The Long March to Capitalism: Embourgeoisment, Internationalisation and Industrial Transformation in India

The Long March to Capitalism EMBOURGEOISMENT, INTERNATIONALIZATION, AND INDUSTRIAL TRANSFORMATION IN INDIA

Anthony P. D’Costa

The Long March to Capitalism

Also by Anthony P. D’Costa: India in the Global Software Industry: Innovation, Firm Strategies and Development (co-editor with E. Sridharan) The Global Restructuring of the Steel Industry: Innovations, Institutions and Industrial Change

The Long March to Capitalism EMBOURGEOISMENT, INTERNATIONALIZATION, AND INDUSTRIAL TRANSFORMATION IN INDIA ANTHONY P. D’COSTA Comparative International Development UNIVERSITY OF WASHINGTON, USA

© Anthony P. D’Costa 2005 All rights reserved. No reproduction, copy or transmission of this publication may be made without written permission. No paragraph of this publication may be reproduced, copied or transmitted save with written permission or in accordance with the provisions of the Copyright, Designs and Patents Act 1988, or under the terms of any licence permitting limited copying issued by the Copyright Licensing Agency, 90 Tottenham Court Road, London W1T 4LP. Any person who does any unauthorised act in relation to this publication may be liable to criminal prosecution and civil claims for damages. The author has asserted his right to be identified as the author of this work in accordance with the Copyright, Designs and Patents Act 1988. First published 2005 by PALGRAVE MACMILLAN Houndmills, Basingstoke, Hampshire RG21 6XS and 175 Fifth Avenue, New York, N. Y. 10010 Companies and representatives throughout the world PALGRAVE MACMILLAN is the global academic imprint of the Palgrave Macmillan division of St. Martin’s Press, LLC and of Palgrave Macmillan Ltd. Macmillan® is a registered trademark in the United States, United Kingdom and other countries. Palgrave is a registered trademark in the European Union and other countries. ISBN-13: 978–1–4039–3647–9 hardback ISBN-10: 1–4039–3647–1 hardback This book is printed on paper suitable for recycling and made from fully managed and sustained forest sources. A catalogue record for this book is available from the British Library. Library of Congress Cataloging-in-Publication Data D’Costa, Anthony P., 1957– The long march to capitalism : embourgeoisment, internationalization, and industrial transformation in India / Anthony P. D’Costa. p. cm. Includes bibliographical references and index. ISBN 1–4039–3647–1 (cloth) 1. India–Economic conditions–20th century. 2. Capitalism–India– History–20th century. 3. Industrialization–India–History–20th century. 4. Automobile industry and trade–India–History–20th century. 5. India– Politics and government–20th century. I. Title. HC435.D36 2005 330.954–dc22

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To Janette for her love and understanding

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Contents List of Tables

viii

List of Figures

x

Acknowledgements

xi

List of Companies Cited

xv

Acronyms

xvi

Map of India

xviii

Chapter 1 Introduction: Capitalism, Markets, and Industrial Change

1

Chapter 2 One Capitalism or Many? Interpreting Indian Industrial Development

16

Chapter 3 State, Embourgeoisment, and Market Development in India

46

Chapter 4 Embourgeoisment, Internationalization, and Auto Market Evolution

70

Chapter 5 Capitalist Regulation, Flexible Production, and Auto Market Evolution

105

Chapter 6 Uneven Development and the Changing Regime of Accumulation in West Bengal

142

Chapter 7 Capitalist Competition, Consumption, and Contradictions of Industrial Transformation

169

Chapter 8 Concluding Remarks on Capitalism, Markets, and Development

199

Appendix

208

Notes

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References

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Index

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List of Tables Table 3.1 Table 3.2 Table 3.3 Table 3.4 Table 4.1 Table 4.2 Table 4.3 Table 4.4 Table 4.5 Table 4.6 Table 4.7 Table 5.1 Table 5.2 Table 5.3 Table 5.4 Table 5.5 Table 6.1 Table 6.2 Table 6.3 Table 7.1 Table 7.2 Table 7.3 Table 7.4 Table 7.5

Expansion of Selected Indian Industries, 1950–2000 Structural Changes in the Indian Economy, Sectoral Contribution to GDP (%) 1950–2004 (1993–94 prices) Number of Educational Institutions for Selected Categories Three Estimates of the Size of the Indian Middle Class (based on household income) World Motor Vehicle Production, 1950–2000 World Motor Vehicle Production by Manufacturers (2000) (Top 24 Firms) India’s Changing Balance of Payments Profile Changing Market Structure of Car and Utility Vehicle Production in India (1955–2001) Changing Structure of Commercial Vehicles Production (1950–2001) Major Foreign Collaborations in the Automobile (Four-Wheeler) Segment Internationalization, Diversified Output, and Market Segmentation Maruti Udyog’s (MUL) Relative Performance (circa 1994) The Co-Location of MUL’s Suppliers Intra-Firm Flexible Arrangements for Mass Production (Early 1990s) Recent Changes in the Indian LCV Market by Firms Expanding Market for the Indian Component Industry (Rs. and US$, in millions) Percentage Distribution of Net Value Added Across Selected Indian States Statewise Sale of Passenger Cars Profitability of Hindustan Motors in the 1990s Excess Capacity in the Indian Vehicle Industry Increasing Competition and Product Variety in the Indian Car Industry Competition and Tendencies Toward Excess Capacity in the Indian Automobile Industry Excess Capacity by Firms Estimated Distribution of Households by Income Group in India viii

51 53 60 64 74 75 79 86 87 94 100 112 116 120 131 136 145 147 163 172 174 175 176 179

List of Tables ix

Table 7.6 Table 7.7 Table 7.8 Table 7.9

Number and Annual Growth Rate of Wealthy Households (1993–94 and 1995–96) Purchases of Selected Consumer Durables in India (millions) and Rural Share (%) Prices of Two-Wheelers and Distribution of Household Income Prices of Selected Cars and Household Income

181 183 184 187

List of Figures Figure 2.1 Figure 2.2 Figure 3.1 Figure 3.2 Figure 4.1 Figure 4.2 Figure 5.1 Figure 5.2 Figure 5.3 Figure 6.1 Figure 6.2 Figure 6.3 Figure 7.1 Figure 7.2 Figure 7.3

An Alternative Conceptualization of Capitalist Industrialization The Dynamics of Capitalist Industrialization in India India’s Food Grain Production, 1951–2002 (mt) Net Additions in Vehicle Populations by Category India’s Net Trade Balance General Motors and the Internationalization of the Indian Auto Industry Industrial Governance Under Changing Capitalist Regulation Cooperation Within and Outside MUL Sona’s Evolution of Product Variety Net Value Added in Manufacturing by States Increasing Lockouts in West Bengal, 1979–1997 HM’s Accumulation Strategy and Capital Flight from West Bengal Growing Divergence in Car and Two-Wheeler Production (1971–2001) Commodity Balance in Crude Oil Changing Energy Consumption Ratios (1971–1994)

x

39 42 54 65 76 97 109 111 118 146 153 158 185 189 190

Acknowledgements This book is the second of a trilogy of research studies on globalization, industrial change, and development. The first, titled The Global Restructuring of the Steel Industry: Innovations, Institutions and Industrial Change, (Routledge 1999) examined how the role of states and technology-driven capital accumulation shaped the global reorganization of a largely national industry. The third examines the dynamics of informational capitalism, its impact on the changing global division of labor in high technology development, and economic development at the national level. The second volume investigates the evolution of contemporary industrial capitalism in India by showing how state-led economic and social change and business responses contributed to market development and subsequent integration with the world economy. The study situates the restructuring of the Indian automobile (and other consumer durables) industry in the wider capitalist context. The entry of Japanese capital into the Indian auto industry in the early 1980s radically changed the industry. The literature on Japanese development and its deployment of flexible practices raised a host of new questions on the heterogeneity of capitalism and its varied institutional underpinnings. Moreover, India’s gradual economic reintegration with the world economy added another layer of complexity to the trajectory of Indian capitalism, which paralleled global developments in a limited way. To fully appreciate the nature of capitalist development in India I felt it was important to capture the macro-national social forces influencing the expansion of the Indian auto industry. Not only are industry-level dynamics important for increasing output but, from the demand side, the larger social change in motion since Indian independence is crucial to explaining the turning point in India’s auto industrial development. In extending my earlier work, I argue that this structural transformation, which has been state engineered, is the foundation for market growth, a quintessential feature of capitalism. With increasing demand there are supply responses, spearheaded largely by multinational corporations and their Indian partners in a liberalized market environment, attempting to cash in on the growing Indian middle class. Market development from the supply side is witnessed in terms of increasing volume of output using best-industry practices. The two sides of cumulative capitalist development in India are thus comprised of embourgeoisment from the demand side and internationalization of the Indian industry from the supply side. However, the story does not end there. There are, on the one hand, unfavorable social and economic consequences of xi

xii Acknowledgements

embourgeoisment, industrial expansion, and the working of capitalist market dynamics in India’s particular institutional context. On the other hand, there are also social responses to these emergent contradictions. It is through this comprehensive appreciation of the evolution of industrial capitalism, as seen through the internationalization of the auto industry, that the highly ambiguous contemporary process of economic development and social change in India can be brought out. This study has its initial roots in a plant visit I made in 1987, almost five years after India’s flagship auto company Maruti Udyog Limited was launched by the government of India and Suzuki Motors of Japan. Subsequently, two organizations financially sponsored my field research. A fellowship from the US Department of Education under the FulbrightHays Faculty Research Abroad program (1991) and a Senior Fellowship from the American Institute of Indian Studies (1992) allowed me to collect primary data in India and Japan (see Appendix A.1). Since then I have visited India several times to update information on a rapidly changing industry and follow through with additional interviews of firms that seemed poised to make a mark on the industry. Four of these trips were partially supported by small grants from the Founders’ Endowment Fund (1994, 1996), University of Washington in Tacoma, the Graduate Research Fund (1994) and the Center for Labor Studies (1995) (now Harry Bridges Center), University of Washington in Seattle. As a Royalty Research Fund Scholar of the University of Washington, I made two more trips to India in 2001 and 2002. The financial support allowed me to hire a research assistant in India and work on several chapters full-time for a quarter. Without the financial help from these institutions and organizations it would not have been possible to get to know the industry at the shop-floor level. There have been many individuals from the industry, government, and academic establishments who have been generous with their time. Some of them organized the logistics of plant visits, most of which were located away from city centers. Two individuals in New Delhi deserve particular mention: Mr. R. C. Bhargava, the Chairman and Managing Director of MUL for many years, and Mr. N. Srinivasan, the former Executive Director of the Automotive Components Manufacturers Association. In the 1990s, both of them helped me with plant visits and industry publications and allowed me to obtain primary data from individual firms and various departments within them. I am especially grateful to the many employees of MUL who enthusiastically shared their work and helped me make sense of the larger transformation taking place. There were other individuals, too numerous to mention, who went out of their way to help me understand the industry. The firms they represented are listed in Appendix A.1. Additionally, I would like to thank Mr. Hirofumi Nagao of Suzuki Motors for making my Hammamatsu visit professionally productive. Various

Acknowledgements xiii

government departments and officials also extended their assistance. The now defunct Directorate General of Technical Development, which evaluated industrial investments, opened up for me the byzantine dimensions of Indian bureaucracy and economic administration. Senior officials, with an academic bent, such as Bimal Jalan, Rakesh Mohan, Ashok Desai, and Pronab Sen in various ways introduced me to the complexities of Indian economic reforms. Biman Basu of the Communist Party of India (Marxist) in Kolkata provided an interesting analysis of changing industrial relations and politics in West Bengal and introduced me to labor leaders and unions in the state. The leaders of major trade unions, located in Delhi, also narrated their versions of industrial democracy in capitalist India. I would also like to thank my friends E. Sridharan, M. R. Anand, and Gautam Mazumdar, all from Delhi, for acquiring and sending research-related publications to me and sharing their particular knowledge of Indian political economy, administration and planning, and the auto industry. Rakesh Basant in Ahmedabad helped arrange the General Motors plant visit in Halol. Cherian Samuel, at the World Bank, has been always eager to help with data and research contacts. The basic materials in this volume have been previously presented in seminars and conferences; some have been published in academic journals and the popular press. I am grateful to the individuals and institutions that hosted my visits. In no particular order I would like to thank Ramprasad Sengupta and his colleagues for hosting two of my presentations in Delhi at the Center for Economic Studies and Planning, Jawaharlal Nehru University; Amiya Kumar Bagchi of the Center for Studies in Social Sciences, Calcutta; Makoto Kojima of Chiba University of Commerce (now with Takushoku University), Japan; Harukiyo Hasegawa of University of Sheffield (now with Doshisha University in Kyoto); Tony Shorrocks and Tony Addison of World Institute of Development Economics Research, Helsinki; and Rob Tulder of Erasmus University, Rotterdam. Other institutions and organizations that invited me or acted as presentation outlets include Tokyo University of Foreign Studies, Duke University, Association of Asian Studies, Social Science Research Council (New York), Hallym University (Chunchon, Korea), South Asia Colloquium of the Pacific Northwest, National Tsing Hua University (Taiwan), University of Calgary (Alberta, Canada), University of Hawaii, the India Association of Western Washington, the University of Washington, and the Eindhoven Centre for Innovation Studies, Eindhoven Technology University, the Netherlands. Publication outlets include World Development, Contemporary South Asia, Journal of International Development, Asian Business and Management, Industrial and Corporate Change, Ekonomisuto (in Japanese), and Business Line (India). There have been a few individuals who have either read some of these papers or who shaped some of the arguments and ideas. I would like

xiv Acknowledgements

to thank Gary Hamilton for unwittingly being my professional mentor. His kindness and seasoned advice were always a source of inspiration. Rick Doner and Fred Deyo provided useful comments on some of the ideas on flexible production. Debdas Banerjee read Chapter 6 on West Bengal and provided useful feedback, while Saikat Sinha Roy compiled manufacturing data from the Annual Survey of Industries of the Government of India. Amiya Kumar Bagchi, in addition to his sustained interest in my work, helped me find Bhubanes Misra, who carried out a part of the data collection process in West Bengal. At Palgrave Macmillan it has been always a pleasure to work with Amanda Watkins, the Senior Commissioning Editor. Thanks also to Jen Nelson at Palgrave for seeing the project through. But there is only one person who has read not only all the pieces I have written but the entire manuscript itself. Janette Rawlings, as always, meticulously combed through the book and enthusiastically offered numerous editorial and substantive suggestions. More importantly, her generosity, at a time of extreme family circumstances, allowed me to undertake research travel for over five months. For this and more I will be always grateful. As a small token of reciprocity, I dedicate this book to her. A.P.D. Tacoma, Washington 2004

List of Companies Cited Allwyn-Nissan Asahi India Asahi Glass Ashok-Leyland Bajaj Auto Bharat Seats BMW Brakes India C.K. Daikin C.K. Birla Group Caparo Industries Citroën Climate Systems Daewoo Motors Daimler-Benz DCM Engineering DCM-Daewoo DCM-Toyota Eicher Tractors Eicher-Mitsubishi Fiat Ford India Ford General Motors GM-Daewoo Auto Technology Hindustan Motors Honda Hyundai Ind Auto Ltd. India Piston Indian Iron and Steel Infosys Isuzu Jay Bharat Maruti Koyo Seiko Krishna Maruti Leyland

India India Japan India India India Germany India India India UK France India South Korea Germany India India India India India Italy India USA USA South Korea

Lucas Engineering Machino Plastics Mahindra & Mahindra Mark Auto Maruti Udyog Ltd. Matsuda Mazda Mercedes Benz MG Rover Mikuni Mitsubishi Motors Mitsubishi Nippon Denso Nissan Peugeot Premier Automobiles Purolator India Scooters India Ltd. SEAT Sipani Automobiles Somic Ishikawa Sona Steering Sona Somic Sona Koyo Standard Motors Subros Ltd. Sundaram Fasteners Sundaram-Abex Suzuki Motors Swaraj Mazda Tata Iron and Steel TELCO Toyota Toyota-Kirloskar TVS UCAL Vauxhall Volvo

India Japan South Korea India India India India Japan India Japan India UK xv

UK India India India India Japan Japan Germany UK Japan Japan Japan Japan Japan France India India India Spain India India India India India India India India India Japan India India India Japan India India India UK Sweden

Acronyms ACMA AIAM AL BIFR BJP BMW BOP CII CITU CKD CNC CNG CPI CPM CV EOS EOSC FDI FERA G-7 GATT GDP GM GNP GOI HCV HM IDA IMF INTUC ISI IT ITI JIT JLCV KVA KWH LCV M&M

Automotive Components Manufacturers Association Association of Indian Automobile Manufacturers Ashok-Leyland Board for Industrial & Financial Reconstruction Bharatiya Janata Party Bavarian Motor Works Balance of Payments Confederation of Indian Industry Centre of Indian Trade Unions Completely Knocked Down Computer Numerically Controlled Compressed Natural Gas Consumer Price Index Communist Party of India (Marxist) Commercial Vehicle Economies of Scale Economies of Scope Foreign Direct Investment Foreign Exchange Regulation Act Group of Seven General Agreement on Tariffs and Trade Gross Domestic Product General Motors Gross National Product Government of India Heavy Commercial Vehicle Hindustan Motors Industrial Dispute Act International Monetary Fund Indian National Trade Union Congress Import Substitution Industrialization Information Technology Industrial Training Institute Just in Time Japanese Light Commercial Vehicle Kilo Volt Amperes Kilo Watt Hour Light Commercial Vehicle Mahindra & Mahindra xvi

Acronyms xvii

MES MISH mt MNC MRTP MUL MUV NCAER NCR NOIDA NRI OBC OECD OEM PAL PCI PMP PPP PSU QC R&D Rs. RTV SAL SC SIAM SMC SMP SSA ST TELCO TNC TVS UNCTAD WB WBIDC WTO

Minimum Efficient Scale Market Information Survey of Households million tonnes Multinational Corporation Monopolies Restrictive Trade Practices Maruti Udyog Limited Multiutility Vehicle National Council for Applied Economic Research National Capital Region New Okhla Industrial Development Authority Non-Resident Indian Other Backward Classes Organization of Economic Cooperation and Development Original Equipment Manufacturer Premier Automobiles Limited Per Capita Income Phased Manufacturing Program Purchasing Power Parity Public Sector Unit Quality Circle Research and Development Rupees Rural Transport Vehicle Sipani Automobiles Ltd. Scheduled Caste Society for Indian Automobile Manufacturers Suzuki Motor Corporation Standard Motors Private Ltd. Social Structure of Accumulation Scheduled Tribe Tata Engineering and Locomotive Company Transnational Corporation TV Sundram Iyengar and Sons Ltd. United Nations Conference on Trade and Development West Bengal West Bengal Industrial Development Corporation World Trade Organization

India’s Principal Automotive Clusters

Source: Compiled by Author.

xviii

1 Introduction: Capitalism, Markets, and Industrial Change

1.

Introduction

The 2004 general elections in India produced some dramatic outcomes. The incumbent government, led by the Hindu fundamentalist Bharatiya Janata Party (BJP), was unexpectedly thrown out and the Congress Party was returned to power. In forming a government the mildly left-of-center Congress party secured the alliance of India’s communist parties. Neither defeating the incumbent party nor forming unusual political alliances are unfamiliar in India’s anti-incumbent voting behavior and coalition politics. What was jolting, however, was that the BJP could not cash in on the goodwill it had generated during its five-year tenure marked by a high economic growth rate, the rapidly emerging information technology sector, and India’s larger presence in the global economy. The class revolt indicates that a large segment of Indian society has not benefited from economic growth and India’s integration with the global economy. At the same time, India’s long-established Communist Party of India (Marxist) (CPM), which won its sixth consecutive victory in the state of West Bengal, has been enthusiastically embracing globalization and its attendant capitalist imperatives such as multinational investments, shopping malls, and middle class consumerism. Recently the Chief Minister of West Bengal, who is also a senior politburo member of the CPM, argued that “globalization is a must” and proceeded to meet with several multinational business leaders (Rohde 2004). This brief exposition of Indian elections raises a number of interrelated questions on the nature of recent Indian economic development and social change. For example, why is it that high growth and high technology industries are not benefiting the population as a whole? What is behind India’s high growth rates, given its historical low growth performance? What explains the coexistence of India’s growing class of consumers and persistent poverty? Why is the CPM, traditionally hostile to business, especially multinational firms, openly courting them? What can we say about 1

2 The Long March to Capitalism

the functioning of the contemporary world economy and how is the Indian economy articulating itself with this larger system? While there are many ways to approach these questions, I believe asking the larger question about how capitalism is unfolding in India is likely to provide a more comprehensive answer to the nature of the process of economic development and social change. The challenge, of course, is how to delimit the parameters of capitalism and its workings. Much has been written about Indian and global capitalism and their interactions in various historical phases (see D’Costa 1995a). However, there are few studies that integrate the contemporary Indian capitalist trajectory with market development; bringing out not only the recent turning point in Indian capitalism but also the co-evolution of social, economic, and institutional shifts in a dialectical way.1 The associated changes in the direction of Indian capitalism warrant a greater engagement with the global economy. This has been duly acknowledged, but the underlying social force behind this turning point in contemporary capitalist development has been underplayed. Intellectually engaging postmodern critiques of economic determinism, emphasizing capitalist transition in India, have not adequately accounted for heightened industrial capital accumulation in India (Chakrabarti and Cullenberg 2003). This study aims to capture some of the salient dynamics of capitalist evolution and social change in contemporary India by limiting the analysis to the Indian automobile market growth with some references to the larger consumer durables industry. The automobile industry has been used extensively as a vehicle for discussing social, economic, political, environmental, and ethical issues (see Luger 2000). This study similarly situates the industry in the larger political economy of Indian development in both historical and institutional terms, thus providing a comprehensive look at contemporary Indian capitalism. The automobile and the broader consumer durables industry represent quintessentially capitalist commodities that reflect market growth, industrial deepening, and technological maturity on the one hand and on the other, a growing class of highincome consumers and thus social differentiation. There are some similarities between the Brazilian auto industry in the 1970s and the Indian experience of the 1980s. The key difference is the regime under which such industrialization has taken place. In the Brazilian case, multinational auto firms entered early on under the import substitution industrialization strategy, while in India the presence of foreign firms is due to neoliberal policies (Addis 1999, Shapiro 1994).2 The “rupture” for India’s auto industry has been more sudden than Brazil’s and hence India’s turning point is likely to reveal pronounced industrial and social transformations. The industry’s evolution is likely to reflect complex production and institutional systems, designed ultimately to cater to an ever more personalized and individualized form of consumption.

Introduction: Capitalism, Markets, and Industrial Change 3

2.

Capitalism, markets, and institutions

It is common knowledge that markets are integral to capitalist development. In addition to the significance of markets there are several key characteristics that render capitalism a unified system. It is a class-based system with the separation of direct producers and owners of the means of production. Wage labor constitutes the principal form of production work. Owners pursue production for profit, which is realized in the market. Market prices increasingly act as signals for production and consumption. Capitalism is a competitive system in which both suppliers and buyers respond to changing prices. It is increasingly global in scope but the major sources of growth remain national. In reality not all characteristics of capitalism are likely to be present in all places, at all times, though the spread of wage labor, the formation of price-driven markets, commercial motives behind market production, and ensuing competition are now routine. The issue here is less over what constitutes capitalism and more over what contributes to its heterogeneity and thus varying market development. There is nothing natural about markets. They are social institutions by which economic activities are coordinated (Lindblom 2001). They are influenced by other institutions such as private property laws, corporate governance systems, and the legal framework, among others (Rosenberg and Birdzell 1986). Perhaps the most important institution that has been responsible for the expansion of capitalist markets is the state. While much has been written about the state and its role in the wider economic and political system, much less has focused on the changing character of the state as a consequence of social and class differentiation brought about by the state itself. This process of embourgeoisment, in which an emergent middle class with increasing purchasing power is a product of the state, itself creates the political and economic pressure on the state to deregulate the economy and facilitate market expansion. Embourgeoisment in the Indian context means the upward mobility of those already in higher social and economic ranks, with the added condition that parliamentary democracy provides some space for lower ranked social groups to experience limited mobility (Stern 2003). Widening embourgeoisment is expected to translate into structural changes in the composition of demand, thereby reinforcing the process of market growth in a cumulative and path-dependent way. In this non-linear process with increasing returns, two issues come to the fore: the mechanisms by which markets grow and the coalescing of factors that contribute critically to the turning point of capitalist evolution in which market expansion itself takes off. This study posits that India is undergoing a capitalist transformation by which markets in India are expanding in a systemic way. This is not a

4 The Long March to Capitalism

novel argument. A cursory examination of basic economic data suggests relatively high rates of market growth and structural change in the Indian economy. There is a recognizable Indian middle class today, which is driving the Indian economy, and the business press is gung-ho about India’s prospects. However, the institutional basis for this market expansion remains relatively unexamined. In the affluent countries the institutional underpinnings of capitalist development have been well recognized, especially those that facilitate the smooth functioning of markets. Conversely, the lack of such institutions in developing countries are often argued to retard the development of markets. Excessive regulation by the state over private sector activity is said to constrain market growth, and weak private property laws and underdeveloped financial markets limit capitalist development. It is true that institutions are important to market development and it is also undeniable that the Indian state has constrained the private sector through over-regulation. However, it is also conceivable that state intervention has led to social and economic changes, which, under a reformed role reinforced further changes such as the establishment of novel flexible industrial practices to cope with heightened competition in a deregulated environment. Business responses such as these to deregulation can have a profound effect on the organization of production, the nature of inter-firm relationships, industrial relations, the technology adopted, that is, on the very workings of capitalist markets in fundamental ways. My objective here is to demonstrate that, irrespective of the inefficacy of the state at an earlier period, the Indian state has contributed to market demand at the macroeconomic level through embourgeoisment. At the microeconomic industry level businesses in a more deregulated environment have responded creatively to meet hitherto suppressed demand. The perceptions of both businesses and the middle class about the role of the government are changing due to the twin processes of globalization and embourgeoisment (see Bardhan 2002: 131). This institutional approach differs from others as it does not rely on the identification of a particular factor purportedly contributing to market development over the long haul. Rather it deploys an approach that attempts to bring out the dynamic interactive processes behind market development including the contribution of the state in altering the structure of Indian demand attended by supply responses of capitalist firms, their transnationalization, and consequent adjustment in a deregulating, market-friendly environment. I argue that at the larger political economy level, the state-led development strategy from India’s independence in 1947 until roughly the mid-1980s contributed to the growth of the Indian middle class, that is, to the embourgeoisment process. In the Indian context “middle” is not the statistical middle or the mean, rather it refers to the upwardly mobile, more affluent, consumer groups who can afford to participate in the growing industrial

Introduction: Capitalism, Markets, and Industrial Change 5

markets. This is the demand side of the market story. There is also the supply side to this market growth. Indian businesses are responding to capitalist expansion in new ways, while the Indian government and Indian businesses are cultivating cooperative arrangements to increase profits. They are not only adopting modern methods of production and technologies but also instituting organizational changes within and between firms to enhance efficiency and competitiveness. Industry associations and government departments are interacting to create more competitive industries. These institutional responses to changing market conditions are designed to handle economic coordination better as markets have become more volatile and uncertain. How can we explain the turning point at which India began to experience higher industrial growth? Here concepts such as path-dependence, cumulative causation, and dialectical outcomes are useful. As the middle class experiences economic and social mobility, there are rising expectations from this class in terms of income growth, consumption norms, and demonstration effects. Market reforms and deregulation become an inevitability accompanying social differentiation. This contrasts with the expectations prevalent under the state-led model where competition was limited and the availability of good quality, inexpensive products highly constrained. The turning point is also a result of macroeconomic instability, which is linked to India’s state-led capitalist project. For example, the political compulsion of transfer payments in the form of subsidies to a variety of urban, rural, industrial, and agricultural constituencies (all part of the broader Indian middle class) contributed to unsustainable budget deficits. The chronic balance of payments deficits, due to import substitution policies, also contributed to instability. Such structural preconditions, in the context of embourgeoisment, are argued to reinforce middle class sentiments toward market-friendly policy reforms. It is therefore not coincidental that economic reforms that facilitate expanding output are likely to be favored by social classes that expect to benefit the most from such policy shifts. In doing away with unnecessary regulation of business, the Indian middle classes have been well positioned to reap the benefits of market growth. But capitalism is global in scope and contemporary markets transcend national boundaries (Sklair 2002). Increasing domestic demand and the greater economic space created by reforms are likely to attract global capital as well. Consequently, the national economy becomes integrated with the global system through trade, foreign direct investment, technology transfers, and the broader financial movements. Therefore, it should come as no surprise that Indian firms are found to be integrated with multinational ones through mergers and acquisitions (see Conybeare 2004). All of these developments in a virtuous cycle are conducive to market expansion in new directions, with demand translating into new investment opportunities

6 The Long March to Capitalism

and profitability, leading to further accumulation, embourgeoisment, and market growth in India. If market development is successful, as evidenced by embourgeoisment and subsequent economic reforms, does this mean that Indian capitalism is converging with capitalist successes found elsewhere? At one level market development suggests a degree of convergence in that the imperatives of capitalist market forces will dictate various favorable economic outcomes such as higher growth rates, investments, and increased competitiveness. However, market development is contingent on institutions and how they regulate the functioning of such markets (Lange and Regini 1989: 5). The severe challenges faced by the former Soviet Union in transitioning to a market system and reproducing core capitalist institutions is reflective of the evolutionary and heterogeneous character of global capitalism (Keaney 2002). Since varied national histories, impact of colonialism, social and political institutions, policy interventions, and historical accidents all have a bearing on market growth, it is inevitable that convergence, if any, is likely to be partial at best. The existence of varying institutional processes or (national) business systems, designed to cope with the complexities of economic coordination, suggests that the organization of capitalism differs from one national environment to another. This heterogeneity of capitalism, however, does not invalidate the fundamental dynamics and characteristics of market capitalism shared by different countries. In essence, capitalism is about accumulation, which means businesses are circumscribed by investment requirements to maintain existing markets and capture new ones. They are expected to produce efficiently and adopt modern technologies to cut costs or else face extinction. They are receptive to various kinds of handouts and economic incentives from governments, which socialize their risks and reduce costs. Ensuring industrial peace with attractive wages and benefits but also reining in workers to enhance profitability are expected to ensure favorable accumulation. In a hyper-competitive era businesses are also expected to foster cooperative relationships with other businesses, including competitors. It is the different configuration of these institutions and their arrangements with each other that give rise to varying business systems and economic outcomes. Hence, even if these systems are all subject to the imperatives of capital accumulation, convergence is likely to be confined within the narrow workings of an industrial sector and not necessarily for the economy as a whole. Consistent with the heterogeneity argument then, Indian capitalism and its corporate business system, is likely to diverge from more advanced country forms, whether Anglo-American, German-Japanese, or East Asian versions. Nevertheless, some Indian industries, especially those that are tied to transnational networks, are likely to display capitalist dynamics that are not very dissimilar from their rich country counterparts. This is despite the structural

Introduction: Capitalism, Markets, and Industrial Change 7

tendency of advanced capitalist countries to dominate global production (United Nations Conference on Trade and Development (UNCTAD) 2004, Amoroso 1998). Expansion of capitalism means the integration of national economies in the wider architecture of international markets. Hence, we can expect India’s market growth to lead to greater integration with global capitalism. In the end, it is the reach of markets, both territorial and sectoral, by which individual economies expand and become globally enmeshed. It also gives capitalism its unifying and systemic character despite the national embeddedness of capitalism in general. If it can be shown that markets are expanding in India does this mean that India is on its way to becoming a successful capitalist economy? Critics from both the right and the left are of course wont to point out the failings of Indian capitalism based on past anemic growth, persistent poverty, and economic and technological relegation compared to East Asian societies, including China. In this sense they correctly identify the limited transformation India has witnessed in the last half century and would hold either state intervention or the particular form of capitalist class domination as the culprit for limited transformation. However, in this interpretation there is also an implicit understanding that capitalism means successful economic and social transformation. There is nothing in capitalism per se, or in its workings, that suggests such an outcome. For example, capitalism in Latin America, despite its early imposition, has not worked well (Sheahan 2002: 25). While capitalist markets are superior to feudal markets in terms of efficiency and volume of production, the actual distribution of the benefits of such growth is a matter of politics and social policy. There is also a built-in sentiment among proponents of an unbridled market system that should the state get out of regulating business, capitalism (read markets) would thrive in a favorable way. This too is correct in that the retreat of the state from unproductive forms of regulation creates more space for capitalism to unleash its productive forces. However, it is a leap of faith to expect that the resurgence of market capitalism is necessarily sustainable over the long haul or that it could in a reasonable way address social problems of inequality, poverty, and unemployment. Moreover, the presumption behind this kind of reasoning that capitalism as a social system is bereft of states is naive at best (see Ohno 1998). Capitalism, in the end, is fundamentally about accumulation, which is expansionary in a systemic sense and subject to class conflict (Heilbroner 1985: 36–38, 183, Landes 1966). It is an open-ended system, hence capitalist growth could be inclusive but need not be. Much would depend on pre-existing class distributions of income and wealth (Bhaduri 1990), social policy, and regulation of the accumulation process itself. Hence, capitalism in India must be seen for what it is, a market system that is evolving in an uneven way, geographically, sectorally, and socially. In its wake capitalism in India is creating increasing

8 The Long March to Capitalism

pockets of social and economic mobility but also bypassing many others, suggesting the ambiguous nature of capitalist development.

3.

Accumulation, regulation, and the Indian auto industry

To best understand the evolution of contemporary capitalism in India, it is necessary to not only demonstrate how markets are developing from the demand and supply side but also to account for the turning point at which Indian capitalism appears to have moved to a higher plane. It is also important to demonstrate that while Indian capitalism differs from other cases it is also subject to the imperatives of capitalist production, competition, and uneven development. Furthermore, if the automobile is the quintessential capitalist commodity, it is also necessary to bring out the industrial dynamics that shed light on the accumulation process by the deployment of new production techniques, labor control, and other institutional arrangements at the sectoral level. While there are several theories and frameworks within the broader political economy of development field, such as neoclassical industrial organization, historically sensitive evolutionary economics, and the sociologically-inspired business systems approach, the multilayered, inter-temporal nature of capitalist evolution calls for a more eclectic, metalevel approach. The French regulation framework, rooted broadly in marxian analysis, is a useful starting point to situate the broad trajectory of Indian capitalism. The framework is adapted for the Indian case as there are shortcomings in directly applying this framework to late industrializing countries (see Chapter 2). However, it provides a broad canvas by which the turning point in Indian capitalism can be captured. The turning point can be discussed as the change in the accumulation regime, from one of state-led industrial development to that of a neoliberal, market driven regime of capital accumulation. Accompanying the shift in accumulation regime is the mode of capitalist regulation, whereby institutional arrangements are devised to cope with economic coordination. Capitalist regulation is a system of rules and norms, formal and informal, tacit and otherwise, that purport to control, direct, promote, and sometimes thwart economic transactions. Institutionally-based regulation, whether conducted by the state, private industry associations, or buyersupplier networks is necessary to stabilize capitalist development (Boyer 1990). Under the state-led model bureaucratic intervention regulated capitalist production, propped up by a Keynesian-type demand management system and Fordist mass production systems at the industry level. Under the new mode of regulation markets are the driving force, which is institutionally accompanied by flexible production systems at the industry level. The Indian case only loosely fits these two regimes and modes. First, this understanding of capitalist evolution has been empirically based on the experience of the US and other advanced capitalist countries. Second,

Introduction: Capitalism, Markets, and Industrial Change 9

the transition from mass production to flexible production must be interpreted cautiously since India did not really have mass production as conventionally understood by the regulation framework (Mascarenhas 2002: 135–225). Nevertheless, the utility of this framework is that it can account reasonably well for the contemporary phases in global capitalism and provide the intellectual space to articulate specific country experiences with the broader shifts in capitalist production. Furthermore, the regulation framework has been heavily influenced by the empirical evidence surrounding the global restructuring of the automobile industry. The shift from mass production to flexible production within the auto industry has entailed numerous institutional innovations designed to regulate a more volatile capitalist system. Hence, the framework has the added advantage of understanding capitalist evolution involving the transformation of the Indian auto industry. The regulation framework, however, is unable to capture the specifics of Indian capitalism. In fact it not only has little to say about peripheral capitalism in general but it also underestimates capitalist maturity in India.3 Furthermore, the regulation framework, in seeing developing countries as appendages to the global division of labor, fail to adequately account for the internal dynamics of developing countries such as India. For example, the Indian economy today is less reliant on agriculture, is endowed with considerable entrepreneurial skills and administrative capacity, and possesses significant technological capability. There is also a growing class of consumers in both rural and urban areas. Hence, the framework is useful in providing the backdrop to capturing the evolution of capitalism in India but it must be complemented by other perspectives to account for social change. The regulation framework is useful for appreciating the processes behind uneven development, which is an intrinsic feature of capitalist expansion (D’Costa 2003a, Chakrabarti and Cullenberg 2003). However, the specificities of the Indian situation characterized by uneven regional development, endemic poverty, illiteracy, and persistent (worsening) inequality calls for a more India-centered approach. Western secular systems of management, law, and administration coexist with nepotism, religious factionalism, and a non-secular caste-based affirmative action program (or a system of reservations). Globally integrated high-tech and low-wage export-oriented firms, family-owned businesses, professionally-managed large enterprises, and primitive small-scale workshops serving local markets characterize the industrial map of India. There is also an adjustment process by which industries and firms must cope with the demands of the new regime of accumulation. Not all industries and firms are able to successfully make the transition. There is uneven development of national capitalism even as India adjusts to the new regime of accumulation and the mode of regulation. To account for these historical and institutional

10 The Long March to Capitalism

developments in a larger global context calls for a political economy of development framework that incorporates cumulatively both the stateled embourgeoisment process and subsequent responses by industrial capitalists to new market opportunities. Any commentary on capitalist development in India cannot rest without an assessment of some of the contradictions of such changes (Gupta 2002, Saunders 1995). After all, capitalism for all its redeeming features in creating wealth is also riddled with political and ethical issues of distribution and equity. Such questioning is not unusual even in successful capitalist transformations such as in South Korea (Kim 2004). This study presents some of these dilemmas as India transitions to a new regime of accumulation and a mode of capitalist regulation. As markets expand in a deregulated environment and incomes rise, questions arise as to whose incomes are rising and who is becoming the quintessential consumer? What is the class character of automobile production and consumption in India? Is this process of industrial development socially inclusionary, as embourgeoisment suggests, or are there social and economic groups that are excluded from the benefits of such industrialization? Markets have been argued to be exclusionary because initial economic inequality is reproduced in the asymmetric relations characterizing market functioning (Nayyar 1998). There are other emergent concerns such as whether this form of industrialization is sustainable in India, as evidenced by the growing dependence on imported fossil fuel. Capitalism and the environment have become unmistakably intertwined as increases in output (engendered by market processes) deplete absolutely more natural resources (Foster 2002, Saunders 1995: 52–76, Norgaard 1994: 44). Hence, an appreciation of the nature of contemporary Indian industrialization cannot be divorced from a critical inquiry of the consequences of capitalism itself. This study is designed to identify the principal ways by which India is increasingly marching toward capitalism. It is about social change, business responses, and global enmeshments. More pointedly it is about industrial capitalism, a system that is global in scope but with specific national characteristics. The development of the Indian automobile industry is situated in the larger Indian institutional and global contexts to bring out some of the salient features of late capitalism and its various manifestations in particular locales. Admittedly one industry does not make capitalism. But the historical context of capitalism is the industrial context (Bhaduri 1990: 4, author’s emphasis). Hence, by critically investigating the industry’s evolution in the broader institutional, political economy canvas, I believe specific features that would reflect capitalist development, its deepening, and its variation from other experiences can be captured. More importantly, by identifying some of the contradictions intrinsic to the process of capitalist development in India this

Introduction: Capitalism, Markets, and Industrial Change 11

study will hopefully contribute to not only a better understanding of the process of economic development but also point to social policies that will make economic growth and industrial change serve national societal interests (Preteceille and Terrail 1985: 79).

4.

A note on methodology and data sources

To analyze the sources of India’s industrial transformation and appreciate the process of capitalist development in India I cover the following five areas: • the social (class) foundations of state-led capitalist development and structural transformation in creating market demand; • the macroeconomic basis for the shifting regime of accumulation and the emerging new capitalist mode of regulation, mainly as a response to the exhaustion of state-led development and the impending economic crisis; • changing institutional arrangements under the new mode of regulation such as state-business relationships, the role of foreign capital in internationalizing the automobile supply system, and increased output; • the backward integration of the automobile industry with the diffusion of best industry practices in India, reflecting the second layer of supply responses to new market opportunities; • the social consequences of capitalist industrialization such as uneven regional development, social and economic exclusion, excess capacity, and environmental challenges. Capitalism is a historical system and hence evolutionary. It is also a dynamic system, ceaselessly expanding in terms of output, efficiency, technological sophistication, and geographical and product markets. It is global in scope. It is also subject to failure, ushering in slower growth, unemployment, and poverty, and bypassing many. To account for these features, notwithstanding the ambitiousness of the task, it is necessary to ask questions that go beyond narrow academic disciplines to a more informed appreciation of the larger process of transformation itself. This is no easy task. However, by limiting the study to India and its automobile industry, it is possible to tease out why and how the industry is changing at this particular juncture, and the consequences of this change on the industry and society. To appropriately frame these questions it is necessary to account for a more generalized analytical framework that can situate the turning point in India’s recent industrialization experience. A simple economic analysis of supply and demand is inadequate to understand the more historically-derived social change and

12 The Long March to Capitalism

consequent market development. The regulation framework along with the political economy of development approach are best suited for this purpose. However, Indian industrialization, as reflected by the dynamic auto industry, is not solely an endogenous process. External factors are also at work, especially with the participation of multinational firms, the transformation of industrial practices, and the global neoliberal environment. The study is also historical as it is designed to capture the turning point in India’s economic and industrial development process. It is also a comparative study in an inter-temporal sense. This study covers the post-independent pre-reform (1950–1990) and the post-reform (1991 to the present) periods, mapping the changes in the auto industry since the mid-1980s. Documenting the interaction between the nuts and bolts of existing capitalism lies at the heart of this study. Notwithstanding the pitfalls associated with one-country, one-industry cases studies, the analysis is aimed to be comprehensive. Throughout the discussion, the analysis is thus conducted at several levels to capture not only the larger political economy of India but also the intrinsic dynamics of capitalism such as the nature of competition, product variety, and business strategies. The first is the national level, emphasizing the economic system, social change in the form of embourgeoisment, industrial development, and the changing role of the government. The second is the industry level, accounting for the changing structure of the Indian auto industry and the adoption of novel business practices. The ongoing internationalization of the industry also situates India and the Indian industry in a global context. The third level involves an investigation of specific firms which have spearheaded India’s auto industry transformation. An empirically-rich description of the auto industry thus provides the platform to disentangle some of the institutional reasons for the success and the challenges facing the industry. These challenges are not confined to the industry alone. The emerging contradictions such as uneven regional development, inegalitarian industrial outcomes, and excess capacity are also addressed. The auto industry thus provides a window to the unfolding of contemporary industrial capitalism and India’s immutable march toward it. A wealth of data is presented to uncover industrial transformation and social change in India. Both published data as well information gathered since 1991 through interviews of industry officials, policy makers, journalists, union leaders, and researchers have been used. Some firms were visited several times over the years, complemented by auto plant visits in Japan and India (Appendix A.1). A total of nine field trips were made to India of varying duration. The data were collected to understand why and how the auto industry was changing from a political-economic and production point of view and how it articulated with the global industry.

Introduction: Capitalism, Markets, and Industrial Change 13

5.

An outline of chapters

By reviewing the literature on the institutional bases of capitalism, Chapter 2 develops an alternative framework to capture the process of capitalist transformation in India. It presents a stylized account of the singular logic of capitalism embedded in a variety of institutional contexts. The chapter adapts the French Regulation framework to discuss the capitalist transition process in India. It combines this framework with the more India-centric understanding of the embourgeoisment process, leading to market growth. Demand is also matched by new kinds of supply responses of businesses in a deregulated, internationalized environment. The chapter also outlines some of the contradictions inherent in this type of capitalist industrialization. Chapter 3 develops the embourgeoisment process and market growth by discussing the class-making role of the Indian state under import substitution industrialization. By using a historical and sociological understanding, the chapter empirically demonstrates the extent to which the Indian economy and class structure has changed. Estimates of the size of the Indian middle class is presented to underscore market development, growing consumption of high-value goods, and the mounting pressures on the state to deregulate and internationalize the economy. In Chapter 4, the evolution of the Indian auto market is linked to the embourgeoisment process. It begins by outlining the exhaustion of the previous regime of accumulation as manifested in macroeconomic imbalances such as budget and balance of payments deficits, and microlevel industrial inefficiencies and technological backwardness. The ensuing disequilibrium is resolved by gradual deregulation, effectively leading to a new regime of accumulation. This turning point, over several years, is best seen in terms of the transformation and transnationalization of the automobile industry. Such a shift enables the industry to meet the demand for consumer durables, which was hitherto suppressed by the logic of national industrialization. A detailed account of the interaction of Japanese firms and the Indian state is presented. Data are presented on key Indian and foreign auto firms and their strengths and weaknesses. The chapter ends by demonstrating the increasing maturity of the Indian market and product diversification along with the accompanying systemic tendency of capitalism to generate excess capacity. Chapter 5 delves into the heart of the auto industry to show how Indian businesses and their foreign partners have responded to the more deregulated environment associated with the new regime of accumulation. It presents data on the auto supplier industry and the particular forms of institutional arrangements consistent with the new mode of regulation. The backward integration of the industry is a clear manifestation of industrial deepening and capitalist maturity. It is also an appropriate

14 The Long March to Capitalism

business response to changing economic circumstances. A wide range of actual industrial practices introduced at the enterprise as well as in the shop-floor level are documented to suggest expanded capital accumulation. These non-market relations highlight the institutional bases of market development. However, the transition process is not smooth. The challenges facing the light commercial vehicle segment is also highlighted to reflect that industrial success under deregulation is not automatic, nor are multinationals always successful. However, the growth of the Indian supplier industry, resting on domestic demand, clearly points to greater participation in global production networks. Chapter 6 takes up the theme of capitalist contradictions by specifically examining uneven regional development. What happens to older firms and their locales within the context of overall economic and industrial expansion is examined for the state of West Bengal, the home of India’s first auto company. However, West Bengal’s industrial fortune is also examined in light of India’s differential regional endowments, a federated political system, and the particular legacies of colonialism and state-level politics. Details of industrial change, local politics, firm strategy, class conflict, and mounting pressure to accept the new regime of accumulation are documented. The chapter underscores the notion that the long march to capitalism entails painful adjustment to the new flexible, hyper-competitive environment and an ideological shift to cope with uneven development. The seventh chapter returns to political economy questions about the nature of Indian industrial capitalism. Extending the contradiction of uneven development, this chapter examines three additional forms of contradictions of capitalist industrial transformation. The first is systemic in nature, that is, the nature of capitalist competition and consequent excess capacity. The new mode of regulation, privileging the market over society, creates the dilemma of idle resources in a context of poverty. The second contradiction quintessentially reflects the ambiguous nature of capitalist development. It presents data on the embourgeoisment process by demonstrating that upward mobility among Indian households is real but the degree of mobility is still quite limited. Large segments of the Indian population are outside the orbit of market development, especially when consumer durable goods are concerned. This poses a serious dilemma of not only the sustainability of future growth but also the protracted issue of social equity. The third contradiction is the increasing dependence of the Indian economy on imported fossil fuel, creating additional challenges for the Indian economy and the quality of life. The chapter ends by exploring some countervailing measures to cope with environmental concerns and suggests that some form of re-regulation of capitalism under the new regime of accumulation will be necessary. The final chapter briefly presents some of the key issues confronting capitalist industrialization in India and by extension the developing coun-

Introduction: Capitalism, Markets, and Industrial Change 15

tries. It highlights the significance of capitalist logic and its dynamics and the importance of placing them in concrete institutional contexts. It establishes the heterogeneity of capitalism on the basis of particular endogenous processes of change. The chapter ends by reflecting on the contemporary process of capitalist transition, industrial transformation, and economic transnationalization in India. In the end, capitalism, as a system of markets, generates ambiguous outcomes. It is an expansionary system based on accumulation and hence on its own it cannot equitably distribute the benefits of growth and efficiency and prevent the social and environmental contradictions integral to the expansion process. If the new mode of regulation has deepened industrialization in India, then capitalism as a whole needs to be managed and not left unregulated as neoliberal policies would suggest. Notwithstanding the retreat of states to unleash greater market forces, the study suggests that capitalist development, to be inclusionary, must be socially regulated.

2 One Capitalism or Many? Interpreting Indian Industrial Development

1.

Introduction

The objective of this study is to capture the process of capitalist transformation in India. The starting point is a theoretical account of why the singular logic of capitalism, namely, market exchange for profit based on mainly wage labor, in reality takes many institutional guises. An examination of the “heterogeneity” of capitalist “models” allows us to capture the institutional variety underpinning capitalist evolution. However, these accounts usually describe advanced capitalist economies or their newly successful East Asian counterparts. In the search for institutional variety in these economies, considerable emphasis is placed on agency-based non-market social arrangements for economic coordination or capitalist regulation at both the macro and sector-specific levels. I take a complementary, albeit different approach to capturing capitalist transformation in India. Relying on the concept of capitalist regulation, I use a more structural, political economy framework for analyzing market development. I bring in the state to demonstrate how its regulatory, classmaking role leads to embourgeoisment, which is a process of social differentiation. This structural change constitutes the demand side of market formation and a foundation for further industrial expansion. With different business systems behind economic coordination in capitalist markets, such as contemporary flexible production systems, I develop the supply side of the market equation. Out of these forces an alternative structural framework is generated whereby capitalist transformation results from the interaction of an endogenous embourgeoisment process with external forces of neo-liberalism and increasing international economic integration. Changing demand at home and externally generated market competition induce new kinds of institutional arrangements at the national, industry, and firm levels to enhance efficiency and cater to larger and more diversified markets. As these outcomes are contingent on a host of social-structural factors, there is no presumption that market development 16

One Capitalism or Many? Interpreting Indian Industrial Development 17

will be smooth or that production systems will be successful. Several contradictory outcomes are possible even with the widening and deepening of markets. For it is precisely the ambiguities of capitalist evolution that warrant a greater scrutiny of India, a country that is at once capitalist and modern and peripheral and primitive as well. The chapter is divided into four main sections. The first presents a combined synthesis of heterogeneous “models” of capitalism approach and the capitalist “regulation” framework. Section two examines those studies that go beyond capitalist diversity by examining the social networks in economic organization. These studies investigate how such networks help coordinate the many facets of capitalist dynamics and cushion instabilities arising from them, especially at the enterprise and industry levels. Most such studies focus on endogenous processes such as business systems in advanced capitalist and successful East Asian societies. Hence, in section three, I discuss an alternative institutional framework to capture the evolution of the more ambiguous Indian industrial experience. In this approach, I link the endogenous process of embourgeoisment with externally-driven institutional arrangements for flexible production. The context for these two interrelated developments is the changing regime of accumulation and a new mode of capitalist regulation. Empirically I show that as state-led development in India yields to market-driven economic expansion, new institutions for production coordination evolve to cope with market uncertainty and the opportunities associated with an increasingly “globalized” context. Section four outlines an alternative framework to study Indian industrialization and bring out some of the contradictions associated with capitalist development.

2.

Heterogeneous models of capitalist regulation

At a fundamental level capitalism can be interpreted as a total system in which economic production is driven by the imperatives of capital accumulation. By organizing production for markets, capitalists invest, hire workers, and earn a profit (Heilbroner 1996: 36, 52, Saunders 1995, Bhaduri 1990: 4–5, Landes 1966). The cycle of reinvestment of profits and the resultant ever-expanding stock of capital constitutes the process of accumulation. Institutionally, firms accumulate on behalf of owners of capital, governments support them by socializing private investment risks, and citizens participate in the process as workers, consumers, and voters. Accumulation is facilitated by favorable supply conditions, such as the deployment of new cost-saving, efficiency-enhancing technologies, innovations in organizational structures, and the availability of a skilled workforce. On the demand side, the state tries to encourage accumulation through both Keynesian-type demand management income policies or a more monetarist approach toward macroeconomic stability by reining in

18 The Long March to Capitalism

inflationary pressures. Ideological props for accumulation include the sanctity of private property, profit-making, and economic well-being as integral to national interest. This total system of accumulation is typically a national one but its workings can be located at sectoral, regional, and global levels. Beyond these universal attributes of capitalism and a generalized process of accumulation, there is a wide variety of capitalist forms, classified by geography or institutional arrangements. Coates (2001) labels them as market-led (liberal), state-led (trust-based), and negotiated or consensual (corporatist). Roughly these correspond to Anglo-American, Japanese, and German/Swedish models. Similarly, Hall and Soskice (2001) view the US and German variants as “liberal” market and “coordinated” market economies respectively. Developing countries as a group fall under “peripheral” capitalism, which is not a model at all, but rather a condition that is integral to the structure and processes of the world economy (Wallerstein 1984). There are many reasons for the heterogeneity of capitalism. Broadly, institutional variation due to different histories explains divergent capitalism. In a larger sense and long-term view, advanced capitalism as captured by “models” indeed represents a fundamental shift in the way particular societies are organized. They are materially highly developed and contain institutions that serve capital accumulation well. The problem is that these “models” are unable to capture post-colonial capitalist societies. Capitalism cannot be assumed to mean the complete dissolution of feudalism in developing countries or well-developed markets. Consider for example the diversity of Indian capitalism as captured by Bagchi’s (1999) metaphor of “bungalow-chawl-haveli” capitalism representing the western-inspired modern dwelling, the urban shanty, and the mansion of the landed (semifeudal) gentry. Once history and institutions are introduced in the evolution of capitalist societies the vestiges of feudal attributes are not replaced with “pure” capitalist forms but rather these “residues” in composite ways become integral to capitalist social formations. The Veblenian institutional perspective argues that “inertia” and “habits of thought” are difficult to change (Hodgson 2001: 63–64), suggesting that capitalism takes on myriad forms by retaining as well as discarding elements of an older system. Thus profit maximization or price-driven market relations, both hallmarks of “pure” capitalism, could be subordinate to the strategy of maximizing market shares or socially-embedded stable business partnerships based on ethnic solidarity.1 While economic motivations define and drive capitalism as a whole, non-economic parameters, such as social change, politics, and culture wield considerable influence on economic processes in different national and regional contexts, demonstrating the significance of institutional variation within which the contours of capitalist parameters are located.

One Capitalism or Many? Interpreting Indian Industrial Development 19

Capitalism, notwithstanding its general features, thus takes on national characteristics. Different initial conditions, subsequent evolution of institutions, and exogenous forces shape the varying trajectories of capitalism. The collapse of feudalism in Western Europe, the colonial subjugation and independence of the non-western world, state-sponsored economic development nearly everywhere, and increased, albeit selective, interconnectedness of national economies at the global level provide the cumulative context in which diverse capitalist formations are taking place today. As each nation is imbued with its own history, cultures, politics, and links with other nations, the institutions underpinning the development of national capitalism display considerable variation. The distinctive feature of full blown capitalism is the formation of pricemaking markets (a la Polanyi). Markets are said to coordinate supply and demand via prices for the system as a whole. Competitive markets are argued to be the best way to organize economic activities as impersonal relations between buyers and sellers efficiently allocate a society’s resources. Capitalism is then defined in terms of liberal markets with all the attendant institutions supporting capital accumulation, such as a legal system that enforces voluntary contracts (Rosenberg and Birdzell 1986). Where markets are inadequate, alternative institutional arrangements such as firm hierarchies are established to overcome economic coordination problems (Chandler 1990). However, this liberal market interpretation of capitalism has been both theoretically and empirically challenged (Best 1990, Zukin and DiMaggio 1990). It has been shown that non-competitive markets have been deployed effectively to solve coordination problems. For example, firms can resort to long-term collaborative relations in lieu of short-term market-based contracts to ensure reliable supplies in economies of scarcity (Hall and Soskice 2001: 8, 9). Relatedly, rather than leave production to market forces, the state may deliberately intervene through planning to coordinate unregulated market forces. Even within the OECD, countries with large agrarian sectors and interventionist states have been grouped under “Mediterranean type of capitalism” (Hall and Soskice 2001: 21), suggesting the importance of non-market forms of capitalism. As markets (or lack thereof) are a defining feature of capitalism, it is imperative to identify the institutional settings underpinning such development. For example, capitalism has been argued to be anchored around the institutions of economic coordination and market stability (Williamson 1985, Lazonick 1991). Most economists suggest that well-established institutions of private property and arms-length transactions allow markets to coordinate economic activities efficiently (North 1990). While this is an important feature of advanced capitalism, economic coordination is also conducted outside of the market. For example, Japanese capitalism has been engineered significantly by the state (Johnson 1982). The state enforces contracts, thus allowing markets to function but it also stabilizes

20 The Long March to Capitalism

markets through macroeconomic management. States in this way also contribute to national competitiveness (Porter 1990). Firms counter market instability through informal interactions with business groups, the state, and through formal relationships between firms, such as long-term subcontracting arrangements, joint-ventures and the like (Dore 2000). These together constitute national business systems, influenced significantly by “proximate” and “background” social institutions (Whitley 1992). In the twentieth century the dominant form of industry organization for economic coordination has been the Chandlerian vertical integration of big business (Best 1990). Eschewing pure market forces, the hierarchy within organizations is created to offset the uncertainty of arms-length economic transactions between two independent contracting parties. Coordination is easier as external market transactions are internalized within firms. However, the rigidities associated with vertical integration demand large, stable markets, which have been historically propped up by Keynesian demand management (Aglietta 1979). Large-scale, undifferentiated output allowing firms to attain economies of scale (EOS) provided relative market stability. As mass production became technologically and organizationally feasible on the supply side, Keynesian policies institutionally propped up mass consumption on the demand side. The ensuing market expansion (with falling unit costs) ensured a “Fordist” coordination system in which both business and the government came to play considerable roles in sustaining capitalist development in the advanced industrialized economies (Jessop 1992, Marchak 1993). At a theoretical level, the French Regulation approach, empirically based on western capitalist economies, has attempted to capture institutional changes accompanying phases of capitalist development (Aglietta 1979, Boyer 1990). 2 Each phase is characterized by stability and historically specific socio-institutional structures that shape the nature and direction of capital accumulation. 3 These include wage-labor-capital relationships, inter-capitalist rivalries, and varying forms of state intervention. As the uncoordinated nature of market-based economic transactions and technological developments introduce instability and uncertainty, the entire edifice of Fordist institutions is challenged (Smith 2000: 6–8). Alternative institutional arrangements are devised to govern economic coordination. In addition to firm hierarchy, coordination is carried out by outright monopoly control, cartels, oligopolistic competition, and state intervention (Best 1990). Other arrangements include collaborative, long-term outsourcing arrangements, joint-ventures, strategic alliances, active industry associations, and effective government-business partnerships (Hatch and Yamamura 1997, Dore 2000, Nooteboom 1999). Also, conflictual labor-management relations, characteristic of Fordism, are replaced by cooperative arrangements as found in the Italian Emilia-Romagna industrial districts (Tolomelli 1990,

One Capitalism or Many? Interpreting Indian Industrial Development 21

Pyke 1992, Cadène and Holmström (eds) 1998) and in Japan (Best 1990, Smitka 1991, Hollingsworth and Boyer 1997). Collectively such large-scale institutional transformation attempts to renew capital accumulation on a grander scale both as a consequence of and a response to intensified competition and market fragmentation. Mass production is eschewed as the associated economies of scale is no longer a viable strategy. Instead, economies of scope (EOSC) based on “diversified quality mass production” becomes the new system of production (Hollingsworth and Boyer 1997: 21 Kotha 1995, Pine 1993: 44–50), variously labelled “flexible specialization” (Piore and Sabel 1984), “innovationmediated production” (Kenney and Florida 1993), and “new competition” (Best 1990). Markets and states are not the only institutions for governing capitalist development. Other institutional arrangements based on trust-based cooperative relationships also govern economic coordination. They are especially designed to reduce transaction costs through increased information flow (Cusumano 1985, Aoki 1987, Best 1990, Williamson 1990, Langlois and Robertson 1995, Morales 1994, Tauile 1995: 32). Accordingly, the “anatomy” of capitalism is best understood by looking at national business systems influenced by national cultures, ideologies, politics, and macroeconomic policies (McCraw ed. 1997: 12) with considerable heterogeneity of institutional practices among advanced industrialized economies. There are several shortcomings to both the models of capitalism approach and the regulation framework. Of course there are significant problems in any classification scheme, especially one categorizing entire economic systems based on a limited number of criteria. These models are also arrived at from an understanding of capitalist development largely based on the experience of affluent societies. For example, in an otherwise excellent discussion, Coates (2001), confines models of capitalism to the UK, US, Germany, Japan, and Sweden. The successful spawning of capitalism with relatively well-functioning markets and other supportive institutions implicitly equates capitalism with economic success. This approach is intellectually constraining, given that there are far more capitalist blunders than successes. It also raises a slew of rhetorical questions. Is economic failure a result of the absence of capitalism, given that much of the world is capitalist? How do we classify failures? Will the imposition of markets by way of deregulation and privatization of state assets, as proffered by Bretton Woods institutions, lead to successful capitalism? Can markets be simply willed to prod capitalist development, as say, in contemporary Russia? In the end what are some of the forces that shape the formation, functioning, and expansion of capitalist markets? The regulation framework is also not immune from shortcomings. First, it relies on “middle-range” methodology and “stylized facts” to come up

22 The Long March to Capitalism

with a periodization of capitalist history, particularly since World War II (Mavroudeas 1999). For example, the period roughly between 1950 and late 1960s has been classified as Fordist, displaying certain organizational and technical aspects of the labor process. Since then another period often dubbed post-Fordist has been identified and associated with flexible production systems. The absence of a unified, generalized theory informing the regulation framework has condemned it as crude empiricism, lacking in “dialectical abstraction” (Mavroudeas 1999). Even Robert Boyer (1990), one of the leading exponents of the regulation framework, acknowledges several flaws identified by both neoclassical and marxian scholars (Boyer 1990: 78–97). Aside from the difficulty in attributing specific features to characterize capitalist history as whole, the regulation framework is unable to account for economies that are not part of the advanced capitalist group or are late industrializers.4 Therefore, it is not surprising to see that regulation discussions are still confined to advanced economies and at best treat developing countries as mere adjuncts to the changing international division of labor (Aglietta 1998: 62–66). This interpretation suggests that developing countries as a general rule do not have an endogenous dynamic for capitalist development. Such an interpretation is not all together misplaced, given that the engine of the world economy is largely confined to the triad economies of the US, Western Europe, and Japan. However, Boyer (1990: 98–100) is acutely aware that “peripheral Fordism,” the regulation framework’s reference to developing countries does not contribute much to theory and “suggests more case studies to enrich the theory” in general (p. 99). At the same time his caution against mechanistic application of the regulation framework to developing countries is valid. After all there is a fundamental disjunction between the absence of mass consumption in developing countries and the international division of labor, which often incorporates peripheral economies into the global mass production system. However, it still begs the question of how to place former colonies and non-western societies that appear to have endogenously driven capitalist development, even if these economies do not display mass consumption. Rather than apply the regulation framework post hoc, as some critiques argue the regulation scholars do, why not anticipate the turning points in terms of both consumption and production? The question is how to capture this capitalist dynamic if indeed it can be demonstrated that a developing country is witnessing new levels of consumption and production. It is in this spirit that the Indian case is investigated. Consumer durables industries, mainly the automobile industry, are used as empirical evidence to examine changing production and consumption norms in India. A historically sensitive, institutional interpretation of capitalist dynamics suggests that developing countries and especially post colonial societies are

One Capitalism or Many? Interpreting Indian Industrial Development 23

no doubt on a different trajectory from that of their affluent counterparts. From this point the regulation approach is limiting. The mere existence of capitalist markets does not generate successful economic transformation nor are these economies likely to fit the “models” of successful capitalism. Yet they are undoubtedly part of a unified logic of global capitalism, namely that of market growth, ongoing proletarianization (of peasants), and participation in the global division of labor, however constrained. Capitalist development in the “periphery” is thus consistent with economic diversity found in a variety of national “models” and regional settings. Also, assuming that there is an endogenous capitalist dynamic, the regulation framework could anticipate institutional shifts in select developing countries for sustaining capital accumulation. Rather than identify models of capitalism that best fit developing countries or simply rule them out as not integral to the workings of capitalism, as implied by the regulation framework, an alternative approach would be to devise an understanding of how markets develop in particular places without presuming these to be successful ones. Before undertaking such a task it would be prudent to explore those cases, which are neither western nor advanced capitalist countries, to see why they have successfully fostered capitalist markets.

