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Posted at: Nov 19, 2019, 6:42 AM; last updated: Nov 19, 2019, 6:42 AM (IST)

History lessons Indian industry refuses to learn

M Rajivlochan

M Rajivlochan
India was one of the richest and militarily strongest states in the world when it fell prey to colonial control. The disastrous colonial control over India happened not because of some grand design of capitalism or imperialism but because the British government, 300 years ago, realised that supporting businesses enriched the State.
History lessons Indian industry refuses to learn
THE WAY OUT: The WTO may prohibit subsidies for exporters, but it does not debar the State from providing market intelligence to businesses.

M Rajivlochan
Historian

LOOKING at India’s tame withdrawal from the RCEP and its all-round welcome by India’s political class makes us wonder. The wealth of a nation is created by promoting business. Not by not doing business. In the pre-British India, some zamindars did make scattered efforts to promote business by setting up marts on their lands and providing security to traders travelling to these markets. It was thus that the rulers of Panipat, Sonepat, Baghpat became wealthy and the towns developed into trade centres. Despite such successes, there was never any sustained effort by the authorities of the pre-British Indian State to promote business. In an amazing display of continuity, the popular belief in India then, and today, often shared by policy-makers, is that wealth for the State comes from squeezing businesses. A few businesses do manage to come close to the powers that be to either escape the squeeze or claim preferential control over markets. These, we call, crony capitalists.

Crony capitalism does not amount to the idea that the State is providing support to business. Rather, it sets up a vicious cycle that demoralises the market, delegitimises businesses in the eyes of people and only underlines the general indifference of the State towards business.

Our research on the historical relationship between business and government in India shows that the Indian State, before and after Independence, has been largely indifferent to the concerns of business even while practising protectionism of the worst kind. Only recently did people realise that the protection was only for crony businesses. 

Few today remember three important points:

One, that India was one of the richest and militarily strongest states in the world when it fell prey to colonial control. The disastrous colonial control over India happened not because of some grand design of capitalism or imperialism but because the British government, 300 years ago, realised that supporting businesses enriched the State.  The Indian State of the 17th century, which looked towards businesses only as cash cows, quickly lost power to the East India Company as soon as the company decided to take on the Indian State even though the company’s total wealth and military power was nothing more than the size of a small zamindari in India. That was an encounter in which Indian businessmen preferred to throw in their lot with the East India Company rather than with Indian rulers. 

Two, even at Independence, after a century and a half of colonial exploitation, India still was one of the richer and more developed of countries in Asia with a flourishing textile sector and chemical industry and a steel industry with great potential. Yet, within a few decades, the Indian economy became a basket case, despite (or may be because of) its socialist push.

Three, crony capitalism, the word used to describe the undue advantage given by the authorities to a handful of industrial houses by making lopsided policies, may have come into popular use in recent times, but it was being practised fully even in olden socialist times.

The one thing consistent over these decades and centuries has been that little thought has been given to the fact that higher business production can lead to more jobs, higher wages and a robust tax base. Protection to a few industries, creating a hothouse for them to survive, does not result in those industries growing but enables the incompetent and inefficient to survive at huge costs to everyone else. For countries to grow rich, business productivity needs to improve. 

A sustainable strategy to improve business capabilities would be, to provide resources that businessmen cannot generate for themselves without incurring extraordinary costs. Security, especially of property and, regulations that are stable, fair and implementable, are not goods that businesses can create. Only the authorities of the State can. Similarly, providing an ever-expanding pool of skilled manpower, which has skills to re-skill itself in harmony with changing needs and requirements, too, is something that only the State can provide by creating a robust and trustworthy system of education. Both these are strategies that China has used to good effect to transform its economy in just three decades. Similarly, timely enforcement of the law of contract can be a key to business viability but that is a function only the State can perform. India continues to be among the lowest in the world for this indicator.

As early as 1948, the Japanese created what is today called the Ministry of Trade, Economy and Industry (METI), with its official objective, to guide businesses on how best to make profit. The WTO may prohibit subsidies for exporters, but it does not debar the State from providing market intelligence to businesses. Market intelligence is much more than figuring out what can sell and where. It also is about effective knowledge management and making such knowledge available to businesses at nominal or no cost. Information is the most valuable resource of all for any business to make a handsome profit. Currently, businessmen pay through their nose for trade-related information. Systematising those links and helping set up institutional mechanisms for sharing of information would help Indian businesses go up the learning curve much faster. 

Even if we can persuade just one-tenth out of the two lakh researchers who work in our universities (according to the latest AISHE 2019 figures) to work on issues that lead to high material cost and low productivity in many sectors, we might be able to find a way towards a Rs 5-trillion economy. In the absence of such systematic intelligence, the learning curve for businesses remains flat. Even if they are aware of a problem that needs correction, they are rarely able to diagnose it correctly or come up with a workable solution. The State, of course, remains indifferent to such absence of learning.

Intuition is not a good guide in such circumstances. Modern society is too complex for that. Only systematic research can help. Would, for example, the setting up of an exchange for gold help the jewellery business? To what extent and in what time-frame do the benefits outweigh the costs of setting up infrastructure for export inspection and phytosanitary certification of plants and plant products, India’s agriculture sector? What is the payback period for investment in artificial intelligence for small or medium-scale retail industry, is it worth their while to modernise?

Any researcher with some basic training can work on such issues and generate data for decision-taking. Today, what the State needs to do is to support work on such questions and to use the results as determinants for economic policy and to support business. It is societies that go up the learning curve fast that can become rich.

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