socio-economic issues of india

International Journal of

Social EconomicsSpecial Issue on India: Parts 1 and 2Guest Editor: Ananda Das Gupta

Volume 34 Numbers 9 and 10 2007

ISSN 0306-8293

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Access this journal online _________________________ 575

Editorial advisory board __________________________ 576

Ethics and values in Indian economy and businessP. Kanagasabapathi ____________________________________________ 577

Financial development, trade and growth triangle:the case of IndiaSalih Turan Katircioglu, Neslihan Kahyalar and Hasret Benar _________ 586

Economic size and performance of dispersed andclustered small scale enterprises in India: recentevidence and implicationsM.R. Narayana ________________________________________________ 599

Empirical analysis of the relationship between totalconsumption-GDP ratio and per capita income fordifferent metals: the cases of Brazil, China andIndiaAntonio Focacci _______________________________________________ 612


Social Economics

Special Issue on India: Part 1

Guest EditorAnanda Das Gupta

ISSN 0306-8293

Volume 34Number 92007

CONTENTS

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Social responsibility in India towards global compactapproachAruna Das Gupta ______________________________________________ 637

Critical evaluation of growth strategies: India andChinaParikshit K. Basu ______________________________________________ 664

Enhancing competitiveness of India Inc.: creatinglinkages between organizational and nationalcompetitivenessSanjib K. Dutta________________________________________________ 679

CONTENTScontinued

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International Journal of SocialEconomicsVol. 34 No. 9, 2007p. 576# Emerald Group Publishing Limited0306-8293

EDITORIAL ADVISORY BOARD

Dr James AlveyMassey University, New Zealand

Dr Josef BaratMinister of Transportation, Sao Paulo, Brazil

Professor Y.S. BrennerDepartment of Economics, University of Utrecht,The Netherlands

Professor Tan Chwee-huatFaculty of Business Administration, NationalUniversity of Singapore

Dr Floreal H. ForniCentro de Estudios e Investigaciones Laborales delCONICET, Buenos Aires, Argentina

Professor Patrick McNuttPatrick McNutt & Associates, Dublin and VisitingFellow, Manchester Business School, UK

Dr Daniel O’NeilDepartment of Political Science, The University ofArizona, USA

Professor Doktor Manfred PrischingKarl-Franzens-University, Graz, Austria

Professor Stylianos A. SarantidesUniversity of Piraeus, Greece

Professor K.K. SeoCollege of Business Administration, University ofHawaii at Manoa

Professor Udo E. SimonisWZB Science Centre, Berlin, Germany

Professor Clem TisdellUniversity of Queensland, Australia

Dr Matti VirenUniversity of Turku, Finland

Professor Jimmy WeinblattDepartment of Economics, Ben Gurion University,Israel

Professor Zhang WenxianFudan University, Shanghai, China

Professor Laszlo ZsolnaiDirector, Business Ethics Centre, BudapestUniversity of Economic Sciences, Hungary

Ethics and values in Indianeconomy and business

P. KanagasabapathiTamil Nadu Institute of Urban Studies, Coimbatore, India

Abstract

Purpose – This paper seeks to give an idea about the role of ethics and values in the Indian economyand business in ancient times and the changed nature of these factors in the contemporary period.

Design/methodology/approach – Books and writings from ancient times are used for discussionsrelated to the earlier periods. Studies by the author and other scholars are used to analyze thecontemporary situation.

Findings – Ethics and values have guided the Indian economy and business since ancient times. Withthe large-scale destruction of the native systems in the eighteenth century, and the failure to recognizeand revive them after independence, ethics and noble values ceased to guide the economic and businesssystems. At the local business and society levels, higher human qualities such as help, faith-basedbusiness transactions and basic norms are present even today, especially at the non-corporate level.

Research limitations/implications – This paper does not discuss different aspects of ethics andvalues in detail. For contemporary times, it takes up only a few higher human values such as help,faith and broad-based norms in business promotion and transactions.

Practical implications – It highlights the contribution of higher human values such as help, faithand unwritten norms to the business and economy of contemporary India.

Originality/value – It presents that, even in contemporary times, higher values such as help,goodwill and faith-based transactions help in the economic and business development of India.

Keywords Ethics, India, Economics, Business environment, History

Paper type Research paper

Ancient India’s emphasis on creation of wealthIndia is an ancient nation. A wrong notion prevails that ancient India was concerned onlywith spiritual pursuits and that the attention given to economic activities was insufficient.But this is not borne out by facts. Archaeological evidences, observations and writingsindicate India as a prosperous and highly performing economy, with people engaged indiverse productive activities. One could see scriptures and books from different parts ofthe country emphasizing the significance of creating wealth. Arthashastra, considered tobe the oldest book on economics in the world, and written about 2300 years ago, said: “Theroot of wealth is economic activity and lack of it brings material distress. In the absence offruitful economic activity, both current prosperity and future growth are in danger ofdestruction” (1.19.35,36).Thirukkural, written by the Tamil sageThiruvalluvar more than2300 ago, went to the extent of compelling people to earn wealth. (Couplet 759) It alsounderscored that a country should have enormous wealth (Couplet 732).

Business historian Agarwala (2001) has noted that India was actively participatingin the international trade since ancient times as a significant trading nation. Maddison(2003) shows that India’s share of world GDP was almost one third during 0 CE, andIndia maintained her economic leadership for more than 16 centuries subsequently.The prosperity of India seems to have continued almost till the end of the eighteenthcentury.

The current issue and full text archive of this journal is available at


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International Journal of SocialEconomics

Vol. 34 No. 9, 2007pp. 577-585

q Emerald Group Publishing Limited0306-8293

DOI 10.1108/03068290710778606

Ethics and values as the basis of all economic activitiesThe Thirukkural pointed out that a disease free situation, wealth, fertile lands, happylife and proper protection are the five jewels to a country (Couplet 738). The sages,saints and books constantly reminded the society to follow ethical principles in all theiractivities. The rulers were advised to ensure that different activities were conductedethically. Hence, one could notice a higher ideal in all the economic activities of theancient society which continued almost till the beginning of the nineteenth century. Letus take for example, agriculture. Taking the case of Chengalpattu region in the State ofTamil Nadu in the mid-eighteenth century, Bajaj (2001) points out that the farmerscultivated rice achieving world class production and productivity. But the objective ofthe society was not just higher levels of production and highest levels of productivity.The ultimate aim of the society was to make food available to all. Hence, sharing offood was part of life in the society. Bajaj explains the noble practice of sharingof agricultural produce in the following lines. To quote:

. . . striking feature of the Chengalpattu information is the extensive sharing of the producethat was practised then. The sharing arrangements of the Chengalpattu society coveredalmost every institution and every household of the region.

While sharing food, the concern of the ancient Indians was not only the human beings,but all the living beings. See further:

On looking at India of classical times, we find an extraordinary emphasis on production andsharing of food. The classical texts unanimously insist that abundance of productionand sharing is the essential condition of Dharma. For classical India, a state or a societytolerating the hunger of even a single individual commits an unthinkable sin. This disciplineof taking care of the hunger of all encompasses not only human beings, but also animals,birds, insects and, in fact, all aspects of nature (Bajaj, 2001).

It is important to take note of two points here. One is that the abundant production andsharing of food was insisted as the essential condition of Dharma, the noble ideal thatgoverns human life in India. The next point is the emphasis on sharing of produce, andthe discipline of taking care of not only human beings, but also animals, birds andinsects. The rulers in those days saw to it that those who traversed through their landswere provided with good food and staying arrangements. In this connection it is worthreading the extracts of the letter written by the Sarfojee Maharaja (King) of Thanjavurin Tamil Nadu in 1801, on the arrangements made for food in the rest houses fortravelers:

All travellers . . . pilgrims of every description . . . are fed with boiled rice; those who do notchoose to eat the boiled rice receive it unboiled with spices, etc. These distributions continuetill midnight when a bell is rung and proclamation made requiring all those who have notbeen fed to appear and take the rice prepared for them (Bajaj and Srinivas, 2001).

Inculcation of ethics and values through teachings and booksEven while encouraging wealth creation, the ancient Indian society emphasized ethicsand higher principles. The texts and literature exhorted people to follow higherprinciples, while earning wealth and doing business. They cautioned people to avoidmaking wealth through wrongful methods. Ancient India emphasized the significanceof earning wealth through proper methods in all possible ways, through texts,

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teachings of the sages and common sayings in the local languages. Thiruvalluvar hadallotted a separate chapter in his classic, entitled “means of wealth.” Thirukkural said:“For those who earn wealth through right means, virtue and happiness follow”(Couplet 754). It advised that one should avoid using wealth earned without humanconsiderations and unfair methods (Couplet 755).

The Jainese texts advised their community men “to follow truthful and peacefulmeans of earning wealth.” Jain (2001) notes:

A large number of traders in western India during the eleventh – thirteenth centuries wereJainas. They were exhorted by their teachers and preachers to follow truthful and peacefulmeans of earning wealth. Jinesvara Suri (eleventh century), in his Satsthanakaprakarana,dilates upon the code of conduct which a merchant was expected to follow. He advises that amerchant should neither weigh less nor charge more. He should deliver the goods of the samequality as seen and approved by the customer, and should never indulge in adulteration.

Fair practices were advocated as basic principles of trading. Arthasastra noted thefollowing among the principles of fair trading:

. Both locally produced and imported gods shall be sold for the benefit of thepublic (2.16.5).

. When there is an excess supply of a commodity, a buffer stock shall be built upby paying a price higher than the prevailing market price. When the market pricereaches the support level, the buying price shall be changed according to thesituation (2.16.2, 3).

. When there is a glut in a commodity, its sale shall be canalized (through statecontrolled outlets) and merchants shall sell only from the accumulated stock,until it is exhausted, on a daily wage basis with no profit margin for them(4.2.33-35).

. Surplus stocks unaccounted for in the hands of merchants shall be sold for thebenefit of the public (4.2.26,27).

. Even a large profit shall be foregone if it is likely to cause harm to the public(2.16.6).

. No artificial scarcity shall be created by accumulation of commodities constantlyin demand; these shall (be made available at all times and) not be subjected torestrictions when they may be sold (2.16.7).

Role of the societyEthical principles and higher values were taught and basic norms were advocated inthe society. The society at different levels functioned as self-regulatory organizationsand involved itself to maintain the basic norms. For example, the villagers wereinvolved to take care of the merchandise of the traveling merchants so that trade couldcontinue without disturbances. Arthasastra noted:

Traders may stay inside villages after letting the village officers know of the value of theirmerchandise. If any of these is lost or driven away, the village headman shall recompense thetrader, provided that these had not been [deliberately] sent out at night (4.13.7, 8).

Evidences show that there were arrangements in the society to take care of all thetravelers, including those with merchandise. Well-defined systems were in place to see

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that those who traveled were not allowed to suffer any expenses, including the carriageof their merchandise.

While explaining the condition of India under the native rulers, Naoroji (1966)reproduced materials from different sources to explain the responsibilities of the stateand the society with regards travelers in Bengal. To quote:

The traveller, either with or without merchandise, becomes the immediate care of theGovernment, which allots him guards, without any expense, to conduct him from stage tostage; and these are accountable for the safety and accommodation of his person and effects.At the end of the first stage he is delivered over, with certain benevolent formalities, to theguards of the next, who, after interrogating the traveller as to the usage he had received in hisjourney, dismissed the first guard with a written certificate of their behaviour and a receiptfor the traveler and his effects, which certificate and receipt are returnable to the commandingofficer of the first stage, who registers the same and regularly reports it to the Rajah. In thisform the traveller is passed through the country; and if he only passes he is not suffered to beat any expense for food, accommodation, or carriage for his merchandise or baggage; but it isotherwise if he is permitted to make any residence in one place above three days, unlessoccasioned by sickness, or any unavoidable accident. If anything is lost in this district, Forinstance, a bag of money or other valuables, the person who finds it hangs it on the next tree,and gives notice to the nearest chowkey, or place of guard; the officer of which ordersimmediate publication of the same by beat of tomtom, or drum.

Role of the governmentThe governments enforced a fair system and intervened to maintain basic principles.It required the traders and businessmen to follow fair practices in the interests of thesociety at large. Any misuse or exploitation by the merchants and traders wasconsidered seriously punishable. The government officials intervened in the marketwhenever it was considered necessary in the larger interests of the society:

The testimony of Megasthenes, corroborated by the Arthashastra, shows that in Mauryantimes prices were regulated by market officials. The latter text suggests that, as a furthereffort at maintaining a just price, government officers should buy on the open market whenany staple commodity was cheap and plentiful, and release stocks from government storeswhen it was in short supply, thus bringing down the price and making a profit for the kindinto the bargain (Basham, 2001).

Thus, it could be seen that moral, social and state mechanisms were used to see thateconomics and business worked in the overall interests of the society.

World wide appreciation of the fair business practices and characterof IndiansWe could see different scholars and visitors from outside repeatedly emphasizing thehigher human qualities that prevailed among people. Basham had recorded his feelingsof appreciation for these qualities through the following words:

India was a cheerful land, who’s people, each finding a niche in a complex and slowlyevolving social system, reached a higher level of kindliness and gentleness in their mutualrelationships than any other nation of antiquity.

