estimated the contribution of the private corporate sector in Net Value Added to be 8% in 1960-61, which declined to 5% by 1982-83. But a later estimate for the latter year found it to be 10%. The only explanation offered for this very sharp difference in the figures for the same year is that they are based on different methodologies. [Shanta (1999)]

46

unaffected so that the private sectors share in organized manufacturing too tended to show a declining trend though it remained largely private. This would be clear if we were to note in addition to what is in the above table that the share of the private sector in registered manufacturing was over 98% in 1960-61 and in 1970-71 it was nearly 89%85.

The narrowness of the private corporate segment in the economy and that of its spheres of activity serves to demonstrate its persistent inability to possess any autonomous growth momentum. Since it also accounted for only a miniscule share in employment, much of the domestic market for the Indian private corporate sector depended on incomes generated by economic activities outside that sector. On the supply side, the agricultural sector and the public sector provided most of the basic raw materials for the

manufacturing sector. It was the extent of possible expan~ion of these other sectors that always set the limits to the growth of the private corporate sector, and this expansion of other sectors could not have been induced by the private corporate sector's own growth. Private corporate expansion was therefore not only limited by such constraints, it was also accompanied by their continuous reproduction.

1.4.4 Financial Aspects of Private Corporate Growth

As is well known, the private corporate sector in India was always, along with the . public sector, a deficit sector dependent substantially for its financing needs on the surplus household sector. However, the constraint on the private corporate sector's expansion was also reflected in this sphere, and can explain why the drawing on external finance did not enable it to increase its relative importance in the Indian economy.

One should normally expect that the savings ratio out of surplus income generated through private corporate activity should be higher than the average savings ratio in the economy. Private corporate savings and household sector financial savings as a proportion of GOP both showed an increasing trend. But the increase of the former since independence was relatively small while that of the latter was significantly greater. Since the household sector as a sector of economic production was one whose relative position in the economy was shrinking, obviously underlying the rising trend of household sector savings was its receipt of incomes generated through economic activity in the private corporate and public sectors. These receipts would be either wages and salaries or returns to financial investments by the household sector.

The private corporate sector's own savings-investment gap fluctuated as a result of fluctuations in capital formation. It was the highest in the 1980s, and the lowest in the second phase. But in relation to the financial savings of the household sector, it was the highest in the first phase -at 53.44% of household sector financial savings. In the 1980s, despite the capital formation and savings-investment gap to GOP ratio of the private corporate sector being the highest amongst the three phases, and the degree of

85 Both the conclusions - that of increased concentration of the private corporate sector in manufacturing and its declining share in manufacturing, at least up to the early 1980s, are confirmed by the estimates made in the two studies by Shanta. The discrepancies between the two sets of estimates however also appear in this case. [Shanta ( 1999)]

47

dependence on external finance being the highest, the private corporate financing gap was just 33.5% of household sector financial savings.

Table 1.20: Savings and Capital Formation of the Private Corporate Sector, and Financial Savings of the Household Sector (as % of GDP at market prices)

Period Private Corpor.ate Sector Household Sector Gross Gross Capital Capital Gross Capital Financial

Saving/GOP Formation/ GOP Formation- Formation/Gross SaYings/GOP Savings Gap/GOP Saving

1950-65 1.37 2.71 1.35 1.99 2.51 1965-80 1.56 2.45 0.88 1.57 4.66 1980-90 1.93 4.40 2.47 2.29 7.39

Source: NAS

Table 1.21: Distribution of Gross·,Profits (before Depreciation-P'i'ovisim1s) of Non-Financial Public Limited Companies in RBI Samples

Sample Period Number of Retained Profits and Tax Interest Dividends companies in Depreciation Provision Payments

Sample Provision 1950-51 to 1955-56 750 37.36 24.58 6.65 22.10 1955-56 to 1960-61 1001 37.83 25.00 10.40 22.02 1960-61 to 1965-66 1333 39.02 28.64 13.16 19.18

