THE TATA PARADOX
Posted by Team Bizdom TriViA Sunday, May 30, 2010
Business Firms in India have not received much attention from economic historians. Most of the literature available belongs to the genre of firm histories, the writing of which has generally been commissioned by the firms themselves and is therefore often apologetic in nature, if not hagiographical. Of modern Indian business firms, however, the house of Tata is undoubtedly the one which has received the most extensive coverage. One might well ask why add a few more pages to the already abundant literature on this best-known and most studied of all Indian firms. I cannot claim to have discovered anything really new about the Tatas. However, I find the existing literature, although informative and often insightful, either too much informed by a ‘heroic’ conception of entrepreneurship, or too exclusively preoccupied with microanalysis of the specific growth process of particular companies, like the Empress Mills or Tata Iron and Steel Co. (TISCO). It is not my intention to belittle the extraordinary feat of entrepreneurship represented by the emergence of such a firm in the specific context of colonial India. But I think one has to go beyond that kind of statement. Some synthetic survey of the firm across a time span of over a century, aiming at situating it within the general context of Indian entrepreneurial history and attempting to link it to macroeconomic trends appears to be needed.
I must therefore clearly state at the outset that the ‘Tata paradox’, or rather paradoxes which are the theme of this chapter, have a meaning only within a political economy framework which has become largely dominant in historical studies of Indian capitalism, without however having acquired the status of a ‘paradigm’, since no global consensus can be claimed for it. This framework owes a lot to the work of economists such as A.K. Sen and Amiya Bagchi. A crucial element in this approach is the distinction made between indigenous and expatriate firms operating in colonial India. Bagchi has mainly stressed the institutional disadvantage of the former in relation to the latter in terms of access to the state and participation in worldwide trading and financial networks, ultimately tracing its origins in the racial bond of affinity between British rulers and British businessmen. On the other hand, Tomlinson has drawn attention to some advantages Indian firms had over their British competitors, particularly in the jute market, in relation to supply factors, due to the existence of ‘informal’ credit networks, largely caste- and kinship-based, which allowed them more direct access to rural producers. In spite of their widely divergent views, it seems to me that both authors would agree that to differentiate between indigenous and expatriate firms in the Indian colonial context is meaningful, a view that ‘pure’ economists would certainly find strange. It is doubtful in any case whether such ‘pure’ economists would find in India many ‘firms’, British or Indian, which would fit in with the often-quoted definition of the firm as a profit-maximizing agent, endowed with a known and given technology and operating subject to a well-defined market constraint.
This definition of the firm posits as universal characteristics certain features of modern Western industrial firms. Leaving aside the question of technology, when applied to Indian firms it raises two different sets of questions. The first one pertains to profit-maximization. In a well-known analysis of North Indian merchant firms in the eighteenth century, C.A. Bayly has argued in favour of a ‘Chayanovian’ model, stressing the similarities between merchant and peasant families, in particular the emphasis on reproduction of the family. He sees Indian merchant firms as informed by a logic of kinship which does not necessarily enhance profit-maximization, but makes credit, identified with family prestige, the crucial notion. According to him, this specific logic can run contrary to the logic of profit maximization in dictating, for instance, marriage alliances which do not necessarily contribute to an enlargement of the firm’s assets. It is interesting to note that this kind of behaviour can be found in modern Indian industrial firms.
Thus the great Ahmedabad industrialist Kasturbhai Lalbhai is known to have created companies with the stated purpose of endowing nephews of his, without very definite calculations about expected profits. Of course it remains a moot point whether one can validly generalize from all this and put forward a theory of the ‘Indian’ firm as non-profit-maximizing. However, serious doubts are in order regarding a definition of the firm as a profit-maximizing agency in the Indian context. Serious reservations have also been expressed by students of Indian firms regarding the nature of the market constraints. Morris D. Morris in particular has stressed the high degree of uncertainty regarding the market due to lack of infrastructure and paucity of reliable information. In India, therefore, the market constraint does not appear to have been ‘well defined’ but in a state of constant flux which hindered rational calculations of cost.
