Why are projects in India being delayed?


Dr. Wolfgang-Peter Zingel

Dr. Wolfgang-Peter Zingel

Dr. For many years, Wolfgang-Peter Zingel was an academic assistant in the Department of International Economic and Development Policy at the South Asia Institute at Heidelberg University. In his publications he mainly deals with questions of the economic and social development of South Asia.

Introduction and overview

India is seen as one of the BRIC states (together with Brazil, Russia and China) as a new economic power that is supposed to help the world economy out of the crisis. The article examines how the country was able to develop into a beacon of hope after decades of modest growth. The perception of India as an economic power is more recent. Before that, the attempt to overcome the colonial legacy determined the development of a mixed economic order, largely decoupled from international markets, as well as India's reintegration into the world economy.

Women workers in a shoe factory near New Delhi
Photo: Rainer Hörig

At the Cebit 2000 computer fair, the then Chancellor Gerhard Schröder shocked the nation with the announcement that, due to the lack of its own computer experts, sufficient numbers of foreign experts, including those from India, were required - a sign of India's recognition as a power of knowledge. In the spring of 2006, US President George W. Bush offered India cooperation in the field of civil nuclear research - the same country which, after the Indian nuclear tests, tried to deter further nuclear ambitions with economic sanctions in 1998. But nothing came of that, because even then India received hardly any development aid from the USA and the USA needed Indian engineers to prepare old computer programs that only knew two-digit years for the new millennium.

The unprecedented rise of the Indian software industry is so important because the country that was once economically ahead of Europe is finally being perceived as an economic player on a global scale after half a century of independence.

Such a development was only possible because the software industry was free from the restraint of politics and bureaucracy, which otherwise tied the Indian economy for decades, from which it is still far from free. India's path to a planned economy and back again will be examined below from the point of view of the economic system and the economic order.

The colonial legacy

India was conquered by a private trading company that was endowed with all kinds of trading privileges by the British Crown. With the territorial rule she also took over the tax sovereignty. In large parts of the country they made the tax collectors the owners, who in turn passed the property tax on to the disenfranchised tenants by means of a system of intermediate tenants. The industrialization of Great Britain, which began at the end of the 18th century, took place primarily in the textile industry; promoting them and increasing the profits of the East India Company (East India Company) served a double monopoly in India: the export of industrial raw materials and the import of finished products.

Indian textile manufacturers, until then world market leaders in fine fabrics (muslin), became dispensable competitors. The result was widespread de-industrialization and de-urbanization. The uprising of 1857 showed the limits of the business model of the company and its (British) employees, who also worked on their own account. The company became insolvent. The following year the British crown took over the three "presidencies" Madras, Bengal (based in Calcutta) and Bombay.

In the beginning the control of the Indian trade was in the foreground, later it was taxes and duties and in the 19th century the factories, mining, railways, plantations (indigo, coffee, tea, rubber) and finally the emerging jute and cotton industry. The processing of agricultural raw materials on site was only advisable wherever considerable savings in transport costs could be achieved, such as when removing the core from cotton and pressing jute. India provided cheap raw materials and labor and at the same time a sales market.

This also reflects the influence of different British groups in India: after the merchants and adventurers, there were more young aristocrats (army and administration) in the 19th century. Unlike the British colonies in Africa, America and Australia, India did not become a settler colony. Except for a few plantations, the British never had much of the land; Compared to the Indian population, the number of British people living in India was always small. In return, the colonial rulers lured and forced hundreds of thousands of Indians as workers, administrators and traders into their properties all over the world, from the Caribbean to Africa to the Pacific.

British - and gradually Indian - entrepreneurs began slowly to build up an industry. This came in very handy in the First and even more so in the Second World War, when India not only provided hundreds of thousands of soldiers, but also supplied goods that were essential to the war effort. In between was the global economic crisis, which hit India in particular as a supplier of industrial raw materials.

Independence, reconstruction and a mixed economic order

The leaders of the independence movement - especially Indian entrepreneurs - asked early on what form the state and economy should take after independence. They sought not only political but also economic independence, since it would not be enough to have an elected government at the head of an independent India and to replace the British administrators (and officers) with their own forces, but the commanding heights of the economy to occupy and take over the British management of "Indian" companies.

In the last phase of the independence movement and before the outbreak of the Second World War, plans were drawn up in India for the "reconstruction" of the country and its economy. It was not about war-related destruction, but a correction of the deformations of the economy caused by the long colonial rule. The model for many - including Jawaharlal Nehru, the leader of the Indian National Congress - was the Soviet Union.

