Terms of Trade | Can business interests align with national interests?

“It is surprising that India is importing capital goods and machinery worth about $20 billion every year from China. Cumulatively, it is $200 billion in 10 years, which we could have easily saved through local manufacturing. With such demand, we could have set up a manufacturing base for capital goods in India, with tremendous export potential,”, the story quoted a government official, who also added that “Indian businesses must overcome ‘the trader mindset’ of making huge profits quickly and, have a long-term perspective”.

The government official’s comments raise a basic question as far as working of a modern capitalist economy is concerned. Is it fair to expect businesses to prioritise anything other than profit maximisation as long as they are adhering to the law of the land? Is it possible to align private interests with national interests as far as the economy is concerned? Lest one gets the wrong idea that this is a rhetorical question, this has often been the central economic contradiction for economies, especially under modern capitalism.

Let us forget India’s economic predicament for a moment. China’s export driven growth is one of the most fascinating economic transformation stories of modern capitalism.

The US, both via its export market for China and FDI it has sent into China, has been a major driver of the Chinese growth story. Given the fact that China is now increasingly challenging American hegemony, many commentators describe US-China economic cooperation as a strategic blunder on part of the US. Not only are such proclamations against the basic spirit of globalisation, they also do not realise that not all Americans have lost out because of US’s rising trade deficit with China. American capitalists who invested money in Chinese manufacturing and thereby saved costs on far more expensive American labour have made a fortune for themselves in this process. Of course, American workers have lost out in its great bargain. This author had discussed this issue in detail in these pages.

To cut a long story short, India is not the only country that is facing the predicament of private business interests undermining national economic interests by doing what capitalists are supposed to do; i.e. work for profit motive.

And the government of India official is not the first one to point fingers at domestic businesses for displaying a “trader like mindset”. In fact, there exists a proper word — it is called comprador to describe such kind of businesses in the English language.

Is the Indian bourgeoisie comprador?

Simply speaking, a comprador businessman is someone who is engaged in a subordinate (and subversive of national economic interests) but mutually advantageous trading relation with a foreign commercial entity. In the Marxist lexicon, especially in the Chinese case, the comprador bourgeoisie was described as the ultimate class enemy before and immediately after the Chinese revolution.

Does a stray comment by a government official lamenting Indian businesses displaying a trader like mindset mean that most of Indian capitalist class is comprador in nature?

Such an understanding is actually very close to what the Indian Maoists have about Indian capitalist class. Unlike the comprador bourgeoisie, which does not do anything to build a domestic production base, many Indian businesses have helped Indian economy make significant achievements in both industry and services. Reliance, for example, is a global leader in petroleum refining and its Jamnagar refinery is among the most technologically advanced facilities in the world. Bulk of the production in strategic industries such as cement and steel happens in the private sector in India.

What is also true, however, is the fact that India’s manufacturing growth, has been underwhelming when compared to its peers in east and south east Asia. The clichéd explanation for India’s manufacturing predicament is that the a planning-based state-controlled economic regime kept animal spirits of private capital shackled and the Indian economy lost out on the critical period.

While there is no doubt that the pre-1991 regime put shackles on growth of businesses, the argument that it is solely responsible for India missing the manufacturing bus is at best a half-truth.

Joe Studwell’s How Asia Works: Success and Failure in the World’s Most Dynamic Region is an excellent book to read to understand this argument in a better way.

Studwell’s book, in his own words, “investigates how Japan, Korea, Taiwan and China perfected ways to marry subsidies and protection for manufacturers – so as to nurture their development – with competition and ‘export discipline’, which forced them to sell their products internationally and thereby become globally competitive”. This, Studwell argues “overcame the traditional problem with subsidy and protection policies, whereby entrepreneurs pocketed financial incentives but failed to do the hard work of producing competitive products”.

How were some states able to achieve these objectives better than other countries? “Firms that did not meet the export benchmark were cut off from state largesse, forced to merge with more successful companies, or occasionally even bankrupted”, Studwell writes. The failure of the pre-reform Indian state to enforce such discipline on domestic capital, in fact, is a bigger reason for India’s underwhelming manufacturing performance than a state-heavy economic policy per se.

India’s manufacturing dilemmas

As the Indian state is rolling out a new set of industrial policy incentives such as Production Linked Incentives (PLIs) to boost domestic manufacturing and possibly exports, it will have to face a similar challenge once again.

To be sure, a PLI style strategy is bound to give rise to its own set of dilemmas. If the government is offering significant benefits — in some PLI schemes almost half of the capex requirements are being subsidised — then it makes sense for businesses to focus on aligning their investments to sectors that are covered by PLIs. The question the government will have to confront then is the following.

Does it offer PLI benefits in all sectors where it wants domestic businesses to set up import substitution driven investments? The fiscal costs of offering something like this from sectors ranging from household items to nuclear reactors, all of which we import, can be prohibitively expensive.

Last but not the least, there is another question that any criticism of private businesses not doing enough to boost domestic manufacturing capacity must answer. This question is best asked in a rhetorical manner. Why should established industrial houses like Reliance and Tata, which have run extremely sophisticated manufacturing facilities for decades now, invest so much in selling vegetables and groceries, which is what a lot of online retail businesses are doing? It does not take rocket science to sell vegetables or clothes.

Could that capital – most such businesses are actually burning money – not have been better invested in manufacturing activities, as far as national economic interest is concerned? An interesting counterfactual is the best way to answer this question. What if such trading activities by big corporations attracts a higher entry and operating cost compared to, let us say cooperatives or small traders? Growing big business interest into such activities in India has almost coincided with the part-policy part-tech driven formalisation of the Indian economy. It is driven, almost entirely, by the ambition of replacing the small-unorganised businesses in these sectors and appropriating their profits.

Any such move by the state will be seen as weakening the ease of doing business. But then, as the government official quoted in the HT story pointed out, trader like mindset and national interest need not always align. What often remains unsaid in such discussions is the balancing act played by considerations of political finance (in expectation of policy changes) which like profit-driven trading can be completely legal, but not necessarily in sync with national economic priorities.

Every Friday, HT’s data and political economy editor, Roshan Kishore, combines his commitment to data and passion for qualitative analysis in a column for HT Premium, Terms of Trade. With a focus on one big number and one big issue, he will go behind the headlines to ask a question and address political economy issues and social puzzles facing contemporary India.

The views expressed are personal