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On the cusp of India’s independence, 51 companies were incorporated in the country. The history of Indian business is much longer than that of independent India; still, the story of these 51 midnight’s children reflects that of Indian business and its evolution in independent India.
Some of the 51, such as Grasim Ltd still exist and are among India’s most valuable companies by market capitalization. Others, such as Sandoz India Ltd, lost their identity over the years when they were acquired by or merged with other companies.
India’s independence in 1947 also saw a bloody partition of the country resulting in an influx of Hindu refugees from the newly created state of Pakistan; among these refugees were the Munjals of the Hero group, who now run the country’s largest motorcycle manufacturer. And some partnerships dissolved; Mahindra and Mohammed, which was formed two years before independence, saw its co-founder Ghulam Mohammed migrate to Pakistan and become its first finance minister.
Many companies incorporated that year were the subsidiaries of foreign firms that hoped to enjoy the benefits of benign tax laws and tariff protection the new government was sure to grant to encourage local industry. Local businessmen treated these outsiders with suspicion as they were often at the receiving end of biased British policy and looked to the emerging nationalist leadership to protect their interests.
The dominant buzzword in those times was swadeshi. In its 50th anniversary annual report, Andhra Sugars Ltd notes how Mahatma Gandhi’s oft-repeated words of “you must become the change that you wish to see in the world”, inspired its founders to start a mill in the rural Tanuku region in that state.
The early years weren’t easy.
“Capital was relatively scarce (then),” says Raman Mahadevan, a Chennai-based economic historian and professor at the Institute of Development Alternative. So were other resources.
A report from Sandoz India notes how “an old Singer station wagon was used as transport to distribute products to the market. Calcium Sandoz injections were in great demand and consequently rationed”.
The capital scarcity also resulted in the creation of large state-owned enterprises.
“The stance of the industrialists towards foreign capital was quite nuanced and they were aware of the scarcity of capital,” says Mahadevan. “The industrialists of the time realized that they were not in a position to undertake capital investments requiring very large outlays. This is the reason that they made a pitch for state intervention in developing capital goods industries, without which they would have been dependent on foreign capital for these goods.”
And much before the Bombay Club of the 1990s—an informal grouping of business houses that sought a level playing field for Indian companies in the wake of the government’s move to open up the economy—there was the Bombay Club of the 1940s.
This informal grouping of seven leading industrialists of the day, including J.R.D. Tata and G.D. Birla, put together the Bombay Plan of 1944, which argued for an active role by the government in deficit financing and planning equitable growth along with protection to indigenous industries from foreign competition in local markets to increase the pace of long-term growth of the economy.
Such pleas did not go unheeded. Business historian Gita Piramal and Mahadevan argue that the political class in 1947 was deeply sensitive to the sentiments of the industrial class. “The number of factories inaugurated by Nehru in his time remains unmatched by any other prime minister since then,” says Piramal.
“The House must realize that any substantial increase in production is impossible until the shortage of materials, the bottleneck in transport and other impediments are removed,” India’s first finance minister R.K. Shanmukham Chetty said in his budget speech of 1948.
Independence also changed the nature and ownership of managing agencies that had flourished in the years before 1947. Set up to offset scarcity of capital—a problem even during the Raj—these were effectively partnerships between European business houses and Indian entrepreneurs. The former provided seed capital and management expertise to set up companies and factories; the latter ran the enterprises and repatriated a part of their profits as specified in the contract.
Management agencies had helped create new companies in India since the late 18th century and continued to do so after independence as well.
Killick Nixon and Co., a management agency, incidentally born in 1947, collaborated with the Tata group and other business houses to merge several cement firms and created India’s first large cement producer, Associated Cement Cos, now ACC Ltd.
However, as Indians acquired the ownership of the management agencies, abuses crept into the system. As capital became more freely available, the case for management agencies weakened.
“Abuses of the system increased, with the Indian managing agents taking away a larger share of the profits,” says Piramal. “This bothered bureaucrats like L.K. Jha and R.K. Hazari, who wanted some state action.”
This led to the formation of the Hazari committee under the Planning Commission, which investigated the nature of corporate governance of the 20 top business houses of the time.
It argued for an abolition of the managing agency system saying that such a step would be a pre-requisite to the rationalization of the corporate structure of these entities. This led to the system being scrapped in the 1970s by Indira Gandhi.
Indian capitalism has, of course, travelled a long journey since then. By the 1980s itself, India had developed a fairly broad-based industrial base, which was reflected in its exports as well.
By the time Manmohan Singh assumed charge in 1991 as India’s finance minister, and started dismantling the licence raj regime and accelerated the demise of the country’s import-substituting industrialization model, Indian capitalists had outgrown the need for state protection.
“A reading of the period between 1947 and 1991 as India’s dark age is tantamount to being insensitive to our history,” Mahadevan says. “It was in this period that an indigenous diversified industrial base came into being.”