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The Spread of Modern Industry to the Periphery since 1871$

Kevin Hjortshøj O'Rourke and Jeffrey Gale Williamson

Print publication date: 2017

Print ISBN-13: 9780198753643

Published to Oxford Scholarship Online: March 2017

DOI: 10.1093/acprof:oso/9780198753643.001.0001

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From Artisanal Production to Machine Tools

From Artisanal Production to Machine Tools

Industrialization in India over the Long Run

Chapter:
(p.229) 10 From Artisanal Production to Machine Tools
Source:
The Spread of Modern Industry to the Periphery since 1871
Author(s):

Bishnupriya Gupta

Tirthankar Roy

Publisher:
Oxford University Press
DOI:10.1093/acprof:oso/9780198753643.003.0010

Abstract and Keywords

This chapter documents the decline and rise of industrial production in India. As the economy integrated into the British Empire’s global network, there was a rapid decline in artisanal and cottage industries in the nineteenth century and a rising share of commodity exports. However, modern industries also developed in cotton textiles, jute, and tea under the entrepreneurship of British and Indian interests and with little support from the state. After independence in 1947, India adopted the planned development of an industrial sector, by regulating foreign trade and investment. Initial attempts succeeded in building a large capital goods sector, but import substitution ran out of steam. Indian industries remained inefficient and failed to match East Asia’s successful entry to the world market in industrial goods. Re-integration into the global economy after 1980 led to efficiency gains, but rising growth in recent years has been led by the services rather than industry.

Keywords:   India, manufacturing, cottage industry, modern industry, import-substituting industrialization, capital goods, planned economy, services, economic history, economic policy

10.1 Introduction

This chapter documents India’s transition from artisanal production to a modern industrial economy. India’s comparative advantage as the dominant producer and exporter of cotton textiles in the world in the eighteenth century was based on cheap labour and skills acquired through family-based artisanal production over generations. This advantage disappeared with the advent of the capital-using technology of the Industrial Revolution. The increased output per worker achieved by substituting capital for labour dramatically reduced the cost of cotton yarn and cloth. Over the nineteenth century British producers displaced Indian handloom products, first in the world market and over time in the Indian domestic market, leading to the decline of Indian artisanal production. The share of local products in total consumption declined to 40 per cent by the last quarter of the nineteenth century. From this trough a recovery was led by a modern textile industry, organized in factories and using new technology imported from Britain. At the same time, other industries such as jute and tea also began to adopt new technology borrowed from the industrial countries. In the early twentieth century there were signs of revival and growth in artisan industries as well.

The fortunes of cotton textiles reflect the path of Indian industrialization: rise and fall of artisanal production followed by import substitution in simple consumer goods during the colonial period. A more mature phase saw a rise in the share of machinery and equipment including machine tools. The fortunes of this industry in the world market in part reflect the policy regimes of various governments: from merchant-ruler (the East India Company) and British colonial government to the more developmental state of independent India. This chapter focuses on the emergence of a modern industrial sector. It is both a narrative history of what happened and an attempt to explain the specific features of Indian industrialization.

10.2 1800–1947

Indian industrialization can be conveniently divided into two stages. The first was the colonial period (1858–1947) when the economy was open to trade, migration, (p.230) and foreign investment, and state regulation was limited in scope. The second stage began with the post-colonial period, when import-substituting industrialization was implemented under state intervention (1947–c.1985).

The historiography of Indian industrialization in the colonial period tries to explain three long-term processes, each one directly or indirectly connected with the defining features of the time—openness and limited state intervention. These three processes are: de-industrialization or decline of the handicraft industries in the early nineteenth century, modest revival of the handicrafts in the twentieth century, and the rise and growth of factories from the 1860s. The latter process had a few peculiar features: (a) industrialization was concentrated in a few cities and towns, and until the First World War, almost entirely confined to Bombay, Calcutta, and Madras; (b) the composition of products manufactured was narrow, and there was little production of machines or intermediate goods; (c) none of the textbook preconditions for industrialization—cheap capital, high saving, agricultural revolution, or an activist state—were present in India in the 1850s, and (d) despite the growth in manufacturing, politicians and businesses after 1947 decided to change the paradigm completely from the one that had produced the industrialization.

10.2.1 De-industrialization

First, let us consider de-industrialization. Indian artisans had the largest share of the world cotton textile market in the seventeenth and eighteenth centuries. The onset of colonialism and the adoption of free trade as a tenet of British economic policy in India coincided with the Industrial Revolution, which shifted the balance of advantage in cotton textile production from Indian artisans to British factories (Broadberry and Gupta, 2009). A recent paper suggests that political and ecological crises in eighteenth-century India may have contributed to that shift (Clingingsmith and Williamson, 2008). Depending on the scale and availability of alternative employment, the resultant de-industrialization could have caused a consumption crisis and general economic decline, in addition to a decline in India’s relative position in the world economy.

Reliable and direct measurement of the extent of the decline in handicraft employment cannot be found, because during the peak period of the decline (1820–80) few data were collected on employment and production. Indirect measures by Bagchi (1976) and Twomey (1983) suggest that the decline was large. There is some evidence also of a general economic depression between 1820 and 1840 in southern India, especially the Deccan uplands, which the fall in artisanal employment may have exacerbated. Reports on famines in 1876 and 1896, again in the Deccan plateau, mention textile artisans coming to relief camps in large numbers and enlisting for emigration to British colonies abroad. However, such facts and the available research do not add up to a detailed picture of what happened after Manchester textiles began to be imported into India in large quantities, c.1820.

We can do slightly better by working backwards from the state of the artisanal textile industry in 1900. It is possible to say that the impact of imports was (p.231) significant on hand spinning of cotton yarn, and modest on handloom weaving of cloth. With the fall of spinning, an industrial activity that was once present in many regions and employed several million women disappeared. By implication, craft employment concentrated and became more male-biased. Possibly because so many of those displaced were part-time female workers, direct testimony of those made unemployed remains exceedingly rare. Outside cotton textiles, a de-industrializing process can be inferred in iron and steel, but again this cannot be measured precisely. As in textiles, the decline in iron seems to have been concentrated in the production of intermediate goods, namely pig iron, rather than in the iron products industry. The smelter was more likely than the blacksmith to become unemployed due to imports.

10.2.2 Revival of Handicrafts

The revival of artisan industry dates from around 1900. Although employment in the crafts continued to fall between 1881 and 1931, the fall affected women household workers mainly, whereas male full-time workers were unaffected (Thorner, 1962). Despite the fall, 10 million artisans were reported to be working in 1901, and 90 per cent of industrial employment remained in handicrafts—that is, located in households or small workshops using hand tools—and fell outside the scope of factory acts. Output, income, and wages, too, did not fall in the first half of the twentieth century, and in some key instances they rose. Detailed national income statistics of acceptable quality start in 1900. Between 1900 and 1946 total net domestic product in small industry increased slowly (Fig. 10.3 below), but net product per worker increased by 40 per cent between 1900 and 1935. Between 1901 and 1939, the production of hand-woven cloth increased from 207 to 406 million square yards, implying a 127 per cent increase in output per loom and a 200 per cent increase in output per worker. Iron and steel data suggest a successful import substitution by domestic producers including artisans.