Parallels have been seen between the oppression of Russia under the tsars and the oppression of India under the colonial rulers. The Soviet model appeared all the more attractive after World War II when the Soviet Union moved into the circle of superpowers. As a staunch democrat, Nehru did not want a socialist order based on the Soviet model, but he saw the benefits of pooling national resources and centralized control. The fact that Russia had an industrial base before the Soviets (as did China before the war) was overlooked.

The Soviets New Economic Policy (NEP) allowed peasant agriculture, free domestic trade and private / foreign investment, and allowed the economy to recover from the turmoil of the years of war communism. The devastating extent of forced collectivization in agriculture was hardly noticed internationally in the years of the Great Depression, nor was the considerable economic and military aid from the USA during the war. This is the only way to explain that the development policy discussion of the first three decades after India's independence from the idea of ​​superfluous and unproductive labor (labor surplus), which had to be steered into more productive areas through a clever control of state economic policy, and according to the understanding of the time, this was industry.

Larger further costs were not expected, since the maintenance (subsistence) of these workers was already borne by society. Textbooks in India still celebrate the "planning" of a state that not only regulates but also determines economic activity. That this did not always succeed found its expression in formulations such as India as a "functioning anarchy" (John Kenneth Galbraith) and the warning of a "soft state" (Gunnar Myrdal), which takes on so many tasks that it is impossible to cope with them .

In the years after independence, the government was challenged by crisis management: The division of the country through the secession of Pakistan, the integration of hundreds of princely states and the drop in raw material prices after the end of the Korean War (1950-53) had to be mastered. The first five-year plan (1950-55) was an inventory, a list of projects - mostly designed or started during the colonial era - and declarations of intent from politics. This so-called indicative planning never aimed to make the Soviet Union's five-year plans binding. Industrialization was seen as the key to modernization and development. Massive state investments in raw materials and heavy industry and in economic infrastructure took place; In the 1950s, three steelworks were built, including - with German help - the factory in Rourkela (Orissa).

Nehru's ideas about a division of tasks among the actors in economic policy can be read from the constitution (1950) and the first economic laws. So large areas of heavy industry were given to the state and simple, labor-intensive productions to the home industry (Home / Cottage Industry) Reserved. The forced economy of war became public distribution (Public Distribution System, PDS) of basic necessities (food, kerosene) at subsidized prices and a system of public sales outlets. Today, a program is being set up that guarantees poor rural families employment for one member at a time for 100 days a year at the minimum wage.

Other hopes were held abroad: The "Cold War" quickly developed into a "struggle of the systems" in which India, the "largest democracy in the world", for individual freedom, decentralization and competition and the People's Republic of China for oppression and centralization and central administration economy stood. However, the attempt by the Western powers to include India in their system of regional military and economic alliances failed.

Of all the states of the "Third World" that was emerging at that time (compared to the "First World" of the western industrialized countries and the "Second World" of the Eastern Bloc), India is probably the one that succeeded best in evading capture without major damage. The Sino-Indian friendship that was celebrated at the beginning soon broke up over the question of supremacy in Asia, the leadership of the "non-aligned states" and - more specifically - the fate of the Himalayan states, especially Tibet and Sikkims. Meanwhile, the USA tried generous economic aid for India, but did not allow itself to be drawn into the wars with Pakistan and China.

Autonomy, decoupling and regulation

The United States also helped with the looming crisis of 1965 with a rapidly growing population and little increase in agricultural production: Without US food supplies, India would have experienced a major famine; the gratitude was limited, however, since the deliveries were subject to political conditions (Food power), like the ending of the war with Pakistan. The dispute with Pakistan was settled through international mediation; During the talks (Tashkent 1966) Nehru's successor Lal Bahadur Shastri died and Indira Gandhi, Nehru's daughter, became Prime Minister.

They created the all-encompassing regulation that goes under the name License Raj gained a dubious international fame. In quick succession, it nationalized a large part of the financial sector, foreign trade and ultimately also trade. That was the high point of Self-reliance (actually a more cultural concept of reflecting on one's own values) and decoupling from the world market. The failure of this approach became clear when in 1973 it also nationalized the grain trade, which is vital for the country; after a few months she had to withdraw the measure. The declaration of the state of emergency (1975-77) had political and no economic reasons, but allowed Indira Gandhi two more years of central economic control.

In retrospect, Indira Gandhi's economic policy appears to be less an expression of development strategy than a reaction to the political pressures of maintaining power. The devastating defeat in the war with China (1962) and the vulnerability in the war with Pakistan (1965) had shown that non-aligned India was dependent on its own defense; the path of building up its own heavy industry, which had already been taken after independence, seemed all the more important, in 1974 a nuclear explosive device was detonated for the first time.

