Introduction
• Despite the pursuit of similar industrial policies during the post
1990s, Indian states have revealed divergent outcomes in industrial growth.
• Such divergence suggests different levels of policy implementation which is itself a resultant of the interplay of formal and informal institutions, historically shaped.
• We try to explain this divergence in the context of the evolution of state-business relations in West Bengal (WB), a coastal state in Eastern India, and unique among Indian states not only by virtue of being ruled by an uninterrupted Leftist regime for the last thirty-two years, but also by having witnessed a turnaround of sorts in its outlook towards private capital within this period. We narrow down to the last thirty years thus, and concentrate on the manufacturing sector alone

The Policy and Performance
• Though industrially advanced at independence, two sets of central government policies - freight equalization for coal and steel and emphasis on import-substitution- dealt a heavy blow to Bengal’s industry.
• This was aggravated by the confrontationist strategy on part of the state followed since the beginning of Congress rule and carried on by the Left
Front Government (LFG) - which prevented it from lobbying pragmatically to obtain licenses and industrial investment.
• Further deterrents emerged in the form of a radical trade unionism backed by the Leftist intellectual support in the state.
• central government disinvestment in the infrastructure sector in the mid-
1960s, which badly hit WB’s engineering industry and precipitated largescale unemployment in formal manufacturing in the state.
• WB’s manufacturing firms tended to get locked in a low productivity- low wage segment of the spectrum of products dominated by the small firms largely in the informal sector. Consequently, informal manufacturing in the state emerged as an important sector.

• The expansion of informal manufacturing continued unabated during Left rule since 1977 mainly for two reasons .
• First, implementation of agrarian reforms followed by decentralization helped generate effective demand for non-agricultural goods produced mainly in the village manufacturing units in the informal sector.
• Second, as a result of prolonged neglect of basic infrastructure, large units gradually decelerated and the skilled workers employed therein opened shops in the neighbourhood, carrying on businesses either subcontracted - from medium and some large industries
– or independently, fuelling further growth of the informal sector.

70
The percentage share of the formal and informal manufacturing in WB,
1980-81 to 1994-95 (at 1993-94 prices)
60
50
20
10
40
30
0
19
80
-8
1
19
81
-8
2
19
82
-8
3
19
83
-8
4
19
84
-8
5
19
85
-8
6
19
86
-8
7
19
87
-8
8
19
88
-8
9
19
89
-9
0
19
90
-9
1
19
91
-9
2
19
92
-9
3
19
93
-9
4
19
94
-9
5
Formal
Informal

The Policy and Performance continues
• During the end of 1980s as a result of the decline in the traditional industries such as jute, cotton and engineering in WB, workers in large numbers were losing jobs.
• Alternative job prospects were bleak as no new industrial initiatives were emerging in the formal sector. Consequently, it was argued that the trade unions lost their strength; the number of strikes declined, the number of lockouts increased.
• At this juncture the already-liberalizing Indian economy took a more specific turn towards dismantling of the License Raj and opening up to the world market in a significant way.
• The ruling party and the government of WB could see the positive implications of these changes for buttressing the cause of industrialization in the state. This thinking was reinforced by the LFG’s realization of its increasing alienation from the urban voters, faced with growing unemployment. Under these circumstances the chambers of Commerce could convince the LFG to take up the cause of industrialization.

The New Industrial Policy, 1994-95
The Salient features of the new industrial policy of 1994-95
•
(a) Welcoming foreign technology and investment, as may be appropriate or mutually advantageous.
• (b) highlights the key role of the private sector in providing accelerated growth.
• In the context of the changes in the policies of the Government of India, the need for meeting the increased demand for power and the constraints on the budgetary resources, the State Government would also welcome private sector investment in power generation.
• (c) Along with the Public and Private sectors, the State Government looks upon the joint and assisted sectors as effective instruments for mobilizing necessary resources and expertise in important areas of economic activity.
• (d) Improvement and up-gradation of industrial infrastructure is indispensable for accelerated growth of industries.
• (e) Other areas are improvement in roads, communications and development of Growth Centres. These programmes would require massive investments in projects for the development of industrial infrastructure through the Government or through the private and joint sectors, wherever feasible.