The higher human qualities extended beyond personal relationships to the society atlarge. Basham had underlined this aspect when he wrote:

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. . . our overall impression is that in no other part of the ancient world were the relations ofman and man, and of man and the state, so fair and humane. In no other early civilizationwere slaves so few in number, and in no other ancient law book are their rights so wellprotected as in the ‘Arthasastra’. . . To us the most striking feature of ancient Indiancivilization is its humanity.

Evidences indicate that a fair and humanitarian approach guided the lives of people inall their activities, including those related to economics and businesses.

The conduct of Indians in activities related to business and trade seems to be highlyfair. Quoting sources, Jain (2001) shows us as to how the foreign merchants preferred todo business with Indians mainly due to their character, helpful tendencies andvalue-based business practices. Writing in the context of western India, Jain writes:

The character and conduct of traders in western India generally receive high acclaim fromforeign travellers. Al Idrisi tells us that a large number of Muslim merchants visitedNahrwara (Anahilavada) because the people of the town were “noteworthy for theirexcellence of their justice, for keeping up their contracts, and for the beauty of their character”and adds that the people of the region practiced truth and abhorred falsehood. Marco Polobestows yet more generous praise on the merchants of Lata, whom by a curious mistake hecalls Abraiaman or brahmanas. He says, “you must know that these Abraiaman are the bestmerchants in the world, and the most truthful, for they would not tell a lie for anything onearth,” and “if a foreign merchant who does not know the ways of the country applies to themand entrust his goods to him, they will take charge of these, and sell them in the most loyalmanner, seeking zealously the profit of the foreigner and asking no commission except whathe pleases to bestow. These observations of the foreign travellers may reflect the generalethos of the mercantile community in western India.”

Decline of the economy and the native mechanismsThe Indian economy suffered serious setbacks since the eighteenth century. Though thedecline had started in the earlier centuries with invasions and the consequent problems,the overall arrangements within the society suffered on a large-scale mostly from theeighteenth century. Native systems and practices, especially at the administrative levels,were replaced with newer systems due to the colonial rule and the subsequent changes inthe approach of the rulers. Looking at the situation, Mahatma Gandhi was compelled tonote: “The foreign system, under which India is governed today, has reduced Indiato pauperism and emasculation. We have lost self-confidence” (Will Durant, 1930).Ethical principles ceased to govern the different aspects of life due to the collapse of theeconomy and changes in the structure and attitudes of the state.

When India got the freedom to frame her policies in 1947, the ruling sections optedfor the western administrative and economic systems. As a result the native Indiansystems that guided the destiny of this ancient nation could not become the pillars ofthe modern structure. Subsequently, both the socialistic and the market capitalisticapproaches have neglected the higher ethical orientations of the native Indian systems.As Korten (1998) has noted both the neo-Marxian as well as neoclassical economistshave advanced experiments that did not have a clear vision. Korten writes:“Both advanced social experiments on a massive scale that embodied a partial vision ofsociety, with disastrous consequences.”

In the ancient system, villages were “little republics” with codes of conduct and normsand systems. But the modern state took away most of their authority and legitimacy.

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In the present circumstances, a system could be implemented only through the statemechanism as the native systems have been largely ignored and defaced; butunfortunately the state is also losing its influence in the market driven scenario. Theinfluence of the society has become weak in the face of the powerful markets. So the localsocieties cannot do much even when they prefer ethical modes of functioning, as thecollective decision making and control lies elsewhere. In a different context, Soros (2004)noted:

Communism abolished the market mechanism and imposed collective control over alleconomic activities. Market fundamentalism seeks to abolish collective decision making andto impose the supremacy of market values over all political and social values. Both extremesare wrong. What we need is a correct balance between politics and markets, between rulemaking and playing by the rules.

As a result there is no legitimate and authoritative system at different levels toadvocate and enforce the ethical codes and practices. In the largely centralized set up,the local societies have no legal rights to enforce ethical practices. After theintroduction of the policies of globalization, more unethical practices have been allowedinto the system in the name of free trade. Modern economic theories emphasize profitsleaving ethics, and money ignoring morals. The ancient economic principles no longerguide the affairs of the state administration. This is the sad state of affairs in the nationthat emphasized economics through ethics. India was the nation that showed the worldthat a country be prosperous even while following ethical principles. India’s economicsuperiority in the earlier centuries was achieved through her own efforts, withoutexploiting other nations at any time in the course of her long history. It was throughsuperior products, quality services and fair practices. The noted Gandhian economistKumarappa (1997) had earlier noted that Indian civilization could survive so longbecause it was built on the principles of altruism and non-violence.

Failure of the stateIn this situation, it is important to understand that the state has failed to recognize theethical orientations of India during the last three centuries or so. Most of the people attheir family and local society levels try to follow ethical principles, extend help andmaintain basic norms. Even today the close knit communities mostly follow a higherdiscipline among themselves in different activities, including economics and business.With regard to the relationships among businessmen, one could observe the prevalenceof certain basic norms and healthy practices in different places across the country evenin the present times. Human values such as help and trust are widely prevalent indifferent places. As a result faith and goodwill-based transactions are common acrossthe country. These higher human values help the economy and businesses grow faster,as the transactions costs get reduced and businesses move faster. Moreover, there arechances for many of the disputes getting settled at the local levels. One could alsonotice practices based on noble ideals in different business centers.

Higher values in contemporary business transactionsStudies conducted in different centers dominated by small and medium enterprises,including the industrial and business clusters, show the existence of basicnorms, value-based practices and faith-based transactions in varying degrees.

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From time immemorial, Indian culture advised people to treat even strangers as theirrelatives. As a result different sections of people from a wide variety of backgroundslive in the society, with mutual respect towards each other. Hence, a higher sense offraternity exists in the whole society. Industrial and business clusters and centersbeing places with known faces having regular interactions, relationships becomealmost natural and easy. In such an atmosphere most of the transactions tend to takeplace on the basis of faith.

Faith-based transactions find an important place in all businesses, includingthe high-risk finance. In a study of the non-corporate finance sector in Karur, thewell-known textile export centre of Tamil Nadu, it was found that almost the entirefinancial transactions revolved around goodwill and faith (Kanagasabapathi, 2002).In fact, the loans were given only on the recommendations of relatives, friends andbusiness contacts. It was interesting to note that about two thirds of the estimatedfinancial requirements of Karur were met through the local financing mechanisms,though there were more than adequate banking facilities. It was learnt that businessmenpreferred to go through the relationship-based mechanisms rather than the institutionalones. In such a system, the parties would be conscious as any breach of faith would bringa bad name and consequently continuing in business would involve serious difficulties.

It was also observed that the helping tendency enabled the entrepreneurs andbusinessmen to mobilize funds easily. This can be understood when we notice that thebusinesses mobilize most of the funds required through their own and personalsources. In different parts of Gujarat, when people wanted to promote a business, thelocal community and the village helped the entrepreneurs by contributing whateverwas possible. The entrepreneurs returned the funds after one or two years. These fundswere given without any documents, mainly with the intention of helping their “ownmen.” A study of diamond exporters in Gujarat revealed that 46 percent of theexporters received more than 30 percent of their initial funds from their relatives (Pateland Kanagasabapathi, 2004).

Many times the helping tendency extends beyond family relationships to others inthe locality. World Development Report 2001 noted that close community relationshipshave enabled businessmen from the textile export of Tirupur to mobilize funds easilythrough their networks at cheaper costs. It is common to see businessmen helping theirex-employees in their new ventures through financial and business support. Such helpgoes beyond the narrow relationships and extends to all sections of people, includingthose from the lower strata of the society. Kanagasabapathi and Arun Kumar (2005)observed that the truck owners of the Sankagiri transport cluster in Tamil Nadu havehelped a person from the lower strata to become a truck owner, by giving necessaryfunds and providing him with a guarantee for purchasing the truck.

Most of the industrial and business centers follow higher norms that are strictlyfollowed irrespective of personal or societal relationships. While writing on the Kanpursaddlery cluster, Dwivedi (2003) writes:

Norms function in the cluster irrespective of the personal relationship that entrepreneurshave with each other and have an implication in providing stability to the entire cluster.We reported earlier that there are no legal contracts held among businessmen in this cluster.This practice seems to be based on normative behavior rather than a matter of havingpersonal experience with the other party. Even in case of new ties, a contract is not demandedbecause it is simply not considered a way to do business.

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As far as the corporate sector is concerned, only the listed companies that constituteless than 1 percent of the total companies is known outside, and about a few hundredamong them is highly visible. This part of the corporate sector is subject to highinfluence of the western theories, practices and even value systems. This sector ishighly competitive and to an extent impersonal. Even here, the higher societal norms,disrespect in the local community and the overall value systems stop people fromventuring far beyond the limits many of the times. As for the smaller companies, muchof their culture is localized in nature, though the operations and outlook extend beyondtheir boundaries. Hence, they generally reflect the overall value systems of the localsocieties. There are many instances of value-based initiatives at different places.For example, a company in Coimbatore gives additional salary for all the employeeswho keep their parents with them; for those who keep their parents-in-law, the benefitis still high.

ConclusionThe ancient Indian system emphasized ethical principles in all walks of life, includingeconomics and business. The society and the state saw to it that the activities were runon the basis of higher principles of life. The native systems and practices underwent adrastic change from the eighteenth century. The modern State of Independent Indiafailed to understand the ethical orientations of the ancient Indian economy and business.As a result the time honored principles and practices were not given the prime positionthat they commanded earlier. During the recent decades, the market ideology has furtherworsened the situation. So the present situation cannot be strictly compared with theancient systems. The major strength of India is the influence of the age old Indian cultureand ethos. At the family level people try to follow higher values. Even at the businesslevels, generally businessmen try to maintain basic norms among themselves. Onlywhen they deal with outsiders, especially in the cosmopolitan surroundings, are therefailures on the part of businessmen as the state or societal mechanisms have not beenconducive. Studies of business practices in different industrial and business centersshow the prevalence of higher human values and unwritten norms in the contemporaryIndian business systems, especially at the non-corporate sector levels. So the situation isnot as bad as one generally assumes, though India has come a long way from her originalmoorings. It seems the cultural undercurrents at the family and local levels are strong,even though it may not be easily visible to the naked eyes.

References

Agarwala, P.N. (2001), AComprehensive History of Business in India – from 3000 BC to 2000AD,Tata McGraw-Hill, New Delhi.

Bajaj, J. (Ed.) (2001), Food for All, Centre for Policy Studies, Chennai.

Bajaj, J. and Srinivas, M.D. (2001), Timeless India Resurgent India, Centre for Policy Studies,Chennai.

Basham, A.L. (2001), The Wonder that was India, Rupa and Co., New Delhi.

Durant, W. (1930), The Case for India, Simon and Schuster, New York, NY.

Dwivedi, M. (2003), “Nature of trust in small firm clusters: a case study of Kanpur Saddlerycluster”, paper presented at the Conference on Clusters, Industrial Districts and Firms:The Challenge of Globalisation, Modena.

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Jain, V.K. (2001), “Trading community and merchant corporations”, in Chakravarty, R. (Ed.),Trade in Early India, Oxford University Press, New Delhi, pp. 344-69.

Kanagasabapathi, P. (2002), A Study on the Unorganized Finance Sector in India, SwadeshiAcademic Council, Coimbatore.

Kanagasabapathi, P. and Arun Kumar, M.N. (2005), “A study on Sankagiri transport industryand Thiruchengode rig industry”, unpublished report, PSG Institute of Management,Coimbatore.

Korten, D.C. (1998), When Corporations Rule the World, The Other India Press, Goa.

Kumarappa, J.C. (1997), Economy of Permanence, Sarva Seva Sangh Prakashan, Rajghat,Varanasi.

Maddison, A. (2003), The World Economy – A Millennial Perspective, Overseas Press (India)Private Limited, New Delhi.

Naoroji, D. (1966), Poverty and Un-British Rule in India, Ministry of Information andBroadcasting, Government of India, New Delhi.

Patel, S. and Kanagasabapathi, P. (2004), “A study of diamond exporters in Gujarat”,unpublished report, PSG Institute of Management, Coimbatore.

Soros, G. (2004), Open Society – (Reforming Global Capitalism), Viva Books Private Limited,New Delhi.

Further reading

Rangarajan, L.N. (1992), Kautilya – The Arthashastra, Penguin Books India (P) Ltd, New Delhi.

Swadeshi Academic Council (2003), A Study on Gujarat Kite Industry, Swadeshi AcademicCouncil, Coimbatore.

Thiruvalluvar (2002), Thirukkural alongwith the Explanations of Dr Mu.Varadarasanar,The South India Saiva Siddhanda Works Publishing Society, Chennai.

World Bank (2001), World Development Report, World Bank, Washington, DC.

About the authorP. Kanagasabapathi is a Professor at the PSG Institute of Management, PSG College ofTechnology, Coimbatore – 641 004, India. He earned his PhD as a UGC Research Fellow, wasassociated with the capital markets for a brief period, and had headed a Cooperative Bank as itsPresident. He has been involved in studying the functioning Indian systems through empiricaland research works in different centers across the country for more than ten years, and has justcompleted a work on the Indian economic, business and management models. His areas ofinterest include the Indian models, family and community base of economic and businesssystems, culture and ethics. P. Kanagasabapathi can be contacted at: [email protected]

Ethics andvalues

585

To purchase reprints of this article please e-mail: [email protected] visit our web site for further details: www.emeraldinsight.com/reprints

Financial development, tradeand growth triangle: the case

of IndiaSalih Turan Katircioglu

Department of Banking and Finance, Eastern Mediterranean University,Famagusta, Turkey, and

Neslihan Kahyalar and Hasret BenarDepartment of Economics, Eastern Mediterranean University,

Famagusta, Turkey

Abstract

Purpose – This paper aims to investigate the possible co-integration and the direction of causalitybetween financial development, international trade and economic growth in India.