Of all firms operating in colonial India, the firm of Tatas is probably the one which would come closer to that definition, since it was less informed than most Indian firms by a logic of the family and kinship and operated under market constraints which tended to be better defined than for most firms (the steel market is not dependent on the vagaries of the monsoon as is the market for cheap cotton cloth, and the parameters which regulate it are somewhat open to rational types of calculations). But I am not here going to examine Tatas in the light of different ‘theories of the firm’, an exercise for which in any case I am not competent. Rather, I am interested in exploring what I perceive as a paradox in relation to the above-mentioned ‘political economy framework’ and its possible wider implications, treating ‘paradox’ as a sort of heuristic device.
If the Tatas are compared with other large Indian firms, the following features will be noticeable. First, the character of the firm was strictly ‘non-family’, as manifested in particular in the employment of professional managers on a scale unknown in most other large Indian firms, but more common in expatriate firms. Thus the role of Sir Bezonji Dadabhai Mehta, who had started his career in the railways, in the success of the Empress Mills in Nagpur is well known. Though a Parsi, he was not a direct relation of the founder of the firm, J.N. Tata, and yet the latter trusted him with the management of his first major venture, a fairly rare occurrence in the mostly Hindu Indian business world, where family connections were of such crucial importance; Burjorji J. Padshah, another Parsi, who was not a relation, played a very similar role in the development of TISCO and the electric companies. How much of this was due to differences in family structure between Parsis and Hindus is not a point I shall consider here. Secondly, the firms’ financial structure was characterized by a greater degree of reliance on the stock market than in most other large Indian firms; and by a marked divorce between ownership and control, the former being widely diffused among individuals and companies, while the latter was clearly concentrated in the hands of a few members of the Tata family (rather than in the family as a corporate entity).
Moreover, from 1914 onwards, the Tatas enjoyed a close and almost institutionalized relationship to the colonial state such as no other Indian firm ever matched, reinforced by the constant hiring of retired ICS officers as board members or managers, a practice which was not widespread amongst other big Indian firms. (Of course the latter could not offer such attractive conditions as the Tatas, not only in terms of salaries but also of work environment.) Thus the Tatas almost overcame the ‘racial’ barrier which prevented most Indian capitalists from gaining social acceptance by the British rulers. It is true that the success of the Empress Mills in Nagpur is often attributed in part to a particularly enlightened policy of wooing labour in a region where Tatas were the first large-scale industrial employers. But gradually the Tatas seem to have aligned their labour policy with that of most industrial firms operating in India. TISCO in particular is known for its bad record of labour relations, and the anti-union bias in Jamshedpur was strong. It should be noted that in this field the line between Indian and British firms was rather blurred: labour practices in India were largely shaped by the structural characteristics of the labour force and employers’ strategies did not play such a large role as is often assumed. In their financial practices as well, in spite of a reputation of honesty, the Tatas were not above resorting to methods which one associates more with Marwaris, if one is to believe the widely diffused rumour about the existence of a private firm through which much of the profits of their companies was siphoned off without the knowledge and approval of the shareholders. This is not meant to suggest that British businessmen in India were more honest than Indian businessmen: it is just that their ways of dealing with shareholders were different. The Tatas’ marketing network appears also to have been built according to ‘Indian’ rather than ‘British’ principles, although I have not come across a detailed study of Tata dealerships.The product mix of the Tata conglomerate prior to 1947 was wide-ranging, since, apart from the two core activities of cotton textiles and steel, it encompassed real estate, hotel management, electricity production, construction (Tata Construction which was ceded to Walchand in the 1930s), cement production (the three Tata cement factories were amalgamated with others to form the Associated Cement Companies in 1936), tinplate (as a minority partner in a joint venture with Burmah Shell operating in Jamshedpur next to TISCO), oil, and soap.
If the link between cotton textiles and steel is not obvious, since the major linkage of textile machinery production was not represented, nevertheless it is clear that steel in its turn led to tinplate and at a later stage to trucks, and electricity production in the Ghats was geared to the needs of the cotton mills of Bombay. Actually the pattern of diversification went even beyond a simple logic of the firm to become the first attempt at some kind of systematic economic planning in the Indian context. The firm of Tatas thus came to fill a vacuum and to take upon itself some of the economic functions which were those of the state in a Listian conception which was, before 1914, still anathema to the British rulers of India.
(Text is taken from "Merchants, Traders, Entrepreneurs:Indian Business in the Colonial Era" by Claude Markovits)