From Artisanal Production to Machine ToolsIndustrialization in India over the Long Run

Fig. 10.3. Shares of industrial output (per cent)

Source: Sivasubramonian (2000, Appendices 7 and 8).

Evidence such as this has spurred scholarship suggesting that artisans should be seen as an example of industrialization rather than de-industrialization (Roy, 1999). Factory production grew much faster than handicrafts, but handicrafts remained stable rather than disappearing (Fig. 10.3). The new scholarship has shown that artisan textile producers survived because of consumer preference; they served customers who wanted handmade consumer goods for reasons of status, ritual, or display, or demanded a high degree of customization and product differentiation. These traditional preferences, however, were changing from the late nineteenth century along with migration, urbanization, and the emergence of a middle class. Artisans met these challenges with a variety of strategies, often by applying traditional decorative skills to modern utilitarian objects. They borrowed technologies and material from abroad, partly adopted the factory form of work, relocated towards major markets for their goods, and built close ties with cotton mills or the world market for the supply of cheap raw materials like yarn, dyes, metal thread, and synthetic fibre. The main sites of the re-organization process were small towns that received migrant artisans from depressed regions. These towns had easy access to big (p.232) ports and consumer markets, yet avoided the high real estate prices and wages of the city. Somewhat similarly, artisanal industrialization is called ‘small town capitalism’ in a recent study of handloom weaving in western India (Haynes, 2012).

This scholarship usefully draws a connection between the colonial-period transformation of the crafts and the large number of small industrial firms present in post-colonial India. Handicrafts represented one root, but not the only root, of modern small-scale industry. Rural non-farm industry was another. Flourishing agricultural trade encouraged a variety of agro-processing industries involving rice, oilseeds, groundnut, or cotton. These tasks were done in small, usually seasonal, and partially mechanized factories, not of artisanal origin.

10.2.3 Growth of Factories

The third large process is the rise of factories. Officially, the definition of ‘factory’ in the factory acts was a unit that employed at least 100 workers and used power (1881 Factory Act). Not all large units were covered, however. The seasonal units just mentioned were not covered until 1911. On the other hand, cotton spinning and weaving mills, jute spinning and weaving mills, factories manufacturing cane sugar, paper, and wool textiles, and steel factories using the blast furnace were usually covered. In short, despite some flexibility in the definition, factories in colonial India meant units employing mechanical power, usually perennial, hiring on average several hundred workers, and subject to the application of the factory acts.

Between 1860 and 1940, employment in factories increased from less than 100,000 to 2 million (see Table 10.1 for available data on employment). Between 1900 and 1947, real national income originating in factories rose by 4.3 per cent per annum, and factory employment at 3.6 per cent (Sivasubramonian, 2000, pp. 201–3, 287–8, 293–4). In 1940, the port cities of Bombay and Calcutta and their immediate neighbourhoods were homes to about 200,000 factory workers each.

Table 10.1. Employment in factories (thousands)

Cotton and jute mills

British India, all factories

Princely states, all factories

1885

105

300

1905

300

933

1915

460

1,004

1925

330

1,518

140

1935

295

1,611

270

Source: India, Statistical Abstracts for British India. Calcutta: Government Press, various years.

By some benchmarks, the growth of modern mechanized factories in India was an exceptional phenomenon in the tropical world. India had an earlier start than most late industrializing countries in the non-Western world. It led the contemporary developing world in two major industries of the Industrial Revolution, cotton textiles and iron and steel. In 1910, 55 per cent of the cotton spindles installed outside Europe, North America and Japan were installed in India. (p.233) In 1935, 50 per cent of the steel produced outside Europe, North America, and Japan was produced in India (BKS, 1950). There were by then several concentrations of factory workers in the tropics, but possibly none with more factory workers than Bombay and Calcutta.

The impact of industrialization on the structure of the economy was limited, possibly more so in India than in the contemporary developing world. For example, countries in Latin America enjoyed higher inter-war industrial growth rates than India. As Figs 10.1 and 10.2 show, industry and services (trade, finance, transportation) experienced growth in the first half of the twentieth century, but the increase in their share of total GDP was modest. And yet, the extent of structural change in the fifty years before independence was not very different from that which occurred in the thirty years after independence (Fig. 10.2). It was only in the final decade of the twentieth century that the share of agriculture in GDP was exceeded by that of industry and services. The limited scale of structural change (p.234) reflected the fact that manufacturing enterprises remained concentrated in a few cities before 1947. The industrial sector was dominated by small-scale and cottage industry in 1900. In 1947 this still carried the same weight in industrial output as manufacturing, and it remained a significant part of the industrial sector even in 2000 (see Fig. 10.3). This, along with a slow-moving primary sector and rapid population growth, implied a disastrous early-twentieth-century economic record overall.

From Artisanal Production to Machine ToolsIndustrialization in India over the Long Run

Fig. 10.1. Changes in GDP and its components in 1948–9 prices

Source: Sivasubramonian (2000, Appendices 7 and 8).

From Artisanal Production to Machine ToolsIndustrialization in India over the Long Run

Fig. 10.2. GDP (1948–9 prices) by sector, 1901–2000 (per cent of total)

Source: Sivasubramonian (2000, Appendices 7 and 8).

Nevertheless, the scale of factory expansion was sufficiently large to raise the question of why it happened at all.

10.2.4 Origin of Modern Industry

In chronological terms, India was a late industrializer. But as a type it was not, if, following accepted convention, we identify late industrialization with state intervention in exchange or production (Amsden, 1991). In the discourse on international development, the idea that an activist state could overcome the problems associated with arriving late lives on as ‘big push’, ‘embedded autonomy’, ‘developmental state’, and ‘governed market’—some of these labels were coined to account for the recent industrialization of East Asia. The developmental state (p.235) manipulates tariffs or regulates banks or manages the import of technology (Chang, 1999). The British colonial state in India was not an activist state in any of these senses. Not until late in the inter-war period did it set economic development as one of its goals. Until then a loosely defined notion of ‘improvement’ was sometimes cited by the regime as an aim, but improvement did not have a clear economic content, far less an industrializing one.

Nor were resource endowments and factor prices favourable for Indian industrialization. Received wisdom states that Britain industrialized under free market conditions thanks to favourable factor prices—that is, relatively low costs of capital and energy but high wages—and productive and energy-intensive agriculture which generated savings for investment and created path dependence in technological choices (Allen, 2009; Wrigley, 2006). Around 1850 in India, interest rates were two-to-three times higher than in the financial centres of Europe. The savings rate was around 5 per cent of GDP in 1920. Indian agriculture was characterized by some of the lowest yields even in the tropics. India’s artisans may have been skilled but they had little access to the expensive capital market to start factories.