Design/methodology/approach – Annual data covering the 1965-2004 period have been used toinvestigate co-integration and Granger causality tests between financial development, internationaltrade, and growth after employing unit root tests to see if the variables under consideration are stationary.

Findings – Results reveal that there is a long-run equilibrium relationship between financialdevelopment, international trade and real income growth in the case of India. Furthermore, unidirectionalcausality was investigated that runs from real income to exports and imports, from exports to imports,M2 and domestic credits, from M2 to imports, from imports to domestic credits. Bidirectional causalityhas also been obtained between real income and M2, and between real income and domestic credits.Finally, no direction of causality has been obtained between M2 and domestic credits.

Research limitations/implications – Expanded data can be used for further comparison.

Practical implications – This study has shown that the supply-leading and the demand-followinghypotheses cannot be inferred for the Indian economy alone themselves. And furthermore, theexport-led and the import-led hypotheses again cannot be inferred for the Indian economy based on thesample period, 1965-2004.

Originality/value – This study is the first of its kind which investigates the possible co-integration andthe direction of causality between the financial development, international trade and economic growthtriangle not only in the case of India but also in the relevant literature to the best of one’s knowledge.

Keywords Financial management, Trade, Economic growth, India


1. IntroductionThe fundamental question in the relevant empirical literature is: does financialdevelopment or trade causes economic growth or is financial development or increasein trade an engine of growth for an economy? One crucial factor that has begun toreceive considerable attention more recently is the role of financial market and bankingsector in the development of growth process. The nexus between economic growth andfinancial development has been conducted on number of divergent lines. After theextensive studies in this field, it is now well recognized that financial development is acrucial factor for economic growth (Calderon and Liu, 2003) as it is a necessarycondition for achieving a high rate of economic growth (Chang, 2002) and has a strong



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586

International Journal of SocialEconomicsVol. 34 No. 9, 2007pp. 586-598q Emerald Group Publishing Limited0306-8293DOI 10.1108/03068290710778615

positive relationship with economic growth (Mazur and Alexander, 2001). However,De Gregorio and Guidotti (1995) point out that financial development significantlyreduces economic growth for countries (especially in Latin America) experiencingrelatively high-inflation rates.

Although, the direction of causality between financial development and economicgrowth is in attention of the researchers in the relevant literature, this causalrelationship generally remains unclear (Calderon and Liu, 2003). Patrick (1966)developed two hypotheses testing the possible directions of causality between financialdevelopment and economic growth, that is, the supply-leading hypothesis, where itposits a causal relationship from financial development to economic growth, and thedemand-following hypothesis, where it postulates a causal relationship from economicgrowth to financial development. In the empirical literature, McKinnon (1973), Kingand Levine (1993), Neusser and Kugler (1998) and Levine et al. (2000) support thesupply-leading hypothesis while Gurley and Shaw (1967), Goldsmith (1969) and Jung(1986) support the demand-following hypothesis.

Empirical studies of the trade-led growth (TLG) hypothesis fail to produceconclusive findings (Giles and Williams, 1999; Deme, 2002). The new trade theory hascontributed to the theoretical relationship between exports and growth regardingeffects on technical efficiency (Doyle, 2001). Rivera-Batiz and Romer (1991) show thatexpansion of international trade increases growth by increasing the number ofspecialized production inputs. However, this outcome is ambiguous when there isimperfect competition and increasing returns to scale (Doyle, 2001). Krugman (1979),Dixit and Norman (1980) and Lancaster (1980) show economies of scale as a majorcause of international trade, hinting the validity of the growth-led exports hypothesis.Some empirical studies in the literature confirmed the TLG hypothesis for somecountries whereas some others rejected it for some other countries (Deme, 2002). Onthe other hand, some studies in the growth literature support the ELG hypothesis whilesome others investigate the import-led growth (ILG) hypothesis (Deme, 2002).

Recent empirical literature has also revisited the link between financialdevelopment and trade openness. These two factors are identified as macroeconomicvariables as being highly correlated with economic growth performance acrosscountries in the empirical growth literature (Beck, 2002). The other empirical studies inthe literature also searched the channels based on the relationship between financialdevelopment and trade openness affecting economic growth. Kletzer and Bardhan(1987) incorporates financial sector into the Heckscher-Ohlin trade model and showthat financial sector development gives countries a comparative advantage inindustries that rely more on external financing. Additionally, Baldwin (1989) points outthat financial markets are a source of comparative advantage. A number of researchersand economists argued that the development of the financial sector follows rather thanleads the development of the real sector due to the fact that the specialization ofcountries in particular industries would create a demand for a well-developed financialsector (Beck, 2002).

This paper firstly, examines the possible co-integrating link between financialdevelopment, international trade and economic growth; and secondly, tests the directionof causality between these three variables based on the supply-leading, thedemand-following and trade-led hypotheses for the Indian economy. The findings ofthe study might give interesting conclusions for the literature for three reasons:

Financialdevelopment,

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587

(1) the direction of causality between financial development, trade and economicgrowth nexus needs further investigation;

(2) the relationship between financial development, international trade andeconomic growth triangle needs further attention; and

(3) to the best of authors’ knowledge this study is the first of its kind made for theIndian economy.

The remainder of this paper is organized as follows. Section 2 reviews literature reviewin the field. Section 3 describes data and methodology, respectively. Section 4 discussesthe findings. Finally, Section 5 provides concluding remarks.

2. Empirical literature review from IndiaDuring the 1980 s trade and financial liberalization has been initiated in India. Capitalinflows increased in forms of foreign direct investment (FDI). Indian economy attractedforeign investors by providing them a proper situation and financial liberalization thatpositively affected Indian economy. However, possible negative side effects of thefinancial liberalization should not be ignored.

It is notable that there are also studies searching the relationship between economicgrowth and financial sector development in India. Agarwal (2000) examined thefinancial sector reforms in India and indicated that it is important to consider thevulnerability of Indian economy to financial crises due to high current account deficits,high fiscal deficits and slow growth of exports. The study by Bhattacharya andSivasubramanian (2003) investigated the causal relationship between financialdevelopment and economic growth in India using causality analysis. They found thatfor the period 1970-1999 financial sector development as measured by M3/GDP leads toGDP growth. The study by Demetriades and Luitel (1996) investigate the relationshipbetween financial development, economic growth and banking sector controls in India.They find that there is bi-directional causation between financial development andeconomic growth of India. They also points out that policies that affect financialdevelopment, also affect economic growth, and financial sector policies affect financialdeepening by altering the bank behavior.

On the other hand, Topalova (2004) investigated the impact of trade liberalizationon firm’s productivity in India, which found that trade liberalization (especially tariffreduction) increases the productivity among firms. This study also claimed thatproductivity and profitability of firms might lead to economic welfare improvementwith more intensive privatization efforts in India. The study by Bajpai (2001) showsthat there was potential growth of 7-8 percent per year in India because of structuralchanges in industrial, financial areas and trade such as the reduction in protectionlevels, decontrol of prices, and continuing reforms in banking sector. Sachs et al. (2002)indicate that the coastal regions such as Tamil Nadu, Maharashtra and Gujarat takethe advantage of export-led growth because of geographical economic performance inIndia. The key step was through increased exports to coastal regions and greatlyimproved productivity for local production. The study by Bajpai (2002) points outthat with the initiation of economic reforms in India in 1991, the role of privateinvestment has acquired a great deal of significance. State-level data on FDI approvalssuggest that the relatively fast growing states have attracted higher levels of FDI.

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3. Data and methodology3.1 DataData used in this paper for the Indian economy are annual figures covering the period1965-2004. The variables of the study are measured as follows: real gross domesticproduct (GDP) at 1995 constant US$ prices (lnGDP), the first financial developmentmeasure[1] is the ratio of broad money (M2) to nominal GDP, namely; lnM2 and thesecond financial development measure is the ratio of domestic credit to nominal GDP;namely; lnDC. There are many studies in the literature which uses the proxy for tradeopenness as the ratio of trade of goods and services including exports and importsrelative to GDP. And there also many studies which uses exports and importsseparately to consider individual effects. This study will use real exports of goods andservices (lnEXP) and real imports of goods and services (lnMP) where both are at 1995constant US$ prices to capture individual relationships with other variables of thestudy. All of the variables in the study are at their natural logarithm. Data weregathered from World Bank database for World Development Indicators (World Bank,2005).

3.2 MethodologyThe Augmented Dickey-Fuller (ADF) and Phillips-Perron (PP)[2] unit root tests areemployed to test the integration level and the possible co-integration among thevariables (Dickey and Fuller, 1981; Phillips and Perron, 1988). The PP procedures,which compute a residual variance that is robust to auto-correlation, are applied to testfor unit roots as an alternative to ADF unit root test.

Unless the researcher knows the actual data generating process, there is a questionconcerning whether it is most appropriate to include constant term and trend factor inthe unit root process (Enders, 1995). It might seem reasonable to test the existence of aunit root in the series using the most general of the models. That is:

Dyt ¼ a0 þ gyt21 þ a2t þXp

i¼2

bjDyt2i21þ [t ð1Þ

where y is the series; t ¼ time (trend factor); a ¼ constant term (drift); 1t ¼ Gaussianwhite noise and p ¼ the lag order. The number of lags “p” in the dependentvariable was chosen by the Akaike Information Criteria (AIC) to ensure that the errorsare white noise. One problem with the presence of the additional estimated parametersis that it reduces degrees of freedom and the power of the test.

On the other hand, the researcher may fail to reject the null hypothesis of a unit root(g ¼ 0) because of a misspecification concerning the deterministic part of the regression.Therefore, Doldado et al. (1990) also suggest starting from the most general model to testfor a unit root when the form of the data generating process is unknown. The generalprinciple is to choose a specification that is a plausible description of the data under boththe null and alternative hypotheses (Hamilton, 1994). If the intercept or time trend isinappropriately omitted, the power of the test can go to zero (Campbell and Perron,1991). “Reduced power means that the researcher will conclude that the process containsa unit root when, in fact, none is present” (Enders, 1995, p. 255). A linear combination ofintegrated variables are said to be co-integrated if the variables are stationary. Manyeconomic models entail such co-integrating relationships (Enders, 1995).


trade and growth

589

After the order of integration is determined, co-integration between the variablesshould be tested to identify any long run relationship. Johansen trace test is used forthe co-integration test in this paper. Cheung and Lai (1993) mention that the trace test ismore robust than the maximum eigen value test for co-integration. The Johansen tracetest attempts to determine the number of co-integrating vectors among variables.There should be at least one co-integrating vector for a possible co-integration. TheJohansen (1988) and Johansen and Juselius (1990) approach allows the estimating of allpossible co-integrating vectors between the set of variables and it is the most reliabletest to avoid the problems which stems from Engle and Granger (1987) procedure[3].This procedure can be expressed in the following VAR model:

Xt ¼ P1Xt21 þ · · · þPKXt2K þ mþ et ðfor t ¼ 1; . . . ;TÞ ð2Þ

Where Xt, Xt21,. . .,Xt2K are vectors of current and lagged values of P variables whichare I(1) in the model;P1,. . .,PK are matrices of coefficients with (PXP) dimensions; m isan intercept vector[4]; and et is a vector of random errors. The number of lagged values,in practice, is determined in such a way that error terms are not significantlyautocorrelated. The rank of P is the number of co-integrating relationship(s) (i.e. r)which is determined by testing whether its Eigen values (li) are statistically differentfrom zero. Johansen (1988) and Johansen and Juselius (1990) propose that using theEigen values of P ordered from the largest to the smallest is for computation of tracestatistics[5]. The trace statistic (ltrace) is computed by the following formula[6]:

ltrace ¼ 2TX

Lnð1 2 liÞ; i ¼ r þ 1; . . . ; n2 1 ð3Þ

and the hypotheses are:

H0 : r ¼ 0 H1 : r $ 1

H0 : r # 1 H1 : r $ 2

H0 : r # 2 H1 : r $ 3

The finding that many macro time series may contain a unit root has spurred thedevelopment of the theory of non-stationary time series analysis. Empirical studieshave shown that the existence of non-stationarity in the time series considered canlead to spurious regression results and invalidate the conclusions reached usingGranger causality. Toda and Phillips (1993) have led the methods to deal withGranger causality in I (1) systems of variables. A causal long run relationshipbetween non-stationary time series when they are co-integrated could be inferred.Therefore, if co-integration analysis is omitted, causality tests present evidence ofsimultaneous correlations rather than causal relations between variables. The presenceof a co-integrating relation forms the basis of the vector error correction (VEC)specification. Additionally, standard Granger or Sims tests may provide invalid causalinformation due to the omission of error correction terms from the tests (Doyle, 2001).