The Performance
• A vulnerable workforce, as was claimed in the case of WB, generally creates favourable conditions in the economy for renewed investment prospects.
• Moreover, with the changes in the policy regime at the centre since early
1990s followed by changes proposed in the new industrial policy of the state, it was expected that there would be a boost in the investment scenario of the state.
• But a few changes apart, the trend of predominance of the unorganized sector continues over the years.
• Figure 2 shows that since the mid 1990s unorganized manufacturing, in fact, has been contributing almost as much as the organized sector and lately even more.
• Moreover, the rate of growth of organized manufacturing is consistently lower than that of unorganized manufacturing both in the post as well as in the pre new-industrial-policy regimes of the state. However, the magnitude of the growth rate in the organized manufacturing has increased in the second period.
• The relative decline of the organized sector in the case of WB becomes striking when we see how the state’s position deteriorates with respect to the country as a whole during the last three decades when only the organized factory sector is considered.

The percentage share of the formal and informal manufacturing in WB,
1980-81 to 2004-05 (at 1993-94 prices)
50
40
30
70
60
20
10
0
19
80
-8
1
19
82
-8
3
19
84
-8
5
19
86
-8
7
19
88
-8
9
19
90
-9
1
19
92
-9
3
19
94
-9
5
19
96
-9
7
19
98
-9
9
20
00
-0
1
20
02
-0
3
20
04
-0
5
Formal
Informal

Table 1: Trend rates of growth (per cent per annum) of some selected variables in
West Bengal manufacturing before and after the New Industrial Policy of the state in 1994-95
!980-81 to 1994-95 1995-96 to 2002-03
Variables
Employment
Net value added
Labour productivity
Wage rate
Wages to nva
- 2.02*(-6.30)
3.54* (3.88)
5.56* (7.37)
3.86* (12.66)
- 1.7* (-2.76)
- 7.19* (6.91)
- 5.53 (-1.95)
1.70 (0.87)
4.13* (10.17)
2.47 (1.15)
Source: ASI.
Note: * indicates statistical significance at 5 per cent level. t-values are given in the parentheses.

The research question
• In the employment front the importance of the unorganized sector also accentuates over the last three decades. In 2001 only around 13 percent of the workforce was engaged in organized manufacturing.
• The domination, and increasingly, by unorganized manufacturing in employment is not unique to WB. What is unique is the domination of unorganized over the organized sector in relation to output. This is surprising, given the notable changes in the attitudes of the state towards large industry since the early 1990s.
• A related study by Roychoudhuri et al in 2007, argues that the main reason for WB’s failure to attract large investment is poor infrastructure and related inability of the state to improve it over time
.
• Do labour productivity figures suggest further clues?

Figure 2: The levels of Labour productivity in the four states:
1980/81 to 2002/03
350000
300000
250000
200000
150000
100000
50000
0
19
80
-8
1
19
82
-8
3
19
84
-8
5
19
86
-8
7
19
88
-8
9
19
90
-9
1
19
92
-9
3
19
94
-9
5
19
96
-9
7
19
98
-9
9
20
00
-0
1
20
02
-0
3
Gujarat
TN
Maharash
WB

Figure 3: The levels of emolument rates in the four states: 1980/81 to 2002/03
120000
100000
80000
60000
40000
20000
0
19
80
-8
1
19
82
-8
3
19
84
-8
5
19
86
-8
7
19
88
-8
9
19
90
-9
1
19
92
-9
3
19
94
-9
5
19
96
-9
7
19
98
-9
9
20
00
-0
1
20
02
-0
3
Gujarat
TN
Maharash
WB

The Research question continues
• It is interesting that when the growth rate of productivity declines in the post- 1994-95 era, the wage rate actually increases.
• The rate of decline in the wage share to net value added shows an insignificant trend in the period after the new industrial policy regime.
• This is happening when there was a perceptibly sharp decline in the rate of growth of employment in the factory sector of manufacturing of negative order with the second period showing as low as (-) 7.19 percent per annum.
• We wonder to what extent the organized workforce in the state has been rendered vulnerable as claimed by others.
• We try to address these apparently contradictory trends along with the increasing emergence of the unorganized sector with the help of primary data.