Why then did India industrialize at all? An answer can be offered using a business history approach. That is, instead of looking at the cost of resources, we can also consider transaction costs in factor markets, or the cost of accessing capital and labour. Port cities in the nineteenth century created the prospect of a unique encounter between European knowledge and skills on the one hand and India’s advanced commercial tradition on the other, which reduced the transaction costs in accessing technology, skilled labour, and capital. Let us elaborate.

(p.236) In the nineteenth century, the world was transformed by a revolution in transport and communication, and by industrialization in the British Isles. The resultant growth in world trade, along with migration of capital and labour, was directly or indirectly aided by the expansion of British political and military power. By 1858, the British ruled over much of India. The Indian port cities met these developments from a position of advantage. During the time that the East India Company conducted trade from these bases, the cities had grown in population, shipping, and scale of international and coastal trade. Between 1860 and 1940, the ports had been connected with the interior by railways and telegraph. They exported huge quantities of cotton, grain, seeds, indigo, and opium, and imported British textiles, machinery and metals, and chemicals from Germany and Belgium. Merchant firms engaged in these businesses were Indian, European, and Indo-European.

Although Europeans dominated the handicrafts export business, India’s merchant capitalists dominated the export business in agricultural commodities. Further, because exports were dominated by agricultural goods, overseas trade, overland trade, and indigenous banking became ever more interdependent in the nineteenth century. Land trade and caravan trade in textiles, grain or cotton had been well developed before British rule, and bankers who financed long-distance trade could be found in the major towns located on rivers and caravan routes. As the Mughal Empire collapsed from the 1720s, a number of these merchants and bankers migrated, first to the capitals of rising states such as Hyderabad, Lucknow, and Pune, and later in the nineteenth century to the British Indian ports. Here, a string of British and European trading firms purchased agricultural commodities for export from merchants specializing in overland trade. The merchants themselves were financed not by the small number of corporate banks, but by indigenous bankers and money-lenders. By 1920, the biggest market for rediscounting of indigenous trade bills, the hundi, was located not in the interior, but in Bombay and Calcutta. These cities, thus, had an institutional edge over the interior.

The port cities also attracted skilled migrant workers from Britain more easily than did market towns in the interior of India. Capital and labour migration had been earlier constrained by the Company’s monopoly charter, which restricted the establishment of new banks as well as free migration of European artisans, not to mention private merchants. In 1813, the charter ended in India, and an influx of European artisans and merchants began. Bombay’s cotton exporters already had sufficient trading links with Liverpool, and went to England often enough to consider buying machinery and hiring foremen from there and setting up cotton mills in Bombay. The growth of modern enterprise, therefore, turned India into a net buyer of services from abroad. Excluding the government account, the net balance of payments met (out of a trade surplus) the salaries and pensions of engineers, foremen, artisans, teachers, doctors, managers, and scientists who migrated from abroad.

Pioneers in modern industry came from communities that had specialized in trading and banking activities, with some stake in the port cities. On the western coast, the Parsis, Khojas, Bhatias, bankers based in Ahmedabad, and the Bombay- (p.237) based Baghdadi Jews, were the owners of mills. Some of these people had earlier traded in the Arabian Sea. Others, like the Parsis, joined trade after coming into contact with the Company and people connected with it. In Calcutta, Madras, and Kanpur, as well as the regions that formed their hinterland, Europeans dominated import–export trade, banking and insurance, and eventually jute, engineering, mines, plantations, railways, power, and dockyard. Commodity trade, however, was not in European hands, but in the hands of Indian traders, chiefly the Marwaris. By the end of the inter-war period, prominent Marwari firms in Calcutta had entered the jute industry, and on a smaller scale sugar, paper, cement, construction, and share broking.

An industrial entrepreneur in 1850 needed to solve two problems: raising large sums of money cheaply, and running unfamiliar machines. How well did they solve the problems?

10.2.5 Institutional Features

The financial and commercial origin of industrialists suggests that their key contribution lay in raising money for long-term investment. This was a difficult task in a world that offered a huge premium for seasonal agricultural loans. The mill-owners solved the problem of pooling large amounts of capital for investment, initially by using community networks, and later by adopting and making use of the joint-stock company organization. Corporate law followed these developments (Companies Act and amendments, 1850, 1857, 1860, 1866, 1882), and made raising money from the public easier. A particular institutional innovation, the managing agency contract, saved on scarce managerial resources and, by allowing a contracted remuneration to managers, reduced risks of financial loss to the managers.

There were, however, differences in corporate strategy along ethnic lines. Some authors suggest that Indians and Europeans specialized in different fields, consistent with their respective information and resource advantages (Morris, 1979; Gupta, 2014). Europeans raised money from London; the shares were purchased by other Europeans. Indians raised money from family and community resources. Europeans sold goods in export markets, through a transportation and communication network centred in London. Indians sold goods in India and China. The picture of specialization contrasts somewhat with an alternative picture of rivalry. Bagchi (1997), for example, suggests that in colonial Calcutta there were informal guilds that developed along ethnic lines that regarded each other with hostility. Direct evidence on racialist sentiments and how they worked remains scarce and anecdotal. Legally, race was not recognized in commercial law.

Besides, there were many examples of crossovers and collaborations cutting across ethnic divisions. In the inter-war period, a growing number of European capitalists set up small manufacturing firms. In relatively new areas of factory enterprise, such as sugar mills, Indian and European capital was present almost equally. The picture of antagonism between Indians and Europeans is largely an effect of the increasingly tense political situation of the 1930s that eventually destroyed the foundation of the British Empire in South Asia.

(p.238) Although Indian industrialists successfully solved the problem of financing industrialization in a high-cost capital market, they had a rather poor record in attaining technical efficiency on the shop floor. Labour productivity and total factor productivity (TFP) were low in Indian factories, a syndrome variously attributed to the capitalists’ preference for risk aversion (Tripathi, 1996), quality of labour (Wolcott, 1994), degree of unionization (Wolcott and Clark, 1999), and labour market institutions (Roy, 2008; Gupta, 2011a). Although both India and Japan were low-wage textile producers around 1920, Japanese cotton textiles succeeded in the Indian market in the inter-war period thanks in part to greater efficiency from the start, and in part to indigenization of textile machine production, which made a shift from mule to ring spinning more feasible in Japan (Kiyokawa, 1983). If the Japanese mill-owners took interest in technology, no such top-down interest in technology was in evidence in India. Persistence with British standards made for technological inertia. Such generalizations can seem overdrawn because Bombay’s mills were extremely heterogeneous in respect of their openness to innovation. But there is no question that average Indian productivity, however measured, was low.