The simple Granger’s causality test becomes inappropriate when co-integratingvectors are obtained in the series. According to Granger’s representation theorem, theresults of co-integration imply that X and Y have the following error-correctionrepresentations in equations (4) and (5). These are necessary to augment the simple

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590

Granger causality test with the error correction mechanism (ECM), derived from theresiduals of the appropriate co-integration relationship to test for causality:

DlnY t ¼ C0 þXk

i¼1

biD lnYt2i þXk

i¼1

aiD lnXt2i þ piECTt21 þ ut ð4Þ

DlnXt ¼ C0 þXk

i¼1

giDlnXt2i þXk

i¼1

6iDlnYt2i þ hiECTt21 þ 1t ð5Þ

where Y and X are the variables under consideration, and ri is the adjustmentcoefficient while ECTt21 expresses the error correction term of growth equation,D indicates first difference operator. In equation (4), X Granger causes Y if ai and ri aresignificantly different from zero. In equation (5), Y Granger causes X if 6i and hi aresignificantly different from zero. F-statistic is used to test the joint null hypothesis ofai, 6i ¼ 0, and t test is employed to estimate the significance of the error coefficient.

3. ResultsTable I gives ADF and PP test results for unit root, which prove that all the variablesare integrated of order one; that is I (1). This indicates that the first differences oflnGDP, lnM2, lnDC, lnEXP and lnIMP are stationary in the Indian case for this sampleperiod.

Statistics lnGDP Lag lnM2 Lag lnDC Lag lnExp Lag lnImp Lag

LevelstT (ADF) 21.48 (0) 22.55 (1) 22.01 (3) 21.38 (0) 21.58 (0)tm (ADF) 1.93 (0) 20.51 (1) 21.12 (1) 0.45 (0) 1.15 (0)t (ADF) 10.42 (0) 2.46 (1) 1.78 (1) 6.07 (0) 3.85 (0)tT (PP) 21.18 (4) 22.09 (2) 21.29 (3) 21.50 (7) 20.61 (22)tm (PP) 4.09 (7) 0.25 (0) 21.04 (3) 1.66 (38) 4.99 (34)t (PP) 11.16 (1) 4.69 (0) 1.98 (4) 12.77 (38) 4.99 (24)First differencetT (ADF) 25.34 * (3) 24.31 * (1) 24.21 * (0) 27.98 * (0) 26.34 * (0)tm (ADF) 26.92 * (0) 24.44 * (1) 24.22 * (0) 27.53 * (0) 25.66 * (0)t (ADF) 20.60 (2) 22.87 * (0) 22.56 * * (1) 20.52 (3) 22.64 * (1)tT (PP) 28.85 * (6) 23.72 * * (4) 24.17 * * (2) 28.83 * (12) 27.76 * (12)tm (PP) 26.90 * (1) 23.82 * * (4) 24.20 * (2) 27.37 * (5) 25.64 * (5)t (PP) 22.09 * * (4) 22.85 * (1) 23.69 * (3) 24.62 * (2) 24.51 * (1)

Notes: tT represents the most general model with a drift and trend; tm is the model with a drift andwithout trend; t is the most restricted model without a drift and trend. Numbers in brackets are laglengths used in ADF test (as determined by AIC set to maximum 3) to remove serial correlation in theresiduals. When using PP test, numbers in brackets represent Newey-West bandwith (as determinedby Bartlett-Kernel). *, * * and * * * denote rejection of the null hypothesis at the 1,5 and 10 percentlevels, respectively. GDP stands for gross domestic product, M2 stands for money and quasi money aspercent of GDP, and DC stands for domestic credit provided by banking sector as percent of GDP, Expstands for exports of goods and services and Imp stands for imports of goods and services. Tests forunit roots have been carried out in E-VIEWS 5.1

Table I.ADF and PP tests for unit

root


trade and growth

591

Having established the necessary conditions for the stationarity of data underinspection, we conduct Johansen‘s co-integration test (Johansen, 1988; Johansen andJuselius, 1990), which is very sensitive to the choice of lag length (Chang, 2002), toexplore any possible long run relationship among the variables under consideration.We employ both Akaike and Schwartz Criteria to select the number of lags in theco-integration test where the two criteria suggest a VAR model with 1 lag. The resultsshowing number of co-integrating vectors are reported in Table II that presents onlythe trace test results as suggested by Cheung and Lai (1993)[7]. Johansen test resultsshow that every pair in Table II is co-integrated with each other. This means that longrun equilibrium relationship exists between these pairs. It is also useful to mention thatmore than one co-integrating vector has been obtained between lnGDP and lnEXP,lnGDP and lnIMP, and lnM2 and lnIMP whereas other pair of the variables areco-integrated with at most one co-integrating vector.

Variables Trace statistic Critical value (5 percent) Critical value (1 percent)

(1) lnGDP and M2H0: r ¼ 0 29.01 * 15.41 20.04H0: r # 1 1.93 3.76 6.65(2) lnGDP and lnDCH0: r ¼ 0 26.69 * 15.41 20.04H0: r # 1 2.02 3.76 6.65(3) lnGDP and lnEXPH0: r ¼ 0 29.49 * 15.41 20.04H0: r # 1 6.79 * 3.76 6.65(4) lnGDP and lnIMPH0: r ¼ 0 22.53 * 15.41 20.04H0: r # 1 4.24 * * 3.76 6.65(5) lnM2 and lnDCH0: r ¼ 0 15.55 * * 15.41 20.04H0: r # 1 0.78 3.76 6.65(6) lnM2 and lnEXPH0: r ¼ 0 19.02 * * 15.41 20.04H0: r #1 2.10 3.76 6.65(7) lnM2 and lnIMPH0: r ¼ 0 10.16 15.41 20.04H0: r #1 4.13 * * 3.76 6.65(8) lnDC and lnEXPH0: r ¼ 0 23.69 * 15.41 20.04H0: r # 1 1.84 3.76 6.65(9) lnDC and lnIMPH0: r ¼ 0 17.19 * * 15.41 20.04H0: r #1 3.01 3.76 6.65(10) lnEXP and lnIMPH0: r ¼ 0 18.89 * * 15.41 20.04H0: r #1 2.03 3.76 6.65

Notes: r denotes the number of co-integrating vectors; Akaike Information Criterion (AIC) andSchwartz Criteria (SC) were used to select the number of lags required in the co-integration test. Bothgave the same level of lag order

Table II.Co-integration tests usingthe Johansen (1988) andJohansen and Juselius(1990) approach

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592

Since, co-integration relationship is found between the variables under inspection, anECM model should be constructed to determine the direction of the causality. Granger(1988) mentions that there should be at least one direction of causality among thevariables if they are co-integrated. The causality model is expressed as an errorcorrection model as in Equations (4) and (5) since the variables are co-integrated.

Table III reports the F-statistics and t-statistics for error correction term constructedunder the null hypothesis of non-causality. Rejection of the null hypothesis implies thatthe corresponding variable Granger-Causes the dependent variable. The Grangercausality test results Table III suggest that unidirectional causality runs from GDP toexports, from GDP to imports, from exports to M2, from M2 to imports, from exports todomestic credits, from imports to domestic credits, and from exports to imports.Bi-directional causality has also been obtained between GDP and M2, and betweenGDP and domestic credits. Finally, no direction of causality has been obtained betweenM2 and domestic credits.

If these results are to be summarized, the supply-leading, the demand-following,export-led and import-led hypotheses cannot be inferred about the Indian economybased on VECM analysis. But it is important to note that a change in exports andimports leads to a change in domestic credits. Furthermore, a change in exports leadsto a change in M2 and imports, where a change in M2 leads to a change in imports inIndia.

5. ConclusionThis study has investigated possible co-integration and the direction of causalitybetween financial development, international trade and economic growth in Indiausing annual data that covers the period 1965-2004. Results reveal that there is longrun equilibrium relationship between financial development, international tradeand real income growth in the case of India. Granger causality tests show that growthin real income leads to growth in international trade sector, namely exports andimports. Thus, there is unidirectional causation that runs from real income growth tointernational trade growth. On the other hand, bidirectional causality has beenobtained between real income growth and financial development measures, namely M2and domestic credits. This is similar to the findings of Demetriades and Luitel (1996)that they also investigated bidirectional causality between financial development andeconomic growth in India. However, Bhattacharya and Sivasubramanian (2003) hasfound that by using M3 as financial sector development measure there wasunidirectional causality that runs from financial development to real GDP growth.Furthermore, this study shows that exports of India leads to a change in financialdevelopment (both M2 and domestic credits) in India. But in the case of imports, thereis uni-directional causality that runs from M2 to imports and from imports to domesticcredits.

If results are to be summarized, findings of this study have shown that thesupply-leading and the demand-following hypotheses cannot be inferred for the Indianeconomy alone themselves. And furthermore, the export-led and the import-ledhypotheses cannot again be inferred for the Indian economy based on the sampleperiod, 1965-2004. But it is important to note that Sachs et al. (2002) have investigatedexport-led growth hypothesis for India based on regional analysis in major coastalregions.


trade and growth

593

Lag

1L

ag2

Lag

3

Nu

llh

yp

oth

esis

F-s

tati

stic

t-st

atis

tic

onE

CM

t21

F-s

tati

stic

t-st

atis

tic

onE

CM

t21

F-s

tati

stic

t-st

atis

tic

onE

CM

t21

Con

clu

sion

(1)

lnG

DP

and

lnM

2M

2d

oes

not

Gra

ng

erca

use

GD

P2.

81*

**

22.

33*

*1.

722

2.43

**

1.80

**

*2

2.89

*G

DP

,M

2G

DP

doe

sn

otG

ran

ger

cau

seM

214

.29

*2

2.74

*6.

53*

22.

34*

*4.

23*

21.

88*

**

(2)

lnG

DP

and

lnD

CD

Cd

oes

not

Gra

ng

erca

use

GD

P3.

35*

*2

2.15

**

1.92

21.

94*

**

1.60

22.

03*

**

GD

P,

DC

GD

Pd

oes

not

Gra

ng

erca

use

DC

4.17

**

21.

80*

**

2.83

**

22.

42*

*1.

98*

**

22.

36*

*

(3)

lnG

DP

and

lnE

XP

EX

Pd

oes

not

Gra

ng

erca

use

GD

P1.

271.

330.

701.

530.

521.

59G

DP

)E

XP

GD

Pd

oes

not

Gra

ng

erca

use

EX

P2.

74*

**

22.

35*

*1.

752

2.46

**

1.85

**

*2

2.59

**

(4)

lnG

DP

and

lnIM

PIM

Pd

oes

not

Gra

ng

erca

use

GD

P0.

200.

420.

391.

080.

802.

10G

DP

)IM

PG

DP

doe

sn

otG

ran

ger

cau

seIM

P7.

60*

24.

55*

3.21

**

23.

38*

1.81

**

*2

2.07

**

(5)

lnM

2an

dln

DC

DC

doe

sn

otG

ran

ger

cau

seM

22.

86*

**

0.94

2.11

**

*1.

451.

721.

11M

2d

oes

not

Gra

ng

erca

use

DC

2.35

**

*2

1.49

1.93

22.

15*

*1.

472

2.16

**

M2...

DC

(6)

lnM

2an

dln

EX

PE

XP

doe

sn

otG

ran

ger

cau

seM

27.

44*

23.

00*

3.13

**

22.

14*

*3.

16*

22.

91*

EX

P)

M2

M2

doe

sn

otG

ran

ger

cau

seE

XP

0.44

0.95

0.91

1.51

1.94

2.75

(7)

lnM

2an

dln

IMP

(continued

)

Table III.Granger causality tests

IJSE34,9

594

Lag

1L

ag2

Lag

3

Nu

llh

yp

oth

esis

F-s

tati

stic

t-st

atis

tic

onE

CM

t21

F-s

tati

stic

t-st

atis

tic

onE

CM

t21

F-s

tati

stic

t-st

atis

tic

onE

CM

t21

Con

clu

sion

IMP

doe

sn

otG

ran

ger

cau

seM

22.

90*

**

20.

812.

02*

**

21.

58*

**

2.41

**

0.00

M2

)IM

PM

2d

oes

not

Gra

ng

erca

use

IMP

3.21

22.

29*

*1.

602

1.77

**

1.70

22.

25*

*

(8)

lnD

Can

dln

EX

PE

XP

doe

sn

otG

ran

ger

cau

seD

C2.

93*

**

21.

67*

**

2.07

**

*2

2.27

**

2.23

**

22.

80*

EX

P)

DC

DC

doe

sn

otG

ran

ger

cau

seE

XP

1.81

1.47

1.35

1.28

3.80

*3.

27(9

)ln

DC

and

lnIM

PIM

Pd

oes

not

Gra

ng

erca

use

DC

1.87

21.

092.

50*

*2

2.25

**

2.55

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Table III.


trade and growth

595

Notes

1. The definition of financial development, which is the improvement in quantity, quality, andefficiency of financial intermediary services cannot be captured by a single measure, thus,two common measures are advised in the literature (Calderon and Liu, 2003).

2. PP approach allows for the presence of unknown forms of autocorrelation with a structuralbreak in the time series and conditional heteroscedasticity in the error term.

3. Kremers et al. (1992) and Gonzalo (1994) for the comments about disadvantages of Engle andGranger (1987) procedure compared with Johansen and Juselius (1990) co-integrationtechnique.

4. m is a vector of I(0) variables which represent dummy variables as well. This ensures thaterrors et are white noise.