3.

Moving beyond capitalist heterogeneity

The diversity of capitalism, particularly in its non-western East Asian variant, has been also examined through the lens of institutions of economic organization (Orrù, Biggart, and Hamilton 1997). The merit of this approach is that economic action, resting on “institutional logic” (Biggart 1997: 21), is seen as socially embedded. In this account both modern economic organization and traditional practices are intertwined to produce hybrid forms of capitalism that are distinct from those of the west. The diversity of national contexts suggests a variety of business systems (Whitley 1999, Holmström 2001), a trait found even among state-dominated transition economies, such as Russia, Eastern Europe, China, and Vietnam. While a one to one correspondence between a country and its national business system might overstate the institutional variations of capitalism, nevertheless the diverse sources of economic transformation cannot be ignored. The recent focus on institutions and their transformation in different contexts is a significant contribution to our understanding of the dynamics of capitalism. This approach dissects the working of capitalism in non-western societies, not by adapting one particular “model” but by identifying a multitude of governance structures for economic coordination. These include but are not limited to selected attributes of capitalism, namely, the fundamental mechanisms of the price system, the socialization of private risks by the state, the minimization of transactions costs through cooperative arrangements,

24 The Long March to Capitalism

and facilitating the maximization of profits and market shares. However, this approach also has several shortcomings. First, as most of the scholarship on institutions is focused on advanced capitalist, mainly western, societies, the focus here also tends to be on successful cases of capitalist development. It is understandable that the most developed forms of capitalism are likely to draw greater academic scrutiny. However, such a provincial view of capitalism betrays the global reach of the system and greater diversity. The preoccupation with economic governance and business systems, while necessary for establishing capitalist divergence, suggests a bias toward evaluating those systems that have broken the western industrial monopoly. Redding’s (1993) Weberian and cultural analysis of rationality is a fruitful approach and is consistent with institutionally-derived interpretations. However, his focus on Chinese networks and their “spirit of capitalism” steers him away from less successful cases of capitalist development. Capitalism is unwittingly equated with economic and industrial success. Because systems different from an “ideal” market-based British form have produced spectacular economic transformation, as in Germany, northern Italy, Japan, South Korea, and Taiwan (and now China), their business systems have drawn pronounced scholarly and corporate attention (Deyo, Doner and Hershberg (eds) 2001, Whitley 1999, McCraw ed. 1997, Orrù, Biggart, and Hamilton 1997).5 Second, institutional approaches tend to view economic governance as largely a product of endogenous processes. While this is a good corrective to the convergence thesis implied by the protagonists of globalization, or the unwitting admission of the limited role of developing countries in capitalist dynamics by the regulation approach, institutional approaches tend to downplay the exogenous influences of ideas and industrial practices. Their concern with diversity of capitalism accentuates nationalinstitutional arrangements and detracts them from linking the on-going creative tension between local-national and external-global processes. Some studies recognize the importance of external pressure to changing production systems (Deyo, Doner and Hershberg (eds) 2001) but there is no explicit attempt to theorize about “capitalist” development. Few studies of capitalist development have gone beyond the usual economic links, such as technology transfers, trade, foreign investment, and macroeconomic coordination among G-7 and OECD economies. China, a quintessential transition economy, offers interesting insights into the state-led process of “constructing markets” (Guthrie 1999). Businesses are adjusting to this transformed environment by inducing organizational changes and reducing dependence on more traditional guanxi (interpersonal) connections. Yet the internally-driven process of change is also accompanied by exogenous forces, compelling Chinese businesses to create capitalism by relying on older institutions of ethnic connections. Taiwanese businesses, responsible for the massive flow of foreign direct investment into

One Capitalism or Many? Interpreting Indian Industrial Development 25

China, are certainly more market savvy than their mainland counterparts. However, they capitalize on guanxi to reap the rewards of their investment in China (Hsing 1998). In this case, economic coordination for capitalist development transcends local-national institutions to encompass more flexible, decentralized border-crossing networks. Third, where external influences are treated, little attention is paid to the adaptive process of institutional change and industrial practices. This is especially the case where business systems are concerned. Whitley, for example, does not think that international firms through FDI will change key attributes and practices of home business systems (Whitley 1999: 125–129). While this may be true for strong “national” business systems found in the dominant capitalist countries such as the US, Germany, and Japan, developing countries, for better or worse, are likely to be influenced by foreign capital dominant in specific sectors. Exogenously developed “new” industrial practices are likely to be adapted to local conditions. It is unlikely that all the elements of cooperative arrangements of the flexible system of production will be present when the mode of capital regulation shifts away from Fordism. Such a shift may be superficial or be a fusion of old and new institutions at the sectoral level. Thus teamwork (of the new system) could be combined with cost reducing pressures (of the old mass production system). Institutions governing business systems undergo change as they adapt to new circumstances. At the macro level state ineffectiveness in transforming the economy could generate societal pressures to transform its role. Here too we have an institutional adaptation, whereby states do not completely yield to markets but they become the initiators of market reforms or forge a new regime of accumulation (growth) by reducing their role in the economy. There is no doubt that the socially-embedded interpretations of sociologists and anthropologists are very useful in investigating economic organizations and the evolution of business systems in a wide variety of cultural contexts (Zukin and DiMaggio (eds) 1990). Economists, such as Abramovitz (1994), refer to “social capability” to indicate a wide array of national social, political, economic, and cultural attributes. Such socially-grounded explanations as to why myriad forms of capitalist development coexist and why convergence of economic systems is not possible despite narrowing productivity gaps in many cases are more persuasive than simple economic or technological ones. However, because of their focus on social agency, such as social networks and organizational responses in the construction of capitalism, less emphasis is given to macrodynamics and structural processes (Boyer 1996). Biggart’s (1997: 14–15) critique of the political economy approach as being overly structural, economically deterministic, and inherently western in conception is reasonable. But the focus of the approach is on business systems and their embeddedness in the social and cultural milieu. These

26 The Long March to Capitalism

enhance our understanding of firm behavior in a different way from, say market-based impersonal interactions, but they also detract us from the larger canvas of the capitalist process of economic and social transformation reinforcing each other in a dialectical, cumulative way. To analyze these changes in a holistic way within the parameters of a capitalist framework demands that the evolution of institutions be made part of the explanation. Specifying business systems is one important part of the capitalist story, the larger context in which they evolve is another. Questions such as what are the sources of these business systems, how and why they change, and how they contribute to capitalist development in its variegated form call for a structural analysis, balanced by agency-based institutional analysis. Also, capitalist heterogeneity is a product of the fusion of modern market systems with culturally-determined social institutions. Hence the state does not have to be conceptualized in western terms, even if its secular traits are derived from western influences. But non-western capitalist evolution should not be viewed as bereft of any agency. Clearly, if states are seen as arenas of conflict and negotiation, particular outcomes can be traced to social agency. What is important then is to recognize the ways by which the project of building a national system of industrial capitalism is initiated by the state but increasingly shared with the bourgeoisie and influenced by contemporary global forces. However, the relationship binding the state and the national bourgeoisie is not an immutable one nor is the state always hegemonic. The shared nature of the capitalist project suggests that the bourgeoisie can often exercise considerable clout in shaping economic change. When the role of the state is organically viewed in terms of the capitalist project we can bring out both its changing structural relationship to society as well as its responses to the exegesis of social forces, local politics, and global imperatives. Even when critiques of capitalism are in abundance, there are few explicit attempts to link the institutional underpinnings of capitalist development with inequality and uneven development in a dialectical way. Capitalism as an elaborate market system is assumed to have positive externalities, as exemplified by the western experience and more recently by their East Asian counterparts, or it is a system that has practically failed in most developing countries. This binary outlook toward understanding capitalism is flawed. Capitalism is a class-based system with differential rewards of economic growth and development. While inequality is structurally inherent in capitalism, politically negotiated social policies such as economic redistribution and education for the masses could act as countervailing forces. Consequently, whatever social and economic mobility is associated with capitalism could become a structural precondition for future economic and social transformation. While uneven development in capitalist evolution is routine, the task is to identify the dynamics of

One Capitalism or Many? Interpreting Indian Industrial Development 27

capitalist growth. Thus uneven development suggests that some regions grow faster than others and some social groups benefit more than others (Nayyar 1998). Hence, the failure of economies to experience market growth cannot be attributed to the absence of capitalism but must be seen as integral to it. Nor can failure be seen as complete for there are many indicators of capitalist success even in places of wrenching mass misery. The coexistence of affluence and poverty suggests that capitalism systemically generates its own set of contradictions, whose resolution calls for a variety of social policies. Lastly, the process of capitalist development must be seen as contingent and hence open-ended. This suggests that on-going social change, in a cumulative and dialectical fashion, can be a harbinger of future change, despite severe structural impediments and contradictions of capitalist development. The global context is one source of contingency. In an era of economic integration, states by liberalizing, deregulating, and privatizing their national economies are unleashing global economic forces domestically. Why such self-inflicted policies are introduced and how businesses, states, and workers cope with these external influences are likely to have a bearing on the trajectory of capitalism. Just as each country’s pre-existing institutional arrangements filter, harness, and adapt external impositions, so do domestic firms and their workers in different locations adjust to the forces of increased competition (Candland and Sil 2001). For example, the availability of and receptivity to foreign investment capital and technologies in conjunction with domestic resources and capability will influence the extent to which domestic production systems are articulated with foreign ones (Dicken 1998, United Nations Conference on Trade and Development 2001).

4. Examining capitalist industrialization in India: An alternative framework Divergent capitalism as elaborated under “models of capitalism” corresponds to specific nation-states. Given that these models and business systems are based on advanced capitalist systems and the more successful East Asian countries, an alternative political economy approach for other, more ambiguous cases, must be developed. This framework must be able to capture the complexities of capitalist evolution in terms of accumulation and industry development, the changing institutions underpinning such development, and some of the systemic contradictions associated with capitalist industrialization. Such a framework accounts for endogenous dynamics and accommodates exogenous forces impinging on the accumulation process and institutional change. For example, the changing role of the Indian state in the capital accumulation process and the industry responses to economic opportunities and challenges are likely to bring out

28 The Long March to Capitalism

the dynamics of capitalist industrialization. In particular, how the state contributes to the embourgeoisment process and thus to market growth is discussed. This (macro) demand side of market growth is linked to the (micro) supply side of the market in terms of new institutional practices that are designed to increase output. That there is a transnational aspect to the development of Indian capitalism from the supply side is brought out in the discussion of market growth and the contingent nature of that growth. The Indian consumer durables industry, principally the automobile industry, is used here as an empirical referent to bring out the process of market development. Notwithstanding the shortcomings of the regulation approach presented earlier, the overall discussion of capitalist evolution in India is loosely framed with the two intermediate concepts advanced by this approach as they capture the broader tendencies of capitalist development in India. These are the “regime of accumulation” and the “mode of capitalist regulation.” While a “regime” refers to the essential conditions of the national economy geared toward capital accumulation, for this study “regime” refers to a “growth” regime or a strategy of capitalist development.6 Thus for India the shift from a state-led economy to a more market-driven, neoliberal one is interpreted as a changing regime of accumulation. The “mode” of capitalist regulation “designates the necessary institutional forms and social compromises for the reproduction of the regime…” (Mavroudeas n.d.: 2). Among other things, a “mode” refers to the nature of competition and inter-firm institutional arrangements for economic coordination. For the purposes of this study, “mode of capitalist regulation” is used to denote the various types of inter- and intra-organizational relationships associated with flexible systems of production. This suggests a more competitive form of global capitalism in which economic coordination becomes vital.7 While it is not clear as to what exactly is the new (post-Fordist) mode of regulation, for our purposes the changing capitalist regulation in the Indian context refers to new institutional arrangements incorporated under flexible production systems. It is consistent with the changing (neoliberal) regime of accumulation. While institutions behind neoliberalism need not lead to higher growth and neoliberalism does not really represent a new phase in capitalism if there is not accompanying growth rate (Kotz 2001), some countries such as India and China are witnessing considerable growth since launching various kinds of market reforms. In this sense there clearly has been a change in the “regime” of accumulation, although its permanency cannot be predicted. Thus “regime” refers to the macro-national economy, while the “mode” refers to institutional arrangements at the industry/firm levels. The obvious question is what drives regimes and modes to change. The regulation approach suggests instability and capitalist crisis in the form of institutional shortcomings for maintaining production and consumption.

One Capitalism or Many? Interpreting Indian Industrial Development 29

Again this is a highly contested interpretation and it is not the object of this study to reject or validate the regulation approach. Rather the purpose is to adapt some of the conceptual apparatus of the regulation framework to examine capitalist evolution in India. The shift in the regime of accumulation can be argued to be a result of exhaustion of the older state-led development strategy and the emergent external crisis associated with such a strategy. In parallel fashion, the changing mode of capitalist regulation in India reflects the industry-specific institutional changes that are commensurate with the more market-driven, competitive regime under global capitalism. The selective application of the regulation concepts, while limited in its wider applicability, is well-suited to analyze the evolution of Indian industrial capitalism displaying nascent as well as mature attributes of capitalism. The framework is consistent with the logic of institutional diversity, the associated variety of capitalism found in the contemporary world, and the changing institutional arrangements vital to economic coordination. Furthermore, at a basic level contemporary Indian industrialization mirrors the fundamental tendencies of global capitalism. To develop this alternative framework more fully we focus on the endogenous dimension of Indian capitalist development, namely state-led embourgeoisment and capital-led industrial expansion. The Indian auto industry is used as the empirical referent. This sector has been significantly influenced by exogenous factors, namely, transnational corporations. In addition, this study also brings out some of the systemic contradictions of capitalist industrialization as they relate to market dynamics based on a competitive global economic system. 4.1 State and embourgeoisment as sources of market growth As capitalism is primarily a system of markets, conditioned by the institutional environment, growth of markets implies not only greater production but also consumption. Capitalism can be conceptualized in terms of the large-scale processes behind structural change such as marketization, deepening industrialization, and a growing consumption base. It is primarily a system of accumulation, legitimized by social policies and political ideologies, but nonetheless premised on unequal property ownership. Capitalist economic progress also produces unequal consumption, exacerbating the legacies of persistent social inequities already found in post-colonial societies. Thus the system must be also seen in its inegalitarian manifestation for there is nothing inherent in capitalism that guarantees equality. In developing countries markets are circumscribed by the presence of strong vestiges of pre-capitalist institutions and practices (Rudra et al. 1978, Baran 1957). Their subordinate structural position in the world capitalist system also constrains market growth (Wallerstein 1984). Colonial legacies, such as bloated bureaucracies, absentee landlords, low productivity in

30 The Long March to Capitalism

agriculture, raw material dependence, and uneven infrastructure drag them down in the quest for national economic transformation (Larrain 1989). Bureaucracies designed for colonial administration are generally ill-equipped to pursue economic competitiveness (Evans 1995). Post-colonial societies at large suffer from the economics of scarcity, a constrained culture of acquisitiveness among the elites, and narrow markets. In addition, patronage politics, supply bottlenecks, and competitive pressures from foreign sources limit capital accumulation. For these countries fostering efficient markets with favorable developmental outcomes has been difficult. Rather than rely on markets alone for coordinating economic transactions state intervention has been a significant institutional instrument for economic transformation (Amsden 1989, Evans 1979, Bardhan 1984, Byers ed. 1994, Vanaik 1990, Wade 1990, Johnson 1982). Where businesses are more developed, marketbased economic transactions have been internalized by vertical integration and complemented by joint-ventures and long-term subcontracting arrangements (Whitley 1999). Modern state-led economic coordination also has been complemented by social networks and communitarian ideologies based on ethnic solidarity and regionalism (Redding 1993, Orrù, Biggart, and Hamilton 1997). Post-colonial states followed this basic institutional framework to foster industrialization and create national markets through coordinated investments. Until recently private investment remained an appendage of state capital and confined itself to more lucrative, less capital-intensive, consumer industries (Waterbury 1990). This is the formal institutional arrangement of the import substitution industrialization strategy whereby the state planning apparatus regulates private domestic and foreign business to engineer capitalist markets (Evans 1995). State intervention for coordination includes setting price controls, mediating industrial relations, and protecting local business from foreign competition. The national economy is regulated to promote orderly market development. In this context, a diverse range of institutions such as business associations, small firm networks and particular ethnic communities and familyowned businesses characterize developing countries (Deyo, Doner, and Hershberg (eds) 2001). However, as the collective experience of postcolonial societies attests, state intervention and institutional diversity are not necessarily decisive in offsetting the shortcomings of narrow national markets. Market growth is limited by a spoils system, entrenched by deep social divisions in a system of scarcity (Hoogvelt 2001). Understanding the social-structural basis for changing markets in a particular institutional context, or conversely, why markets are slow to expand is one avenue for appreciating contemporary capitalism in developing economies. There are numerous economic factors, endogenous and exogenous, that can be marshalled to explain expanding markets in general. Relevant variables include high rate of investment, liberalization of trade, human capital

One Capitalism or Many? Interpreting Indian Industrial Development 31

development, technological capability, and agricultural productivity (Cypher and Dietz 2004, Griffin 1991, Nafziger 1997, Todaro 1997). However, the march of capitalism cannot be fully captured without an understanding of social change. As markets are arenas of commercial exchange involving production and consumption, the changing class composition brought about by state intervention will have a bearing on capitalist development. This socially-derived foundation for market expansion is in essence the process of embourgeoisment. Embourgeoisment is synonymous with the rise of the “middle class,” a heterogeneous group that experiences rising incomes and educational attainments (Stern 2003, Frankel 1988). It also proceeds from increasing proletarianization. The middle class in former colonies is not a statistical artifact of income distribution. It reflects increasing but gradual economic and social mobility, with an elite segment assimilating foreign (western) life styles and consumption patterns, and sharing certain modern values (Robison and Goodman (eds) 1996, Shurmer-Smith 2000, Dubey 1992). The purchases of consumer durables increasingly takes center stage in the economy and contributes to social differences as revealed by the consumption of such goods. There are several types of goods under this broad category and hence demand for them also corresponds to incomes. Inexpensive consumer electronics such as cassette players and televisions are relatively accessible; refrigerators and two-wheelers are less so. Car purchases, on the other hand, remain prohibitive in a country such as India. Education rather than inherited wealth per se contributes to social mobility, although wealth and education typically reinforce the hegemony of upper classes in developing economies. The state, in its nationbuilding efforts, also supports capital accumulation by educating and training its citizens. The incipient middle class is the primary beneficiary of the government’s education policies (Carnoy 1984). The bourgeoisie thus created remains at the helm of capitalist matters, not only as employers of workers and owners of capital but also as conspicuous consumers of the increasing output of capitalist enterprises. The socialstructural interpretation of capitalist development as offered here includes two interconnected, temporally sequenced processes behind expanding markets: one, the institutional foundations of market expansion, such as state-led development, leading to class differentiation, and two, the changing social composition itself, namely embourgeoisment, becoming the harbinger for further market expansion. The first process is consistent with the “models of capitalism” approach in that the institutional foundation of development, such as the role of the state, can be brought out. The second process, while intuitively predictable, has not been empirically linked to capitalist evolution, even though the logic of the process has been theorized as path-dependent development (Arthur 1994, Cypher and Dietz 2004). The empirical workings of path-dependent

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development was best understood by Myrdal’s (1968) “cumulative causation.” While Myrdal demonstrated how certain institutions held back capitalist development (backwash effects), we can hypothesize that changing institutions, such as the changing role of the state can drive market development. Identifying the sources of such change and delineating their extrinsic links to the wider political economy is expected to offer a window to the unfolding of capitalism in India. Two sources of change can be broadly identified. One is the cumulative endogenous process of embourgeoisment led by the state. This is the demand side of market formation. The second source of capitalist development is selective shifts in business systems, often bench-marked at the global level. This is the supply side of market growth. The two are intimately connected, with embourgeoisment spurring changes in production systems in a virtuous loop. Rising demand generates opportunities for new supplies in a synergistic way. However, since entire systems are hard to dislodge, given their durability and the inertia of institutional practices, responses to new market opportunities are likely to be selective and subject to changing objective conditions. Furthermore, the tension between the inertia of local business systems and rapidly changing global industrial practices is not easy to resolve. On the one hand, the confluence of secular expansion of global markets with nationally-derived embourgeoisment generates a local (latent) demand that is out of sync with local production capability. On the other, the “triumph” of the neoliberal model of capitalism creates global abundance relative to effective demand, compelling deregulation and economic openness (Biersteker 1992). Both forms of external influences – tangible global markets and the ideology of neoliberalism – condition local markets. There are demonstration effects on local consumption and diffusion of best industry practices on local production (Sklair 1995, 2001). In the end, national market development is a selfreinforcing, cumulative process, contingent on embourgeoisment at home and systemic developments abroad. With embourgeoisment the state-led model of capitalist regulation is structurally strained, internally and externally. On the one hand, the very growth of the economy suggests a growing, mature capitalist class that limits the boundaries of state intervention. On the other hand, the competition among firms for hitherto untapped markets compels global economic integration and relatedly national economic liberalization and deregulation. While the emergence of a new model of capitalism is not inevitable, there is creative tension between the vestiges of the old system of accumulation and the elements of a new model. For example, the state does not wither away but its reach is circumscribed by the growing power of private capital, domestic and foreign (Grieco and Ikenberry 2003, Berger and Dore (eds) 1996, Dicken 2003). Growing incomes could lead to rising, albeit unequal consumption, while external competition could

One Capitalism or Many? Interpreting Indian Industrial Development 33

prompt a “nationalist” response, forcing the state to not completely abandon its bourgeoisie. More favorable institutions backed by supportive infrastructural and fiscal policies could be offered in lieu of simple import protection of national capitalists, while social policies may be reduced to more growth-oriented outcomes. 4.2 Transnational sources of capitalist transformation on the supply side With hyper-competition in the global economy the chances of excess capacity and overproduction are high. Consequently, governments and businesses are subject to tremendous market pressures to downsize, diversify, and innovate relentlessly (Ugarteche 2000, Boyer 1997). It also generates varieties of disequilibria, such as persistent trade deficits, indebtedness, and creeping currency revaluation (Brenner 1998). Instabilities in turn demand responses that often call for neoliberal solutions, even among states that are examples par excellence of state-led capitalist transformation (Gao 2001). As the rules of global competition and transnational practices become consolidated with the diffusion of western liberal values and the imposition of neoclassical economic doctrine, strong states such as Japan and Korea are compelled to rethink their role in economic governance. In times of economic crisis these states, too, must adjust to the demands of neoliberalism (D’Costa 2001). Whether this will actually ward off economic malaise cannot be adduced (see Stretton 2000). What can be said is that under crisis, at a particular capitalist juncture, even strong states must carry out their own slow execution and/or reinvent themselves.8 This transition of neo-mercantilist states to neoliberal ones needs explaining. How does this process of “internalization” occur? Rather than see internalization as resulting from this or that factor, a more systematic understanding of the process can be accounted for from the systemic dynamics of capitalist evolution. To understand why states give up their coveted place in the management of national economic development, it is necessary to account for the changes in capitalism, for both material transformations and ideological shifts. It is at this level that we can identify the sources for states that are averse to market-driven economic governance to embrace (reluctantly or enthusiastically) neoliberal policies. For example, economic globalization has enmeshed states in “webs of power” prompting an “ideational” proclivity toward international competitiveness (Cerny 2000: 22). Market competition influences transnational flows of capital, goods, services, and technologies, while the hypermobility of finance are effectively deterritorializing states in their ability to govern national economies (see Grimes 2000; Pieterse 2000: 8–13). As national markets become insufficient for expanded accumulation, world markets become necessary complements to national ones. Also, as costs of production (read wages) rise with economic transformation, capitalists are

34 The Long March to Capitalism

compelled to find cheaper, alternative sites for investment. More knowledgeintensive activities continue to remain in infrastructure-rich locales. With increasing flows of FDI, new regions are brought under the orbit of global production networks (Castells 2003). However, not every country is a participant in this process of integration and not all of these are necessarily on the high road to accumulation, as many labor-intensive export-oriented countries testify. Nevertheless, there are considerable economic and technological benefits from global participation, if domestic capability is well-utilized for international production. Those countries that have pursued some version of a national industrialization program have fostered local technological capability. These are also the countries with more developed markets and a mature capitalist class, making them attractive centers for capital accumulation. With transnationalization, some segments of the local bourgeoisie join the transnational networks and begin to erode the national-ideological basis for state intervention (Scholte 2000: 34–35). The mantra of a liberal economic order is increasingly echoed internally, complementing the externally-generated “coercive liberalism” (Woods 2000: 11). Transnationalization and liberalization are two sides of the same process, namely the extended reach of capital via global markets into correspondingly open national markets. As India gradually alters the entrenched colonial structure of production and trade, a viable domestic bourgeoisie has initiated its transnational integration.9 The intensity of international economic integration adds a further complication to the question of economic coordination. Older models of production, such as vertical integration within firms, are no longer feasible in a hypercompetitive economy. Institutional arrangements, such as subcontracting on a long-term basis and horizontal links among national firms, yield to the internationalization of business and its corresponding governance systems.10 Businesses compete on the basis of a variety of alliances with other businesses, such as technical collaborations, joint-ventures with foreign equity, outsourcing from international firms, and cooperative, long-term buyer-supplier subcontracting relationships. Businesses also seek pliant workers by encouraging more cooperative industrial relations systems, enterprise unions, and government intervention. These changes in the business system, echoing institutional restructuring at the macroeconomic level, can be observed at the sectoral level. They are a general response to growing embourgeoisment and structural change in the economy, whereby international best-industry practices are adopted to meet changing demand and its composition. This is akin to the new “regime of accumulation,” which according to the regulation framework results from the macro institutional crisis associated with the older arrangements (see Amin ed. 1994). To meet rising domestic demand existing systems of production designed under an earlier set of institutions are strained. Just as the state must reinvent its economic role, the institutions

One Capitalism or Many? Interpreting Indian Industrial Development 35

governing industry are also modified to account for increased and diversified demand. Some of the shortcomings of the older system are resolved with selective adoption of best industry practices (Abo 1998). Due to institutional legacies and sunk costs, large switching costs associated with these practices become inevitable. While older institutional arrangements cannot be completely dispensed with, firms are compelled to adopt new ones to avoid economic losses or not forego opportunities offered under new competitive conditions (Kenney and Florida 1993, Hollingsworth and Boyer 1997). For example, in the auto industry older firms are more prone to Fordist forms of industrial relations and shop-floor organization compared to newer ones. In the latter a flexible, often non-union workforce at greenfield sites with cellular production processes are deployed to cope with new demand and competitive pressures (Rubenstein 1992, Howes 1993, Parker and Slaughter 1988, D’Costa 1998). Consequently, the industry as a whole is likely to display a mix of industrial practices both old and new (D’Costa 2004). Given narrow markets in developing countries, mass production and hence the gains from economies of scale (associated with large-scale standardized output) and economies of scope (associated with high-quality diversified output) are limited. Furthermore, with high fixed costs, entry barriers are daunting in developing economies (see Alcorta 1998). However, as embourgeoisment expands markets and transnationalization of production eases access to new technologies, production risks are lowered. Economic coordination takes place outside the market through “networked” relationships among firms (Kenney and Florida 1993; Best 1990). Networks permit information sharing, giving rise to “collective efficiency” (Schmitz 1999). This is similar to Japanese flexible arrangements designed to reduce transaction costs through increased information flow (Cusumano 1985, Aoki 1987, Best 1990, Williamson 1990; Langlois and Robertson 1995; Morales 1994; Tauile 1995: 32). As supply bottlenecks are overcome, output can be expanded continuously and product variability realized through economies of scope (see Schmitz 1990). With risks reduced, mass customization or diversified quality mass production could follow output expansion (Hollingsworth and Boyer 1997, Kotha 1995, Hollingsworth, Schmitter, and Streeck (eds) 1994, Pine 1993: 44–50). Firms of course do not pursue exclusively a single strategy but rather some combination of mass production and mass customization. With successive cycles of output expansion and cost reduction, it becomes easier to establish and consolidate institutional arrangements, such as subcontracting and teamwork, associated with flexible output. These are already present in India as joint-ventures between foreign and local firms, the deployment of programmable machinery, kaizen or continuous improvements in process, quality circles, and more peaceful industrial relations by negotiating more “cooperative” management-labor relations.

36 The Long March to Capitalism

There need not be a perfect fit between embourgeoisment and the timing of the shift in production systems. There is far too much contingency to allow for a neat articulation. But shifts in the global industrial map suggest not only an unprecedented expansion in economic output but also new ways of producing it. This quantitative and qualitative shift reflects both changing composition of demand and concomitant developments in the supply system. In the context of heightened economic integration and embourgeoisment, it is logical for local supply responses to keep abreast of global practices. The details of actual responses at the industry and firm levels will depend on who the change agents are, the timing of entry, the corresponding policy environment, and the objective economic conditions. 4.3 Market expansion, transnationalization, and excess capacity The Great Depression of the 1930s proved that the capitalist economic system is unstable and vulnerable to major cyclical downturns for lack of adequate demand. The disjunction between consumer and producer goods, with producer goods outpacing consumer goods, not only created disequilibria in a systemic sense but the inequality associated with such capitalist dynamics generated excess capacity (Aglietta 1979: 94). At the macroeconomic level, Keynesian-style public spending is able to restore some semblance of equilibrium by raising aggregate demand. However, the stability associated with such Fordist mass production systems is significantly challenged by the new regime of accumulation and the new mode of regulation in which open, highly competitive markets, rather than state orchestration, become the self-organizing process of capitalist development. In this scenario, under new institutions, markets expand rapidly but become once again subject to instability (Dowd 2000). Economic integration at the global level facilitates the widening and deepening of markets just as it creates the basis for intensified competition (Castells 2002). In this hypercompetitive environment, states are compelled to liberalize their economies for fear of being left behind economically. Furthermore, embourgeoisment implies that the dominant classes are likely to pursue their economic interests with more gusto than before by relegating the state to more risky activities and cornering as much of the social surplus as possible through their accumulation strategies. Consequently, there is considerable unplanned investment (in a systemic sense) by the private sector as individual businesses try to capture a piece of the new market. As a result production capacity is often ahead of demand (Grieder 1998). This excess capacity is mirrored by the national industrial structure, whereby certain sectors display a rapid rate of investment as new market opportunities are perceived. 11 While competition drives the investment pattern, leading to rapid expansion in capacity, excess

One Capitalism or Many? Interpreting Indian Industrial Development 37

capacity also results from economies of scale, involving increasing minimum efficient scales (MES) (D’Costa 1999). Admittedly, the greater possibility of niche marketing under flexible production systems, which is integral to the new mode of regulation, suggests descaling in a limited way. As the global division of labor becomes more detailed and as technology facilitates outsourcing worldwide, production becomes more fragmented (Dicken 2003, Held, McGrew, Goldblatt, and Perraton 1999). Open markets permit the imports of parts, components, and technologies; hence building complete products in a given location is no longer a technical necessity. As a result, smaller production capacities, consistent with flexible systems of production, become commercially viable. However, not all imports are price competitive and not all governments permit unbridled imports. Under these circumstances as long as firms can absorb production losses they can import major components and still produce on an uneconomic scale. This contributes to excess capacity as individual firms follow the same logic in a herdlike manner. However, the expectation is that the market will expand and capacity will come into line with demand. If that materializes, investments in more cost-efficient local output, rather than imports, could be justified in the future. It is the ongoing mismatch between expected demand and current capacity that sustains the excess capacity problem. Notwithstanding descaling effects, whereby the MES is reduced, with new technologies and global outsourcing possibilities, excess capacity at the industry level remains persistent. As niche markets emerge, producers not only aim to specialize but due to competitive pressure also try to capture shares of different market segments. Thus, even as individual firms contend with smaller volumes of output, the number of firms in the industry tends to increase with market expansion. The typical net effect is larger installed capacity than the market will bear as each firm tries to cater to different segments of the same industry. This is especially the case in the automobile industry where companies strategically try to serve several markets in order to reap the benefits of economies of scope (D’Costa 2004). It is evident that capitalist diversity cannot be explained by the variations in economic organization and business systems alone but must be complemented by the structural dynamics unleashed by global capitalism in a systemic way (Mittelman 2000, Brenner 1998). In particular, the competition among capitalists, entailing global excess capacity, compels foreign direct investment in search of new markets or production sites. These global shifts are internalized by changing the “model” of capitalist regulation and accommodating them through economic deregulation. In the end the march of capitalism is a cumulative process of the interplay of global forces and national structural factors.

38 The Long March to Capitalism

5. Outlining the analytical framework for Indian capitalist development From the above discussion we can map several interrelated dimensions to the process of capitalist development (Figure 2.1). Capitalist development is seen first as market expansion, in which the role of the state is considered to be paramount in late industrializing societies. Here we have both national endogenous and global exogenous influences on market development. Second, nationally the state has been able to play its class-making role, namely engendering embourgeoisment. The latter is inherently a process of social differentiation. Third, embourgeoisment structurally and ideologically contributes to further market development through increased consumption and through neoliberal economic policies. At this juncture there is a transition to a new regime of capital accumulation, the old regime having outlived its usefulness in a changed environment. More specifically, the inability of state-led development strategy to fundamentally alter the structure of the Indian economy combined with emerging external financial and internal demand pressures calls for a reassessment of the old regime and the mode of capitalist regulation. For example, the state abandoned its rigid protectionist stance and deregulated the economy. Globally, capitalist competition and changing market demand at home encourage the adoption of new business practices such as flexible production systems, aimed at lowering production costs and increasing product variety. The changes in the Indian auto industry described here nicely capture these developments. The adjustments to a new regime of accumulation and mode of capitalist regulation via neoliberal policies and flexible production systems provide a reinforcing feedback loop for further capitalist expansion. However, the transition to a new regime and adoption of market-based regulation is contradictory in at least two ways. First, the process of adjustment is painful and lengthy. Not all businesses and workers are able to cope with the challenges of deregulation. Established firms and industries in old locales are particularly vulnerable. Socially, embourgeoisment is associated with inequality and polarization as high income groups tend to capture most of the benefits even as economic growth due to market expansion pulls lower segments of society up above a certain threshold (D’Costa 2003a, 2003b). The Indian consumer durables industry is likely to exhibit such ambiguous characteristics. For example, casual observations show that an increasing share of Indian households are able to consume typical household white goods such as televisions, refrigerators, consumer electronics, and two-wheeled vehicles, whereas the production and consumption of cars is still relatively limited, with only the high income groups able to purchase such products. The fruits of capitalist industrialization and transformation are hence expected to

CAPITALISM: National and Global

I.

State-led Development

Embourgeoisment

Changing Regime of Accumulation

Market Demand/ Supply

Exhaustion of Old Regime, Social Differentiation

Neo-liberal Market-driven

Economic Reforms Capitalist Contradictions

Exogenous Factors TNCs, Competitive Pressures

II.

State Regulation of Capital

Changing Mode of Capitalist Regulation

Self-Regulation through Business Systems and Flexible Production Sytems 39

Figure 2.1

An Alternative Conceptualization of Capitalist Industrialization

40 The Long March to Capitalism

be both socially inclusive and polarizing. Spatially, too, capitalist development is likely to be uneven as older regions and firms yield to the more dynamic newer regions and modern enterprises (Noponen, Graham, and Markusen (eds) 1993, D’Costa 2004). Hence any commentary on capitalist evolution in the “periphery” must acknowledge these uneven and inegalitarian development outcomes. Second, unequal consumption itself is contradictory not only in social distributive terms but it also generates a variety of negative externalities. For example, the expansion of the auto industry is related to traffic congestion in cities, high rates of emissions and pollution, and excessive reliance on imported fossil fuels with accompanying international debts (Dowd 2000: 190–204). While it is industrialization rather than capitalism per se that generates environment-related contradictions, the absence of alternative forms of economic development in the global economy renders capitalism as the source of systemic contradictions (Dowd 2002). For example, as capitalism in Asia, including India, deepens and it becomes the world’s manufacturing site, there is considerable anxiety that Asia will become environmentally toxic, while rich societies as consumers are likely to avoid the problem (Chapman, Agras, and Suri 1999: 268–71). The problem is exacerbated by an associated undercurrent of individualized transportation and a shift in social expenditures away from public transportation. While embourgeoisment both promises and results in upward mobility, the vast majority of the poor are left to rely on deteriorating public services. These contradictions are integral to the process of capitalist development in India. They illustrate the consequences of the transition to a new regime of accumulation and a new mode of capitalist regulation, signifying the cumulative and path-dependent nature of economic and social change in India. There is of course nothing stable about this mode of regulation as originally theorized in the regulation framework. As embourgeoisment induces class differentiation and markets become more volatile, the systemic expectation is not stability but rather ongoing changes in institutional arrangements to cope with the new demands of economic coordination. There are five interconnected, temporally reinforcing processes and outcomes dialectically associated with capitalist industrialization in India. First, there is an ideological internalization of capitalist imperatives by the growing middle class. This directly corresponds to the process of embourgeoisment, in that the beneficiaries of economic development prefer those policies that produce market efficiencies, better products, etc. The state reinforces this ideology either by failing to intervene effectively, deregulating capital, or by playing a facilitative role in the overall accumulation process. Relatedly, embourgeoisment also springs from social differentiation in that there are large swathes of people structurally excluded from economic development. Market expansion pulls in segments of society that are already better placed than those that are marginalized (Shurmer-Smith

One Capitalism or Many? Interpreting Indian Industrial Development 41

2000). This process has been dubbed “middle up” rather than “trickle down” (Stern 1993). Here too the state plays a class-biased role, promoting tertiary education for the middle class while not providing enough primary education for the masses. The second outcome is the pressure for institutional change, especially on the regulatory role of the state. This is a feedback loop that arises from the larger political economy in a cumulative way to bring about adaptive institutional change. As market production displays its benefits for those actively participating in it, there is greater proclivity to carry out economic coordination through markets. Consequently, there is an ideological pressure on the state to abdicate some of its regulatory responsibilities that is consistent with the neo-liberal agenda (Kohli 1992). Here business associations and individual firms play greater roles under the new regime by establishing a variety of institutional arrangements to cope with market shifts. The third outcome is the impact on business systems, especially at the sectoral level. With increased access to foreign capital and technology, buttressed by regulatory reforms, new methods of production and industrial practices are adopted. Those sectors that are the principal recipients of foreign capital and technology from globally dominant firms are likely to experience adaptive changes in sector-specific business systems. This, too, acts as a feedback loop to reinforce the deployment of new elements of a new mode of capitalist regulation. Fourth is a set of contradictions. Some pre-date the new regime of accumulation such as uneven regional development, but the process becomes accentuated due to the new economic forces unleashed by the changing accumulation regime and the new mode of regulation. Some are systemic as capitalist competition and market development lead to excess capacity. In other cases, capitalist industrialization is both inclusive and exclusive, that is, there is social and economic mobility consistent with embourgeoisment and market growth and ensuing polarization. The basic consumer durables industry is likely to display this basic economic mobility. But there is also a form of industrialization, which selectively captures the global best practice production systems with intended global norms of consumption patterns, but does not match the objective economic reality of peripheral capitalism. The car industry presents a case of exclusionary and polarizing development in which the majority of the population are not consumers. It is this contradiction that presents both an opportunity to redress social inequality and acts as a barrier to fundamental transformation due to constraints on market demand. Related to capitalist industrialization there are other negative externalities. For the Indian case, these include oil dependency and environmental problems, areas that demand immediate social regulation. A fifth outcome relates to the social responses to both the changing regime of accumulation and the emergent contradictions. As a process,

42

State-led Embourgeoisment

Capitalist Development Model – Import Substitution Industrialization – Public Sector Units

– Middle Class Education – Rural Transformation – Politics of Class- and CasteBased Economic Demands

– Social and Economic Mobility – Class Segmentation

– Deregulation – Liberalization – Privatization – Internationalization

– Market Growth – Exhaustion of State-led Model – BOP Problems

– Auto Market Development (Suzuki and GOI) – Entry of TNCs and Internationalization – Maturity of Industry

Emerging Contradictions – Excess Capacity – Industry Fragmentation – Adustment problems under global competition – Tension between old and new regime and mode – Tension between EOS and EOSc Figure 2.2

The Dynamics of Capitalist Industrialization in India

Coping with Economic Coordination – Flexible Production Systems – Diversified Output – Buyer-supplier Relations – Industrial Relations – Just in Time/Quality Circles

Emerging Contradictions – Uneven Development and Regional Decline – Class Conflict under New Regime – Inclusionary/Exclusionary Development – Industrialization, Energy Dependence, Pollution

One Capitalism or Many? Interpreting Indian Industrial Development 43

capitalist industrialization imposes new structural requirements, compelling the political acceptance of accumulation. It also sets off consequences that are inconsistent with economic and social stability and the quality of life. Thus growing class polarization, within and between rural and urban sectors, generates considerable political tension as aspirations are unmet, but the environment spares no class. Consequently, social responses to reduce oil dependency, regulate the air quality, and other urban problems can be expected to mount. Development of capitalism is not a unidirectional process. Rather it is dialectical, cumulative, non-linear, and open-ended. It has its systemic dynamics, some progressive and others regressive. The social outcomes it produces will have to be matched by appropriate social regulation to resolve the emergent contradictions. The alternative framework developed here is designed to capture some of the fundamental as well as specific features of capitalist industrialization in India (Figure 2.2). It does so by examining the following: • endogenous source of Indian market development, namely state-led embourgeoisment as a source of market development such as the rise of an Indian educated middle class in urban and rural areas; • India’s balance of payments problems as a reflection of the exhaustion of the previous regime of accumulation and thus a change in the regime of accumulation with deregulation, liberalization, and privatization; • the entry of Japanese firms such as Suzuki to create government-owned Maruti Udyog Limited (MUL) and other transnational corporations to fundamentally reorganize the Indian automobile industry and establish a modern market supply system; • the variety of institutional arrangements associated with flexible systems under the new mode of regulation to cope with economic coordination that emerge as a response to developing a new supplier system for the modern auto industry and the ensuing adjustment process; • a specific example of capitalist contradiction, namely, uneven development, illustrated by the experience of the Indian state of West Bengal and its adjustment to the new regime of accumulation; • other forms of contradictions, both systemic and social, such as excess capacity and some social responses to the economic, political, and environmental problems associated with fossil fuel dependence.

6.

Conclusion

The unfolding of national capitalism comprises the stories of market development and production capabilities, of heightened consumption and inequality, of global integration and regional variation, and of system and social contradictions and social responses. Capitalist regulation in India has come full

44 The Long March to Capitalism

circle: to incubate it, police it, and now to unleash it, and perhaps re-regulate it. However, capitalism is not just a national affair. There is considerable regional variation in economic development in India. In a federated system of governance it is inevitable that different states are likely to produce varying levels of economic and social change. While particular regional histories and institutional settings explain this internal divergence, contemporary capitalism can accentuate regional variation even more, with some locales being institutionally more receptive to global integration than others. For example, states where local governments are more pro-business and avoid rancorous industrial relations are likely to be better placed in attracting investment, both foreign and domestic. Consequently, in a transnationalizing world, pronounced pre-existing regional and social inequality is worsened by forces of market expansion. Rather than try to fit models of “advanced” capitalism to late industrializers in a mechanical way, identifying particular links between institutional changes and market formation is heuristically more appealing. Capitalist success is not presumed even if market attributes take on greater significance in economic coordination. In fact the reorganization of firms at the industry level suggests a protracted adjustment process whereby some firms are prone to marginalization due to organizational and institutional inertia. Though this is typical of competition, markets are still regulated, less by states and more by businesses themselves. The state best manages the macroeconomic environment, which is so vital for economic stability, but businesses increasingly self-regulate for economic coordination via interfirm and intra-firm institutional arrangements. For example, long-term subcontracting arrangements through joint-ventures provide supply reliability with price stability, while teamwork among workers through quality circles reduces costs and enhances productivity. Neither of these arrangements conforms to arms-length market transactions but both are geared toward enhancing market output and efficiency. Capitalist development is path-dependent and cumulative, as displayed by the embourgeoisment process. Understanding how embourgeoisment sets the stage for institutional arrangements consistent with the new mode of regulation and how the new regime of accumulation structures economic production offers an alternative framework to capture the march of contemporary capitalism in India. The coterminous process of economic development and social change paves the way for increased auto production and consumption. The technological and organizational counterpart accommodating the larger regime change for accumulation requires an adaptive flexible production system at the sectoral level, which is matched by the new mode of capitalist regulation. Just as the state begins to deregulate to accommodate greater market forces, auto firms also selectively induct more flexible organizational and industry practices. These include long-term buyer-supplier

One Capitalism or Many? Interpreting Indian Industrial Development 45

relationships, new flexible technologies, and cooperative industrial relations, among others. The likely consequence of these industrial practices is enhanced industry performance through reliable supply systems, improved quality of products, and competitiveness (lower relative costs). These are industry level institutional responses to economic deregulation, bringing supply systems in line with changing macro demand conditions. The overall effect is market expansion that sows the seeds of mass production, increasing diversified output, uneven and inegalitarian development, and systemic and social contradictions.

3 State, Embourgeoisment, and Market Development in India

1.

Introduction

In this chapter the process of embourgeoisment in India and its contribution to market development is presented. While an incipient capitalist class had already emerged under the British, in post-independent India the state significantly contributed to its further development. The state itself pursued a national capitalist project, which was cloaked under a socialdemocratic form and circumscribed by the vestiges of non-capitalist social relations. Adhering to the then popular tenets of Keynesianism and structuralism, the government of India attempted to transform the Indian economy through public investments as well as insulating the domestic economy from the forces of global capitalism. Politically, capital accumulation in India was managed by a coalition of dominant proprietary classes (Bardhan 1984), whose share of the spoils ensured their dominance. However, state-led industrialization with a massive public sector meant that the source of embourgeoisment was not the typical urban-based, entrepreneurial bourgeoisie but one based on middle class, professional, white-collar employees.1 The government’s economic strategy was import substitution industrialization (ISI), aimed at developing the home market and national technological capability (Sridharan 1995). A combination of policies included public investments in capital goods industry and infrastructure, protection of domestic business from foreign capital, the regulation of domestic businesses to avoid excess capacity, and populist policies favoring small-scale industry. Government policies also speeded up the ongoing commercialization of agriculture. Agricultural subsidies and the state’s failure to weaken the power of landlords and money-lenders further contributed to landlessness, proletarianization, and the expansion of a rural bourgeoisie. The net result of this accumulation strategy has been considerable social differentiation. I refer to this as the process of embourgeoisment, whereby a relatively small but numerically growing segment of the society is able to capture the benefits of national economic development. 46

State, Embourgeoisment, and Market Development in India 47

Below I describe some of the changes in the Indian economy, society, and polity brought about initially by state intervention and an autarkic style of capitalist development. First we examine capitalist regulation by the Indian state in altering the social structure. Next the process of embourgeoisment in India along with some indicators of social and economic change are presented. Rural economic change, growth of education, and the political mobilization of the masses in an economy of scarcity are seen as integral to state-led embourgeoisment. The third section highlights the importance of embourgeoisment to market growth for consumer durables. It suggests, in path-dependent fashion, the formation of an ideological space for ushering in global economic forces and the general retreat of the state from the helm of economic affairs. The resulting output and consumption increases with their attendant technological spinoffs have reinforced market-driven capitalist regulation. Embourgeoisment leads to the quintessential internal constituency for accommodating global capitalist dynamics.

2.

The national capitalist project

2.1

State-led industrial development

Independent India, from 1950 to roughly 1985, pursued national industrialization by a strategy of self-reliance, whereby foreign capital was restricted and international economic engagement limited. Several interrelated social forces justified the ideology of self-reliance. Anticolonial fervor, Keynesian thinking, Soviet industrialization, structuralist economic arguments against global dependence, and national aspirations all played a part. The economic and political foundations of nationalism in India had its origin in Europe. Following Frederich List, who argued that in the absence of a national productive base Germany would succumb to the forces of free trade orchestrated by the English, it was evident that free trade imposed a Ricardian pattern of international specialization. Like their German counterpart, excolonies also expressed a similar position regarding economic dependence on foreigners. Nationalism as expressed through industrialization was aimed at transforming “economic backwardness” (a` la Gerschenkron). It attempted to eliminate internal social and economic structures (read non-capitalist) and promote capitalist exchange relations. As in Germany, the Indian state, motivated by anti-imperialist sentiments, tried to resist the classical international division of labor or global capitalism. In India, stateled capitalist regulation thus had the onerous tasks of destruction and generation of old and new economic structures respectively. There was little internal resistance to such a nationalist project since the Indian industrial bourgeoisie found it convenient to renew private capital accumulation under state tutelage (Bagchi 1984: 227–236). Prior to Indian

48 The Long March to Capitalism

independence in 1947, the industrialists wholeheartedly supported the state’s transformative role. The Bombay Plan of 1944 ensured this alliance between the state and private capital (Chattopadhya 1992: 144–148). Enlightened Indian individuals, such as Nehru, accepted industrialization to combat economic peripheralization and military marginalization in the global system (Sen 1984), and underdevelopment and poverty. This strategy served the incipient bourgeoisie’s interest in playing out its historic role of accumulation in post-colonial India. The state acted as the institutional underwriter of national capitalism. Thus, the development of the capital goods sector was targeted rather than a consumer durables industry to facilitate the capital accumulation process (Griffin 1991: 117–121). Resistance to global capitalism therefore was not autonomously expressed by the state, as the model of self-reliance ostensibly indicates, rather it was a response of national capital to imperialism. Resisting the international division of labor implied a public-private division of labor within Indian national capital. By most social and economic criteria, state-sponsored national capitalist development in India has been a failure. A high proportion of the population is still engaged in agriculture eking out a precarious existence. In the absence of any major redistributive program in the rural sector the Indian economy as a whole has remained demand-constrained.2 Consequently, private Indian capital, nurtured under administrative fiat, became unduly dependent on the narrow domestic market, producing internationally uncompetitive products. The coalition itself, based on patronage politics, undermined public investments and contributed to a slow growing economy (Bardhan 1984). The Indian bureaucracy and politicians intervened in the industrialization process, while the Indian industrial bourgeoisie cleverly accommodated their accumulation strategies. The urban-industrial bias inherent in the national capitalist project contributed to the process of embourgeoisment. The state-led industrialization program required a large, educated, salaried class of government employees, a cadre of engineers and administrators to run the administrative and development machinery. As the economy expanded, the Indian capitalist class under a protective environment matured considerably, as evident by the changing composition of the Indian corporate sector (D’Costa 2003c). More importantly, state-led industrialization has not been immune from the numerically strong and politically-influential rural rich. Both the industrial bourgeoisie and the state had to share the national economic surplus with the rural lobby, thus contributing to rural change. The “dominant coalition” or a “centrist state” (Bardhan 1984; Rudolph and Rudolph 1987) with a nationalist, anti-imperialist face limited economic dynamism (Ghosh 1990: 191). As property rights tilted in favor of the state, the nexus between state bureaucrats, big capitalists, and large farmers resulted in a non-Schumpeterian bargain. Under this arrangement the state unproductively consumed a large share of the social surplus while

State, Embourgeoisment, and Market Development in India 49

private capital expanded in a sheltered environment. Concentration of wealth increased with the growth of private and state enterprises (see Chattopadhya 1992: 147–148; Chaudhuri 1975: 1–66). The state often bailed out privately-owned “sick” companies and supplied subsidized industrial inputs. The ensuing massive financial losses incurred by state-owned enterprises were exacerbated by mismanagement, undue “privilege” of secure employment and rising salaries for organized workers. 2.2

The public sector, structural change, and the salaried class

The Indian public sector has been a significant contributor to a growing salaried class. Part of the ISI strategy, the creation of a large public sector, was enshrined in the pre-independence “Statement of Government’s Industrial Policy” of 1945. This was followed by post-independence legislation in 1951 (Industries Development and Regulation Act), which established the basis for state intervention and the public sector (Marathe 1989). Five-year plans were established, the first beginning in 1951. The idea of planned industrial development was rooted in the Fabian tradition. Regulation, creation, and expansion of industrial capacity by the state was accepted as promoting the national interest. Subsequently, the Industrial Policy Resolution of 1956 carved out industrial sectors specifically for the state. Consistent with statism, but resulting from domestic politics, all commercial banks in 1969 were nationalized and regulations enacted to monitor large domestic business houses under the Monopolies and Restrictive Trade Practices Act (MRTP). Foreign capital was controlled by the Foreign Exchange Regulations Act (FERA) of 1973. Statist ideology remained paramount, entry barriers were erected and the public sector expanded. Private capital ambiguously accommodated itself to this regulatory environment as segments of national capital benefited from state control. Indian industrial regulation through ISI included a pre-eminent position for public sector enterprises (PSUs). Public sector enterprises increased from five to 214 during the 1950–84 period, reaching 241 units in 1994–95. Investment in PSUs multiplied by more than a thousandfold. The state remained the model employer, expanding employment through stateowned enterprises, the bureaucracy, and general administration. By nationalizing steel, machinery, railways, and the banking and insurance sectors, the Indian state became a major player in the economy. Many local states own and operate road transportation, thereby contributing to assets owned by the state sector. Between 1961 and 1981, while private sector employment increased by 45%, public sector employment jumped by nearly 120% (calculated from Government of India, Ministry of Finance, various issues). In absolute terms in the total organized sector, the public sector employed more persons than the organized private sector. In 1981 total organized employment stood at 23 million, with 67.7% under the public sector.

50 The Long March to Capitalism

Interestingly, in an era of state retreat of the 1990s, the state share in India in 1997 increased to 69.2%. India’s economic growth rate has been quite unremarkable since the launching of five-year plans. The Second Five Year Plan (1956–61) targeted the heavy industry sector, averaging 4.2% annual growth during the period. However, from the Fifth Plan (1974–79) onward, barring 1979–80 and 1990–92, India’s economic growth has been 5% or more. From 1980–85 onward India seems to have moved on to a higher growth path, with the annual growth rate touching 6.8% during 1992–97. Industrial growth since 1956 (except for the Fourth Plan period) increased by 6% or more. Engineering industries equalled or exceeded these growth rates (Confederation of Engineering Industries, 1991: vi). The results of the import substitution model, with the public sector at the forefront, have contributed to the growth of India’s salaried class. Overall public sector wages have been higher than private sector. The salaries of public sector employees increased by 141% during 1971–81, far higher than the Consumer Price Index (CPI) of 109% (Government of India, Ministry of Finance, 1990–91: S–52). During the 1971–97 period, average per capita emoluments for public sector employees increased by nearly 2,000% compared to 779% for the CPI. This sustained increase in the purchasing power of government employees was accompanied by considerable increase in the household savings rate. The rate more than doubled from 1950 to 1980, reaching 15.2% in 1979–80 and 18.3 in 1997–98 (Government of India, Ministry of Finance, various issues). State-intervention has altered the material basis of Indian society. Structurally the Indian economy now is very different from its colonial roots. From simple to complex industrial products, there has been considerable industrial deepening and diversification, encompassing mining, metallurgical, mechanical engineering, electrical, chemical, textile, and food industries. Since the 1950s, virtually all heavy industries such as steel, machinery, and transport equipment, and chemical sectors have multiplied several times (Table 3.1). For example, between 1950–51 and 1980–81 coal, finished steel, commercial vehicles, nitrogenous fertilizer, and man-made fiber increased by 3.7, 6.8, 8.3, 240.5, and 4.5 times respectively. Over the next two decades these industries expanded further, with some industries like machine tools and man-made fiber growing rapidly. Large-scale investments accompanied by local learning deepened the capital and intermediate goods sectors. Many of these industries are backwardly linked to the upstream automotive segment. The Indian economy now has a modern industrial foundation with a numerically large educated population. The political coalition behind state-sponsored development no doubt constrained capital accumulation as a whole but its fruits accrued to the members of the dominant proprietary classes and urban consumers.

State, Embourgeoisment, and Market Development in India 51 Table 3.1

Expansion of Selected Indian Industries, 1950–2000 Units

Coal Petroleum Finished Steel Aluminium Machine Tools Commercial Vehicles Agricultural Tractors Power Transformers Nitrogenous Fertilizer Cement Cotton Cloth Man-made Fabric Electricity Generated

1950–51 1980–81

million tons million tons million tons thousand tons Rs. million thousands

32.3 0.3 1.0 4.0 3.0 8.6

thousands

na

119.0 10.5 6.8 199.0 1,692.0 71.7

% change

2002–03

% change

3.7 35.0 6.8 49.8 564.0 8.3

367.3 33.0 34.4 467.0 21,794.0 199.0

3.1 3.1 5.1 2.4 12.9 2.8

192.2

2.7

71.0

na

million KVA

0.2

19.5

97.5

74.4

3.8

thousand tons

9.0

2,164.0

240.5

10,559.0

4.9

2.7 4,215.0 300.0

18.6 8,368.0 1,350.0

6.9 2.0 4.5

116.3 18,989.0* 13,725.0*

6.3 2.3 10.2

5.1

110.8

21.7

million tons million sq. m million sq. m billion KWH

480.7

4.8

Source: Government of India, Ministry of Finance (2004: S–31–S–33). Notes: * for 1996–97, % change is change from the previous data point.

3.

Embourgeoisment and social change

The significant departure of Indian capitalist development from the experiences of other late developing countries is the nature of its social mobility. In general embourgeoisment is a process of social differentiation, producing a large middle class with purchasing power several times that of legislated minimum wage. This differentiation is also reproduced in rural areas, with selected segments experiencing growth even as vast swathes of the rural sector remain destitute. Thus embourgeoisment is also consistent with a high incidence of poverty. For example, the poor in India, who are also from lower caste groups, have not experienced significant shifts in their economic standing. Nevertheless, private accumulation, the growth of public sector enterprises, and the expansion of the state bureaucracy at the central and local levels have provided some space for low caste groups. For example, a sizeable portion of government employment and publicly funded educational opportunities are reserved for some of the low caste groups. The politicization of caste and its attendant demands for reservations in higher education seats and employment in government institutions have contributed to embourgeoisment.

