Authors: Patrick French
In the first years after independence, the Indian economy had managed a reasonable growth rate, since it was starting from such a low base. By the late 1960s, the initial surge had ceased. During the premiership of Indira Gandhi, Srinivasan’s father decided to make a cheap moped; he called it his “mechanical horse” and envisaged the people of India being able to go from town to village without having to walk, or drag their goods up and down the dusty roads on undignified handcarts. The rigid official obstacles that he faced demanded an imaginative response. “My father wanted to make a two-wheeler for the common man, the TVS 50 moped. He was told that since it would be a luxury item, no foreign exchange could be used and he was not allowed to import a prototype, or any machinery, or any parts at all. Say he needed a bearing, or a carburettor, he couldn’t get it. And he would have to export 25 percent of production. My father would have to generate an overseas market for this moped. It took him four years to start up. We sold around 10,000 mopeds a month.”
The numerous blocks on commercial activity meant that a large number of talented Indians went abroad for opportunities, especially to the United States. The nation was left with a pool of good, frustrated engineers and scientists. Those who remained in India had no choice but to negotiate the official hurdles; that was business. By the 1960s, the government had another reason not to dismantle the permit raj—it depended on revenues from the tariff system.
“The controlling was so entrenched that before you travelled abroad for work, you had to secure letters of invitation. You had to specify the number of days, and what you were going to be doing, to get foreign exchange. If you were the head of the company, you were allowed a ‘once per trip’ entertainment allowance. On return, you had to show your receipts. Your personal belongings would be examined with a fine-tooth comb. It created a lack of dignity as a nation. Here in Madras, there was a place by the port called Burma Bazaar where you could buy things from the pavement that had been smuggled from the ships—deodorant, chocolate, pens, underwear, soap, talcum powder, liquor.”
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Across India, this sense of restriction during those closed years created a constant and unquenchable demand for everyday consumer goods. So when the businessmen of Madras entertained their contacts in the 1960s, they had to rely on India’s street capitalists, and send their servants down to the docks to buy bottles of French wine and Black Label whisky.
Sitting in his office in the sullen southern heat of Tamil Nadu, Srinivasan had the restless demeanour of a born (or bred) entrepreneur. He had spent time in the U.S., studying at the University of Michigan. Anticipating change, he had moved in and out of numerous fields during his career in India, first with TVS and then on his own—car seats, moulded plastics, vehicle locks, computer peripherals, engineering design services and now private equity, scouting India for new business propositions. On the day we met, I had a conversation with another industrialist, B. Santhanam, who headed the French glass manufacturer Saint-Gobain in India. He believed lower levels of government investment in industry and services in southern India had been to their long-term advantage.
“We have a calmer mentality here,” said Santhanam. “Government has taken care of infrastructure, but not of industry: that has always been entrepreneur-driven. We have no great resources such as mining, we don’t have defence investment like in the north, we are not trying to defend a border. Historically this area had no large kingdoms, and for centuries it was lightly ruled. We have always had a great emphasis on education. The College of Engineering in Madras was established 200 years ago—the first outside Europe. So most of our business success comes from the ambition of our people.” He viewed the permit raj as “a pure dark age,” and was young enough to have little personal knowledge of its strictures.
“The late 1980s were not bad for us, in our industry. I feel that at a microlevel, things were OK but the macroeconomics were all wrong and we were living on borrowed time. In 1996—as MD-designate of Saint-Gobain
Glass—it took me six weeks and no bribes to get approval from the commerce ministry to set up our operation. And over the last decade, we have invested $400m in India.” I mentioned my conversation with Srinivasan and the difficulties TVS had experienced in the old days, trying to get permission to import a bearing. “We employ 800 people,” B. Santhanam said. “Only two of them work on imports.”
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What is the matrix—or, what did it mean to be inside the input-output matrix?
In order to make the most important industries work in a planned economy, it was necessary to have somebody make the heavy stuff, the capital equipment: cranes, mineral crushers, blast furnaces, deep-hole boring machines, excavators, railway materials, crank shafts, draglines, forged rolls, pig casters, slag cups, wagon tipplers and apron feeders. The Heavy Engineering Corporation, or HEC, was created in 1958 and situated in a poor, mineral-rich part of east India near Ranchi. (It is still there today, and in 2006–7 went into profit, prompting the government to describe it in 2010 as a “navratna,” one of the nine gems of the state, and to propose listing it on the stock exchange.)
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One difficulty was that its main output was intended for the benefit of India’s steel industry, which planned to grow capacity by one million tons each year. But as things turned out, steel production grew at only around half that rate. New steel plants were not built, and when they were built they were sometimes sourced not from HEC, but from the Soviet Union.
Between 1973 and 1978, the corporation received no major orders. A prudent early suggestion that HEC should start out gradually, and construct infrastructure in phases as demand increased, was dismissed. Because of the absence of steel plants, HEC’s line on the matrix choked up and things ground to a halt. Against this, state companies which matched the intentions of the economic planners were sometimes successful. For example, Bharat Heavy Electricals, which supplied power sector infrastructure, went into profit in the early 1970s. It had good leadership, and the market for heavy electrical equipment in India was broadly in line with the planners’ anticipation.
Until the mid-1960s, the Heavy Engineering Corporation had substantial teething problems because of the capital and technological barriers involved in setting up such a gigantic public undertaking. The corporation had three units: a heavy machine-building plant, a heavy machine tool plant
and a foundry forge. The tool plant might have been useful for companies such as TVS—which needed to find its bearings—but had trouble getting off the ground. It never came close to operating at full capacity, which had been deemed essential under the Five Year Plan for the input-output matrix to work effectively.