Too much attention to these Indian ‘failures’ can lead to an oversight of learning by doing at the work site. In the inter-war period, the percentage of Europeans among the supervisory staff in cotton mills fell sharply, from well over half to less than a quarter. Major fields of British-Indian engineering, such as railways, telegraphs, and canal construction, reveal numerous instances where British standards were modified to suit Indian conditions (Derbyshire, 1995). The diffusion of the stationary steam engine is another example of absorption and adaptation (Tann and Aitken, 1992). The progressive substitution of Indian foremen for foreign engineers proceeded apace in railway workshops, arsenal factories, field telegraphs, cadastral surveys, mineral prospecting, geological surveys, and meteorological services, along with cotton and jute factories. Civil engineering colleges started being established from the mid-nineteenth century (Ambirajan, 1995).

By the time independence came in 1947, the indigenous component in the technical and engineering workforce in the public services was prominent, and vocal as a lobby, pushing for more public investment in engineering education.

Why did the industrialization drive remain so concentrated in a few locations? A chronological account can answer that question to some extent.

10.2.6 Major Industries, Industrial Cities, and the World Wars, 1860–1947

Standard narratives of Indian industrialization are detailed regarding the early twentieth century, but relatively less clear on the eighteenth-century origins (Bagchi, 1972; Morris, 1983; Ray, 1979). A connected story drawing on existing scholarship and other sources is in order.

Calcutta became the capital of the newly acquired Company territories in India in 1772. By 1800, Calcutta had a sizeable settlement of Europeans and Indo-Europeans. The Company’s military enterprise as well as the civilian population (p.239) needed goods to be made locally, but that could not be procured easily from Indian artisans in the required number or quality. Cannons, small arms, hardware, glassware, cutlery, footwear and saddles, wines and spirits, and carriages, are some examples. Ships and boats were more easily repaired on the coasts by indigenous artisans who served the Indian seafaring groups. But the repair of ocean-going ships and gunships required skills that were not easily available.

Between 1772 and 1813, Henry Watson, a Company officer, James Kyd, an Indian-born artisan of mixed parents, and officers of the Company in Calcutta, established docks, shipyards, and ship-repairing stations on the Calcutta riverfront. They also started a cannon foundry and a distillery (these and other examples are discussed in Roy, 2013). Some of these enterprises were erected in abandoned premises that had existed from the early days of British settlement in Calcutta. Around 1780, a blast furnace was ordered, but not delivered. Some of the pioneering modern factory units were started soon after the charter ended in 1813: for example, the first steam-powered factory producing cotton yarn, which appeared in a river-front site called Fort Gloster in 1817 or 1818, and the famous charcoal-iron-smelting workshop in Porto Novo, a small port on the southeastern coast.

In Bombay, the origin of factories was somewhat different. Long before 1813, the Company’s shipbuilding and ship-repairing tasks had been performed by the Parsi artisans of Surat and Bombay. Parsis worked in close partnership with the Europeans, and established a strong hold on ship-repair by keeping apprenticeship confined to the community. Young members of Parsi shipwright families were sponsored to be trained in England. These strategies led to an unusual degree of Parsi dominance in the dockyard in Bombay by 1840. When the charter ended in 1813, the Company sold its ships at a discount, which the Parsis purchased to conduct trade with Aden, Africa, and China. Profits made in these trades were redirected at first to real estate and financial speculation, and eventually to manufacturing industry.

Meanwhile, as warfare became more frequent in northern India, Indian capitalists left the moribund and declining cities in the interior and moved to the port cities under the Company’s control. A number of unusual partnerships resulted from the joint influx of Europeans and Indians into the port cities. These were known as ‘agency houses’ in Calcutta. On a more limited scale these European and Indo-European partnerships appeared in Bombay and Madras as well. Few of these agency houses engaged in manufacturing or mining, but one or two exceptional ones did, such as Carr Tagore of Calcutta. In the mid-nineteenth century, more individuals with a stake in Indo-China trade became interested in factories. When the administration of India passed to the British Crown in 1857, a new set of people, who had been engaged in manufacturing or trade in the British industrial towns, came to India. Some of them had access to the London money market. They moved into industrial enterprise directly, especially in Calcutta.

The number of cotton textile mills increased from 1854 in Bombay. About the same time, a jute textile industry began to grow in Calcutta. A cotton mill industry also began in British-ruled Gujarat, especially Ahmedabad, from a slightly later date. Although Ahmedabad was not on the overseas trading map, as Bombay and (p.240) Calcutta were, there were specialized banking houses or pedhis in Ahmedabad. They performed money changing, issued and discounted bills of exchange, lent to governments, and occasionally took up revenue contracts. In 1880, there were 58 mills in India with an employment of 40,000. By 1914, the number of mills had risen to 271, and average daily employment to about 260,000.

The Calcutta jute mills were a European enterprise. Jute is a natural fibre grown mainly in southern West Bengal and Bangladesh. It was used as a raw material for sacking cloth. The demand for sacks increased in the nineteenth century in proportion with the volume of the international grain trade. Until the 1870s, Bengal raw jute was processed into sacking mainly in Dundee and Germany. But already by then, mechanized jute spinning and weaving had started near Calcutta, with considerable inflow of capital from Dundee. Between 1869 and 1913, the number of mills increased from 5 to 64, and employment from 5–10,000 to 215,000.

Between 1860 and 1914, the main market for Indian mill-spun cotton yarn was among the handloom weavers in China. A broad division of labour was maintained between Lancashire and Bombay in the Indian market for yarn, the former specializing in finer counts and middle-quality cloths, and the latter in coarser counts of yarn. A serious Indianization of the market began only around the turn of the century when Bombay lost the China market to Japan. Mills in Bombay started weaving their own yarn, and spinning and weaving finer counts of yarn. Both these moves brought the Indian mills into direct competition with Lancashire.

In metallurgy and engineering, factories were slow to develop, but emerged from around the First World War. The drive towards import substitution was always present in iron, which was one of the biggest import items. The drive had led to a number of state-sponsored charcoal-iron-smelting enterprises in the early nineteenth century being set up by British artisans and adventurers. Almost all of them failed, mainly because significant iron deposits occurred in regions that were relatively inaccessible before the railways. Private European-style blast furnaces, foundry shops, rolling mills, and mechanical forges only became successful around 1900, when sources of coal, manganese, limestone, and iron were linked to the railway system, and the expansion in demand from the railways for rolling stock, rails, sleepers, wires, bars, and rods reinforced the drive to promote local production. Coke smelting was becoming more common, and the development of mineral prospecting revealed important information about those inputs necessary in a blast furnace that were available within the easy reach of railways. An ordnance factory of Calcutta and a civil engineering school in Roorkee had metalworking shops, and by the First World War had produced hundreds of locally trained workers with experience in metallurgy.