52 The Long March to Capitalism

As elsewhere the right mix of social connections, class background, and education attained have an important bearing on social and economic mobility. However, caste dynamics mediated by class and ethnicity compound the process of embourgeoisment. In addition, the rise of the Indian middle class followed a path different from the classic bourgeois revolution of the west. First the colonial state and then the post-independent Indian state nurtured a local bourgeoisie. The protection of domestic producers by the “self-financed” British government in India and the resistance to global capitalism by the Indian state generated both capitalists and a class of salaried workers. As I have argued, considerable public investment was integral to the national capitalist project. Hence, a substantial part of the Indian bourgeoisie comprises white collar employees in both public and private sectors (see Rosen 1988: 107–111). However, embourgeoisment in India is more than white collar employment. Middle class aspirations, such as modern education and formal employment, are inducing social change of mammoth proportions. Both urban and rural households pursue modern occupations and modern education for their children. They also respond to economic stimuli with greater predictability than before. The consequence of this change is the pragmatic accommodation of nonsecular, caste-based ethos with economically-driven middle-class values that are integral to capitalist development. India’s primordial forms of social identity, such as caste-based jati (an endogamous group), which are based on a non-secular ethos, are increasingly taking on secular demands, such as access to higher education and government employment in both rural and urban areas. In actual practice caste-based social organization in India is jati-based social identity. They are associations based on shared identity of community. While caste, as generally understood, is a ritually-based hierarchy of purity and pollution, jatis are based on certain hereditary occupations ascribed by caste position. Members of a particular jati are equal. Occupational differences, however, render some jatis higher ranked than others. In a rural setting, for example, typically priests rank higher than farmers. However, with economic development traditional rankings based on ritual purity is giving way to more class-based distinctions. Thus a landlord, economically more powerful than a priest, today could enjoy greater social status than a priest; in the past, the social status would have been reversed. Furthermore, while jati identity is ritually-defined, contemporary jati demands pertain to secular needs, such as access to credit, irrigation, reservations in engineering schools, and so on. Increasingly jati identities coalesce around class issues, responding to market-based stimuli as a class. The landlord jati mobilizes itself as a class to resist state-sponsored land reforms, while the landless rural residents from lower jatis organize themselves to secure a livelihood. In the Indian context it is evident that class relations are mediated by jatis (Stern 2003: 89–94).

State, Embourgeoisment, and Market Development in India 53

3.1

Structural changes in the countryside

State-led industrialization has not been divorced from rural embourgeoisment, even if the slow growth of agricultural productivity has limited overall national growth. Rural economic and social change has been led by commercially-oriented farmers. They successfully secured state subsidies on various agricultural inputs such as fertilizers and have been exempt from paying income taxes on agricultural income. They also received generous price supports for agricultural commodities. Consequently, rural embourgeoisment has been reinforced by the emergence of capitalist farmers, their subsequent diversification of assets, their children’s education and pursuit of professional careers in urban areas, and continued state patronage due to their electoral majority. Changes in the countryside are mirrored by structural changes ensuing from state-led industrialization (Table 3.2). The share of agriculture declined from nearly 60% in 1950–51 to 42% in 1980–81. Currently it stands at a little under one quarter of the GDP. Manufacturing grew faster than agriculture and its contribution to national income today is similar to agriculture. The service sector expanded throughout the post-independence period. It now comprises over 50% of GDP. While transportation’s share, as a subsector of services, is large, the direct involvement of the state in India’s GDP is noticeable. Public administration, defense, and other services, representing already quite high shares of national income, increased from about 10% in 1950–51 to over 13% currently.

Table 3.2 Structural Changes in the Indian Economy, Sectoral Contribution to GDP (%) 1950–2004 (1993–94 prices) Agriculture Manufacturing Transportation Finance 1950–51 1960–61 1970–71 1980–81 1990–91 2000–01 2003–04*

59.19 54.75 48.12 41.82 34.92 26.25 24.43

13.29 16.61 19.91 21.59 24.49 24.90 24.58

11.95 13.74 15.55 18.41 18.73 22.80 24.75

6.69 6.11 5.94 6.53 9.69 12.59 12.83

Source: Government of India, Ministry of Finance (2004: S–5). Notes: GDP at factor cost by industry of origin * advanced estimates Agriculture includes forestry, logging, fishing, mining, and quarrying. Manufacturing includes construction, electricity, gas and water supply. Transportation includes trade, storage and communication. Finance includes insurance, real estate, and business services. Public administration includes defence and other services.

Public Administration 9.41 9.17 10.69 11.65 12.18 13.46 13.41

54 The Long March to Capitalism 200 180

million metric tons

160 140 120 100 80 60 Net Prod. 3 year M ov. Avg. (Net Prod).

40 20 0

1951 1954 1957 1960 1963 1966 1969 1972 1975 1978 1981 1984 1987 1990 1993 1996 1999 2002

Figure 3.1

India’s Food Grain Production, 1951–2002 (mt)

Source: Government of India, Ministry of Finance (various issues).

The relative decline in agriculture was accompanied by increased food grain production, suggesting rising agricultural productivity and rural embourgeoisment. From under 50 mt in 1951 net production increased to 96 mt in 1980 (Figure 3.1). For 2000, production has been estimated at 180 mt. Output has increased with the commercialization of agriculture, leading to an increased reliance on chemical fertilizers and mechanization. Total consumption of fertilizers increased from a mere 292 thousand tons in 1960–61 to 5,516 thousand tons in 1980–81, a nineteen-fold increase (Government of India, Ministry of Finance, 2001: Table 1.21). In 2000–01 consumption stood at 19,368 thousand tons. In addition to fertilizers, irrigation has played an important role, especially for growing a second crop. Of the total area devoted to food grains, only 24% was irrigated in 1970–71. In 1996–97 that figure was estimated at 40.6%. The Indian state has played an important role in providing rural infrastructure, such as irrigation, for increasing food production. Rural embourgeoisment has led to both economic prosperity and impoverishment. The commercialization of agriculture and the adoption of capitalist methods of production has created large landowners and increased rural landlessness (Patnaik 1992). The absence of major land reform programs exacerbated class polarization in the countryside.3 Notwithstanding considerable progress in agricultural development, per capita grain availability has not changed markedly in half a century – from 395 grams per day in 1951 to 466 grams in 2000.4 Capitalist agriculture in India has increased output and efficiency but has not necessarily enhanced

State, Embourgeoisment, and Market Development in India 55

equity. In this rural transformation, the class-making role of the state is quite evident. The development of rural infrastructure favoring the large landowners and the sponsorship of modern agricultural practices supported by industrialization contributed to a rural bourgeoisie. This is also evident from the increasing share of gross capital formation in agriculture from private sources, from 65% in 1960–61 to 75% in 1990–91 to 84% in 1996–97 (Government of India, Ministry of Finance, 1999: 126). Class polarization in the rural economy can be seen from income and land holding distribution. Based on Bardhan’s (1984: 107) 1975 estimates of farm income and land holding size distribution, we find that the top 8% of rural agricultural population operated 40% of the land, while one half (53%) had less than 19% of land. Another 12% of the rural population was landless. The rural land ownership structure by 1975 looked highly inegalitarian, with 19% of the large and very large land owners controlling 60% of the total land, while the bottom 40% a meager 3%. The middle broader category of marginal, small, and medium size land holdings comprised 51% of the rural population with 36% of the land. On an income basis, the polarization is less stark, with the top households obtaining 34% of farm income and 28% of livestock income. Based on this data, Stern (1993: 91) refines the incomes of households by adding income from non-farm sources, such as urban remittances, interest income, and so on. These produce a similar rural class structure in terms of land ownership and income, with about half the rural population in the middle category securing roughly half the income, while the small-owner and large-owner categories earning disproportionate incomes relative to population. More recent figures from the Indian Ministry of Agriculture (2004) are consistent with capitalist polarization in the countryside. In general, due to inheritance customs in India, land holding size is subject to increasing fragmentation, as evident by the increase in the total number of land holdings and a steady increase of the area under small holdings (under two hectares) and corresponding steady decrease in the area of large holdings (above ten hectares). However, the number of small holdings have increased absolutely and relatively since the mid-1970s, from 73% to 78% by 1990–91. Conversely, the number of large holdings has declined, also absolutely and relatively, from 3% to 1.6% over the same period. Even the middle category changed from 24.4% to 20.5% during the same period, suggesting worsening land distribution. Though the average size of operational landholding has not perceptibly changed, output figures by each category of holding suggest considerably more income for large landowners, even after accounting for higher efficiency of small farmers (Griffin 1991: 141–151). Adding non-agricultural income as per Stern’s (1993) refinement such as income from rural trade, transportation services, and remittances from urban-based relatives, class differentiation in the Indian countryside is greater than what might be generally acknowledged.

56 The Long March to Capitalism

Capitalist development and subsequent class polarization in the countryside has been also responsible for rural-urban migration. While India, unlike many Latin American and East Asian societies, is still largely agrarian, with nearly 75% of the population living in rural areas, the motives for migration are not dissimilar. Poverty, indebtedness, declining fertility of land, forcible eviction, and mechanization have contributed to both rural landlessness and destitution. Although much debate persists with respect to poverty figures, recent statistics show a declining trend. The incidence of poverty in India has been steadily falling, from 51.3% in 1977–78 to 36% in 1993–94 (Government of India, Ministry of Finance, 1999: 146). Rural poverty ratio, much higher than the urban poverty ratio, also declined from 53% to 37.3% during this period and has been estimated to be around 26% in 1999–2000 (Government of India, Ministry of Finance, 2001: 193). However, the absolute number of the poor is staggering, roughly 260 million at the current population level. When juxtaposed with India’s caste and class dynamics, the rural untouchables have had a raw deal. Lacking land, education, social status, and facing violent oppression, many of them have migrated to urban centers (Dandekar 1997, Bandyopadhyay 1990). Cities by themselves have not eliminated caste identities, in fact, they often reproduce them if the untouchables are unable to escape from their hereditary occupations, such as sweeping and carcass handling for leather tanneries. Nevertheless cities provide the anonymity that untouchables cannot find in relatively self-contained, village settings. The socialization process in urban areas is wider and not as restrictive as in rural areas. Though data are hard to come by, many studies on the informal urban sector point to limited economic and social mobility of those at the very bottom of the social ladder. In the course of two generations it is possible for children of some of these migrants to place themselves into mainstream society by way of formal education and employment. Both modernization and urbanization provide a demonstration effect, weakening primordial ties such as jati identity in favor of social and economic advancement in the contemporary economy. As shown below, with the political mobilization of lower castes (Omvedt 1994, 1995; Jaffrelot 2002), the chances of securing government jobs and publicly funded education in institutions of higher learning increase. Consequently, the probability of joining the ranks of the Indian middle class also increases. 3.2

Vernacularization of democracy

Unlike many former colonies, India adopted a parliamentary framework of democracy. While liberal and social-democratic in its conception, the actual functioning of democracy in India has been subject to vernacularization, a process by which democracy has been internalized in local terms (Yadav 1999). For example, non-secular social forces such as caste,

State, Embourgeoisment, and Market Development in India 57

class, and ethnicity have politically mobilized various communities and has heightened competition for economic resources, government jobs, and access to education in public institutions of higher learning (Sheth 1999). The state has had to respond to these demands out of both genuine development concerns and political expediency. Inequality notwithstanding, state-led economic transformation is contributing to social and economic mobility in an environment of political mobilization. This is especially salient for communities historically low on the social ladder and subject to economic domination by the proprietary classes. However, capitalist development in the countryside and industrialization in urban areas are creating occupations not found in the typical roster of hereditary occupations. Besides, increased communications, social interactions beyond the village society, and national secular ideologies are increasingly gnawing at some of the more rigid aspects of jati-based practices, such as commensal rules. However, lower ranked jatis, such as the so-called untouchables or Dalits, do not easily escape their low social status. In fact their low caste position structurally limits their social mobility. Conversely, those of upper castes, such as Brahmins, landlords, and traders are better placed to take advantage of opportunities arising out of economic modernization and increasing international economic integration. It is not atypical to find that the bulk of the men and women entering reputed institutes of higher education come from the upper castes. As anywhere, social background, wealth, parents’ education, and political connections are important for social mobility in India. However, it would be misleading to think that embourgeoisment is completely an upper caste process. The Indian political system is open enough to accommodate certain lower caste interests, especially when they are mobilized around jati-based economic demands. Two state-sponsored avenues for mobility – access to higher education and government employment – have been significant factors in the upward mobility of lower castes. Indian democracy is western in origin and has been elitist in its earlier manifestation. Over time it has been indigenized and vernacularized (Yadav 1999). Today the language of democracy, at least in terms of economic expectations, is understood by most. Parliamentary democracy as Stern (1993: 184) points out “is not an ideology nor an immutable ‘rules of the game’ but rather a workable modus operandi for resolving conflicts.” What this suggests is that there is political space for a wide variety of disparate interests to be worked out within the parameters of a democratic framework, leading to colorful compromises and coalitions. It is now possible for upper caste landlords to seek the support of their low caste workers to fight a particular government policy. At the same time, the parliamentary framework, as enshrined in the constitution, permits the reservation of government jobs and seats in state-run professional schools,

58 The Long March to Capitalism

such as engineering, medicine, and business for the historically underprivileged groups. They include the Dalits, referred to by the government as the scheduled castes (SC) and scheduled tribes (ST), in reference to a list that was drawn up by the British in identifying such groups. Rising literacy rates indicate that reservations and other forms of government intervention in favor of such groups has met with some success. Literacy rates among SC and ST have increased from 10.3% and 8.5% in 1961 to 37.4% and 29.6% in 1991 respectively. The urban shares in 1991 stood at 55% and 57% respectively. As a matter of policy the government of India has reserved 22.5% of the jobs and education seats for SC and ST (Chatterjee 1996: 304). As scheduled castes and scheduled tribes number in the hundreds of millions, only a small fraction of them benefit from government preferential treatment. Those SC/ST already better placed than their peers with formal education and income are better able to take advantage of such reservations compared to their less well-endowed peers. In an economy of scarcity one spin-off of this highly controversial policy has been the political mobilization of jatis to press for secular demands (Chatterjee 1996). Since the 1950s the various Indian government commissions have examined the merit and feasibility of reserving jobs and seats for other backward castes (OBCs). OBCs are neither high nor very low on the ritual hierarchy and hence in the past could not effectively secure the benefits of a modernizing Indian economy. They did not have the necessary SC/ST identity nor the social, economic, and political standing of the upper castes to take advantage of the secular benefits of the government’s reservation system and the emerging economic opportunities associated with a modern, capitalist economy.5 Their sustained politicization, spearheaded by the communities themselves and supported by the state, led to the formal implementation of the Mandal Commission Report in 1992 that recommended government reservations for OBCs. Close to 50% of all public sector jobs and seats in state-sponsored higher education are now reserved for SC/ST and OBCs. One estimate in the mid-1990s placed reservations of both government jobs and higher education seats at five million (Chatterjee 1996: 311). This is relatively small progress, given that the “elites” of the OBCs corner the bulk of these seats (see Shurmer-Smith 2000: 122), but it is indicative of the process of embourgeoisment of a certain strata of the marginalized groups, in which the government has played no small role. When the rural rich, the urban professionals, business owners, traders, and unionized workers are added, the relatively small bourgeoisie surpasses the critical threshold necessary to drive the capital accumulation process. 3.3

Expansion of education in India

The British had already inculcated the value of formal education on its Indian minions running the colonial enterprise. Inheriting a skewed

State, Embourgeoisment, and Market Development in India 59

pattern of education, the Indian government, in its quest for rapid industrialization, reproduced this social inequality. In seeking to modernize India, particularly under its elitist political leadership, tertiary technical education was favored. Consequently, India’s overall record on education remains poor, especially when compared to similarly sized China (Drèze and Sen (eds) 1998). Nearly 40% of India’s population remains illiterate, including half of the females. There is still a very high school dropout rate at the elementary stage, over 50% at the national level. On a longer time frame, post-independent India has made considerable progress since colonial times. The literacy rate in the first half of the twentieth century increased from a paltry 5.35% in 1901 to 16.67 in 1951. Today it stands at over 62%. This is no small achievement, given that the Indian population more than trebled since 1901, currently at over one billion. As we have noted, even the historically discriminated communities have made some progress on the literacy front. However, it is not the relative magnitudes, no doubt important for tracking social progress, that matter for understanding capitalist development. Embourgeoisment is about rising incomes in the context of social differentiation, with some groups earning considerably more than others. This inegalitarian outcome is integral to capitalist development, whereby a process of market growth is led by a virtuous circuit of production and consumption. The absolute numbers of educated, as consumers and producers, are large enough to sustain growing markets. Hence, such growth is not inconsistent with unequal education and resulting social polarization. Disproportionately more public resources have been allocated to higher education and professional programs, such as engineering and medicine. While 79% of the education budget in 1995–96 was allocated to elementary and secondary education, 16.4% went to higher and technical education (World Bank 2000: 50). In 1998, nearly 108 million students were enrolled, compared to 5.7 million general education post-secondary graduates. Using the 1995–96 education budget, roughly an annual average expenditure of Rs. 2,875 and Rs. 11,307 was incurred for a school and college graduate respectively. Technical education is likely to be more expensive. What is noteworthy and consistent with the state-sponsored embourgeoisment process is the subsidization of education in general and higher education in particular. For students in public institutions, course fees vary from a mere 2% to 7% of operating costs (World Bank 2000: 50), with the state subsidizing the rest. In a state-led economy of scarcity, formal education at the college level thus is a vital link to social and economic advancement. The huge Indian bureaucracy and the public sector rely on a steady supply of such personnel. Those with technical professional training have been rewarded with remunerative, secure employment in public and private enterprises. A selfreinforcing dynamic facilitated the internalization of the ethos of higher

60 The Long March to Capitalism

education by Indians. Education became a gateway to well-paying jobs, to prestigious nuptial arrangements, and social advancement. Those best placed socially and politically, namely the bourgeoisie, reaped the economic benefits of higher education, leading to the expansion of this sector. As Indian politics gravitated toward the issue of access to higher education, especially by the marginalized groups, more and more Indians began to appreciate the utility of and clamor for formal tertiary training. Hence, what is relevant is the absolute numbers of people experiencing improved social and economic status even as many are structurally excluded from the fruits of social development. In the post-independent period the number of educational institutions has expanded considerably (Table 3.3). As literacy and basic education has spread, there has been also a disproportionate growth in institutions of higher learning beyond the high school level. This is consistent with the state-sponsored industrialization strategy, demanding technically qualified personnel for domestic market development. Both economic imperatives and the social penchant for higher education contributed to substantial growth in post-secondary educational institutions. For example, there are nearly 10,000 schools (compared to less than 1,500 in 1961) that were above the high school degree level. Seventy percent of these comprised general education, while the professional and technical schools accounted for about 20%. The Ministry of Human Resource Development (in World Table 3.3

Number of Educational Institutions for Selected Categories

Primary/Junior Basic High Schools Universities, Institutions, etc. Degree Standard and above General Education Institutions Agriculture, Forestry, Veterinary Science Engineering, Technology & Architecture@ Medicine@# Below Degree Professional/ Vocational

1961

1971

1981

1991

2000

330,399 17,257 45

408,378 36,738 100

494,503 51,006 132

560,395 79,796 184

638,738 102,721 254

967

2,285

3,421

4,862

7,929

52

81

83

107

*122

111

134

171

351

880

133 4,145

179 4,401

249 4,808

346 5,739

**474 6,561

Source: Government of India, Ministry of Human Resources and University Grants Commission in World Bank (2000); Institute of Applied Manpower Research (2002:43). Notes: @ Degree Standard above Professional and Technical Institutions. * for 1998, ** for 1997 # medicine includes allopathy, homeopathy, ayurveda, and unani.

State, Embourgeoisment, and Market Development in India 61

Bank 2000) estimates show that in 1998 there were 5.65 million students enrolled in the arts, sciences, and commerce compared to 1.65 million in 1971, nearly a three-and-half fold increase. Post-baccalaureate enrolment (including doctoral research), about 10% in these fields, expanded by nearly two-and-a-half times during this period. The prospects for economic and social mobility are best ensured by professional training. In addition to the Indian administrative and other services for the bureaucracy, engineering and medicine have traditionally enjoyed considerable social prestige, including a ticket to wellplaced spouses. In 2000 over 74,000 degree-earning engineers were produced compared to less than 3,000 in 1951. Engineering diploma (shorter-term, less academically-oriented programs) holders numbered close to 160,000 (Institute of Applied Manpower Research 2002: 70). 6 The total stock of qualified scientific and technical personnel in 1997 was estimated to be 6.5 million, of which 0.73 and 1.1 million were engineering degree and diploma holders respectively (World Bank 2000: 43). About half a million information technology (IT) related workers were estimated to be employed in 2002 with anticipated needs at 2.2 million by 2008 (National Association of Software and Services Companies (NASSCOM) 2002: 92). Nearly 15,000 medical doctors were trained in 1997, gradually raising the availability of doctors from 15 per 100,000 to more than 50 per 100,000 (Government of India, Central Statistical Organisation 2002: 91). Given the urban bias of industrialization, greater purchasing power of urban residents, and the urban location of medical schools, the urban availability of doctors is expected to be far higher than the rural availability. Again, the point is not really a matter of distribution, for embourgeoisment is a process of social differentiation, regional disparities, and class inequities. There is one other aspect to technical education relevant to the discussion of embourgeoisment and capitalist industrialization, that is, the creation of an industrial workforce vital for the development of the Indian automobile industry. The British and the nascent Indian capitalist class had already initiated the process, especially in the early part of the twentieth century. However, given the colonial arrangement, such a workforce was at best peripheral to the Indian economy. The state’s pursuit of industrialization called for expanding the supply of technically-trained personnel based on apprenticeship programs. These are diploma programs with two years of training beyond the high school level. Like other educational institutions they were plagued with poor quality facilities and limited opportunities for graduates in a slow growing economy. However, their gradual expansion was consistent with economic development goals. Between 1961 and 1981, the combined number of professional, vocational, and technical institutions increased by 20% to 4,808. By 2000, their number stood at 6,855, a 43% increase since 1981 (Institute of Applied Manpower Research 2002:

62 The Long March to Capitalism

43). Of these, about 17% (1,088) are polytechnics; nearly 60% are government-run or government-aided institutions. This segment of the technical education system produced about 95,000 diploma holders in the mid-1990s (World Bank 2000: 46). They form the core of the Indian industrial workforce in the formal sector, and, as we will see in Chapter 5, contribute significantly to the development of India’s auto industry.

4.

Embourgeoisment and market growth

If the process of embourgeoisment or social differentiation parallels capitalist economic development, then self-reinforcing market growth, not necessarily all inclusive, appears inevitable. As more people experience social and economic advancement, there is a greater tendency toward increased consumption. Without income it is not possible to participate in the market, hence embourgeoisment is by definition a selective process. India’s persistent high incidence of poverty indicates the structural barriers to mobility. But the Indian political system does allow for some mobility, certainly less for those who are at the bottom and more for those who are already high up in the social and economic hierarchy. There is considerable social differentiation, on the one hand, and demonstration effects, on the other. What is pertinent is the shift of a peripheral, peasant-based economy to a more industrialized, market-based economy. Both in historic and absolute terms, the extent of embourgeoisment in India is significant enough to warrant the formation of markets and the widening of the consumption base within this middle-up segment. In popular parlance this has been interpreted as the rise of the Indian middle class. In this section we present a brief discussion on the size of the Indian middle class and the maturity of the Indian capitalist class to demonstrate not only market growth but also the ideological constituency for ushering in market reforms for capitalist expansion. 4.1

Size of the Indian middle class

The origin of this class is significantly different from that of the advanced capitalist countries and rather small by western standards. Nevertheless embourgeoisment in India suggests a growing class of rural and urban consumers, capitalist entrepreneurs, and the proletariat. There are of course no objective criteria by which the Indian middle class can be determined because of its heterogeneity. Its evolution does not mirror the rise of the bourgeoisie in Europe (Frankel 1988). This class comprises principally the urban professionals, civil servants, petit-bourgeoisie, and the rich peasantry (Kohli 1992: 328–329, Nayar 1990: 88, Bardhan 1984). For all practical purposes these groups exhibit consumption habits increasingly similar to each other and certainly deviate from India’s poor (Dubey 1992). This class displays facets of westernized consumption and behavior patterns but

State, Embourgeoisment, and Market Development in India 63

not necessarily western values of secularism and the attendant social characteristics based on individualism and modernity found in the west (Dubey 1992: 160–162). Social tension in modernizing India is apparent. Within the middle class there is a segment that is thoroughly western in its outlook and tastes and there is another that resembles western modernity mainly in terms of consumption but is still ensconced in a less secular system. The middle class comprises anywhere from 10–30% of the Indian population, depending on what criteria are used to identify them. Measuring the income of this class in terms of US dollars or purchasing power parity (PPP) also influences the size of this class and hence the composition of the consumption basket. By simply converting rupee incomes to US dollars, the Indian middle class income is low by advanced capitalist countries (Table 3.4). For about 37% of the Indian population annual household income in 1989–90 ranged from Rs. 12,000 to Rs. 40,000 ($721 to $2,403). This restricts proportionately the consumption of capital-intensive consumer durables and internationally branded goods that typically command international prices. Using PPP, Indian incomes are much higher, indicating that the standard of living is not as low as might be suggested by incomes based in US dollars. Furthermore, there is a large underground economy, whose size has been variously estimated to be anywhere from 18–30% of the national economy (Dubey 1992: 147). As class is socially defined, it is more fruitful to see the Indian middle class on India’s terms. Embourgeoisment entails rising selective prosperity and the potential to sustain a range of industries from which the poor, though declining relatively, is effectively kept out. There are different ways to determine the size of the middle class; income, purchases of consumer goods, the number of university graduates, etc. In the Indian context, and pertinent to the embourgeoisment process, a good indicator of social differentiation is the increasing ownership of two-wheeled vehicles – motorcycles, scooters, and powered cycles. The process of economic differentiation with respect to markets was already well underway before the economic liberalization of 1991. In 1951 the total registered number of two-wheeled vehicles was only 26,860. It crossed the one, two, and three million mark in 1976, 1980, and 1982 respectively. However, in 1997 it was nearly 26 million. In 1984–85, the price of a popular scooter represented roughly 25% of the annual salary of a public sector employee (calculated from Association of Indian Automobile Manufacturers (AIAM) 1985: 225, Government of India, Ministry of Finance, 1991: S–52). The increasing ownership of two-wheelers, given their high price relative to average incomes, reflects growing class segmentation and the corresponding demand for a relatively expensive consumer durable. Similarly, the passenger car segment also displays social differentiation even as the

64

Table 3.4

Three Estimates of the Size of the Indian Middle Class (based on household income)

NCAER (1989–90)

ORG (1989–90)

Income Category

Income Group

% of Population

Income Group

Low Middle

Rs.12–25,000 ($721–1,502)

27.0

–

Middle Income

Rs. 25–40,000 ($1,502–2,403)

10.0

Rs. 18,012–30,000 ($1,082–1,802)

Upper Middle

Rs. 40–56,000 ($2,403–3,364)

2.6

High Income

Rs. 56,000+ ($3,364+)

1.4

NCAER (1995–96) % of Population

Income Group*

Rural (m hh)

Urban (m hh)

% of hh

Rs. 16,001–22,000 ($478–658)

7.1

36.9

26.7

13.4

Rs. 22,001–45,000 ($478–1,345)

16.8

37.3

32.8

Rs. 30,012–48,000 ($1,803–2,883)

4.7

Rs. 45,001–215,000 ($1,345–6,428)

16.6

15.9

19.7

Rs. 48,000+ ($2,883)

2.0

Rs. 215,000 + ($6,428+)

0.8

0.4

0.7

Source: NCAER 1989–90, in Stern (1993: 6); ORG 1989–90, in Dubey (1992: 145); NCAER in Indiaonestop.com (1998). Notes: NCAER = National Council of Applied Economic Research, New Delhi; ORG = Operations Research Group, New Delhi. * 1994–95 prices The exchange rates used to convert rupee incomes in 1989–90 and 1995–96 were Rs. 16.65 and Rs.33.45 per US dollar respectively. m = millions; hh = households India’s per capita income (pci) in 2000 was $460; the purchasing power parity (ppp) pci was $2,390. Based on ppp, Indiastop.com estimates were as follows: upper middle class, mid-middle class, and lower middle class households at 40 million (with $600,000 a year), 15 million (with $20,000 a year), and 110 million (with unknown income especially for the affluent rural bourgeoisie) respectively.

State, Embourgeoisment, and Market Development in India 65

production of two-wheelers expanded much faster than passenger cars. At first, car ownership was higher than two-wheelers but over time the ratio of car registrations to two-wheeler registrations declined rapidly. For example, in 1956, the ratio was 495%, given that two-wheelers were not being produced in the country and cars were confined to the national elite. The ratio dropped to 202%, 74%, 28%, and 18% in 1966, 1976, 1986, and 1996 respectively. We can interpret this change as follows: not only were incomes above a threshold level increasing but higher income groups were experiencing even more rapid expansion. Social differentiation via rising incomes is displayed by increasing stock of vehicles of all types (Figure 3.2). The stock of buses has not increased as much, indicating the low priority of public transportation. But the increasing private ownership of trucks (and buses) outside of the corporate sector suggests embourgeoisment. Bus and truck owners form an increasingly important segment of the petit bourgeois. Many of them hail from semi-rural areas having diversified their agricultural assets from cultivation to warehousing and transporting agricultural output. Within this upwardly mobile group, there is a smaller, more affluent segment, that tends to differentiate itself from its peers, as evidenced by the declining vehicle registration ratios. Overall, even as the base of the middle class is widening with dramatic increases in the stock of twowheelers, the pyramidical structure is persistent with fewer cars registered

6,000

5,000

thousands

4,000

Two-Wheelers Cars Trucks

3,000

2,000

1,000

0 1961 1971 1981 1983 1985 1987 1989 1991 1993 1995 1997 2000 –1,000 Figure 3.2

Net Additions to Vehicle Populations by Category

Source: Automotive Components Manufacturers Association (various years).

66 The Long March to Capitalism

relative to two-wheelers. Cars are far more expensive than two-wheelers, anywhere from ten to twenty times that of a scooter. There are then structural limits to embourgeoisment, given that a critical threshold income is necessary to sustain an expanding car industry. It has been pointed out by industry officials that the expanding population of two-wheelers is a good indication of potential car demand (Personal Interview, Honda Motors, Tokyo December 1991). If this assessment is accurate then the Indian automotive segment fits that profile, given that India’s two-wheeler market is only second to China’s and India boasts the largest producer of two-wheelers in the world. 4.2

Embourgeoisment, capitalist maturity, and transnationalization

Capitalist development in India has been a multifaceted and complex process. Influenced by colonial rule and state-led development, today it is no longer insulated from the contemporary global economy. The incubation of new capitalists during the state-led phase of industrialization sustained the old guard and contributed to India’s global standing. For example, the Tatas and the Birlas, established business families, built up considerable expertise in engineering industries. The Ambani family with its Reliance Corporation, on the other hand, was a newcomer. Politically well connected, the Ambanis began their modest operation in 1966 and has grown severalfold since then. Strategically, they have integrated backwards from synthetic textiles to petrochemicals for making fibers. Today Reliance is a diversified company, with the world’s largest ethylene cracker plant, and a potential Fortune 500 entrant. Capitalist development in India has been also spurred by the remarkable expansion of an entrepreneurallydriven Indian IT sector. Firms such as Infosys and Wipro have become household names even though they are mainly exporters of software services (D’Costa 2003a). Increasingly entrepreneurs of Indian origin command many high-tech firms of Silicon Valley and many of them are returning to India to start new ventures (Saxenian 1999). A New York Times article citing IndUS Entrepreneurs, a group of US-based Asian entrepreneurs, estimates that 30% of the software engineers in Silicon Valley are of Indian origin (Glanz 2001). The maturity of business families and the new entrepreneurs represent a new breed of Indian capitalists. They are also products of state-led embourgeoisment. Consequently, not only is the Indian economy undergoing transformation but its external economic relationships are also being altered. For example, the Indian government no longer plays the same kind of dirigiste role as it did during the ISI phase. It has adopted a more neo-liberal economic strategy by deregulating the economy. The gradual reforms initiated in the late 1970s were speeded up in the 1980s. By this time embourgeoisment was already recognizable and the Rajiv Gandhi government began a major overhaul of economic policies to take India into the

State, Embourgeoisment, and Market Development in India 67

“Twenty-first Century.” Trade controls, foreign investment, and technology imports were all liberalized to cater to middle class demand. This led to macroeconomic imbalances, such as international debt and a run on foreign exchange reserves, ultimately culminating in the economic crisis of 1990–91. The crisis itself led to the 1991 market reforms, whereby the Indian economy was thrown open to the international economy. Deregulation is also facilitated by an internal constituency for neo-liberal policies. There are a number of interrelated ways by which such a marketbased approach is gaining momentum: First is the migration of Indian professionals to advanced capitalist centers. Second are investments by Indian firms abroad; and third is the return of some foreign-based Indian entrepreneurs. As the Indian economy becomes more internationalized with the offering of “global” goods and services and the diffusion of best-industry practices, many non-resident Indians (NRIs) return permanently or else move back and forth between India and foreign markets. These professionals abroad and their counterparts at home serve as the catalyst for promarket reforms, for these are the very groups which in the past benefited from market mechanisms. Embourgeoisment has created a vested interest in keeping the economy open. There is a conviction expressed by the middle class on the appropriateness of the neo-liberal order for India. For example, professionals can be considered the most successful in their fields, having gone through a rigorous screening process in Indian and American higher education systems. They have also worked for big global firms and many of them, like their US counterparts, have begun their own operations in the US. This repeated success, in terms of economic mobility and entrepreneurial achievements, distances whatever collective, publicly-supported solutions they might have entertained for Indian development. Consequently, economic reforms are pursued by those who gain the most from market participation. Embourgeoisment cumulatively contributes to market development. It also provides the ideological ammunition to sustain market reforms and engineer international economic integration.

5.

Conclusion

It is evident that the process of embourgeoisment, while selective, is altering the social structure in important ways. The declining share of agriculture to national income, the commercialization of agriculture, and the increases in food grain output are manifestations of this transformation. While its industrial record has been mixed, the state has played an important role. The public sector and public investments in general incubated an industrial infrastructure and a salaried class. The intertwining of political democracy with caste-based politics of higher education has allowed some social and economic advancement among the lower classes. Consequently,

68 The Long March to Capitalism

embourgeoisment has created a class of consumers that is increasingly participating in markets, hitherto undeveloped. By resisting global capitalism the Indian national capitalist project has been established. While there is no guarantee that these markets will be self-sustaining in the future, the process of embourgeoisment has its own momentum, or at least built-in supporters.7 As the self-reliant model had its problems of shortages, lethargic technological development, bureaucratic inefficiency, and corporate corruption there was little possibility of continuing in the same mode. Additionally, the global interconnectedness via economic integration, emigration, overseas education and employment, and the diffusion of popular culture heightened the “rising expectations” of the Indian middle class. As the national productive structure could not meet the changing demands of an increasingly differentiated Indian society, pressures to change the political course for economic development mounted. Some segments of the differentiated capitalist class demanded the dismantling of regulations. Also a new breed of capitalists, within and outside India, challenged the more traditional Indian bourgeoisie. They were more internationally-oriented, technologically more savvy, and less risk averse. The Indian middle class and its non-resident counterpart (see Appadurai 1992), sought “luxury” consumer goods which were either scarce, outrageously priced, or of inferior quality. Given that the “foreignness” of a good itself was perceived as a middle class status symbol, an ideology of the market was more or less internalized. As we will see in the next chapter, it is in this context of embourgeoisment that the development and the turning point in the Indian automobile industry can be examined. The model of national capitalist development was shelved in favor of a more market-oriented model that sought greater international economic integration. In 1982 for the first time, a foreign firm, Suzuki Motors, was allowed equity in the auto industry. By the mid-1990s virtually all major global auto companies had entered the market. The adoption of a neo-liberal model, while influenced by the immediate macroeconomic imbalances of 1990–91, was socially in the making in the post-independence period. The state-led capitalist development model transformed the Indian economy and induced social differentiation. The ensuing embourgeoisment, accompanying economic and social advancement, engendered formation of markets and their deepening. Rising incomes and social mobility of the Indian middle class sought to retain those privileges just as other less mobile groups clamored to secure some of those benefits through competitive politics and employment and education reservations. Deregulation of the Indian economy became part of urban middle class household ideology for it promised cheaper and wider variety of manufactured goods. The rural rich, though less tied into the neo-liberal model, were indirectly participating in it through their consumption of industrial goods, made possible by state support. In the wake of the

State, Embourgeoisment, and Market Development in India 69

macroeconomic crisis, the international pressures from the IMF and the World Bank to liberalize the Indian economy reinforced this market ideology. Globally capitalism itself was transforming. The collapse of the Soviet Union and the rapid emergence of an East Asia-based new bourgeoisie demanded a thorough re-evaluation of the Indian model. The debunking of the Keynesian welfare state gave way to a market-driven, individualized, neo-liberal order. India’s march to capitalism cannot be divorced from these external developments, though we know that the process of embourgeoisment was definitively set in motion by the Indian state itself.

4 Embourgeoisment, Internationalization, and Auto Market Evolution

1.

Introduction

By pursuing the national capitalist project the Indian state contributed to embourgeoisment and the material basis for market demand. Regulation of the economy – through public investments, five year plans, subsidies, and infant industry protection promoted home-grown capitalism. The results were by no means a runaway success and by some accounts disastrous (Bhagwati 1993). Indian demand was constrained by low incomes, endemic poverty, and persistent inequality. By the late 1970s the Indian economy as a whole exhibited signs of exhaustion. Declining public investments and internal political turmoil fundamentally challenged the state-led national capitalist project (Bardhan 1984). Excessive regulation, prompted by political expediencies, led to bureaucratic inefficiency, corruption, criminalization of politics, and corporate technological lethargy (see Ahluwalia 1989). Inter-party rivalry, militant trade unionism, the centralization of power by the ruling party, and radical insurrectionary movements in various parts of the country severely undermined political stability. Exogenous shocks, such as the tripling of world oil prices and the associated worsening balance of payments (BOP) position, exposed the overall vulnerability of the Indian economy. These developments occurred at a time when profound shifts were taking place at the global level. Structurally, US companies had already transnationalized their production operations, Western Europe had been reconstructed, while Japan and East Asia had emerged as new challengers to US economic hegemony. The new competition was both a cause and consequence of state regulation of capitalist markets, increased trade, foreign direct investment, and microelectronics-based innovations (Best 1990, Dicken 1998). To coordinate and control global operations, new flexible organizational arrangements became best-practice standards. Subsequently, considerable industrial restructuring was foisted on mature capitalist countries in adjusting domestic production to global competition. Both labor70

Embourgeoisment, Internationalization, and Auto Market Evolution 71

intensive industries such as textiles and garments (Grunwald and Flamm (eds) 1985, Bonacich et al. (eds) 1994, Fröbel, Heinrichs, and Kreye 1980) and later heavy industries such as steel, auto, and machine tools were reorganized at a global level (Dertouzos et al. 1989, D’Costa 1999). Statesponsored social welfare and full employment policies gave way to greater reliance on markets for growth and job creation. Increased competition resulted in excess capacity and consequently industry restructuring (Brenner 1998, Crotty 2000). The institutional foundations of contemporary capitalism also underwent significant changes. Instead of states regulating capitalism, markets led states to deregulate, reform, and privatize the economy. Keynesian demand management was discredited in favor of tight money policies (Marchak 1993, Brenner 2002). Such institutional flexibility, a necessary response to hypercompetition, had also become the new economic orthodoxy for inducing market growth nearly everywhere. In developing countries, such as India, the autarkic economic approach to building national capitalism was discredited and global integration encouraged (Bhagwati 1993). Like most countries, India was not immune to these exogenous influences, even if it was able to modulate them in the past. Its slow-growing economy and balance of payments difficulties, coupled with pressing demographic and political problems, called for a revision of its development strategy in the context of competitive politics. Under state tutelage, the limited social and economic mobility through education and employment generated further demands for economic change. The economic reform process in India was subjected to the vagaries of democratic politics even if embourgeoisment underway facilitated the internalization and accommodation of global economic forces (D’Costa 2001). In this chapter I introduce the supply side of the embourgeoisment process. Specifically, I analyze the evolution of the Indian auto industry to explore how latent demand associated with embourgeoisment found its full expression in new auto production. In discussing the trajectory of the Indian industry we find that the sources of supply shifts have been both internal and external. Domestically, embourgeoisment meant demand creation. However, the auto industry was deliberately curtailed for fear of BOP problems and its association with the rich in India. Furthermore, persistent BOP problems were an intrinsic feature of the autarkic, anti-export biased model of development in India. Hence the disequilibrium associated with a slow growing economy, concurrent BOP problems, and gradual embourgeoisment could be resolved through a new regime of capital accumulation. This translated into deregulation through economic reforms, which were tentative at first and wholesale in 1991. Insofar as the auto industry was concerned, there was a corresponding change in the mode of capitalist regulation as market coordination became more challenging in a deregulated environment. However, the challenge initially was less due to market

72 The Long March to Capitalism

volatility than due to the opportunities that came after relaxing state control over the sector. The ensuing change in the mode of regulation altered the Indian auto industry substantively – from restricted, low volume output to relatively open, massive output expansion. More importantly, the transformation of supply has been led by foreign auto transnational corporations (TNCs), which is consistent with heightened global competition. The evolution of the Indian auto industry is presented in three parts. First, I demonstrate the relative isolation of the Indian auto industry from its global counterpart. The shifts in global production and India’s changing relative position is brought out. Also, India’s relationship with the world economy in terms of worsening BOP position and rising external indebtedness is briefly presented. This is both a legacy of the state-led ISI model, embourgeoisment, and the subsequent rejection of autarky through economic reforms, resulting in increased imports of middle class consumer durable goods. Second, I examine the shifting supply of auto production through transnationalization in two steps. A detailed account of the interaction of the Japanese TNCs and the Indian state is presented. I show that capitalist development is influenced by institutional dynamics, mediated by the Indian state, and circumscribed by national firms. The entry of Japanese firms was largely influenced by their competitive success in the global auto industry. This was followed by a second wave of TNCs. In the third part, two dimensions of capitalist market development are briefly introduced – a greater variety of output and the tendency toward overproduction. The first results from the relationship between ongoing embourgeoisment and capitalist industrialization. As demand rises in the context of internationalization access to foreign technologies is enhanced, leading to not only output expansion but also a greater diversity of output. The second feature is the systemic nature of excess supply in the Indian auto industry unleashed by increased reliance on markets to regulate capitalist development.

2.

Two sources of supply shifts in India

2.1 The reconfiguration of and India’s entry in the global auto industry In the post-World War II period there have been three different layers to the global shift in automobile production. The first was the decisive US decline relative to global output due to the expansion of the industry elsewhere. Second, the remarkable ascendancy of Japan, in relative terms, shifted the global structure away from the US. The development of the industry in a select number of developing economies such as South Korea and Brazil also contributed to this shift. Third, as national markets expanded and as global production became technically and organizationally feasible, automotive firms undertook overseas production for both local and third country

Embourgeoisment, Internationalization, and Auto Market Evolution 73

markets. Consequently the shifting locus of production, with its attendant transnational linkages among selected countries, contributed to excess capacity and heightened competition. The US has been the largest producer and market for automobiles (Table 4.1). In 1950 it was responsible for over 75% of global production. However, by 1965 US share of production had dropped to 46%, stabilizing around 23%. This relative decline was accompanied by the increase in production in Europe, Japan, and other countries, mainly from Asia and Latin America. Japan experienced a dramatic increase in production from 1960 onward, exceeding US output during the 1980–1993 period. The US is also a major importer of vehicles. From a share of imports (relative to total market) of less than half a percentage in 1951, the US imported over 30% of its market in 1987 and currently imports roughly a quarter of its total car sales (Ward’s Motor Vehicle 2001: 15). Japan’s contribution to US imports of vehicles stood at 21.3% in 1987, declining to roughly about 10% in 2000 (Ward’s Automotive 2001: 21). With international economic integration, production of automobiles is no longer confined to national economies. Firms, for a variety of reasons such as new markets, resources, and low costs are investing in overseas manufacturing facilities for both local and export markets. For example, there are several Japanese auto firms in the US producing for the US market. Their American presence has been influenced by the large US market, rising costs of production in Japan (both wage costs and appreciation of the yen) and US protectionist policies quantitatively restricting Japanese imports. In a macroeconomic sense, Japan’s current account surplus with the US had to be recycled in the form of foreign direct investment (FDI), leading to establishment of Japanese auto plants in the US. Japan, for cost and market reasons, also expanded its operations in South East Asia. Economic integration of Mexico under the North American Free Trade Agreement offered US and Japanese firms the opportunity to manufacture in Mexico for the US market. Mexico’s auto exports were between 68% and 70% in 1999–2000, with a substantial portion aimed at the US market. The development of the Indian industry, until the early 1980s, was independent of the global shifts taking place. India’s share of global production remained under 0.5% until 1981 (United Nations Centre on Transnational Corporations 1983: 14). However, with gradual deregulation, India’s global share has been rising and currently stands at more than 1%, even as many other countries have expanded their production. The entry of Japan’s Suzuki Motors in India in the early 1980s fundamentally reorganized the Indian auto industry, leading to expanded output. As markets materialized other auto firms in India and their foreign collaborators joined the bandwagon. Consequently, an entirely new supply system was incubated with assemblers of vehicles and their suppliers.

74

Table 4.1 Year

1950 1955 1960 1965 1970 1975 1980 1985 1990 1995 2000

World Motor Vehicle Production, 1950–2000 United States

Europe

Japan

Other

millions

% share

millions

% share

millions

% share

millions

% share

8,006 9,204 7,905 11,138 8,284 8,987 8,010 11,653 9,783 11,985 12,771

75.7 67.5 47.9 45.9 28.2 27.1 20.8 25.9 20.1 24.0 22.2

1,991 3,741 6,837 9,576 13,049 13,581 15,496 16,113 18,866 17,045 17,161

18.8 27.5 41.5 39.5 44.4 41.0 40.2 35.9 38.9 34.1 29.8

32 68 482 1,876 5,289 6,942 11,043 12,271 13,487 10,196 10,145

0.3 0.5 2.9 7.7 18.0 21.0 28.6 27.3 27.8 20.4 17.6

160 163 866 834 1,637 2,211 2,692 2,939 4,496 8,349 14,490

1.5 1.2 5.3 3.4 5.6 6.7 7.0 6.5 9.3 16.7 25.2

Source: Ward’s Motor Vehicle (2001:12).

Embourgeoisment, Internationalization, and Auto Market Evolution 75 Table 4.2 World Motor Vehicle Production by Manufacturers (2000) (Top 24 Firms) Manufacturer

Country of Origin

General Motors Ford Toyota-Daihatsu-Hino Volkswagen Daimler-Chrysler PSA Peugeot Citroe¨n Nissan Fiat Renault Hyundai Honda Mitsubishi Suzuki-Maruti Mazda BMW Daewoo Avtovaz Fuji-Subaru Isuzu GAZ Proton Changan Tata MG Rover

US US Japan Germany Germany-US France Japan Italy France Korea Japan Japan Japan-India Japan Germany Korea Russia Japan Japan Russia Malaysia China India UK

Passenger Car Output

Total Vehicle Output (including trucks and buses)

5,247,245 4,038,670 4,655,935 4,859,478 2,043,376 2,493,980 2,041,346 2,183,858 2,101,855 2,023,042 2,250,771 1,094,357 1,181,929 822,187 834,628 758,059 755,997 499,738 35,911 116,319 212,681 100,000 90,122 174,885

8,114,357 7,206,029 5,897,214 5,106,749 4,666,640 2,879,422 2,697,957 2,639,405 2,514,897 2,488,321 2,469,256 1,613,253 1,434,345 971,676 834,628 833,735 755,997 581,035 571,819 227,673 212,681 203,127 193,580 174,885

Source: Ward’s Motor Vehicle (2001: 13).

Some Indian firms responded to heightened competition through entrepreneurial initiatives, allowing two of India’s vehicle manufacturers to enter the top 24 auto companies globally (Table 4.2). Of Suzuki’s total worldwide production, one third comes from its Indian operations. It has a joint-venture Maruti Udyog Ltd. (MUL) with the Indian government. Of the top twenty-four globally ranked companies, Suzuki’s Indian operations and the Tatas of India enjoy considerable competitive strengths. Both have high volume of production, thereby reaping the benefits of economies scale. Tata vehicles are known for their ruggedness and durability, while Maruti has successfully introduced a wide range of fuel-efficient vehicles at affordable prices. The growth of these two firms indicates not only the embourgeoisment process underway in India but also illustrates the integral nature of internationalization of production in contemporary capitalist development.

76 The Long March to Capitalism

2.2 Changing external economic relations and the pre-conditions of market expansion In addition to India’s engagement with the global automobile industry, the shifts in supply have been also a result of the new regime of capital accumulation, namely economic liberalization. The latter is a direct response to the persistent BOP deficit associated with an autarkic model of development. There are of course several interrelated factors responsible for India’s persistent balance of payments problems including colonial legacies, India’s structural position in the world economy, and the changing political economy of external economic relations (Sen 2000). Paradoxically, the dismantling of the autarkic model initially, both on account of its internal failings but also its rejection by the middle class, added to the BOP problem. India’s self-reliant strategy and its dependence on external sources for oil contributed to India’s trade deficits and weak foreign exchange reserve position. Its foreign exchange reserve fell from $2.2 billion in 1950–51 to an average of $736 million during 1957–70 (Government of India, Ministry of Finance 2001: S–69–S70). From the mid-1970s, India’s foreign exchange reserves gradually increased until 1990–91, after which it rose dramatically. In mid-2002 it stood at over $55 billion and over a $100 billion in 2004. India’s trade balance has been persistently negative, despite growing exports (Figure 4.1). The share of oil imports to total imports ranged from 8 to 11% between 1970–73. In 1973–74, after the price hikes, the share increased to 19%, rising to 42% in 1980–81. The trade balance with respect to oil doubled in 1979–80 from the previous year, to over $4 billion. Having stabilized at around a third of total imports it is still a heavy drain 10,000.00

million US$

5,000.00

0.00 1970 1972 1974 1976 1978 1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000

–5,000.00

Oil –10,000.00

Non-oil Total

–15,000.00

Figure 4.1

India’s Net Trade Balance

Source: Computed from Government of India, Ministry of Finance (various years).

Embourgeoisment, Internationalization, and Auto Market Evolution 77

of precious foreign exchange. India’s mostly negative trade balance could not be offset by increased exports partly because of low-value products, partly because of intense global competition in labor-intensive and extractive industries, and partly because of India’s special relationship with the former Soviet Union. Bilaterally arranged barter exchange between India and the Soviet Union shielded the Indian economy from exchange rate fluctuations and high prices but it did not induce technological competence that often arises out of competitive pressures (Mehrotra 1990). Consequently, India’s ability to compete in international markets was seriously hampered. The increase in and the changing composition of India’s trade reflected Indian industrialization and the embourgeoisment process. India’s main imports were modern industrial inputs, such as “crude” materials, oil and petroleum products, chemicals, and machinery and transport equipment. In 1970–71 crude materials accounted for 12% of imports, oil and petroleum products 8%, chemicals 12%, and machinery and transport equipment 24%. In 1980–81, crude material imports declined to 6%. Oil and petroleum imports shot up to 59%, while the other two categories of imports slightly increased and decreased to 15% and 20% respectively. Aside from primary products, India competed in labor-intensive semi-finished manufactures using various materials such as leather, jute, textiles, carpets, precious and semi-precious stones, and metals. In 1970–71, nearly 40% of its exports were in such manufactured goods, with about 4% in finished goods. By the end of the decade about 7% comprised exports of engineering goods such as machinery and transport equipment, rising from $110.2 million to $554.2 million. The share of exports of engineering goods changed gradually over the next decade, rising to 12% or about $2 billion in 1989–90, even as manufactured goods as a whole rose to $8.2 billion. At the end of the 2000–01 financial year, India’s manufactured exports had reached $34.5 billion, representing 20% of manufactured exports and over 15% of total exports. These exports nearly equalled India’s exports of agriculture and allied products for that year. Economic reforms in the context of embourgeoisment and internationalization also unleashed an entrepreneurial energy hitherto unseen in India (D’Costa 2003c). Soon after the 1991 reforms, the Indian software industry expanded rapidly, meeting the global demand for services with an abundant supply of highly-skilled but low-cost labor. In 1990, India’s software exports were $131.2 million, which by 2002 had reached $7.8 billion, and crossed the $10 billion mark in 2004. In this frenetic expansion software exports became an important foreign exchange earner for the country. In 2003–04 software exports were 21.3 % of total exports and the IT industry as a whole represented 3.82% of GDP (NASSCOM 2004). Today the Indian IT industry boasts nearly 1,000 firms, with many of them operating

78 The Long March to Capitalism

overseas. In parallel fashion, most global information technology firms are present in India, undertaking a variety of development work for their in-house needs. It is clear that software contributes to the diversification of India’s exports and acts to reduce the vulnerability associated with open economies. The increase in India’s trade also has been accompanied by significant financial movements. After the oil price hike, trade deficits were financed by worker remittances from the Middle East. Later, private transfers by non-resident Indians (NRIs), who were largely white-collar professionals, and external loans financed such deficits (Nayyar 1994). India’s inflows of “net invisibles,” representing remittances shot up from a deficit of $186 million in 1972–73 to $2.09 billion the following year. These inflows continued rise until 1980–81, reaching over $5 billion and declining steadily thereafter. With the onset of the economic crisis, they fell precipitously to $615 million and minus $243 million in 1989–90 and 1990–91 respectively (Table 4.3). Total remittances were $134 million in 1972–73 and $2.69 billion in 1980–81, of which the shares from the Middle East were about 5% and 57% respectively. Throughout the 1980s over half of the remittances originated from the Middle East (Reserve Bank of India in Nayyar 1994: 46). Deposits by non-resident Indians, initially small compared to worker remittances, picked up in the 1980s. Net NRI deposits were $42 million in 1975–76, rising to nearly $2.5 billion in 1988–89 (Reserve Bank of India (various years), Government of India, Ministry of Finance (various years)). They fell precipitously to $290 million in 1991–92, resulting from the withdrawal of NRI deposits with the onset of the economic crisis (see Nayyar 1994: 52). In the 1990s, net NRI deposits displayed considerable fluctuations. India’s commercial borrowing has been small historically, partly offset by foreign assistance. This changed from the mid-1970s onward reaching a new level in the early 1980s. The average net annual borrowing was less than $130 million during the 1970–82 period (Reserve Bank of India, various years). It jumped to an average of $1.37 billion during 1982–92, with a massive decline in the mid-1990s. These financial movements are both a result and cause of embourgeoisment. While worker remittances from the Middle East were influenced by North–South geo-politics, they also had the unwitting effect of inducing consumerism beyond what existed among the urban rich in a regime of controlled production. Migrant workers at the end of their contracts returned home with consumer durables, made principally in Japan, hitherto unavailable or unaffordable by the Indian middle class. Their earnings, while propping up India’s foreign exchange reserves, also led to conspicuous consumption in several ways: directly in villages where such workers originated; indirectly, by imports of inputs and finished goods for the industrial economy; and by government relaxation of import regulations

Table 4.3

India’s Changing Balance of Payments Profile 1950–51

1. Merchandise a) Exports b) Imports Trade Balance (a–b) 2. Invisibles (net) 3. Current A/C (1 + 2) 4. Capital Account (a + f) a) Foreign Investment b) External Assistance, net c) Commercial Borrowings (net) d) Rupee Debt Service e) NRI Deposits (net) f) Other Capital 5. Overall Balance (3 + 4)

1954–55 1959–60

1964–65

1969–70

1974–75

1979–80

1984–85

1989–90 1994–95 1999–00

1359 1366 –7

1254 1450 –196

1330 1958 –628

1683 2985 –1302

1873 2101 –228

4006 5620 –1614

7817 12076 –4259

10061 15715 –5654

16955 24411 –7456

26855 35904 –9049

37542 55383 –17841

88

208

237

319

–84

415

3574

3238

615

5680

13143

81

12

–391

–983

–312

–1198

–685

–2417

–6814

–3369

–4698

–20

–14

–407

865

669

600

1090

3147

6977

9156

11100

8

17

–109

99

32

87

86

0

410

4807

5191

–11

–21

–368

1143

625

1071

813

1184

1856

1526

901

0

0

0

0

0

195

55

934

1777

1030

313

0

0

0

0

0

0

0

0

0

–983

–711

0

0

0

0

0

0

201

740

2403

172

1540

–17 61

–10 –2

–70 –16

–377 –118

12 357

–753 –599

–65 405

289 730

531 136

2604 5787

3866 6402

Source: Reserve Bank of India, Annual Reports (various years).

79

80 The Long March to Capitalism

due to windfall gains in foreign exchange reserves. Opulent houses with modern conveniences were constructed alongside village huts. Imports of foreign technology, encouraged by deregulating foreign investment regulations, enhanced the availability of consumer durables, as evidenced by motorized transportation in the form of two-wheelers and cars, purchases of air conditioners, refrigerators, and other white goods (Dubey 1992: 151, see Chapter 7). The hard currency deposits of NRIs represent the other side of embourgeoisment. Most of them, well-educated, had emigrated to Europe and North America. Unlike workers in the Middle East, NRIs settled abroad, thereby remitting little to the Indian economy. Over time as their numbers abroad rose, the Indian government perceived them as a source of foreign exchange. Incentives were provided to attract NRI deposits at high interest rates. NRIs themselves, accustomed to high standards of living abroad, introduced new consumption styles in India. Their visits to India, combined with increasing international travel by professionally mobile Indians themselves, contributed to large-scale demonstration effects. The deteriorating external conditions of the 1980s were a direct result of relaxation of import regulations, which in turn was related to embourgeoisment. Rajiv Gandhi, elected following the assassination of his mother Indira Gandhi, introduced several policy measures aimed to unshackle the Indian economy. These actions were consistent with those being prescribed worldwide by the Bretton Woods institutions of the IMF, World Bank, and GATT. However, the wide range of vested interests in an open political system constrained the full implementation of these reforms (see Kohli 1992). Opposition to reforms came from several quarters, many of which comprised the dominant coalition and, paradoxically, from groups that were also part of the Indian middle class, such as the more domestically-inclined Indian industrialists and organized labor, especially under the public sector. These reforms were aimed at higher economic growth, a process that was perceived to benefit the already well-placed urban middle class in the private sector and the rich rural bourgeoisie (Bardhan 1998). Since reforms entailed both domestic deregulation and external liberalization, the stakes were high for various groups. Whatever doubts existed on the merits of economic reforms became moot with the onslaught of the balance of payments crisis of 1991. Fundamental changes in India’s economic policies appeared inevitable. Correspondingly, the internationalization of the Indian economy was now a foregone conclusion as India’s import capacity became precarious by its heavy dependence on external supplies of oil and the financing of the trade deficit by depleting foreign exchange reserves (Sen 2000: 63–70). The withdrawal of NRI deposits at this time, along with the complete collapse of remittances during the Gulf War, pushed the country to the brink

Embourgeoisment, Internationalization, and Auto Market Evolution 81

of insolvency, coinciding with rising imports of consumer durables, technology for manufacturing them at home, and multinational involvement in their production. Embourgeoisment in India set the stage for India’s global participation. Capitalist regulation had to move away from a state-led model to a greater reliance on markets as the Indian capitalist class had matured and a consuming class had become economically viable. The mismatch between the rise of the Indian bourgeoisie and a slow growing economy plagued with balance of payments problems meant reforms were necessary to sustain capital accumulation. In the 1970s various forms of deregulation were mooted and gradually observable policy changes were initiated in 1977 by the Indian government. Since then each administration has introduced some form of economic liberalization, by deregulating at home and opening up the Indian economy to foreign participation. Foreign direct investment, emphasis on exports (and trade), and foreign technology collaborations became part of the Indian economic environment. Select Indian businesses themselves had begun making investments abroad, with a few of them gaining considerable international recognition. These changes are consistent with developments in the global economy and implied that the model of self-reliance had to be abandoned in favor of global integration, a switch that was embraced by China in 1979. It is in this changing global and national contexts that the transformation of the Indian auto industry must be located.

