Malfunctioning hub

The promise of the advocates of neoliberalism to position India as a factory for the world remains a pipe dream, thanks to the very policies that they put in place to fulfil it.

Workers at BHEL's photovoltaic manufacturing facility in Bengaluru. Public sector companies such as BHEL have been hit hard by the lifting of tariffs on imported equipment.

One of the key promises made as India steppedinto a brave new world 25 years ago was that it would be transformed from an “inward-looking” economy into a dashing player on the global economic stage. Specifically, the promise was that the orchestrated policy response that was being assembled would enable India to shed its lethargic and reticent image and embark on a path that would establish the country as a manufacturing hub to the world. Twenty-five years on, that dream remains a forlorn hope. Consider this: in 1989-90, manufacturing activity accounted for 16.4 per cent of India’s gross domestic product (GDP). In 2015-16, despite several new packages tailored to boost manufacturing, it accounted for just 16.2 per cent of GDP.

The liberalisation wave rested on three key aspects of policy to take India into the brave new world. The first was the commitment to reduce tariffs on a whole range of manufactured products. This, it was argued by advocates of the new approach, would prepare Indian industry to face competition. They would be able to use cheaper intermediate and capital goods that were now available at lower prices because of lower tariffs to reduce costs. Moreover, it was argued, this would enable them to address the needs of global markets. The across-the-board cut in tariffs—even below levels mandated by the World Trade Organisation (WTO), applied not just to industrial inputs or intermediates but even to project imports such as those relating to power-generation equipment—had a significant impact, which was felt not just by individual companies but by large swathes of the ecosystem in which they operated. For example, while publicly owned companies such as Bharat Heavy Electricals Ltd were hit by the cheap inflow of imported equipment, the effect was also felt by a host of smaller units that had established a long-term relationship with the company.

The second aspect of the policy regime that had a bearing on manufacturing concerned foreign direct investment (FDI). It was argued that the FDI inflow into manufacturing would enable Indian companies to attain global standards of efficiency, access technologies and reach markets that had hitherto been inaccessible.

The third key aspect of the policy concerned finance. It was argued that the state-run banks, which had been in development-finance mode for long, were no longer the main option for companies. The international market for external commercial borrowings (ECBs) was now open to them. Large industry houses lapped up this proposition because such borrowings, denominated in foreign currency, had a much lower rate of interest. It was only much later, when the reality of the vicissitudes of exchange rates hit them, did Indian corporates realise the risks in such borrowings, even if the risks were borne more by the overall economy rather than by individual borrowers. However, the link between state-run banks and industry was seriously broken as a result of these policies. Nowhere is this more evident than in the repeated and persistent cries of small-scale manufacturing units that they have been shut out of the banking system.

Role of manufacturing

One of the striking features of the neoliberal paradigm is its treatment of the very notion of an industrial policy of the state. In a framework that assigns primacy to the unfettered demands and needs of the market, it seems to ask: “Why do markets need an industrial policy anyway?” Manufacturing activity has always held the attention of development economists because of its perceived economy-wide benefits. The sector’s value as an “engine of growth” arose from its characteristics, they argued. Its dynamic economies of scale, its potential for enabling a country to absorb “excess” workforce employed in low-productivity agriculture, the chain of production and the forward and backward linkages it establishes in the overall economy and the sector’s ability to foster technology and innovation have long been—since the Industrial Revolution—recognised as a marker for the development of any economy. Moreover, industrial-scale production requires discipline and complex organisation, which demand a broad range of skills acquired through education, all of which result in a modern work ethic that has a transformatory effect on the economy and society. Growth, employment and productivity in manufacturing activity were thus seen as providing an impetus to the economy that went far beyond the confines of the sector. All this also meant at least a degree of planning, which not only took into account the sectoral linkages but also gave prominence to the necessity of a national industrial policy that gave a formal shape to priorities and strategies.

The virtual abandonment of an industrial policy regime, notwithstanding a National Manufacturing Policy statement (2011), which was modified into Prime Minister Narendra Modi’s Make in India campaign, explains why the share of industrial output in national income has remained stagnant in the last two decades. The fact that agriculture has languished or that the services sector accounts for a significant portion of national output does not address key issues that arise from the questions of livelihood. While incomes in agriculture have been sliding, the services sector is characterised by low pay and productivity. Two other developments have worsened matters. First, the ability of industry to absorb labour has diminished; second, real wages in manufacturing increased by a mere 1.4 per cent per annum between 2005-06 and 2010-11, even though labour productivity increased by more than 6 per cent per annum during this period. In the last few years, manufacturing activity has grown slower than the overall economy, implying that the objective of generating one-fourth of the national output in the manufacturing sector remains a distant dream, with no semblance of a credible plan to attain it being visible.

Under the onslaught of neoliberal policies, especially those pertaining to the dismantling of tariff walls, domestic production in a range of industries was impacted. Among them are a range of capital goods, particularly machinery of various kinds, aircraft, television and communication devices, office automation and computing equipment, railway equipment and ships and boats. The only sectors within industry that managed to just about weather the storm were sectors such as chemicals, iron and steel, and pharmaceuticals. Incidentally, in the case of pharmaceuticals, this was achieved despite, not because of, the neoliberal regime. The pharma companies’ competitiveness arose from their commanding presence in the global market for generics, which was made possible by the Patents Act of 1970 and the National Drug Policy of 1978, which was a prime target at the WTO negotiations.