However, she was unable to keep her election promise to eradicate poverty. After the exhausting war with Pakistan in 1971 (which ended with the independence of Bangladesh) the "oil shock" followed when in 1973 the oil exporting countries (OPEC) quadrupled the price of crude oil. Thus, at the end of an increasing regulation of the economy, there is a concentration on one person (election slogan: "Indira is India"), a centralization of decisions and a departure from the democratic principles of the independence movement.

After Indira Gandhi's fall in 1977, the Janata government hesitantly set to work to dismantle the comprehensive regulatory system, as did her son Rajiv Gandhi, who succeeded her after her second term (1980-84) and assassination. The social policy of the minority governments that followed it, which were to be classified as left-liberal, led to unrest: As a measure of "positive discrimination" against disadvantaged groups, a number of university places and public service positions for members of the original population known as Adivasi (Scheduled Tribes, ST) as well as lower caste groups such as the "untouchables" (Dalit, Scheduled castes, SC) "reserved" according to their proportion of the population and subject to their professional qualifications.

According to the recommendations of the Mandal Commission, further "other backward classes" (Other backward classes, OBC) received quotas, which caused a storm of indignation, especially among the directly affected members of the traditional educated middle class, i.e. the higher castes, even if the highest court ruled that the reservations were less than half (in practice a maximum of 49, 5 percent) of all positions. The problem reignites every time the government tries to expand the reservation further. In the case of jobs, however, an extension to the private sector is called for.

Reintegration into the world economy

The assassination of Rajiv Gandhi during the 1991 election campaign contributed significantly to the Congress party's election victory. The new finance minister and later prime minister Manmohan Singh was faced with new tasks when oil prices exploded after the Iraqi invasion of Kuwait and India suffered losses in remittances from its migrant workers in Iraq and Kuwait. In view of a looming international insolvency, the Indian government made a clearly noticeable change of course. The economy reacted very favorably to the country's opening to the world market and the repeal or relaxation of many of the regulations that had restricted India's economy up to that point. However, this deregulation is only remarkable when measured against the Indian past. In international comparison, India is still a highly regulated country.

Construction of high-rise buildings near Mahalaxmi Station in Mumbai (& copy picture alliance / Robert Harding)
Even today, greater parts of the economy in India are state-owned than in the industrialized countries. Not satisfied with this, the Indian state has overlaid its economy, including private companies, with a sophisticated system of rules. Because they restrict the management in their entrepreneurial decisions even more than the state-owned industrial property, they are seen as obstructive to development. For a long time there has been a call to free the economy from its shackles and to deregulate it, i.e. to reduce state controls on markets and prices and to privatize state-owned companies.

According to critics such as the economists Jagdish Bhagwati and Arvid Panagariya, the greatest obstacle is labor law with its extensive protection against dismissal, which makes it practically impossible for medium-sized and large companies in the "organized" sector to lay off workers. Small companies therefore shy away from entering this category. Subcontractors and temporary employment agencies benefit from this at the expense of the employees.

India boasts of being the 10th largest industrial producer, but it is still more of an agricultural country with a growing industry. This has a share of the domestic product of less than a quarter (2012-13).Six to seven percentage points of this are attributable to the construction industry and one to two percentage points to the energy, gas and water sectors, so that the manufacturing industry only contributes a sixth of the domestic product. Around two thirds of this is accounted for by the "unregistered" companies in the "unorganized sector", each with few employees and low turnover. They are largely withdrawn from state guidance and control and are part of the "informal sector", which, due to the lack of a reporting requirement, is covered by the official statistics with blanket approaches. Only the registered companies of the manufacturing industry correspond to our ideas of industry. They have a share of around a tenth of the domestic product.

India's labor force participation rate, i. H. the share of the labor force (employed and unemployed) was recently only 39 percent. Almost two thirds of the workforce are still employed in agriculture, only one sixth in industry and one fifth in the service sector. Only 28 million are in the "organized" sector, including the public service, of which one fifth are women. The structural change in employment lags far behind that in value creation. IT earns the most foreign currency, but only employs two to three million directly and maybe 12 million indirectly, while the country needs an additional 10 million new jobs every year.

Following the modernization-theoretical approach that states are on a path to development on which the stragglers are hurrying to catch up with the developed states, we expect a sectoral change, with agriculture, industry and services as the dominant sectors, measured against the Employment and - with some delay - economic output. In the traditionally labor-based societies of India, where caste membership determines career choice, one can observe a different development: Here, services (measured by economic output) have moved directly to the first place; the distribution of employees across the three sectors, on the other hand, has hardly changed for over a hundred years.