3. Internationalization and changing supplies in the Indian auto industry 3.1

Toward liberal industrial policies

Based on the alternative framework developed in Chapter 2, the shifting supply system of the Indian auto industry can be explained by a change in the regime of accumulation at the macro level – from state-led development to market reforms – and by the corresponding change in the mode of regulation at the industry level – from a mass production system to flexible production arrangements. The pre-independence “Statement of Government’s Industrial Policy” of 1945, followed by post-independence legislation in 1951 (Industries Development and Regulation Act) established the basis for state intervention in the economy. The idea of planned development of industries was rooted in the Fabian tradition. Five-year plans were initiated with the first beginning in 1951 (see Marathe 1989). Regulation, creation, and expansion of industrial capacity by the state was accepted as promoting the national interest. Subsequently, the Industrial Policy Resolution of 1956 carved up industrial sectors specifically for the state. All new capacity in the iron and steel industry for example was reserved for the state. Assurance was given to existing private firms, such as

82 The Long March to Capitalism

Tata Iron and Steel and Indian Iron and Steel, that there would be no nationalization of their industry. In 1969 all commercial banks were nationalized and regulations enacted to monitor large domestic business houses under the Monopolies and Restrictive Trade Practices Act (MRTP). By regulating big firms, the government wanted to promote the small-scale sector. India-based companies with more than 40% foreign equity were, under the Foreign Exchange Regulations Act (FERA) of 1973, designed to limit foreign technology collaborations. Both Acts were counterproductive in a licensed, demand-constrained economy. There were no economies of scale for large or small firms, the small-scale sector was highly fragmented, big business continued to corner industrial licenses despite the attempt by the government to reduce their market power, and industries fell far behind international technological developments. With respect to the auto industry, in 1949 the government of India banned the import of completely built vehicles and since 1953, under the aegis of the Tariff Commission, has refused permission to Indian manufacturers to assemble imported vehicles without increasing local content. This emphasis on gradual but mandatory increase in local content was termed “phased manufacturing program” (PMP). With this measure the government reduced the number of assembly firms from twelve to five (Kathuria 1990: 2). Unwilling to invest in India, both General Motors and Ford shut down their operations, while Hindustan Motors of the Birla family and Premier Automobiles of the Walchand Group entered the fray. It was only since 1970 that the automotive industry was gradually added to the core list (under Appendix I) that gave it a strategic status by the government. This list included the FERA/MRTP companies. While the implication of this inclusion meant that the government would treat favorably the industry’s expansion and modernization needs, the car industry remained tightly regulated. Cars were treated as luxury products and price controls on the auto industry were in effect until 1975. The industry’s output was controlled by licensing production capacity and restricting output to single models so as to minimize foreign exchange outflows due to imports of components. Auto component manufacturing was reserved for small-scale industry but in the absence of economies of scale the industry remained highly fragmented and technologically underdeveloped. After the energy crisis of the early 1970s, the Indian government encouraged unlimited production capacity for “non-luxury” vehicles produced by non-MRTP and non-FERA companies, which comprised commercial vehicles and two-wheelers (Pingle` 1999: 99). The market for two-wheelers exhibited considerable growth, reflecting the latent consumer demand that had already built up. In 1975, imports of capital equipment for replacement were allowed as long as the net foreign exchange outflow was zero. This implied an export commitment of some sort. Almost eleven years

Embourgeoisment, Internationalization, and Auto Market Evolution 83

later, the government granted nearly a 50% increase in foreign exchange to importers of capital equipment. In addition to raising the amount of permissible imports, the bureaucratic process of permits for net imports was significantly simplified. This indicated the government’s interest in upgrading technology, promoting exports, and deregulating the business environment. As a general industrial policy the government in 1975 permitted an automatic capacity expansion of 25% every five years. This was over and above the 25% that was already allowed by the industrial license of the Industries Development and Regulation Act of 1951. However, this policy included commercial vehicles but not the passenger car segment. The “Industrial Policy Statements” of 1977 and 1980 marked the beginning of the liberalization process. The state’s tight grip was loosened in favor of increased competition at home and greater participation of foreign capital by relaxing regulations governing production licenses, foreign collaborations, asset size, and scope of industrial operations. To reap the benefits of economies of scale the policies aimed to do away with stifling limits on capacity. Through delicensing both the large business houses and foreign companies under FERA were also permitted to enter several areas reserved for the state sector. Between 1984 and 1986 the asset limit used to identify and regulate large businesses was raised from Rs. 200 million Rs. 1,000 million. However, other than the 25% automatic increase in capacity, large domestic and foreign firms falling under MRTP/FERA regulations were still kept on a tight leash. In the automotive segment, while there are only a handful of FERA companies, a large number of them fall under the MRTP regulations. The liberalization of the automobile industry was aimed primarily at the components manufacturing segment, for which the government had previously reserved a large chunk of the industry for the officially defined small-scale sector. Also, very selectively and on a case-by-case basis, the Indian government allowed new auto ventures with foreign collaborators, almost all Japanese, to be established in the auto industry. In addition to the four new jointventures with Japanese companies in the light commercial vehicle (LCV) segment, the state also created a public sector firm Maruti Udyog Ltd. (MUL) as a joint-venture with Suzuki Motors Corporation (SMC) of Japan in the car segment. In 1985 “broadbanding” was introduced. It did away with production licenses for a specific commodity and instead encouraged production of a range of related products. A vehicle manufacturer thus could produce scooters, motor cycles, and three-and four-wheelers, thereby introducing flexibility to use both economies of scale and economies of scope. Similarly, components manufacturers could produce a broad range of parts and related products. In 1985 even those automotive firms that came under the purview of MRTP were granted the freedom to expand capacity in existing plants or set up new units. Paradoxically, after a burst of opening up, the production of passenger cars throughout the 1980s and

84 The Long March to Capitalism

early 1990s remained tightly regulated and controlled through industrial licensing. No other new car manufacturers were permitted until after the reforms of 1991, even though numerous applications for foreign technical collaborations had been made and several joint-ventures permitted in the Indian LCV market. The reasons were both political and economic – to protect MUL and save foreign exchange. Also, erroneous projections of the LCV market and the herd-like behavior of transnational corporations created a flurry of international investments in the Indian automotive sector. The post-independence changes in economic and industrial policies in India reflect the tension between state and private capital in pursuing the national capitalist project. They also indicate the institutional learning that resulted from the mismatch between economic aspirations and performance. Policy changes were aimed at enhancing macroeconomic growth but they were also targeted at improving microeconomic efficiency. Evidently, in the context of embourgeoisment, the national capitalist project also induced supply bottlenecks, whose resolution demanded significant policy shifts. These policy changes also reflect the fundamental shifts occurring since the late 1960s in the larger global economy. The new international division of labor brought about by TNCs, while rebuffed by the Indian state, was later accommodated by the increasing embourgeoisment of Indian society The internationalization of the Indian auto industry is the meeting place for transnational and national capitalism. For all the messiness of institutional dynamics, the direction of economic liberalization in India is telling in its consistency; it is as much a consequence of endogenous developments as it is of exogenous forces. 3.2

The entry of Japanese capital

The timing of Indian economic liberalization coincided with Japanese firms’ desire to find new markets. Beginning in the early 1980s, factors such as the yen appreciation, protectionism in industrialized countries, rising wage costs in Japan, and the importance of proximity to final markets had already compelled many Japanese producers to invest overseas (Steven 1990, Encarnation 1992, Gwynne 1991, Shaiken with Herzenberg 1987). Riding this Japanese wave of outward capital movement Suzuki Motors Corporation (SMC) in the early 1980s teamed up with Maruti Udyog Limited (MUL) of the government of India. This joint-venture has been the most important contributor to the nearly fivefold increase in passenger car production in India in the 1980s. In 1982, the Government of India created Maruti Udyog Limited, a public sector company as a joint-venture with Suzuki Motors Corporation of Japan. The government owned 80% of the equity. For the first time the state became an investor in a car project and in a successful monopoly.1 At first sight this is inconsistent with economic reforms and

Embourgeoisment, Internationalization, and Auto Market Evolution 85

internationalization since neither monopoly nor state dominance is expected with liberalization. However, this marks the beginning of the internationalization process in the auto industry. MUL itself emerged from a failed enterprise started by Sanjay Gandhi, the second son of Indira Gandhi. High prices and automobile shortages in the 1970s attracted Sanjay Gandhi to set up a “people’s” car project. However, not a single vehicle was manufactured and with the re-election of Indira Gandhi in 1980 the enterprise was nationalized in 1981 (Pinglè 1999: 107). The selection of Suzuki Motors as a partner, aside from the routine technical and financial criteria, was also based on its specialization in small cars. In the Japanese market in the 1980s, Suzuki’s total market share was around 7%, doubling its output every five years in the decade (Japan Automobile Manufacturers Association 1991: 16). It was the sixth largest producer in Japan (Toyota Motor Corporation 1990: 2). The company is known for its small cars, which form the bulk of its passenger car output. SMC’s successes in South Korea through the licensing of small car technology to Hyundai, manufacturing in Canada for the North American market, and increasing competition in Japan made it more aggressive than others to enter the Indian market. Also, with the rising cost of production in Japan, surplus foreign exchange, and domestic market saturation it became imperative for Japanese firms to invest outward. The Japanese government, still engaged with sector-specific intervention, encouraged firms to diversify their markets. For smaller firms like Suzuki, it was singularly more important as the home market had become crowded. With the entry of MUL the structure of the Indian car market changed perceptibly (Table 4.4). Until the 1960s there were three producers of cars, Hindustan Motors (HM), Premier Automobiles Ltd. (PAL), and Standard Motors Private Ltd. (SMP), each with very small output. Mahindra & Mahindra (M&M) produced utility vehicles (jeeps). All of these producers initially licensed foreign technologies from the UK, Italy, and the US. With increased local content under the phased manufacturing program they produced essentially wholly indigenous vehicles. By the 1970s HM and PAL formed a duopoly in the car industry, while M&M was a monopoly in utility vehicles. In 1984, two years after it was established, MUL manufactured over 12,000 cars mainly from imported completely knocked down (CKD) kits. In 1990 MUL produced over 50% of all passenger vehicles produced in India, a higher share if only passenger cars are included, while India’s output increased by nearly 400%. By the next decade, India’s output more than doubled, while MUL held on to an average of 53% of the car market in 2001 (calculated from ACMA 2002: 10). The internationalization of the Indian auto industry is also evident in the commercial vehicle segment (Table 4.5). The evolution of the structure of this segment differs from that of passenger cars. While the formative stage

86

Table 4.4

Changing Market Structure of Car and Utility Vehicle Production in India (1955–2001) HM

1955 1960 1970 1980 1990 1997 2001

PAL

SMP

# of units

Mkt. share

# of units

Mkt. share

# of units

Mkt. share

4,874 9,217 22,703 21,752 26,204 24,059 23,987

37.9 37.5 51.0 47.7 12.0 5.0 3.5

3,581 6,616 12,054 8,729 42,737 14,169 0

27.8 26.5 27.0 19.1 19.5 2.9 0

1,526 3,364 448 6 – – –

12.0 13.7 1.0 0.0 – – –

SAL # of Mkt. units share – – – 51 924 – –

– – – 0.1 0.4 – –

M&M

MUL

# of units

Mkt. share

# of units

2,864 5,501 9,334 15,068 32,706 69,277 56,380

22.3 22.4 21.0 33.0 15.0 14.3 8.3

– – – – 116,194 349,780 356,608

Mkt. share

TELCO # of units

– – – – – – – – 53.1 *265 72.0 6,302 52.7 82,195

Others##

Mkt. share

# of units

Mkt. share

– – – – – 1.3 12.2

– – – – – 22,545 157,076

– – – – – 4.6 23.2

Source: Association of Indian Automobile Manufacturers (AIAM) and Automotive Components Manufacturers Association (ACMA) (various issues). Notes: See list of firms and acronyms for full name of auto firms, * for 1991. Others include Daewoo, General Motors, PAL-Peugeot, Mercedes-Benz and 1999 onward Hyundai and Fiat. In 2001, Daewoo, Fiat, PAL-Peugeot, and PAL had stopped operations. In 2001, Hyundai and Toyota had 57.3% and 18.1% of “Others” shares respectively.

Total

12,865 24,598 44,539 45,606 218,765 486,132 676,246

Table 4.5

Changing Structure of Commercial Vehicles Production (1950–2001) 1950

HM PAL SMP SCL M&M Bajaj TELCO AL Japanese JVs M&M (Nissan) Eicher (Mitsubishi) Daewoo (Toyota) Swaraj (Mazda)

1960

1970

1980

1990

1997

2001

Nos.

% share

Nos.

% share

Nos.

% share

Nos.

% share

Nos.

% share

Nos.

% share

Nos.

% share

1,044 847 – – – – – –

55.2 44.8

7,079 6,347 – – 1,429 – 9,665 2,071

26.6 23.9

1,689 4,893 156 – 966 1,212 24,671 5,264

4.3 12.6 0.4

4,880 1,235 3,491 591 3,617 9,801 31,768 12,928

7.1 1.8 5.1 0.9 5.3 14.3 46.5 18.9

1.1

1.7

1.7 6.4 70.0 14.3 6.0 2.4

76 – – – 5,640 2,066 93,574 32,036 15,298 0

0

3.5 10.4 58.2 17.3 9.7 2.3

4,247 – – – 4,298 16,354 177,709 36,305 15,079 6,019

–

–

–

–

1,538 – – – 4,899 14,569 81,829 24,297 13,538 3,213

–

–

–

–

2,377

1.7

6,019

2.4

9,197

–

–

–

–

4,483

3.2

420

0.2

0

–

–

–

–

3,465

2.5

2,621

1.0

6,101

5.4 36.3 7.8

2.5 3.1 63.5 13.5

3.8 1.4 62.9 21.5 10.3

6.2

4.1

Source: Association of Indian Automobile Manufacturers (AIAM) and Automotive Components Manufacturers Association (ACMA) (various issues). Notes: – negligible

87

88 The Long March to Capitalism

was characterized by a duopoly, by 1960 the industry was already fragmented. There were five manufacturers, with a combined output of under 27,000 units. Of them, HM, PAL, and M&M were also passenger vehicle producers. Ashok Leyland (AL) and Tata Engineering and Locomotive Company (TELCO), with 8% and 36% of the market respectively, specialized solely in commercial vehicles. By 1990 this segment had undergone considerable reshuffling, with both fragmentation and monopolization. There were eight producers but TELCO had cornered nearly half the market (Kathuria 1990: III–3 and Table 3.6). In the 1990s, three producers had abandoned this segment, including two car producers – PAL and SMP. Despite the entry of four new firms with Japanese partners, TELCO consolidated its position even further with 63% of the market. Its nearest rival was Ashok-Leyland with a share of about 22%. Unlike the passenger car segment, the government permitted new ventures with foreign collaborations in the commercial vehicle segment. Since this segment catered to public and goods transportation, it did not face the same kind of restrictions placed on car capacity expansion. However, unlike MUL, the Japanese joint-ventures could not dominate the Indian market. In the mid-1990s four new ventures were permitted: Allwyn-Nissan (subsequently merged with M&M), Eicher-Mitsubishi, DCM-Toyota (subsequently DCM-Daewoo, now Daewoo), and SwarajMazda. They were all in the light commercial vehicle (LCV) segment. Notwithstanding the doubling of commercial vehicle output from 1980 to 1990, the Japanese collaborations had a combined share of less than 10%. Their total share was under 5% in 1997, though higher if only the LCV segment is considered. 3.3

Some institutional explanations for the structure of the industry

The dominance of two firms in the car and commercial vehicle segment demands some elaboration, especially when monopolization was a consequence of economic liberalization. Relatedly, why did one of the Japanese ventures succeed while the others failed, given that the Japanese firms as a whole set the global industry’s production standards. Relatedly, how do we explain the success of TELCO, a wholly domestic firm? To address these questions we need to examine both the changing institutional context in which these firms engaged themselves, especially the motivations behind joint-ventures with foreign capital, and the techno-economic factors influencing the contours of the Indian market. It is not clear whether Japanese or Indian firms took the initiative to create joint-ventures in the automotive segment. An extensive industry survey reveals a mixed picture.2 Indian capital needed Japanese technology to exploit rising expectations of the Indian middle class while the Japanese perceived this as a commercial opportunity to increase their global market shares. Joint-ventures appeared attractive for all parties: the Japanese found

Embourgeoisment, Internationalization, and Auto Market Evolution 89

a way to share risks in a difficult market, the Indian partners had equity in what appeared to be a very lucrative business, and the Indian government preferred national ownership. Joint-ventures were very useful to the Japanese who were unfamiliar with the highly politicized and patronagebased market. With some exceptions, Indian partners accustomed to a nonSchumpeterian environment preferred quick and high returns in trading activities rather than long-term investments in manufacturing. Hence, importing Japanese-made vehicle parts and components – completely knocked-down kits (CKDs) – and assembling them in India were attractive propositions to Indian firms. This fit nicely the Japanese strategy that used foreign direct investment to increase exports from home (see Encarnation 1992). Thus, supplying CKDs for assembly in India for the local market was equally attractive for the Japanese. By exporting CKDs to India the Japanese firms hoped to minimize the risks associated with unpredictable state policies, poor infrastructural facilities, and poor industrial relations. 3 Under these conditions the Japanese did not expect to transplant their manufacturing methods. The low wages of Indian skilled workers could not compensate for the absence of a pliant labor force, technological backwardness, and the poor industrial and physical infrastructure. Aside from the small market, the issues of quality of components, delivery schedules, and price remained foremost in the minds of the Japanese. Yet liberalization amid a growing Indian market compelled the Japanese to seek Indian partners, while most established Indian businesses sought to preempt future competition introduced by liberalization by seeking Japanese technology and equity. This reversed a longstanding government policy of unbundling foreign technology from equity (see Encarnation 1989), a condition that was perhaps necessary to entice Japanese firms. 3.3.1

The jockeying for entry into India

The jockeying for entry into the passenger car industry was fierce in the 1980s. By this time embourgeoisment was firmly ensconced in the Indian milieu, as evidenced by the growth of the salaried class and the proclivity of the political leadership to foster the consumer durables industry. However, as we have seen earlier, there was a limiting factor: as foreign exchange remittances declined by the mid-1980s, the balance of payments position worsened in the latter half of the decade (Ghosh 1990: 343), thereby exposing the vulnerability of the Indian economy to oil prices. When seeking transnational joint-venture partners, the Indian government specifically mandated fuel-efficiency standards. This way the Indian government attempted to meet both challenges, to contain BOP problems while it catered to the rising aspirations of the Indian middle class. As the Japanese were renowned for their automotive technologies, particularly for small cars, it was inevitable that they would play some role.

90 The Long March to Capitalism

The initial round of liberalization attracted numerous passenger car proposals from several transnational corporations. There were about nineteen proposals, of which some were only preliminary inquiries. These numbers and the firms involved reflect the changing market conditions of the Indian economy. Transnational corporations such as Citroën, Fiat, Honda, Toyota, and Mitsubishi, among others, were leading contenders to enter the Indian passenger car market. All of these proposals, including one between TELCO and Honda, were ultimately rejected by the government of India on grounds of foreign exchange outflows. The joint-venture between TELCO and Honda was intended to produce the internationally recognized high-end Accord or the less expensive Civic models. Yet the project was rejected allegedly after the two private parties had already agreed to establish the joint-venture and government permission was expected to be a mere formality.4 According to TELCO officials, the company’s in-house strengths would have allowed the project to begin with 50% local content and attain 90% by the end of five years. This scheduling of increasing local content conformed to the government’s Phased Manufacturing Program (PMP) policy, in force since the 1970s and revamped in the 1980s. It stipulated that a local content ratio of about 90% be attained in five years.5 However, other sources point out that the government wanted the venture to begin with 70% local content, which in all probability was not possible even for TELCO, nor was it in the interest of Honda.6 Interestingly, Eicher Tractors, with long manufacturing experience, wanted to team up with Citroën to produce small cars. This project was considered viable enough to export 50% of its output and its cost was projected to be lower than MUL (Interview with Senior Government Official, Department of Electronics, New Delhi, Oct. 1991). This too was rejected by the Indian government. Why did the government reject the joint-venture proposal of TELCO and Honda of Japan when top-notch firms from both countries were involved, and especially when old capital such as the Tatas of TELCO had long experience working with those in the corridors of power? Most automotive producers quite unequivocally blame the government’s preferential treatment of MUL. It was alleged that any of the passenger car proposals submitted by various parties would have threatened MUL. This argument being a counterfactual is difficult to sustain. However, there is no doubt MUL benefited from being the only new entrant in the car segment. Numerous industry officials from several automotive firms based in Delhi, Bombay, and Madras argued that as a firstcomer to the auto sector, meeting newly imposed fuel-efficiency standards, MUL secured a solid headstart in a new line of business.7 Others, such as the representatives of the Association of Indian Automobile Manufacturers, and C. K. Daikin, a clutch producer, rejected this view.

Embourgeoisment, Internationalization, and Auto Market Evolution 91

What is incontrovertible is that the Indian government cleverly used MUL’s advantage in fuel efficiency over other Indian companies to allow it to import components at a reduced tariff – ranging from 40% in 1983–85 to 70% in 1991. Other companies allege their import duty burden was 150%. MUL also benefited from imports of pre-cut steel, which was defined as a component with 40% duty, whereas steel sheets were interpreted as raw material with 150% duty. Pre-cut steel imports meant less waste, greater production efficiency, and higher profits for the Japanese exporters. With effective elimination of a competitor, MUL’s product mix, superior production technology, relatively large capacity, and government support in the initial years made MUL virtually unassailable. Economies of scale allowed MUL to attain 88% local content for its principal vehicle within five years (Kathuria 1990: 33). A consuming class accustomed to expensive and shoddy products found the Japanese vehicle aesthetically pleasing and economically attractive. MUL was the first to tap into the pent-up demand built up over the decades by the state-led embourgeoisment process. At the same time, the incumbent firms were weakened but not eliminated. The new fuel-efficiency norms were applicable only to new enterprises and new products. Established producers, such as HM and PAL, did not have to comply with fuel-efficiency standards for existing products thereby averting plant shutdowns and labor strife in older firms. The liberalization policies of Mrs. Gandhi in the early 1980s, and their continuation by her son Rajiv Gandhi can be interpreted as weakening the domain of the old capitalists but not eliminating them. Hindustan Motors, for example, owned by the powerful business house of the Birlas, relied on obsolete technology in a sheltered market. Changing fuel-efficiency standards meant the sudden need for huge investments for HM.8 It also meant that the old protected companies, such as PAL, did not have the resources to meet the new capitalist challenge either financially or technologically. Restructuring these companies would have automatically entailed retrenchment of labor. This was neither socially nor politically acceptable. Thus there was a general reluctance by the government and the established private sector firms to speed-up the liberalization process (see Kohli 1992: 322).9 3.3.2

Excessive competition in the LCV segment

The poor performance of the Japanese LCV firms and the success of TELCO in the commercial vehicle segment also has its institutional context in which business interests, political expediency, and market factors played a role. There were four Japanese joint-ventures in the Indian LCV market – Eicher-Mitsubishi, Allwyn-Nissan, Swaraj-Mazda, and DCM-Toyota. The Indian partners of the Japanese joint-ventures were well-established business firms. They also had political access to secure a production license. Once MUL’s production success was apparent, other Japanese companies

92 The Long March to Capitalism

were keen to get on the bandwagon. However, bullish sentiments erroneously overestimated the CV market (Kathuria 1990: III–5), to which the Japanese firms also succumbed. Almost all of the Japanese ventures were initially aimed at the passenger car market and not the commercial vehicles segment. On failing to obtain the requisite industrial licenses all entered a different segment of the Indian market than they initially intended. The purpose was to maintain a presence in the Indian market (see Hamaguchi 1985: M118). Several Japanese firms entered the same LCV market because of oligopolistic behavior. Like capital in general, Japanese firms behaved in a herd-like manner, thus transferring their vigorous competition from their home turf to the Indian market. Finally, there were Indian firms who exploited the market opportunity by teaming up with the Japanese, initiated by one firm and subsequently followed by others. More firms were allowed in the segment partly because Indian big business possessed the commercial acumen and political connections necessary to maneuver around government regulations.10 The trade mentality “buy cheap and sell dear” of many Indian capitalists complemented the mercantilist policy of Japanese firms to quickly reap high profits by assembling imported kits, and later components. The government liberally permitted an annual capacity of 12,500 units each for these four firms. However, the best performing firm – Eicher-Mitsubishi – attained a maximum utilization rate of 54% in 1996. The combined utilization rate for all four firms during 1988–97 was a mere 26% (Computed from ACMA 1998). Low output meant low local content, even if there were mandatory requirements to meet a 90% target in five years. DCM-Toyota’s (later taken over by Daewoo) claims of 80% local content by the sixth year and promises of 90% in the seventh year were hotly contested (Personal Interview with DCM-Toyota 1991). On the other hand, many industry experts were quite confident of Eicher-Mitsubishi attaining high levels of local content. The Indian market was not ready for relatively expensive Japanese trucks, whose costs were rising in the 1980s due to increasing yen-denominated imported parts and components. Between 1984 and 1987, the Japanese yen appreciated nearly 200% (Mathur 1991: 92).11 As a result capacity utilization was abysmal and costs prohibitive. For example, DCM-Toyota had a utilization rate of less than 20% in the late 1980s (computed from Mathur 1991: Figure D.1). The combined LCV market share of the four Japanese LCV units fell from 31.2% in 1988 to under 20% by 1993–94. Small output meant rising costs, which in turn limited the market. Also, these four ventures catered to a niche market, for which the Indian economy was not ready. Failure to meet local content targets did not attract the government’s wrath. Rather the government, through its pragmatic approach, accommodated the mercantilist practices of both Indian and Japanese businesses. From 1983–84 to 1988–89 the average value of components imported exceeded the average value of components exported by nearly 170% (Automotive Component

Embourgeoisment, Internationalization, and Auto Market Evolution 93

Manufacturers Association of India 1991: 67–69). Due to strict import regulations on completely built units, India’s balance of trade in this segment remained positive. In any case, the Japanese joint-ventures in the LCV segment, due to industry fragmentation, market size, and commercial strategies, could not substantially increase local content. The government ultimately abolished the PMP scheme altogether. TELCO capitalized on the fragmented market by relying on its in-house engineering capabilities and its long familiarity with the Indian business environment. It has one of the most advanced machine tool industries, capable of manufacturing dies at around 25% of the Japanese cost (Kathuria 1996: 215). The Japanese LCV units relied on expensive imported equipment and components. Whereas low volumes hurt the Japanese LCV manufactures, TELCO could overcome this barrier due to its solid in-house engineering strength. On the whole, TELCO’s output of commercial vehicles was high, thus enjoying significant economies of scale, especially in the utilization of its equipment. Its years of in-house production positioned it to make interchangeable parts of sufficient volume and thus reap the gains of not only economies of scale but also economies of scope. It introduced its own models, TELCO 407 and 608, and competed directly with the newly established Japanese LCV producers, capturing over 50% of the LCV market within a few years. By mid-1980s TELCO was already producing 50,000 CVs, whereas its nearest Indian rival Ashok-Leyland produced less than a third of TELCO’s output. Together, the four Japanese joint-ventures combined barely produced a third of TELCO’s 1985 output in 1990, their peak production year. By 1997–98, TELCO was producing nearly 155,000 units, of which 27% were LCVs. In contrast, of what was left of the Japanese segment of the LCV market, total output in 1997 was 11,437 units, with Toyota’s venture producing only 420 units (ACMA 1998).

4.

The second wave of transnationalization

In 1993 the Indian passenger car segment was completely delicensed. In continuing with the institutional practice of joint-ventures, Indian companies tied up with foreign ones. Several new ventures by multinationals in the automobile segment were formed (Table 4.6). Some of these ventures were a result of defensive responses by incumbent Indian firms such as HM and PAL who sought to protect their increasingly diminishing markets. In the 1980s to deflect some of the competitive pressure from MUL, both HM and PAL collaborated with Japanese companies to obtain engine and transmission technology from Isuzu and Nissan respectively. No equity was involved in these two joint-ventures. Later HM and PAL formed other partnerships involving equity, with General Motors and Mitsubishi and Fiat and Peugeot respectively. An established producer, Standard Motors, had to exit the passenger car market altogether.

94

Table 4.6

Major Foreign Collaborations in the Automobile (Four-Wheeler) Segment

Name of Indian Partner

Name of Foreign Partner

Name of Indian Company

Nature of Collaboration

Hindustan Motors (HM) Birla Group (of HM) Premier Automobiles Premier Automobiles Premier Automobiles TELCO Mahindra & Mahindra Mahindra & Mahindra Mahindra & Mahindra DCM Group Kirloskar Group Government of India Shriram Industrial Enterprises Ashok-Leyland Eicher Group Caparo Industries

Isuzu, Mitsubishi, Japan General Motors, USA Nissan, Japan Peugeot, France Fiat, Italy Daimler-Benz, Germany Nissan, Japan Ford, USA Mitsubishi, Japan Daewoo Motors, Korea Toyota Motor, Japan Suzuki Motors, Japan Honda Motors, Japan IVECO Fiat, Italy Mitsubishi, Japan Mazda, Japan

Hindustan Motors General Motors India Ltd.** Premier Automobiles PAL-Peugeot Ltd. Fiat India** Mercedes-Benz India Ltd. Mahindra and Mahindra** Ford India Ltd.** Mahindra and Mahindra@ Daewoo Motors, India* Toyota Kirloskar Motor Pvt. Ltd. Maruti Udyog Ltd. Honda SIEL Cars Pvt. Ltd. Ashok-Leyland Eicher-Mitsubishi Swaraj-Mazda

Cars: Technical Cars: Technical, Financial Cars: Technical Cars: Technical Cars: Technical, Financial Cars: Technical, Financial LCV: Technical, Financial Cars: Technical, Financial Minivan: Technical Cars: Technical, Financial Cars, MUV: Technical, Financial Cars, Vans: Technical, Financial Cars: Technical, Financial CVs: Technical LCVs: Technical, Financial LCVs: Technical, Financial

Source: Automotive Components Manufacturers Association (ACMA) (various issues). Notes: * previously a joint-venture between DCM and Toyota to produce LCVs, subsequently became DCM-Daewoo, Daewoo, and now under General Motors. **In these units the Indian partners have divested, making these units 100% multinational subsidiaries. @ This is one case where ownership has reverted completely to the Indian partner.

Embourgeoisment, Internationalization, and Auto Market Evolution 95

The reasons cited were political, technical, and economic (Personal Interview with former Chairman, Madras, India, November 1991). Sipani Automobiles, a relatively new-comer to the industry, simply failed to get off the ground. In parallel fashion, joint-ventures were also established in the parts and components sector. With severe infrastructural and supply bottlenecks, resulting partly from past government policy of neglecting infrastructure and reserving components for the officially defined small-scale industries, manufacturers were compelled to encourage partnerships among their suppliers to reduce mutual vulnerability. Besides, best practice standards in the industry dictated flexibility and hence a greater reliance on outsourcing. In the 1980s, soon after the establishment of MUL, foreign collaborations with Japanese firms in the automotive segment increased dramatically. Auto-related Japanese technical collaborations as a share of all collaborations increased rapidly, from 4% to 18% in the 1980s (D’Costa 1998: 307). In the post-reform phase foreign technical collaborations continued to mount. Numerous component manufacturers emerged to supply the auto assembly units. Most of them have had to resort to foreign technologies through joint-ventures. From August 1991 to April 2002, the auto industry garnered 5.48% of the total foreign direct investment approved during this period (Government of India, Ministry of Commerce and Industry 2002). Of this, 0.8% was for the components sector, which was equivalent to 10.75% of the transportation sector. Collaborators were mainly from Japan, western Europe, and the US. There were South Korean firms as well, especially those linked to Hyundai and Daewoo Motors. The internationalization of the Indian industry principally entailed jointventures with foreign multinationals. Under this institutional arrangement there was some degree of national control over the industry even as the overall trend has been toward denationalization, which is integral to economic liberalization and integration with the global economy. However, there have been four recent developments that have accelerated the dominance of foreign companies in the industry. In effect they can be seen as consequences of neoliberal policies in an integrating world economy with advanced capitalist firms maintaining their structural grip over developing country firms. First, some foreign companies have entered India without an Indian partner. For example, Hyundai of Korea in passenger cars and Volvo of Sweden in trucks have been wholly-owned subsidiaries from the very beginning. Second, a few companies that began as joint-ventures ended up as 100% subsidiaries of multinational companies. As capitalist competition dictates investment strategies, many Indian partners are either unwilling or unable to make the necessary investment contribution. The Indian partners of DCM-Daewoo, General Motors-Hindustan Motors, Mahindra-Ford, and Fiat-PAL are no longer involved in these joint ventures. Third, consistent with liberalization, there has been a gradual privatization of the 50% state-owned MUL. In 2002 the

96 The Long March to Capitalism

Indian government announced that it was relinquishing its control for Rs. 10,000 million (approximately $210 million), raising Suzuki Motors’ equity to 54.2% (Muralidharan 2002). A fourth development has been competition and fragmentation and subsequent tendency toward consolidation of the industry. This is somewhat idiosyncratic for India but it is consistent with global integration and capitalist industrialization. The herd-like approach by multinational firms to enter India always runs the risk of excess capacity, suggesting intense competition and subsequent consolidation through mergers and acquisitions. This is a capitalist dynamic and General Motors stands out as an exemplary illustration of this development (Figure 4.2). General Motors’ recent entry into India began with a 50:50 joint-venture with HM. With the departure of Hindustan Motors, GM is the sole proprietor of the former joint venture at Halol, Gujarat. GM’s Indian operations are globally linked. At the Halol plant, GM assembles the German-designed Opel Astra using engines manufactured in GM’s Brazilian plant. GM recently inspected its manufacturing facilities in India for possible joint operations. GM also relies on Indian firms, such as Sundaram Fasteners, which supplies components to GM for its worldwide operations. As GM expands globally with mergers and acquisitions, its overseas investment activities have a bearing on the supply structure of the Indian auto industry. For example, GM has 20% equity in Suzuki Motors, Japan, which in turn controls more than 50% of MUL. Hindustan Motors, which sold off its share to GM, is technically collaborating with Mitsubishi, a GM affiliate, to produce the Lancer. Recently HM has agreed to produce engines for GM’s new launch in India and Ford India’s Ikon (Philip 2001, Philip and Rajawat 2003). The new launch is expected to be a utility vehicle produced by Isuzu in Japan, a GM affiliate, with 49% stake. Curiously the Lancer competes with Ford’s Ikon. A few years ago GM secured a 20% stake in Fiat in Italy and currently Fiat India is discussing product sharing with GM and Suzuki (Press Trust of India 2002). GM is also planning to outsource components from its Indian subsidiary for its China operations (Kant 2002). While GM has allowed its foreign affiliate companies to run autonomously, it is becoming clear that GM’s global strategy of production integration will impact the supply system of the Indian industry. Most recently, the bankruptcy of Daewoo Motors of Korea has strengthened GM’s grip on the global and the Indian industry even more. For example, Daewoo Motors entered India as a joint-venture partner with DCM-Toyota in the LCV segment. Subsequently, Toyota pulled out as its product – the Dyna – performed poorly in India, leaving DCM and Daewoo in the venture. Toyota re-entered the Indian market with a partnership with the Kirloskars in the late 1990s. DCM, unable to keep up with the investment requirements, sold its stake to Daewoo. Until recently Daewoo India was a 92% owned subsidiary of Daewoo Korea. In 2001 heavily-

Embourgeoisment, Internationalization, and Auto Market Evolution 97

Fiat, Italy (equity)

Opel, Germany (equity) Daewoo, Korea (equity) GM, Brazil (equity)

Daewoo, India engines GM, India (equity)

GM, USA

Maruti Udyog Ltd.

Suzuki, Japan (equity)

Isuzu, Japan (equity)

technical

engines

Hindustan Motors engines

Mitsubishi, Japan (equity)

technical

components

OVERSEAS OPERATIONS Figure 4.2

Ford India

Sundaram Fasteners

INDIA OPERATIONS

General Motors and the Internationalization of the Indian Auto Industry

Note: Solid lines depict equity relationship, dashed lines non-equity relationship.

indebted Daewoo Motors was sold to GM. What is also interesting is the emerging partnership between GM and Suzuki to establish GM-Daewoo Auto Technology by a combined investment of $400 million (Kirk 2002: W1). Fiat is also likely to be a partner in this venture. The transnationalization of the Indian industry is contributing to supply shifts as Indian enterprises with foreign collaborations expand output for both home and foreign markets. The Indian auto industry is not as globally

98 The Long March to Capitalism

integrated as other countries such as Brazil and Mexico. However, foreign direct investment, rising exports, technical collaborations, and trade in parts and components suggest increasing links with the world economy. Export of vehicles, though small by international standards, is rising absolutely. However, with greater output for the domestic market the relative share of exports has been declining. In 1992–93, India exported a paltry 4.3% of car output compared to 8.8% in 2001–02 (ACMA various years). Similarly, Indian exports of auto components, especially the more labor-intensive type, are also increasing. Its export share has been stable around 10%, notwithstanding a higher share in the early to mid-1990s varying from 13% to 16% (ACMA 1998: 29, 67). India exported auto components worth $417 million in 1999–2000, roughly 10% of its total components output and crossed the $1 billion mark in 2003–04, representing nearly 15% of output (ACMA various years, ACMA 2004). Whether internationalization of the industry will lead to greater manufacturing and technological capability and thus elevate India’s supply to global standards is examined in the next chapter. What is of importance is that these industry developments are a significant departure from a moribund Indian automotive industry of the 1980s, shaped largely by a mode of regulation that restricted supply and yet contributed to embourgeoisment. Economic reforms and internationalization have thoroughly altered the structure of the industry consistent with changing demand conditions.

5.

Competition, oligopoly, and diversity of output

The increasing number of joint-ventures in India is suggestive of the deepening of capitalist production. On the one hand the Indian market is growing, as evidenced by the volume of output and increasing market segmentation. On the other hand, auto market growth in an economy characterized by endemic poverty reflects uneven capitalist development. Both are quintessentially embourgeoisment features – an absolute increase in vehicle purchases and increasingly diversified product range (see Table 4.7). This corresponds to social differentiation, whereby some own cars and others do not, and the availability of various models correspond to income niches within the upper income households. The economy price of around $5,435 is a substantial sum in the Indian context. However, the fact that a luxury segment exists in this same context, with prices beyond $22,000, suggests the inherent inequality associated with the embourgeoisment process. It was estimated that 90.2% of car sales in fiscal year 2000 comprised the economy segment, while the mid-size and luxury segment combined the remaining 9.8% (India Infoline 2003). Only two firms in 2000 catered to the economy segment, MUL and PAL, with the former controlling the bulk of the market, while there was considerable competition for the limited mid-size and luxury car segments.

Embourgeoisment, Internationalization, and Auto Market Evolution 99

The features of embourgeoisment are readily apparent from the increasing output of passenger cars and utility vehicles and the subsequent market segmentation that has accompanied such growth (Table 4.7). From four companies prior to the reforms producing cars and utility vehicles, today there are 10 firms in the Indian car industry. The industry is highly internationalized, with wholly-domestic firms collaborating with foreign companies. For example, HM has technical collaboration with Nissan and equity partnerships with Mitsubishi to produce the Lancers. There are a few units such as Hyundai, GM, and Ford that are wholly owned by the parent companies. On the other hand, TELCO’s production entails little foreign collaboration, save for its separate jointventure with Daimler-Benz. Market segmentation is evident from the four broad groups of cars, beginning with the small economy class, comprising over 90%, and ending with high-end luxury vehicles. Including utility vehicles there are at least 30 different models to choose from, with new ones being added every year. Recent production figures indicate increased output in the mid-size segment, with some replacement purchases. However, increased output has been a result of mostly new entrants to the market. The significance of product differentiation to capitalist evolution will be discussed in the next chapter. At this time emphasis is placed on the idea that increasing volumes and market segmentation indicate economies of scale and scope respectively. They are production features which facilitate cost reduction and overcome a variety of supply bottlenecks. In the Indian market few firms have attained scale economies. Thus far, MUL and TELCO have been the most successful. These firms, diversifying into different product niches, are also able to reap the benefits of economies of scope. They produce relatively high volume with a wide range of vehicles. In 2000–01 MUL produced 340,000 units spanning 10 models with varying engine sizes. TELCO by diversifying into passenger cars, first with its utility vehicles, has positioned itself to capture high shares in the commercial vehicle and car markets. In 2000–01, TELCO produced nearly 85,000 commercial vehicles (62% of the market) and in the following financial year captured 12.7% of the car market with an output of nearly 89,000 Indica cars. Other firms such as Hyundai are also aiming to secure the benefits of scale and scope. In 2001–02, Hyundai produced 93,244 cars with three different models. This development has significant implications for the organization of production, cost competitiveness, and capitalist industrialization in general. It is evident that the internationalization of the Indian auto industry has led to intense competition among firms. It has also led to considerable fragmentation of the market, especially in the mid-size segments, (a theme taken up in Chapter 7). Lacking scale economies, the viability of these

100 The Long March to Capitalism Table 4.7

Internationalization, Diversified Output, and Market Segmentation

Market Segment

Company/Model

Nature of Firm

Collaboration

Economy Rs. 250,000 $5,435

MUL 800, Omni

Joint-venture

PAL Padmini

National

Suzuki Motors (technology and equity) n/a

PAL 118NE

National

Nissan (technology)

HM Ambassador Nova, Contessa Fiat Uno MUL Zen, 1000, Alto*, Wagon R, Balena Altura Hyundai Santro

National

Isuzu (technology)

Mid-Size Rs. 250,000–450,000 $5,435–$9,785

TELCO Indica

100% Multinational Subsidiary 100% Multinational Subsidiary National

Peugeot 309

Joint-venture

TELCO Estate, Sierra MUL Esteem, Versa Daewoo Cielo, Nexia Honda City Mitsubishi Lancer Ford Ikon

National

Daewoo Matiz

Luxury Rs. 450,000–1,000,000 $9,785–$21,740

GM Opel Astra, Corsa Fiat Siena Hyundai Accent Super Luxury Above Rs. 1,000,000 $21,740

Multinational Joint-venture

Mercedes Benz, Other Imports

Joint-venture 100% Multinational Subsidiary Joint-venture Joint-venture 100% Multinational Subsidiary 100% Multinational Subsidiary 100% Multinational Subsidiary 100% Multinational Subsidiary Joint-venture

Source: India Infoline (2003). Notes: Rs. 46/USD, rounded to 0 or 5. * upgraded version of 800 (Japan was producing this in 1991).

Suzuki

Technical

Suzuki

Honda Technical

Daimler-Benz

Embourgeoisment, Internationalization, and Auto Market Evolution 101

units becomes questionable. Relatedly the fragmentation of the industry also raises the specter of balance of payments problems if production is import-intensive, which they are likely to be as low volume of production cannot justify investments in upstream activities. At the same time competition means increased technology flows and greater consumer choice. It also means competitive pressure on MUL. Currently, of the three main producers in the economy segment, MUL has nearly all of the market. Its firstcomer advantage, government protection, and scale economies rendered it virtually unassailable. As we will see in the next chapter, rather than rest on its advantages, MUL increased local content, transformed the Indian supplier industry, and introduced wide-ranging institutional changes within the firm and the industry. More importantly, it continued to introduce new products in a limited way. Thus, some firms such as MUL and TELCO are in a better position to ride out the competition, while others will have to restructure due to greater competition. However, consistent with capitalist market growth and its diversification, MUL in the 1990s witnessed considerable competition. There was room for new players in the industry as a whole, especially in the economy segment. The three most serious contenders have been TELCO’s Indica, Hyundai’s Santro, and Daewoo’s Matiz, competing with MUL’s 800 cc and Zen models. TELCO has been producing 6,000 units a month. Daewoo’s output of Matiz was 35,000 in 1999–2000, with plans to increase to 80,000 units. MUL has faced competition from other car makers as well (see Table 4.5). Its Esteem model is being challenged by several multinational products. Hence it is not unreasonable for it to introduce new models as a way to pre-empt and keep up with cutthroat competition. Already it has four new models in the upper end of the economy and mid-size segments, with prices roughly ranging from $6,500 to $12,700. It has also resorted to price cuts when demand has been weak, a situation markedly different from the previous long waiting periods for MUL’s vehicles. Judging by the post-reform record of the Indian auto industry, it is clear that the Indian market has matured considerably. Most of the multinational majors present in the Indian market coexist with Indian firms. The Indian firms have had to respond to heightened competition through foreign technical collaborations, while the foreign firms are entrenching themselves by unleashing new products in an already crowded market. Economic liberalization has allowed multinationals to import components and diversify the market. Consequently, the supply system of the Indian auto industry has been fundamentally altered by output expansion and greater diversity of output. This increased supply is very much integral to the embourgeoisment process. At the same time there has been excess capacity, a systemic feature of capitalist competition. This is consistent with increased reliance on markets to regulate capitalist development in India.

102 The Long March to Capitalism

6.

Conclusion

Following the demand side of embourgeoisment, this chapter presented the changing supply side of the Indian auto industry. The evolution of the output expansion was examined in terms of the formation of capitalist markets. By anchoring market development around the changing regime of accumulation I showed how the shift away from state-led industrialization to market liberalization contributed to the shifts in the supply system. Clearly a major factor for increased output and its diversification has been the internationalization of the Indian auto industry. The internationalization can be interpreted as a logical extension of capitalist development, a process by which both Indian and foreign companies are engaged in capital accumulation, playing the market game by offering consumers a greater variety of products. In the process there has been a tendency toward excess capacity and market fragmentation as well. As suggested earlier, capitalist market development has been a product of both internal dynamics and external influences. Structurally, embourgeoisment in the context of slow economic growth produced a disequilibrium between demand and supply. Simultaneously, persistent balance of payments deficits and changing international economic relations accentuated the internal economic crisis. India has not been immune to exogenous forces despite autarkic policies. There have been considerable financial movements, including remittances by Indians working overseas (the Middle East) and foreign exchange deposits by NRIs (the US). These developments are both a cause and consequence of embourgeoisment. The crisis has been “resolved” by altering the regime of capital accumulation. Policy reversals, by way of economic reforms, introduced market dynamics that were both endogenous in origin as well as exogenous in character. Consistent with the historical continuity of the embourgeoisment process, the reforms succeeded in bringing about macroeconomic growth and microeconomic efficiency. India’s economic growth since the mid-1980s has been at a higher level, while the auto industry has undergone a fundamental shift. The evolution of the Indian auto industry provides a window to the unfolding of capitalist development in a global context. The Indian industry was out of sync with the global one for nearly four decades after independence. However, India’s policy-induced sectoral isolation has fundamentally changed with a new regime of accumulation. As the next chapter illustrates, with increased market competition there has been a change in the mode of capitalist regulation as well. Businesses are adopting a wide variety of industrial and organizational practices to cope with rapidly changing market conditions. The gradual liberalization of the Indian economy and the auto industry mirrored the global shifts, with Japan playing an important role in transforming the supply system

Embourgeoisment, Internationalization, and Auto Market Evolution 103

in India. India is a small player but noticeable changes are taking place in production, suggesting that capitalism need not be equated to successful economic development. Paradoxically, Japan’s global success has not been replicated in India. Only one joint-venture with the government of India worked, namely MUL, while four light commercial vehicle projects failed. Fostering capitalist markets is a competitive process and sheer technological mastery is no guarantee of market success. Local firms such as TELCO are also formidable players, suggesting the maturity of Indian capitalists. The company capitalized on its prior strengths to take advantage of new opportunities arising from economic liberalization. While the Japanese created the LCV niche they failed miserably; TELCO succeeded in tapping this market niche. The recent changes in the Indian auto industry rest significantly on the entry of multinational firms. However, the internationalization does not mean the retreat of the state, as the ownership of MUL testifies. The auto market was opened a little before being shut again. Only in the 1990s was the sector fully deregulated. During this period the Indian state continued to exercise considerable influence in shaping the structure of the industry. Nor does it mean complete denationalization even if the overall trend is liberalization, privatization, and transnationalization. In this sense there has been a consistency in the direction of economic reforms. Yet, a closer inspection of the industry shows that in spite of heightened competition for market entry, both old and new globally-connected firms coexist. Old firms have been compelled to rejuvenate their market presence with foreign collaborations. But in a number of cases, joint-ventures have been dissolved and the units reverted to full multinational control. This is not unusual in an era of extreme capital mobility and unequal access to investment funds. The dominance of multinationals such as GM provides an interesting illustration of the tension between internationalization and denationalization. GM’s growing presence in India through its global expansion suggests a tight grip in the Indian market. At the same time GM’s growth is pulling Indian suppliers into global production networks. Companies such as HM, on the verge of collapse at one time, are becoming critical suppliers to multinational firms such as GM and Ford. These developments in the supply dimension of the Indian auto industry indicate the tremendous heterogeneity of firms in a given sector, let alone in a given country. The “model” of capitalism that is evolving in India is very much integral to institutional change behind a changing regime, which is consistent with a new mode of capitalist regulation. Consequently how firms respond, the impediments to production, and how the industry as a whole shakes out make the ingredients of contemporary capitalist dynamics. However, there are contradictions to capitalist development. For example, both output growth and a variety of output, are consistent

104 The Long March to Capitalism

with market development and consumer choice, they also reflect uneven economic development and inegalitarian social outcomes. On a national basis there is still a very small percentage of people who can afford cars. Among those who can there is considerable choice in product offerings, as reflected by the proliferation of niche markets. The associated excess supply, made stark by an economy characterized by rampant poverty and scarcity, is another side to the development of capitalism in India. As the next chapter shows, the development of the parts and components industry has been a critical sector for the expansion of the Indian auto industry. The establishment of a dynamic components sector with best industry practices is likely to indicate the form of capitalist industrialization and its global significance. Identifying the challenges faced by the Indian supplier industry is also likely to reveal the impediments – both institutional and technical – to capitalist development.

5 Capitalist Regulation, Flexible Production, and Auto Market Evolution

1

Introduction

The ability of the Indian economy to accommodate numerous automobile manufacturers rested partly on demand growth. It was also supported by a fundamental restructuring of the industry as a whole, spearheaded by jointventures such as MUL and other collaborations between Indian and multinational firms. To meet growing demand not only did auto firms increase production of vehicles, but in order to successfully compete and quickly capture emerging markets firms had to cultivate a viable auto components supplier industry. This is the second layer of supply-driven market development. Increasing backward integration was made possible by new institutional arrangements at the macro (national) and micro (industrial and firm) levels. These are institutional responses to a changing national environment of market growth induced by embourgeoisment and the challenges of securing that market. The discussion here is anchored around shifting capitalist regulation, from an earlier mass production system to a more decentralized flexible production system. This does not mean that the institutions associated with mass production are completely abandoned under a flexible production system. Rather there is continuity. In fact the high volume of production characteristic of mass production remains critical even under flexible systems (D’Costa 2004). The transition to a new system involves significant changes in production relations among firms and their workers. Not all enterprises are able to cope with the institutional demands of forging cooperative relations with suppliers or introducing organizational changes on the shopfloor. Why some firms succeeded and others failed in India in a deregulating environment is also examined to appreciate the challenges of contemporary capitalist market development. The chapter is divided into four main parts. The first part discusses changing capitalist regulation by showing how market development can be supported by the supply expansion of the automotive components 105

106 The Long March to Capitalism

industry. This backward integration has been possible due to the deployment of flexible industrial practices. Next, flexible practices are disaggregated in terms of the actual forms of institutional responses to new market imperatives to increase supply quickly and reliably. Three levels of cooperative arrangements are presented: between business and government, among firms, and between enterprises and their workers. All three are argued to contribute to a new foundation for capital accumulation and its regulation in a market-expansive system. However, there are also difficulties in instituting these arrangements due to a variety of structural features typical of developing economies. The third part discusses the significance of low-volume production for the adoption of flexible industrial practices. Using data from the early to mid-1990s for the Japaneseinitiated light commercial vehicle (JLCV) segment, the third part demonstrates the challenges of instituting a new mode of capitalist regulation. The fourth part briefly analyzes the growth of the Indian supplier industry as partial evidence of successful capitalist regulation within the context of limited economic transformation.

2

Changing mode of capitalist regulation at the industry level

One of the features of contemporary capitalism is the flexibility of economies to cope with rapid changes in markets. With the diffusion of markets worldwide, radical technological change, massive increases in trade and investment flows, and the corresponding intensification of competition, firms, markets, and institutions have been pressured to become more agile (Morales 1994: 5–15). At the macroeconomic level, fiscal discipline along with tight money policy are aimed at stabilizing markets. At the microeconomic level, production flexibility has become necessary to cope with market volatility and rapid shifts in demand. Consequently, the entire system of capitalist regulation designed for mass production and mass consumption of an earlier phase has become out of sync with new market realities. For example, as budget deficits widened, the Keynesian welfare system, which effectively propped up aggregate demand, was being replaced gradually by a market growth-driven supply system. Macroeconomic flexibility is introduced by curtailing social welfare expenditures and subsidies. Welfare is substituted by workfare, a euphemism for worker retraining, and a stable market maintained through monetary discipline rather than employment growth through fiscal spending. In India the new system of accumulation translated into economic reforms, which induced increased competition at home and greater international economic integration. In practice reforms entailed limited privatization of state assets, considerable deregulation of industry, removal of subsidies, greater export-orientation, higher foreign capital inflows and outflows, and more liberal trade. Consumption is now

Capitalist Regulation, Flexible Production, and Auto Market Evolution 107

expected to be supported less by fiscal spending and more by economic growth that is anticipated from increased market efficiencies. Changing market realities have elicited highly proactive industry associations to secure infrastructural and financial support from the state. They have engendered greater networking among various industry stakeholders and an expectation of a more pliant workforce that can be mobilized (or fired) corresponding to shifting output. On the microeconomic production front, changing capitalist regulation suggests restructuring institutional arrangements to transform the rigid system of mass production into a more flexible system. Market volatility in the context of a rigid mass production system suggests imbalances in supply and demand due to lags in the adjustment process. Flexibility, on the other hand, suggests quickly removing excess capacity or capturing underserved markets by continuously matching production to demand through the collective institutional efforts of supplier firms, the industry, the government, and workers. In addition, flexible production is enhanced by the deployment of modern, reprogrammable machines, as opposed to general purpose machines, which can quickly adjust to small changes in niche markets. These industry-level flexible practices also entail institutional changes. For example, output can be adjusted by decentralizing production (outsourcing) and making suppliers flexibly adjust to changing buyers’ demand. This calls for long-term cooperative relations between buyers and suppliers, which encourages close geographical proximity of supplier firms. The supplier firms are expected to deliver high quality parts cheaply and reliably.1 Modern, multipurpose machinery, producing a wide range of products for specific market niches permits flexibility. The use of new technologies such as computer numerically controlled (CNC) machines and information technology demands far more multi-skilled workers than in a standardized mass production system. Similarly, workers are also expected to adjust to new market realities such as increased competition from low-wage areas, less rule-bound employment contracts, limited job security, and higher quality control. The supply system is also influenced by labor stability. Unlike typical hostile industrial relations, partnerships between business and labor become institutionalized with increased interaction between them. Enterprise unions also become integral to new forms of capitalist regulation. For example, production disruptions are minimized and quality enhanced through the formalization of teamwork and quality circles on the shopfloor. The restructuring of the Indian industry, as evidenced by the remarkable expansion of output, suggests easy transition to flexible production. However, there are serious structural barriers to institutionalized flexible practices. The main drawback is small internal markets, especially in the early phase of market expansion. However, the barrier itself can spur the forging of new institutional arrangements to develop the supplier

108 The Long March to Capitalism

industry. Buyers prefer outsourcing over in-house manufacturing so as to maintain flexibility and cost competitiveness, while sellers are unable to expand in new business lines without some guarantee of a market. It is the lack of economies of scale that prevents easy transition to flexible practices. Consequently, a trust-based cooperative subcontracting arrangement is perceived to reduce mutual vulnerability associated with emerging market growth. Also, a long-term relationship between buyers and sellers avoids high “switching” costs as markets and suppliers are quite underdeveloped in low-income economies. The adoption of flexible automation, such as CNCs, to create a diversified output, is also dependent on scale economies. Without adequate production volume, investment in CNCs will be limited (Alam 1998: 328). With the adoption of flexible automation (CNCs for example) exploitation of economies of scope becomes possible (Alcorta 1998: 14–17, 28, 99–100).2 Economies of scope permit product variability with small volumes and rapid adjustments to changing market conditions. But in low-income markets, demand constrains fixed investment that is critical to flexible automation. Also, the prevalence of low wages discourages full-scale automation. Hence the reduction of mutual vulnerability will be sought primarily through institutional means, such as subcontracting and cordial industrial relations. With the rudimentary flexible institutional arrangements in place, supply bottlenecks can be reduced, output expanded, and product differentiation enhanced. Given initial non-discriminating demand, there is no compelling reason for firms to produce differentiated output. However, over time as demand diversifies, flexible practices, such as cooperative arrangements and automation become effective and easier to deploy. Economies of scope are more a consequence of increasing scale of production rather than independent of it (Figure 5.1). With embourgeoisment and subsequent economic liberalization and internationalization, India’s increased demand for automobiles could be met by reducing supply bottlenecks, minimizing mutual vulnerability, and coping with new forms of competitive pressure. Institutional arrangements consonant with changing capitalist regulation entail reconfiguring both inter-firm and intra-firm relations. Long-term buyer-supplier relationships and intra-firm teamwork are two examples respectively. The results are demand-driven economies of scale accompanied by declining costs and rising quality, followed by supply-driven economies of scope accompanied by product variability. At this stage, the Indian market can be argued to display features of more advanced capitalism with diversified demand and a more mature supplier industry. The Indian industry has pursued mass production with attendant reductions in production costs. Only with successive cycles of output expansion have the institutional arrangements been ratcheted up to produce diversified output. Today these institutional arrangements in the industry are increasingly seen as routine.

INSTITUTIONAL RESPONSES INTER-FIRM RELATIONS

DEMAND GROWTH

Cost Reduction, Quality Enhancements, Higher productivity

Joint-ventures Subcontracting Information Sharing: Commercial/Technical Industrial Agglomeration SUPPLY BOTTLENECKS – mutual vulnerability – competitive pressures

INTRA-FIRM ARRANGEMENTS Teamwork Quality Circles (Kaizen) Multiskilling/Training Enterprise Unions/Bonus Flexible Machinery Cellularization Co-responsibility

Mass Production

Economies of Scale and Scope

Mass Customization, Product Variability, Rapid Launch

Economic Reforms, Internationalization, Technological Capability Figure 5.1

Industrial Governance Under Changing Capitalist Regulation

109

110 The Long March to Capitalism

There were other objective conditions that compelled firms to institutionalize cooperate arrangements at home. First, India’s precarious balance of payments position mandated high local content. This was consistent with the earlier self-reliant strategy. Second, the high cost of imported components, especially with the 1980s appreciation of the Japanese yen, made local production more attractive. Third, to reduce transaction costs and increase reliability, best-industry practices dictated that supplier industries be located in India, preferably in close proximity to manufacturing. All three factors influenced the decision of new firms, beginning with MUL and continued by later entrants, to create a viable parts and components industry. The growth of the industry is consistent with India’s internationalization and suggestive of India’s deepening capitalist market development. More importantly, it signals the changing mode of capitalist regulation whereby institutions are rearranged to exploit best-industry practices for capital accumulation.