Without these developments it would be hard to explain why Tata Steel, a project conceived in the 1880s, needed more than twenty years before it was considered ready for implementation. Almost from the start, the company owned an integrated steel factory, but also mines, transportation, and a coal washery. Judging by relative factor costs, India should not have gone into steel making. But it did, thanks to the confidence of Jamsetji Tata, and also to data available from geological (p.241) surveys, an Indo-European advisory team, easy access to European know-how, and purchase contracts from the European-owned railways.

Large factories were few and far between outside these examples and outside the port cities. Ahmedabad has been mentioned; Madras developed a European textile industry. Among the other exceptional ventures of nineteenth-century origin, and located outside the ports, were two woollen textile mills at Dhariwal in Punjab and at Kanpur. Kanpur was an emerging factory centre, an important army base, and a source of army supplies since the Indian mutiny (1857), and both towns were situated on, or conveniently close to, trade routes in country wool. A few woollen mills were also set up in Bombay and Bangalore towards the end of the nineteenth century, after railway connection improved their access to wool originating in the interior tracts of Rajputana and Mysore.

In the inter-war period, by contrast, the majority of factory enterprises were small in scale and located away from the ports. Examples include a number of rice mills on the Madras coast, sugar mills in the Gangetic plains, and brick and tile works in southwestern India (Yanagisawa, 2010). At the same time, there was also a significant expansion of cotton mills and cotton gins and presses in the princely states.

The First World War was a landmark event. Indian jute bags, cotton canvas and tent cloth, and military clothing were in great demand. But disruption to supplies of machinery, raw materials, spares, and chemicals normally imported from Britain or Germany caused inflation. As the war progressed, industry overcame some of these supply constraints, and began to make large profits. The long-term impact of the war was a change in official policy. Until the war, the government followed a hands-off policy in respect of Indian industry, and a buy-British policy in respect of purchases for defence, railways or administration. Manchester textile interests had until then successfully countered moves to protect the Indian textile industry. After the war, the government began to look towards local sources and became more open to promoting such sources by means of protective tariffs. In cotton, protective tariffs became available, with the understanding that a new framework of preferential trade within the empire would minimize the losses to British industry.

The First World War had another effect. It enabled big business to expand, and made the leading entrepreneurs take an interest in national politics.

10.2.7 Business and Politics in the Inter-war Years

In the 1920s, the nationalist movement for political reform and independence under M. K. Gandhi’s leadership began to attract funds from Indian merchants and industrialists. The dependence was mutual, for inter-war India confronted Indian industrialists with the ever more pressing need to seek political intermediation. One impetus was the increasingly militant trade unions in the cities; others included the government’s currency policy, and crises in jute and cotton.

Indian business firms had a long-standing grievance against the empire. They resented the close control that London exercised on the Indian currency system, even though Indian rule functioned with a great degree of autonomy in many other (p.242) domains (such as public goods and the fiscal system). Until 1920, London’s control was justified on the ground that Britain’s economic interests and Indian interests were compatible, and afterwards on the ground that the world’s biggest money market was located in London. As the world economy came under strain and Britain stared at economic decline, that argument lost force and the control looked more cynical than ever. As the British economy weakened, some Indian businesses formed partnerships with the nationalists, and joined them in demanding autonomy.

The Great Depression made divisions within the capitalist class sharper than before. In jute, the world demand for sacking was growing less rapidly in the 1920s and 1930s than during the war. Facing depressed conditions, European economic interests in Calcutta formed an informal cartel (Gupta, 2005). By then, a small Indian-owned industry had begun, which refused to join the cartel. Europeans tried to use their proximity to the political elite and the government-backed Bank of Bengal to demand special privileges. Such attempts broke down because those who stayed out of the cartel grew faster than those who stayed in. The provincial government of Bengal temporarily played a partisan role, worsening political tensions between business communities. By 1940, Indian capitalists who funded the Congress had developed an uncompromising hostility towards foreign capital.

In the 1940s, when independence was imminent, a blueprint of development drawn up by Bombay’s magnates and known as ‘the Bombay Plan’ delivered the message that the future of India should be a closed economy and a state-dominated economy. It is not quite clear where these two ideas came from. The majority of the individuals who signed the document had made money in the open economy. Why they turned their backs on that system must be understood with reference to politics as well as economics. The most likely explanation was that the plan represented a compromise between the capitalists and the pro-Soviet socialist lobby in the main political party, the Congress (Kudaisiya, 2014). Both groups keenly wanted a policy to industrialize India. The former wanted and were promised a protected home market. In return, the latter received support for an enlargement of the role of the federal state as investor and regulator. Thus emerged the foundation of one of the most aggressive forms of import-substituting industrialization the post-war world would see.

10.3 India After Independence

The newly independent state of India moved away from colonial economic policies. The first step was to set out an agenda for industrialization that represented a break with the global economy. Altering the global division of labour was critical to policy-makers at the time. Similar views were expressed in other parts of the underdeveloped world following the disruption in trading arrangements during the Great Depression and Second World War. The Economic Commission for Latin America raised similar concerns. The newly independent states of South Korea and Taiwan also adopted industrialization as a goal, which came to be (p.243) guided by developmental states. Newly independent states in Africa moved in a similar direction a decade later, adopting policies of import substitution as the way forward.

While Alexander Hamilton and Friedrich List had evoked national prestige and the infant industry argument in motivating economy policy regarding industrialization, the rhetoric in post-colonial countries was to move away from an unequal exchange between rich industrial nations and economically backward colonies. Difference in policies between the newly industrializing countries concerned how to implement import substitution.

Hirschman’s theoretical framework of import substitution saw this as a process that takes place in stages: first, substitution of imported consumer goods, where technology was simple, to be followed by substitution of more complex capital goods. Indian industrialization strategy attempted to jump straight into the production of capital goods, borrowing as a model that of Soviet industrialization. Planning for industrialization and modernization was the goal of the first government under Nehru, who saw ‘dams as the temples of Modern India’. Nehru’s vision differed entirely from the Gandhian vision of labour-intensive development that suited Indian factor endowments, opting instead for a top-down development strategy based on the experience of Soviet industrialization and relying on much greater use of capital.

In the Bombay Plan of the 1940s, the principle of public–private partnership was emphasized: the state was to play a guiding role not only through tariffs and advantages provided to the private sector, but via a more direct involvement of the state in building industrial capacity. Existing industrial interests were waiting to take advantage of policies of import substitution in coordination with the public sector. In post-independence India, the public sector became the main investor in the production of capital goods.

Who was to pay for industrialization? While the colonial economy had tried to deal with capital scarcity via capital flows from Britain, involving both portfolio investment and entrepreneurship by British investors, independent India chose to provide the required capital from internal sources. The gap between saving and investment was to be filled by foreign aid, and entrepreneurship was to be provided by the state. In 1950–1, gross domestic capital formation (GDCF) and gross domestic saving (GDS) were in balance. In the second plan GDCF increased to 17 per cent of GDP, while GDS fluctuated between 8 and 13 per cent. The gap was filled by foreign aid. During 1951–61, 12 per cent of incremental saving, 21 per cent of incremental investment, and 13 per cent of the increase in national income was aid-generated. In the second and third five-year plans, external assistance covered about a quarter of actual plan expenditure in the public and private sectors. Compared with colonial times, when 70–80 per cent of aggregate investment was in the private sector, after 1947 the public and private sectors shared investment about equally. Table 10.2 indicates that the share of machinery in gross fixed capital formation (GFCF) did not change much, but the share of GFCF in GDP increased significantly after independence. The data also point to an increasing role of the public sector in capital formation.