The limits of liberalization

Nevertheless, it is not to be expected that India could skip the phase of industrialization and rise as a service economy directly into the circle of emerging countries or "developed" economies.

In his writings on the economic development of India, Dietmar Rothermund pointed out how industry was more hindered than promoted by the colonial government. Critics accuse the government of independent India that the successes of prestigious defense, space and nuclear technology projects have come at the expense of other industries and social development.

In any case, industry in India does not play the role that the independence fighters hoped and expected, and globally speaking, India today as an industrial nation does not have the remotest importance that the population of more than 1.21 billion (as of 2011 census) or would correspond to the strategic weight of a nuclear power - neither in terms of size and certainly not in terms of the state of the art. Indian economists share this view. The fact that India has achieved much in other areas is cause for optimism for the industrial sector as well. The main bottleneck is the infrastructure. In addition, new social problems have arisen.

The Indian market has long since ceased to be closed off: India's share of world trade is increasing; the foreign trade quota of 43 percent has tripled since 1980; China has overtaken Germany and is the number one trading partner, and trade with Pakistan and the other South Asian neighbors is also increasing significantly. Monetary policy no longer tries to artificially keep the rate of the rupee high: since the beginning of the global economic crisis, the value of the rupee has almost halved against the dollar and the euro.

A family forms bricks from clay (& copy picture alliance / Robert Harding)
There is a reform backlog in the domestic economy. The list of changes demanded by leading Indian economists is long: First, the divided labor market with its small number of highly protected workers is mentioned, while the vast majority enjoy little protection. Second is land law, which at the same time makes industrial settlements difficult and leaves the victims of expropriation and displacement without adequate compensation. In third place the completely overburdened infrastructure, and in other places the overburdened universities, the inefficient trade with its state distribution system and a fragmented wholesale and retail trade. It is significant that the economic output of trade is higher than that of agriculture: it creates employment while a considerable part of the food products never reaches the consumer due to a lack of suitable storage and careful and fast transport.

When it comes to social services (elementary schools, health), India has in some cases fallen behind Bangladesh. The sensational economic growth has recently halved to 5 percent.

Insofar as the state runs the industry on its own, it controls itself. This - according to the critics - results in little public interest in compliance with safety standards, which is also used by private companies that are active in the relevant branches of industry. This could explain why the world's most devastating industrial disaster to date (Bhopal 1984) occurred in a chemical factory in India.

In order to protect state (and other) companies, such as the airline Air India, which has been losing money for years, from insolvency, the state banks are always granting them new loans that are refinanced from large savings deposits and, if necessary, from the state budget. Banks also had loans on preferential terms to selected sectors of the economy, particularly agriculture, through cross-subsidization. Investors will only be found to take over state-owned companies if the problem of old debts has been resolved.

The privatization of profitable state-owned companies is branded by their opponents as "selling family silver". The comfortable earnings situation of these companies is usually due to state monopolies, especially in the area of ​​"natural monopolies", where technical conditions make effective competition impossible. There have been tentative first steps here. As in other countries, taking over state utilities is not without its pitfalls, because fee exemptions, consumption-independent tariffs and a lack of consumption recording reward the widespread free-rider mentality, which has promoted corruption and has led to "system losses" that pose unsolvable financial problems for providers. System overload is the result; There is often a lack of funds for expansion and even maintenance investments.

In response to these grievances, resistance is building up. The rising middle class is no longer willing to accept the ubiquitous corruption as an inevitable evil to speed up approval processes. In the parliamentary elections in New Delhi at the end of 2013, Aam Aadmi, the new "common man's party", immediately became the second largest party.


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Selected facts and figures

Share of sectors in GDP (FC at current prices, estimated) 2011-12:

- Agriculture: 19.6%
- Industry: 24.3%
- Trade: 25.2%
- Financial sector: 16.6%
- Services: 14.0%

Source: Economic Survey 2012-13, A-6 (January 30, 2014)
Foreign trade quota = sum of exports and imports of goods and services in relation to gross domestic product 2012-13: 42.9%.

Exports 2012-13: INR 16,343 billion
Imports 2012-13: INR 26,692 billion

Source: Reserve Bank of India: RBI Monthly Bulletin, January 2014, p. 93 (January 30, 2014).
GDP (current MP) 2012-13: INR 100.281 billion

Source: Economic Survey 2012-13, p. 2. (1/30/2014)
Employees in the organized sector in 2009: 28.1 million, of which 19.9% ​​were women.

Source: Census of India. Selected Socio-Economic Statistics, November 2011, p. 56. (As of January 30, 2014)
Number of factory workers 2005-06: 9.0 million

Source: Statistical outline of india 2008-09, p.60.