Book Review

Indian Big Business in the Nehruvian Period

Bernard D’Mello

Nasir Tyabji, Forging Capitalism in Nehru’s India: Neocolonialism and the State, c. 1940-1970 (New Delhi: Oxford University Press, 2015).

The potential of the industrial enterprises controlled by Indian businessmen, those who had already become wealthy through large-scale mercantile and financial pursuits in the colonial period, was marred by their obsessive preoccupation with short-term profit making. These businessmen had organised their conglomerate business activity in the form of managing agency firms that controlled a wide spectrum of enterprises, some of them structured as joint stock companies, in manufacturing, trade, indigenous banking, including the deployment of funds indirectly in usurious rural money-lending (and land transactions), and speculative finance in the stock, money, and commodity markets. It was highly profitable to route money from its urban banking/financing operations to rural money-lending, given the vast differential between the urban money market rate of interest and the rates of return from rural money-lending to peasants and rural artisans firmly in the grip of a network of moneylenders,1 commission agents, and merchants. Merchant, speculative-financial, and industrial capitals, so different from each other in terms of their ways of accumulation of wealth, came to be managed together by one managing agency firm. Given the relative importance assigned to trade, indigenous banking and speculative finance, the business group as a whole was certainly not representative of industrial capital, though the patriarch of the business empire came to be referred to as an industrialist.

The original accumulation of wealth of these “industrialists” came mainly from their involvement with the hundi (indigenous remittance, credit, and bill-of-exchange instruments) bazaar, the commodity markets, including the fatka (futures trading), and the arhat (indigenous commission agency system) form of wholesale trade, as also the international trade (exports and imports) associated with the imperial economies. In the inter-war period, the size of indigenous banking (in terms of short-term credit advances), the turnovers of the commodity markets, including futures trading, and of household industry exceeded the size of modern banking and the turnovers of the export-import trade and factory industry, respectively. The creation of an interlinked national financial and commodity trading network of money exchanges and produce markets connecting the local economies of the hinterland ultimately with the modern commercial banks, the international trading houses like Ralli and Volkart, and the ports owed much to the operations of the large-scale indigenous traders and financiers. It was their mercantile and financial capitals that integrated the commodity markets and the financial system on a nationwide basis. And, it was these businessmen who grabbed the hindmost in the black-marketing and speculation, and the swindling in government contracts during the two world wars.

A small part of the wealth amassed from their mercantile and financial operations had found its way into the cotton textile industry from the mid-nineteenth century onwards and later into industries like sugar in the 1930s, with the initiation of some Greenfield industrial ventures, but mainly through buying blocks of shares in existing industrial enterprises. The cotton, jute, and sugar mill “industrialists” were usually the very ones who were already the major players in the raw cotton, raw jute, and sugarcane trade, respectively. The wealthy traders and financiers who now had industrial enterprises in their business portfolios, however, didn’t even bother about allocations for depreciation, let alone accumulating reserves for technological modernisation. Instead, besides paying themselves high dividends and fat commissions to their managing agencies on the basis of the profits declared, they diverted a significant part of their industrial surpluses into speculative trade and finance. They also bought up British businesses in jute, engineering, and plantations whose expatriate managements were eager to disinvest around the time of Independence, for the Congress Party had assured them of a secure home market in the post-Independence period.

They were by then big businessmen, but were they really industrialists with enduring interests in technology and the labour process, at the core of surplus-value creating activity in industry? British colonialism had created the managing agency to serve as a crucial “institutional channel by which the commodity and capital markets in the city of London could exert direct influence on the Indian economy,” but this very institution was moulded by India’s big businessmen for company management that bypassed the interests of non-promoter shareholders and virtually gave a carte blanche to financial manipulation, made worse by the absence of effective regulatory mechanisms in company law to rein in the managing agencies (chapter 1).

Nasir Tyabji, the author of the book Forging Capitalism in Nehru's India, examines the role of the state in post-Independence India in the Nehruvian period in nurturing and turning Indian big businessmen into “entrepreneurs with a truly ‘industrial’ frame of mind.” At around Independence and in its immediate aftermath, the factory form “cloaked concentrations of merchant and usurer capital.” The so-called industrialists continued to allocate a significant part of their surpluses to the expansion of their speculative trading and financial pursuits, of course, alongside manufacturing. Tyabji emphasises that what the economic and business history scholar interested in understanding the evolution and development of industrial capitalism therefore has to focus on is “not the industrial enterprise itself but the organisation that actually held all operational control over it—the managing agency,” which also simultaneously controlled the big businessmen’s other enterprises, those in speculative trade and finance.

The book’s focus is thus on the development of industrial capitalism with the managing agency, not the industrial enterprise, at the centre of the analysis. The managing agency was a closely held firm, under which enterprises—some of which were joint stock companies—in industry, speculative trade and quick capital gains-seeking finance came under a single controlling authority. In fact, when the industrial enterprise was a joint stock company, the managing agency, although it controlled that enterprise’s management decisions, and took a huge commission, it refrained from assuming all the risk associated with the enterprise. The development of industrial capitalism required the evolution of businessmen from mercantile and financial speculators to industrialists. With access principally to the post-Independence papers of Jawaharlal Nehru, T T Krishnamachari, C Rajagopalachari, Kasturbhai Lalbhai, Pushottamdas Thakurdas, the Indian Merchants Chamber, and a few others, Tyabji throws considerable light on the conduct and behaviour of Indian big business in the Nehruvian period and on how some important functionaries in the executive of the Nehruvian state tried to make big businessmen behave as industrialists.