3 Institutional responses conforming to a new mode of capitalist regulation 3.1

Changing business environment

In the post-independence protectionist era, the relationship between business and government was dictated by regulation, thus contributing to various restrictive policies and unproductive rent-seeking activities. With embourgeoisment and the unshackling of the economy, firms had to devise institutional mechanisms to exploit new opportunities. It was evident that a different kind of enterprise would be needed if new supplier industries were to meet both high investment and international, especially Japanese, quality standards. MUL’s location in Delhi was advantageous, as most of these entrepreneurs in its supplier industry were well connected to the political machinery and business associations in New Delhi. These social networks, in the context of changing government policy, contributed to a conducive business environment. There were several layers of interconnectedness that boosted the supplier industry (see Figure 5.2). In the early 1980s, Suzuki Motors was selected to assist MUL, a public sector unit, to produce small passenger cars. MUL is an exemplary case of nepotism, formerly owned by Sanjay Gandhi, son of India’s Prime Minister Indira Gandhi, and subsidized by the government. This patron-client relationship, which failed to produce a commercially viable product, worked extremely well when such a relationship was institutionalized after nationalization. Under the Chairmanship of V. Krishnamurthy, and later R.C. Bhargava, both top-notch civil servants with extensive public sector experience, Suzuki became a minority partner with the Indian government. With the reconstituted MUL in the public sector, the government, through its industrial licensing policy,

Capitalist Regulation, Flexible Production, and Auto Market Evolution 111

STATE

CII 1 GJE 2 2

ACMA AIAM

Maruti Udyog Ltd. (MUL) Japanese Firms (mainly Suzuki) 4

Mark Auto 3 ME

Sona Steering 3 JME Bharat Seats 3 JME

Machino Plastics 3 JME

Jay Bharat 3 ME

Asahi Glass 3 JME

ENTERPRISE UNION

LEGEND E = EQUITY GJE = Equity held by Government and Japanese Firms ME = Equity held by Maruti JME = Equity held by Japanese firms and Maruti 1, 2, 3, 4 represent different levels of unranked pathways of cooperation Dashed line identifies Maruti's inter-firm cooperation CII = Confederation of Indian Industry ACMA = Automotive Components Manufacturers Association AIAM = Association of Indian Automobile Manufacturers Figure 5.2

Cooperation Within and Outside MUL

barred other entrants in the passenger vehicle segment. Within a decade MUL had become the industry leader in terms of production, capacity utilization, and scale. It also attained international standards in terms of installed capacity and was cost competitive with similar small car models made by Nissan (the March) and SEAT (in Spain) (Table 5.1). Today its capacity is over 500,000 units, a scale that matches the best plants in the world. More importantly, such capacity growth created abundant opportunities for a nascent components industry in India. By virtue of being a civil servant, the Chairman of MUL had easy access to the relevant Ministry of Heavy Industry, making preferential treatment feasible (Pinglé 1999). Indeed, government policies favored MUL. They

112 The Long March to Capitalism Table 5.1

Maruti Udyog’s (MUL) Relative Performance (circa 1994)

Production (cars) Production (cars + utility vehicles) Capacity Price (800 cc)

Price (Zen model)

MUL

MUL’s Share (%)

Nearest Rival’s Share in India (%)

Foreign Benchmark

149,743

72

13

–

155,780

60

17

–

200,000 units* $3,992 (1990)

– –

65,000 units –

$7,161 (1993)

–

–

200,000** $6,600 (SEATMarbella, Spain)# $7,284 (Nissan March, Japan)

Source: Automotive Components Manufacturers Association (ACMA) (various years), Maruti Udyog Ltd. (MUL) (Delhi), Nissan (Japan), Suzuki Motors (Japan). Notes: *expanded from installed capacity of 140,000; currently installed capacity stands at over 500,000 units, with 2001–02 production nearly 357,102, a decline from 406,807 units two years earlier. ** Nissan’s Mexico plant; #data obtained from Suzuki Motors, Japan.

allowed imports of capital equipment at lower tariffs and barred other entrants into the passenger car segment. MUL was treated as a national champion, which ensured its autonomy to make decisions regarding technology, products, production methods, and work practices. This is a significant departure from the bureaucratic approach prevalent under the previous mode of capitalist regulation, namely the restrictive industrial licensing system, which entailed micromanagement of public sector units. The discriminatory approach paid off in the form of economies of scale. By avoiding excessive, ruinous competition in a small market, the Indian state in effect nurtured MUL to a robust status (D’Costa 1995b). The changing business environment was also reflected by the activism of industry associations, which helped MUL in particular and the parts industry as a whole. First, these suppliers were linked to the pro-active apex industry association, the Confederation of Indian Industry (CII), comprising mainly engineering export-oriented firms. CII was responsible for spearheading the economic liberalization movement by seeking to deregulate trade and investment.3 CII has an elite membership and overshadows two associations that previously had considerable influence: the Associated Chamber of Commerce (comprised of former British companies) and the Federation of Indian

Capitalist Regulation, Flexible Production, and Auto Market Evolution 113

Chamber of Commerce and Industry (mainly national domestically-oriented firms). Its members also comprise most affluent family-owned entrepreneurial firms, with many owners trained in technical and commercial fields at home and abroad. Second, the entry of MUL created opportunities for these select entrepreneurs and the existing larger, specialized suppliers who were also members of CII and the Automotive Components Manufacturers Association (ACMA). Incidentally, the former President of CII, Subodh Bhargava, is a sibling of MUL’s former chairman R. C. Bhargava.4 Of the two industry-specific associations, the Automobile Components Manufacturers Association (ACMA) has been more proactive due to the critical nature of the segment than the Society of Indian Automobile Manufacturers (SIAM), formerly known as the Association of Indian Automobile Manufacturers, AIAM. As ACMA is also a member of the Confederation of Indian Industry (CII), it bridges complementary groups of industries–automotive firms with general engineering firms. With expanding Indian output in the 1980s, MUL, as a public sector firm, and many of its suppliers have become conduits for information exchange and policy change. For example, every year the Automotive Components Manufacturers Association (ACMA) organizes an annual gathering that brings auto-related manufacturers, government officials, foreign businesses and their diplomatic representatives, and researchers together. The meeting itself is organized around particular themes. In 1992 the focus was on “Export of Auto Components.” It recommended several policy changes, many of which have since been implemented. In 1994 it held a seminar on “Competitiveness Through Productivity and Cost Control.” Through these meetings, ACMA facilitates dissemination of information on technical developments, new products, market potential at home and abroad, and government policy changes. It also mobilizes industry opinion for desired policy changes. This “learning by interacting” (Chesnais 1991) among businesses has been instrumental in addressing collective solutions to industry problems. Each gathering in the past has displayed lobbying efforts, articulating members’ responses to supply bottlenecks, heightened competition, infrastructural barriers, and new environmental regulations. Another dimension to the changing business environment is the significance of location of production in which the government had a visible role to play. Local governments have targeted the National Capital Region (NCR) (Delhi and its surroundings, including the industrial centers of Gurgaon in Haryana and NOIDA in Uttar Pradesh states) to become a new center for the automotive industry.5 MUL’s principal suppliers located near MUL’s plant in Gurgaon. In the late 1990s Ford and Hyundai in Chennai also urged their suppliers to locate nearby (Gulyani 2001a). This business-government partnership was also a result of liberalization of the 1980s under Prime Minister Rajiv Gandhi to foster other “clean” industries

114 The Long March to Capitalism

in the region. This shift in favor of a new industrial zone near the capital, away from established automotive centers in Kolkata (formerly Calcutta), Chennai (formerly Madras), and the Mumbai (formerly Bombay)-Pune region, had more to do with national politics than economics. With regional parties becoming more important in national politics, industrial licenses were often awarded to ruling party constituencies. The prosperity brought about by decades of state control and associated rent-seeking activities, massive infrastructural investments in the capital city, and the green revolution in neighboring Haryana and Punjab states and the relative industrial backwardness of the region, made Delhi and the surrounding areas ideal for new investments. Only more recently, with the second wave of foreign automotive multinationals, has there been some consolidation of other regional production sites: one in the west (Mumbai-Pune) and the other in the south (Chennai-Hosur-Bangalore). The growing importance of these regions has been accompanied by the relative industrial decline of the former industrial belt in the east around Kolkata (see also Chapter 6). 3.2

Inter-firm collaboration to expand output

The Indian industry also instituted a wide variety of inter-firm best practices to overcome supply bottlenecks. This was highly pertinent for an industry, which was isolated from the global industry for nearly three decades. Assured of a captive market by government decree, but constrained over time by rising import values and local content rules, MUL pursued a multipronged approach to minimize supply bottlenecks. It created dedicated suppliers and introduced shopfloor practices geared toward uninterrupted production. Until then, the Indian industry had few vendors supplying high-value components and numerous government-spawned small-scale producers serving low-value products in the spare parts market. With MUL’s initiatives small firms, using state-of-the-art technologies, could introduce new plant and equipment with an assured market. At the same time, the buyer, in this case MUL, could count on reliable deliveries of competitively priced intermediate parts and components. This reciprocal arrangement reduced the mutual vulnerability that characterized the Indian industry. In the past, even Mahindra and Mahindra, an established monopoly in utility vehicles, was at the mercy of several sole suppliers of parts (Interview with Mahindra & Mahindra Staff, Bombay, October 1991). Dwarfing the supplier companies in size, and therefore access to information, the onus was on MUL to form technology and equity collaborations. In a supply-constrained and price-sensitive market, cost reduction and productivity growth were critical to MUL’s aggressive growth. Both outcomes hinged on the ability of parts suppliers to meet MUL’s demand, while MUL’s output expansion had a favorable cascading effect on the suppliers in realizing economies of scale. The cumulative outcome has been market expansion of the Indian auto industry.

Capitalist Regulation, Flexible Production, and Auto Market Evolution 115

Inter-firm cooperation was critical as small markets discouraged launching new products. Successive rupee devaluations made imports of components prohibitive. To overcome supply constraints, Japanese capital, technology, and organizational practices played an important role. MUL deployed Japanese technology selectively to introduce new products. Licensing of foreign technology also became commonplace for MUL’s suppliers. Many of these collaborations entailed Japanese equity as well (Table 5.2). The development of the Indian parts industry corresponded to the entry of multinationals. This entailed both technical and financial partnerships. In the 1980s, after the formation of MUL, auto-related Japanese technical collaborations increased from 4% to 18% (computed from Indian Investment Centre, various years). Between 1988 and 2002, the share of Japanese auto-related collaborations reached 31% of the total number of collaborations, while 20% of Japanese auto-related collaborations entailed financial partnerships (Computed from Indian Investment Centre 2002). Of the 72 Japanese ventures, 55 involved equity partnerships. Roughly a third of these entailed equity over 70%. In the 1990s South Korean vehicle manufacturers entered India and created 37 partnerships–eight between 1990–95 and twenty-nine during 1996–2002. The share of technical collaborations was 30% of all South Korean auto ventures in India (Computed from Indian Investment Centre 2002). Technology transfer went beyond arms-length supply of drawings and equipment. For example, by having a small equity stake in Sona Steering, MUL has been able to work more closely with Sona and ensure the supply of quality steering components. Koyo Seiko of Japan, a supplier of Suzuki in Japan, also has technical and financial collaboration with Sona Steering. UCAL, a manufacturer of carburetors and fuel tanks, was introduced to Mikuni of Japan by MUL. With the transfer of Japanese know-how, UCAL today is the single source for its original equipment customers, with MUL as the main buyer. This cross-interpenetration of Japanese firms with Indian firms as buyers and sellers has generated positive externalities and enhanced collective efficiencies. Several Indian vendors are now “original equipment” manufacturers for MUL’s products, and in some instances, for example Sona Steering, exporters as well.6 They are also located near the MUL plant, making just in time (JIT) a reality. Many of these joint-ventures make deliveries several times a day. For example, Machino Plastics supplies plastic panels, made from molds supplied by MUL, every four hours or four times in a two-shift day. Jay Bharat and Bharat Seats deliver components on a daily basis (D’Costa 1998). The Indian industry is also marked by the development of non-routine forms of institutionalized cooperation. For example, if MUL orders 3,000 units from a vendor (not necessarily a joint-venture) but adjusts it downward to

116

Table 5.2

The Co-Location of MUL’s Suppliers

Firm

Foreign Collaborator

Bharat Seats Climate Systems Jay Bharat Maruti Mark Auto Sona Steering

Suzuki, Houwa Kogyo (Japan) Ford (USA) None None Koyo Seiko, Somic Ishikawa, Matsuda (Japan) Nippondenso, Suzuki (Japan) Asahi Glass (Japan) Suzuki (Japan) Caparo (UK)* SNIC (Japan) Nippon Denso (Japan)

Subros Ltd. Asahi India Machino Plastics Caparo Maruti Krishna Maruti Nippon Denso

Source: Maruti Udyog Ltd. (MUL). Notes: * = Newly established non-resident Indian firm.

MUL’s Equity (%)

Foreign Equity (%)

Year Established

Sales (1995–96) mill. US$)

Number Employed

15.5 39.0 29.5 33.9 9.0

15.5 61.0 – – 7.8

1986 1991 1988 1986 1986

22.3 8.1 28.6 14.5 37.0

350 50 450 400 404

0.0 12.0 15.5 20.0 13.0 10.0

26.0 23.8 15.5 60.0 49.4 60.0

1983 1985 1987 1994 1993 1984

108.6 27.0 10.2 0 22.4 37.9

1,000 325 70 35 151 800

Capitalist Regulation, Flexible Production, and Auto Market Evolution 117

2,500, then MUL, unlike long-standing Indian practice, can reject the excess. In other words there is an institutionalized understanding that suppliers are expected to meet the buyer’s requirements. MUL also negotiates prices with its suppliers through a detailed cost breakdown. Older manufacturers could not or did not care to pursue this strategy because of high in-house production and little concern for quality and costs in a sellers’ market. The changeover is an indication of a more open, competitive environment rather than monopsonistic behavior on MUL’s part. Strategically MUL purchases each component from at least two vendors, introducing competition and keeping its options open. But it also encourages multiple customers for its vendors. In other words, it does not want its suppliers to be too dependent on MUL for the simple reason that it can reduce its own vulnerability by strengthening its suppliers. MUL’s suppliers also recognize this interdependency. For example, UCAL in recognizing its responsibility in meeting its commitments reduced its costs and supported its suppliers by ensuring prompt settling of bills. MUL reciprocated by compensating UCAL when its costs rose due to the devaluation of the rupee. While MUL still relies on imported components such as steel coils for body panels, which may take weeks to deliver, other products are obtained more easily from its nearby suppliers. Short-cycle deliveries by a few suppliers are possible for several reasons. First is MUL’s direct involvement in the technical and financial aspects of its the joint-ventures. As we have seen, MUL took the initiative of creating suppliers through equity and facilitated technology transfer through Suzuki Motors. Second is the close physical proximity of the supplier firms to MUL’s plant. There were five joint-ventures within MUL’s property, supplying pressed components, seats, and plastic parts. These firms could maintain short supply schedules. There were also over 100 firms within an 80 km radius, which could practice JIT (Gulyani 2001a: 117). More importantly, close proximity meant that local suppliers could rely on MUL’s captive power plants, which then prompted suppliers from other regions to relocate near MUL’s operations (Gulyani 2001a). There are other ways by which close proximity of firms is beneficial to reducing vulnerability. For example, Machino Plastics, making injection-molded components, uses MUL’s maintenance equipment if needed. When they are not available from MUL, Machino Plastics can rely on the support of other joint-ventures such as Caparo Industries, a joint-venture for steel pressed parts (Personal Interview with Machino Plastics Staff, Gurgaon, June 1996). 3.3

Further backward integration and capitalist development

There are two significant effects of inter-firm linkages involving technology transfer and equity. First, a trusting environment is cultivated between buyers and suppliers, which facilitates the negotiation of prices of components through a detailed cost breakdown. Second, substantial spill-over

118 The Long March to Capitalism

effects through buyer-supplier synergy contribute to vendor development, inducing greater reliability of the entire supply chain (Gulyani 2001b). For example, Sona Steering begun as a dedicated supplier to MUL has been gradually integrating backward by establishing its own joint-ventures to supply components to Sona Steering, MUL, and others. As a result Sona Steering has been able to diversify its own product offerings for the automotive industry (Figure 5.3). Beginning with simple steering systems for MUL, Sona Koyo helped diversify its steering systems output. Consequently backward integration was further pursued by the production of manufacturing inputs for steering systems, such as Sona’s joint-venture with Somic Ishikawa of Japan. It produces ball and suspension joints, critical inputs for steering assembly (Plant Visit, Gurgaon, July 1996, September 1991). FLAGSHIP COMPANY SONA (KOYO) STEERING SYSTEMS (various steering systems, column and drive line assembly)

AFFILIATE COMPANIES 1. Sona Somic (with Lemforder Metattwaren in 1998) (ball joints for steering, suspension components) 2. Sona Matsuda Cold Forgings (cold forged components for gear box, engine, etc.) 3. Sona Educational & Training 4. Sona Okegawa Precision Forgings (high quality transmission products, die forging) 5. Sona Oberland 6. Ferodo India

MAIN FOREIGN PARTNER KOYO SEIKO, Japan

FOREIGN COLLABORATORS

1. Somic Ishikawa, Japan 2. Matsuda Industry, Japan 3. Degem Systems, Israel 4. Mitsubishi Materials, Japan 5. Oberland Manigold, Germany 6. T&N, UK

Ownership of Sona Koyo Steering Systems (%) Only those holding shares of more than 1% Chairman and MD: 5.45 Maruti Udyog Ltd. (co-promoter): 7.85 Chairman's Family: 3.53 Chairman's Other Promoters (firms):10.76 Koyo Seiko (Japanese Promoter): 20.47 Institutional, Corporate, Foreign: 13.19 Indian public (a single individual): 2.56 Figure 5.3

Sona’s Evolution of Product Variety

Source: Company Documents obtained from Sona Steering and Company website, http:// www.sonagroup.com/accessed 10/27/2003 10:13 AM Note: MD = Managing Director, Surinder Kapur.

Capitalist Regulation, Flexible Production, and Auto Market Evolution 119

Similarly, Sona’s collaboration with Matsuda of Japan is aimed at producing small parts by cold forging to be subsequently used in components production. Reliability of the supply chain is enhanced by the diffusion of common standards such as the adoption of statistical process controls by Sona Steering, its affiliate Sona Somic, and their vendors. Backward integration of the automobile industry has been significantly influenced by effective technology transfer from overseas companies who are themselves suppliers to manufacturers in their home countries. For example, Koyo Seiko’s technology transfer played a key role in Sona Steering’s manufacturing success. Between 1987 and March 1996 Sona Steering used 382 workerdays of Japanese advising from Koyo (Sona Group of Company Documents, 1996). Knowledge imparted ranged from the routine to specific manufacturing processes, testing, selection of equipment, line layout and tryouts, quality enhancement processes, and top management self-study. Between 1986 and 1996, Sona, in turn, spent 155 engineer-days in Japan for training in the areas of manufacturing, process control, cost control, and JIT. It also sent two batches of 12 machine operators for six months of training in Japan. With backward integration, quality standards are transmitted to other suppliers. In addition to Sona Steering, several of MUL’s suppliers have also instituted organizational changes to reduce costs and increase productivity. These cover better audit methods, training, cellular manufacturing, and technological upgrading (Table 5.3). The effect of this backward integration is increased local content and reduced supply bottlenecks. What is noteworthy is that vendor initiatives, in raising output and productivity are no longer dependent on a Japanese partner. Of the seven cases (in Table 5.3), India Pistons and Brakes India have British collaborators. Both of these firms have been quite successful in reducing waste, increasing productivity, and improving quality. Industrial deepening was also facilitated by inter-firm arrangements that reduced mutual vulnerability. For example, one of the key strategies of MUL has been to create an industrial cluster, to overcome India’s treacherous physical infrastructure (Gulyani 2001a). MUL has about 400 first-tier suppliers. Fifty-three of them depend on MUL for at least 90% of their sales. One hundred are small and located within an hour’s drive from MUL’s plant (Okada 2000), an agricultural area prior to setting up MUL. Over 50% of MUL’s total domestic parts and components purchased were made by firms located in the industrial cluster around Delhi (Gulyani 2001a: 119). One strategy MUL used to lure its suppliers to locate nearby was to share its surplus power. Given the inadequate local power supply, MUL invested in a gas-based captive power plant (Gulyani 2001a). It skillfully negotiated with the government to obtain gas and construct a dedicated gas line. By overcoming the power bottleneck, it also averted component delivery problems due to distance and erratic power and realized JIT deliveries. MUL also worked with its suppliers in other parts of the country, thus facilitating the sourcing of components by other firms such as Ford in Chennai and Daewoo in Delhi.

120

Table 5.3

Intra-Firm Flexible Arrangements for Mass Production (Early 1990s) Year Established

Sales (m$)

UCAL Fuel System

1990

10.84

300

India Pistons

1949

35.00

2,500

Sundaram- 1976 Abex (brake linings)

9.88

NA

Brakes India

63.00

2,325

1964

Buyers

Goals

Measures

Outcomes

Mikuni, Japan

MUL, domestic

Cut costs

Better inventory management

Costs reduced, quicker payment to vendors

T&N, UK

TELCO, domestic

Cut costs, enhance quality

Internal audit

Scrap reduced, productivity rose from 7.5 pistons/ man-hour to 8.5 in a year.

NA/NK

TELCO, domestic Foreign original equipment: MB, Indonesia

Cut costs

Reduce raw material storage space

Costs reduced, quicker payments to vendors

Lucas, UK

Ashok-Leyland, others. Foreign original equipment: Various

Cut costs, enhance quality

Cellular manufacturing

Costs reduced, quality improved, reliable delivery, small lots, lowered investment, set up time reduced, accurate costing possible, job enrichment.

Employees Foreign Collaborator

Table 5.3

Intra-Firm Flexible Arrangements for Mass Production (Early 1990s) – continued Year Established

Sales (m$)

Purolator India (filters)

1976

16.43

429

Asahi Glass

1987

12.54

248

Engine Valves

1959

18.02

1,506

Buyers

Goals

Measures

Outcomes

NA/NK

MUL, domestic Foreign original equipment: Bosch (Spain), MB, Indonesia.

Increase productivity

Audit, training, explicit procedures, vendor assessment, JIT, management review meetings.

Line rejects fell from 2% to 1%, inventory reduced from 30 days to 21. Productivity increased from 232 filter/ man-day to 376. Exports raised to 30%.

Asahi Glass, Japan

MUL, domestic (no direct exports)

Increase shift capacity (1000 pieces to 1500)

Equipment, heating conditions, etc. assessed. Load increased from 4 to 6 pieces.

Reduced time loss of furnaces from 19.5% to 9.5% in two years, output increased by 30%, turnover by 20%, prices fell by 13%.

NA/NK

Ashok-Leyland, domestic. Foreign original equipment: K.H.D. Germany

Increase Reassess flows, Reduced waste, productivity of balance capacity, increased output, manufacturing training. enhanced quality, systems increased utilization, prices reduced, various savings

Employees Foreign Collaborator

121

Source: Automotive Components Manufacturers Association 1994. Notes: NA = Not Available, NK = Not Known, OE = Original Equipment, MB = Mercedes-Benz. All firms listed secured various ISO 9000 standards. Most firms have limited exports.

122 The Long March to Capitalism

The results have been remarkable. In 1999–2000 MUL produced nearly 400,000 vehicles, double its 1994 output. In tandem, the supplier industry adopted flexible practices to cope with rising demand, leading to significant backward integration. For example, a new press shop was established under a joint-venture arrangement. The unit is housed on MUL’s premises. Like other joint-ventures, such collaborations reduced the required investment freeing up capital for other uses and maintained tight links to keep up with expanding output. Also, between 1993–94 and 1994–95, the production of CNC machine tools in India increased by 77% (from 484 to 858), and in sales by 56%. Similarly, metal-working machine tools grew 48% (from 4,999 to 7,400) and in sales by 44%, indicating a deepening of the local supplier industry (Confederation of Indian Industry (CII) 1996). This backward integration had an unusual effect on firms, which were vertically integrated. For example, the adoption of CNCs by component suppliers compelled TELCO, which is a large commercial vehicle and a CNC manufacturer to subcontract parts and components as well (Alam 1998: 310). 3.4

Enterprises and unions

In addition to business–government partnerships and inter-firm collaborations, Indian firms, like their counterparts elsewhere, have instituted a variety of internal organizational changes to increase output, productivity, and quality. There are two levels at which reorganization of work has been carried out and both of them involve the interplay of power, politics, and economics (Mathur 1991). The first is the overall industrial relations system, which is a product of the larger national political economy and particular local characteristics. The establishment of enterprise unions in certain regions divorced from the larger party-based unions is an example of how particular industrial relations could be politically used to increase output (D’Costa 1998). The second is the mobilization of workers on the shopfloor through technological and organizational means such as cellularization and teamwork respectively. Built into this are a variety of pecuniary and non-pecuniary social and cultural initiatives that tends to undercut rampant hostilities between management and workers. A. Managing industrial relations Traditionally India’s industrial relations in the organized sector have been conflict-prone.7 The political party-affiliated trade unions in most large workplaces have fragmented labor and immobilized management (Venkata Ratnam 1995). There is little bargaining power among the fragmented Indian trade union movement, with the exception of public sector employees who are perceived as “pampered citizens” (Johri 1992). Industrial relations in India, patterned after the confrontational Taylorist industrial relations of the West, have contributed to labor militancy, low morale, and opposition to new production systems. Multiple unions based on political

Capitalist Regulation, Flexible Production, and Auto Market Evolution 123

parties and external union leaders, who are not employees of firms in question, often make collective bargaining a nightmare in India. However, in all the new automotive joint-venture plants, the workers are under company unions. Their managers have explicitly dictated the formation of only one union and barred the union from any political party affiliation, making negotiation easier. Extra-firm attempts by political parties to organize workers under party-affiliated trade unions have been thwarted by management. While the DCM-Toyota (now-defunct) management did not want any union, MUL’s management explicitly sought to create an enterprise union.8 In most cases the workers themselves opted for internal enterprise unions. For example, at its inception, MUL proactively avoided a strike organized by external agents by creating a conducive environment for greater worker participation in the production process. This was evident also in the most recent Toyota-Kirloskar joint-venture, where a strike by the union on wage issues was quickly settled to maintain production (Plant Visit, Bedadi, March 2003). From a supply vulnerability point of view it is clear that workers must be flexible to maintain uninterrupted production. Union membership at MUL is high: 80% to 100% of the workers belong to the company union. Past attempts by central trade unions, such as centrist Congress party controlled Indian National Trade Union Congress (INTUC) and the more left-leaning Hindusthan Mazdoor Sangh, to organize MUL’s workers failed. The failure itself was a result of the struggle between different factions of workers, state intervention, and the management’s pre-emptive strategy in “democratizing” the union, facilitated by the ethnically heterogeneous workforce (Mathur 1991: 50–51). Furthermore, MUL in settling labor disputes unilaterally, demanded major concessions, including the formation of a single union independent from political parties, and the reliance on consultation and cooperation rather than strikes and agitations (Mathur 1991: 113). Labor peace was secured with attractive incentive packages. MUL workers recognized themselves as more privileged than their counterparts elsewhere, evident from the significant upward mobility of workers within the organization. Also MUL’s few thousand workers are electorally insignificant in India and therefore MUL may not be attractive for the larger partybased central trade unions. Lay-offs are rare and redeployment of workers in other divisions is common when production declines. With most production decisions in the hands of management, single unions help prevent overstaffing. This adds to a negative kind of flexibility, encouraging hiring of casual labor when output expands. However, given the near-impossibility of laying off workers when production declines, DCM-Toyota has justified this strategy as an economic necessity. As a result labor productivity is kept at relatively high levels. Most workers in these plants are young, high school trained, and amenable to the rigor of tight production schedules. The average age at Eicher-Mitsubishi is 29 and many workers have a rural background.

124 The Long March to Capitalism

Employers in these plants strategically hired workers who were not from other auto-related enterprises so as to facilitate the transfer of new production practices and avoid polluting a presumably peaceful “work environment” (Mathur 1991: 29). Lacking industrial experience the new recruits were generally unprepared to organize unions and secure adequate representation. They found themselves at the center of tensions between selected labor and political party leaders and management. Others on the shopfloor at these plants have been recruited from the government-run Industrial Training Institutes (ITIs). These are vocational training schools which supply trained workers for Indian industry through a legally mandated year-long apprenticeship program. ITIs and subsequent employment in auto firms facilitates mobility for some of the socially weaker ethnic and caste groups. Employee turnover is generally low and these jobs are coveted. For example, in 1991, at the minimum, a MUL worker could earn Rs. 2,295 per month, equivalent to $92 after devaluation. This translates to an annual income of roughly $1,100, representing three times the per capita GNP of less than $350. This does not include production incentives, meals, some medical reimbursement, children’s education, encashment of leave, and uniforms. Most vacancies are filled through internal promotions; in a few cases fresh ITI graduates and engineers for higher-level positions are externally recruited. This internal labor market and inter-firm immobility in conjunction with incentives enhances worker loyalty, job satisfaction, and an averseness to labor militancy. The response of traditional trade unions in India toward flexible industrial relations is ambiguous. If flexibility is simply perceived as numerical flexibility, that is a “hire and fire” policy then most unions are against it. They are also against company unions (Personal Interview with Trade Union Leaders, Delhi 1992). If, however, flexibility encompasses the various Japanese-type practices that increase production efficiency, then several union leaders appear to be favorably disposed. They see it as a necessary step in coping with economic challenges.9 They believe that empowering the worker, even with nominal changes such as providing common canteens, office space, and uniforms can have a significant psychological bearing on the Indian worker. Trade union leaders from the left and the right had little to say about the actual shopfloor innovations. Leftist leaders uncritically accepted the western-rationalist approach, arguing that Indian unions are not secular.10 Unions on the political right, sharing the nationalist critique of foreign investments, were generally unappreciative of the relationship between industrial peace and flexible production systems. Their main concern was the reduced membership in their unions. Unlike the Japanese system, workers in Indian firms are union members while supervisors cease to be so, marking a sharp division between workers and supervisors. Workers can and do move up to the staff/supervisory level,

Capitalist Regulation, Flexible Production, and Auto Market Evolution 125

although in these new plants very few workers have actually moved to the supervisory level. Vacancies are largely filled through internal promotions. Inter-company transfer of employees has been a feature at EicherMitsubishi, where surplus workers from Eicher Tractors were deployed. There is no detailed occupational classification of workers in these plants. There are several grades (or levels) of workers that vary from company to company. These grades are based on experience and skills. At MUL there are 19 levels, including staff and managers, with the first 7 for workers. Eicher-Mitsubishi had only 5 levels. Flatter organizational structure and fewer skill-based distinctions are part of flexibility. The degree of skill variation is small for low-volume producers like Eicher-Mitsubishi and DCMToyota. They subcontract a large part of the work or import finished components. In the early 1990s, the ratio of production workers to nonproduction workers (including staff and executives) was 2.58 for MUL, 0.43 for Eicher-Mitsubishi, and 0.72 for DCM-Toyota. The large difference is primarily due to the difference in scale of production and the degree of in-house production, high for MUL compared to the JLCV units. Non-confrontational industrial relations can be partly explained by industrial location where limited job opportunities and relative isolation from major union centers deter any major labor movement. A large part of MUL’s workforce hails from the surrounding area of Haryana, largely an agrarian state. All three sites, Gurgaon, Surajpur (both near Delhi and host to MUL and DCM-Toyota respectively) and Pithampur in Madhya Pradesh state (for Eicher-Mitsubishi) were initially selected by Japanese investors for Industrial Model Towns. The chief criterion for such towns has been “industrial climate,” a euphemism for peaceful industrial relations compared to older industrialized areas such as Kolkata or Mumbai. With economic liberalization, state governments are compelled to promise industrial peace to attract foreign capital. Like Haryana, Madhya Pradesh has become another host state to greenfield plants. More recently, Hindustan Motors, headquartered in Kolkata, decided to locate its join-venture with General Motors in Gujarat state. This is part of a global trend whereby greenfield plants adopting flexible practices tend to locate away from industrialized areas (see Law 1991). B. Introducing new technologies and organizational changes On the technological front, cellularization, automation, and incremental innovations have been quite effective in reorganization of production.11 With few models, die changes at MUL have been infrequent, perhaps two or three times a day, with average die-change time in the mid-1990s taking 10–15 minutes. This compares well with Japanese standards.12 Die maintenance and repair are undertaken only by specialized workers. 13 However, as competitive pressures rise along with wage costs, labor productivity for the firm as a whole is raised through increased automation.

126 The Long March to Capitalism

Enterprise performance also has been improved through organizational changes that demands worker flexibility. For example, in the early 1990s MUL expanded its annual capacity from 130,000 units to 180,000 without significant outlays on new capital equipment. This was technically possible by increasing the number of strokes per minute of the press shop (the press shop being a major bottleneck). But this solution had to be accompanied by an organizational one that called for workers’ contributions. Lunch breaks had to be staggered and equipment maintenance was shifted to non-production time. Both required significant adjustments on the part of workers. Various other incremental technical changes released labor time for additional production. 14 In early 1997 MUL was operating at 40% above its installed capacity of 250,000 units, a feat made possible by intra-firm flexibility. Sona Steering at the behest of MUL introduced cellularization as well. Sona deployed work reorganization and flexible machinery to reduce production costs and increase output. The results of cellularization in Sona Steering have been remarkable. From an earlier practice of roughly one worker for every two machines, cellularization increased the ratio to eleven machines per worker. Sona’s production doubled even as the number of shifts was reduced from three to two (Sona Steering’s Chairman’s address at ACMA Annual Meeting, New Delhi 1994). Thus, since 1994 Sona’s output of column and rack and pinion steering assembly increased sharply, whereas labor remained virtually the same (from 415 to 418). The number of operators per machine, per shift was also reduced – from two to one. This is more than simple automation. The resulting “surplus” labor was redeployed in maintenance support for the machine operators, while others were put into new production lines. Sales nearly doubled between 1994 and 1996 (from Rs. 656 million to Rs. 1,219 million) with sales per worker increasing from Rs 1.58 million to Rs. 2.92 million (Sona Group Company Documents, 1996). Large buyers like MUL reduced their vulnerability by encouraging their suppliers to adopt a system of “self-certification.” This allowed vendors like Sona Steering to find ways of cutting costs. Sona Steering attempted to eliminate several costly inspection procedures by reducing manpower costs and assembly time and raising quality. Here too, the cooperation of its workers was necessary since virtually all the elements of self-certification required collective efforts and technological learning on the shopfloor. Simple gestures such as delivering paychecks directly to workers on the shopfloor by the personnel department rather than having workers queue up for them appeared to impress Sona Steering’s workers. Cellularization also has built-in quality control. Because each worker uses the output of one machine as the input of another, defects are reduced significantly. In the 1990s, Mahindra and Mahindra, long-time Indian producer of utility vehicles and tractors, aggressively introduced extensive

Capitalist Regulation, Flexible Production, and Auto Market Evolution 127

“Business Process Engineering” (Personal Interview, Mahindra and Mahindra Bombay, 1991, 1996). This program entailed retooling, cellularization, and other shopfloor innovations to increase output and productivity. The company brought in the UK-based Lucas Engineering Systems “to change the company’s manufacturing methods to contemporary Western and Japanese styles” (Business World 1994: 13; Business Today, November 5 1995). Cellularization requires constant vigilance on the part of the machine operator and provides a sense of responsibility. The machines themselves are reprogrammable and designed to handle several variants of a given process, ensuring not only quality of diversified output but also skill development. In conjunction with cellularization, continuous learning on the shopfloor has been emphasized by institutionalizing teamwork in many enterprises. For example, quality circles (QCs) comprising a team of workers have been deployed to solve technical problems. In the mid-1990s MUL had 34 QCs on the shopfloor, with 50 in the entire organization.15 Members meet one to three times a month to discuss their production needs and offer suggestions. Such issues could be related to improvising a special tool, which could call for changes in technical parameters to be used by the tool room. These meetings take place after the shift is over, perhaps for half an hour, or during the period when production has been stopped, making volunteerism an essential part of problem-solving. The meetings are informal. Eliciting suggestions convey a sense of belonging, narrowing the prevalent hierarchical gulf between workers and supervisors in Indian industrial workplaces. In 1991–92 at MUL there were nearly 50,000 suggestions, averaging about two suggestions per person per month. Company documents indicate that this average has been maintained through the 1990s. In 1992 a cash reward of Rs. 2 per suggestion was made, irrespective of acceptance or rejection of the suggestion, and 10% of cost savings is given to the employee. MUL also rewards its employees for meeting production targets. For example, in the early 1990s a regular bonus equivalent to one and a half month’s salary was given to employees earning less than Rs. 2,500 a month.16 This bonus is not dependent on the performance of the company. Instead a production incentive scheme pays a flat amount for every 300 vehicles, often providing an additional 1,000 rupees per month for a worker. This incentive ensures meeting production targets, an objective critical in an increasingly deregulated economic environment. Although peer pressure and employee evaluation on the basis of suggestions may underlie the rising rate of suggestions at MUL, the cash rewards and the “Suggestion of the Year” award are excellent incentives for an industrial work force that is otherwise discouraged from taking initiatives. 17 Between 25–30% of the total suggestions were implemented, compared to over 90% in some Japanese firms.18

128 The Long March to Capitalism

Enterprise unions lack political power but their members have not been completely excluded. On the contrary, a paternalistic relationship has ensured job security, high wages, and some decision-making power in exchange for industrial peace. There is a once-a-month formal consultation between management and labor at MUL. In the ten years of MUL’s operation there have been very few labor-management disputes. Some management decisions, albeit non-critical, are taken in consultation with unions. For example, worker representatives sit on the Canteen Committee and decide on the menu. These canteens are used by all employees of MUL.19 During local festivals unions negotiate and decide on the value of the gifts to be given to workers by the company. In other enterprises such as EicherMitsubishi a mix of both liberal democratic and paternalistic relationships have existed. At Eicher-Mitsubishi management “takes care of people’s personal lives” (Interview with Eicher-Mitsubishi official, Pithampur 1994). The company provides housing, loans, support for children’s education, etc. to its workers to promote teamwork and foster familial relationships among and between workers and management. Enhanced communication by managers is facilitated by morning meetings, formal and informal grievance procedures, and a general “openness” toward worker problems. Group values are inculcated largely in an apolitical context. Rather than lay off workers, the company transferred its “surplus” employees to another unit (Eicher Tractors). These measures, however, were not effective in transforming the workplace for increasing diversified output.

4 Challenges to the contemporary mode of capitalist regulation Notwithstanding the significant institutional changes on the supply side that have contributed to market growth, the transition from the stateled model of capitalist development to the new, more flexible system of production has been partial even within the automobile sector. Several Indian firms have been unable to cope with the new technological and organizational demands of modern production. Both institutional rigidities influenced by national and regional factors and the limited structural transformation of the Indian economy continue to hinder a smooth transition. It is not surprising to witness established Indian car producers such as Hindustan Motors and Premier Automobiles confronting severe industrial strife and market pressures. At the same time, as discussed in the previous chapter, excessive competition in the Japanese-inspired light commercial vehicle segment established in the mid-1980s hurt the segment. Aside from the institutional constraints to bringing about industry-wide organizational and technological change, the common factor that plagued the older Indian car producers and the new Japanese LCV manufacturers was their inflexibility in introducing competitive products. This was largely due to

Capitalist Regulation, Flexible Production, and Auto Market Evolution 129

lack of economies of scale. The increased competition from MUL and subsequently from other MNC-linked entrants squeezed the long-time car producers, while too many new producers with similar new products in the LCV segment effectively cut into each other’s market. In both cases low volume of production failed to bring down relative costs and increase quality. Only those firms that already enjoyed economies of scale such as MUL, because of its firstcomer advantage, and TELCO, which was already a dominant producer, could exploit the new market opportunities that opened up with industrial deregulation. 4.1

Established car producers

The older established car producers who did not or could not introduce flexible practices confronted production and market challenges in the new regime of capitalist regulation. In 1980 both Hindustan Motors (HM) and Premier Automobiles (PAL) together had 67% of the car market. By 1990, their combined share had fallen to about 32%, which by 2000–01 had fallen to about 5% (ACMA 2002). They succumbed to the competitive pressures generated both by MUL’s large volume of high quality output and by the additional multinational players from South Korea, Japan, the US, and Western Europe. It is of course entirely understandable why the two older firms could not transform themselves internally to adopt more flexible approaches. Heavy legacy problems encompassing the institutional, technological, and business strategy areas held them back. These were establishments that matured in an era of heavy protectionism, contributing to technological obsolescence (Plant Visit, PAL, Bombay, September 1991). They operated as monopolists in a tightly regulated market. They were also products of the older industrial system, driven by mass production concerns in which vertical integration was of strategic interest. Both plants were located in India’s old industrial heartlands: Kolkata in the east and Mumbai in the west. They have been sites of strong labor unions, strengthened in the case of HM by the leftist ruling party in the state of West Bengal (Personal Interviews with HM Trade Union, Uttarpara, December 1995). Consequently, in an era of outsourcing and vertical disintegration, these firms could not extricate themselves from their high-cost, inefficiently produced, shoddy vehicles. Their responses have been at best ad hoc to stem their decline in market shares. Both firms in the mid-1990s established technical collaborations with Japanese manufacturers by importing transmissions and engines from Isuzu (HM) and Nissan (PAL) and obsolete dies for body panels. There was no significant impact on the performance of these firms except to temporarily defer the inevitable competitive pressure from firms such as MUL that deployed superior governance systems. Later both firms formed other jointventures – HM with General Motors and Mitsubishi; PAL with Fiat and Peugeot. For HM adapting to the new regime of regulation has meant

130 The Long March to Capitalism

moving investments out of the state. HM’s joint-ventures with Mitsubishi and GM were respectively in Tamil Nadu in the south and Gujarat in the west. Today, HM is no longer a partner in the GM venture in India, although it has become an important supplier of critical components such as engines and transmissions to GM. In the late 1990s PAL was plagued with industrial strife, leading to suspension in production, and bickering among the two foreign partners Peugeot and Fiat and PAL. The company was reformed into a PAL-Fiat venture called Ind Auto Ltd., while Fiat withdrew PAL’s venture with Peugeot. Fiat also has its own 100% subsidiary in India, currently producing the relatively successful Uno and Palio models. 4.2

TELCO and the Japanese LCV producers

The Japanese-inspired LCV (JLCV) firms failed to overcome supply bottlenecks and attain economies of scale. Established soon after MUL in the mid-1980s their market share has been more or less stagnant over the last 12 years. In 1989, the Japanese joint-ventures had a combined share of 33% of the Indian LCV market or about 12% of the total commercial vehicle market. Despite their recent vintage and the involvement of Toyota, Nissan, Mazda, and Mitsubishi offering contemporary products, their total market share of commercial vehicles was under 10% in 1990. In 2000–01 their shares of LCV market and the total CV markets were 31% and 13% respectively. Today the Toyota venture is defunct and Nissan has sold its equity to Mahindra and Mahindra. It is logical to argue that low output was a result of low demand for LCVs. However, a closer examination of the data reveals that LCV demand has increased since the early 1980s paralleling the growth of the commercial vehicle segment since the 1970s (Table 5.4). Though the Japanese firms created the LCV niche in India, it was TELCO, specializing in heavy commercial vehicles, that gained the most in this segment. In 2000–01 TELCO captured 63% of the LCV market (D’Costa 2003c: 118). This counterintuitive outcome was largely a consequence of scale economies, which TELCO possessed. So what did TELCO do right that the Japanese joint-ventures in the LCV market did not? The key factors were the effective adoption of flexible industrial practices, which overcame supply bottlenecks and tapped worker skills. TELCO’s learning was made possible by long industry experience, market familiarity, and increased throughput, a feature that the Japanese LCV firms found daunting. TELCO did not have to introduce JIT in its subcontracting relationship in part because it had already cultivated long-term, reliable partnerships with its suppliers, many of them located in close proximity to its operations in Pune. However, the LCV firms such as DCM-Toyota and Eicher-Mitsubishi attempted to introduce various forms of flexible practices that were neither deep nor system-wide (Plant Visits 1991, 1992, 1994). Market

Table 5.4

Recent Changes in the Indian LCV Market by Firms 1994–95

1995–96 % share

1996–97

Units % share

Units

Units

AshokLeyland

1,327

1.43

12,342

1.81

2,262

2.66

Bajaj Tempo

24,035

25.90

28,027

21.66

8,023

Daewoo Motors

2,754

2.97

2,045

1.58

Eicher Motors

4,802

5.17

5,913

Hindustan Motors

2,079

2.24

Mahindra (Zahirabad)*

1,238

Mahindra & Mahindra

1997–98

% share

Units

1998–99

2001–02

1999–2000

% share

Units

% share

Units

% share

1,279

1.97

245

0.44

510

0.83

453

0.82

9.43

5,776

8.89

2,772

5.00

4,790

7.83

2,072

3.74

765

0.90

204

0.31

–

4.57

6,531

7.68

5,696

8.75

5,299

2,668

2.01

–

1.43

2,093

1.62

1,575

1.85

4,487

4.83

4,636

3.58

4,275

Swaraj Mazda

3,507

3.78

4,500

3.48

TELCO

48,576

52.43

77,193

Total

92,805 100.00

129,417

–

–

6,956

11.36

9,638

– 17.41

–

–

–

–

–

–

3,017

4.64

–

–

–

–

–

–

5.03

4,093

6.29

4,589

8.29

4,421

7.22

5,908

10.67

4,006

4.71

2,931

4.50

2,877

5.20

4,010

6.55

6,360

11.49

59.65 57,632

67.75

42,073

64.66

38,589

62.94 30,929

55.87

100.00

65,069

100.00

55,371

85,069

–

9.57

–

–

100.00

–

–

Units % share

100.00

61,213

100.00

55,360

100.00

131

Source: Automotive Components Manufacturers Association (various years). Notes: – denotes no production. * Formerly a joint-venture with Nissan Motors of Japan.

69.69 38,526

132 The Long March to Capitalism

fragmentation exacerbated the LCV problems. Also, macroeconomic swings, such as the exchange rate, created havoc with yen-denominated imports for JLCV firms. Between 1984 and 1987, the Japanese yen appreciated nearly 200% (Mathur 1991: 92).20 As a result capacity utilization was abysmal and costs prohibitive. For example, DCM-Toyota had a utilization rate of less than 20% in the late 1980s (computed from Mathur 1991: Figure D.1). The combined LCV market share of the four Japanese LCV units fell from 31.2% in 1988 to under 20% by 1993–94. In contrast to the JLCV firms, TELCO facilitated learning for quality improvements and process control. Though TELCO is not known for its explicit application of Japanese-type flexible practices, it has cultivated cooperative arrangements with its suppliers and always has had a good work environment for its employees. It also capitalized on the LCV market by relying on its in-house engineering capabilities, interchangeable parts of sufficient volume, and economies of scope (Lall 1987). Over the years TELCO built up a reputation for its rugged vehicles well-suited to Indian conditions and its wide service network. It introduced its own models, TELCO 407 and 608, and competed directly with the newly established Japanese LCV producers, capturing over 50% of the LCV market within a few years. It has one of the most advanced machine tool industries, capable of manufacturing dies at around 25% of the Japanese cost (Kathuria 1996: 215). Consequently, it could develop markets rapidly, in a flexible way. Thus in the 1980s, TELCO’s introduction of LCVs was very rapid, 18 months for the new 407 model, compared to the much longer time required by global firms (Kathuria 1996: 223–225). TELCO relies on a basic platform to produce variations of a given product, approximating mass customization. The Japanese LCV units relied on expensive imported equipment and components. Whereas low volumes hurt the Japanese LCV manufactures, TELCO did not face this problem. TELCO’s output of commercial vehicles was high, thus enjoying significant economies of scale, especially in the utilization of its equipment. By the mid-1980s TELCO was already producing 50,000 CVs, whereas its nearest Indian rival Ashok-Leyland produced less than a third of TELCO’s output. The four Japanese joint-ventures combined barely produced a third of TELCO’s 1985 output in 1990, their peak production year. By 1990, TELCO was producing over 80,000 vehicles and by 1999–2000 nearly 172,000 including 57,000 cars and 39,000 LCVs. Interestingly, TELCO’s flexibility is partly due to its high degree of vertical integration, and its in-house engineering skills. This resulted in reduced “innovation cycle time” and enhanced market share in the LCV segment. Increasingly TELCO is moving toward flexible practices by introducing QCs, reconditioning its mass production machines, and reducing inventories. This contrasts with the teething problems the Japanese LCV segment has faced in reducing costs and enhancing marketability of its products.21

Capitalist Regulation, Flexible Production, and Auto Market Evolution 133

TELCO was refining its own longstanding cooperative sourcing practices. TELCO’s growth took place under the old mass production system; its vertical integration during the 1977–88 period was about 40% (Kathuria 1996: 197–205), high by industry standards but considerably less than what prevailed in the 1960s. Consequently, TELCO had other competitive advantages over the JLCV firms, such as in-house manufacturing capability in dies, forgings, and machine tools. However, over the years TELCO has also successfully nurtured over 3,000 small-scale suppliers by maintaining a steady demand for their products (Personal Interview, Bombay, September 1991). TELCO, like its Japanese counterparts, has begun to deverticalize, relying on its previously established suppliers. TELCO, through technical and financial arrangements, was instrumental in developing the supplier industry. Most large suppliers found TELCO to be “extremely cooperative” (Kathuria 1996: 208; Personal Interviews, TELCO Officials, Bombay, September 1991). Thus TELCO was already practicing institutionalized cooperation with its suppliers more deeply than the newer JLCV firms. In the 1990s TELCO, from a position of strength, deepened its inter-firm arrangements. This was a consequence of the increasing maturity of the components sector, increased competition in the machine tool sector, and the entry of numerous transnational vehicle manufacturers. It has decentralized production as it begins to introduce product variability, from heavy commercial vehicles to light ones and utility vehicles. Today it is an important producer of passenger cars having designed the Indica model in India. TELCO has captured 9% of the Indian passenger car market and is ready to export its cars through UK’s MG Rover to Europe (Indiacar.net 2003). This flexible response is due to its technological capability, extensive vendor development, and cordial labor relations. In contrast, the Japanese LCV segment failed to institute flexible practices, which were easier to introduce with growing volumes of production. Given low volumes of production and higher costs due to imports, the Japanese LCV segment could not nurture a vibrant supplier base.22 Their attempts to introduce various elements of flexible elements were feeble at best. For example, Eicher-Mitsubishi had a zero defect policy on the production line, placing significant responsibility on its suppliers. The problem was that there were very few parts to deliver in the first place since the unit was dependent on imported knocked-down kits from Japan (Plant Visit, Pithampur August 1992). Four months lead time for imported kits implies there was little that the local plant could add in the area of quick and reliable deliveries of components. This experience was replicated by DCM-Toyota as well (Plant Visit, Surajpur 1991, 1992). Both DCM-Toyota (later DCM-Daewoo, now defunct) and EicherMitsubishi required fewer and a narrower range of parts. The lead time for vendor supplied parts averaged three months for DCM-Toyota,

134 The Long March to Capitalism

clearly indicating its inability to introduce more flexible governance systems that would elicit a quicker response on the part of the suppliers. Moreover, DCM-Toyota has confronted part shortages as a result of work stoppages in supplier firms and by default relied on suppliers that MUL had nurtured. This again reflects not only the vulnerability of manufacturers on suppliers but also the significance of instituting favorable industrial relations among their suppliers to undertake flexible production. The Japanese LCV units tried to introduce various facets of flexibility. For example, both DCM and Eicher followed the Japanese “value-engineering” approach. This is a process by which firms try to reduce costs not only by breaking down cost of inputs but by reducing waste or identifying redundancy in parts and material supplies without fundamentally altering the final product.23 This approach is significant as it demands a “trusting” environment for both buyers and sellers to conduct open discussions of costs that are typically proprietary information under arms-length market transactions.24 However, given the limited supply base and instances of supply disruptions the value engineering approach could at best have a limited effect. Furthermore, the JLCV producers confronted supply problems and higher costs as they tried to increase local content because of their weak ties to their suppliers. Nevertheless, as the demand for novel products rose, the LCV producers had to cultivate new, reliable suppliers.25 Both Eicher-Mitsubishi and DCMToyota have benefited from MUL’s suppliers, indicating some spill-over effects (externalities and sectoral agglomeration). However, the DCM plant, being in an industrial area near Delhi, had some advantage over Eicher, which was located in central India in Pithampur, Madhya Pradesh. However, in either case there has been little scope for just-in-time delivery. In the early 1990s, the lead time for vendor supplied parts averaged three months for DCM-Toyota. The company has not been immune to supply shortages, even if most of these suppliers (60%) are within a radius of 150 km, a few of them as dedicated suppliers. More recently, however, the purchase of the DCM-Toyota plant by Daewoo to produce cars has added to the supplier synergy in the Delhi region, even though the production of Toyota-designed LCVs has virtually ceased (Gulyani 2001a: 133). Weak supplier relations for the JLCV manufacturers have been accompanied by weak organizational changes. For example, unlike MUL, where QCs were an important form of institutionalized cooperation within the firm, the Japanese LCV producers did not seriously consider such arrangements. The low volume of production and high import content did not justify such flexible arrangements. There were only three QCs in DCMToyota, whereas Eicher-Mitsubishi had non-mandatory QC groups. In DCM-Toyota, although several different elements of Japanese practices were initially instituted, labor conflicts over unionization in the 1980s

Capitalist Regulation, Flexible Production, and Auto Market Evolution 135

encouraged workers to resist offering suggestions (Mathur 1991: 93). The turnkey nature of these projects meant that most technical problems would have been already solved in Japan. Also, multiskilling of workers associated with flexible industrial practices, was difficult to adopt in these enterprises, due to both limited training opportunities and rigid “work to rule” norms in many industrial enterprises. Work to rule practices are results of labor-management bargaining, which assigns specific tasks to specific categories of workers and hence prevent management from moving workers from one task to another.26 Moreover, little variety in output itself made multiskilling redundant. Opportunities for suggestions were also limited due to undiversified output and small volumes of production. For both political and production reasons instituting flexible practices was superfluous in these enterprises. For example, kaizen in Eicher, a Japanese shopfloor practice which encourages workers to make incremental improvements continuously, was carried out when the production line had stopped. This could mean that there were too few improvements to be made if the line stops were infrequent. It also appeared that this was the only opportunity for kaizen when such improvements in process could be made rather than adopting a more organic approach to problem-solving. On the other hand, if line stops were due to defective parts or shortages, which was likely to be high at the initial stages there were few improvements that could be made in the shopfloor.27 It was reported that every year between two and three thousand kaizen suggestions were implemented. However, it is unclear as to the significance of these efforts on Eicher-Mitsubishi’s performance. Often “continuous improvements” entailed simple tasks such as cleaning the work space, carrying out preventive maintenance work, and finding ways to improve the effectiveness of tools used in the manufacturing process. These activities, while conducive to a healthy work environment, are limited by their small scale of production.28 Eicher’s output stood at 8,000 units annually, with a market share of 8% of the LCV market.

5.

The Indian supplier industry today

The contemporary Indian supplier industry is a testimony to the selective adoption of flexible industrial practices and attempts toward establishing a new mode of capitalist regulation, which is consistent with neo-liberal economic policies and the opportunities thrown open by the embourgeoisment process. As Table 5.5 shows, backward integration in the Indian automotive industry has been quite remarkable. Between 1981–82 and 1991–92, the production of components increased by 47% and by 2000–01 the increase was fivefold and nearly threefold in rupee and US dollar terms respectively. With the full deregulation of the automobile

136

Table 5.5

Expanding Market for the Indian Component Industry (Rs. and US$, in millions)

April/March

Engine Parts

Electrical Parts

Transmission & Steering Parts

Suspension Braking Parts

Equipment

Total

Other Parts

1961–62

80.78

6.60

9.42

36.85

8.26

36.41

178.43

1971–72

479.44

124.66

273.26

303.80

65.82

63.64

1,310.63

1981–82

2,529.98 (282.11)

897.03 (110.02)

1,680.89 (187.43)

1,150.55 (128.30)

231.03 (25.76)

290.11 (32.35)

6,480.00 (722.57)

1991–92

10,491.73 (428.69)

2,212.17 (90.39)

6,782.52 (277.13)

3,696.05 (151.02)

1,116.70 (45.63)

1,775.74 (72.56)

26,074.91 (1,065.41)

2001–02

38,370.88 (804.56)

13,000.66 (272.60)

26,332.03 (552.13)

19,556.74 (410.06)

11,114.23 (233.04)

52,998.54 (1,111.27)

161,642.09 (3,389.29)

Source: Automotive Components Manufacturers Association (various issues). Notes: US$ values are in parenthesis, based on the appropriate official exchange rates taken from Government of India, Ministry of Finance (various issues). Data is for organized sector only and does not include the Small Scale Industry sector as defined by the Government of India.

Capitalist Regulation, Flexible Production, and Auto Market Evolution 137

industry in the mid-1990s, component production more than doubled in the latter half of the decade. The small-scale sector has also expanded in tandem, having doubled its output between 1995–96 and 2000–01.29 Component production has witnessed significant growth, with an 18-fold increase in rupee terms from 1984 to 2001 (ACMA 2001: 38) (Table 5.5). Even in US dollar terms the industry has done quite well. The component industry’s revenues stood at nearly $4.4 billion in 2001–02 and in 2004 Indian exports of components crossed the one billion dollar mark for the first time, reflecting the incubation of an entirely new and competitive supply system. Today the Indian auto industry has become more quality conscious and correspondingly more export-oriented. As a result foreign companies with Indian operations are eyeing third country markets. For example, India exported 70,547 cars in 2002–03 compared to 25,468 in 1998–99 and nearly a quarter of a million of two- and three-wheeled vehicles. MUL’s Alto in the late 1990s has been quite popular in Western Europe, projected to sell 24,000 units during 2002–03 (Indiacar.net 2002). Similarly, Hyundai, with a capacity of 150,000 units, plans to export 25,000 units in 2003 (just-auto.com 2003). Fiat and Suzuki announced plans to make India an R&D hub (Anand 2003). Also India’s component exports increased by 203%, from Rs. 893 million 1995–96 to Rs. 27,750 million in 2001–02. In dollar terms the increase was over twenty-one fold. The quality of Indian components has gone up considerably and buyers are no longer subject to arbitrary price increases for components. 30 The manufacturers of components are inducing quality improvements in their equipment suppliers. The machine tool industry is a case in point. Over 75% of the industry’s output is produced by ISO 9000 certified firms, a post-1991 deregulation development. By 2003, 378 of ACMA’s over 400 members were certified ISO holders (41 of these have environmental certification), an increase from 8.6% to over 75% of member firms (ACMA 1994, 1995, 1998, 2003). Two of ACMA’s members have been recipients of the coveted Deming Prize and one is a Japan Quality Medal recipient as well, which recognize significant achievements in manufacturing quality. Recently, Bajaj Auto and TVS announced plans to expand their operations to South East Asia (Vietnam and Indonesia now and China and others later) (Sify 2003). The TVS Group has become a major components manufacturer in India. It has successfully captured the new opportunities arising from deregulation by diversifying and vertically integrating the company’s tightly controlled activities (Swaminathan 1992: 194–195). The company benefits from economies of scale, making it one of the leading Indian original equipment (OEM) suppliers for GM’s global operations. Indian firms are producing a wide array of products with significant backward integration and increasingly targeting them for the global market (Rai 2003).

138 The Long March to Capitalism

6. Conclusion: capitalist regulation and industrial transformation In investigating capitalist development in India, this chapter examined market expansion from the supply side. Taking off from the state-led embourgeoisment process as a source of demand, punctuated by supply constraints in the earlier regime of state-led accumulation, this chapter highlighted the shift toward a new regime of capitalist regulation. The internationalization of the auto industry was accompanied by institutional responses to an emergent deregulated environment. The Indian auto parts and components industry met the challenges of transition, from one form of regulation to another, with new forms of intraindustry coordination and intra-firm collaborative arrangements to overcome supply bottlenecks and reduce costs. Capitalist development viewed through this industry suggests stronger interfacing of the Indian economy with the global one. Today the Indian automobile industry is highly internationalized with leading multinational companies driving the growth of the industry. Output growth of the industry has been remarkable while the quality of products has vastly improved. The foundations of this expansion have been concomitant industrial deepening through backward integration. In the last decade and a half the Indian parts industry has witnessed remarkable growth such that the industry is now poised to enter the global market. This was unimaginable a decade ago. It is evident that the Indian auto supplier industry is entering a more mature phase thus contributing to the overall transformation of the Indian automotive industry. At the macro level the gradual liberalization of the economy and the industry prompted the industry to tap the world market for technology and products. At the industry and firm levels efficiency and quality concerns led them to adopt what are generically known as Japanese flexible industrial practices. This response is consistent with the shift in capitalist regulation entailing more flexible production systems. Economic liberalization and internationalization accompanying embourgeoisment provided the contextual foundations for the growth of the auto parts and components industry. Initiated by MUL’s aggressive efforts early on in institutionalizing cooperative arrangements with its suppliers and workers, the rest of the industry followed suit. Supply vulnerability was reduced through inter-firm collaboration and through worker involvement in the production process. However, not all firms have successfully adopted these practices, as illustrated by the lackluster performance of the Japanese LCV producers, suggesting the immense challenges confronting developing economies in inducing institutional change for capitalist transformation. Lack of economies of scale, a dimension still critical to unit cost reductions, was also responsible for this outcome.