5. Asymptotic critical values are obtained from Osterwald-Lenum (1992).

6. At the beginning of the procedure, we test the null hypothesis that there are noco-integrating vectors. If it can be rejected, the alternative hypothesis (i.e. r # 1, . . . r # n)are to be tested sequentially. If r ¼ 0 cannot be rejected in the first place, then there is noco-integrating relationship between the variables, and the procedure stops.

7. Cheung and Lai (1993) show that trace test are much more robust than max eigen value teststatistics regarding to skewness and excess kurtosis in the residuals. Therefore, tracestatistic was preferred in this study.

References

Agarwal, R.N. (2000), Global Financial Integration and Vulnerability to Crisis in DevelopingCountries: A Study of Indian Economy, Institute of Economic Growth, University Enclave,Delhi.

Bajpai, N. (2001) in Bajpai, N. (Ed.), Sustaining High Rates Of Economic Growth in India, CIDWorking Paper No. 65, Center for International Development, Harvard University,Cambridge, MA.

Bajpai, N. (2002), A Decade of Economic Reforms in India: The Unfinished Agenda, CID WorkingPaper No. 89, Center for International Development, Harvard University, Cambridge, MA.

Baldwin, R.E. (1989), “Exporting the capital markets: comparative advantage and capital marketimperfections”, in Audretsch, D. (Ed.), The Convergence of International and DomesticMarkets, Chapter 5, North-Holland Press, New York, NY.

Beck, T. (2002), “Financial development and international trade: is there a link?”, Journal ofInternational Economics, Vol. 57, pp. 107-31.

Bhattacharya, P.C. and Sivasubramanian, M.N. (2003), “Financial development and economicgrowth in India: 1970-1971 to 1998-1999”, Applied Financial Economics, Vol. 13, pp. 925-9.

Calderon, C. and Liu, L. (2003), “The direction of causality between financial development andeconomic growth”, Journal of Development Economics, Vol. 72, pp. 321-34.

Campbell, J.Y. and Perron, P. (1991), “Pitfalls and opportunities: what macroeconomists shouldknow about unit roots”, Technical Working Paper, 100, NBER Working Paper Series,April.

Chang, T. (2002), “Financial development and economic growth in Mainland China: a note ontesting demand-following or supply-leading hypothesis”, Applied Economic Letters, Vol. 9,pp. 869-73.

Cheung, Y. and Lai, K. (1993), “Finite-sample sizes of Johansen’s likelihood ratio tests forco-integration”, Oxford Bulletin of Economics and Statistics, Vol. 55, pp. 313-28.

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De Gregorio, J. and Guidotti, P. (1995), “Financial development and economic growth”, WorldDevelopment, Vol. 23, pp. 433-48.

Deme, M. (2002), “An examination of the trade-led growth hypothesis in Nigeria: a cointegration,causality, and impulse response analysis”, The Journal of Developing Areas, Vol. 36 No. 1,pp. 1-15.

Demetriades, P. and Luitel, K.B. (1996), “Financial development, economic growth and bankingsector controls: evidence from India”, Economic Journal, Vol. 106 No. 435, pp. 359-74.

Dickey, D. and Fuller, W.A. (1981), “Likelihood ratio statistics for autoregressive time series witha unit root”, Econometrica, Vol. 49, pp. 1057-72.

Dixit, A. and Norman, V. (1980), Theory of International Trade, Cambridge University Press,Cambridge.

Doldado, J., Jenkinson, T. and Sosvilla-Rivero, S. (1990), “Cointegration and unit roots”, Journal ofEconomic Surveys, Vol. 4, pp. 249-73.

Doyle, E. (2001), “Export-output causality and the role of exports in Irish growth: 1950-1997”,International Economic Journal, Vol. 2 No. 15, pp. 147-61.

Enders, W. (1995), Applied Econometric Time Series, Wiley, New York, NY.

Engle, R.F. and Granger, C.W.J. (1987), “Co-integration and error correction: representation,estimation, and testing”, Econometrica, Vol. 55, pp. 251-76.

Giles, J.A. and Williams, C.L. (1999), “Export-led growth: a survey of the empirical literature andsome non-causality results”, Econometrics Working Paper, EWP9901, Department ofEconomics, University of Victoria, Victoria.

Goldsmith, R.W. (1969), Financial Structure and Development, Yale University Press, NewHaven, CT.

Gonzalo, J. (1994), “Five alternative methods of estimating long-run equilibrium relationships”,Journal of Econometrics, Vol. 60, pp. 203-33.

Granger, C.W.J. (1988), “Some recent developments in a concept of causality”, Journal ofEconometrics, Vol. 39, pp. 199-211.

Gurley, J. and Shaw, E. (1967), “Financial structure and economic development”, EconomicDevelopment and Cultural Change, Vol. 34, pp. 333-46.

Hamilton, J.D. (1994), Time Series Analysis, Princeton University Press, Princeton, NJ.

Johansen, S. (1988), “Statistical analysis of co-integration vectors”, Journal of Economic Dynamicsand Control, Vol. 12, pp. 231-54.

Johansen, S. and Juselius, K. (1990), “Maximum likelihood estimation and inference onco-integration with application to the demand for money”, Oxford Bulletin of Economicsand Statistics, Vol. 52, pp. 169-209.

Jung, W.S. (1986), “Financial development and economic growth: international evidence”,Economic Development and Cultural Change, Vol. 34, pp. 336-46.

King, R.G. and Levine, R. (1993), “Finance and growth: Schumpeter might be right”, QuarterlyJournal of Economics, Vol. 108, pp. 717-38.

Kletzer, K. and Bardhan, P. (1987), “Credit markets and patterns of international trade”, Journalof Development Economics, Vol. 27, pp. 57-70.

Kremers, J.M., Erisccos, N.R. and Dolado, J.J. (1992), “The power of co-integration tests”, OxfordBulletin of Economics and Statistics, Vol. 54, pp. 325-46.

Krugman, P. (1979), “A model of balance of payments crises”, Journal of Money, Credit andBanking, Vol. 11 No. 3, pp. 11-25.


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Lancaster, K. (1980), “Intra-industry trade under perfect monopolistic competition”, Journal ofInternational Economics, Vol. 10, pp. 151-75.

Levine, R., Loayza, N. and Beck, T. (2000), “Financial intermediation and growth: causalityanalysis and causes”, Journal of Monetary Economics, Vol. 46, pp. 31-77.

McKinnon, R.I. (1973), Money and Capital in Economic Development, Brookings Institution,Washington, DC.

Mazur, E.A. and Alexander, W.R.J. (2001), “Financial sector development and economic growthin New Zealand”, Applied Economic Letters, Vol. 8, pp. 545-9.

Neusser, K. and Kugler, M. (1998), “Manufacturing growth and financial development: evidencefrom OECD countries”, Review of Economics and Statistics, Vol. 80, pp. 638-46.

Osterwald-Lenum, M. (1992), “A note with quantiles of the asymptotic distribution of the MLco-integration rank tests statistics”, Oxford Bulletin of Economic and Statistics, Vol. 54,pp. 461-72.

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Phillips, P.C.B. and Perron, P. (1988), “Testing for a unit root in time series regression”,Biometrica, Vol. 75, pp. 335-46.

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Toda, H.Y. and Phillips, P.C.B. (1993), “Vector autoregression and causality”, Econometrica,Vol. 61, pp. 1367-93.

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Corresponding authorSalih Turan Katircioglu can be contacted at: [email protected]

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598


Economic size and performanceof dispersed and clustered small

scale enterprises in IndiaRecent evidence and implications

M.R. NarayanaCentre for Economic Studies and Policy,

Institute for Social and Economic Change, Bangalore, India

Abstract

Purpose – The purpose of this study is the empirical measurement and analysis of economic size andperformance of dispersed and clustered small-scale enterprises (SSEs) in India.

Design/methodology/approach – Methodology is descriptive and comparative, using acombination of different official databases. Economic size is measured by distribution of SSEs byemployment, output, fixed capital investment, and export variables. Measurement of economicperformance is focused on output/capital ratio, output/labour ratio, and labour/capital ratio.

Findings – The results offer evidence for economic diversity in the size compositions andperformance variations of dispersed and clustered SSEs; and bigger economic size and highereconomic performance of clustered than dispersed SSEs.

Research limitations/implications – Subject to the comparability of economic structure, theresults and implications for India are of relevance for promotion and development of clustered SSEs inother developing countries.

Practical implications – From the viewpoint of policy formulation, the results offer a strongempirical basis for a cluster approach rather than a dispersed approach for promotion anddevelopment of SSEs in India. The cluster approach has implications for establishing linkagesbetween formal and informal SSEs and for elimination of smallness of dispersed SSEs.

Originality/value – The paper provides a comparative analysis of economic size and performance ofthe dispersed and clustered SSEs by consolidating the diverse databases in India.

Keywords Small enterprises, Cluster analysis, Economic growth


1. IntroductionIndia’s small-scale enterprises (SSEs) are developed in the private sector and compriseboth manufacturing and service-oriented units: small scale industries (SSIs), ancillaryundertakings (AUs), tiny units (TUs) export-oriented enterprises (EOEs), women



This paper is substantially modified and extended version of a paper, presented for the JointWorkshop on evolving areas of research on topics of current relevance, jointly organised by theIndian Council of Social Science Research (New Delhi) and World Institute of DevelopmentEconomic Research (Helsinki) in New Delhi 31 January-1 February 2004. Grateful thanks are dueto Professors V.R. Panchamukhi, Gopal K. Kadekodi, L.S. Bhat, and other participants of theWorkshop for constructive suggestions; and Sri Amir Subhani (Joint DevelopmentCommissioner, Ministry of Small Scale Industries, and Government of India) for sharing withuseful policy documents and data. However, usual disclaimers apply.

Economic sizeand performance

of SSEs

599


Vol. 34 No. 9, 2007pp. 599-611


DOI 10.1108/03068290710778624

enterprises (WEs), and small-scale service business-oriented (industry-related)enterprises (SSSBOEs)[1]. For the regulatory, protective and promotional policies(except for excise duty concessions, however), these enterprises are defined by theoriginal value of investment on plant and machinery. As on 31 March 2005,the investment limit is equal to Rs.10 million for SSIs, ancillary, EOEs and WEs andRs.2.5 million for TUs[2]. Further, the investment limit is accompanied by additionalcriteria for defining AUs (i.e. 50 percent of output should be for other undertakings),EOUs (i.e. 30 percent of output is exported) and WEs (i.e. 51 percent of equity holdingby women)[3]. The investment limit for SSSBOEs is equal to Rs.1 million[4].

India’s SSEs have grown in both dispersed and clustered environments. DispersedSSEs have been supported and developed by deliberate policy interventions with theobjectives of both growth and equity. Growth objectives are evident in terms ofproduction (or increase in output); employment (or generation of productiveemployment); investment (or higher capital formation); exports for earning foreignexchange; and resource utilisation by exploitation of local resources. Equity objectivesare underlined in terms of broader ownership, management, and financing of economicdevelopment through sectoral and spatial decentralization of economic activities andsocial participation.

In contrast, and in general, clustered SSEs have been developed naturally or withoutpolicy inducement[5]. The importance and advantages of clusters for industrialdevelopment of SSEs is recognized, for instance, by the Report of the Expert Committeeon Small Enterprises (Government of India, 1997, p. 137) in following terms:

The proximity of a web of businesses lowers the unit cost of infrastructure, leads to accretionof skills and is a source of informational economies. From an institutional point of view, thecosts of monitoring and promotion are lowered since news spreads faster in a regionalcontext. The consequent low transaction costs stimulate a virtuous circle of growth.

Available studies on India’s SSEs have a separate analysis for growth and patterns ofSSEs by dispersed and clustered approaches. This is evident in Government of India’s(2003a) consolidated list of 150 studies during 1990-2002[6]; and in the excellent andcomprehensive global surveys on industrial clusters by Nadvi and Schmitz (1998)and Schmitz and Nadvi (1999)[7]. However, a comparative study on India’sclustered and dispersed SSEs, as being attempted in this paper, can be an additionto the current understanding of the working of SSEs in different economicenvironments and for suggesting plausible policy interventions.

The main objective of this paper to analyse the economic size and performance ofdispersed and clustered SSEs, as it would provide with empirical evidence on theircomparative growth patterns. This evidence is useful to design for an appropriatepolicy strategy for current and future development of SSEs by a choice between, or acombination of both, dispersed and clustered approaches[8]. Subject to thecomparability of economic structure, these analyses and evidence are of policyrelevance for promotion and development of SSEs in other developing countries.

The rest of the paper is organised as follows. Section 2 presents the secondarydatabases and indicators of current economic status and size of dispersed and clusteredSSEs. Section 3 compares the economic performance of dispersed and clustered SSEs.The main conclusions and policy implications are summarised in Section 4.

IJSE34,9

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2. Current status and economic sizeThe current status and economic size of dispersed and clustered SSEs are described byavailable data in published form. The sources, techniques of collection, characteristics,and limitations of the recent data at the national level are summarised in Table I.Unlike for dispersed SSEs, database are multiple and diversified for clustered SSEs.Thus, a combination of database is essential to single out the unique status andeconomic size of clustered SSEs[9]. Dispersed SSEs are distinguished by registered(i.e. with the Directorate of Industries and Commerce of a State Government) andunregistered SSEs[10]. Registration is a necessary condition to avail benefits under thepublic policies and programme for SSEs. However, registration is voluntary.According to the Third All India Census of SSIs 2001-2002 (Government of India, 2004),the reasons for non-registration include not aware of the provisions for registration for53.13 percent of SSEs and not interested in registration for 39.86 percent of SSEs.