1965-66 to 1970-71 1501 38.95 23.51 21.27 16.26 1970-71 to 1974-75 1650 42.01 24.66 21.39 11.94 1974-75 to 1975-76 1650 37.49 28.00 24.62 9.89 1975-76 to 1977-78 1720 31.68 27.03 29.82 11.47 1977-78 to 1978-79 1720 33.84 25.87 28.63 11.66 1978-79 to 1980-81 1720 38.37 23.48' 27.36 10.79

1980-81 to 1982-83 1651 38.13 18.27 33.55 10.05 1982-83 to 1984-85 1838 38.14 14.58 38.24 9.05 1983-84 to 1985-86 1867 39.65 14.03 37.50 8.82 1984-85 to 1986-87 1942 39.20 12.85 38.97 8.98 1985-86 to 1987-88 1953 37.87 11.62 41.22 9.29 1986-87 to 1988-89 1885 37.19 10.66 42.45 9.70 1987-88 to 1989-90 1908 39.53 11.06 39.65 9.76 Source: RBI, Pnvate Corporate Busmess Sector m Ind1a, Selected FmancJal Stat1st1cs from 1950-51 to I 997-98 (All Industries)

What these reflect is perhaps that the mobilization of external finance by the private corporate sector reflected only a return to it of a part of the SUI]Jlus generated within that sector itself. Examining the distribution of the gross profits before depreciation, interest and dividend payments, and taxes, of non-financial public limited· companies covered in the RBI studies on company finances may empirically substantiate this. As Table 1.21 shows, the proportion that would constitute gross savings or internal funds for expansion (retained profits and depreciation provision), of the private corporate sector, was relatively stable across phases. The total gross surplus (inclusive also of taxes, interest and dividend paid) was always about 2.5 times of gross savings, though capital formation in the private corporate sector as a ratio of its gross savings was always be.low this. In other words, expenditure on capital formation by the private corporate sector was always less than the gross surplus generated by that sector. In the net, therefore, there was always an outflow of capital from the private corporate

48

sector. The degree of this net outflow varied with the level of capital formation in the sector and the consequent relative importance of external finance86

• Thus, external finance did not in the ultimate analysis draw into the corporate sector finance from income generated outside that sector.

As to the mechanisms of outflow of surplus from the privat.e corporate sector, it can be seen that corporate income taxes and dividend payments tended to decline in relative importance in each subsequent phase while interest payments continuously increased. This reflected a major change that took place after independence, and particularly since the mid-1960s, of a shift from equity to debt finance as the principal instrument of long-term external finance, as a consequence of which debt-equity ratios in the private corporate sector showed a long-term rising trend.

Table 1.22: Debt-Equity Ratios of Non~nn•ancial Public Limited CompaYi-res~in;;·,_, RBI Samples(%)

No. of Cos. in the sample: 1333 No. of Cos. in the sample: 1720 1960-61 18.4 1978-79 48 1961-62 17.6 1979-80 51.1 1962-63 17.2 1980-81 57.1 1963-64 18.3 No. of Cos. in the sample: 1908 1964-65 18.7 1987-88 90(117.8) 1965-66 19.7 1988-89 92.8 ( 117.5)

1989-90 99.4(121.9) F1gures m brackets represent debt-eqUJty rat1os adjusted for revaluation. Source: Same as Table 1.20

The sharp rise in debt-equity ratios in the 1980s may appear surprising given that the

late 1970s and the 1980s saw a boom in the capital issues market. But two factors can

easily explain this. The first of these is that while the capital issues market boom

included the private corporate sector raising much larger quantities of finance than

had been possible earlier, it was accompanied by a decisive shift in favour of

debentures in the relative importance of different instruments.