Table 10.2. Capital formation and the public sector

Gross domestic capital formation as share of GDP

Share of the public sector

Share of machinery in gross fixed capital formation

1850–1

5.0a

2.24

3.3

1860–1

4.8a

2.61

9.2

1870–1

5.1a

14.96

24.5

1880–1

4.8a

25.21

18.5

1890–1

6.2a

17.48

36.8

1900–1

7.0a

21.59

47.5

1910–11

6.6a

25.20

49.5

1920–1

6.2a

32.68

49.5

1930–1

6.3a

31.95

47.3

1940–1

6.7a

19.81

46.4

1951–5

13.1 (11.6a)

25.0

38.2

1956–60

17.3

38.9b

43.1

1961–5

17.7

43.2

44.0

1966–70

19.3

39.2

38.2

1971–5

19.7

40.2

41.5

1976–80

21.2

45.2

43.8

1981–5

20.8

51.4

54.1

1985–90

23.7

44.3

1990–5

23.7

38.4

1995–2000

24.8

29.2

(a) Refers to the ratio to gross national income in 1980–1 prices.

(b) Refers to 1961–2.

Sources: Nagaraj (1990); Kohli (2004, 2006); Bina Roy (1996, Tables 46, 52, 55).

(p.244) 10.3.1 Planning for Industrialization

The Nehru–Mahalanobis model, as it is known after the statistician who designed the plan, put development of capital goods production at the heart of economic policy. It thus questioned the role of comparative advantage and suitability of factor endowments as the basis for economic growth. The Nehru–Mahalanobis framework held that economic growth depended on the share of investment in national income, and therefore on the output of investment goods. The economy consisted of two sectors—capital goods and consumer goods. The higher the share of the former, the higher would be the rate of growth. Agricultural stagnation was viewed as a consequence of a lack of capital goods invested in the sector.

A system of five-year plans was adopted, with specific targets set in each plan. The first plan set targets for infrastructure development. It was the second plan of 1956–61 that implemented the Mahalanobis model by developing capital goods production in the public sector. The plan regulated the involvement of the private sector by introducing industrial licensing, and many sectors remained outside the scope of private investment. This was a significant departure from the limited public investment in colonial India. The years that followed saw a rise in public sector investment. The state became a producer in several capital goods industries, including iron and steel, heavy machinery and machine tools, telecommunications (p.245) and telecom equipment, minerals, oil, mining, aeronautics, railway equipment, and electricity generation and distribution. The emphasis was on reducing dependence on imports and self-sufficiency in industrial output, with unbalanced growth providing a ‘big push’ to industrialization. There was acceleration in industrial growth, and also in the growth of agriculture and services.

The Licence Raj, as it came to be known, presided over the regulation of trade, industry, and investment. A private entrepreneur could apply for a licence to set up a plant in a ‘permitted’ sector. Protection of domestic industry from external competition came via regulation rather than the exchange rate. Unlike in many other newly industrializing economies, such as Brazil and East Asia, multiple exchange rates were not used to protect some sectors and allow easy imports of others. The rupee remained overvalued and built an anti-export bias into the developing economy. Consequently, Indian traditional exports faced declining competitiveness in the world market, and the products of new industries could not gain an entry. Indian exports grew at just 2.3 per cent per annum between 1950 and 1973, at a time when world exports were growing at 7.9 per cent per annum. Exports accounted for 7.1 per cent of GDP in 1951, but only 3 per cent in 1965, and remained below 4 per cent in 1973.

The resulting foreign exchange shortage was dealt with through quantitative controls. India had one of the highest tariffs in the world, but the main instrument for trade regulation was non-tariff barriers (NTBs), making actual protection much higher. The highest protection rates were in consumer goods. The price mechanism played little role in guiding India’s industrial development, and ad hoc criteria used to select the beneficiaries of industrial licences and import licences (Chibber, 2003) led to corrupt practices in the allocation of foreign exchange and industrial licences. Bhagwati’s meticulous work on the effective protection of Indian industries showed high levels of protection, which over the long run led to inefficiency and rent seeking.

Independent India sought to build an industrial capacity that would make her self-reliant, and succeeded. The share of imported machinery in gross fixed capital formation in machinery was close to 40 per cent in 1960, but less than 15 per cent by 1970 (Rangarajan, 1982). The cost was inefficiency and an early slowdown in industrial growth, which contributed to low overall growth. The development literature sees India among the failures of import-substituting industrialization, in contrast to the successful industrializing economies of East Asia. South Korea and Taiwan adopted a standard model of import substitution that started with consumer goods and moved early to export promotion in consumer goods before moving to the next phase of import substitution in capital goods (Chapter 8). There is now a consensus that the East Asian miracle did not rely on the market to determine industrialization, but that a highly interventionist state effectively solved the ‘coordination problem’ of private investment (Rodrik, 1995). The Indian industrial sector faced a similar problem requiring state support, but the state may not have got the intervention right. Neither a lack of demand, nor supply-side inefficiencies, nor an inability to finance imports due to balance of payments constraints, slowed down industrial growth in East Asia, but they plagued the Indian economy from the mid-1960s.

(p.246) As Table 10.3 shows, industrial growth was rapid between 1950 and 1965, driven by the growth in capital goods production. The decline in this sector led to a growth slowdown in the mid-1960s, a period which also experienced an agricultural crisis. Economic policy became more balanced, without much impact on industrial performance. The slowdown was also accompanied by a political crisis that eventually led to a leftward shift in economic policy. Banks were nationalized, and greater state control was introduced in the financial market. However, economic growth did not recover and the droughts of 1971–2 and the oil crisis of 1973 led to stagflation.

Table 10.3. Industrial growth, 1951–98 (per cent, per annum)

Basic goods

Capital goods

Intermediate goods

Consumer goods

Consumer durables

Total output

1950–65

9.4

14.4

7.1

4.6

9.5

7.5

1965–76

6.5

2.6

3.0

3.4

6.2

4.1

1981–91

8.0

5.3

11.2

8.9

12.0

6.5

1980–98

7.1

9.1

5.9

5.9

11.0

5.8

Share 1956

22.3

4.7

24.6

48.4

Share 1980

39.4

16.4

20.5

23.6

Note: Basic goods refer to basic materials used in production, which are therefore intermediate goods.

Sources: Sivasubramonian (2000, Tables 9.14 and 9.15); Nagaraj (2003).