• The physical infrastructure is still wanting particularly in the domains of power, water and, ports.
• In a densely-populated, highly fertile agrarian state like WB there is no clear and consistent thinking about a land bank to facilitate industry, which has momentous implications for the future of industrialization in the state.
• While the regulatory regime has been simplified to a great extent on paper, in practice its secret presence at lower levels of the bureaucracy frustrates the emergence of a benign relationship between state and business.
• In fact regulation hazards turned out to be a major reason behind small firms desiring to operate from the informal sector. Further, infrastructural inadequacy, particularly power shortage, is a major reason leading largescale units not to expand their capacity but farm out to the informal sector.

Figure 3: Time of starting business in different categories of firms
90
80
70
60
50
40
30
20
10
0
Large Medium Small Exp. Or.
Large
Exp. Or.
Medium
Exp. Or.
Small
Series1

Table 4: State regulations and the firm
Farm size
Separate employee for dealing with the governme nt
Percentage of senior management’s time spent for dealing with the government on an average per size group per year
2003-04
Frequency of inspection by the state govt. officials on an average per size group per year
2008-09 2003-04 2008-09
Large Firm I,
Firm J,
Firm K,
Firm H
Medium Firm A
Small
Not applicable
None of the small firms have a separate employee
Between 25 to 40
Between 30 to 45
Not applicabl e
1.2
Between
20 to 30
Between
30 to 45
1.5
Two to three visits
.75
1
Two to three visits

Findings
• Political interference continues to retard development of infrastructure in
WB as efforts at such upgradation are thwarted by infighting within and among political parties patronizing vested interests and seeking to ensure contracts for their own clients.
• Besides, the entire domain of policy-making and implementation has become complicated.
• Previously, the businesses had to negotiate with the government and vice versa.
• Presently, the businesses have to negotiate with the government, the party and also with the Opposition.
• The omnipresent phenomenon of the institution of ‘party’ seems to have encroached upon administrative spheres increasingly often paralyzing administration and incapacitating it for action.
• The increasing tension between formal governance and informal party control is affecting the credibility of the government .

Findings
•
Turning to the other dimension of the problem, our research prompts us to strongly suspect the apparently docile character of organized labour and their unions.
•
In the guise of cooperative behaviour, organized labour in the state is showing an extreme path dependency arising out of uncertainty in the prospect of future gains.
• True, the ‘ gherao ’ culture , which terrorised managers in the sixties and seventies, is no longer in evidence. Management in many firms confirm that militancy in the bargaining process reduced significantly as the patronage from the state leadership in favour of pressure tactics is now unavailable.
• However, the unions still bargain quite adamantly for higher wages , although not insistent on filling up vacancies or making the contract workers permanent.
•
Till the abolition of the licensing policies, the state and the ruling party were indifferent to the ground realities of industrial relations and improving work ethic at the shop floor. But in the changed scenario, the senior trade union leaders are seeking to improve the work ethic among permanent workers of the manufacturing units.
•
But the management feel that the permanent workers have got habituated not to work and work only on ‘overtime’ payment, which in Bengal, virtually means extra payment without extra hours of work.
• While senior leaders at the state level ask cadres and unit-level leaders to cooperate with the management at the shop floor, the workers resist passively. The management inform about the tremendous increase of absenteeism among permanent workers in recent years. Can the permanent workers, accustomed to wages without work, start working sincerely at the instance of the party whip?
Nowadays the management seldom have to encounter a written charter of demands; what they have to face is some kind of continuous indirect pressure, which is a serious deterrent to new investment in the state.

Large Firms
Table 4: Percentage of Contract/casual labour in the sample firms
Totally domestic market oriented
With some export share in their sales
Firms Percentage of contract labour
2005-06 2007-
08
Firm J: 15 percent export share
NA 51
Firms
Firm H
Percentage of contract labour
2005-
2006
NA
2007-
2008
40
59 Firm I NA 42 Firm K: 25 percent export share
47
91 Medium Firms Firm A: 40 percent export share
Firm E: 15 percent export share
85
Small Firms Firm B: 60 percent export share
Firm C: 65 percent export share
NA
98
Firm D: 65 percent export share
100
92
87
90
100
100
Firm L
Firm M
Firm F
Firm G
NA
NA
93
NA
42
46
95
90
Source: Field survey, conducted during December, 2008 and January, 2009 . Note: “NA” refers to not available. Only blue collar workers have been considered.

