It is worth quoting some lines of what Mahalanobis said in his speech in Calcutta in 1954, for although his thinking did not match what was coming out of China at this time in its folly, the inhumanity of his approach and its disengagement from normal commercial experience were extraordinary. He began with a haze of numerical examples, designed to stress the uniquely scientific quality of the new project: “Different models of economic growth are being constructed and studied on the basis of different sets of relations (sometimes expressed in a mathematical form) between relevant varieties.” India, in its infinite variety, would become an input-output matrix: the Mahalanobis Model. Materials would be allocated to different industries from the centre: “When an approximate allocation of investments is ready, the anticipated consumer expenditure is known, and the requirements of final flows of consumer goods have been settled, it would be necessary to work out the total output of the different industries (inclusive of all intermediate products and consistent with the bill of final goods) … Work is already in progress in 12 sectors (that is, a 12 × 12 table); and arrangements are being made to prepare a 90 × 90 table.” What a thought, 90 × 90—or 8,100 table cells, in a time before computer spreadsheets! In Mahalanobis’s dream of the future, India would industrialize rapidly and full employment should be assured within ten years. To get there, he announced that both large and small industries across the nation would now be obliged to “increase productivity by all other means such as working 2 or 3 shifts,” and the resultant surplus of goods would be purchased by the state “on a large scale to build up inventories which would be used to meet the increase in demand later on.”42
It was fantasy, an imaginative piece of Bengali creativity and an implausible economic vision. An exceptionally damaging consequence of all this thinking and action was that as new nation after new nation tried to make itself afresh following the European retreat from empire, postcolonial leaders and their economic advisers turned to India and to Mahalanobis. They went not to Chicago for guidance, but to Calcutta. As one such thinker, Hans Singer, said: “P. C. Mahalanobis became the prophet (or guru) of the development economists” in the postwar decades.43 Later in life Mahalanobis even proposed the creation of what he called a Labour Reserve Service, an idea that fortunately never turned into reality, in which a giant pool of surplus workers on half-pay (half-pay, for labourers on a few rupees a day) would be shifted around the country from project to project on the whim of government officers, like something out of pharaonic Egypt. He had it all worked out: “The Labour Reserve Service (LR) would then act as a buffer against unemployment and would serve as a (perhaps socially more useful and psychologically more preferable) form of or substitute for unemployment insurance limited, however, in the first instance, to persons who are already factory workers.”44
What did it mean for Indian business people, in practical terms, to have their day-to-day commercial decisions controlled by the theoretical strictures of successive Five Year Plans? Some of the larger conglomerates, such as those owned by the Tata and Birla families, were left to get on as they liked. The enthusiasm of the owners of capital for the aspects of socialism contained in the Bombay Plan soon dissipated. From 1966 to 1969, India had a “plan holiday,” largely because of a lack of finance, but it did nothing to unravel the stifling structure Nehru and Mahalanobis had created.
In the years immediately following independence, the new system had appeared to be working. Import substitution (making goods locally rather than importing them from abroad) and unmatched public investment had generated economic growth. During Nehru’s premiership, per capita GDP rose on average by just over 2 percent a year, which was a noticeable improvement on the preceding half-century. By the 1960s, serious structural problems were becoming apparent. The new Third Five Year Plan was dependent on foreign assistance in order to make it possible.45 The worst period came during the 1970s, when India’s annual per capita GDP grew at 0.76 percent.46 Under Indira Gandhi, the country was in the illogical position of getting American food aid while denouncing American capitalist hegemony, and looking over its shoulder at countries like Japan and South Korea admiringly even while disapproving of their methods. A developing cult of the larger national cause made it somehow unpatriotic to question the economic system that had been created by the victors of the freedom movement—even if it was not really working. Indira Gandhi started to use economic policy as a form of political patronage, pacifying farmers who had grown richer under the Green Revolution with subsidized power and fertilizers one minute, and championing the poor the next with populist moves like taking money from the former maharajas or proposing to nationalize the wheat trade.
Shortly before the outbreak of the First World War, a lawyer named T. V. Sundaram Iyengar had started southern India’s first motor bus service, using the dense network of roads in the Tamil region. It was an innovative idea; he offered a promise of wayside meals in an effort to recruit passengers, knowing that many people would be frightened of using such a novel form of transportation. Over the years, he had diversified into road building, car parts manufacture and rubber retreading. The south of India had fewer merchant capitalists than the north. Prominent trading communities like the Chettiars had largely stayed away from industry (unlike the Marwaris, a prosperous mercantile community originally from Rajasthan) and done business abroad, giving a rare opportunity to people like T. V. Sundaram Iyengar.
The TVS group that was named for him had grown and grown, and today it has an annual turnover of about $1bn. His grandson, Gopal Srinivasan, remembered how in order to make anything happen during the Mahalanobis era, the company had no choice but to woo government bureaucrats.
“Nineteen fifty-six to 1984, when Rajiv Gandhi came in and started to make some changes, was a black period in our history. We were ruled by the DGTD, the Director General of Technology Development. If you wanted to import a $10 machine, he would make the decision. Before 1956—after the Brits went into decline in the 1930s—Indians were used to doing business largely as we liked. You had the textile businesses in Ahmedabad and Coimbatore, and my family were involved in truck and car distribution. By 1960 we had obtained the licence to make Dunlop wheels, Lucas electricals, Girling brakes—but we had nothing to distribute!”
So each effort that TVS made in the international market in the 1950s and 1960s was hamstrung by the planning regulators.
“We needed to import steel and copper, and had to make the payments to an English company. So that meant we had to: one, get an import licence; two, ask the Reserve Bank of India to release the foreign exchange; three, get the payment released; four, get permission to manufacture.
“For foreign collaboration, like we had between TVS and Lucas, we had to prove it was justified: how much it would cost, how long it would last, whether expatriates were needed, then how much they would be paid, how many days’ travelling would be required. Each stage—each permission—took us six months to a year. We had to set up a large office in Delhi in order to apply to the ministries. Twice every month my father had to fly from Madras to Delhi.”
This was a journey of more than 1,000 miles, in a four-prop Viscount aeroplane, from India’s southern reaches to the nation’s capital. Because their brand was based on reliability and trust, Srinivasan said TVS had refused to pay bribes to the bureaucrats. Some of the important ministers and civil servants originated from south India, which made the process of winning their support easier.
“You needed to develop a social relationship. In the 1950s and ’60s, I would say there was still some sense of purpose connecting business and government—that we were all in it together, building the new India—but by 1969 it had become bureaucratic to the point where … it was really a lost era.”
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 mak
e 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.”47 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.”48
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.)49 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 1965–80.50
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.”51
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 chan
ge. 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.”52 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.53 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.”54
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