Capitalist Regulation, Flexible Production, and Auto Market Evolution 139

Overcoming supply bottlenecks has been critical to the growth of the industry. Even as late as 1997, nearly 15 years after MUL began production, the former Managing Director of MUL, Mr. R. C. Bhargava emphasized the importance of supply bottlenecks to industry expansion in the following way: “My problem is, in the next two years I don’t have the capacity for growth. So the best we can do in this period is to improve quality, work to reduce cost, improve the marketing network and generally consolidate” (Shipping Times, April 1, 1997: 2). In late 2003, MUL suffered severe supply problems from its near-dedicated supplier DCM Engineering. The threemonth strike at the supplier firm crippled MUL’s production as 70% of the cylinder blocks were supplied by DCM Engineering (India Daily 2004). Limits to capacity utilization are not only influenced by macroeconomic demand constraints dampening vehicle sales but also by the technical and infrastructural ability of components suppliers. The Indian auto industry illustrates how flexible industrial practices to reduce costs and overcome mutual vulnerability has been a strategic response to meeting rising demand. The deployment of flexible practices in India also suggests that such practices were not designed for greater product variability as is often the case in high-income markets. Rather flexibility initially circumvented physical, technological, and institutional impediments to increased output, which over time led to greater responsiveness to meet a more diverse Indian market demanding greater output volume and product variability. For example, with rising output and backward integration both MUL and TELCO could produce differentiated output. Both MUL and TELCO focused on a competitive strategy that depended on a reliable supply system. As demand rose increased production became the very basis for learning-by-doing, quality improvements, and further backward integration. TELCO has been successful not only in the CV/LCV market but also in the passenger car segment. There are over 450 ACMA members which represent the Indian components segment. Suppliers, such as Sona and TVS Group, have diversified their manufacturing base and are contributing to regional agglomerations (see Chapter 6). MUL’s third plant was located at its existing site, close to its suppliers rather than a distant coastal site, suggesting the importance of proximity to flexible practices. The clustering of firms along with high technology enterprises could encourage innovation-mediated production in the regions. What then is the possibility of Indian firms participating in global production networks? Virtually all major multinational firms from the US, Western Europe, Japan, and South Korea are present in India. Indian suppliers are expected to cash in on their production capability to meet the needs of diverse multinational firms. Past efforts to reduce costs and increase productivity will not have gone to waste. However, there are two contradictory movements: with new players there is market fragmentation

140 The Long March to Capitalism

at the assembly level, while at the same time there are increased opportunities to exploit economies of scale and scope at the components manufacturing level. With nearly thirty car models produced in India today, covering the compact, mid-size, and luxury segments, the market has become highly competitive. Fragmentation is likely to engage firms in consolidating flexible practices so as to cope with demand variability. Standardization of parts and components (modular production, for example) will be one strategy to tackle the challenges of diversified quality mass production. So long as national demand increases the implementation of flexible systems will be facilitated, thereby making Indian products internationally competitive. As oligopolistic competition heats up, MNCs are expected to consolidate their market control. Recently several Indian partners of joint-ventures relinquished their equity in favor of multinational majority ownership. For example, foreign equity at Daewoo stood at 92% (before becoming defunct due to the parent firm’s financial problems in Seoul now being acquired by General Motors), Mercedes Benz at 76%, General Motors at 100%, Ford 92%, Honda 90%, and Toyota 74%. Hyundai is the only multinational that did not start out as a joint-venture. Consequently, the entry of home-based suppliers of multinational auto firms is likely to spur increased competition for local components suppliers as well. This could either substitute or complement local suppliers, much depending on volume of output. The implication is that inter-firm and intra-firm flexible arrangements will have to be deployed to greater depth to attain both mass production goals such as cost reduction and flexible performance to increase quality and product variability. There is another possibility. As flexible production demands the proximity of suppliers, MNCs will to have source many components locally. Hence the diffusion of best-practices raises the possibility of Indian firms to insert themselves into existing international production networks. With greater design responsibility of parts suppliers in a subcontracting arrangement, flexible output in India suggests global integration of Indian suppliers. However, Humphrey (1999) has argued that with standardization of modular components globally, developing country firms, such as those from India or Brazil, are likely to be excluded from participation. This is because large multinationals are using common platforms and designs for several of their overseas operations, making imports from familiar multinational suppliers important for local production. Additionally, with market expansion and WTO norms in place, foreign companies are likely to increase their equity and engage their home-based suppliers. However, system-wide technological capability is expected to increase with expanded and increasingly diversified output. Continuing low labor costs in India and the growing domestic market are likely to favor diversified output. The consolidation of flexible practices and the localization of the components

Capitalist Regulation, Flexible Production, and Auto Market Evolution 141

sector through a combination of tariffs, technology transfer, and FDI and widening markets can make India’s selective participation in international markets more realistic. Already there are signs of such development. For example, India’s design and engineering capability is rated high by the industry, given the relatively abundant supply of inexpensive skilled workers and qualified engineers. Its competitive edge is evident by Toyota’s Indian hub for transmissions, Hyundai’s export base for small cars, and several other multinationals targeting India for outsourcing components. What then can we say about capitalist development in India? The growth of the Indian auto industry through backward integration is a sign of successful industrial development. However, there are inherent contradictions, namely uneven regional, social, and economic development. We take up the regional dimension of capitalist contradiction in the next chapter by examining the institutional, political, and business responses to industrial decline in West Bengal, a state that boasts independent India’s first major auto company. The source of uneven development of the Indian auto industry is displayed by both success and painful adjustments to a new regime of capital accumulation. Contradictions are also visible with excessive competition. For example, today there are nearly 15 car producers in India, with a total output of less than 0.7 million and installed capacity over one million units per annum. The dialectical process inherent in capitalist market development is illustrated by the changing nature of competition: from monopoly to excessive competition, market fragmentation, retrenchment, and consolidation. The next chapter presents some of the regional dimensions of development, underscoring the uneven impact of capitalist industrialization and the mismatch between institutional legacies such as local politics and industrial relations and the new flexible mode of capitalist regulation. The attempt by the state government of West Bengal to resurrect industrial development in the wake of long-standing capital flight from the state and subsequent industrial decline has been at best fleeting. Thus the hybrid nature of contemporary industrial capitalism in India, as captured by the restructuring of the Indian automobile industry, can be interpreted as the product of the institutional inertia of older systems of capitalist regulation and the dynamism of new ones under changing regimes of accumulation.

6 Uneven Development and the Changing Regime of Accumulation in West Bengal

1

Introduction

The changing regime of capital accumulation at the national level has fostered significant transformation of the auto industry. In a liberalizing environment embourgeoisment has also led to increased production and consumption of consumer durables. These developments suggest uneven development, not only in terms of worsening pre-existing economic and social inequality (a theme taken up in the next chapter) but also regional differentiation. The assumption is that not all social groups or geographic regions are likely to experience similar rates of growth. Rather, in an expansionary environment the benefits of growth also accrue differentially among different groups. Not all firms are capable of making a successful transition to the new imperatives of capital accumulation.1 Older firms located in older industrial regions are likely to find it more difficult to adjust to the new mode of capitalist regulation involving not only less state protection but also the adoption of flexible systems of production. Moreover, institutional legacies, firm strategy, local industrial relations, and, in the case of multicultural, federated system in India, the particular role of provincial governments will have a cumulative bearing on industrial transformation. The long march to capitalism entails industrial restructuring, whereby lagging firms must either adjust to a new competitive environment or else become moribund. There must be also an accompanying ideological shift, whereby the regime is anticipated to change to accommodate the imperatives of a deregulated capitalist environment. In the event of failure to change, regional decline becomes imminent. This chapter presents uneven capitalist development by examining the dispersion of automobile production in India to new locations in general and relatedly the adjustment process experienced specifically by an established firm in an older industrial location. The discussion is aimed to bring out not only some of the familiar institutional factors responsible for industrial change but also to highlight the constraints institutional actors 142

Uneven Development and the Changing Regime of Accumulation in West Bengal 143

face when confronted with the new logic of capital accumulation, namely deregulation. More importantly, it shows that capitalist transformation is often partial, with successful firms imposing severe adjustment costs on firms, industries, and regions that do not conform to the imperatives of market expansion and competition. The uneven development experience also suggests that adjustment failures are not independent of capitalist expansion but very much integral to it. Capitalist development is as much expansionary as it is destructive of the materialist basis of society. The latter is a necessary condition for its resurrection as well. The empirical case discussed here is drawn from West Bengal, a state that boasts the first auto company – Hindustan Motors (HM) – in independent India. However, leftist politics consistent with an earlier national regime of state-led capitalist regulation undermined West Bengal’s relative industrial position. In this context conservative firm strategy has also weakened the state’s industrial base in the more competitive national and global environments. Both output and market shares for HM have drastically fallen, an outcome that is not inconsistent with industrial deregulation and neoliberalism. The adjustment process has been multifaceted. The company has diversified its activities and invested outside the region. The local government of West Bengal is attempting to resurrect industrial growth in the state by accepting the tenets of liberal economic reforms. HM wants to close the auto unit in Uttarpara, West Bengal, while the workers demand the protection of their jobs. The state, however, is in a quandary. On the one hand, its critical political and ideological support comes from organized industrial workers and, on the other, the political leadership must also meet the imperatives of capital accumulation to rejuvenate the local economy. Consequently, both HM and its workers are not only pitted against each other but the latter is also up against the very state that claims to represent them. This particular dialectic of industrial restructuring illustrates the dilemma of capitalist development as new competitive pressures undermine the social pact between workers and the state, while firms are liberated to seek alternative investment outlets in their accumulation strategy. The chapter is divided into five parts. The first part introduces uneven capitalist development by bringing out the particular Indian context of industrialization and the relative industrial decline of West Bengal. The second part delves into the political economy of capitalist regulation in West Bengal and its link to uneven development. In particular leftist politics, industrial disputes, and capital accumulation strategies by firms are seen as integral to such local development. The next two parts examine the performance of Hindustan Motors, its strategies, and the inherent class conflict that is associated with industrial growth and stagnation. The final part illustrates the growing acceptability of the new regime of capital accumulation as a response to uneven development.

144 The Long March to Capitalism

2

Capitalism and uneven regional development

There are many sources of uneven capitalist development (Banerjee 1998). Legacies of history and institutional factors such as colonialism and the dominance of a landed gentry and consequent agrarian relations have a strong bearing on the future trajectory of regional economic development. Geographical variation also arises from particular state policies toward industrialization and the region-specific political economy of industrial relations. And, in the federated Indian system, the political relationship between the central and state governments, dictated by inter-party conflict, has influenced the direction and the magnitude of central government revenue resources toward different states. Also, the issuing of industrial licenses by the central government favored industrial investments in areas outside West Bengal. The cumulative effects of multiple factors can be seen in the uneven distribution of industrial production (Table 6.1). Based on the national industrial classification of Indian manufacturing, in 1970–71 the three states of Maharashtra, West Bengal, and Gujarat had a combined share of 49.5% of total net value added in the manufacturing sector. By 1997–98, when the economic reforms of the 1990s were well under way, their combined share fell to 37.1%. Among these three states, Maharashtra has consistently maintained its industrial lead by a wide margin over the last three decades, even though historically its share of net value added has been declining (also Gangopadhyay 1996: 267–273). Gujarat has increased its share since the late 1980s, experiencing a fairly typical business cycle pattern. What is most noteworthy is the secular decline in West Bengal’s share since 1970–71 (Figure 6.1). Over the last thirty years, the state’s share of manufacturing has been more than halved, with Tamil Nadu and Uttar Pradesh having exceeded or narrowed the industrial output gap with West Bengal considerably. Among the various manufacturing sectors, jute and other vegetable fibers, along with transport equipment and parts (i.e. National Industry Code 2-digit Code 25 and 37 respectively), witnessed the steepest decline since the late 1970s. In 1979–80, the net value added by jute and other vegetable fibers and by transport equipment were 23.78 and 10.50, which in 1997–98 stood at 10.81 and 5.52 respectively. Other industries such as chemicals, rubber, plastics, petroleum products, basic metals, and machinery also show declines (Government of India, Ministry of Statistics and Programme Implementation, various years). These are also industries that expanded considerably at the national level. Concomitant to relative industrial decline, the state has been also impacted by uneven national development. For example, in the late 1960s, West Bengal was among the top states in the sale of passenger cars (Table 6.2). At the time cars were considered a luxury item, hence heavily taxed. Other than government departments, only very well-placed professionals or rich households could

Table 6.1

Percentage Distribution of Net Value Added Across Selected Indian States AP

1970–71 1971–72 1972–73 1973–74 1974–75 1975–76 1976–77 1977–78 1978–79 1979–80 1980–81 1981–82 1982–83 1983–84 1984–85 1985–86 1986–87 1987–88 1988–89 1989–90 1990–91 1991–92 1992–93 1993–94 1994–95 1995–96 1996–97 1997–98

Bihar

Gujarat

4.00 5.50 9.10 4.00 5.70 8.30 Survey was not conducted 5.10 4.90 9.50 4.30 6.30 10.00 5.00 7.80 8.90 5.10 5.40 9.40 4.90 4.90 10.20 4.90 5.40 9.30 5.00 5.00 9.50 4.90 4.20 9.50 4.80 6.30 8.70 6.10 6.70 9.10 6.50 7.90 11.60 6.90 5.50 10.20 5.40 5.40 9.30 5.40 5.60 10.20 4.40 6.70 10.10 5.30 7.40 9.80 5.00 6.10 8.50 5.80 5.00 8.70 5.80 6.00 7.50 6.00 4.80 11.30 5.60 7.60 10.70 7.00 4.10 11.40 7.00 3.80 12.60 5.80 4.90 12.30 7.40 6.00 9.20

Haryana

Karnataka

Maharashtra

Punjab

TN

UP

WB

2.20 2.60

5.70 6.00

26.80 27.40

2.30 2.10

9.80 9.40

6.60 6.20

13.60 14.40

2.20 2.20 2.40 2.50 2.70 2.70 2.90 2.90 3.10 3.10 3.70 2.80 2.90 2.90 2.80 2.90 2.70 3.20 3.20 2.30 2.40 2.80 3.40 3.90 3.00

5.10 4.50 5.10 4.90 4.90 6.40 5.20 5.10 4.60 4.90 5.60 5.00 5.00 5.00 4.70 4.70 5.00 5.40 6.20 5.80 4.70 5.40 4.80 6.10 5.50

26.80 26.20 24.60 24.40 25.00 25.20 24.90 25.00 23.30 21.60 21.80 22.80 25.90 23.80 22.00 23.70 23.00 23.30 19.80 22.80 24.40 22.00 23.70 21.20 21.70

2.20 2.20 2.70 2.80 2.80 2.90 3.30 3.20 3.00 2.70 2.70 3.00 3.20 3.10 3.60 3.10 5.00 3.60 3.80 4.10 3.40 3.20 2.90 3.60 3.00

9.30 9.50 8.50 9.40 9.90 10.00 9.90 10.30 9.80 10.10 9.00 11.30 10.30 10.40 10.00 10.90 10.90 11.20 11.20 10.20 11.20 10.80 10.20 10.20 8.70

6.40 6.50 6.50 7.40 6.40 6.20 6.30 6.30 10.20 9.00 6.00 6.60 6.00 9.10 9.10 8.60 9.70 9.00 10.80 9.10 6.50 9.90 8.40 9.60 9.20

13.30 12.90 13.30 12.10 11.60 11.20 11.00 11.50 9.90 9.80 8.10 8.80 8.40 7.80 8.90 6.30 5.30 6.20 6.80 5.90 6.10 5.00 4.70 5.50 6.20 145

Source: Government of India, Ministry of Statistics and Programme Implementation, Annual Survey of Industries, various years, compiled by Saikat Sinha Roy. Notes: AP = Andhra Pradesh, TN = Tamil Nadu, UP = Uttar Pradesh, WB = West Bengal.

146 The Long March to Capitalism 30

% share

25 20 15

Gujarat Maharashtra Tamil Nadu West Bengal

10 5 0 8 –9 97 1 9 –96 95 1 9 –94 93 1 9 –92 91 1 9 –90 89 1 9 –88 87 1 9 –86 85 1 9 –84 83 1 9 –82 81 1 9 –80 79 1 9 –78 77 1 9 –76 75 1 9 –74 73 1 9 –72 71 19

Figure 6.1

Net Value Added in Manufacturing by States

Source: Government of India, Ministry of Statistic and Programme Implementation (various issues).

afford cars. While West Bengal had its share of industrialists, rich merchants, and absentee landlords, Delhi, with no industrial legacy to speak of, dominated the car market because of its status as the national capital. The arrival of entrepreneur-cum-refugees from erstwhile West Pakistan after 1947 might have added to the city’s purchasing power. However, under both colonial and postindependence national governments, Delhi inherited and appropriated substantial national resources for the upkeep of the city and for national administration. State-led development in India benefited the city far more rapidly than other regions as evidenced by its growing market share for passenger cars. Delhi, a Union Territory akin to a city-state, had 11% of national passenger car sales in the 1960s, compared to highly populous West Bengal’s 13.5%. The two territories are not strictly comparable, as one is a state with an agricultural hinterland and a large impoverished population and Delhi is the administrative capital with all the privileges that go along with being one. Nevertheless, the fact that Delhi, with a small population, could become a leading national center of consumption and production implies a changing industrial and economic geography of the country. In 1980 their shares of passenger car sales were identical but in the 1981–85 period Delhi’s share increased to 17.4%, while West Bengal’s fell to 9.3%. The sales gap in this particular consumer durable remained wide between the two regions over the next two decades. In 1990, Delhi had a share of 25.3% of national car sales compared to West Bengal’s 5.3%, and in 1998, a recession year, the two had 16.7% and 5.5% respectively (ACMA various years). The difference is highly pronounced when we compare the three metropolitan cities of Delhi, Mumbai (formerly Bombay), and Kolkata (formerly Calcutta), the state capitals of Maharashtra and West Bengal respectively. In 1977 Delhi had 389,000 vehicles of all types (or 11.9% of national total)

Table 6.2

Statewise Sale of Passenger Cars

Delhi Gujarat Karnataka Kerala Maharashtra Orissa Punjab-Haryana Tamil Nadu Uttar Pradesh West Bengal Total

1966–70

1976–80

1980

1981–85

1990

1995

1998

18,499 7,670 7,784 7,729 28,467 2,008 6,318 24,023 11,514 22,702 167,921

18,163 9,028 9,157 7,317 37,305 1,125 10,644 16,051 6,384 22,538 161,155

3,780 1,880 1,896 1,130 6,338 162 2,433 3,385 1,293 3,775 30,950

50,649 15,356 11,183 9,640 68,620 3,118 17,494 28,614 12,321 26,962 291,445

42,901 10,457 7,491 4,469 26,128 870 18,201 12,167 10,059 8,949 169,730

55,842 22,024 19,649 12,511 50,935 1,635 18,767 26,616 18,443 11,652 298,065

45,832 20,925 14,190 11,263 28,334 3,064 29,380 17,366 23,054 14,985 274,324

Source: Automotive Components Manufacturers Association (various years). Notes: Punjab-Haryana, previously part of the same province, are now two different contiguous states and share a common capital.

147

148 The Long March to Capitalism

compared to Mumbai’s 245,000 (or 7.5%) and Kolkata’s 148,000 (or 4.5%) (ACMA 1984: 66). Notwithstanding West Bengal’s rural hinterland and rich industrial base, uneven development was rife in an era of tightly regulated capitalist economy. By 1981, the three cities’ respective shares stood at 10.4%, 5.9%, and 3.3%. The economic deregulation of the early 1980s and the unprecedented launching of passenger car production for the first time by a joint-venture between a foreign firm (Suzuki Motors) and the government of India boosted output considerably in a supply-constrained market. A new regime of capital accumulation was in the offing even if it initially entailed deep state engagement in industrial production. Market barriers were lowered and international openness to integrate with the world economy was encouraged. The location of the new auto plant in the outskirts of Delhi reflected Delhi’s emergence as a pre-eminent market. Subsequent deregulation of production in the 1990s led to increased overall market expansion, with Delhi capturing 24% of the share of 23 “metropolitan” cities combined in 1998, while Mumbai and Kolkata had a combined share of only 12% (ACMA 2001: 60). Twenty other cities shared the remaining 64%. Uneven development and industrial decline in West Bengal was predicated on the rise of Delhi as a center of consumption. In a recent study of state performance, Delhi was ranked first in terms of affluence, mass media, consumer purchases, and personal finance; while the corresponding ranks for West Bengal were 14, 8, 16, and 11 out of 18 (Debroy, Bhandari, and Banik 2000: 12). Though its rise is a cumulative outcome of both old and the new regimes of capital accumulation, Delhi has become an important center of industrial production. This is something quite new in the history of Indian industrialization but consistent with the institutional requirements of flexible production in a deregulated environment. In fact the National Capital Region (NCR), which includes Delhi, became an industrial competitor to leading industrial states such as West Bengal, Maharashtra, and Gujarat (National Capital Region (NCR) Planning Board 1997: 18). As we have seen in the previous chapter, firms and their collaborators coped with the new rigors of capitalist regulation and exploited new accumulation opportunities by creating new regional centers of automotive production. New producers could respond to increasing demand by establishing institutionalized cooperation. For example, business-government partnerships, buyer-supplier cooperation, more cooperative industrial relations, and intra-firm teamwork contributed to this flexibility. These are precisely the attributes neither HM nor the state of West Bengal could nurture.

3 3.1

Capitalist regulation in West Bengal The legacy of uneven development

The state of West Bengal occupies an interesting industrial and political position. Aside from hosting colonial India’s administrative city, Calcutta,

Uneven Development and the Changing Regime of Accumulation in West Bengal 149

until 1911, West Bengal has been also a major industrial center of the country. It is also a state that has been ruled by leftist political parties for nearly three decades. Boasting a river port and rich raw material and cash-crop based hinterland, the state remained one of the more industrially advanced in the country in the immediate post-independence period. Politically the state has been relatively progressive, with its coalition of various communist and socialist parties working on behalf of the rural poor (Kohli 1989, Williams 2001, Maiti 2002). Historically its intelligentsia has been at the forefront of the nationalist, anti-colonial movement, social reforms, and mass political mobilization (see Franda 1971). However, the signs of the city’s, and by extension the state’s, decline were already present (Bagchi 1990). Historical, structural, and institutional factors limited the emergence of a strong Bengali entrepreneurial class. The colonial practice of revenue maximization created a class of absentee landlords, thereby contributing to rural inequality and poverty (Tomlinson 1993; Rothermund 1993). The dominance of British merchants and the role of Indian intermediaries, both Bengalis and non-Bengalis, facilitated colonial trade from the hinterland. However, unlike western India such as contemporary states of Maharashtra and Gujarat where the local traders had greater autonomy from British merchants, in Bengal the emergence of a nascent local bourgeoisie was severely constrained. In addition, the demand for administrators and bureaucrats attracted the local educated Bengalis to service-oriented careers. The partition of the subcontinent into Pakistan and India in 1947 also truncated what was for a while a regionally integrated production system– jute cultivation in East Bengal (East Pakistan) and jute processing and related manufacturing in West Bengal (part of India). The declining demand for jute products led by technologically-driven substitutes further undercut the local industrial base. However, as traders (mainly Marwaris who belonged to trading communities) began to take up businesses now vacated by the British and as the Indian government pursued a state-led import substitution industrialization strategy, West Bengal was not all together cut off from the initial surge of investments. In fact, several capital-intensive projects were undertaken. For example, Durgapur obtained the first of three one-million ton steel plants. Hindustan Motors set up India’s first car manufacturing unit in Uttarpara near Calcutta. Many other industries such as paper and pulp, plastics, chemicals, metals, rubber, etc., which were already established along the banks of the river Hooghly were complemented by new ones as well. Unfortunately the initial momentum in industrial investments could not be sustained due to both fiscal constraints at the central level and the increasing rivalry among states to obtain a slow-growing share of national revenue surplus. The Marwari trading groups in West Bengal had neither

150 The Long March to Capitalism

the legitimacy nor the clout to be representative of the region (Banerjee 1998: 90–91). Their speculative activities limited growth-enhancing economic activities and, in the absence of a local Bengali bourgeoisie, various leftist parties found the political space to pursue economic transformation (Pedersen 2001: 666–668). Consequently, Marwari traders began to diversify their investments outside the state as illustrated by the Birla enterprise, which was one of the largest Marwari business houses. In the 1960s the Birla house had sought approvals for industrial investment to the tune of Rs. 3,315 million outside the eastern region compared to Rs. 2,414 for the eastern region as a whole, which included West Bengal (Banerjee 1998: 93). Capital mobility out of West Bengal was already underway as other states were perceived to be more attractive. Also, as the Indian federation carved out more states (for example, the Indian Punjab province was divided into Punjab and Haryana), the clamor for central funds also increased. The parliamentary political system that could have one ruling party at the central level and another one at the state level left open the possibility that the distribution of central funds could be politically motivated. Both Punjab and West Bengal, which were ruled by non-Congress parties believed they received proportionately less than what they deserved.2 On the demand side West Bengal was home to a large population that was deep in poverty. Consequently, there was a considerable mismatch between the state’s political mobilization of the masses and its economic performance. This friction was historically compounded by the sub-continent’s partition in 1947, the Indo-Pakistan War of 1965, and subsequent independence of East Pakistan, which became Bangladesh in 1971. West Bengal, including Kolkata, witnessed increased poverty with high population growth in part due to net in-migration from Bangladesh next door and neighboring Indian states. Bengali refugees from erstwhile East Pakistan and now Bangladesh, and economic migrants from the poor neighboring states of Bihar and Orissa further compounded West Bengal’s poverty. The legacy of poverty in Bengal since the infamous Bengal famine of 1943, subsequent famine in the 1960s, and the continued high population growth in the overall climate of slow national economic growth has created not just an economic malaise but also a political hotbed. Early exposure to anticolonial struggles and the political mobilization of the masses by leftist parties for economic justice (often with an anti-nationalist, anti-capitalist fervor) created a radical political climate in the state. 3.2

Leftist politics and capitalist imperatives

The mobility of capital in independent India was not only regulated by state-led economic development programs but in the state of West Bengal capital was heavily circumscribed since the 1960s and 1970s by a labor force prone to agitation. Anti-colonial movements had exposed West Bengal to radical politics and consequently influenced industrial relations in the state.

Uneven Development and the Changing Regime of Accumulation in West Bengal 151

After the formation of the Communist Party of India (Marxist) (CPM) in 1964 from the Soviet-leaning Communist Party of India, West Bengal has been ruled by a coalition of left-leaning parties (Franda 1971). Not only were labor unions in the state dominated by the CPM but the party also tried to address the farmers’ plight through land reforms. In 1967, the labor minister under the United Front government, which included the CPM as a partner, decreed that “gheraos” (literally surrounding management and employers) were legal (Modak and Bhatkhalkar 1997: 17). Over time the CPM increased its political influence in the state through grassroots organization and increasingly won many state assembly seats. In 1977, the CPM formed the Left Front government of West Bengal with other leftist parties. The party has been returned to power in all subsequent state elections and the Left Front remains in power. During its rule, the CPM pursued two divergent strategies. The first, and the more important one, promoted land reforms (for example the bargadar or sharecropper movement that redistributed land and regulated the bargadar-landlord relationship), which solidified its political support in rural West Bengal. The second, consistent with its left ideology, was a pro-labor strategy, which over time had a seriously debilitating effect on industrial investments. Declining industrial investment led to declining profitability (Ray 1996: 252–253). This strategy also unwittingly cornered the CPM into a political dilemma and an ideological quagmire. While there is disagreement as to whether declining profitability led to West Bengal’s industrial decline (see Banerjee et al., 2002), it is important to recognize the cumulative impact of a number of interrelated factors that contributed to the state’s decline and thus set the stage for capital flight from the state. A political economy explanation for the state’s decline calls for an understanding of the prevailing industrial climate, which would include a discussion of industrial relations and its likely impact on the profitability of investment (Gangopadhyay 1996: 269). There are three interrelated developments pertinent to the understanding of West Bengal’s industrial decline in the larger context of uneven capitalist development. First, was the political mobilization of organized industrial workers in the state. Workers had considerable leverage to raise salaries, buttressed by a dramatic increase in membership of the Centre of Indian Trade Unions (CITU), the labor wing of the ruling CPM. From 1977 to 1996, CITU’s membership increased by 49% to 709,708 (Modak and Bhatkhalkar 1997: 42). Second, while the CPM legitimized its political influence among organized industrial workers and rural small-holders and landless workers, it effectively pushed industrial capital on the defensive. Investments and profitability were undermined by increasing wage costs due to overstaffing, technological obsolescence (due to a slowdown in investments), industrial agitation by workers, and lockouts by employers. Third, organized blue-collar workers and white-collar state employees

152 The Long March to Capitalism

adopted a casual, undisciplined approach to work. This was a consequence of the earlier go-slow agitations adopted by trade unions especially when the CPM was an opposition party. However, on coming to power in 1977, the CPM had to make an ideological about-face and be more pragmatic toward industrial capitalists and workers in the state. The challenge for the CPM was to transform the anti-capitalist ideology that has been the party’s political mainstay to a pro-capital investment-friendly government and to rein in labor demands after having politically mobilized labor and raised worker expectations. Trade union activity heightened under the Left Front government. Not just CITU, but other unions as well vied for political influence. Between 1995 and 2000 the total number of trade unions increased from 216 to 352 (Government of West Bengal, Department of Labour 1994). As the CPM came to power in an era of industrial decay, declining productivity, and challenges of capital accumulation, the pro-labor party had to politically and ideologically cope with a new regime of capital accumulation. By this time industrial capital had gone on the offensive and deliberately under-invested in industries.3 Declining capital productivity (accompanying declining labor productivity) was a product of declining investments and technological obsolescence (Ray 1996: 258). A neoliberal world demanded that political legitimacy be sought not simply by political mobilization but also by economic welfare through job creation, especially when capital was leaving West Bengal and other states in India were economically and industrially forging ahead of West Bengal. 3.3

Industrial disputes, accumulation crisis, and capital flight

The consequence of heightened political activity, encouraged by the ruling party, created unusual labor turmoil. In 1979 West Bengal lost 18 million persondays to strikes and lockouts (Ramanujam 1990: 283). Tamil Nadu was a distant second with only 8.4. million persondays. West Bengal represented over 40% of national losses in 1979. The paradox, however, was readily apparent. The ruling communist party was firmly ensconced in capitalist India. While in opposition the left could agitate against and veto capitalist development but when in power it had to contend with the everyday issues of employment generation for the masses and restore profitability for industrial capitalists. This contradiction between party ideology and capitalist imperatives forced the CPM leadership to adopt a more pragmatic, social-democratic stance. Consequently the number of strikes and the loss in workdays declined (Figure 6.2). But the damage was done and the pragmatic compulsion came too late. In the automotive industry, other states such as Haryana, Gujarat, and Tamil Nadu were perceived to be better destinations for investments than West Bengal.4 Over 40% of national disbursements by financial institutions and foreign direct investment went to Maharashtra, Gujarat, and Tamil Nadu in the early

Uneven Development and the Changing Regime of Accumulation in West Bengal 153 350

300

No. of Disputes Strikes No. of Disputes Lockouts No. of Disputes Total

Number

250

200

150

100

50

0 1979 1980 1981 1982 1983 1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997

Figure 6.2

Increasing Lockouts in West Bengal, 1979–1997

Source: Government of West Bengal, Department of Labour (various issues) in Datt (2003: 124).

1990s (Venkata Ratnam 2001: 182). Even as recently as 2000, one of West Bengal’s most significant weaknesses was in the area of quality of labor and industrial relations. The state ranked 12th compared to first, second, and third for Tamil Nadu, Gujarat, and Maharashtra respectively (Debroy, Bhandari, and Banik 2000: 11–15). These states had already adopted more flexible approaches to capitalist regulation: namely, better industrial relations, infrastructure development, and competitive wage costs (Tendulkar 2001: 13). In fact capital based in West Bengal went on the offensive, effectively striking against workers and the political leadership by locking out industrial units (Figure 6.2).5 This macro dynamic is consistent with the heightened mobility of capital associated with an increasingly capitaldominated neoliberal world of faster reforms and stronger integration with the world economy. West Bengal accounted for a major share of national industrial disputes. More importantly, while strikes by workers decreased over time, lockouts by employers increased significantly. Clearly political power in West Bengal had shifted in favor of employers precisely at a time when capital in general had become highly mobile in a neoliberal setting. Strikes resulting from industrial disputes in West Bengal reached a peak between 1967 and 1969. There were 772 cases of strikes in 1967. Since then it declined precipitously until 1975 and rose again to roughly 200 cases in 1979. In the

154 The Long March to Capitalism

following decade strikes became virtually non-existent (Mallick 1993: 201). What is noteworthy since 1978 is the widening gap between the number of strikes and lockouts, with the latter exceeding the former throughout the ten-year period until 1989. There were over 200 lockouts over the 1987–89 period (Mallick 1993: 201). In 1975 West Bengal represented 64.5% of national persondays lost due to strikes, which fell to 3.5% in 1983 (Mallick 1993: 200). However, West Bengal exhibited a very high share of persondays lost due to lockouts. Of the seventeen years from 1967 to 1983, there were 15 years in which West Bengal’s share of losses due to lockouts exceeded 45% of the national total. While the number of workers involved and the number of persondays lost due to strikes and lockouts reflect cyclical patterns since the 1960s, lockouts since the 1980s have been clearly on the rise in the state (Gangopadhyay 1996: 277). There are at least three interrelated interpretations of this. The first is the macro political economy interpretation whereby capital as a whole was on the offensive. Data on industrial disputes at the national level point to rising lockouts in terms of number of disputes, number of workers involved, and the number of persondays lost (Datt 2002: 179–181).6 In 1997 of the total number of persondays lost due to disputes 66.4% of persondays were lost due to lockouts. However, of the total number of workers involved in disputes, only 35.9% of them were affected by lockouts. This suggests that industrial disputes resulting from lockouts involved fewer workers but of a more protracted form that favored employers. In recent years the numbers of both strikes and lockouts have been falling at the national level. The average number of strikes and lockouts during 1999–2001 were 446 and 345 respectively, involving 0.88 and 0.26 million workers (Calculated from Government of India, Department of Labour 2003). However, the average number of persondays lost due to strikes and lockouts in these three years were 9.38 million and 51.17 million respectively. This pattern of declining industrial disputes has been mirrored in West Bengal, albeit for different institutional and historical reasons. Between 1992 and 1997, West Bengal had nearly half the lockouts of the national total. The industrial employers, including some multinationals, also took on an offensive posture. Since lockouts are plant shutdowns at the express will of the management, they can be interpreted as capital exercising its accumulation choice by foregoing production in the state. Though plausible, this collective action does not make much sense in terms of capitalist logic. The strategy appears to be overtly coordinated and suggests a preference for political outcomes rather than favorable capital accumulation. The second interpretation is that capital, when faced with increased costs and labor strife, sought alternative accumulation strategies such as diversification of production, movement into financial activities, or movement of productive capital outside the state to other more conducive host states.

Uneven Development and the Changing Regime of Accumulation in West Bengal 155

The relative industrial decline of West Bengal and the concomitant rise of other regions suggest that the conditions for favorable accumulation had shifted elsewhere. The emergence of Delhi and other states as new clusters of automobile production and consumption reflects the changing terrain for economic activities. This outcome is also consistent with heightened capital mobility encouraged by economic reforms and the competition among state governments to attract investments. The third interpretation accounts for the continued and deliberate deterioration of plant and equipment by gradual disinvestment strategies or “harvesting” of capital equipment.7 Investors in West Bengal have been found to borrow money, strip the assets of firms, and declare a lockout (Banerjee et al. 2002). Consequently, technological obsolescence meant plants could not be economically operated and lockouts seemed to be a good accumulation strategy under the circumstances. In the end, West Bengal’s industrial decline and capital flight, which began even before the 1960s, was a cumulative outcome of a slow growing national economy with local labor strife during the 1970s, plant obsolescence by economic choice in the 1980s and 1990s, and finally the emergence of alternative industrial locations in the national economy under a changing regime of market-led capitalist regulation. As we will see, the institutional legacy of West Bengal was much too deep for easy adjustment to the new environment. The relative decline of West Bengal in the wider context of uneven capitalist development must be seen as changing conditions of accumulation. The legacy of industrial disputes has been one contributor to the accumulation environment, while the other has been industrial profitability. While labor strife is related negatively to profitability, the improvement in labor conditions in West Bengal did not necessarily raise profitability. West Bengal during the 1980s and early 1990s was an investment-unfriendly location as reflected in the bleak industrial relations of the 1960s and 1970s. Industrial capital was already seeking better opportunities elsewhere. However, industrial relations begin to show a marked improvement in the 1980s and 1990s as the CPM recognized the importance of working with capital to promote economic growth and employment. This is evident by the dramatic decline in the number of labor strikes. What did not improve was the number of employer-driven lockouts. This outcome is unexpected, given that the Indian economy as a whole was already on a higher growth path beginning in the mid-1980s. Under this scenario rising labor costs need not have driven capital away from the state even though profitability of several manufacturing sectors of the state was quite poor. For example, industrial wage costs as reflected by the consumer price index in West Bengal, specifically in Kolkata, show no discernible difference from the national trend – both have been steadily rising at identical rates during 1972–1994 (Government of West Bengal, Department of Labour, 1994: 85). Data on profitability by industrial

156 The Long March to Capitalism

sectors, while quite mixed, suggest poor performance by large manufacturers in some of the more traditional industries, such as cotton textile and jute processing (Gangopadhyay 1996: 270). They not only declined in the tenyear period from 1980–81 to 1990–91, but several sunset sectors since the mid-1980s experienced a negative rate of return. Increasing frequency of lockouts in West Bengal is an explicit manifestation of class conflict, grounded in the routine matters of capital accumulation. Between 1992 and 1997, West Bengal had 81% of disputes under lockouts compared to 59.7% in Andhra Pradesh, 29.6% in Maharashtra, 12.3% in Gujarat, and 14.3% in Tamil Nadu (Datt 2002: 197–199). To maintain overall profitability capitalists found it profitable to not operate the units. This in turn has been a result of asset deterioration and concomitant risk-averse behavior of not modernizing plant and equipment.8 Thus when we examine the causes of lockouts in West Bengal, we find for example that in 1988, of the 212 cases of lockouts, 95 of them (or 45%) were shut down because of “uneconomic operation, financial stringency, loss of economic viability,…” or some other description of profitability crisis (Government of West Bengal, Bureau of Applied Economics and Statistics 1990: 535). This single cause represented 75% of the persondays lost due to lockouts in the state. In 1994, the corresponding figures were 121 lockouts, of which 47 (or 39%) relate to lack of financial viability of the plant (Government of West Bengal, Department of Labour 1994: 8). This represented 56% of the total workers impacted by the lockouts that year. At the end of 2001 there were 300 cases of “sick” units in West Bengal which fell under the Board for Industrial and Financial Reconstruction (BIFR) (Government of West Bengal, Bureau of Applied Economics and Statistics 2003: 44). BIFR sought to arrange loans and other forms of support from the state government for the revival and continuation of sick units. Of the 300 cases, twenty-four units were central government units and the rest under the private sector. Not only was capital accumulation in the state’s industrial system not favorable but because of it capital was aggressively seeking alternative outlets outside West Bengal. Capital flight from the state can be seen as the exhaustion of the previous regime of accumulation and the attempt by industrial capital to renew accumulation elsewhere. Both employers’ accumulation strategies and politically-motivated industrial disputes have contributed to the state’s industrial climate and thus its industrial decline (Nossiter 1988: 142). The earlier mode of state-led capitalist regulation protected capital from competition both at the national and state levels. As a result technological and labor inefficiencies could be absorbed through higher prices. However, in the new national environment of capitalist competition, accumulation in West Bengal was heavily circumscribed. There were various reasons for this state of affairs: manufacturing units were locked out as they became technologically and commercially unviable;

Uneven Development and the Changing Regime of Accumulation in West Bengal 157

other states offered better infrastructure, less disruptive workforces, and lucrative commercial incentives; many of West Bengal’s inherited manufacturing industries were already declining industries such as jute, paper and pulp, and small metals-based units with outdated technologies. Hence, their modernization and rejuvenation could not be economically justified in an era of increased capital mobility.

4

Accumulation strategy of Hindustan Motors

India’s first major automobile company, Hindustan Motors (HM) located in Uttarpara just outside of Kolkata, is an excellent case for understanding the accumulation strategy in the context of uneven national development. It illustrates capital’s response to the constraints imposed by local political conditions while also attempting to cash in on opportunities arising outside of the state. HM has been the flagship company of the C.K. Birla Group of the Birla family business house. In 1948 HM began producing the ubiquitous Ambassador car from a Morris Oxford model (Hindustan Motors Ltd. 2003). Until the arrival of MUL in 1983, HM was largely a single model enterprise. Under state-led capitalist regulation, HM displayed a strategy no different from most other Indian firms. It did not technologically upgrade its product nor introduce new models as long as output was controlled and prices were regulated (see Chapter 4). Strategically HM, like the rest of the industry, favored government protection, without which it most likely would not have survived. This protection also entailed maintaining HM’s monopoly position by thwarting domestic competition. As early as in the mid-1960s, HM was already quite defensive about competition that could have arisen with the introduction of small cars by competing firms (Hindustan Motors Ltd., Department of Economics and Market Research 1966: 83–84). HM justified its strategy by insisting that small cars in India would be inappropriate as Indians travelled together as families and would have had to carry “beddings.” Given the small market with no economies of scale, any argument at that time in favor of more firms would have been persuasive. The diffusion of small cars in contemporary India of course suggests the lack of basis for such an argument. As soon as MUL began capturing the Indian car market, HM had to devise new strategies to remain viable. The plant was technologically obsolete and there was little interest in modernizing it. Its industrial relations were contaminated by mutual suspicion of plant closure and labor strikes. As a strategy HM pursued a number of investment decisions, which has kept the company afloat. However, India’s pioneering auto unit in Uttarpara, West Bengal has been relegated to HM’s other plants elsewhere in the country. Since the early 1980s HM pursued four principal accumulation strategies (Figure 6.3). First, it introduced a new model in the 1980s, the Contessa, with Japanese technology as a stop-gap measure to stem the rapid

158

Uttarpara West Bengal 1948

Tiruvallur Tamil Nadu 1971

1957: Ambassaor 1963: Ambassador Mark 2 1975: Ambassador Mark 3 1984: Contessa 1990: Ambassador Nova 1993: Ambassador 1800 ISZ 1998: $20 mil. modernization 2003: Grand Ambassador 2004: Ambassador Retro (Avigo)

2004 2004

assembly for

1971: Equipment 1998: Mitsubishi collaboration 1998: Mitsubishi Lancer 2002: Mitsubishi Pajero Pithampur Madhya Pradesh 1983

2003 engine/transmission for for 2003 engine/transmission

1983–1993 (Isuzu collaboration Contessa engine/transmission) 1998: RTV plant 2000: Mitsubishi collaboration Lancer engine/transmission

Chennai Cluster (Ford, Leyland, Hyundai)

1985: Transmissions Hosur/Bangalore Cluster (TVS, Toyota)

1948 Figure 6.3

HM’s Accumulation Strategy and Capital Flight from West Bengal

Source: Compiled by Author from Hindustan Motors websites and the business press. Note: HCV = heavy commercial vehicle; RTV = rural transport vehicle

Ford India

2003

Hosur Karnataka 1985 Pithampur Cluster (Eicher-Mitsubishi, Bajaj Tempo,

BMW

Halol Gujarat 1994

GM, India

1999: Collaboration dissolved 1986: HCV Unit in and GM's 100% subsidiary Gujarat abandoned and formed assets sold to GM 1994: GM–HM 50–50 collaboration 1996: Opel production 2004

Uneven Development and the Changing Regime of Accumulation in West Bengal 159

decline in its market share.9 However, the Contessa was a hybrid between an obsolete body made by Vauxhall of UK that was retrofitted with an Isuzu engine and transmission. It did poorly in the Indian market. Second, it made cosmetic changes to its classic Ambassador model, which fundamentally did not alter the state of the Uttarpara unit. For example, in 1963 it introduced its Mark 2, in 1990 the Nova, and in 1993 an Ambassador with an 1800 Isuzu engine. A diesel version of the Ambassador model was also introduced and in August 2003 a retro version called the Ambassador Grand was announced (Rajanala 2003). As the engines were produced in its Pithampur unit, West Bengal’s gain was limited. Third, it established new manufacturing plants in new locations, producing more modern vehicles, often in collaborations with multinational companies. In addition to the Vauxhall (1980–90) and Isuzu (1983–93) collaborations, HM established a major 50-50 joint-venture in Halol, Gujarat with General Motors of the US in the mid-1990s. Today, the unit is a 100% GM subsidiary. In 1998, HM set up a technical collaboration with Mitsubishi Motors to assemble Lancers and sports utility vehicles in Tiruvallur (in Chennai) in the southern state of Tamil Nadu. Later Mitsubishi engine and transmission manufacturing was launched at its Pithampur plant in the central state of Madhya Pradesh. Fourth, HM, having built up local technological capability in certain areas, is now poised to exploit global opportunities by becoming a supplier to multinational companies operating in India and third country markets (Ghosh 2002). For example, HM has agreed to supply engines and transmissions from its Pithampur plant to GM and Ford of India (V. P. Kumar 2002). In 2002 talks were afoot that HM might deploy its idle capacity to assemble cars for other companies such as BMW at its Chennai plant (Business Standard 2002a). The accumulation strategy of HM, leading to gradual capital flight from West Bengal, did not seriously begin until the early 1980s, when the jointventure between the Indian government and Suzuki was established. While MUL’s location near Delhi contributed significantly to the national capital region’s development, HM’s new investments in Tamil Nadu, Madhya Pradesh, Gujarat, and Karnataka became integral to pre-existing industrial agglomerations. Both Tamil Nadu and Gujarat were already major industrial centers, the former in auto and the latter in chemicals. Madhya Pradesh was a latecomer to industrialization. Favorable state policies and the absence of a politicized industrial workforce (except in public sector steel plants) helped it emerge as a new center for automotive production. West Bengal, as illustrated by HM, witnessed considerable industrial restructuring under the new regime of capitalist regulation. Not only was the legacy of industrial relations unfavorable but the industrial capitalists were already seeking out alternative accumulation opportunities.

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HM, not known for its entrepreneurial dynamism, had strategically found new collaborators in the auto industry and set up several units outside West Bengal. Based on optimistic projections and the threat of new competition to its market dominance, in the early 1980s HM petitioned the government to increase its capacity of 30,000 units by another 50,000. Of this 50,000, HM’s plan was to produce 30,000 Contessa (Vauxhall-Isuzu) cars in Uttarpara and the remaining 20,000 in a new plant in Madhya Pradesh (Raghavan and Saroja 1984: 19). In examining the production trend of Contessa, we find that the highest output achieved by HM was only 4,982 in 1988 (ACMA 1991: 16). The average annual output over the 1983–98 period was 2,388 units. Any notion of reviving the Uttarpara unit with the production of Contessas was effectively shelved. This was a direct outcome of more efficient, demand-driven producers such as MUL with technologically superior products. West Bengal suffered industrially because of severe competitive pressure arising from new producers such as MUL. Consequently, the decline of West Bengal in automotive production is mirrored by the development of industrial clusters elsewhere in the country. Tamil Nadu already had an automotive base with manufacturers such as Ashok-Leyland and Standard Motors (now defunct). The state is now host to Ford India and Hyundai Motors. Similarly, Hosur in Tamil Nadu, a few miles away from Bangalore, is now becoming part of a new industrial cluster with the Toyota-Kirloskar venture and several auto components firms located there. Both Karnataka and Tamil Nadu together are becoming part of a larger industrial site in the automotive industry. For example, Tamil Nadu in 2003 accounted for 26% of the 410 major auto component suppliers in the country, 35% of the total investment of $2.3 billion in the industry, and 30% of output of $1.2 billion (Kumar 2003). Lastly, Pithampur in Madhya Pradesh is now an important industrial agglomeration with HM’s engine and transmission plant, Eicher-Mitsubishi’s commercial vehicle unit (the most successful of the Japanese LCV plants), and Bajaj Tempo’s commercial vehicle plant. HM’s joint-venture with GM did not lead to significant expansion of HM’s capacity as it pulled out of the project in 1999. HM did not have or was not keen to commit resources to expand capacity at the GM–HM facility. Instead, HM has strategically elected to assemble cars for other companies (BMW for example) and supply engines and transmissions to General Motors and Ford in India. As a result HM is carving out an interesting subcontracting manufacturing niche for itself as it moves out of West Bengal. HM also diversified its products and plant locations but not in terms of reviving the West Bengal unit. It moved away from the Ambassador and from West Bengal to the Astra model for a while (jointly with GM) in Gujarat, to the assembly of imported kits of Mitsubishi’s Lancer in Tamil Nadu, and more recently, engine manufacturing for Lancers in Madhya Pradesh. The West Bengal unit has had to contend with prolonging the

Uneven Development and the Changing Regime of Accumulation in West Bengal 161

life of the Ambassador in its various incarnations and sustain itself with an obsolete rural transport vehicle (RTV), the Trekker (with less than 3,000 units a year). Though it introduced a more modern variant of the RTV in Uttarpara, production volume has been very low. Furthermore, it is saddled with a workforce of over 10,000. The management felt that with modernization of the plant in 1998 and increasing reliance on outsourcing of parts and components, less than a tenth of the workforce was needed (Bearak 1999). However, given the pro-labor state government, strong unions, and their frustration over HM’s mismanagement and accumulation strategy, the Uttarpara unit has been a site of prolonged labor conflict. The battle has been complicated by the awkwardness of the leftist ruling party in dealing with the capitalist imperatives of increased productivity and capital-friendly investment policies that are now integral to the new regime of capitalist regulation.

5 Class conflict in the transition to a new regime of accumulation Beleaguered by legacies of industrial strife and ideology-driven antiinvestment policies by the government, Hindustan Motors astutely, albeit lackadaisically diversified its production outside of the state. The new competition unleashed by the creation of MUL and the subsequent liberalization of the passenger car industry in 1993 brought the Uttarpara unit to its knees. As the wave of foreign multinationals in the Indian market continued, HM’s Uttarpara unit became saddled with obsolete plant and equipment designed for a product that was already obsolete. It also inherited a large workforce, which it cannot get rid of even if the economics of production suggest otherwise. The central conflict has been over employment and job preservation. Not surprisingly workers, their unions, and their sympathizers in the West Bengal political establishment are fighting desperately against plant closure. Legally, HM must seek government approval to shut the unit down or to retrench workers, however partial. The 1947 Industrial Disputes Act (IDA) expressly states that “no workman shall be laid off by the employer except with the prior permission of the appropriate government…stating clearly the reasons for the lay-off….” (Government of West Bengal, Labour Department 1999: 2, Tendulkar 2001: 11–12). There is an elaborate bureaucratic process that involves such a request and its final resolution.10 Under the IDA a lay-off can be justified due to “the failure, a refusal or inability of an employer to account of shortage of coal, power or raw materials or the accumulation of stocks or the breakdown of machinery or natural calamity or for other connected reason to give employment to a workman whose name is borne on the master-rolls of his industrial establishment who has not been retrenched” (Government of West Bengal, Labour Department 1999: 2). Not

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only are the reasons for layoff narrowly circumscribed by the IDA but in a state ruled by leftist parties it is highly unlikely a principal constituency will be betrayed. After all it was the leftist parties that mobilized the already politicized industrial workers of the state. Nevertheless, there is a curious deadlock between workers, the employer HM, and the state. The fault line between the first two parties is clearly drawn, but the relationship between them and the state of West Bengal, with its attendant political party establishment, is considerably strained. The ruling party recognizes the importance of productivity and investmentled growth today, especially after overseeing the state’s remarkable decline both temporally and comparatively with other states. However, it also has a political obligation to its labor constituency, whose economic vulnerability is heightened under the new regime of regulation. It is instructive to examine the economic context of some of the legal exchanges that have taken place in the late 1990s between the three parties to illustrate the complexity of adjusting to a transformed capitalist environment in India.11 On November 11, 1998 HM filed a request with the West Bengal government to layoff 7,861 workers and 2,093 staff for three days each week from its Uttarpara unit. Their principal reasons were increased competition resulting from MUL and several new multinational firms and the prevailing recessionary conditions. The government refused the request as it found “no adequate ground” (Government of West Bengal, Labour Department 1999). HM challenged the decision, hence an industrial tribunal was appointed to adjudicate the case. The tribunal also rejected HM’s petition for lay-offs. That firms can not lay off workers in an age of flexibility goes to illustrate the friction between older and newer forms of capitalist regulation and the considerable vulnerabilities associated with more marketdriven capitalist transition. By all market logic employers are expected to adjust their output should demand fall and thus their workforce as well. However, not only was this market “logic” challenged by the state and employees as it did not conform to the legal definition but there were several inconsistencies in the explanations offered by HM and its legal representatives. These varying interpretations by HM of what was going on in the Indian market and why they responded the way they did have been hotly contested by the firm’s employees. For example, HM highlighted its losses due to competition and economic slowdown. It presented data on unsold inventory and thus justified its request for lay-offs. However, there is no systematic pattern over time in HM’s losses as a whole and the Uttarpara unit in particular, except that profitability was clearly linked to minimum volume of scale (roughly over 26,000 units) (Table 6.3). Labor was blamed for work stoppages leading to losses but there was no perceptible decrease in output. On the contrary, HM’s output for the year under review reflects no perceptible recession as MUL was raising production,

Uneven Development and the Changing Regime of Accumulation in West Bengal 163 Table 6.3

Profitability of Hindustan Motors in the 1990s Production (units)

1991–92 1992–93 1993–94 1994–95 1995–96 1996–97 1997–98 1998–99

16,375 23,047 27,781 28,481 30,822 29,036 26,634 23,166

HM’s Loss/Profits (Rs. million) –181.4 –304.9 176.9 317.2 510.8 444.5 438.1 –281.7

Uttarpara Plant’s Losses/Profits (Rs. million) –346.6 –416.2 –77.2 103.5 111.9 16.1 –68.6 –591.7

Source: Government of West Bengal, Labour Department (1999: 48–49).

while TELCO’s Indica, which was launched in December 1998, was slated for rapid expansion to 60,000 units in 1998–99 and increased to 115,000 a few months later (Government of West Bengal, Labour Department 1999: 46–47). The workers in turn dismissed HM’s claims by arguing that these losses have been inflated and that the company siphoned off huge profits to other states made from the Uttarpara plant since Indian independence. This was inconsistent with HM’s claim that its manufacturing units were independently financed. On the question of its inability to compete with small car manufacturers, the company argued that it was saddled with an excess workforce and hence its productivity has been low. The employees countered that the company was floating different productivity figures and needed to compare productivity of HM with other companies in the same market segment, and that it surreptitiously began outsourcing components from outside vendors. Furthermore, in spite of losses, company executives were given large increases in travel and other allowances and over 60 new staff were hired. In its petition in the late 1990s, the company claimed wage cost as a share of total costs to be 7.98%, 16.6% in December 1998, and later revised it to 18% (Government of West Bengal, Labour Department 1999: 14). This creeping inflation of costs was not acceptable either to the government or the workers. Similarly, a wide variety of overhead costs were cited by HM to justify lay-offs. HM also complained about state patronage to MUL and more recently allowing multinationals to import engines and transmissions at much lower tariff rates (130% in 1992–92, reduced to 50% in 1993–94), though its own Chennai operations have relied on imported engines and transmissions from Mitsubishi Motors. It also alleged that the government did not approve its requests for a small car unit in 1971 or 1985. However, HM’s own department had defensively

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argued against small cars as they would eat into HM’s monopoly. Furthermore, in its petition HM did not offer any explanation as to why the Uttarpara unit was unfit for small car production, whereas in practice it began producing the Lancers in Chennai. At the same time HM does not openly acknowledge that government departments specify norms for taxi registration, for which HM’s Ambassador meets the criteria. 12 Also, the Ambassador has a high resale value and hence appears to stand up to fierce competition. Similarly, both state and central governments remain large buyers of HM’s Ambassadors. HM seems to underplay its own shortsightedness. As a comprehensive producer in an era of protection, with high local content, HM relied very little on outsourcing. Yet, it does not seem to have exploited its in-house technological learning strategically in an era of liberalization. The inability to compete with enterprises importing components with 50% tariffs suggests the company’s sheer lack of competence. The unions allege that even if HM had higher wage costs (greater labor intensity), its lower, fully amortized capital equipment could have been an important countervailing force. Rather than modernize the plant or exploit its huge idle land (over 744 acres were granted by the state on concessional terms and 250 acres were given free decades ago), HM diversified its holdings outside the state by establishing new component manufacturing units. The government, on behalf of workers, blocked HM’s attempted sale of land for real estate development (Statesman News Service 2003). Of the approximately $100 million it invested in the 1990s, less than 20% went to the Uttarpara unit (Government of West Bengal, Labour Department 1999: 22). According to the unions, the company deliberately created the conditions to render workers redundant and justify layoffs. It offered voluntary retirement packages, which had few takers, and it was also alleged that HM was creating conditions of fear to make its employees accept voluntary retirement. Workers have made the argument that they cannot be responsible for management’s poor lack of judgment. On the other hand, HM has asserted that just because units in other states are profitable does not mean that the West Bengal plant cannot be shut down. The class conflict mediated by legal and bureaucratic maneuverings between workers and the employer illustrate the vulnerability associated with the new regime of capital accumulation. Not only are workers under the old regime underprepared to cope with the challenges of a transnationalized economy but the changing accumulation strategies of capital as a response to the neoliberal environment leave workers to fend for themselves. The heightened mobility of capital worldwide is mirrored at the local/regional level as relative costs shift due to changing economic and political developments. West Bengal, despite its longstanding industrial leadership, is no longer able to compete with more flexibly-oriented

Uneven Development and the Changing Regime of Accumulation in West Bengal 165

Maharashtra and Gujarat and increasingly in the automotive sector with Tamil Nadu and Haryana. In the latter state 17% of its gross industrial output in the 1990s was contributed by transport equipment (NCR Planning Board 1997: 56). This uneven regional development is concomitantly accompanied by the destruction of capital and its subsequent renewal through accumulation. The decline of HM’s Uttarpara plant in the context of HM’s profitable operations in Pithampur and Chennai with transnational capital is suggestive of the quintessential dynamic of capitalism, namely capital mobility (flight), expansion (destruction), and social upheavals (job losses and worker insecurity).

6

Resurrecting capitalism in West Bengal

In transitioning from a labor-centered, pro-peasant political force, the ruling leftist parties have been compelled to make a Faustian bargain. Far from the anti-capital posturing of the 1960s, the CPM and its allies have come to recognize the significance of working with the parliamentary system of elections. It has been relatively successful in rural Bengal when compared to many other Indian states and consequently has been voted to office every term. However, its political mobilization of the organized industrial workers against capital provides only temporary political mileage. The state has abysmally failed on the urban-industrial front in not being able to prevent plant lockouts and permanent closures and generate new industrial employment. Not only was West Bengal subject to the unequal distribution of industrial licenses by the central government, which dictated investment flows, but its own home-grown capitalist class found ways of sustaining capital accumulation through diversification into non-manufacturing activities and investments in more capital-friendly states in the country. Consequently, the ruling party has become more investment-friendly in the neoliberal era. With the dismantling of the Indian industrial investment licensing system and the opening up of the economy to multinationals, virtually all Indian states now compete with each other for investments. By and large the economic incentives provided by local governments to investors are similar (Government of West Bengal, Information and Cultural Affairs Department 2002). Where they differ are in the areas of political stability, industrial relations, technical education, energy supply, and basic infrastructure. West Bengal’s record on these fronts has been mixed at best but it is improving. The Government of West Bengal is initiating reforms in labor laws to boost productivity (Confederation of Indian Industry 2004a). The state has become an active agent in attracting capital (Pedersen 2001: 660, Baldauf 2001, Confederation of Indian Industry 2004b). In a recent report, the Confederation of Indian Industry, the country’s most influential industry lobby,

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gave high marks to West Bengal (Confederation of Indian Industry 2003). It listed the state’s above-average economic growth (Government of West Bengal, Information and Cultural Affairs Department 2002: 7), increasing purchasing power, improvements in infrastructure such as power supply and roads, and aggressive information technology sector promotion.13 It also boasts some of the country’s finest higher education institutions. Politically the West Bengal government does not antagonize capital in general and it now periodically reminds workers of the importance of efficiency. For example, the former Chief Minister, “advised the workforce to strike a balance between realizing its demands and maintaining productivity” (Hindu 2003a). Reining in combative workers has become necessary as factory closures or threats thereof have become a routine strategy of business in an era of flexible capitalism. In its quest for enhancing the state’s economic standing the state government has pursued a number of interrelated strategies. It has established the West Bengal Industrial Development Corporation (WBIDC) for favorable and speedy decisions on investment and sent abroad many high ranking state officials, including the former Chief Minister Jyoti Basu, to invite investors. The state has also improved infrastructure where it could and pragmatically sought to ride on the success of the Indian information technology sector as other states such as Maharashtra, Karnataka, Tamil Nadu, and Andhra Pradesh have done. The West Bengal government has plans to set up a $55 million dedicated IT hub (Sunrise City) at a greenfield site with a private partner (yet to be selected) just outside Kolkata (Silicon India News Bureau 2003a). The state would provide equity through land (40 acres). Several multinational firms such as Oracle, IBM, and Price Waterhouse Cooper were present at the meeting called by the Chief Minister. The inherent contradiction associated with “new” industries such as IT has not gone unnoticed. It has created an unusual split between the ruling party (the CPM) and its affiliated trade union (CITU). For example, in its recent official session, CITU lamented the fact that the CPM-led government is promoting the IT industry, which is likely to be detrimental to a strong labor movement typically associated with traditional heavy industries (Bhattacharya 2003). Furthermore, the government itself is becoming an important stakeholder in an industry led by the private sector and undeniably its actions are going against its staunchest ally – the organized industrial working class. Disciplining its own unions has become the task of the CPM to make West Bengal an important investment destination (Chakrabarti 2003). That workers, even the most radical, are being tamed under the neoliberal banner is evident from CITU’s admission of being ineffective in preventing plant closures and representing workers’ demands. More importantly, it has ruled out continuous strikes as an appropriate worker response (Times News Network 2003).14 However, CITU’s leadership itself has admitted that the trade union has not been able to do much for its members.

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7

Conclusion

This chapter presented capitalist development by way of market growth. Both changing supply and demand conditions presuppose the growth of the market. However, market growth is not uniformly distributed. There is not only the cyclical boom and bust of capitalist dynamics but spatially there is uneven development as older centers of capital accumulation decay while new ones emerge. This unevenness becomes especially acute when the regime of capitalist regulation shifts away from its statist moorings to one driven by market deregulation. Older firms and regions, such as Hindustan Motors and West Bengal respectively, must now cope with the new competitive environment. However, the adjustment process is neither a foregone conclusion nor a smooth one. Institutional history, business strategy, and local politics have a significant bearing on the form and substance of regional industrial transformation. This chapter presented a particular case of the adjustment process to bring out uneven development and social contradictions as an integral process of capitalist expansion. The state of West Bengal is examined to underscore relative industrial decline from its pre-eminent position as new centers of industrial production in the north and south emerged in India. The experience of Hindustan Motors, India’s first auto company, located in Uttarpara, West Bengal illustrates the complex interplay of leftist politics, industrial relations, commercial goals, and historical contingencies in shaping the transition process. The West Bengal case is interesting because of the emergent contradictions associated with uneven development. In a deregulated environment, the state’s pro-labor government has had to make an ideological switch in favor of capital to address the everyday issues of market expansion and productivity growth. This about-face underscores the gravity of structural imperatives to conform to the norms of capitalist development. Increasingly the policies of the “left” government have become less distinguishable from other contending platforms.15 This is in part driven by the accumulation strategy of business, which, when constrained, must find alternative investment outlets for economic viability. The consequence of capital mobility is further decoupling of business from its regional allegiance, while organized workers, when confronted with the specter of plant closure, desperately fight to save their jobs. The political economy of transition from a state-led to a market-driven economy suggests a contradictory and open-ended process. It illustrates the highly uneven character of capitalist growth, the significant bearing of historical and institutional factors on this process, and the increasing mobility of capital echoing the forces of contemporary global capitalism. However, the relative decline of West Bengal is not a foregone conclusion as the political leadership pragmatically sets a new course to underwrite capital

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accumulation through foreign direct investment, foster high technology industries, and tame its industrial workforce. The state’s industrial decline also does not necessarily mean the failure of HM as a whole. Capital mobility, especially in the form of capital flight from the state, has been a preemptive strategy by HM to overcome accumulation barriers. At the same time, HM is not absolutely freed from its workers either. Workers want HM to stay and continue production. Curiously, class conflict under the new regime of regulation takes on a new meaning as workers become far more dependent on capital. This is a far cry from the anti-capital political rhetoric of an earlier era for reining in capital. The emerging contradictions in the transition to full-blown industrial capitalism does not end here. In addition to the complexities of moving to a new regime of capitalist regulation, industrial transformation in India contributes to ambiguous outcomes such as massive output expansion and excess capacity, the democratization of consumption and income polarization, and ecological problems and greater environmental consciousness. The consumer durables industries, especially the automobile industry, presents us with development dilemmas that cannot be simply wished away. The next chapter takes up these topics to further assess the nature of uneven capitalist evolution in India in an era of deregulation – a process that has been backed by the process of state-led embourgeoisment.

