In 2014, Narendra Modi promised to bring the Gujarat model of development to India. But the state's focus on megaprojects at the expense of SMEs hurt job creation, says a new book
Close relations between a robust business community and the state politicians, as well as the bureaucracy, crystallized at an early date in Gujarat. In fact, this is one of the states where the exceptionally developed sense of entrepreneurship of the locals resisted most effectively the Nehruvian system, with the help of politicians and bureaucrats.
Years before Narendra Modi took over, the Gujarati economy was pushed forward very much by deliberate state interventions that resemble the interventions of the developmental state of East Asia, which means that Gujarat’s rapid economic growth was propelled by a close working alliance between the region’s political and economic elite.
Modi’s economic policy in the 2000s gave a new dimension to this business-friendliness. What has been publicized by the longest-serving chief minister (2001–14) as the “Gujarat model" benefitted first the large corporate houses. The special relationship that developed between the government (and more precisely the chief minister) and big companies had implications not only for the economy, but also for the society (big firms need fewer workers than small and medium enterprises) and the polity.
Before the BJP took over, the liberal leanings of the earlier chief ministers were systematically balanced by attention to social policies, including reservations-based positive discrimination in the 1980s. In 1990, the new employment policy was aimed at guaranteeing employment in backward talukas and laid down that “80% posts in new industries should go to local people and 50% posts of managerial and supervisory posts should go to local people".
Things changed in 2003, when the new industrial policy was designed and implemented under the leadership of the chief minister Modi. The new policy called for labour reforms to the extent permissible at the state level. A large number of industries were exempted from obtaining No-Objection Certificate (NOC) from the Pollution Control Board. They were allowed relatively easy and quick possession of land through the ‘urgency’ clause, as well as a simplification of the administrative processes to release agricultural land for industrial use.
In the last page of his book Gujarat: Governance for Growth and Development, Bibek Debroy summarized the state’s economic policy as follows: “What is the Gujarat model then? It is one of freeing up space for private initiative and enterprise and the creation of an enabling environment by the state". In fact, it was more about business-friendliness than market-friendliness, as evident from the non-market prices some companies paid for their land. While market-friendly economies minimize interventions by the state, in business-friendly economies, politicians (and “their" bureaucracies) intervene in favour of the companies they seek to favour—their cronies. Gujarat has a long tradition of business-friendliness, but in the past, it allowed a dense network of SMEs to blossom in the state, besides bigger players like the Ambanis.
The 2009 industrial policy was explicitly designed for making Gujarat the most attractive investment destination not only in India but also in the world. It targeted not only the “prestigious units" ( ₹ 3 billion and more since 1991), but even more the “megaprojects" that implied ₹ 10 billion and more investment in projects, and direct employment of two thousand persons—hence a ratio of ₹ 500,000 per job.
The Gujarat Industrial Development Corporation (GIDC) started to give land to industrial units on a 99-year lease and created SEZs. In 1990–2001, it had acquired 4,620 hectares, but this figure rose to 21,308 hectares between 2001 and 2010–11.
The industrialists’ appreciation of the Modi government was most obvious on the occasion of “Vibrant Gujarat" meetings. The chief minister conceived this special event—which was to occur every alternate year—in 2003, in conjunction with chambers of commerce and industry in order to attract Indian investors, including those residing abroad, and to publicize his economic credentials.
Modi had become one of the favourite chief ministers of Indian businessmen. They made a point of attending the Vibrant Gujarat meetings and of showering praise on him. Among them, the Gujaratis were usually the first to appear on the platform; the most prominent ones including Mukesh and Anil Ambani, Shashi Ruia (Essar group), and Gautam Adani, probably the closest of all to the chief minister.
While Modi had not attracted many foreign investors (only 4.5% of FDI went to the state from 2000 to 2012, as against 32.8% in Maharashtra, 19% in Delhi, 5.6% in Karnataka, 5.2% in Tamil Nadu, and 4% Andhra Pradesh), he has been very popular among Indian businessmen.
Reliance, for instance, developed a huge petroleum refinery whose capacity jumped from 27 million metric tonnes per annum to 62 million tonnes per annum in 2008, after the building of a second factory on a 30,000 hectare SEZ. In the same year, also in Jamnagar, Essar inaugurated another refinery of 20 million tonnes per annum capacity.
These investments boosted the growth rate of Gujarat. While in the 1990s, Gujarat was already ahead of all the other states of India, it remained so in the years 2002-03 to 2011-12, and lagged behind Bihar by a single percentage point in the years from 2006-7 to 2012-13, when Gujarat became number three, neck and neck with Maharashtra.
As a result, today it accounts for 20% of India’s industrial output, including 24% of its textile production, 35% of its pharmaceutical products, 51% of its petrochemical production—and 22% of its exports.
However, by focusing on “megaprojects", the “Gujarat model" has relied on big companies that have boosted the growth rate but have not created many good jobs, not only because the rules pertaining to job creation have been relaxed, as mentioned above, but also because big companies are very capital intensive. The petrochemical industry and the chemical industry are cases in point. They have been so dynamic that they represent, respectively, 34% and 15% of the industrial output, but they are not labour intensive at all. Manufacturing is more labour-intensive, but automation is also gaining momentum in large factories. For instance, the Nano plant at Sanand never had more than 2,200 employees—for an investment worth ₹ 2,900 crore, hence a ratio of more than ₹ 1.3 crore per job created directly (indirect job creation needs to be taken into account but is more difficult to measure).