Table 5: Percentage share of production farmed out by the sample firms
Totally domestic market oriented
With some export share in their sales
Large
Firms
Mediu m Firms
Firms
Firm J: 15 percent export share
Firm K: 25 percent export share
Percentage of production farmed out
Firms Percentage of production farmed out
Around 25 Information not available
Around 20
Firm A: 40 percent export share
Around 60
Firm
H
I
Firm
Firm
L
Information not available
Between 10 to 15
Small
Firms
Firm E: 15 percent export share
Firm B: 60 percent export share
Firm C: 65 percent export share
Firm D: 65 percent export share
Information not available
Around 10
Does not farm out
Does not farm out
Source: Same as Table 4.
Firm
M
Firm
F
Firm
G
Does not reveal information
Does not farm out
Does not farm out

Table 6: Incidence of Trade Unionism in the Sample Firms
Firm type
Large export market oriented
No Union One dominant union More than one dominant union
Firm I: CITU
Firm J: CITU, INTUC
Firm K: Trinamul
Congress, CITU
Firm H: CITU,
Trinamul Congress
Large domestic market oriented
Medium export market oriented
Medium domestic market oriented
Small export market oriented
Small domestic market oriented
Firm A, Firm E
Firm B, Firm C, Firm
D
Firm G
Firm L: CITU
Firm F: Trinamul
Congress
Firm M: CITU,
Trinamool Congress
Source: Same as Table 4.

Findings
• Consequently management is weary of technology-intensive investments that can lead to human asset specificity and in turn costly haggling.
• We detect an implicit understanding between entrepreneurs, organized labour and their unions. It seems that the state has also played a passive role in this regard.
• This particular outcome has serious implications for the perpetuating informalization in the state.
• This is all the more due to easy availability of unorganized cheap labour and an old practice of farming out production to the small units in the state.
• Management informalize production in more than one way by employing contact workers and farming out production. Trade unions also recognize the fact that to retain power in a situation of decline, informalization to an extent is beneficial .
• On the one hand, they have succeeded in achieving higher wages even in the absence of corresponding productivity gains for a small group of insiders (permanent workers); on the other, they have been able to develop a typical patron-client relationship with the contract workers.

Concluding remarks
• Clearly the right institutions for creating a more enabling environment for organized industry do not seem to exist in the state.
• Not only do they not exist, but also their growth or emergence is frustrated by an overarching institution –the multi-layered party- which seems to widen its domain increasingly.
• While large firms do seem to confirm certain changes in operation, which may give the impression of WB being an investor-friendly destination, these changes are neither sufficient ( because vital problems like inadequacy of infrastructure and absence of work ethic remain) nor pervasive
( relatively small and medium scale firms feel discriminated against and unable to cope with bureaucratic hurdles).

Concluding
• Having been in power for so long the ruling party or its mass organs are no longer monolithic.
• There thus exists a multi-layered power structure in the state where each local unit of the party wields enormous power over the local people through ‘management of illegalities’ on the one hand and promotion of
‘clientelism’ on the other.
• The party has encroached upon every sphere thwarting smooth transactions. Even if the top leadership wants the cadres to change their behaviour, unless the cadres see the prospect of immediate gains, it is unlikely for them to behave in a ‘non-sticky’ fashion.
• Furthermore, when the LFG implemented its earlier programmes of land reforms and decentralization, howsoever successfully, the power structure within the party had not got fractured.
• The leadership at the top is at present not as united as it was during the earlier policy-implementation years. Intra-party and inter-party differences are surfacing increasingly and eroding both the strength of the government and the people’s perception about the government’s seriousness and ability to execute its own decisions. This is in contrast to China where not only is there no opposition, but also where there is unified party control over policy making. It is unlikely that the party cadres in WB would fail to note these dissensions and not use them to their advantage.