Scandalous routes

The justification of attracting foreign investment has always been a key pillar of the neoliberal enterprise. It was argued that foreign investment needed to fill in the gap caused by the state’s “withdrawal”, under the pretext that it could not allow its fiscal deficit to rise too high. Of course, FDI was given the more privileged place, ostensibly because, unlike short-term portfolio investments, it would have a vested interest in the productive capacity in the country. However, two crucial factors, unveiled by meticulous researchers such as Biswajit Dhar (Jawaharlal Nehru University), reveal a disturbing picture that flies in the face of the logic that has been advanced to justify the manner in which the Indian state has bent over backwards to woo foreign capital.

First, official statistics show that 49 per cent of all cumulative FDI between 2000 and 2015, amounting to $258 billion, came from just two countries: Mauritius (35 per cent) and Singapore (14 per cent). The scandal that characterises the Mauritius route has to do with the simple fact that it provides a conduit for many Indian entities (individuals and companies) to indulge in round-tripping. The practice, which literally means undertaking a journey that results in arriving back at the same place as the starting point, is closely associated with its use as a device to evade tax. Money is sent overseas by generating inflated invoices or, in more outrageous instances, through hawala transactions. While this practice has been going on for long, well before liberalisation began, it acquired a new meaning and purpose after 1991. The fact that the Indian state was providing sops on a platter to foreign capital meant that Indian entities had an incentive to masquerade as “foreign” entities in order to benefit from such sops. This is what round-tripping enabled after 1991. In effect, the FDI brought in by such entities has nothing to do with either productive capacity, technology or long-term commitment to the Indian economy. As Dhar’s studies have shown (including one about Walmart’s investments in India), it is very difficult to pierce the veil to expose the actual entities behind such investments.

The second aspect of FDI inflows, however inaccurately captured in spirit by official statistics, is that industry, manufacturing in particular, has received a small fraction of the total investment. According to a 2014 study by Dhar and others, manufacturing received about 30 per cent of the overall FDI into India between 2000 and 2012. However, almost 60 per cent of the FDI in manufacturing was channelled into four areas: pharmaceuticals, chemicals, automobile and metallurgy industries. Significantly, the industries that suffered as a result of the lifting of import curbs, especially machinery and engineering goods, did not receive investments in the form of FDI. FDI ignored the sectors where Indian industrial capacity was impaired by liberalisation.

The third, and damaging, aspect of even these limited FDI inflows in manufacturing is that almost one third of the “investments” were for the acquisition of shares in existing Indian units. Far from being used for any expansion of capacity, such investments by foreign entities were aimed either at getting a toehold in the Indian market or to jockey into a position of economic power in the market. The “strategic” move would explain their intention to establish a presence to curtail competition in the market or to acquire pricing power in the market, the ability to set prices.

Retelling the software story

Of course, there is an alternative to this story of industrial stagnation in India, what some economists prefer to call “premature deindustrialisation”. It is very much present and alive in the single biggest “success story” of liberalisation, the industry for outsourced information technology (I.T.) services, if only there is a willingness to disarm oneself of the glib assertions made by writers such as Thomas Friedman (of The World is Flat fame).

The dominant narrative of the revolution and growth of the Indian I.T. services industry, disseminated by its self-serving industry and a media that has displayed a spineless inability to dissect the march of liberalisation, rests on a mixture of outright distortion of facts, selective amnesia about key milestones at crucial stages, and a refusal to acknowledge the critical importance of state support through policy. Jyoti Saraswati’s Dot.compradors: Power and Policy in the Development of the Indian Software Industry (2012) offers, from a political economy perspective, an excellent counter to the merry tale of how the Indian software services industry shook off the shackles imposed by a licence raj.

He argues that, contrary to popular belief, the Indian software services industry owes its status to the “highly interventionist” state policies that originated as early as in the 1970s. He argues, through extensive documentation, that the prolonged intervention, spread over three decades, well before neoliberal dogmas landed on Indian shores, played a critical role in the development of Indian companies as the spearhead of the global provider of outsourcing services in the last two decades. He points to the fact that foreign companies, giants in the global world of computing technologies such as IBM, ICL and Burroughs had to agree to the Indian state’s demands for equity dilution (IBM eventually exited). The establishment of the Electronics Corporation of India Limited (ECIL) and its “near-monopoly” powers in India were among other measures undertaken by the Indian state in the 1970s.

By the mid 1980s, under growing pressure from industry lobbies such as the National Association of Software and Service Companies (NASSCOM), the Indian state started interventions that directly promoted the interests of the software services industry. Jyoti Saraswati notes the “remarkable haste” with which the government established International Packet Switching Service (IPSS), which became operational in 1989. This, he notes, meant “Indian software companies could write and transmit most of their software from their own offices to their clients abroad”. A few years later, the Software Technology Parks (STPs) were established. A little later, Indian companies started enjoying virtually a tax-free status from within the confines of export-processing units. And, as they say, the rest is history, only of a different kind, one in which the careful guiding hand of the state, rather than a heavy-handed one, was responsible for the fairy-tale run that extended for close to two decades.

This saga of the Indian IT services industry is a powerful counter to the neoliberal logic that has played havoc with large swathes of industry in India. At another level, it offers a cautionary tale and a ray of hope about how and why state intervention is critical for Indian industrialisation.

The irony today lies in the fact that the hopes of India becoming a global manufacturing hub of the world were snuffed out by those who made the promise, even as they set the country on a course that made it increasingly import-dependent. Even more ironic is the Modi government’s Make in India thrust. Even if India did miss the bus to catch the global market after 1991, today’s recession-ridden world is hardly the time to make a dash for it. In any case, with policies like these, India is not even in the race.