2.1 Dispersed SSEsTable II presents the indicators of current status and economic size of dispersed SSEsby registered, unregistered and total SSEs.

It is evident that the number of unregistered SSEs is about 6.8 times higher than theregistered SSEs. In terms of number of manufactured products and delivery of services,registered SSEs are more diverse than the unregistered SSEs. Unlike the registeredSSEs, the unregistered SSEs are located more in rural areas. Manufacturing (or service)activities dominate the registered (or unregistered) SSEs. Exporting SSEs constituteless than one percent in total number of registered as well as unregistered SSEs.

Ownership pattern by gender and social categories shows that the SSEsowned/managed by:

. women are about 10 percent in both the registered and unregistered sector; and

. socially backward persons are higher in unregistered sector than in registeredsector.

Organizational set up of SSEs include proprietary, partnerships, private company, andcooperatives. The evidence suggests that proprietary SSEs are dominant, especially inunregistered sector.

Economic size of the dispersed SSEs is highlighted by five indicators:

(1) employment per SSE;

(2) historical value of investment on plant and machinery per SSE;

(3) market value of fixed investment per SSE;

(4) value of gross output per SSE; and

(5) value of gross output per employment. It is evident that the size of registeredSSEs is bigger than that of unregistered SSEs as well as that of total SSEs.

About 99.5 percent of total SSEs are tiny with investment on plant and machinery upto Rs.2.5 million or US$0.052 million. Thus, large number of small investmententerprises is a dominant feature of India’s SSEs. Further, smallness of SSEs can behighlighted by determining the proportion of SSEs under a floor and ceiling level ofproduction and employment. This is highlighted in Table III. The floor (or ceiling) levelof production is given by Rs. 0.1 (or Rs.50) million. Contribution of SSEs to number of


of SSEs

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Table I.Sources, characteristics,and limitations of recentdatabases on dispersedand clustered SSEs inIndia

IJSE34,9

602

enterprises, employment, output, investment (i.e. market value of fixed investment,and original value of plant and machinery), and exports under the floor (or ceiling) levelof production measures the relative smallness (or bigness) of SSEs. Obviously, theenterprises in between these extreme levels constitute the middle size. The evidence

Indicators of current status and economic sizeRegistered

SSEsUnregistered

SSEs

TotalSSEssector

1. Indicators of current status1.1 Number of SSEs (millions) 1.34 9.15 10.491.2 Number of products/services 5,983 2,680 6,0031.3 Percent of SSEs in rural areas 44.33 56.8 55.001.4 Percent of tiny industries 97.90 99.90 99.501.5 Percent of women enterprises 10.00 10.13 10.111.6 Percent of enterprises engaged in

manufacturing/assembling/processing activities 63.45 36.12 39.691.7 Percent of exporting enterprises 0.53 0.47 0.481.8 Percent of SSEs owned by persons belonging to scheduled or

backward castes/tribes 49.88 56.18 56.201.9 Percent of SSEs under proprietary organisation 88.85 96.90 95.802. Indicators of economic size2.1 Employment (or number of persons) per SSE 4.48 2.05 2.372.2 Historical/original value of investment (Rs. in million) on plant

and machinery per SSE 0.22 0.03 0.052.3 Market value of fixed investment (Rs. in million) per SSE 0.67 0.07 0.122.4 Value of gross output (Rs. in million at current prices) per SSE 1.48 0.07 0.152.5 Value of exports (Rs. in million at current prices) per exporting

SSE 16.76 0.44 2.81

Source: Compiled and computed using the basic data in Government of India (2004)

Table II.Current status and

economic size ofdispersed SSEs in India:

2001-2002

Indicators of smallness Percent of registered SSEs Percent of unregistered SSEs

1. Share of enterprises with total value of output up to Rs. 0.1 (or over Rs.50) million1.1 Number of enterprises 70.83 (0.45) 95.39 (0.01)1.2 Employment 37.70 (6.37) 88.24 (0.05)1.3 Value of fixed investment 13.88 (19.52) 77.21 (0.82)1.4 Original value of plant and machinery 15.80 (14.95) 77.69 (0.26)1.5 Value of gross output 3.26 (49.35) 51.39 (14.53)1.6. Value of exports 0.06 (78.33) 4.52 (89.52)2. Share of enterprises with total employment less than or equal to ten (or more than 100) persons2.1 Number of enterprises 94.15 (0.17) 99.51 (0.01)2.2 Employment 63.15 (8.32) 94.65 (0.35)2.3 Value of fixed investment 49.15 (8.11) 95.36 (0.14)2.4 Original value of plant and machinery 51.61 (6.37) 95.13 (0.09)2.5 Value of gross output 35.09 (12.12) 88.43 (0.09)2.6 Value of exports 10.08 (38.14) 9.57 (0.00)

Source: Computed using the basic data in Government of India (2004)

Table III.Smallness of India’s

dispersed SSEs by selectindicators: 2001-2002


of SSEs

603

suggests that smallness is dominant among the unregistered SSEs, except in regard toexports; bigness is dominant among the registered SSEs in regard to exports and grossoutput; and middle size is relevant only for registered SSEs in regard to employmentand investment indicators.

On the other hand, the floor (or ceiling) level for employment is given by less than orequal to ten (or more than 100) persons. The floor level enterprises dominate both theregistered and unregistered SSEs in regard to all indicators (i.e. number of enterprises,employment, market value of fixed investment, original value of plant and machinery,and value of gross output). Further, in all these indicators, the share of unregisteredSSEs is higher than that of registered SSEs. For instance, registered (or unregistered)SSEs with less than or equal to ten persons is equal to 94 (or 99) percent in number ofenterprises, 63.15 (or 95.65) percent in employment, 49.15 (or 95.36) percent in totalmarket value of fixed investment, 51.61 (or 95.13) percent in total original value of plantand machinery, and 35.09 (or 88.43) percent in value of gross output. Thus, only inregard to exports, middle size enterprises are relevant for both registered andunregistered SSEs.

2.2 Clustered SSEsTable IV presents the indicators of current status and economic size of clustered SSEsby using SIDO’s database on 388 clusters in 2003[11]. The indicators reveal thefollowing:

. Clusters are marked by product homogeneity, as the single product clustersconstitute about 89 percent.

. Highest number of clusters (30.15 percent) is concentrated in Sector 7, whichinclude base metals and machinery equipment. This is followed by Sector 5(18.81 percent) comprising textile and textile articles) and Sector 1 (15.98 percent)comprising animal, vegetable, horticulture, forestry products, beverages, tobaccoand pan masala and non-edible water/spirit and alcohol chiefly used in industry).These three sectors together account for 64.94 percent of total clusters in thecountry. On the other hand, the lowest number of clusters is concentrated inSector 2 (4.90 percent) comprising ores, minerals, mineral fuels, lubricants, gasand electricity). This is followed by Sector 4 (5.41 percent) comprising wood,cork, thermocol and paper and articles thereof, and sector 7 (12.79 percent)comprising railways, airways, ships and road surface transport and relatedequipment and parts. These three sector account for 23.1 percent of clusters inthe country.

. By the levels of potential for technology upgradation and export promotion,higher number of clusters belongs to the medium and high levels. For instance,number of clusters that belongs to medium (or high) level potential fortechnology upgradation is equal to 68 percent (or 29.4 percent).

. By size of annual value of turnover, the highest number of clusters (32.3 percent)has the annual turnover of more than Rs.10 billion. This is followed by20.9 percent of clusters with annual turnover between Rs.1 billion and 10 billion,and 15 percent of clusters with annual turnover of less than Rs.100 million.

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Indicators of current status and economic sizePercent of

clusters

1 SIDO database: total number of clusters ¼ 388

1.1 Single product clusters 88.92

1.2 Sectoral distribution of clusters:Sector 1 15.98Sector 2 4.90Sector 3 12.63Sector 4 5.41Sector 5 18.81Sector 6 30.15Sector 7 12.19

1.3 Potential for technology upgradation (or export promotion)High 29.4 (38.9)Medium 68.0 (41.8)Low 2.6 (19.3)

1.4 Distribution of number of clusters by annual value of turnover (Rs.)More than 10 billion 32.31 billion-10 billion 20.9100 million-1 billion 32.3Less than 100 million 14.7

1.5 Distribution of clusters by number of enterprisesMore than 10,000 enterprises 37.61,000-10,000 enterprises 9.3500-1,000 enterprises 10.0100-500 enterprises 35.6Less than 100 enterprises 7.5

1.6 Distribution of clusters by level of employmentMore than 100,000 persons 45.910,000-100,000 persons 13.41,000-10,000 persons 29.1Less than 1,000 persons 11.6

2 Cluster Development Programme’s database: total number of clusters ¼ 358

2.1 Natural clusters 92.732.2 Manufacture unreserved product 55.87

2.3 Manufacture modern SSE products 75.422.4 Sources of clustering:

2.4.1 Market based 57.822.4.2 Resource based 39.942.4.3 Infrastructure based 2.24

2.5 Nature of linkages2.5.1 Horizontally linked 74.022.5.2 Horizontally and vertically linked 15.642.5.3 Large unit centred or vertically linked 10.34

(continued )

Table IV.Current status and

economic size of clustersof SSEs in India


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. By size of number of enterprise, clusters with more than 10,000 enterprises arethe highest (37.6 percent). This is followed by 35.6 percent of clusters in between100 and 500 enterprises, and 8 percent of clusters with less than 100 enterprises.

. By size of employment (i.e. number of persons employed), number of clusterswith more than 100,000 persons is highest (45.9 percent), and is followed the29.1 percent of clusters in between 1,000 persons and 10,000 persons and12 percent of clusters with less than 1,000 persons.

Using the Cluster Development Programme’s database on 358 clusters, the followingadditional insights into the current status and economic size are evident:

. Highest number of clusters is natural (92.73 percent) rather than induced[12].

. Highest number of clusters is a manufacturer of modern SSE products ratherthan traditional consumer goods, and traditional art and craft products.

. Highest number of clusters is a manufacturer of unreserved items (55.87 percent)rather than reserved items[13].

. Higher number of clusters is horizontally linked (74.02 percent) and horizontallyand vertically linked (15.64 percent) rather than large unit centred or verticallylinked[14].

. Market-based (57.82) and resource-based (39.94 percent) rather thaninfrastructure-based are the bases for clustering[15].

. About 57.82 percent of clusters faced competition from large enterprises.

Indicators of current status and economic sizePercent of

clusters

2.6 Competition with large enterprises 57.82

3 Third All India Census of Small Scale Industries’ database Cluster ofregisteredSSEs

Cluster ofunregistered

SSEs3.1 Number of clusters 1,223 8193.2 Number of SSEs per cluster 233 1,5273.3 Value of fixed assets per cluster (Rs. in million at current prices) 129 703.4 Employment per cluster 1,114 3,3793.5 Value of gross output per cluster (Rs. in million at current prices) 269 112

Notes: Sectoral composition of clusters is as follows: Sector 1 includes animal, vegetable, horticulture,forestry products, beverages, tobacco and pan masala and non-edible water/spirit and alcohol chieflyused in industry. Sector 2 includes ores, minerals, mineral fuels, lubricants, gas and electricity. Sector 3includes chemical and allied products, rubber, plastic, leather and products thereof. Sector 4 includeswood, cork, thermocol and paper and articles thereof. Sector 5 includes textile and textile articles.Sector 6 includes base metals, products thereof and machinery equipment and parts thereof excludingtransport equipment. Sector 7 includes railways, airways, ships and road surface transport and relatedequipment and parts, other manufactured articles and services, not classified elsewhereSources: Computed by using the basic data in Government of India (2003b, 2004)Table IV.

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In addition, by using the clustered SSEs data by registered and unregistered SSEs inthe Third All India Census of the Small Scale Industries 2001-2002, the followinginsights are evident on the current status and economic size of clustered SSEs[16]:

. Number of clusters of registered SSEs ( ¼ 1,223) is higher than that ofunregistered SSEs (819).

. Average size of fixed investments and gross of output per cluster is higher in clusterof registered SSEs than in unregistered SSEs. For instance, value of fixedinvestment (or gross output) per cluster of registered SSEs is equal to Rs.129(or Rs.269) million and that of unregistered SSEs is equal to Rs.70 (or Rs.112) million.

. Average size of number of SSEs and employment per cluster is higher in clusterof unregistered SSEs than in registered SSEs. For instance, number of SSEs(or employed persons) per cluster of unregistered SSEs is equal to 1,527 (or 3,379)and that of registered SSEs is equal to 233 (or 1,114).

Three major implications of the above descriptions are as follows. First, there is lack ofinternal heterogeneity in the product composition of clusters, as the single productclusters dominate over dual or multi-product clusters. Second, there are no “missingmiddle” level clusters, as the distribution of key size variables are broadly distributedacross different levels. Third, cluster as a unit has a bigger size and capacity ascompared to dispersed individual SMEs.

On the whole, the above analyses clearly imply the vast divergences in currentstatus and economic size of dispersed and clustered SSEs in India. The implications ofthese divergences on their economic performance are analysed below.

3. Comparison of economic performance of dispersed and clustered SSEsGiven the limitations on the comparability between the databases, the followingcomparisons of economic performance between the dispersed and clustered SSEs islimited to the comparable data in the Third All India Census of SSIs 2001-2002.