7 Capitalist Competition, Consumption, and Contradictions of Industrial Transformation

1

Introduction

Market expansion in India has been undoubtedly solid as evidenced by the growth of the vehicle industry. Not only has demand increased to unprecedented levels but there has been considerable diversity in the composition of demand. From the supply side firms have kept up with market growth with new products – parts and components – and adopted institutional arrangements, which have contributed immensely to production flexibility. The Indian state contributed to the class of consumers through state-led industrialization in general. But most importantly it transformed itself from a passive regulator to an active participant in the industry. It formed the key joint-venture in the Indian auto industry with majority equity, regulated industry participants, and ultimately facilitated the internationalization of the industry through economic liberalization, deregulation, and privatization. This shift to a new mode of regulation, namely market-driven economic and industrial change, has not been without its contradictions. The state of West Bengal provided an excellent illustration of uneven capitalist industrialization, which was uneven to begin with. The greater interplay of market forces compelled governments with alternative political programs such as West Bengal’s to succumb to the global capitalist imperatives of efficiency and commercialization. Admittedly such a reorientation is integral to the new mode of regulation and necessary as the earlier mode of state-led development becomes exhausted. However, the unleashing of market forces, in the absence of countervailing forces, is intrinsically unequal. This inequality, evidenced through uneven regional development, no doubt a specific institutional and historical outcome at the local level, is nevertheless linked to market development. For example, the swift decline of Hindustan Motors in Uttarpara in West Bengal under capitalist competition and its expansion outside the state, piece-meal and wholesale, suggests that uneven development is very much a part of the new regime of capital 169

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accumulation in India. After decades of industrial decline even leftist parties, sympathetic to industrial workers, are compelled to court capital in the neoliberal era to tackle unemployment and economic transformation. Workers also are forced to adjust to new market-driven realities of competition, efficiency, and productivity and business strategies that are more consistent with profits and less with job security. There are other contradictions arising from market growth, which itself rests on the very process of state-led embourgeoisment. The first contradiction is at the level of capitalist competition. The shift from one mode of capitalist regulation to another has resulted in output expansion and concomitant growth in consumption. At the same time, accumulation subjects capital to hypercompetition and excess capacity, features typically associated with unregulated capitalism, and often characteristic of advanced capitalism (Brenner 1998: 24–35, D’Costa 1999). The new mode of regulation privileges markets over the state and hence encourages systemically unplanned private investment and production often beyond the absorptive capacity of the economy. This is a serious economic dilemma as resources are unproductively tied up in idle industrial capacity or in production whose realization is constrained by limited market demand. The irony for poor countries such as India is that excess capacity, should it be there, is likely to coexist with entrenched poverty and social misery. Hence, excess capacity cannot be seen simply as a consequence of business downturns with anticipated quick market corrections in the future. For this to occur the market must be assumed to work like a well-lubricated system, adjusting quickly to market surpluses and deficits. This cannot be assumed in general and certainly not for India where hundreds of millions of people live in poverty. Excess capacity can be thus a product of demand constraints, which when brought on by severe inequality, could be persistent. The second related contradiction, associated with market expansion, is between increased consumption by a wider segment of society on the one hand and, on the other, a greater depth of household consumption by a narrower strata of society. As more Indian households partake the benefits of expanding markets through rising incomes and associated consumption, there remains a vast number of households outside the orbit of such market growth. This growing inequality, as well as income and wealth polarization, is a serious structural limit to future market growth and hence to an inclusive economic and industrial development process. The third contradiction with capitalist industrialization, especially with the auto industry, is growing environmental problems. Emissions, the eroding quality of urban life, pressure on deteriorating public transportation, extensive demands on physical infrastructure, and rising dependency on external sources of energy are significant problems. Technologically, capitalist industrialization is energy-intensive, while embourgeoisment is a social force driving consumption in an unequal way.

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Contradictions call for countervailing policies, whether in the form of state regulation of capital, politically negotiated redistributive justice, or socially informed environmental protection. These emergent issues also suggest cautious optimism as developing countries such as India are compelled to address issues of inequality as they become more pronounced in an expanding market and adopt socially regulated environmental standards that are consistent with global treaties and best practices. With heightened environmental awareness, the experience of developing countries demonstrates that the quality of life is not a matter of affluence but one in which all classes are affected. How the state responds to these emergent problems will depend on the political pressures brought upon the government by civic bodies and the degree to which the state is willing to regulate capitalism under the new regime of accumulation. This chapter is divided into three main parts, covering the three contradictions associated with industrial transformation and market expansion. The first is systemic dynamics of capitalism as illustrated by growth and excess capacity in the automotive industry. The nature of capitalist competition, fragmentation, and concentration is highlighted in a dialectical way to capture some of the dynamics of the capitalist transition process from one mode of regulation to another. The second section dwells on a related issue of excess capacity as it arises from demand constraints. This discussion is centered around the twin processes of inequality as a source for limiting demand and expanding consumption by segments of the lower strata associated with market expansion. This double movement is consistent with the embourgeoisment process as both exclusionary and inclusionary. The third section briefly examines India’s growing vulnerability to imported oil, environmental pollution, and social responses to these adverse developments. Specifically, the contradictions arising from market growth in consumer durable industries such as automobiles and high cost household goods are discussed below.

2

Excess capacity in the Indian automobile industry

When the mode of regulation is largely anchored around the market, there are at least three scenarios that could be generated to discuss excess capacity characteristic of dynamic capitalism. All of them reflect industry dynamics and subsequent evolution in affluent industrial economies. First, excess capacity persists as expectations about the future remain optimistic and actual markets consistent with expectations do not materialize. There is a high degree of competition and industry fragmentation. The second possibility is when demand does not match the actual installed capacity. In this case market correction could take place over time bringing both supply and demand within reasonable balance in a dynamic way. However, under this scenario there are at least two possible outcomes: a consolidated industry

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with oligopolistic competition or a highly fragmented, competitive industry. In the first case, weaker players are eliminated while those wishing to cut their losses exit the market. Consequently, only a few players remain. The second case suggests continued fragmentation of the industry in a buoyant market with new entrants and few leavers. In this case many firms coexist, with several of them operating production units of uneconomic scale. For example, only one car firm in India met the minimum efficient scale (MES) of 100,000–150,000 units a year among thirteen firms (Association of Indian Automobile Manufacturers (AIAM) 1999: 38). The third scenario is the more favorable one in which demand grows on a macroeconomic basis and supply adjusts to this new environment, with each firm better able to utilize its existing capacity. More players are added as the economy continues to expand. However, there is always the possibility of overcompensating for anticipated demand by building new capacity ahead of demand. Excess supply occurs especially when competition is severe, firms behave in a herdlike manner in their capacity expansion program, and the MES has a tendency to fall due to complex outsourcing arrangements and detailed segmentation of the market. Given these possibilities in affluent dynamic economies it is unlikely that India could display similar traits. However, when India’s demandconstrained economy is considered it is not far-fetched to predict excess capacity. Well before the economic reforms of the 1990s or the gradual entry of foreign auto producers in the 1980s, the Indian auto industry suffered from periodic excess capacity (Table 7.1). In virtually each of

Table 7.1

Excess Capacity in the Indian Vehicle Industry Cars

Utility Vehicles

Commercial Vehicles

Total

1st Plan

Target Excess

13,500 –1,179

4,200 –444

12,300 –1,237

30,000 –2,860

2nd Plan

Target Excess

20,000 674

5,500 346

28,000 –262

53,500 758

3rd Plan

Target Excess

30,000 –4,971

10,000 385

60,000 –26,187

100,000 –30,773

Annual Plans (1966–69 average/year)

Target

33,333

9,000

38,333

80,667

Excess

–747

–1,630

–5,817

–8,193

Target Excess

75,000 –34,068

15,000 1,418

85,000 –41,079

175,000 –76,565

th

4 Plan

Source: Hindustan Motors Limited (1974: 5).

Capitalist Competition, Consumption, and Contradictions of Industrial Transformation 173

the plan periods there was excess capacity. It could be argued that faulty plans led to excess capacity. However, even under state-led industrialization with the government maintaining a tight leash on the Indian auto industry, there was a bias toward excess capacity. Even a minimal annual target of 75,000 cars in the fourth five year plan (1969–74) could not be fulfilled. This is suggestive of a very low level of economic development, endemic poverty, and persistent inequality characterizing the Indian economy.1 Such a shortfall did not necessarily result from the lack of actual physical capacity but rather due to inadequate demand. The low demand was also a consequence of government policies that treated cars as luxury goods and hence were subject to very high excise duties. However, since the threshold income for cars was very high in the Indian context it is debatable if high taxes had a significant impact on demand (Nowicki 1968). Furthermore, it was known that many companies often deliberately created excess capacity as a preemptive strategy to keep future competition at bay (Bhagwati 1993). Hence, the two car producers at that time, despite little competition between them, deliberately kept capacity high as a way to persuade the state not to issue industrial licenses for additional capacity to likely competitors. Such strategies contributed to uneconomic scales of production and thus a high-cost industry. Under the new mode of capitalist regulation there have been two contradictory movements. The first is that economic reforms, under the broader umbrella of deregulation, contributed to market expansion rapidly by capturing the latent demand that was already built up by state-led embourgeoisment. The second related movement is heightened capitalist competition that arose from deregulation, leading to excess capacity. Theoretically, this could be acute in the initial round when a previously insulated market is opened up rapidly in a climate of extremely bullish market expectations. Both market demand and subsequent excess capacity are visible in the Indian market. For example, Indian output has increased quite substantially in the last decade – rising from 218,765 cars in 1990 to nearly 700,000 in 2003–04, while all passenger vehicles together exceeded one million (Automotive Components Manufacturers Association (ACMA) 2002: 25; Society of Indian Automobile Manufacturers (SIAM) 2004a). Total vehicle output increased several fold during this period. Competition is also visible by the sheer increase in the number of firms in the vehicle industry and the several models of vehicles offered by these companies (Table 7.2). In 1990 there were only three major car companies, which by 2004 stood at sixteen. During this period the number of basic models multiplied seven-fold, from 8 to 57. This is a remarkable change in the competitive environment, given that each basic model had several variants. This development is also suggestive of the changing supply conditions, in that several firms such as MUL were able to deploy flexible production systems and

174 The Long March to Capitalism Table 7.2 Industry

Increasing Competition and Product Variety in the Indian Car

1990

2004

Number of Cars Produced in India

219,000

696,000

Number of Firms

3

16

Number of Basic Models

8

57

Names of Companies and Number of Models*

MUL (3) HM(2) PAL (3)

Daewoo (3), Daimler-Chrysler (6), Fiat (3), Ford (3), GM (6), HM (2), HM Pajero (1), Honda-Siel (4), Hyundai (4), M&M (5), Suzuki (9), Mitsubishi (1), San (1), Skoda (1), TELCO (5), Toyota (3)

Source: Automotive Component Manufacturers Association (1997–98) and http://www.cybersteering.com 5/10/2004 11:00 AM and Society of Indian Manufacturers Association (SIAM) (2004b), www.siamindia.com 5/02/2004 2:00 PM. Notes: * Models include cars, utility vehicles, and multipurpose vehicles. These exceeded one million units for 2003–04. Figures in parenthesis show the number of models for each company.

incubate competent parts and components vendors. As market output increased, accompanied by demand growth, producers had the incentive to exploit economies of scope (D’Costa 2004), which in turn induced further competition. As the number of players mounted, the market was finely segmented to cater to niche markets. Each new niche created the pressure to establish more niches, thus raising the specter of excess capacity. With the complete deregulation of the automobile industry in the mid1990s, competition intensified with many more firms vying to capture a share of the growing Indian market. In doing so the industry as a whole created additional capacity to stay ahead in the competitive game. Consequently, installed capacity has always exceeded production as evidenced by less than 100% capacity utilization (Table 7.3). What is noteworthy is that the Association of Indian Automobile Manufacturers (AIAM), now known as the Society of Indian Automobile Manufacturers (SIAM) had predicted excess capacity in a 1999 report, and had estimated capacity utilization to be only about 50% (AIAM 1999: 38). There has been considerable decline in capacity utilization in all automobile segments, with a steeper decline in four-wheelers than in two- and three-wheelers. In the former segment, capacity utilization fell despite some market correction. For example, between 1997–98 and 1998–99 there was a 36% increase in capacity and a corresponding 6% decline in production. In subsequent periods capacity increased by only 4 and 2%, while production increased 17% and

Table 7.3

1997–98 1998–99 2001–02 2002–03

Competition and Tendencies Toward Excess Capacity in the Indian Automobile Industry Installed Capacity (millions)

Production (millions)

Four-wheelers Two- and Three-wheelers

Four-wheelers Two- and Three-wheelers

1.10 1.50 1.56 1.59

4.67 5.14 6.95 7.95

0.95 0.89 1.04 0.92

3.31 3.58 4.54 5.38

Capacity Utilization (%) Four-wheelers 86 59 67 58

Two- and Three-wheelers 71 70 65 68

Source: Society of Indian Automobile Manufacturers (2000, 2004b) for installed capacity, Automotive Components Manufacturers Association (1998, 2002) for production data. Notes: Installed capacity and production data refer to units per annum. Four-wheelers include passenger cars, utility vehicles, and commercial vehicles. Two- and three-wheelers include scooters, motorcycles, mopeds, and three-wheeled vehicles, mostly used for passenger and goods transportation. These vehicles are similar to scooters and tend to share some elements of the same production platform.

175

176 The Long March to Capitalism

decreased by 12% respectively. Recent recessionary conditions probably have been partly responsible for the demand slowdown. However, it is clear that excess capacity is a capitalist tendency due to unplanned investments associated with competition. Even the two-wheeler sector, which has witnessed massive expansion has been saddled with excess capacity. Given the lower threshold income needed for two-wheelers it is surprising that this segment also displays low capacity utilization. It is also true, as we have seen in the previous chapter, that some firms such as Hindustan Motors have experienced adjustment problems under the new mode of capitalist regulation. Their installed capacity is technologically obsolete and unfit to compete with production systems of more recent vintage. New firms trying to stay competitive will invest in additional capacity, with early entrants capturing first-comer advantages, while later entrants must cope with a crowded market in terms of the number of firms and the variety of output produced. This is evident by the surplus capacity found among several Indian firms (Table 7.4). For example, Daewoo Motors, with a capacity of 87,000 units in India, was shut down Table 7.4

Excess Capacity by Firms Installed Capacity (in thousands) 1998-99/2002–03

Four-Wheelers Ashok-Leyland Daewoo Ford General Motors Hindustan Motors Honda-Siel Hyundai Mahindra and Mahindra MUL Daimler-Chrysler TELCO Two- and ThreeWheelers Bajaj Escorts-Yamaha* Hero-Honda* LML TVS-Suzuki*

Production (in thousands) 2001–02

Capacity Utilization (%) 2001–02

50,000 87,000 100,000 25,000/33,000 64,000 30,000 120,000 113,000/237,000 350,000 9,000 345,000/360,000

31,828 0 (bankrupt) 14,306 8,135 23,212 10,310 93,888 117,289 357,102 1,415 182,601

63.7 na 14.3 24.7 36.3 34.4 78.2 49.5 102.0 15.7 50.7

2,000,000/2,520,000 350,000/400,000 500,000/1,800,000 400,000/630,000 980,000/1,600,000

1,294,632 238,638 1,422,112 167,650 872,572

51.4 59.7 79.0 26.6 54.5

Source: Society of Indian Automobile Manufacturers (1998, 2004b) and Automotive Components Manufacturers Association (2002). Notes: na = not applicable; * now majority controlled foreign subsidiary.

Capitalist Competition, Consumption, and Contradictions of Industrial Transformation 177

due to the parent firm’s financial problems in South Korea. General Motors, as predicted earlier, has acquired this firm and added to its own surplus capacity (D’Costa 2002). General Motors already had a capacity utilization of only 25% and will increase its capacity to 33,000 units. Ford India at present has been licensed to produce 100,000 units but most recently produced only 14,306 units. Anticipating higher growth and fending off competition, several companies increased capacity without experiencing proportionate increase in production. All two- and three-wheeler manufacturers also expanded capacity significantly with most of them suffering from low utilization rates. All but MUL are plagued with excess capacity. To its credit MUL invested at the right time, in the right products, and took great pains to develop its supplier industry. It was the only auto firm in India that enjoyed first-comer advantage but kept pace with increasing demand with product variety, reliability, and extensive after-sales service. With the deployment of flexible production systems, MUL was able to maintain over 100% capacity utilization, a feat which has not been matched by any other Indian automobile firm,. For lack of data it is not possible to demonstrate that there is excess capacity in other consumer durable goods industry such as TVs, refrigerators, and other household goods. However, given the “consumerism” unleashed by the economic reforms of the 1980s, capacity addition in these industries can be inferred (Chadha 1995). Deregulation initially tends to translate into more investments, domestic and foreign, and increased purchases due to falling prices (see Business Standard 2002b, 2002c, 2002d). Prices could fall due to liberalized imports and greater competition, economies of scale, and reduced taxes (Export-Import Bank of India 1996). With upward shifts in income for middle income households, we can expect purchases of these products to rise dramatically (Rao (ed.) 1994: 178–225, Natarajan 1998, National Council of Applied Economics Research (NCAER) 2002). The penetration of household utilitarian goods such as bicycles, wrist watches, fans, and some inexpensive kitchen gadgets and entertainment electronics is increasing rapidly in both rural and urban areas. More expensive household goods such as refrigerators and washing machines are likely to be constrained by low incomes. Their utility in the Indian setting also may not be perceived to be favorable yet. Nevertheless, economic mobility accompanying rising consumption suggests both rising consumer aspirations and output expansion. The optimism surrounding the rise of the Indian middle class and its voracious appetite for such goods is conducive to keeping investments ahead of demand. As Indian consumers are price sensitive and the prices of some of these goods are beyond the reach of many households, the demand for some consumer durable goods may remain low. As we will see in the next section, capitalist contradiction arises not just from the supply side in the form of excess capacity but also as a consequence of persistent demand

178 The Long March to Capitalism

deficits. Poor income distribution can limit market growth and contribute to structural excess capacity (Cypher and Dietz 2004: 20). The extent to which capitalist industrialization in India is socially inclusive or exclusive, as illustrated by the consumer durable industries, is discussed below.

3

Market growth and patterns of consumption

Capitalist industrialization accompanying the shift to a new mode of regulation has meant not only a larger market for consumer durables but also a form of growth that has exclusionary tendencies. The contradiction of such development is evident: as the embourgeoisment process pulls up some lower castes and classes, those who are already well-off push themselves up even further on the economic and social ladder. This is not an end state but an ongoing process, whose favorable conclusion, if there were to be one, would result in a more egalitarian society involving the diffusion of basic consumer durable goods. However, for such an eventuality to take place many of the structural inequalities that characterize Indian society will have to be levelled. Politically this is an impossible task, given the persistence of income inequality, endemic poverty, and the neoliberal pressures for the withdrawal of the state from social policies. In this context maintaining a high rate of economic growth, while it is likely to absorb new participants in the market, is also likely to contribute to polarization as those high up on the economic ladder are likely to gain more and gain faster than those on the lower rungs. It is quite clear that the process of embourgeoisment is steadily contributing to economic mobility as lower income households are being pulled to higher income levels. Based on the National Council of Applied Economic Research (NCAER) surveys, Table 7.5 presents the distribution of Indian households by income.2 The expansion of markets, due to initial economic reforms of the 1980s and more comprehensive liberalization of the early 1990s, is nicely captured by the changing income distribution among classes of households. The share of low income households has steadily fallen from 65% to 40% since the mid-1980s, implying that slightly over 16% of low income households of the mid-1980s experienced rising income levels over this period. In effect these households can be assumed to be the upper margins of poor households in India. This is mirrored generally by the increasing shares of all other income groups. What is noteworthy is the doubling of the middle income group (from 6.95% to 13.89%), the quadrupling of the upper middle income group (from 1.53% to 6.22%), and the five-fold increase in the high income group (from 1.07% to 5.70%). There is a similar trend when income groups are rearranged to create “broadest,” “broad,” and “narrow” middle class groups, i.e. the highest income households seem to have increased the fastest compared to their lower counterparts, suggesting overall an embourgeoisment process

Table 7.5

Estimated Distribution of Households by Income Group in India

Income Group Low (L) Lower Middle (LM) Middle (M) Upper Middle (UM) High (H) Broadest Middle Class (M+UM+H) Broad Middle Class (UM+H) Narrow Middle Class (H) Total No. of Households (in thousands)

1985–86

1989–90

1992–93

1993–94

1994–95

1995–96

1996–97

1997–98

1998–99

65.24 25.22 6.95 1.53 1.07 9.55

58.84 26.95 10.11 2.66 1.44 14.21

58.16 25.42 10.35 3.74 2.33 16.42

57.55 25.86 10.15 3.97 2.48 16.66

53.61 27.94 11.21 4.38 2.86 18.45

48.98 30.55 11.95 4.96 3.56 20.47

44.75 32.61 12.89 5.46 4.29 22.64

42.49 33.53 13.35 5.80 4.83 23.98

39.66 34.53 13.89 6.22 5.70 25.81

2.6

4.1

6.07

6.45

7.24

8.52

9.75

10.63

11.92

1.07 128,486

1.44 142,440

2.33 155,317

2.48 157,319

2.86 160,551

3.56 164,871

4.29 166,664

4.83 169,207

5.70 171,921

Source: National Council of Applied Economics Research (NCAER) (2002: 75, 82, 123), Natarajan (1998). Notes: Income Group based on annual income • 1985–86 and 1993–94 income based on 1985–86 prices (L = up to Rs. 9,000; LM = 9,001–18,000; M = 18,001–30,000; UM = 30,001–42,000; H = above 42,000) • 1994–95 and 1995–96 income based on 1993–94 prices (L = up to 20,000; LM = 20,001–40,000; M = 40,001–62,000; UM = 62,001–86,000; H = above 86,000) • 1989–90, 1992–93, 1996–97, 1997–98, and 1998–99 income based on 1998–99 prices (L = up to 35,000; LM = 35,001–70,000; M = 70,001–105,000; UM = 105,001–140,000, H = above 140,000).

179

180 The Long March to Capitalism

but with significant class differentiation. Over 25% of Indian households are now seen as part of the broadest middle group compared to less than 10% in the mid-1980s. When the Indian data for distribution of households by income groups is disaggregated by rural and urban sectors, the general embourgeoisment process is also observable (see Appendix A.2 and A.3). For example, during the 1985–86 to 1998–99 period, the share of low income households for the rural and urban sectors declined from 74% and 42% to 48% and 19% respectively. The decline in rural and urban sectors are of similar magnitude. However, as the average rural household income base is much smaller than the urban base, the steep fall in low income rural households is not surprising. What is remarkable is the number of households involved. For example, although there was a 30% increase in the total number of rural households, i.e. a net addition of 28.4 million households, there were 10.6 million fewer households from the low income category by the end of 1998–99. This compares to a reduction of 15.6 million at the national level and a 5 million reduction in urban households in the same income category. While more low income households in the rural sector have experienced rising incomes, the lower middle income group in rural areas has also steadily increased – from 21% to 35%. This is in contrast to the slight decline in urban lower middle income groups – from 36% to 34%. What this indicates, in addition to the rural-urban income divide, is further sectoral widening of this income gap. The broadest middle income groups in the urban areas have risen much faster than those in rural areas, from 22% to 47% in the urban sector and 5% to 17% in the rural sector. In absolute terms the rural households have a slight edge over the number of urban households because of the large size of the rural population (15.7 million urban versus 16.4 million rural). However, the urban broad middle class clearly exceeds its rural counterpart. In 1998–99 there were over 12 million urban households in the upper middle and high income groups compared to over 8 million rural households. The overall embourgeoisment process is national but it is more urban-centered than rural when income growth is concerned, with the urban narrow middle class outnumbering the rural group by 2.5 million households (see also Stern 2003). In the mid-1990s, the annual changes in the share of rich households increased significantly, with rural households at high income levels witnessing greater increases than their urban counterparts due to a smaller rural income base (Table 7.6; Natarajan 1998: 56). However, the absolute number of urban households in these high income groups exceeded that of rural households. Nearly 110,000 urban households were added to the Rs. 500,000 annual income group compared to only 49,000 in the rural areas. The number of urban households with an annual income over Rs.5 million was seven times that of the rural group. Due to under-reporting of actual income because of “black money,” the number of very rich households is most likely underestimated.

Table 7.6

Number and Annual Growth Rate of Wealthy Households (1993–94 and 1995–96) 1993–94

1995–96

Average Annual Change

Income (in thousands of Rs.)

Rural

Urban

Total

Rural

Urban

Total

Rural (%)

Urban (%)

Total (%)

Over 500–1,000 Over 1,000–2,000 Over 2,000 Number of Households with over Rs. 5,000,000 annual income

49 10 2 247

151 43 12 2,467

200 53 14 2,714

98 24 6 858

260 82 26 5,685

358 106 32 6,542

42.3 55.2 74.0 84.3

31.0 37.4 47.1 51.8

33.8 40.9 51.0 55.3

Source: Natarajan (1998: 56). Notes: Based on 1995–96 prices.

181

182 The Long March to Capitalism

3.1

Two-wheelers and inclusionary consumption

Both rural and urban middle classes are increasingly translating their incomes to purchases of modern industrial products (Table 7.7). This is an inclusionary dimension of market growth as some households from low income groups are also able to consume these products. The pattern of purchases of selected consumer durable goods shows that most bicycles are purchased in the rural areas (82% in 1985–86 compared to 78% in 1998–99), with total bicycle purchases increasing by nearly 70%. This pattern is also displayed by the purchasing pattern of TVs, with a tripling of rural share over a decade. Other white goods such as refrigerators and washing machines exhibit similar trends but on a much smaller scale. For example, 17% of 10.2 million washing machines purchased were in rural areas. However, that is only 1.734 million units for the entire rural sector, which has a total population of over 700 million. A washing machine in a rural area may likely be purchased for social prestige rather than for intrinsic economic and practical considerations. After all, the dhobis, the caste of launderers in India are integral to Indian society. Nevertheless, the increasing purchases of such white goods by rural households in general reflects new consumption patterns associated with embourgeoisment and represents an inclusionary form of industrialization. Televisions and other related electronic goods and kitchen gadgets are best represented by this inclusionary process. These goods require relatively low threshold incomes. The purchasing pattern of two-wheelers is somewhat ambiguous. It is inclusionary if it can be demonstrated that more lower income households are acquiring them or conversely, with economic mobility, more households are able to afford such consumer durables. The relative share of rural purchases of two-wheelers does not show any noticeable change over the 1985–86 to 1998–99 time period (Table 7.7). It has hovered around 40%, even though the total number of two-wheelers has more than doubled during this period and the rural population is nearly three times that of urban areas. What this suggests is that, notwithstanding increasing rural household incomes, they are not large enough to allow for the purchases of more expensive consumer durables such as motorized transportation. In the urban areas the story is different. There are fewer households in the urban areas compared to rural areas and as urban households continue to absorb nearly all of the increase in two-wheeler output, it can be inferred that there is far greater economic mobility in the cities and towns than in the countryside. This can be seen by a simple comparison of prices of two-wheelers and annual household incomes (Table 7.8). Based on dealer prices in 2001 and household income groups identified by NCAER’s MISH surveys, most two-wheelers are accessible to the lower middle income group (Rs. 35,000–70,000). For those households below an annual income of Rs. 35,000, it is most likely that only a tiny fraction could afford a two-wheeler. Hence, most households earning less than

Table 7.7

Purchases of Selected Consumer Durables in India (millions) and Rural Share (%)

Product

1985–86

1989–90

1992–93

1993–94

1994–95

1995–96

1996–97

1997–98

1998–99

Bicycles Two-wheelers* Refrigerators TVs/VCRs/VCPs Washing Machines

4.7 (82) 1.1 (40) 0.6 (14) 2.1 (21) 2.5 (12)

7.0 (74) 1.6 (40) 1.1 (15) 5.6 (39) 7.3 (7)

7.1 (78) 1.5 (40) 1.2 (18) 4.4 (45) 7.9 (10)

8.1 (78) 1.7 (40) 1.5 (20) 5.3 (52) 8.0 (12)

7.5 (79) 1.9 (40) 1.6 (24) 6.2 (52) 8.7 (14)

8.0 (78) 2.5 (40) 2.0 (24) 7.9 (54) 10.2 (15)

9.0 (78) 2.7 (40) 2.3 (25) 8.1 (56) 1.3 (15)

9.0 (78) 2.9 (40) 2.6 (26) 9.2 (58) 1.4 (14)

10.4 (78) 3.4 (40) 5.1 (38) 10.2 (63) 1.5 (17)

Source: Compiled from Natarajan (1998: 167, 168 (Tables 24.5 and 24.6)). Notes: * combined total of mopeds, motorcycles, and scooters; VCR/VCP = video cassette recorder/player; Figures in parenthesis represent rural shares, (rounded).

183

184 The Long March to Capitalism Table 7.8

Prices of Two-Wheelers and Distribution of Household Income

Income Group

Low (up to Rs. 35,000) Kinetic V2 Scootie Bajaj Sunny Scootie Bajaj Chetak (basic) Scooter Bajaj Chetak (metalic) Scooter Lower Middle (Rs. 35,001–70,000)

Share of Households (1985–86)

Share of Households (1998–99)

Rural

Total

Rural

Urban

65.2

47.9

19.0

39.7

LML NV Scooter Bajaj AT Scooter Honda Active Scooter

30,758 31,960 34,343

73.6 42.1 19,300 22,945 23,800 27,905 21.4 35.8

Bajaj Boxer CT (MC) Hero Honda CD 100 (MC)

35,130 38,300

Kinetic ZX Zoom Scooter Bajaj Kawasaki Caliber (MC)

39,511 41,420

Middle (Rs.70,001–105,000) Bajaj Eliminator (MC) Upper Middle (Rs.105,001–140,000) High (above Rs. 140,000) M+UM+H UM+H Narrow Middle Class

Urban

25.2

34.8

33.8

Kinetic Challenger (MC) Hero Honda Passion (MC) Kinetic GF (MC) Hero Honda CBZ (MC)

4.0 15.2

Total

34.5 41,800 43,960 51,000 54,410

7.0

10.4

22.6

13.9

3.9

1.5

3.9

12.1

6.2

0.4 3.1 5.0 22.1 1.0 6.9 0.4 3.1

1.1 9.6 2.6 1.1

3.0 17.2 6.8 3.0

12.5 47.3 24.7 12.5

5.7 25.8 11.9 5.7

86,170 0.7

Source: National Council of Applied Economics Research (NCAER) (2002), Natarajan (1998), and M. Kumar (2002).

Rs. 70,000 will find owning most motorcycles financially burdensome. Nearly 83% of rural household income falls in this income level. For urban areas, the corresponding share in 1998–99 was under 44%, or nearly half the rural share. The broadest middle class (middle, upper middle, and high income groups) in the rural areas constitutes under 18% of households, while the urban share is nearly 48%. Hence, it is not surprising to see a very high share of two-wheelers in urban areas compared to rural areas. It could be argued that the two-wheeler market is inclusionary for urban households and exclusionary for rural ones. Sociologically speaking they also provide the means of upward mobility as consumer durable goods take on heightened significance in dowry transactions. This is a contemporary feature in both urban and rural areas. Curiously both rural and urban income distribution display nearly identical shares of lower middle income groups – 34.83% versus 33.76% respec-

Capitalist Competition, Consumption, and Contradictions of Industrial Transformation 185

tively. Until the share of the rural lower middle income group begins to decline in parallel fashion to the low income group, the bulk of purchases of two-wheelers will remain an urban phenomenon because high income groups are becoming numerically larger in the urban areas. The rise of twowheeler purchases also reflects the deterioration of urban public transportation as a consequence of declining public investments. The increasing affordability of two-wheelers, a consequence of competition and economies of scale, de facto creates an alternative mode of private transportation in a developing country context. 3.2

Passenger cars and exclusionary industrialization

The pattern in the purchases of consumer durables in India suggests that there is a widening base of popular consumption. The purchase of twowheelers is indicative of the broader urban-based embourgeoisment process, with lower middle and middle income households finding such products within their reach. However, the passenger car industry provides a very different picture. When we compare two-wheeler production with that of passenger cars, there is a marked, growing divergence in the number of units produced (Figure 7.1), with two-wheelers exceeding four million units compared to less than three-quarter million units of cars and utility vehicles. Car purchases represent one-seventh of two-wheeler output, due to low purchasing power of Indian consumers.

4,500,000 4,000,000

No. of Units

3,500,000 3,000,000 2,500,000 Cars Two-Wheelers

2,000,000 1,500,000 1,000,000 500,000 0

1971 1973 1975 1977 1979 1981 1983 1985 1987 1989 1991 1993 1995 1997 1999 2001

Figure 7.1

Growing Divergence in Car and Two-Wheeler Production (1971–2001)

Source: Automotive Component Manufacturers Association (various years).

186 The Long March to Capitalism

Broadly, the output expansion of both types of vehicles show a similar growth pattern. The period preceding the pre-reform era was constrained by the state-led capitalist regulation, which tightly controlled automobile output. It is therefore not surprising that output increased most in the post-reform period of 1991 when considerable deregulation took place. From a virtually flat growth rate in the 1970s, two-wheeler production picked up dramatically in the 1980s and throughout the 1990s. Car production growth is similar, albeit with a lag. The spurt in growth coincides with Maruti’s production in the mid-1980s. The 1990s witnessed rapid expansion of car output. The ratio of two-wheeler to car output was roughly 3 in the early 1970s, 6.6 in the remaining decade, 9.5 through 1986, and back down to a ratio of 7 through 2001. While there is limited convergence, car purchases will inevitably increase, although private transportation will remain skewed in favor of two-wheelers for the foreseeable future. What this suggests, as we have seen, is that capitalist industrialization under the new regime of accumulation is expansionary creating new opportunities. However, this industrialization process caters mainly to the upper middle and high income households. Car prices are indicative of this exclusionary form of industrialization (Table 7.9). Not a single model is affordable for the middle income groups. Even the lower end of the high income group falls far short at these prices. The Maruti 800 is the cheapest model, representing roughly two times the annual income of the high end of the upper middle income group. In this sense demand is heavily constrained even within the high income group. Only those in the affluent group with annual household income of Rs. 500,000 constitute a viable market. In 1995–96 this group comprised no more than 360,000 households in all of India (Natarajan 1998: 56), although this is likely to be an underestimate due to under-reporting of income in India. Creating an expanding car market in India would, in part, entail increasing the share of income in favor of the affluent, which is tantamount to increasing inequality as a whole. Such inegalitarian tendencies are already rampant when we compare the lower income households with the high income groups. As expanding markets contribute to rising incomes as a whole, the higher income groups are likely to experience faster growth than other groups, thus contributing to significant social and economic differentiation (United Nations Development Programme (UNDP) 2003, D’Costa 2003a, 2003b). This is evident from the narrow base of car ownership and the class divide associated with such ownership. The increasing social and economic differentiation is significantly catalyzed by the new mode of capitalist regulation. Not only is there greater economic space with deregulation leading to expanding markets but the imperative of capitalist competition also fosters greater production efficiencies. As we have seen earlier, new flexible institutions for production coordination accompany the new mode of regulation,

Capitalist Competition, Consumption, and Contradictions of Industrial Transformation 187 Table 7.9

Prices of Selected Cars and Household Income*

Company

Model Name

Daewoo

Matiz SA Cielo CNG Classic S320L Palio 1.2 Siena 12EX Ikon 1.6 Mondeo Duratec Opel Corsa Vectra Ambassador 1800 ISZ Contessa Classic New City CRV Santro XING Accent CRD MM550 (jeep) Scorpio 800 DX Alto LX Zen Lancer Qualis Corolla Indica DLE Indigo

Daimler-Chrysler Fiat Ford General Motors HM

Honda-Siel Hyundai M&M Maruti

Mitsubishi Toyota TELCO

Low Cost Model

Expensive Model

402,255 572,935 2,436,000 5,627,765 353,443 466,983 637,015 1,556,185 548,800 1,690,000 432,287 529,336 758,697 1,679,021 452,255 756,511 345,400 803,084 269,310 299,274 494,117 973,166 547,326 1,035,810 358,896 433,093

Skoda

1,117,704

Price as Multiple of Rs. 140,000* 2.9 4.1 17.4 40.2 2.5 3.3 4.6 11.1 3.9 12.1 3.1 3.8 5.4 12.0 3.2 5.4 2.5 5.7 1.9 2.1 3.5 6.9 3.9 7.4 2.6 3.5 8.0

Source: http://www.cybersteering.com 5/10/2004 11:00 AM Note: * Rs.140,000 represents high income group.

leading to greater and differentiated output. Niche markets are consistent with embourgeoisment as they cater to different classes and so is the new mode of capitalist regulation consistent with economic mobility as the overall size of the market is stretched further. The purchasing pattern of bicycles, electronic entertainment products, as well as household goods display widespread diffusion. The two-wheeler industry, at this juncture, illustrates a more ambiguous case. Scooters and motorcycles are coming within the reach of the broadest middle class, but that includes only a small percentage of households in the rural areas. It is evident that the vast majority of households are still not consumers of this particular durable good due to low incomes.

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Only a minority of households, rural or urban, are able to acquire an automobile. The total output of automobiles, though on the rise, is a fraction of global production and relative to the India’s population a minuscule output. While today more people own cars in India they still represent a tiny minority. The threshold income for auto purchases is still high for most Indian middle class consumers. Until there is a dramatic increase in incomes, capitalist industrialization as exemplified by automobile production will remain an exclusionary process. There are other distortions and contradictions that emerge from such an exclusionary form of industrial consumption. These include the use of foreign exchange for oil imports, growing dependence on external sources of oil, and the environmental implications of automobile industrialization. These topics are taken up in the next section.

4

Industrialization, energy dependence, and the environment

With industrial growth and diversification India’s dependence on external sources of energy has grown considerably. Under the old mode of regulation, the state severely curtailed fuel consumption by industrial licensing, restricted output in the automobile industry, heavily taxed the industry, treated automobiles as a luxury product, and insisted on high local content. As India has limited domestic supplies of oil, it relies significantly on the Middle East. Also, under the previous regime of accumulation, the state, through its import substitution strategy, de facto discouraged exports, thereby contributing to India’s foreign exchange scarcity and import dependence. India’s foreign exchange crisis of the late 1980s and early 1990s was precipitated by a rapid increase in imports, including that of consumer durables, and energy-intensive industrialization such as automobile production.3 As shown in Chapter 4, India’s net trade balance has been persistently negative, mainly because of oil imports (see Figure 4.1). Excluding oil, India’s net trade balance was mostly positive in the 1990s as exports became integral to the regime of capital accumulation. With rapid growth of the automotive industry, including two-wheelers, the demand for energy has risen as well. This is seen in both increased domestic production as well as imports (Figure 7.2). Imports have been increasing since the 1960s. However, both imports (and net-imports of oil) show a dramatic rise from the mid-1980s and late 1990s, during which period domestic production stabilized around 32 million tonnes. However, there was almost a ten-fold increase in “petrol-driven vehicles in car equivalent units” between 1971–1994 (Srivastava and Sengupta 2000: 121). The share of domestic production to imports has fallen more recently due to new off-shore sources discovered by India. However, oil dependency is still high, with nearly 80 million tonnes being imported each year. In 1999–2000 net imports totalled 73.7 million tonnes and two years later stood at 75.6 million tonnes (Government of India, Ministry of Petroleum & Natural Gas 2003: 79).

Capitalist Competition, Consumption, and Contradictions of Industrial Transformation 189 90 80 dom production on-shore production off-shore production oil imports net oil imports

70

million tons

60 50 40 30 20 10 0 1960 Figure 7.2

1970

1980

1990

1996

1997

1998

1999

2000

2001

Commodity Balance in Crude Oil

Source: Government of India, Ministry of Finance, various issues. Notes: dom prod = domestic production net import = imports, indicating no exports

There is no doubt that the auto industry expansion since has contributed to this growing dependence, especially since 1996. Within a decade oil imports nearly tripled.4 As illustrated by the changing pattern in energy consumption, the ratio of oil consumed by the transportation sector (e4/d4) has been rising rapidly (Figure 7.3). Oil consumed by road transportation as a share of oil consumed by the total transportation sector is also creeping up (f4/e4 = 0.85 in 1994), given that the share was already high (0.74 in 1971). With sustained imports, driven considerably by the automobile industry as a whole, India’s long-term debt of around $80 billion could become a precarious situation. At the same time, foreign exchange revenues have increased substantially due to increasing exports, with the information technology sector contributing substantially to foreign exchange reserves. The environmental dilemma is apparent: there is increasing dependency on imported energy on the one hand while India now has a greater ability to pay for such imports, on the other. This dependency has taken on unanticipated characteristics. First, the rapid industrial growth of China with limited domestic supplies, including the failure to find oil in western China, suggests greater dependence on Middle East supplies. Second, in addition to China, there are other

190 The Long March to Capitalism 1.2

1

ratio

0.8

0.6

c4/b4

d4/b4

d4/c4

e4/d4

f4/e4

0.4

0.2

0 1971 1973 1975 1977 1979 1980 1982 1983 1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994

Figure 7.3

Changing Energy Consumption Ratios (1971–1994)

Source: OECD in Srivastava and Sengupta (2000). Note: Ratios refer to energy consumption as a whole and consumption of oil by various sectors oil energy requirement is treated as consumption of oil, all ratios refer to consumption in thousand tonnes of oil equivalent; c4/b4 = total oil consumed as a share of total energy consumed; d4/b4 = energy consumed by total transport sector as a share of total energy consumed; d4/c4 = energy consumed by total transportation as a share total oil consumption; e4/d4 = oil consumed by total transportation as a share of total energy consumed by total transportation sector; f4/e4 = oil consumed by road transport sector as a share of oil consumed by total transport sector.

industrialized East Asian economies, including Japan and Korea, with a voracious appetite for petroleum-based energy (Cordesman 1998). Hence, India will have to compete with these economies should all of these economies continue to grow at healthy rates. Third, given this likely scenario, the Indian government is aiming to construct international pipelines from Iran, Oman, and Central Asian republics such as Kazakhstan, Kyrgyzstan, and Tajikistan. The problem with these projects is that the pipelines will have to be either land-based, going through Afghanistan and Pakistan or sub-sea and deep-sea lines, skirting these countries for security reasons. Even China is likely to seek supplies from Central Asia, thereby creating additional pressures on India. 4.1

National and social responses to regulating capitalism

There are two levels at which responses to regulate capitalism might be forthcoming. The first is the national response to perceived and real scarcity of and vulnerability to imported petroleum products. This may

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prompt a variety of state-initiated functional attempts to curtail imports and consumption and enhance production. This can be accomplished by tariffs, subsidies, and investments. Conversely, increasing export revenues could make imports financially viable. This may, in the Indian case, lead to creating various geo-political alliances. The other response could be driven by civil society, resulting from the deteriorating quality of urban life and increased environmental consciousness. Irrespective of the nature of the responses it is evident that capitalism as we know it needs to be socially regulated. The negative externalities are far too consequential to be left to the market. In the next two sections a brief discussion of these responses is presented to bring out the dialectical nature of industrial evolution, contradictions, and social regulation for their resolution. India’s net imports of crude oil and petroleum, oil, and oil-based lubricants have been steadily increasing. There are several longer term strategies, which could alleviate, albeit in a limited way, the emergent energy co-dependency. The difficult strategy would be to explore new sources of supply of both oil and natural gas, as natural gas is becoming an important fuel for automobiles as well. Bilateral exploration for both oil and natural gas between India and Myanmar is a possibility. Bangladesh as a major supplier of natural gas is another possibility. However, Bangladesh is reluctant to supply natural gas to its more powerful neighbor and that scenario does not sell well in Bangladesh’s domestic politics. In the end the uncertainty associated with geopolitical ramifications limit India’s options to establish new supplies. An easier option is to reduce oil dependency by cutting back on consumption. However, given the nature of output expansion under the new regime of accumulation and fueled by the new mode of regulation, it is unlikely that growth will be curtailed. One possibility is increasing the fuel efficiency of industries through technological change. This is consistent with the flexible system of production under the new mode of capitalist regulation. New products and new processes are integral to contemporary capitalist competition and fuel efficiency is an important element to consumer satisfaction in rich and poor countries alike. This is already taking place in India as Indian consumers find Japanese-inspired vehicles attractive for their fuel efficiency. As Indian consumers are very price-sensitive, to petrol prices for example, the small car model is expected to remain popular. More importantly, alternate fuels such as compressed natural gas (CNG) are becoming more common in India as well, creating the possibility of coping somewhat with oil dependency, but certainly combating air pollution. 4.2

Rising energy dependence and growing pollution

There has been a nearly 140% increase in the domestic production of natural gas between 1990–91 and 2001–02 (Government of India, Ministry of Petroleum & Natural Gas 2003: 80). While much of this increase has

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been driven by household energy needs (mainly for cooking), the impetus for adopting CNG as an automotive fuel has come from another quarter. Not only is there is a supply problem with petrol but the emissions associated with such fossil fuels have been responsible for the pressure to switch to alternate fuels. In 1991 when the Indian automobile industry was on the cusp of another round of take-off, a study of the transport sector estimated that there were over 40,000 premature deaths and health damage totalling between $170 million and $1.6 billion (Sengupta 2001: 80). The three major cities of Kolkata, Mumbai, and Delhi accounted for 40% of the deaths. Virtually all forms of mass transportation and motorized individual transportation contribute adversely to the environment (Sengupta 2001: 65). Fossil fuel based road and air transportation contribute significantly to air pollution with carbon monoxide, hydrocarbon particulates, nitrogen oxides, sulphur dioxide, and lead. In 1991, the share of the transport sector in Delhi’s urban air pollution in terms of various emissions was 64%, accounting for 97% of hydrocarbons, 48% of nitrous oxide, and 76% of carbon monoxide contributed by the transportation sector alone. The World Health Organization considers Delhi to be one of most polluted cities in the world (World Resources Institute 1998). Other cities such as Mumbai and Kolkata do not fare any better. In part, a large number of poorly maintained diesel-run buses and ageing three-wheelers for public transportation have been responsible for such high numbers. One government report points out that buses, despite providing social benefits, are not a solution to Delhi’s pollution problems, rather they contribute far more to pollution than newer cars (Government of India, Ministry of Heavy Industries & Public Enterprises 2002: 224–225). However, the addition of more passenger cars on the streets in the last decade has compounded the problem. In the 1990s virtually every major city in India had increasing emission levels (suspended particulate matter per cubic meter) in residential areas; a few cities have reduced emissions in recent years (Government of India, Ministry of Heavy Industries & Public Enterprises 2002: 59–60). Despite more modern engines that are friendlier to the environment, the sheer number of vehicles on the roads suggests that reducing oil dependency and emissions will be a herculean task in India. That said, there are various efforts to deal with the emerging contradiction of capitalist industrialization under the new regime of accumulation. There are two sets of efforts to combat environmental effects of fossil fuel consumption. The first and the most important initiatives have been governmental, as discussed earlier. For example, to reduce pollution and dependency, the Government of India has introduced several legislative measures. They include earlier measures such as Air Prevention and Control of Pollution Act (1981), Environment Protection

Capitalist Competition, Consumption, and Contradictions of Industrial Transformation 193

Act (1986), and the Motor Vehicles Act (1988). More recent measures have been the notification of National Ambient Air Quality Standards and vehicle emission norms such as Bharat I and II modeled on Euro I and Euro II pollution standards adopted by the European Union. These provide a benchmark for regulatory authorities such as Central and State Pollution Control Boards. Also, there are more R&D efforts by several government laboratories aimed towards emission reduction technologies. The second set of efforts, briefly discussed below, have been civic responses to deteriorating air quality and environmental degradation, albeit in a limited way. 4.3

Social and civic responses in Delhi

It is beyond the scope of this project to address the specific measures needed to cope with environmental problems arising from the broader industrialization process and the auto industry in particular. Clearly the solutions will have to incorporate sector-specific policies such as technological developments to reduce consumption and emissions and economic measures such as pricing of fuels, alternative modes of transportation, and taxes on automobiles. There must be various social targets too, in terms of infrastructure development, urban decongestion, and population growth. Lastly, astute political maneuverings to negotiate with manufacturing industries, transportation lobbies, and economically mobile urban-based middle class households will be critical to implement environmentally friendly policies. More fundamentally, the very model of economic growth based on capitalist industrialization may have to be revisited should the interplay of contradictions become economically, socially, politically, and environmentally untenable. Such questioning is already a part of a much wider global environmental movement and increasingly within India there are growing concerns with quality of life issues. Here the particular case of Delhi is presented to highlight India’s social and institutional responses to tackle the growing menace of environmental problems, suggesting that the new regime of accumulation under the new mode of regulation is not immune to social regulation. In 1986, M. C. Mehta, a renowned environmentalist, filed a public interest litigation case in India’s Supreme Court pertaining to air pollution in Delhi (Turaga 2002: 555). He was already battling the Indian government over a wide range of environmental and human rights issues (Alley and Meadows 2004).5 Gradually, over a ten-year period, the Supreme Court ruled in favor of improved fuels, catalytic converters, CNG-powered engines for government vehicles, and low-sulphur diesel as a result of the suit (Government of India, Ministry of Heavy Industries & Public Enterprises 2002). It is remarkable that a country known for bureaucratic lethargy moved quite swiftly in establishing new emission standards, thereby removing

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older vehicles from plying, and compelling others to adopt CNG-based engines. In August 2002, the Government of India’s Report of the Expert Committee on Auto Fuel Policy was released (Government of India, Ministry of Heavy Industries & Public Enterprises 2002). The Indian automotive industry, loathe to adopt measures that would eat into their bottom lines in a highly competitive, price-sensitive Indian market, institutionally adopted new technologies and standards. For example, the Society of Indian Automobile Manufacturers, the auto industry lobby, agreed to a plan to introduce Euro III and IV norms. The automobile manufacturers already produce vehicles that meet Bharat II pollution norms (a domestic standard) and the Euro II standard. The entire country will be subject to Bharat II standards and Euro III norms for eleven major cities from April 1, 2005, and the entire country by 2010 (Outlook 2003). No segment of the road transportation system has been spared by the new rulings. The twoand three-wheeler segment and trucks and buses also have to meet new pollution standards, albeit with varying timelines. For example, in Delhi, no interstate buses or trucks will be allowed to originate or terminate unless they meet India 2000 emission norms beginning April 1, 2007 (Outlook 2003). In August 2001 Delhi boasted the largest number of CNG-run buses for any city in the world. In 2003, Delhi was awarded the US Department of Energy’s first Clean Cities International Partner of the Year award (Solomon 2003). While this dramatic turnaround in auto fuel policy can be explained by social activism, much of it attributable to the tenacity of a particular individual, the objective conditions of Delhi’s environment were transformed by rapid growth in the Indian automobile industry and Delhi’s central role in consuming autos. The contradiction was no less remarkable. While the production and consumption of automobiles was largely an exclusionary form of industrialization, Delhi’s upper middle and high income households, however, were not immune from the deteriorating air quality. The rise in respiratory illnesses (combined with congested streets and high incident of accidents) prepared the groundwork for policy shifts. For example, Delhi’s particulate pollution during 1987 to 1998 was roughly three times the national annual average, which in turn was roughly three times the national standard of 140 micrograms per cubic meter (Ghose 2002). On some days Delhi’s concentration of particulates was 5–12 times the permissible limit. Consequently, there was a convergence of interests of the court, middle class owners of vehicles, passengers, and residents of the city in pushing through major environmental reforms, including the wholesale adoption of CNG. Even the government of West Bengal adopted stringent Euro norms post-April 2000 and thus barred established manufacturers from entering the West Bengal market if they did not meet those emission standards (Rediff 1999).

Capitalist Competition, Consumption, and Contradictions of Industrial Transformation 195

There were opponents to alternative fuels and the new environmental standards. These included, initially, automobile manufacturers, as it entailed some redesign and foregoing sales due to additional cost of vehicles. For example, on the average, MUL’s vehicles retrofitted with imported fuel management kits cost an additional $600–700 (Iype 1999). As some of the automobile manufacturers were already exporting to the European Union they could turn around quickly to meet new emission norms. However, most of the resistance came from transport operators, mainly the owners of the ageing public transportation system, which included taxis, three-wheelers, diesel buses, and private two-wheeler owners. While the exhausts from ageing (subsidized) diesel-based buses and trucks contributed massively to air quality, the three- and two-wheeler units with two-stroke engines also contributed significantly to airborne particulates. Of course the proprietors of buses, trucks, and some taxis were relatively well-off, while the owners of single taxis and three-wheelers were clearly not. Furthermore, there were many three-wheeler drivers who rented their units on a daily basis. Once the court ruling went into effect the owner either had to retrofit a CNG converter or idle the unit. While the owner could cope with idle capacity, the renter who lived from day to day could not. Hence, opposition to new fuel policy was resisted by both owners and drivers. The tacit alliance between owner and renter was also reflected by the thousands of low-wage workers who were left jobless with the Supreme Court’s ruling over polluting industries in Delhi to either shut down or relocate their factories. In the end the Indian automobile industry has adjusted to the new emission standards. Now policymakers have become more conscious about oil dependency and there is a new auto fuel policy in place. The government is trying to meet the new demand for CNG, especially after the chaos that erupted due to a lack of adequate CNG supplies in Delhi when the ruling went into effect. Today, Delhi’s air quality is significantly better than what it was in the mid-1990s. For example, the widespread adoption of CNG has cut particulate emissions by 80% for each bus in use in Delhi (Reddy 2004). Additional reduction of 50% of smog producing compounds is expected through the use of better fuels and tighter emission standards. Nationwide, the new emission standards will cut particulate emissions by nearly 60% for large commercial vehicles, while agricultural tractors will curtail carbon monoxide (CO), hydrocarbons, and nitrous oxides by over 30% (Reddy 2004). This transformation has been a consequence of social regulation that arose in the first place as a countervailing force to the relentless pursuit of capital accumulation under the new regime and accompanied by the new mode of regulation pursued by private capital. Capitalist regulation as practiced by the Indian union since the 1980s has been of the neoliberal order, albeit of an Indian sort, where the state continued to play an important economic role. However, with economic reforms and deregulation the

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state increasingly retreated from the public sphere. It encouraged private businesses – both domestic and foreign – to shape the Indian economy and society. The environmental countervailing force was noteworthy not only because of the socially beneficial outcomes but also because it demonstrates that capitalist regulation need not be bereft of social regulation. The environmental crisis is quintessentially a contradiction of the advance of industrial capitalism but capitalist markets as a system of efficient production and consumption could be made to accommodate new social demands placed on the system. This tense dialectical movement, while far from producing a comprehensive resolution, does point to the necessity of regulating capitalism politically and socially. It also points to the importance of identifying alternative forms of capitalist regulation, which would be driven more by society and its priorities and less by the expediency of market rationale.

5

Conclusion

This chapter presented three contradictions arising from capitalist industrialization. It situated the Indian consumer durables industry in the larger context of the changing regime of accumulation and the changing mode of regulation. In this transition process, as the state becomes less important in regulating capital, a variety of social and economic contradictions emerge. These emanate from the tensions and disequilibria often associated with rapid capitalist market expansion. At the same time contradictions, in a heuristic way, can produce social and political responses, as illustrated by the recent environment-friendly policies enacted in India, which could act as a countervailing force for coping with capitalist contradictions. Three types of contradictions resulting from market growth were covered. The first dealt with capitalist competition resulting from the increased number of firms and the number of models of automobiles produced in India. The high degree of competition has fragmented the Indian market and produced excess capacity at both the industry and individual firm levels. Consequently, most production units are uneconomic, producing below the minimum efficient scale. However, this is consistent with a flexible production system, which allows diversified output and niche marketing through the hypercompetitive global economic system. The problem of excess capacity is likely to remain unless the Indian market grows rapidly, in which case installed capacity could exceed market demand, or if firms continue to add new capacity ahead of demand. Constraining market expansion by demand is seen as another contradiction of capitalist development. Specifically, the exclusionary form of industrialization as evidenced by the growth of automobile production

Capitalist Competition, Consumption, and Contradictions of Industrial Transformation 197

was examined. Based on NCAER’s MISH data (Natarajan 1998 and NCAER 2002) this chapter showed that the embourgeoisment process is real, in that some income groups are moving up much faster than others, while a low income group persists. The growing household income gap is most pronounced between rural and urban households. The broad middle class is experiencing economic mobility with the high income groups growing the fastest. This kind of polarization is most pronounced when household incomes are compared to automobile prices, reflecting the exclusionary nature of industrialization. However, a similar mapping of income with two-wheeler prices reflect a more ambiguous outcome. While the urban sector clearly absorbs the bulk of two-wheeler production, the rural sector is largely left out. In other consumer durable goods, such as household goods, the evidence suggests a more inclusionary form of industrialization. Consumption has become more “democratic” as many of these goods are now affordable and accessible even to rural families. In this sense capitalist market growth is contradictory as it includes and excludes consumers from the fruits of contemporary production systems in the larger setting of a new regime of capital accumulation. The third contradiction, the most visible, literally, in India’s large cities, is the environmental crisis. The deteriorating quality of urban life, traffic congestion, and pollution are products of industrialization, which has both positive and negative externalities. But the contradiction goes deeper as India’s dependence on imported oil becomes more acute. Paradoxically, India’s increasing ability to pay for imported oil because of rising foreign exchange revenues could work to its disadvantage if alternative energy sources are not aggressively sought. There are some signs of coping with these contradictions in limited ways. The intervention by activists and the government’s recognition of environmental problems in Delhi have prompted both state and social responses, especially toward problems attributable to the automobile industry. The adoption of CNG and the search for new energy sources are examples of coping strategies to deal with the transition to a new regime of capital accumulation and the limits of market-based regulation of capital. Many states in the country are more cognizant of their environment and are keen to protect it from the ravages of ageing automobiles and poor quality fossil fuels in the country. The contradictions unleashed by the move to a new mode of capitalist regulation has created the political and social space to cope with the tensions associated with such changes. In the dialectics of social change it is relatively predictable that capitalist expansion, when fraught with major contradictions, is likely to produce social regulation of industrial growth. Whether the time has come or not is difficult to say. After all, it was only recently that India, through its economic reforms of the 1980s and 1991,

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abandoned an earlier regime of accumulation, which immediately produced rapid market growth and industrial development. It is also true that growth itself has not produced benefits on a wider scale and instead has been limited to upper income households. This has both rewarding and retarding effects. While capitalism hones the market system by making it competitive and economically efficient, thereby lowering prices and increasing output for the population, systemically unplanned production often overshoots actual demand. This excess capacity is reinforced by a high degree of inequality and high incidence of poverty. While some industrial goods come within the reach of the poor precisely because of market growth and falling relative prices, many others remain prohibitive due to the class bias of market expansion. The poor are effectively barred from participating due to their low purchasing power. Without adequately addressing these contradictions, India’s ability to make a smooth transition to the new regime of capital accumulation will be difficult. The transition necessarily demands a more healthy balance between growth and equity. Without socially regulating capital, market growth in India could remain at best lopsided and at worst malign, making it difficult to fundamentally alter the structure of the Indian economy and society.

