Fifty years ago, the Planning Commission appointed a committee headed by economist R.K. Hazari to examine the Indian experience with industrial licensing till then. Hazari found that big industrial groups had managed to corner licences to keep out competition from new entrepreneurs.
Political connections mattered even at a time when the buzz was all about socialism rather than crony capitalism. These groups then sat on the permissions in a bid to restrict new capacity creation.
It was a classic case of regulatory capture. One option would have been industrial delicensing, but India went down quite a different road in the years that followed. It is widely accepted that the stunning findings of the Hazari report were one of the reasons (there were at least two other reports that also came to broadly similar conclusions) India ended up with a draconian monopoly law that prevented economies of scale being used in Indian manufacturing.
That is history. India belatedly abandoned industrial licensing in 1991. However, there is a wealth of information in the Hazari report that throws some interesting light on a current policy debate—the creation of a single Indian market through a goods and services tax (GST).
The rest of this column will try to explain how the growing national footprint of major Indian business houses leaves them with a strong interest in the creation of a single domestic market that is unfettered by multiple indirect tax rates.
Hazari had painstakingly collected information about the regional distribution of industrial investments in the early years of planning. He then matched this data with the ownership of the business groups, defined in those days along caste or ethnic lines, that were putting money in various parts of the country. The results are worth repeating here.
The Marwari business groups were the only ones that had investments spread across the country. Their major locations were West Bengal, Uttar Pradesh, Maharashtra, Madhya Pradesh and Bihar. Gujarati investment was concentrated in Maharashtra, Gujarat, Madras and Uttar Pradesh.
The southern groups were mainly present in the southern states of Madras, Andhra Pradesh and Mysore, though Maharashtra also had a presence in their portfolio. Punjabi investment was mainly in the Delhi-Punjab area, with some presence in Maharashtra, West Bengal, Madhya Pradesh, Bihar and Madras as well. Parsi investment was mainly in the states of Maharashtra and Bihar.
A close look at the data available in the Hazari report shows that Indian capital was fairly regional in its outlook. Maharashtra was perhaps the only state that was getting investment from all varieties of business groups. West Bengal too, but this was just before its unfortunate industrial decline began. Most large business groups had their money in a handful of states—broadly around two-thirds of their assets were in two or three major states. It is quite likely that the markets for many of their products were also localized. The Marwari groups were perhaps the only important exceptions in the domestic private sector.
It is quite clear that the Indian business class was more regional than national as recently as 1966. There was one interesting exception to this regional distribution of business interests—the public sector. The Indian government had set up many new industries during the high noon of the planning era. They dotted the country rather than being concentrated in two or three states.
The public sector experiment failed in its core economic objectives, but one of its achievements was the regional dispersion of investment as well as the creation of a new middle class that was employed in places far away from the usual industrial hubs.
Another committee to examine the working of industrial licensing was set up in 1969. It was headed by Subimal Dutt. It listed the top 50 business groups operating in India in terms of assets. Many of the names on that list will barely be remembered today—Martin Burn, S. Nagurmull, Bird Heilgers, Scindia, Chinai. Most of the former big business groups could not survive the industrial stagnation of the 1970s followed by the competitive pressures that began to build up after the mid-1980s.
Much has changed after 1991. Indian business now has a truly national footprint rather than the earlier regional focus, especially when one takes into account the entire ecosystem that includes production facilities, supply chains, dealers and consumer markets. Some have even gone global.
These large business groups with a truly national footprint are far more likely to be held back by a fragmented domestic market than the earlier business groups that were more regional in nature. It is hard to think of an important Indian business group that has a presence in only a few states.
The fundamental promise of the new GST—to replace a fragmented domestic market with a truly integrated one—should be of significant strategic interest to contemporary Indian business, or what the Marxists would call the new national bourgeois, that has gained strength after the 1991 reforms. And here is a parallel question: Is the bargaining position of some of the states driven by more local elites that do not have economic interests crossing state boundaries but would rather protect their positions within their respective regions?
Think about it.