10.3.2 Dismantling Regulation

The economic crisis of the 1970s and the decline in the support of the ruling Congress Party ushered in a period of reforms from 1980, with reforms accelerating from 1991 onwards. Policy moved towards dismantling the Licence Raj, with an emphasis on economic growth rather than redistribution. Rather than announcing an IMF-style structural adjustment, the reforms proceeded by ‘stealth’ (Kohli, 2006). Rodrik and Subramaniam (2005) distinguish between ‘pro-business’ and ‘pro-market’ reforms. In the first phase, the reforms were ‘pro-business’ and removed many of the barriers faced by the private sector. Industrial policy saw the greatest change. The list of industries reserved solely for the public sector was shortened from eighteen to three. Defence aircrafts and warships, atomic energy generation, and railway transport remained under the public sector. Industrial licensing by the central government was abolished, except for a few environmentally sensitive industries. At the same time, the long-standing policy of reserving production of some labour-intensive products such as garments and shoes for the small-scale sector remained in place.

In the sphere of trade policy, reforms sought to phase out import licensing and reduce import duties. Table 10.4 shows changes in the protection of Indian industry using three indicators: effective rates of protection (ERP), non-tariff barrier (NTB) coverage ratios, and the share of imports in total consumption. (p.247) As the economy reduced the incidence of NTBs, the initial effect in the 1980s was a rise in average tariffs and ERP as many products moved from being protected by import quotas to being protected by tariffs (Gupta, 1993; Das, 2003). A second phase brought in ‘pro-market’ reforms that began with the devaluation of the Indian currency in 1991. Tariff rates began to decline across sectors and capital goods became freely importable (see Table 10.4).

Table 10.4. Trade regulation by type of industry (per cent)

Phase 1 1980–5

Phase 2 1986–90

Phase 3 1991–5

Phase 4 1996–2000

Consumer goods

ERP

101.5

111.6

80.6

48.3

Import coverage ratio

98.3

98.3

41.8

27.6

Import share ratio

0.04

0.04

0.1

0.05

Intermediate goods

ERP

62.8

78.5

54.2

33.3

Import coverage ratio

95.1

77.2

20.5

8.2

Import share ratio

0.13

0.15

0.18

0.14

Capital goods

ERP

147.0

149.2

87.6

40.1

Import coverage ratio

98.7

87.6

45.7

33.4

Import share ratio

0.12

0.12

0.19

0.14

All industries

ERP

101.5

125.9

80.8

48.3

Import coverage ratio

97.6

91.6

38.0

24.8

Import share ratio

0.11

0.12

0.16

0.12

Note: ERP measures the effective rate of protection; import coverage ratio shows the share of imports covered by NTBs; and import share ratio shows the share of imports in total consumption.

Source: Das (2003, Tables 3, 4, 5).

10.3.3 Assessing Regulation and Reform

We can evaluate industrialization policies according to four criteria: growth; efficiency; structural change due to industrialization; and comparisons with similar economies.

Since the dismantling of the regulatory regime, economic growth has increased significantly, and its variance has declined (Basu and Maertens, 2007). While the surge in industrial growth from the 1950s was not sustained, growth increased significantly after 1980 and was followed by faster growth in the 1990s. Rodrik and Subramanian (2005) argue that the Indian economy was at some distance from the production possibilities frontier in the 1970s, and that the new environment incentivized the private sector and encouraged a move towards the frontier. (p.248) The ‘pro-business’ environment created favourable conditions for existing firms and led to a large productivity increase.

Taking a long-run view changes the assessment of the Licence Raj. GDP per capita growth during the period was well above the colonial-era growth rate. Tests for structural breaks in GDP and GDP per capita find the break points to be in the Nehruvian period, well before the economic reforms (Dongre and Hatekar, 2005; Gupta, 2011b). Alongside the high variability in secondary sector growth during first half of the twentieth century was sustained growth in modern manufacturing after 1920 (Table 10.5). The secondary sector comprises manufacturing in large-scale units (referred to as manufacturing) and industrial production in unregistered small-scale and cottage industries (referred as small-scale and cottage industry), and it is the small-scale sector that experienced high variance. Since this was the larger component of the secondary sector, its fluctuations had a bigger effect on growth. The share of large-scale manufacturing only overtook that of the small-scale units after 1950. Fig. 10.4 shows the relative growth of the two sectors over the twentieth century.

Table 10.5. Sectoral growth over the twentieth century (per cent, per annum)

Primary

Secondary

Manufacturing

Small scale

Tertiary

GDP per capita

GDP per worker

1901–10

1.0

1.7

5.7

0.5

2.1

0.7

0.7

1911–20

–0.2

–3.5

1.6

–5.7

0.4

–0.5

–0.2

1921–30

0.7

5.6

4.8

6.2

3.4

1.1

–1.9

1931–40

0.0

0.9

7.1

–2.3

1.3

–0.8

–0.1

1940–7

–0.1

2.6

4.3

2.0

–1.4

–1.3

–1.3

1951–65

2.6

6.8

6.7

5.2

4.5

1.9

1966–80

2.7

3.5

4.6

4.4

4.3

1.3

1981–2000

3.2

5.7

7.2

5.9

6.7

3.5

1991–2000

3.1

5.2

8.2

7.4

8.1

4.7

Note: All estimates are in 1948–9 prices.

Source: Sivasubramonian (2000, Tables 7.3 and 9.4).

From Artisanal Production to Machine ToolsIndustrialization in India over the Long Run

Fig. 10.4. Industrial output in 1948–9 prices

Source: Sivasubramonian (2000, Appendices 7 and 8).

Most econometric tests looking for evidence of a structural break in industrial growth consider the period 1950 to 2000. Wallack’s (2003) sectoral analysis does not find a structural break for industry and manufacturing, while Balakrishnan and Parameswaran (2007) find a structural break in industrial growth after 1980, coinciding with estimated break points in per capita GDP growth. Again, taking a long-run view brings new insights: India’s industrial growth during the Licence Raj was better than the historical trend. Balakrishnan (2010, pp. 61–72) suggests that the institutional and policy environment of the colonial government did not foster industrial development; it was the Licence Raj that solved the coordination problems involved in building industrial capacity, and raised the rate of investment by increasing public sector involvement. This interpretation overlooks the steady growth in manufacturing after 1930 (Table 10.5). However, this growth involved a sector that was small in absolute size and mainly produced simple consumer goods. (p.249) The first phases of planning laid the foundation of a more diversified industrial sector, but did not ensure sustainable industrial growth. The economic reforms of the 1980s put the economy on a more sustainable growth path.

The capital goods sector had been the focus of the Mahalanobis plan. The sector did not decline as the focus shifted away from planned industrialization; rather, its composition shifted towards transport equipment. Machine tools, which were the key industry of the Mahalanobis plan, declined in importance with a growth rate of less than 2 per cent per annum in the 1990s (Nagaraj, 2003). Consumer durables became the most dynamic sector (Table 10.3).