Table V presents three indicators of economic performance by registered,unregistered, and total SSEs:

(1) output/capital ratio as measured by value of gross output per unit value of fixedassets;

(2) output/labour ratio as measured by value of gross output per employment; and

(3) labour/capital ratio as measured by employment per unit value of fixed assets.

Clustered SSEs Dispersed SSEsPerformance indicators Registered Unregistered Total Registered Unregistered Total

1. Gross output per rupeeof fixed assets 2.08 1.59 1.95 2.21 1.26 1.83

2. Gross output (Rs. in million)per employment 0.23 0.03 0.10 0.33 0.04 0.11

3. Employment perone million rupeesof fixed investment 8.85 47.98 19.31 6.71 30.00 16.15

Source: Computed by using the basic data in Government of India (2004)

Table V.Comparative economic

performance of dispersedand clustered SSEs in

India


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The evidence suggests that output/capital ratio as well as labour/capital ratio is higherfor clustered SSEs than the dispersed SSEs. Thus, both output and employment per unitof fixed assets/investment is higher in clustered SSEs than in dispersed SSEs. On thecontrary, output/labour ratio is higher for dispersed SSEs than for clustered SSEs.

If output/capital (or output/labour) ratio is a partial measure of capital (or labour)productivity, then labour/capital ratio is equal to the ratio of capital productivity tolabour productivity. Or, employment generation per unit of capital is determined byboth capital and labour productivity. From this viewpoint, the results in Table V offerevidence for higher labour/capital ratio in clustered SSEs than in dispersed SSEs.Thus, employment generation per unit of capital is higher in clustered SSEs than indispersed SSEs.

4. Conclusions and implicationsThe descriptions and analyses in this paper lead to the following main conclusions.

First, available databases differ in measurement of current status, economic sizeand economic performance of dispersed and clustered SSEs. Lack of comparabilitybetween the databases implies that each database is unique in terms of diversity ofinformation and can be used separately for description and analyses of current status,economic size, and economic performance of dispersed and clustered SSEs.

Second, the existing policy approaches are focused on registered SSEs for the simplereason that non-registration is a voluntarily accepted situation by the SSEs. Thus, thecurrent policy approaches for promotion and development of SSEs do not offera framework for bringing a linkage between the formal and informal SSEs[17].This calls for an alternative framework for linking of formal and informal SSEs. Thisframework is evident in India’s experience with the development of clusters.

Third, clusters include the registered (or formal) and unregistered (or informal)enterprises. In term of economic size and capacity for production and employmentgeneration, and potentialities for exports promotion and technology upgradation,clustered SSEs eliminate the disadvantages of smallness of dispersed SSEs. Economicperformance of clustered SSEs is remarkably higher than that of dispersed SSEs,especially in terms of employment per unit of capital investment. Most importantly,clusters facilitates for linkages, both horizontal and vertical. Thus, promotion ofclusters is contributory for enlarging size and capacity, strengthening of vertical andhorizontal linkages, and for attainment of higher economic performance andcompetitiveness of SSEs.

The above conclusions lead to the following policy implications on current andfuture strategy for promotion and development of SSEs in India:

. Development of SSEs must be integrated between cluster and dispersedapproaches. This calls for integration of objectives and goals for promotion anddevelopment of SSEs, such as, increase in production/output, exports,investment, employment, and utilisation of local resources. Further, policyco-ordination at all levels of governments is essential for integrated developmentof clustered and dispersed SSEs[18].

. India has a long history of natural clusters. Policy support for further growth ofnatural clusters is important in view of the advantages of clustered development.The nature and timing of such policy intervention in different clusters should beaccorded high priority in policy agenda for SSEs. In this regard, lessons from

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global experiences on cluster development may offer useful lessons andguidelines for India’s policy initiatives.

. Subject to the comparability of economic structure, the conclusions andimplications of this paper are of relevance for development of clustered SSEs inother developing countries. In addition, India’s efforts to formulation andimplementation of Small Industry Cluster Development Programmes, incollaboration with the UNIDO Focal Point Cluster Development Programme,deserve special policy consideration by the developing countries[19].

Notes

1. Alternatively, SSIs may be identified as a part of Village and Small Industries (VSIs).The VSIs include the traditional SSIs (i.e. handicrafts, handlooms, khadi and villageindustries, coir and sericulture) and modern SSIs (i.e. power looms and non-traditional SSIs).The traditional SSIs are promoted and administered at the national level by the DevelopmentCommissioner for Handicrafts under Ministry of Textiles (MOT), DevelopmentCommissioner for Handlooms under MOT, Khadi and Village Industries Commissionunder Department of SSI and ARI, Coir Board under Department of SSI and ARI, Central SilkBoard under MOT and Textile Commissioner under MOT. In the same way, the modern SSIsare promoted and administered by Small Industries Development Organisation underDevelopment Commissioner for Small Scale Industries. Thus, for administrative, promotionaland regulatory purposes, SSIs may not be strictly used interchangeably with VSIs and SSEs.

2. Investment limit is raised to Rs.50 million for hosiery and hand tools in 2001-2002, and 13 selectstationary items and ten products in drug and pharmaceutical sector in 2002-2003. The list ofthese items and products is available at: www.laghu-udyog.com/policies/ssilimit.htm

3. The investment limit as a criterion for defining a SSE in India is in contrast with size ofemployment criterion in other countries. For instance, as quoted in McIntyre and Dallago(2003, p. 10), the European Union definition of SSEs is in terms of number of employees:micro enterprises (less than or equal to nine employees) and small enterprises (10-49employees). Further, the Indian criterion is in contrast with a combination of (a) investmentand turnover criteria for defining small firms in United Kingdom (Buckley, 2003), and(b) capital investment limit and size of employment in Japan (Yamawaki, 2003).

4. SSSBOEs include 32 enterprises, such as, advertising agencies, marketing and industrialconsultancy, equipment rental and leasing, zeroxing, industrial R&D and testing labs,software development, tailoring, ISD/STD booths, weight bridge and laundry and drycleaning. The complete list of these enterprises is available at: www.laghu-udyog.com/policies/annexure.htm#sub

5. Cluster development is one of the spatial approaches for development of SSEs. Otherapproaches include industrial estates, industrial growth centres, export processing zones,industrial parks, integrated infrastructure development centres and national programme forrural industrialisation. For details of these non-cluster and infrastructure-basedprogrammes, see, for instance, Chapter 2 in Government of India (2001).

6. In particular, these studies are available at: http://web5.laghu-udyog.com/clusters/index.html

7. In these surveys, clusters are defined as the geographical and sectoral concentration of firms.A general and broader definition of a clusters is given by Porter (2003, p. 164): “A cluster is ageographically proximate group of interconnected companies and associated institutions ina particular field, linked by commonalities and complementarities”.

8. No formal definition exists for a medium enterprise in India. However, in Government ofIndia (2001, p. 95), investment limit of higher than Rs.10 million but less than or equal to


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Rs.100 million is recommended for medium scale units. More recently, the Small andMedium Enterprises Development Bill 2005 (Government of India, 2005a) has proposed forinvestment limit between Rs.50 million and Rs.100 million for a medium enterprise.

9. Another important source of data on dispersed SSEs is the Office of DevelopmentCommissioner (Ministry of Small Scale Industries, Government of India). Based on a smallrandom sample survey, the Office estimates annual (a) total number of registered andunregistered enterprises; (b) total employment; (c) total production; and (d) total exports.However, no values for investment (or capital formation) by SSEs are estimated. These dataare published in the annual Economic Survey of Government of India (for instance, seeChapter 7 in Government of India, 2005b). This data is not used in this paper due to limitedcoverage and scope of SSEs.

10. As on 31 March 2001, all permanently registered (or unregistered) SSEs with the States’Directorate of Industries and Commerce are called a registered (or unregistered) SSE.

11. The details of methodology and data update are available at: www.laghu-udyog.com/clusters/unido/methcludata.htm

12. Clusters developed without (or with) deliberate policy intervention by the government arecalled natural (or induced or infrastructure-based) clusters.

13. Items reserved for exclusive manufacture or production by SSEs is called reserved items.This national policy was started in 1967 and has been continued to date. The policy aims toprotect SSEs from vertical competition from the non-SSIs in domestic economy by erectingan official entry barrier and from foreign competition by non-tariff barriers (e.g. importrestrictions through licensing) on reserved items. However, the policy has allowed forhorizontal competition between SSIs in the same product.

14. Horizontal clusters comprise units, which process the raw materials, and produce andmarket the finished products by themselves with no scope for division of units. Clusters ofunits around a large unit or few large units are called large unit based clusters. Verticalclusters are linked with large units as suppliers or processors of raw materials or assubcontractors of large units.

15. Resource includes raw materials and skilled labour. Infrastructure is largely in the form ofpublic provisioning of economic infrastructure (e.g. industrial estates and technology parks).

16. In the Third Census, a district having 100 (or 500) or more registered (or unregistered) SSEs,and engaged in manufacturing the same product as per Annual Survey of IndustryCommodity Classification 2000 (at five digit), is considered as a cluster for that product inthat district. For details, see Chapter XII in Government of India (2004).

17. Within the formal SSEs, policy for promotion of ancillary industries is a case for verticallinkage between the SSEs and non-SSEs (i.e. medium or large-scale industries).

18. At the national level, policy for dispersed SSEs refers to the comprehensive policy package forSSIs and tiny sector, announced on 30-31 August 2000. The Policy offers 12 broad categories ofdomestic support measures, viz. policy support, fiscal support, credit support, infrastructuresupport, technological support and quality improvement, marketing support, streaminginspections/ rules and regulation, entrepreneurship development, facilitating promptpayment, rehabilitation of sick units, promoting rural industries, and improving data base.The details are available in Government of India (2001). In addition, India’s 10th Five YearPlan of India 2002-2007 (Government of India, 2003c) envisages adequate credit/loans fromfinancial institutions/banks, funds for technology upgradation and modernisation, adequateinfrastructure facilities, modern testing facilities and quality certification laboratories,modern management practices and skill upgradation through advanced training facilities,marketing assistance, and level playing at par with the organised sector for dispersed SSEs.

19. UNIDO Cluster Development in India is available at: www.unido.org/doc/4380.

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References

Buckley, P.J. (2003), “Foreign direct investment by small and medium sized enterprises: thetheoretical background”, in Audretsch, D.B. (Ed.), SMEs in the Age of Globalization,Edward Elgar Publishing Inc., Northampton, MA, pp. 126-37.

Government of India (1997), Report of the Expert Committee on Small Enterprises, Ministry ofIndustry, New Delhi.

Government of India (2001), Report of the Study Group on Development of Small ScaleEnterprises, Planning Commission, New Delhi.

Government of India (2003a), Indian SME Clusters, Small Industry Development Organisation,Ministry of Small Scale Industries, New Delhi, available at: www.laghu-udyog.com/clusters/clus/indsme.htm

Government of India (2003b), Cluster Development and Sector Programme: Achievements & NewInitiatives by Ministry of SSI, Development Commissioner (Small Scale Industries),Ministry of Small Scale Industries, New Delhi.

Government of India (2003c), Tenth Five Year Plan 2002-2007, Vol. II, Sectoral Policies andProgrammes, Planning Commission, New Delhi.

Government of India (2004), Final Results: Third All India Census of Small Scale Industries2001-2002, Development Commissioner (Small Scale Industries), Ministry of Small ScaleIndustries, New Delhi.

Government of India (2005a), The Small and Medium Enterprises Development Bill, 2005,Ministry of Small Scale Industries and Agro and Rural Industries, New Delhi, available at:http://rajyasabha.nic.in/legislative/amendbills/personal_law/75_2005.htm

Government of India (2005b), Economic Survey 2004-05, Economic Division, Ministry ofFinance, New Delhi.

McIntyre, R.J. and Dallago, B. (Eds) (2003), Small and Medium Enterprises in TransitionalEconomies, Plagrave Macmillan/UN/WIDER, New York, NY.

Nadvi, K. and Schmitz, H. (1998), “Industrial clusters in less developed countries: review ofexperiences and research agenda”, in Cadene, P. and Holmstrom, M. (Eds), DecentralisedProduction in India: Industrial Districts, Flexible Specialisation and Employment, Sage,New Delhi, pp. 60-138.

Porter, M.E. (2003), “Locations, clusters, and company strategy”, in Audretsch, D.B. (Ed.), SMEsin the Age of Globalization, Edward Elgar Publishing Inc., Northampton, MA, pp. 163-84.

Schmitz, H. and Nadvi, K. (1999), “Clustering and industrialisation: introduction”, WorldDevelopment, Vol. 27 No. 9, pp. 1503-14.

Yamawaki, H. (2003), “The evolution and structure of industrial clusters in Japan”, in Audretsch, D.B.(Ed.), SMEs in the Age of Globalization, Edward Elgar Publishing Inc., Northampton, MA,pp. 186-206.

Further reading

Morosini, P. (2004), “Industrial clusters, knowledge integration and performance”, WorldDevelopment, Vol. 32 No. 2, pp. 305-26.