Between 2009-10 and 2012-13, Gujarat was the state where investment in industry was the highest (above Maharashtra and Tamil Nadu), but that did not translate into job creation as much as in these states, where the enterprises tended to be smaller and more labour-intensive. The comparison between Gujarat and Tamil Nadu is illuminating in that respect: in 2013, Gujarati industry represented 17.7% of the fixed capital of India but only 9.8% of the factory jobs, whereas the industry of Tamil Nadu represented 9.8% of the fixed capital but 16% of the factory jobs.
Gujarat’s annual employment growth plummeted from 2.4% in the years between 1999-2000 and 2004-05 to 0.1% in the years between 2004-05 and 2009-10. Not only has the growth rate of urban employment hardly increased—from 4% to 4.9%—but wages have lagged behind too. The quasi-stagnation in job creation is partly due to the crisis of the SMEs, which are four times more labour- intensive than the average for all firms.
Indeed, the share of the MSMEs’ (micro, small, and medium enterprises) credit as a percentage of the gross bank credit had declined from 12.98% in 1997-98 to 6.34% in 2006-07. It started to rise again afterward to reach 10% in 2009-10, but it remained below the late 1990s figure. Their financial troubles were partly due to the crisis of the district cooperative banks, which are in a bad shape after financial irregularities almost sealed the fate of eight of them in the early 2000s. Four of the eight banks had to be liquidated. The BJP government did not help cooperative banks, not only because, in its eyes, small is not beautiful, but also because the cooperatives are traditionally strongholds of the Congress in Gujarat.
This has precipitated a crisis among many MSMEs. According to the Union ministry of MSMEs, the number of sick units jumped from 4,321 in 2010-11 to 20,615 in 2012-13 and 49,382 in 2014-15—a figure second only to Uttar Pradesh. Between 2004 and 2014, 60,000 MSMEs shut down in Gujarat.
Not only has the growth rate in jobs not increased in proportion to the growth rate of the state GDP, but the quality of the jobs has not improved, evident from the informalization process at work in the job market. In the Nano plant, out of 2,200 employees, 430 are “permanent workers". They earned ₹ 12,500 in 2016, whereas the informal workers earned about ₹ 3,300 a month.
One of the reasons why industrialists have invested in Gujarat is also, precisely, the low level of wages, which is largely due to the inﬂow of migrant workers—men from Odisha, Bihar, and UP, whose presence is very much resented by local labourers. According to the report of the National Sample Survey of 2011, Gujarat has some of the lowest average daily wages for casual labourers in the urban area. These wages are not only much below the national average but on a par with those in Uttar Pradesh.
The very fact that the Gujarat government has given increasing priority to big investors has impacted the state in many different ways. The cooperatives and SMEs, which used to epitomize the Gujarati entrepreneurial ethos, have not continued to benefit from the traditional attention of the state, and this evolution has affected the labour market—where jobs have been few and where wages have not increased. The state has also suffered financially, due to a slew of big-ticket incentives, which partly explains its indebtedness and the low level of social expenditures.
The BJP’s radical shift in the early 2000s may be explained in a number of ways. First, after the 2002 pogrom, the party wanted to prove wrong the entrepreneurs who had argued that Gujarat would not attract investors anymore, and Narendra Modi wanted to change his image to appear as the “development man" (the “Vikas Purush"). Second, he wanted Gujarat to be singled out because of its growth rate—a magic figure everybody was obsessed with at that time. Third, to attract big companies was the best way to finance his political activities by retaining a small number of donors while emancipating oneself from the BJP leaders (including Prime Minister A. B. Vajpayee) who had expressed their displeasure with the 2002 violence. Fourth, giving priority to megaprojects enabled Modi to boost the career of emerging figures who were prepared to help him, like Gautam Adani—a man who was not part of the establishment either.
This strategy had many implications for the economy, the society, and the ecology of Gujarat. First, big firms developed at the expense of the SMEs, which had to pay more for the gas and the power produced by the big players, had to face new competition (in the market and with the banks, which lent them less money). Second, the decline of the SMEs, one of the finest assets of a state known for its entrepreneurs, affected the labour market in terms of the number of jobs available and, possibly, the quality of these jobs—with wages remaining very low. Third, the big companies that have been attracted to Gujarat have been offered so many incentives—the price of land, the interest rates of loans, and tax deductions—that the exchequer has suffered (as evident from the growing indebtedness of Gujarat). These fiscal constraints have further reduced the ability of the state to spend on social expenditures (education, health…)— something Gujarat was good at in the 1980s, but not anymore. Last but not least, the clout that big companies acquired at the highest level in the Gujarat government allowed them to resist pressures from the regulators in charge of environmental norms.
In a democracy, elections and the rule of law are supposed to offer corrective mechanisms when imbalances have become unbearable. In 2015, Patel youth demonstrated in order to have access to government jobs quotas. This massive protest showed that good jobs had become an acute need. Soon after, the BJP lost local polls in the rural parts of Gujarat, and in 2017, it also lost to the Congress in rural constituencies—a clear indication of the crisis the peasants, the artisans, and the cottage industry were facing.
One of the factors of this crisis is land: land is now a source of tension between the agriculturalists and industry, in part, because the later has sometimes polluted both the surface and the subsurface water tables. Whether the voters are in a position to change the center of gravity of the political economy remains to be seen.
Excerpts from the chapter: Business-Friendly Gujarat Under Narendra Modi
Christophe Jaffrelot is a senior research scholar at CERI-Sciences Po/CNRS and professor at the King’s India Institute in London
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