Here are some figures for capacity utilization in the heavy machine tool plant, in percentage terms, which show how the matrix did not work:
| 1968–9 | 3 |
| 1969–70 | 11 |
| 1970–71 | 11 |
| 1971–2 | 8 |
| 1972–3 | 9 |
| 1973–4 | 12 |
These are not misprints: 3 percent of capacity, 11 percent of capacity. Only during Mrs. Gandhi’s Emergency did production rise above 25 percent of capacity, before dropping back to 6 percent in 1977–8. In the foundry and heavy machine-building plant, things were little better. The largest forging press in Asia operated at the feeblest levels. The heavy machine-building plant averaged a capacity utilization of 21 percent during the period 1965–80.
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So year after year, the gargantuan enterprise lay idling and bleeding public money. Over time, politicians realized the system was not functioning in the way they had intended. At first, it seemed easier to blame external forces for the economic stagnation—a poor harvest, another war with Pakistan or the failure of aid donors to live up to their promises. In June 1980, this question was asked in the Lok Sabha: “Will the Minister of Industry be pleased to state: (a) Has the HEC, Ranchi, the capacity to fabricate a one million ton [steel] plant per annum? (b) If so, whether this capacity has been utilized so far, and (c) If not, for how long the capacity has remained underutilized?” The minister may have been in a hurry (he went on to become a movie producer) because he responded as follows: “(a) Yes, sir, (b) No, sir, (c) From the beginning up to this time.”
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It is apparent that senior managers at HEC were unhappy about the way it was working (or not working) but were locked into the grid in such a way that it was hard to make anything change. The management was not frightened to raise objections, as they would have been in the Soviet Union or China; rather, they had no means to break out of the system. Lacking
skilled employees, they were initially obliged to hire local farmhands as workers. One director said later they had been dragged down by “the mass recruitment resorted to in the early years, unrelated to the production needs. Large bodies of idle men led to slackness and unhealthy practices.”
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During the 1970s, HEC employed around 20,000 people and nearly 200 “foreign experts,” who were visiting from the Soviet bloc. Although HEC was set up as a “model employer,” much time was taken up with industrial disputes. It was nearly impossible to sack anyone. Rival trade unions—each one tending to represent a different caste or tribal group—would fight each other at the plants, and the management would have to call in the police. Strikes, slow working and mammoth demonstrations were frequent, usually calling for incentive payments, overtime payments or changed working hours.
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In some cases “tight delivery commitments” forced the corporation to subcontract work to private companies, or to import orders from abroad. Young engineers, who had joined HEC with first-class degrees and gold medals from their institutes in a blaze of optimism in the 1960s, began to flee in the early 1970s to other firms in India or abroad. As Ravi Ramamurti, now a professor at Northeastern University, wrote in 1987: “The irony of the situation is that while HEC was losing the people it most needed, it was forced to hire those it did not need, and to retain those it could afford to let go.”
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Worried that the Heavy Engineering Corporation was not running according to plan, politicians tried to help. One of their methods was to parachute in new chief executives on a regular basis: a man who ran a sewing machine company, the head of the state coal company, a major general, a manager from the railways, even a left-wing politician who had lost his seat in Parliament (and who stayed for less than a year before leaving to contest another election). During a critical period from 1964 to 1974, HEC had eight different chief executives. One left because he thought his deputy had closer links to the relevant government minister than he did, another quit because there were riots in the sprawling township, which contained more than two dozen schools and a hospital, adjoining the plants in Ranchi.
In 1968, a committee of MPs visited HEC and wrote a report. They found a large number of Soviet advisers running it, trailed by interpreters. Almost all sections of the plant were used below capacity, and attendance and time-keeping were poor. “It is with the help of Russian Experts and considerable work of foreign trained engineers some of whom are heading the shops and departments and the Junior USSR trained supervisors, that the company have been able to produce whatever they have so far.”
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During the Emergency, HEC ran a little more efficiently and the chief executive fired 170 workers and officers, the first to lose their jobs in the history of the company. When the Janata government (an assortment of opposition parties, including the forerunner of the BJP) came to power in 1977, the workers were reinstated. So year after year, HEC made the Top 10—meaning it featured in a survey of the “Top 10 Loss Making Public Sector Undertakings” in India.
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The sheer scale of the giant meant no government would dare to kill it.
The Heavy Engineering Corporation is one of the more extreme examples of how big dreams in India went wrong. A lot of what it could make was not wanted or needed. At the opposite end of the scale, or on the other axis of the matrix, was a commodity that many industries needed, often in larger quantities than was available: coal. Here, the problems became more creative, for whatever happened, the nation could not do without coal.
Indian coal is usually of poor quality and contains a lot of ash. At the time of independence, it was mined mainly in open pits in Bihar and West Bengal, and in 1956 a state body was set up to develop an indigenous coal industry. After a decade, the Ministry of Steel, Mines and Metals noticed it was not getting very far. The public sector had produced merely 37 percent of its target for coal under the Five Year Plan, while the private sector had hit 93 percent.
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The production targets had been set centrally using forecasting techniques, when the demand for coal from every sector of the economy had been aggregated, using an input-output model.
The Ministry of Steel, Mines and Metals produced a report in 1967 which stated that each nationalized mine should “prepare cost data reflecting the actual expenditure and showing separately the direct costs which vary with production”—implying nobody had thought of doing this before. “There may be scope for improvement in regard to such matters as planning, administrative and organizational set-up, staffing, procurement of equipment, control of stores, financial and budgetary control management, employees’ relationship and marketing.”
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Or, everything. Each industry in the input-output model claimed it was suffering from the inefficiencies of another. Coal blamed rail for not supplying wagons, rail blamed steel for not producing materials and steel blamed coal for not providing a regular power supply. The conditions in the mines were dangerous, with accidents caused by cave-ins, gas explosions and flooding; many miners suffered from pneumoconiosis, or black lung disease.