Table 1.23: Capital Issues By Non-Government Companies

Period I Ordinary Shares L Preference Shares I Debentures I Total Amount of Issues (Rs, Crores)

1970 to 1980 I 768.6 I 66.8 I 212.3 I 1047.7 1981-82 to 1989-901 6573.3 I 52.0 I 12447.3 I 19072.6

Percentages to Total 1970 to 1980 I 73.36 I 6.38 I 20.26 I 100.00 1981-82 to 1989-901 34.46 I 0.27 I 65.26 I 100.00

Source: RBI, Handbook of Statistics on Indian Economy, 1999

The other important factor is that the rapid growth of private sector capital issues was

accompanied by not a lesser, but an even greater role of intermediation in financing

the private corporate sector's deficit than had been the case earlier. The private

86 A further substantiation of this may be given from the national accounts. In the 1980s, when the importance of external finance was the maximum, net savings of the private corporate sector was just under II% of the operating surplus of the private corporate sector while the level of its net capital formation was just over 70%.

49

corporate sector·s dependence on banks and financial institutions was always

significant, and loans and advances were the principal mode of such financing. This

dependence increased quite significantly in the 1980s. In fact, the relative importance

of direct finance from the household sector was the least in the 1980s.

Table 1.24: Pattern of Net issues for Financing Private Corporate Business Deficit (Percentage shares)

Source Sector 1951-52 to 1964- 1965-66 to 1979- 1980-81 to 1989-65 80 90

Banking 41.47 33.70 35.67 Other Financial Institutions 14.96 17.36 36.80 Banks and Other Financial Institutions 56.42 51.05 72.47 Government 9.00 7.09 -0.10 Rest Of World 4.90 -0.82 2.42

"·

Households 31.58 30.75 17.91 Sectors n.e.c. -1.91 11.93 7.30 Total 100.00 100.00 100.00

Source: RBI (2000), F.Jow of funds Accounts of the Indian Economy, 1951-52 to 1995-96

I.4.5 Private Corporate Capital and the Transition to International Integration

The private corporate sector's position in the Indian economy described earlier may suggest that it had little influence on the dynamics oflndian development till 1991, its own growth being of a dependent nature. But such a conclusion based on merely the technical linkages characterizing the Indian economic structure would amount to ignoring the political economy of that development. The private corporate sector was the domain of Indian private monopoly capital, the leading influence on the Indian State after independence, and this fact is crucial to explaining the State's pursuit of a strategy of relatively autonomous capitalist industrialization since independence. But that in turn also raises intriguing questions with regard to the abandonment of that path after I 991.

The liberalization process after 1991 has been characterized by a remarkable consensus with regard to it between many of the so-called 'vested interests' that had thrived in the old regime of Indian capitalism. The 'rent-seeking' bureaucracy that had flourished on the 'license-permit raj' has played a key role in that process. Despite the fact that electoral verdicts have consistently shown liberalization to have been unpopular in India, the spectrum of Indian political parties other than the Left have remained committed to it. Of all the different segments of private corporate capital, the one segment that was the prime beneficiary of the earlier sheltering from foreign competition, namely Indian private corporate capital, has also been part of this consensus. As at the time of independence, when it offered no major resistance or alternative to planning and the leading role of the State, Indian corporate capital's attitude towards the post-1991 dire·ction of economic policy has been a consenting one87

•

87 This conclusion would stand despite the fact of the creation of the Bombay Club.

50

The last of the above can partly at least account for the previous two, given the leading position of Indian monopoly capital in independent India's political economy. But without it and the fact that this consensus between the State and Indian monopoly capital has survived through a decade and a half of 'economic reforms', the durability of that process would be hard to explain. But how did this remarkable metamorphosis in the attitude of Indian -capital towards its relationship with international capitalism come about despite the general historical situation of Indian capitalism remaining relatively unchanged? What made this capital tilt in favour of a strategy that eroded

the very autonomy that had been so important for its development till then, without that development having eliminated its relatively unfavourable position in international capitalism? How did a capital that had consistently remained·extremely dependent on an active role of the state in the economy for creating the scope for its advance.accept and even advocate a circumscribing of that role? These are important questions with regard to the historical origins of Indian liberalization. The emergence of these questions point towards the private corporate sector having a major part in the deep-seated changes in Indian capitalism that lie behind the rather dramatic shift in the strategy of capitalist development since 1991. An examination of its evolution is therefore a necessary step towards revealing the historical forces behind that shift.

51