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Failure to industrialise efficiently
Deepak Lal | January 31, 2003
The greatest failure of post- Independent India is that it has not lived up to its promise in the 19th century, and become the workshop of the world.
Ironically, after opening up its economy following a similar disastrous experiment with heavy industry based import substituting industrialisation in the Maoist period, China has now taken over this role.
What are the reasons for this Indian failure to fully embrace the means of converting a traditional agrarian organic economy dependent on land into a modern industrial economy based on using mineral energy resources?
Indian Marxists and nationalists laid the blame on the policies of free trade and laissez-faire that the British Raj instituted in the 19th century. But as I argued in The Hindu Equilibrium, the evidence does not support these inferences.
After the inflow of imported mill- made textiles had challenged the indigenous handloom textile industry in the 1830's, by the 1850's Indian enterprise and capital using modern imported technology had set up its own mills, which by 1875 were exporting modern textiles to Lancashire.
This overturning of tables led the English manufacturers to demand (in collaboration with various do-gooders) that, the newly introduced Factory Acts, to protect industrial labour in Britain, should also be adopted by India -- to create a level playing field!
This agitation succeeded, and from 1881 India introduced the labour laws -- whose net effect was to raise the effective price of labour to industry -- which to this day has hobbled Indian industry.
The Indian textile industry, which had pioneered industrialisation in the Third World, now found that it could not compete in export and later domestic markets with the rising industry of Japan. Lower Indian wages reflected lower efficiency.
Whereas the Japanese textile industry was built on using female labour working two shifts a day, the Bombay textile industry was hamstrung by labour laws which forbade such long working hours. Indian textile producers demanded protection and got it.
The large home market, which provided an easy life as it was increasingly protected from imports, gave little incentive for Indian producers to raise efficiency. Thus, began that long decline which ended up with many mills in the list of sick industries during the post-Independence period.
In the 19th century, the growth of modern industry was not confined to cotton textiles. The first jute mill was set up in 1854, only three years after the first cotton mill, and the first steel mill was established by the Tatas in 1911.
Other industries, including paper, sugar and engineering were also established during the free trade and laissez faire period. The overall rate of industrial growth was higher in India than in most tropical countries and higher than in Germany between 1880-1914.
Lidman and Domerese (in W A Lewis': Aspects of Tropical Development 1880-1913) have estimated that: "An index of industrial production based on six large-scale manufacturing industries more than doubled from 1886 to 1914.
By 1914 the Indian economy had developed the world's fourth largest cotton textile industry and the second largest jute manufacturing industry."
It was the discriminating protection that the Raj introduced soon after the First World War, which was to be extended to unimaginable extents in the post- Independence period, which led to the endemic inefficiency of Indian industry which turned inward looking largely at the domestic market.
A rough comparison can be made of the performance of Indian industry in the broadly free-trade period of 1900-13 ( for which data are available) with the protectionist 1919-39 period. It shows that, even judging by crude and inadequate criteria such as the growth of manufacturing output, employment and investment, the performance during the free trade period was better.
But the combination of the colonial labour laws and creeping protection began those trends which have continued till today: with an accelerating trend in the capital employed in industry and a decelerating trend in the labour employed.
In the first few decades after Independence, a decelerating trend also developed in industrial output.
It can be seen that the post-Independence period can be divided into a number of sub-periods. The first was the heyday of planning (1950 to 64), when industrial output, employment and capital stock, all rose markedly as compared with the preceding pre-Independence period. The second period from 1965 to 79 saw a slowing down in all these variables, as the heavy industry biased import substituting strategy began to run into the sands.
The third period 1980 to 1989 was a period when there was partial liberalisation of foreign trade controls and a dash for growth, based on increased foreign borrowing and rising fiscal deficits. Industrial output and capital stock rose but employment was virtually stagnant.
In the post- reform period of the 1990's, industrial output and capital stock grew at the same rates as in the 1980s but in a more sustainable manner. But, industrial employment continued to stagnate. The result has been a massive rise in the capital/labour ratio in Indian industry over these fifty years -- and that too in a labour abundant country.
The remedies are obvious. With trade liberalisation, many of the deleterious effects of protection are disappearing. But the poisoned chalice of the colonial labour laws is yet to be broken.
As is that Gandhian legacy of protecting small-scale industry, which has in effect created an industrial caste system. This too needs to be eliminated.
But, perhaps most important, is to provide new and update India's creaking old infrastructure. The backbone of Korea's and now China's industrial success has been the provision of adequate infrastructure.
Korean export-led growth took off when President Park in the late 1960' constructed a North-South highway. India despite planning has woefully neglected its infrastructure. This must be improved, and given the constraints on public finance, this requires massive foreign investment. But the Enron fiasco is not encouraging.
If these necessary measure can be taken, India's labouring poor can at last be offered the only sustainable escape from their ancient poverty.
There are some who argue that, with the development of the IT industry, India can jump the industrial revolution stage of modernisation. This is an illusion. Moreover, given the poor educational levels in the country, such a view condemns the millions of semi and unskilled labourers in the country to continuing poverty.
The nationalists were right in seeing industrialisation as essential to modernisation, only their means were counter-productive. Now that India is shaking off the Nehruvian incubus, perhaps it will at last become the workshop of the world.
So that when I go into any supermarket in Los Angeles, the current label on every consumer good, 'Made in China', will have been replaced by 'Made in India'.