Tyabji holds that the famous Bombay Plan of 1944, associated with the names of Purshottamdas Thakurdas, J R D Tata, G D Birla, Shri Ram, Kasturbhai Lalbhai, and A D Shroff, recognized the fact of the “incomplete transition of a significant bloc of capital from its merchant/moneylending/ speculative origins to industrial capital proper,” and in this light looked at the role of the state and progressive sections of big business in “inculcating corporate responsibility” (chapter 2).

But this “social engineering” of big businessmen into industrialists got off to an uneasy start with Liaquat Ali Khan’s 1947 budget of the interim Congress-Muslim League government and the hostile response to it from Indian big business, especially from G D Birla himself and the Federation of Indian Chambers of Commerce and Industry (FICCI). The budget had placed emphasis on direct taxes on business profits and on capital gains, and even proposed ways of controlling financial speculation, and also came up with conducting of an investigation into the vast and rapid accumulations of wealth during the war years. The speculators, of course, were “not organizationally distinct from the industrialist.” The Congress leaders, who were known to be close to the main big businessmen, seemed to have struck a bargain with them, but the “Rajagopalachari-brokered compromise” was not acceptable to Liaquat Ali Khan. Even Nehru, who had supported Khan’s proposals in the pre-budget consultations, capitulated to big business. Tyabji however argues that one should not view the surrender to big business “in isolation from larger political events” centred on the Congress Party’s confirmation of the proposal of partition of Punjab and agreement on the principle of India’s partition (chapter 3). A major political party, the Muslim League, which had “shown itself capable of withstanding the pressure” of Indian big business, “vanished from the scene.”

Tax evasion was already a fine art; nothing came from the investigations of tax evasion, perhaps because the names of the alleged evaders included some of who’s who of Indian big business. The tax evaders included companies of the Birla and Tata groups, for example, the Birla owned Kesoram Cotton Mills, and the Tata-controlled Tata Iron and Steel Company Ltd, then the “single largest case of evasion in the entire history of Indian income tax evasion.” What, in general, the investigations brought to notice were the various methods employed to divert funds and evade taxes without leaving any evidence of resort to extralegal practices. It was difficult to trace financial transactions between interconnected companies managed by a common managing agency firm (chapter 4).

The managing agency was in control; the associated joint-stock companies were de facto merely its operating arms. In a large number of companies, the managing agency indulged in a “variety of corrupt practices.” Tyabji brings out the legal infirmities under which the government functioned in a case study of the Sholapur Mills, managed by the Bombay- based managing agency Morarji Gokuldas and Company, and then by Morarka and Company. The political forces within the Congress Party and powerful sections of Indian big business favouring the continuation of the managing agency system were formidable, with the latter funding the former. But the multinational corporations didn’t want the managing agency system of control of companies, even in their joint ventures with Indian big business (chapter 5). Even then, the managing agency system’s demise came only much later in 1969, the 1955 Avadi resolution of the Congress Party declaring its aim to usher in a “socialist pattern of society” notwithstanding.

Of course, the government was aware that financial manipulations by managing agencies controlling an interconnected (interlocked) group of companies were significantly affecting its tax revenue and duping the investing public. In the case of the Dalmia group, its merchant capital and speculative-financial capital arms, also under the control of its managing agency, conducted their parasitical operations in its joint-stock industrial enterprises. The other scandal was the Mundhra episode involving Haridas Mundhra’s penchant for share-market speculation involving large blocks of company shares to reap capital gains at a time when British businesses were selling out to Marwari businessmen.

When he was in serious trouble and needed to liquidate part of his holdings, the public-sector Life Insurance Corporation (LIC) was politically directed to purchase Mundhra’s shares, but their prices continued to fall, entailing significant capital losses for LIC. The then finance minister T T Krishnamachari, pressured by his cabinet colleagues, was complicit in LIC’s decision and ultimately had to resign. Of course, all this happened at a time when following the 1955 Avadi resolution, the Industrial Policy Resolution of 1956, the Second Five-Year Plan, and Krishnamachari’s 1957 union budget, a section of big business, dissatisfied with government policy, formed the Forum of Free Enterprise, and when foreign capital and the Birla “clan” allied with the Forum, big business was able to manoeuvre Krishnamachari’s exit. One of the main advocates of “social engineering” of those businessmen into industrialists was sidelined. From now on, private enterprise, Indian big business and the multinationals increasingly set the terms on which they would negotiate with the government.

Indeed, in the wake of a foreign exchange crisis in 1957, the US government came forward with considerable “development assistance” relative to the size of the Second Five-Year Plan, and the government then began to encourage more foreign direct investment (FDI) in the form of equity capital in joint ventures with Indian big business. More than the government’s role in “social engineering” “businessmen” into “industrialists” that Tyabji considers essential for successful industrial development, I would look at the reality of capitalist development as one wherein large business groups realise the imperative to have their fingers in the pies of trade, finance, and production in their respective drives to gain monopolistic advantage, and, in this single-mindedness, they seek and compete among themselves for state-political backing.

The “neocolonialism” in the sub-title of the book is misleading. The book has little to do with neo-colonialism. As I understand it, a neo-colony is formally sovereign, but in reality it is politically, economically, diplomatically and militarily dependent on a single imperialist power. The book has very little, if any, to do with this. But it does succeed in throwing considerable light on the conduct and behaviour of Indian big business in the Nehruvian period.


1 The mahajan in the village drew on the moneylender in the town, who, in turn, was creditworthy enough to be accommodated with funds from the big indigenous bankers.

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