8 Concluding Remarks on Capitalism, Markets, and Development

1

The ambiguity of capitalist industrial transformation

To analyze India’s long march to capitalism this study focused on the process of industrial change within the broader context of capitalist heterogeneity. Despite common sets of economic dynamics in market capitalism, the process of development is inherently evolutionary, subject to structural conditions, institutional variations, and divergent outcomes. Hence, the analysis was rooted in unravelling some of India’s political economy dynamics and the consequences of such capitalist development. On some measures India is doing very well. For example, recent economic growth, the IT industry, and exports are all on the upswing. However, on the broader developmental front India has made limited progress in basic education, poverty, and women’s emancipation and worsened income and wealth disparities as evidenced by India’s multiplying millionaires (South Asian Media Net 2004a). These themes were examined by analyzing India’s transformation of the consumer durables industry, particularly the auto industry. The study adopted a holistic approach by framing the general issue of market development and why it was changing. My argument was that capitalist development in India was encapsulated in India’s auto industry’s turning point. It reflected broad changes in the structure of demand and dynamically induced supply responses by the industry to meet this demand. The theoretical interpretation of the turning point was situated within the regulation framework, which provided the backdrop to discuss India’s shift in the regime of accumulation. With the exhaustion of the previous regime of accumulation and the associated mode of regulation a switch to a new regime and mode was inevitable. However, the change was not simply due to a crisis, as most turning points tend to be, rather it was also driven by the embourgeoisment process. This endogenous force moved in tandem with external developments such as the diffusion of neoliberal ideas and their execution through structural adjustment 199

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programs. The change in direction in India echoes the typical macroeconomic imbalances associated with the rigidities of the mass production paradigm, compelling the adoption of a market-driven, more flexible mode of regulation. However, the precondition for a turning point was already in the making, namely, the emergence of an expanding Indian “middle” class. While the regulation framework provided a general anchoring device to discuss the accumulation crisis and institutional shifts, in late industrializing India alternative processes, such as embourgeoisment in a dialectical way, was argued to drive India’s contemporary accumulation trajectory. The exhaustion of the earlier regime in India is symptomatic of the stateled import substitution industrialization strategy within the specific configuration of India’s dominant class structure. Nevertheless, the state contributed to embourgeoisment, leading to economic and social mobility for some. It also laid the structural foundation for capitalist renewal and further expansion of the Indian middle class. This is best seen in terms of business responses to a liberalizing economy, unleashing a range of capitalist market dynamics hitherto unseen in India. For example, today there is heightened competition with numerous players in the auto industry, considerable product variety, increases in labor productivity, technological maturity, rising exports, and significant backward integration leading to a competitive local supplier industry. These changes can be explained by the adoption of flexible industrial practices, which are consistent with the new mode of regulation under the neoliberal regime of accumulation. Industrial practices such as interactive business-government partnerships, the establishment of a long-term subcontracting system, shop-floor innovations such as cellularization, teamwork, quality circles, and enterprise unions have characterized the growth of the industry. While the bulk of these changes have been initiated by multinational partners of Indian jointventures, Indian firms themselves have been receptive to these practices. Both small and large firms show signs of maturity. For example, numerous small and medium enterprises in the parts and components segment have established competitive production operations. TELCO’s recent acquisition of Daewoo’s truck division in South Korea and its diversification plans in both India and China are a testimony to this capitalist maturity (South Asian Media Net 2004b, 2004c). India’s favorable industrial trajectory is not without its challenges. As seen in the case of the light commercial vehicles segment, even the Japanese multinationals had a hard time tackling the Indian market. Older established firms such as HM and PAL, located in older industrial heartlands, are confronted with the challenges of adjusting to the new regime of growth and adopting practices associated with the flexible mode of regulation. Even MUL, the industry leader, is taking competition seriously.1 Between 2001 and 2003, it reduced its workforce by 41% through its voluntary retirement

Concluding Remarks on Capitalism, Markets, and Development 201

scheme (Silicon India News Bureau 2003b). Thus it comes as no surprise that HM has diversified its investments to new locations and currently is reinventing itself by becoming a components producer (Business Standard 2004a). Past state policies and deregulation have contributed to uneven regional development, as witnessed in the rise of the National Capital Region and the concomitant industrial decline of West Bengal. The offensive posture of industrial capital, as witnessed by the increasing number of lockouts, is indicative of the social challenges posed by the new regime of accumulation. Local governments such as in West Bengal, historically hostile to capital, have had to switch ideologically to accommodate the new regime of accumulation (see Jenkins 1999: 142–143, 191). Thus, it is not out of place to see the West Bengal government offering an island to Japanese investors (the largest foreign source for the state) to set up a town and a golf course (India Abroad News Service 2004a), while industrial workers in the state are precariously coping with a competitive and technologically-driven capitalist economy. The new regime of accumulation has also introduced capitalist problems typically found in advanced capitalist countries. For example, deregulation in India has generated a highly fragmented Indian industry, exhibiting the classic global capitalist problem of excess capacity found in other countries as well (Arnesen (ed.) 1988, Harwit 1995: 69). With a shallow market, worsened by entrenched Indian poverty and persistent inequality, the industry’s profitability could be significantly checked. The fact that the Indian industry is now part of a transnational one, as evidenced by GM’s strategies, suggests that the national industry will be subject to global developments. In a narrow sense this creates a semblance of industrial convergence as, for example, GM integrates its Brazilian and Indian operations in new ways. There are both constraints and opportunities to this internal division of labor. Thus as long as Indian production of engines and transmissions was unviable, GM imported these from Brazil. However, with market growth, GM is gradually expanding its local production in India. There are other dilemmas with contemporary capitalist industrialization. The fruits of market development are accruing rapidly to those already well placed economically and socially, namely, the middle class, while arguably undercutting collective consumption (Preteceille and Terrail 1985: 3–4). Embourgeoisment, however, is a combination of centripetal and centrifugal forces, pulling in better-off social groups and structurally excluding the millions of underprivileged Indians (Ghosh 2004, Chandrasekhar and Ghosh 2002). There are also sector-specific contradictions such as fossil-fuel dependency and environmental degradation. However, India’s foreign exchange reserves have crossed the $100 billion mark and thus paradoxically may delay the search for alternative energy sources. The study of Indian industrialization suggests the ambiguous character of capitalist development.

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To its credit, market development today presents a far more mature Indian capitalism than that incubated by the state earlier. However, it is also important to recognize the role of the state in creating markets and sustaining them through the provision of critical inputs and public sector employment. Rather than see the role of the state as unchanging, the study acknowledges a state that is itself engaged in introducing the new regime of accumulation. The cumulative process of capitalist development suggests a complex relationship between the state and market development, each dominating the other at different times but always mediated by societal forces.

2 Framing questions on capitalist dynamics and market development The study of the Indian auto industry in the larger capitalist context raises several interrelated intellectual and practical concerns. The first concerns the framework for analyzing capitalist development and identifying its boundaries. The Indian auto industry was argued to be a reasonable proxy of capitalist dynamics. This case study was appropriate because the industry displayed a distinct turning point. To account for the stagnation and growth of the industry it was necessary to frame the issue within the regulation framework and examine the larger Indian political economic context and the prevailing conditions that led to the subsequent rise of the industry. Hence, the trajectory of the industry had to be looked at in a dialectical, path-dependent, and cumulative way. Non-institutional analyses of the Indian auto industry would have more narrowly focused on policy dimensions, shift in relative prices, changing industrial structure, and increased competition. These are important areas of investigation but, because they are heavily circumscribed by social institutions, a more comprehensive analysis of the industry was taken up to explain the industry’s transformation. The problematique suggests that capitalism, despite its historic break with feudalism, is still an evolving system, largely driven by endogenous processes but increasingly influenced by global dynamics. The outcomes are at best mixed. The second concern relates to late capitalism and the economic space available for developing countries such as India. At one level, it is clear that firms, in order to tap global opportunities, will have to be highly competitive. This demands technological sophistication, organizational coherence, focus on efficiency and productivity, and flexible responses to changing price signals and market conditions. In this sense there is almost a singular capitalist logic of accumulation and growth that unites businesses around the world and brings about a degree of industrial convergence. Those unable to follow the dictates of this logic fail to participate effectively. However, within this basic logic there is a wide variety of

Concluding Remarks on Capitalism, Markets, and Development 203

responses, given institutional diversity and historical legacies. Developing countries are still peripheral to global capitalism, and hence their participation is mostly influenced by exogenous developments. Within the auto industry, for example, Indian and Chinese productivity relative to the US has been estimated as 24% and 21% respectively (McKinsey Global Institute 2003: 4). Yet, as the Indian experience shows, domestic market development is critical to capitalist expansion, even if recent production initiatives have their external origins. Local firms will have to be receptive to changing market conditions, introduce modern, best-industry practices, and engage in the learning process. In late capitalism the state can still be an important player not only to protect developing countries from the ravages of global competition but also to foster a conducive environment for industrial development. For example, education, research and development, industrial relations, foreign investment, infrastructure development, and technology policy have a bearing on industrial outcomes. The fact that the Indian state had a strict local content program meant that the industry had to integrate backward to maintain its competitiveness. With market expansion this became an advantage for the manufacturers. How the state regulates multinationals has an important bearing on local skills and industrial development (Okada 2004). But regulation goes beyond its negative connotation of restricting business. Rather, the concept suggests that capitalism must be managed broadly not only by the promotional role of the state in expanding industrialization but also through inter-firm and inter-industry partnerships (business associations) to coordinate market transactions and reduce market uncertainties. Regulation also demands other kinds of institutional changes, which have a direct influence on production. These include more cooperative industrial relations, reorganization of work on the shopfloor, deployment of flexible machinery, technical training, and significant involvement of workers in the production process. For example, Toyota-Kirloskar claims to have halved production costs by introducing flexible production systems (Giriprakash 2002). Not all of these are easy to implement as older workers and industries find the adjustment process painful. Notwithstanding the contemporary pressures on states to distance themselves from social policy, regulation also needs to encompass non-market processes to ease the transition of excluded social groups to the new regime of accumulation and mode of regulation. Two other key issues that emerge from the analysis of the Indian auto and other consumer durables industries are transnationalization, national ownership, and development, and social policy under capitalism. It is evident that the Indian auto industry is Indian to the extent that production is located there with local content of the vehicles to be high. But the manufacturers are almost all foreign. This raises the issue of ownership and

204 The Long March to Capitalism

developmental impact. In the past foreign ownership was seen as detrimental to local development because of the net outflows associated with such control. The repatriation of profits, dividends, royalties, and the imports of technology and other inputs were not balanced due to limited exports. The balance of payments concern remained high on the agenda of national economic planners as foreign debts over time became linked to the persistent BOP deficits. The outcome was interpreted as more than economic dependence and was seen as a weakening of national sovereignty as macroeconomic instability led to the imposition of structural adjustment programs by the International Monetary Fund and the World Bank. Today, the verdict on foreign ownership is less negative as it is recognized that under certain conditions multinational participation can lead to local development. Under the new regime of accumulation, more or less operating worldwide, exports within limits are very much a part of the transnational equation. Multinationals seeking to enhance their accumulation do not produce only for local consumption. They are continuously engaged in fine tuning the global division of labor by integrating production across national boundaries. Under this process developing countries participate in a limited way, offering low wages, some skills, and markets. If multinational investment contributes to increasing local content and net exports over a few years then foreign investments should not be seen as either an economic or political threat. Consistent with this recognition, even the CPM has officially embraced foreign investments (India Abroad News Service 2004b). More importantly, investments are likely to set off cluster formation, as the Indian auto industry amply demonstrates. For example, the new industrial city Pithampur in Madhya Pradesh now hosts over 75 suppliers catering to domestic and multinational firms (Business Standard 2004b). Investments have meant industry expansion, increased productivity, and greater opportunities for technological learning (McKinsey Global Institute 2003: 95–121). However, on the employment front the story is less sanguine, with the exit of old firms and relatively “lean” production of new firms. This suggests limited employment growth in the sector as a whole. Technically there is denationalization in India but the fear of displacement is misplaced as there is local industrial development with local businesses complementing foreign capital. From an investment point of view, multinational activity can be made to serve national interests if it complements local investments. For example, several foreign companies have over 70% local content. GM’s new Tavera model produced in Gujarat is expected to have 93% local content by 2004 (Silicon India News Bureau 2004a). It is also investing $21 million in an automotive R&D center in Bangalore, its first outside of the US (India Abroad News Service 2004c). It is evident that multinational capital can serve national development interests if local capitalists are technologically strengthened to exploit new export opportunities. Some

Concluding Remarks on Capitalism, Markets, and Development 205

of this is already under way in India. Daimler-Chrysler is sourcing Indian components, original equipment manufacturer exports are on the rise, and Sundaram Fasteners has set up a manufacturing base in China (Silicon India News Bureau 2004b, Das 2004, Business Standard 2004c). Furthermore, given that India is the second largest producer of small cars, after Japan, it is possible for India to become a manufacturing hub for this type of vehicle (South Asian Media Net 2004c). This is a favorable outcome for India. To replicate favorable global integration elsewhere, developing countries will have to foster deep industrial capability and technological learning. On the social policy front, the following broad issues are germane to capitalist regulation: • Should there be a balance between private and public transportation systems so that the former is not promoted at the expense of the latter? • Relatedly, what kind of infrastructural projects should be funded to promote national development? • As oil dependency becomes more acute, should alternative energy sources and new transportation systems be explored? • What social policies exist for workers and their dependents who are unable to adjust to the new dynamics of capitalist competition? • If capitalist development entails market development and enhanced consumption, how could it be made more inclusive? • What should be the general approach to regulating capitalism such that it also supports social agendas? In looking ahead, these questions could guide India’s social policy in the future. As businesses become more globally connected, as competition crowds the state out to pursue more capital-friendly policies, and as middle class consumption of industrial products expands voraciously, the underprivileged communities could be left out by this pattern of capitalist industrialization. The paradoxes in contemporary capitalism are stark. For example, Brazil boasts the second largest market for corporate jets but 25% of its people go hungry (Haseler 2000). Developing countries such as India, despite considerable structural transformation and economic mobility, are nowhere near meeting the Millennium Development Goals outlined by the United Nations (United Nations Development Programme 2003). It is evident that social programs directly benefiting the poor are critical (Drèze and Sen 1998). In particular, increasing the incomes of the rural poor would vastly improve social conditions in India and expand markets (Patnaik 1986). This brings up the related issue of economies of scale. Just as the Brazilian experience shows, it is entirely possible that inequality in India has been the precondition of auto industry growth. Since a high threshold income is necessary for consumer durables such as cars, India’s market

206 The Long March to Capitalism

size will remain demand-constrained. For example, a threshold income of Rs. 361,000 permits only 10% of Indian households to afford a car (McKinsey Global Institute 2003: 100). However, embourgeoisment facilitates larger volumes of production at the low-end segment and consequently declining unit costs and market growth. This virtuous cycle is already evident in China, as the number of consumers grow and economies of scale become feasible (Uchitelle 2003, Bradsher 2004). In India, too, scale economies are at work with MUL’s declining prices (McKinsey Global Institute 2003: 109, 111). However, there is an alternative scenario. As more international firms compete in India with expanded capacity, limited demand could undermine capacity utilization and thus reduce the cost advantages associated with a large volume of output. Thus Hyundai’s installed capacity of 100,000 units in India matches global norms but its actual capacity utilization of 50% questions its commercial viability (Gullapalli 1999). Relatedly, in the absence of economies of scale, firms in India will find it difficult to introduce flexible industrial practices and thus exploit economies of scope more effectively. There is no theoretical necessity for instituting cooperative arrangements in emerging economies since without a critical mass of output the opportunities for diversified output are limited. MUL’s success demonstrates the importance of high-volume production to flexible practices, while the Japanese LCV segment illustrates how low-volume output has rendered cooperative arrangements ineffective. Economies of scope were more a consequence of rather than independent of scale of production. Thus far the adoption of flexible practices associated with the new mode of regulation has been critical to cope with mutual vulnerability, market volatility, and uncertainty. Only with deepening markets will economies of scope, i.e. small volumes of multiple products, be an Indian reality. Without an overt social policy aimed at India’s poor full-blown national market development is likely to remain elusive.

3

Conclusion

Clearly without regulation markets are unable to address broad social development even as they work toward democratizing consumption on a larger scale. This does not mean that developing countries halt industrialization, where presumably markets are not working well. It only suggests that not all countries are equally predisposed to create the conditions for market development and ensure rapid economic transformation. However, given that capitalism is an expansionary system it does open up the possibility of new opportunities and new participants. Regulating capitalism creatively can harness the dynamics of market development and minimize, if not quell, capitalist contradictions. Hence, it is not a hopeless situation as the

Concluding Remarks on Capitalism, Markets, and Development 207

new environmental regulations implemented in Delhi and the recent defeat of the incumbent Indian government show. There is greater awareness of the importance of quality of life in poor countries even if the material standard of living in the developing world is woefully below OECD norms. Recognizing that capitalist industrialization and global economic integration have been exclusionary, the new Indian government has allocated greater spending for rural India and is pursuing economic reforms with a social development agenda (Kripalani 2004). At the same time, the government has also liberalized foreign ownership in strategic sectors such as insurance, telecom, and civil aviation believing that integration will lead to market growth. Curiously this has been opposed by the coalition government’s supporter, the Communist Party of India (Marxist), which has moved closer to embracing the new regime of accumulation. Irrespective of the outcome, India’s long march to capitalism is clearly ambiguous. It is also unmistakably toward embourgeoisment and market development, punctuated by state resistance to and accommodation of global capitalism. Theoretically it need not be since such a trajectory is predicated on a particular mix of historical legacies, institutional dynamics, and political exegesis. Many scholars already doubt that further deregulation will take place (Bardhan 2002, Mukherjee-Reed 2001). But that is a moot point. When the selective opening of the Chinese economy began in 1979 little did anyone think that the long march begun by Chairman Mao Zedong in 1934 would end up as an aggressive sprint toward capitalism. Deng Xiaoping’s aphorism that the color of the cat is irrelevant so long as it catches mice seems apt for the developing world today. In the end, capitalism needs to be seen for what it is, embourgeoisment, market development, and business responses, and not a road map for some teleological end nor a recipe for economic success or failure. Social policies of course could make it what we want it to be, reinforcing the heterogeneity of capitalism and the multiple paths toward inclusive market development.

Appendix Appendix A.1

Institutions Visited and/or Contacted for Data Collection

Institution

Place, Country

Year

All India Trade Union Congress Allied Motors Ltd. Am Forge Asahi Glass Ashok-Leyland Associated Chambers of Commerce and Industry of India Association of Indian Automobile Manufacturers Automotive Components Manufacturers Association Bharat Gears Bharat Seats Ltd. Bharat Seats Ltd. Bharatiya Mazdoor Sangh Business India Centre for Indian Trade Unions Centre for Indian Trade Unions

New Delhi, India New Delhi, India Mumbai, India New Delhi, India Chennai, India New Delhi, India

1992 1991 1991 1996 1991 1994

Mumbai, India

1991

New Delhi, India

1991, 1992, 1994, 1995, 1996 1991 1991 1996 1992 1994 1992 1995

Center for Studies in Social Sciences C.K. Daikin Communist Party of India (Marxist) Communist Party of India (Marxist) Confederation of Indian Industry Dalmia Engineering DCM-Toyota Eicher Tractors Eicher-Mitsubishi Embassy of Japan Embassy of the Republic of Korea Federation of Indian Chambers of Commerce and Industry General Motors India Gleitlager India Government of India, Department of Electronics

Mumbai, India New Delhi, India Gurgaon, India New Delhi, India New Delhi, India New Delhi, India Uttarpara, Kolkata, India Kolkata, India Mumbai, India Kolkata, India Uttarpara, Kolkata, India New Delhi, India Kolkata, India Surajpur, Uttar Pradesh, India New Delhi, India Pithampur, Madhya Pradesh, India New Delhi, India New Delhi, India New Delhi, India Halol, Gujarat, India Mumbai, India New Delhi, India

208

1994, 2002 1991 1994 1995 1991, 1992, 2001 1991 1991, 1992, 1994 1991 1992 1991 1994 1991 2001 1991 1991

Appendix 209 Appendix A.1 continued

Institutions Visited and/or Contacted for Data Collection –

Institution

Place, Country

Year

Government of India, Directorate General of Technology and Development Government of India, Ministry of Finance Government of India, Ministry of Industry Government of India, Planning Commission Government of West Bengal, Cottage & Small Scale Industries Haryana State Industrial Development Corporation Hind Mazdoor Sabha Hindustan Motors Honda Motors Honda Motors

New Delhi, India

1991

New Delhi, India

1992

New Delhi, India

1991

New Delhi, India

1991

Kolkata, India

1995

New Delhi, India

1994

New Delhi, India Kolkata, India Tokyo, Japan Saitama Plant, Tokyo, Japan New Delhi, India New Delhi, India New Delhi, India

1992 1991, 1995 1991 1991 1991, 1992, 1994 1991 1991, 1992

New Delhi, India

1991

New Delhi, India Tokyo, Japan Tokyo, Japan New Delhi, India Tokyo, Japan

1992 1991 1991 1991 1991

India Investment Centre India Today Indian Council for Research on International Economic Relations Indian Machine Tool Manufacturers Association Indian National Trade Union Congress Indo-Japanese Association Isuzu Motors Jamna Auto Industries Japan Automobile Manufacturers Association Japan External Trade Organization Japan International Cooperation Agency Jawaharlal Nehru University Korea Trade Center Lucas-TVS Machino Plastics Mahindra and Mahindra Mark Auto Maruti Udyog Limited

New Delhi, India New Delhi, India

1991 1991

New Delhi, India New Delhi, India Padi, Chennai, India Gurgaon, India Mumbai, India Gurgaon, India New Delhi, India

Maruti Udyog Limited

Gurgaon, India

1991, 1992 1994 1991 1996 1991, 1996 1996 1991, 1992, 1994, 1995, 1996, 1999, 2002 1987, 1991, 1992, 1994, 1996

210 Appendix Appendix A.1 continued

Institutions Visited and/or Contacted for Data Collection –

Institution

Place, Country

Year

Mazda Motor Corporation MICO-Bosch Mitsubishi Motors National Council of Applied Economics Research National Institute of Public Finance and Policy National Union of General Workers (South District) Nippon Denso Industry Co. Nissan Motor Company Nissan Motor Company

Hiroshima, Japan New Delhi, India Tokyo, Japan New Delhi, India

1991 1991 1991 1991, 1992

New Delhi, India

1991

Tokyo, Japan

1991

Tokyo, Japan Tokyo, Japan Yokohama Plant, Yokohama, Japan Kurla, Mumbai, India Chennai, India New Delhi, India

1991 1991 1991

New Delhi, India New Delhi, India

1991 2002

New Delhi, India Gurgaon, India Gurgaon, India Chennai, India Hammamatsu, Japan Mumbai, India

1991, 1994 1991 1996 1991 1991 1991

Tokyo, Japan Bedadi, Bangalore, India Chennai, India Kolkata, India

1991 2003 1991 2002

Premier Automobiles Ltd. Rane (Madras) Ltd. Research and Information System for the Non-Aligned and Other Developing Countries RICO Auto Industries Ltd. Society of Indian Automobile Manufacturers Sona Steering Sona Steering Sona Components Standard Motors Suzuki Motors Tata Engineering and Locomotive Company Toshiba (International Operations) Toyota-Kirloskar UCAL Fuel Systems West Bengal Industrial Development Corporation World Bank World Bank XLO India

1991 1991 2001

Washington, D.C., USA 2002 New Delhi, India 1998 Mumbai, India 1991

Appendix A.2

Estimated Distribution of Urban Households by Income Group in India

Income Group Low (L) Lower Middle (LM) Middle (M) Upper Middle (UM) High (H) Broadest Middle Class (M + UM + H) Broad Middle Class (UM + H) Narrow Middle Class (H) Total No. of Households (in thousands)

1985–86

1989–90

1992–93

1993–94

1994–95

1995–96

1996–97

1997–98

1998–99

42.09 35.84 15.16 3.85 3.06 22.07

37.14 34.76 17.89 6.46 3.75 28.10

38.44 32.97 16.07 7.62 4.90 28.59

36.73 33.07 17.07 7.85 5.28 30.20

33.46 33.06 18.74 8.71 6.04 33.49

28.13 34.56 20.34 9.63 7.35 37.32

24.46 34.69 21.33 10.55 8.98 40.86

21.87 34.42 22.11 11.29 10.30 43.70

18.96 33.76 22.59 12.16 12.53 47.28

6.91

10.21

12.52

13.13

14.75

16.98

19.53

21.59

24.69

3.06 34,103

3.75 40,106

4.90 42,114

5.28 43,025

6.04 44,676

7.35 46,698

8.98 47,375

10.30 48,161

12.53 49,111

Source: National Council of Applied Economics Research (NCAER) (2002: 75, 82, 123), Natarajan (1998). Notes: Income Group based on annual income • 1985–86 and 1993–94 income based on 1985–86 prices (L = up to Rs. 9,000; LM = 9,001–18,000; M = 18,001–30,000; UM = 30,001–42,000; H= above 42,000) • 1994–95 and 1995–96 income based on 1993–94 prices (L = up to 20,000; LM = 20,001–40,000; M = 40,001–62,000; UM = 62,001–86,000; H = above 86,000) • 1989–90, 1992–93, 1996–97, 1997–98, and 1998–99 income based on 1998–99 prices (L = up to 35,000; LM = 35,001–70,000; M = 70,001–105,000; UM = 105,001–140,000, H = above 140,000).

211

212

Appendix A.3

Estimated Distribution of Rural Households by Income Group in India

Income Group Low (L) Lower Middle (LM) Middle (M) Upper Middle (UM) High (H) Broadest Middle Class (M + UM + H) Broad Middle Class (UM + H) Narrow Middle Class (H) Total No. of Households (in thousands)

1985–86

1989–90

1992–93

73.61 21.38 3.98 0.69 0.35 5.02

67.34 23.89 7.07 1.16 0.54 8.77

65.49 22.61 8.22 2.30 1.37 11.89

1.04

1.70

0.35 94,383

0.54 102,334

1993–94

1994–95

1995–96

1996–97

1997–98

1998–99

65.39 23.15 7.54 2.50 1.42 11.46

61.38 25.97 8.31 2.71 1.63 12.65

57.21 28.97 8.63 3.12 2.07 13.82

52.80 31.79 9.54 3.44 2.43 15.41

50.69 33.17 9.87 3.61 2.65 16.13

47.94 34.83 10.41 3.85 2.97 17.23

3.67

3.92

4.34

5.19

5.87

6.26

6.82

1.37 113,203

1.42 114,294

1.63 115,875

2.07 118,173

2.43 119,289

2.65 121,046

2.97 122,810

Source: National Council of Applied Economics Research (NCAER) (2002: 75, 82, 123) and Natarajan (1998). Notes: Income Group based on annual income • 1985–86 and 1993–94 income based on 1985–86 prices (L = up to Rs. 9,000; LM = 9,001–18,000; M = 18,001–30,000; UM = 30,001–42,000; H = above 42,000) • 1994–95 and 1995–96 income based on 1993–94 prices (L = up to 20,000; LM = 20,001–40,000; M = 40,001–62,000; UM = 62,001–86,000; H = above 86,000) • 1989–90, 1992–93, 1996–97, 1997–98, and 1998–99 income based on 1998–99 prices (L = up to 35,000; LM = 35,001–70,000; M = 70,001–105,000; UM = 105,001–140,000, H = above 140,000).

Notes Chapter 1 1. This approach, long-established and widely used by historically-grounded marxian scholars, has only recently caught the attention of other scholars (see Pierson 2004). 2. The growth of the middle class, income polarization, and transnationalization of the industry are features common to both. 3. Robert Boyer warns of mechanistic application of western institutions of capitalist development to non-western, semi-industrialized economies (Boyer 1990: 99). He classifies India as a “mixed” economy in which intensive accumulation (a feature of advance capitalism) coexists with the absence and presence of mass production and traditional agriculture respectively (Boyer 1990: Table 3). This of course does not adequately capture the institutions of Indian capitalism.

Chapter 2 1. For example, in two cities deeply integrated with the contemporary global economy, Singapore and Penang (Malaysia), the high degree of business collaboration is actually based on primordial ethnic ties rather than impersonal arms-length, market transactions (Wong 2001, Rasiah 2001). 2. The literature on the Regulation school is voluminous and hence it is beyond the scope of this chapter to disentangle the subtleties of the various positions within the Regulation school (see Robles, Jr. 1994 for a survey). A critique of the Regulation framework can be found in Brenner and Glick (1991) and Mavroudeas (1999). 3. This is similar to the “social structure of accumulation” framework, whereby each phase corresponds to a social structure of accumulation (SSA) comprising sets of institutions favorable to capital accumulation (Kotz 2001). 4. Boyer does not even include Japan in his classification scheme (1990: Table 3). See Williams (1994) for an alternative Japanese approach to regulating markets. 5. Whitley (1999), however, also examines the East European case, which can be argued to fall broadly under the “transitional” group–from state socialism to market capitalism. Within this group there is considerable diversity, with Russia and the East European economies (closer to the more “liberal” Western Europe) and China and Vietnam (closer to more “socially” embedded Asian systems). However, the common link between the two groups is the significance of exogenous capitalist forces in altering their institutional foundations for economic transformation. 6. As per the regulation approach, there are two types of regimes–extensive and intensive regimes of accumulation. For the purposes of this study no distinction is made, although the market-driven strategy intuitively reflects a more intensive regime of accumulation. 7. The regulation approach in its stylized historicization of advanced capitalism offers two kinds of modes, namely, competitive (mid-19th century to World War 213

214 Notes

8.

9.

10.

11.

I) and monopoly (post-World War II until the 1970s) forms. These parallel the extensive and intensive regime of accumulation respectively. Neoliberal ideology could be imposed by exogenous forces. For example, economic failings, as in the Japanese and Korean financial systems, are often explained by the non-adoption of neoliberal banking practices. Thus these states are forced to accept practices that they have historically avoided, to their benefit, in creating an industrial foundation unprecedented in capitalist development. Today they reluctantly accept neoliberal foundations for economic organization to extricate themselves from stagnation and stave off further crisis. This interpretation of the transformation of states is consistent with Pedersen’s society-centered explanation of economic liberalization in India (Pedersen 2000). However, his attempt to link the 1991 reforms to the emergence of a new crop of entrepreneurs (the “quiet revolution”), underplays the larger context of state-sponsored embourgeoisment, which was in process much earlier. This is in sharp contrast to the distinctiveness of Japanese business systems, which seem to remain “nationally” intact despite the considerable internationalization of the Japanese economy and significant outward foreign direct investment (Whitley 1999: 128–129). There are various definitions of excess capacity, depending on how production capacity is defined (European Commission 1997: 3). In general, excess capacity is the “amount of extra volume that a firm could produce if all its existing plant and equipment were fully used for 24 hours a day” (European Commission 1997: 3). Excess capacity in the Indian auto industry is equivalent to the difference between installed capacity and actual production. For a given firm, this difference could arise not only in the way installed capacity is defined (and sometimes “stretched” incrementally) but due to actual production falling short of such capacity (see D’Costa 1999: 21–27). However, excess capacity as discussed here is integral to capitalism and is hence interpreted as systemic.

Chapter 3 1. There are many structural and historical reasons for India’s low level of entrepreneurship. Suffice it to say the British contribution to landlordism (zamindars), support of local traders, managing agencies involving commissions, and high caste disdain for manual work contributed to a rent-seeking, risk-averse business orientation. 2. Other factors include the structural constraints of the import substitution model. This includes bias against exports, misallocation of resources, regulation of production through licensing of industrial capacity, and restrictions on foreign capital to eliminate competition. The results have been induced competition for state largesse in the form of industrial licenses and the encouragement of high-cost, inefficient industry. 3. Rural class differentiation can be gauged by the fact that in 1971 about 17,000 tractors were produced compared to nearly 83,000 in 1981. This is a five-fold increase (Automotive Components Manufacturers Association (ACMA) 1999: 10). 4. Since 1951 India’s population increased by 2.76 times but grain output increased by 4.21 times. 5. The irony of this politicization should not be lost on scholars of social change, whereby communities consciously devalorize their primordially-derived social

Notes 215 standing or construct an inferior one in order to gain secular economic benefits. It is of course entirely possible that new-found secular gains can cumulatively reinforce non-secular attributes. 6. In 1997 138,450 and 186,155 students were admitted to engineering degree and diploma programs respectively (Institute of Applied Manpower Research 1998). There is a high attrition rate among lower ranked institutions, which results from both under-preparation of students as well as poor quality facilities. 7. In Africa, local support for state-led import substitution arose from vested interests (Lofchie 1997).

Chapter 4 1. The government in the 1970s had established Scooters India Ltd. to capture the lucrative two-wheeler market. However, it failed miserably because of industrial strife and managerial and technological incompetence (Nayar 1992). 2. Discussions held with relevant officials in New Delhi, Bombay, Madras, Calcutta, Tokyo, Hammamatsu, Hiroshima, and Toyota-shi (August-December 1991). 3. In 1986 about 33 million persondays were lost due to industrial disputes (Confederation of Engineering Industries 1991: 131). In a highly politicized society such magnitudes were not uncommon in the past. 4. One component manufacturer confided that dies worth about $4 million for the TELCO-Honda project were already made and were lying idle in Japan (Interview with RICO, New Delhi, Sept. 1991). This could not be confirmed with Honda officials in Tokyo. 5. Although exporting the Indian-made Hondas was not explicitly stated in the application, one TELCO official stated exports could have been made if necessary. But he added that since the Hondas would be extremely popular in India there would not have been a need for exports (Interview with TELCO officials, Bombay, Oct. 1991). This argument, however, is not persuasive if the government was concerned with foreign exchange outflows since not exporting would have entailed outflows under the assumption imported components had to be used for production. 6. I am grateful to Makoto Kojima for this information. 7. Based on interviews conducted during September-November 1991. 8. See Chapter 6 on the continuing controversy over the firm’s restructuring. 9. Nayar (1992) illustrates the difficulty in privatizing state-run firms such as Scooters India Ltd. as part of the overall liberalization package. Even for private firms labor retrenchment is fraught with difficulty, as in the case of Standard Motors. 10. Manor (1988) sees this principally as a result of the breakdown of the ruling Congress Party’s discipline. 11. The feasibility studies of many Japanese LCV projects were done at 260 yen to the US dollar. The yen subsequently rose to about a 100 per dollar.

Chapter 5 1. Cooperation between partners need not be symmetrical. A survey carried out fifteen years ago indicates the vulnerabilities of small parts suppliers (Category C), each of whom sold nearly two-thirds of their output to a single buyer, whereas some of the larger suppliers (Category A) were quite independent of assemblers (Narayana 1989: 57–58).

216 Notes 2. Economy of scale in microeconomics is seen as declining long-run average cost with output increases. It is expressed as the cost-output elasticity and written as E = (ΔC/C)/(ΔQ/Q). The numerator is the percentage change in cost and the denominator the percentage change in output. An E value less than one indicates an economy of scale (Pindyck and Rubinfeld 1995: 213). Economy of scope is said to exist if the cost of joint output by a firm is less than the combined cost of output under two firms. However, this economistic view of scale and scope overlooks the importance of risks in low-trust environments. 3. This interpretation differs from Kohli’s analysis of liberalization of the 1980s where he does not even mention the CII (1992: 315–330). 4. After relinquishing his position as the Managing Director of majority stateowned MUL in the late 1990s, R. C. Bhargava was recalled in 2003 to serve under the majority Suzuki-owned MUL. 5. Proximity to the assembler is not a new development in India. Several “job-works”-oriented firms are found in the vicinity of vehicle manufacturers. In Narayana’s survey (1989), these firms were small, dedicated, and heavily dependent on the vehicle manufacturer. In the current discussion mutual vulnerability would also imply the buyer’s dependence on suppliers. 6. An important exception is TELCO, which over the years cultivated a highly diversified network of suppliers. However, TELCO, as with other Indian firms in existence prior to MUL, was vertically integrated (see Narayana 1989: Table 2.2: 17). This turned out to be an asset in the changing market. 7. This was echoed by virtually all the representatives of automotive firms I spoke to during my fieldwork in Delhi, Bombay, and Madras in 1991, Pithampur in 1992, Halol in 2001, and Bedadi in 2003. 8. It is therefore not surprising that DCM-Toyota in its initial years was plagued by various labor disputes. While lay-offs have been rare in the assembly industry, DCM-Toyota in the late 1980s resorted to firing workers as it continued to face limited demand for its product. This was a quintessential feature of contemporary capitalist regulation with deleterious effect on industrial relations. 9. This section is based on extensive interviews conducted in Delhi in 1992 with central trade union leaders from the All India Trade Union Conference, Conference of Indian Trade Unions, Hind Mazdoor Sangh, and Bharatiya Mazdoor Sangh. 10. One renowned trade union leader chastised the workers and national politicians for the strange mix of “political sophistication and social backwardness” when commenting on workers wanting to build temples on factory premises and officials breaking coconuts to inaugurate high science-based projects (Interview with Centre of Indian Trade Unions (CITU) official, Delhi 1992). 11. Cellularization is defined as a production process in which a number of machines are programmed to produce outputs, which become inputs for other machines. The machines are synchronized in a way such that there is a strict adherence to “takt” time. It is a central principle of lean processes, which dictates that a specific number of finished parts must come off the lines within a set time – less than a few minutes. This is accomplished by simplifying and breaking down operations according to takt time, grouping machines tightly together in cellular fashion and limiting operator involvement (Thomas Net Industrial Newsroom 2003). 12. At its Saitama plant, Honda took 8 minutes in all to change the die – 5 minutes and 40 seconds for the actual transfer plus 2 minutes and 20 seconds for manual testing (Saitama Plant Visit, Japan, December 1991).

Notes 217 13. There are dedicated but programmable welding robots for passenger car production. Most welding has been manual because of low labor costs. In India there is no definitive trade-off between workers and robots. When output increases rapidly other manual welders are generally deployed. Workers are sufficiently trained to undertake relatively complex but routine tasks on the welding line. 14. Other cost-reducing, output-enhancing changes included reductions in welding and transfer time, lengthening the conveyor line, and adding another work station. Models with low demand were easily replaced with high demand items, making a new line available for high demand units. Even the paint shop (an expensive bottleneck) was reconfigured to accommodate production of additional units. 15. Mathur (1991: 119) notes that there were 400 QCs in MUL in the 1980s, most of which have become inactive due to power struggles between workers, management, and unions. I suspect this high figure was due to the overzealousness of the management to embrace the QC system in every facet of the organization, resulting in natural redundancy. The fact that MUL’s productivity was 26.38 vehicles per person per year compared to 3–4 in other (non-Japanese) car producing units does indicate, at least partly, the utility of Japanese-type practices, including QCs. 16. In the late 1980s, the lump sum payment at MUL was Rs. 6,900 for monthly production exceeding 400 vehicles per day and an additional Rs. 5.20 for every vehicle over 400 per day (Mathur 1991: 119). 17. All the QCs compete and the winning team is sent to Suzuki Motors in Japan. The trip in itself is a significant perk for Indian workers, while Suzuki uses the visit as a learning opportunity. 18. Although the number of suggestions per employee of MUL is comparable to Toyota, the implementation rate is significantly lower in India than in Japan. For example, in 1983, Toyota in Japan had an average of 31.8 suggestions per employee, of which 96% were implemented (Hoffman and Kaplinsky 1988). 19. Commensal rules outside of the modern managerial hierarchical system are significantly conditioned by caste, jati, and, increasingly, class positions. For example, social and religious rules have been based on the notion of ritual purity and pollution, which dictate rules of association with others in India, including rules pertaining to eating. Hence, common canteens represent a significant deviation from the typical Indian experience. 20. The feasibility studies of many Japanese LCV projects were done at 260 yen to the US dollar. The yen subsequently rose to about a 100 per dollar. 21. Several representatives from the Indian auto industry felt that Japanese LCV joint-ventures made their money before the appreciation of the Japanese yen, suggesting rent-seeking behavior. 22. See Baranson (1969) for the relationship between local content and cost of output. Eicher-Mitsubishi earlier had four months lead time for the import of knocked-down units from Japan for assembly. Not surprisingly, as predicted by Baranson, supply problems increased with Eicher-Mitsubishi’s increase in local content. 23. DCM-Toyota saved Rs. 6,005 per vehicle, 60% of which was material, through the breakdown of vendors’ costs, while Eicher-Mitsubishi reported it was able to save Rs. 212 per vehicle simply by eliminating excess parts available with dealers. Though the amount saved by Eicher is a mere $6 per vehicle, such incremental savings cumulatively become crucial for the viability of the firm with

218 Notes

24.

25.

26.

27.

28.

29.

30.

low capacity utilization. These cost reduction approaches are unilateral but suppliers recognize the benefits as well. Generally the labor content of vendor-supplied parts is not negotiated. Buyers could negotiate over prices and material content in parts and components, should changes in part specifications warrant a reduction. Eicher-Mitsubishi experienced long distance delivery problems, prompting development of local vendors in a limited way. Of the 1500 parts used by Eicher Mitsubishi in the early 1990s, 112 were supplied from Pithampur itself on pallets which are placed directly on the production line. Eicher’s inventory level in 1992 averaged 23 days. Rotation of workers in MUL was not across shops. There was negligible rotation in DCM-Toyota and Eicher-Mitsubishi. In these enterprises rotation was motivated not because of the wider implication for flexible production and increasing product variety but rather to reduce vulnerability associated with absenteeism. Absenteeism in MUL and the two JLCV producers have been low by Indian standards, roughly 12–15%. At DCM-Toyota, there was an average of nearly 150 line stops per month during April–July of 1992. These stops are indicative of intractable supply problems. Line stops were more frequent at Eicher-Mitsubishi, 15–20 per day, lasting several minutes. Again, this was due to supply problems. This is inconsistent with Eicher-Mitsubishi’s zero defect policy on the production line, which placed significant responsibility on its suppliers. Eicher had no industrial engineering department because of low volume production. Instead it encouraged its workers to adopt self-directed learning. But low volume of production and imported kits constrained local “learning by doing” opportunities. Quality control was often confined to fairly mundane tasks such as physical counting of weld spots. There appears to be statistical artifact, whereby the small-scale sector has a constant share of 23.1% of the total components market for each of the financial years between 1995–96 and 2000–01 (Calculated from ACMA 2001: 27, 38). In the past even large producers like Mahindra and Mahindra confronted arbitrary price increases by its suppliers (Personal Interview, M&M Staff, Bombay October 1991).

Chapter 6 1. In this connection, the restructuring of the global steel industry is a good example of the changing fortunes of older and newer industrial regions (D’Costa 1999). 2. Mallick (1993) disputes that West Bengal faced any discrimination. He finds no pattern in the statewise distribution of industrial licenses granted by the central government during the 1974–84 period (pp. 183–184). West Bengal’s experience paralleled the decline in the total number of licenses issued nationwide. 3. Such a response is typical in capitalist economies and is not unfamiliar in post-independent India when capital, opposed to the state’s disciplined form of regulation, refused to make industrial investments (Chibber 2003: 23–39). 4. Banerjee et al. (2002) dispute the significance of labor militancy to West Bengal’s relative industrial decline. They see a drastic drop in strikes during the 1980–97 period as a good reason for investment to pick up. However, industrial relations as a whole remained problematic with a massive rise in industrial lockouts and

Notes 219

5. 6.

7.

8. 9. 10.

11.

12. 13. 14.

15.

capital flight out of the state. There is indeed a relationship between earlier labor militancy and later investment slow-down in the state. This interpretation is somewhat different from but not inconsistent with the micro institutional view of Banerjee et al. (2002). This was also evident in Karnataka but investments continued to pour in, suggesting labor instability or high wage costs are two of several factors that influence investment decisions. This was also witnessed in the case of the US steel industry where investors shied away from modernization of plant and equipment and instead diversified into more profitable non-steel activities (Markusen 1985, D’Costa 1999). A similar argument has been made by Banerjee et al. (2002) to explain the state’s industrial decline. See Chapter 4. A copy of the request must be provided to the workers and a judgment passed by the government. If the resolution is disputed then the matter is transferred to a tribunal for adjudication. Like most older manufacturing plants in India, the HM plant at Uttarpara also has several labor unions. Class conflict at the shop-floor level is further complicated by inter-union rivalry. However, in this instance as workers’ jobs are at stake we can reasonably assume that the major battle lines are drawn between workers and employer (management) rather than among workers. Similarly, there are various arms of the government that impinge on the process of arbitration of labor disputes. Involved are the judicial system, the ruling political party, the bureaucratic arm under the Department of Labor of the state, an Industrial Tribunal that specifically aims to resolve the problem, and others. I am grateful to Debdas Banerjee for pointing out HM’s captive market. West Bengal has wooed Japanese investments and consequently it has received India’s largest Japanese investment in a petrochemical complex. In an unrelated way but consistent with the notion of productivity and efficiency, the Kolkata High Court banned rallies and processions in the city on weekdays (Hindu 2003b). The historic rise of the Workers Party in Brazil and the subsequent election of its leader Lula as the country’s president displays similar dilution of “leftist” political and economic agendas under a rapacious capitalist setting.

Chapter 7 1. These characteristics have been captured by India’s low GINI coefficients, which intuitively suggests them to be high rather than low. 2. Strictly speaking, the data in Table 7.5 are not comparable as the incomes are based on different base years. However, since the NCAER’s Market Information Survey of Households (MISH) consistently has five income groups, it probably makes little difference in the distribution of households by such income groups (see Natarajan 1998 and NCAER 2002). The discussion in this section is largely based on NCAER’s MISH Reports of 1998 (same as Natarajan 1998) and 2002. 3. Absolutely, coal remains India’s principal fuel, followed by imported petroleum, oil, and lubricants. In more recent years natural gas consumption has been on the rise but it is a fraction of imported energy and electricity consumption. 4. Other modes of transportation such as railways and airlines also contribute to oil dependency, as the data for consumption of oil by the transportation sector

220 Notes illustrates. For example, in 1975 consumption by this sector was 8.8 billion tonnes of oil equivalent, which rose to 29 billion tonnes in 1994 (Srivastava and Sengupta 2000: 67–92, also Government of India, Ministry of Heavy Industries & Public Enterprises 2002: 88–89). A decade later this consumption is expected to be much higher, given the rapid expansion of the automobile industry. 5. Of the 72 entries obtained for “MC Mehta v Union of India” under the Environmental Law Alliance Worldwide, over 50% of the entries dealt directly with litigation pursued by Mehta (http://www.elaw.org/5/24/2004 11:41 AM). Mehta not only dealt with environmental issues such as automobile emissions and hazardous industries but also worker abuses that resulted from unregulated industries such as mining and quarrying and subsequent layoffs from court-ordered closures of polluting enterprises around the Yamuna river and the Taj Mahal in Agra. In 1996 he received the Goldman Prize (the “green Nobel”) and he is credited in the decision to make Delhi’s buses use CNG.

Chapter 8 1. This was evident from MUL’s refusal to update some of the information, which they enthusiastically shared with me in the 1990s (Personal Interview with MUL Staff, August 2002).

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Index Agrarian society 54–56 Agriculture, commercialization of 54–55 Air pollution 40, 42, 170, 191–195, 197 Air Prevention and Control of Pollution Act 192 Allwyn-Nissan 88, 91 Alternative analytical framework 13, 17, 23, 27–45 Andhra Pradesh 145, 156 Asahi Glass 111, 116, 121 Ashok-Leyland 87, 88, 93–94, 120, 121, 131, 132, 160, 176 Association of Indian Automobile Manufacturers (AIAM) 90, 111 see also SIAM Automotive Components Manufacturers Association (ACMA) 111, 113, 137, 139 Backward integration 11, 13, 119, 122, 135, 138–139, 141 Bajaj Auto 87, 137, 176, 184 Bajaj Tempo 131, 158, 160 Balance of payment (BOP) problems 70, 76–77, 79–81, 89 Best industry practices 11–12, 38, 67, 70, 95, 104, 110, 114 see also Flexible practices Bharat I and II pollution standards 192–194 Bharat Seats 111, 115, 116 Bharatiya Janata Party (BJP) 1 Bhargava, R. C. 110, 113, 139 Bhargava, Subodh 113 Birla Group 82, 91, 94, 150, 157 Black money 180 BMW 75, 158, 159, 160 Board for Industrial and Financial Reconstruction (BIFR) 156 Bombay Plan of 1944 48 Brakes India 119, 120 Brazil, automobile industry 2, 72, 96, 97, 98, 140, 201 Broadbanding 83

Business associations 30, 41 see also Industry associations Business systems 12, 16, 20–21, 23–27, 31, 32, 34, 37, 39 C. K. Daikin 90 Capacity utilization 92, 177 see also Excess capacity Caparo Industries 94, 116, 117 Capital flight 151, 156, 158–159 Capitalism alternative framework of 13, 17, 23, 27–45 heterogeneity of 3, 6, 15–18, 21, 23, 26, 27, 199 models of 16, 18, 21, 23 peripheral 18, 40 Capitalist competition 3, 8, 12, 14, 19, 36, 91–93, 96–101, 129, 143, 156, 160, 162, 171, 173–176, 185, 191 Capitalist contradictions 10, 14, 27, 38–43, 169–171, 173, 196 Capitalist development, turning point 2–5, 7, 8, 14, 22, 26–27, 29, 37, 41, 105, 199–200 Capitalist regulation 5, 8–11, 28–29, 39, 70, 81, 106, 108–110, 112, 129, 135, 138, 169–170, 173, 186, 195, 199 see also French regulation approach Caste and class dynamics 51, 52, 56–57 see also Dalits, Jatis, Other backward castes Caste-based affirmative action 9, 51, 57–58 Cellular manufacturing 35, 109, 119–120, 122, 125–127, 200 Centre of Indian Trade Unions (CITU) 152, 166 Chennai (formerly Madras) 113, 114, 119, 158, 164, 165 China 7, 23, 24–25, 28, 59, 81, 189–190, 200, 203, 205–207 Chinese networks 24 see also Business systems

239

240 Index Citroe¨ n 90 Class conflict 143, 156, 161–165, 168 Climate Systems 115 Communist Party of India (Marxist) (CPM) 1, 151–152, 155, 161–162, 165–166, 204, 207 Completely knocked down (CKD) kits 85, 89, 92, 133 Components industry 95, 98, 104–105, 110, 115, 117–119, 122, 135–140 Computer numerically controlled (CNC) machines 107, 108, 122 Confederation of Indian Industry (CII) 111, 112, 113, 165 Conspicuous consumption 62–63, 78, 177 Consumer class 1, 4–5, 9, 17, 177 Consumer durables 2, 22, 28, 31, 38, 48, 63, 89, 183 Consumption 59, 142, 144, 182–188, 197, 205–206 Continuous improvements see Kaizen Convergence 6, 24 Cooperative arrangements 5–6, 19–21, 23, 34, 44–45, 73, 105–110, 115, 117–119, 122, 130, 133–134, 138, 148, 200, 203 see also Economic coordination Daewoo 75, 86, 87, 88, 92, 94–97, 100–101, 119, 131, 134, 140, 174, 176, 187, 200 Daimler-Benz 75, 94, 99, 100, 174, 176, 187, 205 Dalits 56, 57, 58 DCM Group 94, 96, 139 DCM-Daewoo 88, 95, 134 DCM-Toyota 88, 91, 92, 93, 96, 123, 125, 132, 134, 135 Delhi 110, 119, 134, 146–148, 155, 159, 192, 194, 195 Diversified output 99, 100, 101, 108 see also Flexible practices East Asia 7, 16–17, 23, 26, 70 Economic coordination 5, 16, 19, 28–29, 34–35, 40–41, 43 Economies of scale 20–21, 35, 37, 42, 82–83, 91, 93, 99, 106, 108–109, 112, 114, 129–130, 137, 139, 177, 185, 206

Economies of scope 21, 35, 37, 42, 83, 93, 99, 108–109, 132, 174, 206 Education 31, 53, 58–61 caste reservations 51, 57–58 higher education 41–43, 59–62 and social inequality 58–61 Eicher Group 87, 94, 131 Eicher Tractors 90, 125, 128 Eicher-Mitsubishi 88, 91, 92, 94, 123, 125, 128, 132, 133, 134, 135, 158, 160 Emission standards 192–195 Energy dependence 42, 188–192, 201 Enterprise unions 34, 107, 109, 111, 122–124, 128, 200 Environment Protection Act 192 Environmental challenges 10, 11, 41, 43 Euro pollution standards 193–194 Excess capacity 11–14, 33, 36–37, 41, 43, 71–73, 96, 170–177, 201 Exclusionary development see Inequality Export of vehicles and components 98, 137 Foreign Exchange Regulation Act (FERA) 49, 82, 83 Fiat 75, 86, 90, 93, 94, 96, 97, 100, 130, 137, 174, 187 Fiat-Premier Automobiles Ltd. (PAL) 95 Flexible practices 4, 9, 16, 17, 28, 37–39, 43–44, 70, 81, 105–110, 122, 124–125, 128–130, 132–135, 138–141–142, 173, 203, 206 Food grain production 54 Ford 75, 82, 94, 95, 99, 100, 103, 113, 116, 119, 140, 160, 174, 176, 187 Ford India 94, 96, 97, 158, 159, 160, 177 Fordism 8, 20, 22, 35–36, 94–95 see also Mass production system Foreign exchange reserves 76–77 Fossil fuel imports 10, 14, 40, 76, 170, 188–191, 201 French regulation approach 7–9, 12–13, 20–24, 28, 29, 34 Fuel efficiency 91, 191, 194–195 Gandhi, Indira 85, 91, 110 Gandhi, Rajiv 66–67, 91, 113 Gandhi, Sanjay 85, 110

Index 241 General Motors 75, 82, 86, 93–100, 103, 125, 130, 137, 140, 158–160, 174, 176–177, 187, 201, 204 German capitalist model 18, 21 Germany 24, 25, 47 Gujarat 125, 130, 144–148, 152–153, 156, 159–160, 165, 204 Gurgaon, Haryana 113, 125 Halol, Gujarat 96, 158–159 Haryana 113, 114, 125, 145, 147, 152, 165 Hero Honda 176, 184 Hindustan Mazdoor Sangh 123 Hindustan Motors (HM) 82, 85–88, 91, 93–100, 103, 125, 128–131, 143, 149, 157–169, 174–176, 187, 200–201 Honda Motors 75, 90, 94, 100, 140 Honda-Siel 94, 174, 176, 187 Hosur, Tamil Nadu 158, 160 Household incomes 98, 179–182, 184, 186, 187, 197, 206, 211, 212 Hyundai 75, 85, 86, 95, 99, 100, 101, 113, 137, 140, 141, 160, 174, 176, 187, 206 Import substitution industrialization 2, 5, 8, 30, 31, 39, 42, 46–49, 50, 72, 81, 149, 200 Inclusionary consumption 15, 182, 184–185 Income distribution among households 98, 178, 179, 184, 186, 187, 197, 206, 211, 212 Income polarization 38, 168, 170, 178, 197, 199 Incremental innovations 35, 125–127, 135 Indian National Trade Union Congress 123 Industrial clusters 113–114, 119, 130, 134, 139, 140, 141, 158, 160 Industrial decline in West Bengal 144–165 Industrial Disputes Act 161–162 Industrial licenses 110–112, 114, 144, 165, 188 Industrial Policy Statements 83 Industrial relations 20, 35, 89, 122–126, 150–165 Industrial Training Institutes 124

Industries Development and Regulation Act 49, 81, 83 Industry associations 5, 8, 107, 112, 113 see also Business associations Inequality 7, 11, 12, 15, 26, 29, 32, 36, 38, 43, 55, 56, 59, 98, 142, 149, 170–171, 178, 184–186, 188 Information technology industry 61, 66, 77–78 ISO 9000 121, 137 Isuzu 75, 93, 94, 96, 97, 100, 158, 159 Italy 20, 24, 85, 96 Japan 12, 24–25, 33, 70, 72–73, 85, 95–96, 102, 103, 139, 190 Japanese capitalism 18–21 Jatis 52, 56, 57, 58 Jay Bharat 111, 115, 116 Just in time (JIT) 115, 117, 119, 130, 134 Kaizen 35, 135 Karnataka 145, 147, 159, 160 Keynesian policies 8, 17, 20, 36, 46, 69, 71, 106 Kirloskar 94, 96 Kolkata (formerly Calcutta) 114, 125, 129, 146, 148–149 Koyo Seiko 115, 116, 119 Krishnamurthy, V. 110 Labor 107, 123–126, 128, 143, 151–152, 161–163, 166, 170 Labor relations in West Bengal 152–165 Light commercial vehicles (LCV) 14, 84, 88, 96, 103, 106, 128–130, 132–134, 138–139 Local content 92, 93, 101, 110, 134, 164, 203 Lockouts 151–156 Long-term subcontracting arrangements 20, 34, 44–45, 73 Luxury car segment 98, 100 Machino Plastics 111, 115, 116, 117 Macroeconomic stability 17–18 Madhya Pradesh 159, 160 Maharashtra 144, 145, 146, 147, 148, 152, 153, 156, 165 Mahindra & Mahindra 85–88, 94, 95, 114, 126–127, 130, 131, 174, 176, 187

242 Index Mark Auto 111, 116 Maruti Udyog Ltd. (MUL) 75, 83–86, 88, 90–95, 97–100, 101, 103, 105, 110–130, 134, 138–139, 157, 159–160, 162, 173, 176–177, 187, 195, 200, 206 Marwaris 149–150 Mass consumption 22, 106 see also Fordism Mass customization 35, 132 Mass production system 9, 20, 21, 35, 106, 81, 105, 107 Mazda 75, 87, 88, 91, 94, 130 Mehta, M. C. 193 Mercedes Benz 86, 94, 100, 121, 140 MG Rover 75, 133 Middle class 3–5, 13, 31, 41, 52, 68, 80, 89, 177–180, 184–187, 193, 194, 200–201, 211, 212 Middle class, size of 62–64 Minimum efficient scale 37, 172 Mitsubishi 75, 87–94, 96, 97, 99, 100, 130, 158, 159, 160, 163, 174, 187 Mode of capitalist regulation see Capitalist regulation Models of capitalism 17–18, 21, 27, 103 Monopolies and Restrictive Trade Practices Act (MRTP) 49, 82, 83 Motor Vehicles Act 192 Multinational firms 1, 5, 12, 14, 29, 72, 84, 103 Mumbai (formerly Bombay) 129, 146, 148 Mumbai-Pune region 114 National Ambient Air Quality Standards 192 National Capital Region (NCR) 113, 148, 201 National Council of Applied Economic Research (NCAER) 178, 182, 196 Natural gas 191, 193–195 Negative externalities 40–41 Neoliberalism 2, 5, 12, 13, 15–16, 28, 32–33, 38–39, 66, 71, 95, 135, 164–165, 195 Nissan 75, 87, 88, 91, 93, 94, 99, 100, 111, 112, 129, 130, 131 NOIDA, Uttar Pradesh 113, 125 see also Industrial clusters

Non-resident Indians (NRIs) 78, 80, 102

67, 68,

Oil dependency 41, 43, 76, 188, 189 Opel 96, 97 Other backward castes (OBCs) 58 Outsourcing 34, 37, 95, 96, 107, 141, 164 Overproduction 33, 72 see also Excess capacity Path-dependent development 31–32 Peugeot 93, 94, 100, 130 Phased Manufacturing Program (PMP) 90, 93 see also Local content Pithampur, Madhya Pradesh 125, 134, 158, 159, 160, 165, 204 Political economy approach 10, 12, 25, 46 Pollution see Air pollution Pollution Control Boards 193 Poverty 11, 27, 51, 56, 62, 150, 199 Premier Automobiles Ltd. (PAL) 82, 85–88, 91, 93, 94, 95, 98, 100, 128, 129, 130, 200 Premier Automobiles Ltd. (PAL)-Peugeot 86, 94 Prices cars 186–187 two-wheelers 184–185 Punjab 114, 145, 147 Quality circles 25, 35, 107, 109, 122, 127, 133, 135, 200 Regime of accumulation 9–11, 13, 25, 28–29, 34, 36, 39, 81, 102, 141–143, 164, 169–171, 199, 201 Regulation approach see French regulation approach Rural embourgeoisment 53–55, 68 Rural-urban income distribution 59, 180–185, 211–212 Russia 21, 23 Scheduled castes Scheduled tribes SEAT 111, 112

58 58

Index 243 Shopfloor organization 105, 114, 122, 125–128, 135, 200, 203 Skoda 174, 187 Social regulation 41, 193, 196, 205, 206 Society for Indian Automobile Manufacturers (SIAM) 113, 174, 194 Sona Steering 111, 115, 116, 118, 119, 126, 139 South Korea 10, 24, 33, 72, 85, 95, 115, 139, 177, 190, 200 Soviet Union 6, 69, 77 Standard Motors Private Ltd. (SMP) 85–88, 93, 95, 160 Statement of Government’s Industrial Policy 49, 81 Sundaram Fasteners 96, 97, 120, 205 Suzuki Motors Corp. (SMC) 43, 68, 73, 83–85, 94, 96–97, 100, 110–111, 115–117, 125, 137, 174 Swaraj-Mazda 87–88, 91, 94, 131 Swedish capitalist model 18, 21 Taiwan 24–25 Tata Group 75, 90 TELCO 86–88, 90, 91, 93, 94, 99–101, 103, 120, 122, 129–133, 139, 163, 174, 176, 187, 200 Three-wheelers 175–177 Tiruvallur, Tamil Nadu 130, 144–147, 152–153, 156, 158–160, 165

Toyota 86–93, 96, 130, 134, 140, 141, 158, 174, 187 Toyota Kirloskar 94, 123, 160, 203 Trade unions 122–125, 129, 152, 161, 164, 166 see also Enterprise unions TVS Group 137, 139, 158, 176 Two-wheelers 63–66, 82, 137, 175–177, 182–187, 197 UCAL Fuel Systems 115, 117, 120 Uneven capitalist development 8–9, 26–27, 98, 104, 143–144, 148–149, 151, 155, 157, 167, 169 Uneven regional development 11, 14, 40–42, 141–142, 144, 165, 200 Untouchables see Dalits Uttar Pradesh 145, 147 Uttarpara, West Bengal 143, 149, 158–169 Vertical integration

20, 34

Walchand Group 82 West Bengal 1, 14, 129, 143–168, 169, 194, 20 West Bengal Industrial Development Corporation 166