Now we come to the efficiency effects. Bhagwati and Desai (1970) and Bhagwati and Srinivasan (1975) have highlighted the misallocation of resources and industrial inefficiency arising from protection. Estimates of total factor productivity show negative TFP growth in most industrial sectors during the period of import substitution, 1959 to 1979. The pro-business reforms of the 1980s led to an increase in industrial TFP growth. The pro-market reforms of the 1990s, on the other hand, slowed TFP growth in manufacturing from 1.9 per cent per annum to 0.7 per cent per annum as capital accumulation increased (Goldar and Kumari, 2003).

DeLong (2003) argued that the failure of economic policies in terms of promoting efficiency during the regulatory regime was largely offset by successes in mobilizing resources, to a great extent in the public sector. Total private savings rose from 6 per cent of GDP in the early 1950s to 15 per cent of GDP in the early (p.250) 1960s, and 23 per cent by the 1980s. The reform years brought a significant increase in manufacturing and services TFP growth, relative to the period of regulation (Table 10.6). Notice that TFP growth in manufacturing in the 1980s was high, as suggested by Rodrik and Subramaniam (2005). However, TFP growth in Indian industry has in every period lagged behind that of the service sector.

Table 10.6. Sources of growth (per cent, per annum)

Output per worker

Contribution of

Physical capital

Human capital

TFP

Agriculture

1960–80

0.1

0.2

0.1

–0.1

1980–2004

1.7

0.4

0.3

1.1

Industry

1960–80

1.6

1.8

0.3

–0.4

1980–2004

3.0

1.6

0.3

1.1

Manufacturing

1960–80

2.0

1.5

0.3

0.2

1980–2004

4.0

2.1

0.4

1.5

1983–7

3.7

1.4

0.3

2.0

Services

1960–80

2.0

1.1

0.5

0.4

1980–2004

3.8

0.7

0.4

2.7

India

1960–80

1.3

0.8

0.2

0.0

1980–2004

3.7

1.4

0.4

2.0

Source: Bosworth, Collins, and Virmani (2007, Tables 4 and 5).

This brings us to the third point, which is one of the most important aspects of Indian industrialization: India has not followed the standard pattern of structural change. In most economies the share of agriculture in employment and GDP declines with industrialization, and industry becomes the largest sector. In India, the declining share of agriculture in GDP was matched by a rising share of services rather than of industry. Industry has absorbed only a small proportion of labour re-allocating from agriculture. India’s service sector-led growth is unique. Broadberry and Gupta (2010) point to an important difference in human capital between the industrial and service sectors. In 2000 the service sector had a concentration of workers with secondary and tertiary education, whereas industry still had a large number of workers with no basic education. This difference in human capital can be traced back to 1900 and may account for the differences in labour productivity between the two sectors.

Now we come to our last point. A comparison with other newly industrializing countries finds India lagging behind East Asia in capital formation and manufacturing value added per capita (Tables 10.7 and 10.8). The share of GFCF in manufacturing (p.251) was comparable to that in other newly industrializing economies in the 1960s, but was lower by the 1990s; the share of machinery in total manufacturing has been high in India, reflecting the country’s application of the Mahalanobis model. India is one of the few late industrializers that developed the machinery sector early. The success stories of industrialization in the twentieth century, such as South Korea, had a small machinery sector in the early stages and successfully became exporters of manufactured consumer goods before moving into the production of capital goods. The Indian model of industrialization may have got some of the intervention ‘wrong’.

Table 10.7. Manufacturing value added per capita in US dollars, 1998

Argentina

1,253

Brazil

1,078

South Korea

2,142

Malaysia

946

Thailand

582

China

286

India

70

Source: Nagaraj (2003).

Table 10.8. Gross fixed capital formation in manufacturing and the share of machinery in industrial output

Gross fixed capital formation

Share of machinery

1950

1970

1990

1975

1990

Brazil

13.0

19.7

13.5

23.4

24.9

South Korea

13.6

17.0

32.3

14.2

32.2

Malaysia

n.a.

26.8

23.9

16.9

28.1

Thailand

25.4

n.a.

48.8

9.6

11.8

India

11.6

27.5

10.4

23.3

23.7

Source: Amsden (2001, Tables 6.3 and 5.2).

Although the development of Indian manufacturing was impressive in the colonial period despite the lack of state support, India’s performance does not compare well with that of the leading industrializing countries in more recent times. The role of the state in India recently has differed significantly from that of the developmental state of South Korea. Kohli (2004) points to colonial legacies regarding the role of the state in the two countries. The Japanese developmental state actively engaged in developing industrial capacity in South Korea towards the end of the colonial period, and also developed primary education and suitable infrastructure for industry. The British colonial state viewed India as an agricultural producer that met the needs of the imperial economy. Railways were built to meet the demands of trade, and there was little investment in developing human capital. The rise of industrial enterprise in India in the colonial period occurred despite the (p.252) state. In independent India the role of the state in industrialization was interventionist rather than developmental.

Another comparison with the USSR is called for, since Indian policy-makers drew inspiration from the Soviet model of development. Despite putting the capital goods sector at the centre of industrialization strategy, the two economies differed significantly in many respects. The main difference lay in India’s adoption of the ‘mixed’ economy, with a substantial role for private ownership of land, industry, and other businesses. This allowed the private sector to develop, despite its inefficiencies. Both countries enjoyed a spurt in industrial growth in the 1950s and 1960s, but Soviet per capita GDP growth was higher (Chapter 3). As economic growth slowed in both countries, their policies diverged. In India, economic reforms were able to incentivize the existing private sector, leading to faster growth. In the former USSR, in contrast, attempts to reform public enterprises caused disruption.

10.4 Conclusion

Indian industrialization took place against the backdrop of an economy that moved from a relatively open and unregulated market system in the 1800s, to a state-dominated and state-directed one in the mid-1900s. The first phase saw a decline of indigenous industry, a limited revival relying on imported inputs, a rise in British investment in India, and an increased ability and willingness of Indian merchants to invest commercial profits in manufacturing industry. The outcome was a growth of factories concentrated in a few port cities.

The post-independence closed economy phase built on the business and industrial infrastructure inherited from colonial times, adding a mainly state-owned capital goods sector and an import substitution policy. The autarkic-dirigiste regime gave rise to problems that are familiar to historians of post-war industrialization—foreign exchange crises, falling factor productivity, excess capacity, and poor-quality consumer goods. But the strategy did spread the industrialization impulse to a wider geographical area than before, strengthened the commitment of the state to industrialization, and gave political and economic power to big business of Indian origin.

The ongoing industrial transformation in India, which began with the reforms of the 1980s, led to efficiency gains and rising growth. However, the industrial sector in India has lagged behind a dynamic service sector, and the pattern of structural change in India has a correspondingly unique pattern.

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