State-business relations: now and then

Financial Express, November 29, 2009
By Pradeep S Mehta & Siddhartha Mitra

A chronological flip across the pages of India’s modern business history clearly demonstrates the evolution of big business, especially its relationship with the state. In what follows we shall briefly characterise this evolution as well as identify the gaps left by such an account.

The spirit of cooperation between political leaders and big business that characterised the freedom struggle—Gandhi’s closeness to the Birlas and Tata’s nationalistic urges—thinned in the immediate post-independence era with the former reposing confidence in a state led mixed economy characterised by public sector monopolies in many strategic/important sectors. Such restrictions were to be compounded in the late sixties and early seventies through the follies of the License Raj—a mesh of controls which was instituted ostensibly to prevent dominance but actually served to protect traditional business from incursions by fresh blood. The resultant quagmire of stagnant efficiency stunted Indian economic growth.

This state of affairs continued till the late 80s which was marked by significant changes—the near death of licensing and the consequent rise of a set of imaginative and risk loving entrepreneurs who had been hardened by the rigours of the licensing era. Liberalisation in the early 90’s lured foreign investment into India and made its domestic counterpart more attractive—the rise of Reliance in the 80’s was followed by the more refreshing rise of the software giant, Infosys and similar firms led by technocrats of high pedigree. The telecom revolution was ushered in later by a combination of imaginative private enterprise and the arrival of new technology.

Camaraderie blossomed between big business and politicians/ government with delineations becoming blurred. This often had a dark side to it—the government was rocked by major scandals from time to time. Over the course of a couple of decades, the political caging of business had been, according to some, replaced by the commercial enslavement of politics.

This fast paced and colourful history of Indian big business and its relationship with the government is known to many of us. But it is far from a comprehensive account of the history of Indian business as a whole, especially its relationship with the state. It neglects the Indian small and medium business sector which has made significant contributions to India’s economic march. These constitute 45% of Indian industrial output and 40% of its exports. However, individual hotlines to politicians and ministers are not a possibility for such entre- preneurs and chambers of commerce are often used as a rallying point to attract attention.

Not much is known about how such businesses have organised themselves and how such organisation has evolved over time, except for a cursory awareness of the existence of state business associations. There is ignorance about how these have interacted with each other and with the government; whether these, in association with the government, have been agents of competition or collusion; and how the state has sought to control such business through stamp duties, labour legislations etc. This history, while not as colourful as that of big business, is infinitely more nuanced and probably analytically richer, as it has been characterised by variations over time as well as space corresponding to fluctuations in political regimes.

A study by the Consortium for Improving Institutions for Pro-Poor Growth, to which the Jaipur headquartered CSO, CUTS International is a major contributor, has made a significant attempt to fill the vacuum that characterises our understanding of the history of Indian small and medium business and its relations with the government. The study measures the intensity/effectiveness of state-business relations on the basis of primary survey data through an index which takes into account the organisation of business associations, their interactions with the government (cooperation, conflict and government controls) as well as anti-competitive collusion, if any.

In general, the finding is that state-business relations have been characterised by an increase in intensity over time. However, these trends exhibit considerable differences across states—rapid improvement in Andhra contrasted with slow movement in Kerala and almost complete stagnation in Bihar and Madhya Pradesh.

Such variations illustrate the crucial influence that political regimes and mindsets have over the evolution of the business sector’s relationship with the state. Another illustration offered by the study of such variation is the difference in correlation across states between controls such as stamp duty and labour regulation (that are state specific) on the one hand and the changes in the extent of licensing (which is controlled by the centre) on the other—Andhra Pradesh, Kerala, Bihar, Orissa and West Bengal show a negative correlation whereas Karnataka, Rajasthan and Punjab exhibit a positive association.

Rankings in terms of the measured effectiveness of state business relations also have a few surprises in store—Tamil Nadu leads the pack followed by Karnataka and Andhra. This implies increasing commercial importance of Southern India in the years to come. Unsung Rajasthan in fourth place leads the Northern states. It is surprising to note that Gujarat, a top economic performer does not find a place in the top eight nor do Maharashtra and Haryana, the leaders in terms of per capita income.

A little introspection offers a probable answer at least for Gujarat and Maharashtra – these two states are dominated by big business with a long legacy. The current value of the index of state-business relations, by contrast, predicts the immediate future better than it explains the past or even the present.

Accounts of this nature are consistent with the rising graph of Indian economic activity and point to healthy cooperation between government and business in scaling new economic heights. A beginning has been made by such studies but the analysis of the potential of Indian business, big and small, is a field which deserves more attention.

The author is the Secretary General of CUTS International and can be reached at Siddhartha Mitra Research Director, CUTS International contributed to this article.

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