Corresponding authorM.R. Narayana can be contacted at: [email protected]; [email protected]


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Empirical analysis of therelationship between totalconsumption-GDP ratio and

per capita income for differentmetals

The cases of Brazil, China and India

Antonio FocacciFaculty of Economics, Management Sciences Department,

University of Bologna, Bologna, Italy

Abstract

Purpose – The main purpose of the paper is to propose an empirical analysis of the relationshipbetween total consumption of different key metals (aluminium, copper, lead, nickel, tin and zinc) andper capita income of some important developing countries (Brazil, China and India) today present inthe international scenario with very different perspectives from in the past.

Design/methodology/approach – The research is carried out investigating a double aim. Mainly,whether the environmental Kuznets’ Curve (EKC) model related to material consumption (and hence“renamed” as material Kuznets’ Curve) could be used – in empirical terms – as a possible explanatorypattern of past and current trends for these three important countries. Second, whether the observabletrends in industrialised countries is similar to those already implemented in the developing ones. Aftera brief, but ineluctable, premise considering the theoretical basic assumptions to define the issue andregarding general statements, the specific cases for Brazil, China and India are proposed.

Findings – Results do not closely fit the theoretical expectations but, as has already been seen forindustrialised countries in previous research work, there is a prevailing trend in the lowering ofmaterial intensities with rising per-capita income levels.

Originality/value – Without pretending to be exhaustive, this paper can be useful in improving theunderstanding of such developing economies, considering features not yet included in theinternational literature.

Keywords Consumption, Metals, Developing countries, Economic sustainability


1. IntroductionConcerns about environmental degradation have become an important recurring themewithin the international debates on the sustainability of economic systems also in therecent period. Nevertheless, the question of availability of minerals and its relationshipwith economic growth can certainly be considered of undisputable importance withinthe field of economic studies since the beginning of the eighteenth century (Robinson,1980; Fisher, 1987; Pearce and Turner, 1990).

Industrialised countries, during the years of economic booms (1960s), paid littleattention to the limited nature of natural resources (Tilton et al., 1988) even if the 1973first energy crisis helped in changing several authoritative opinions.



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For developing countries, the problems of economic growth and resource depletion tosustain such a growth are linked and exacerbated by the demographic increase. OECD(2001) estimates the world total population between 7.3 and 10.7 billions of people in2050 with the majority of such people living in developing countries. A further problemis the not homogeneous distribution of such people as a result of social/economicprogressive transformations. As a matter of fact, the rate of inhabitants living in urbanareas – expressed as average level for developed ones – should increase to 60 per cent in2025 while it was only 45 per cent in 1994 (projections consider also a further increaseeven more up to 80-90 per cent).

Such aspects have evoked a sizeable literature on the pollution-income per capitarelationship following the well-known model called “Environmental Kuznets Curve”(EKC) (Beckerman, 1992; Grossman and Krueger, 1996; de Bruyn and Opschoor, 1997;Panayotou, 1999; Andreoni and Levinson, 2001; Ezzati et al., 2001). The most appealingpoint of these theoretical assumptions is that environmental quality deterioratesduring the early stages of economic development and improves in the later stages aseconomy continues its growth hence, for these reasons, a specific analysis of importantdeveloping countries seems advisable.

2. Economic growth and metals consumption: the same parallelismbetween developed and developing countries?Towards the transition from mainly rural economic system to more industrialisedones, reciprocal and existing relationships among different environmental elementsacquire complex and increasing interdependent connotations during the various stagesof the process itself (Tucker, 1995; Cluver et al., 1998; Weber and Perrels, 2000).

The raising, unstable and cyclical trend in apparent overall metals’ consumption forthe different uses is a very important element in the analysis of the whole economicsystems of the countries involved in such transformations (Eggert, 1991). As aconsequence, the final effect can be so much relevant as higher are both the impact ofthe change and its speed.

For all these kind of considerations, concerns about the future of the whole world, the(rightful) economic growth expectations of developing countries and the newinternational relationships among countries have gained a renewed attention among aconsiderable part of scholars and politicians. The case of China, for example, assumes aparadigmatic role because its commercial relationships are growing at raising rates aftera long period of economic isolation (Chang et al., 2005). As Gan (2003, p. 538) reports:

China has made considerable progress in its economic development over the past twodecades. During 1980-1999 average GDP growth rate was 10.4% annually. The industrialgrowth rate was at 12.7% per year in the same period. The average annual growth rate ofGNP per capita was 8.3% during 1985-1995.

Several different positions are currently proposed within the debate over the long-termeconomic sustainability of modern societies. Some of them appear to be more optimisticabout physical depletion of natural resources (Tilton, 1999), while others seemparticularly concerned about the possible future scarcity (O’Brien, 1999 and Stahel,1998, for example). However, even if there are with very different starting positions,both scholars and international resources’ analysts seem agree in concerns about theuse and overall consumption of materials with particular reference to the concepts ofdematerialisation (weak dematerialisation) and resources productivity targets.

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613

Main assumptions in the various degrees of development, together with the linkwith environmental aspects at the macroeconomic level, are described in literaturefrom the well-known EKC model. This theoretical model postulates an inverse U-trendof the economic systems during the transition from rural and pre-industrial phasestowards prevailing industrial and post-industrial ones (Figure 1). The term EKCoriginates from Russian-native economist’s analysis (Kuznets, 1955) showing theincreasing disparity in income distribution during the early stages of economicdevelopment followed by a more even degree of distribution subsequent to thestabilisation of growth itself.

The main aim of this research study is to investigate if empirical data – about metals’consumption – can support the theoretical assumptions originated from Kuznets’ worktranslating the concept for a possible determination of a material’s Kuznets’ curve(adapting the original terminology by substituting the word “environmental”).

As a consequence, in the literature concerning the investigation of relationshipsbetween environmental burdens and income growth, the Environmental Kuznets’analysis implies that subsequent rising levels in per-capita income are followed byimprovements in the environmental situation as a result of several structural jointcauses:

. a different aptitude toward the problem on behalf of the whole society as aconsequence of positive income elasticity towards the value of environmentalquality;

. more open political systems; and

. highly structured forms within international commerce frameworks (Selden andSong, 1994; Atkinson et al., 1997; de Bruyn et al., 1998; Munasinghe, 1999).

3. Theoretical and empirical elements of analysisIn order to accomplish this analysis, it is necessary to construct two series of diagramsfor the three countries taken into consideration in the paper.

In the first group is followed the classical theoretical approach of the EKCcorrelating resource consumption to per-capita income (expressed by per-capita GDPin national currency). Resource consumption is approximated by using apparentconsumption data for different key materials: aluminium, copper, lead, nickel, tin andzinc (as reported within Metallgesellschaft (1996, 1987, 1977, 1966) publications cited inthe references section). In elaborating the total consumption-GDP ratio, the approach

Figure 1.The classical EKC

Indicator ofenvironmmentaldamage

Income per capita

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already proposed within the paper of Cleveland and Ruth (1998) for intensity of usecalculation is assumed. The diagrams showing the trend of metals’ consumption inrelation to per-capita income (used as a proxy of dematerialisation index) refer todifferent periods, because the available historical series of data do not cover the sameperiods of time for the involved countries. More precisely, as far as historical seriesexpressed in national currencies are concerned:

. Brazil data cover the period from 1969 to 1995 because the figures about GDPimplicit price deflator have a lack in the 1968 year value (even if previous valuesare available).

. China data cover the period from 1969 to 1995 for aluminium and copper, asalready seen for Brazil, while for other metals (lead, nickel, tin and zinc) the seriesstart from 1972 because there are no previous figures about consumption.

. India series cover the whole period from 1960 to 1995 for all metals except fornickel (in this case the first consumption data are available starting from 1966).

Even if also some previous years are available, it is not possible to include them in anappropriate way because of the lack of continuity; hence, their use would invalidate thewhole elaboration process (as above mentioned for the case of Brazil).

As far as the second group of diagrams data expressing GDP is concerned, per-capitaincome is expressed in Purchasing Power Parities (as an acronym PPPs). As a matter offact, by using PPP coefficients (given in national currency units per 1995 US$) it ispossible to overcome the usual problems related to the use of local/national currencyexchange rates. In fact local exchange rates:

. refer to goods and services traded on the international markets, that are usuallyvery different from those exchanged on the domestic markets;

. do not take into account the effects of custom duties, transport costs among themain economic factors; and

. are affected by the currency swaps that take place on financial capital markets(Guarini and Tassinari, 1996).

Hence, the PPPs coefficients give the rates of currency conversion that equalise thepurchasing power of different currencies by eliminating the differences in price levelsbetween countries and all relevant misalignments that would imply the employ of dataof the transformed GDP into the different currencies by using exchange rates. Thiscalculation permits to obtain homogeneous international data useful for directcross-country comparisons.

For these PPPs diagrams the showed period is shorter (1975-1997) than localcurrencies GDP series, because of the lack of PPPs coefficients for previous years.

In both series of diagrams (GDP expressed in national currencies and GDPexpressed in PPPs), we had to elaborate the original figures about macroeconomicsdata in order to render homogeneous the information recurring to the followingprocess. First of all, per-capita GDP was calculated from the historical figures forpopulation and for current GDP (World Bank, 2002); then, current GDP figures weretransformed at 1995 prices (in order to rid them of the inflation factor and render themhomogeneous over time) using the specific deflator for GDP at market prices in thevarious local currencies (World Bank, 2002).


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To test the possibility of fitting the gathered data to the EKC model, a multipleregression analysis has been proposed by recurring polynomial equations having thematerial intensity as the dependent variable and per-capita income as the independentvariable. The statistical models are of the following kind (using at the maximum level asixth degree polynomial equation):

MIit ¼ b0 þ b1Yit þ b2Y2it þ b3Y

3it þ b4Y

4it þ b5Y

5it þ b6Y 6

it þ 1it

where: MIit represents the value of material intensity for country i and year t; Yit is theper-capita income for country i and year t; 1it is the general error term (which isnormally distributed with the mean value 0 and variance d 2 that is independent of Yit);the various bs are the regression coefficients (Pindyck and Rubinfeld, 1981).

4. Empirical findingsThe first diagrams (Figures 2-16) show groups of results calculated with valuesexpressed in local currency at 1995 prices (all graphs show total figures gathered).

Figure 3.Material intensity (copper)– per capita income(expressed in localcurrency at 1995 prices)ratio for Brazil

Brazil (Copper)

0.00

0.10

0.20

0.30

0.40

0.50

0.60

1,700 2,200 2,700 3,200 3,700 4,200Per capita income (BRL at 1995 prices)

Mat

eria

l Int

ensi

ty (

t/mill

ions

BR

L a

t 199

5 pr

ices

)

Source: Personal elaborations on data: Metallgesellschaft and World Bank (2002)

Figure 2.Material intensity(aluminium) – per capitaincome (expressed in localcurrency at 1995 prices)ratio for Brazil

Brazil (Aluminium)

0.00

0.10

0.20

0.30

0.40

0.50

0.60

0.70

0.80

0.90

1,700 2,200 2,700 3,200 3,700 4,200

Per capita income (BRL at 1995 prices)

Mat

eria

l Int

ensi

ty (

t/mill

ions

BR

L a

t 199

5 pr

ices

)


IJSE34,9

616

Figure 5.Material intensity (nickel)

– per capita income(expressed in local

currency at 1995 prices)ratio for Brazil

Brazil (Nickel)

3.00

8.00

13.00

18.00

23.00

28.00

1,700 2,200 2,700 3,200 3,700 4,200


Mat

eria

l Int

ensi

ty (

t/bill

ions

BR

L a

t 199

5 pr

ices

)


Figure 6.Material intensity (tin) –

per capita income(expressed in local


Brazil (Tin)

2.00

4.00

6.00

8.00

10.00

12.00

14.00

1,700 2,200 2,700 3,200 3,700 4,200


Mat

eria

l Int

ensi

ty (

t/bill

ions

BR

L a

t 199

5 pr

ices

)


Figure 4.Material intensity (lead) –



Brazil (Lead)

0.00

0.05

0.10

0.15

0.20

0.25

1,700 2,200 2,700 3,200 3,700 4,200


Mat

eria

l Int

ensi

ty (

t/mill

ions

BR

L a

t 199

5 pr

ices

)



capita income

617

Figure 8.Material intensity(aluminium) – per capitaincome (expressed in localcurrency at 1995 prices)ratio for China

China (Aluminium)

Mat

eria

l Int

ensi

ty (

t/mill

ions

CN

Y a

t 199

5 pr

ices

)

0.00

0.050.10

0.15

0.20

0.250.30

0.35

0.400.45

0.50

0 1,000 2,000 3,000 4,000 5,000 6,000

Per capita Income (CNY at 1995 prices)


Figure 7.Material intensity (zinc) –per capita income(expressed in localcurrency at 1995 prices)ratio for Brazil

Brazil (Zinc)

0.20

0.22

0.24

0.26

0.28

0.30

0.32

1,700 2,200 2,700 3,200 3,700 4,200


Mat

eria

l In

ten

sity

(t/

mil

lion

sB

RL

at 1

995

pri

ces)


Figure 9.Material intensity (copper)– per capita income(expressed in localcurrency at 1995 prices)ratio for China

China (Copper)

0.00

0.05

0.10

0.15

0.20

0.25

0.30

0.35

0 1,000 2,000 3,000 4,000 5,000 6,000Per capita Income (CNY at 1995 prices)

Mat

eria

l Int

ensi

ty (

t/mill

ions

CN

Y a

t 199

5 pr

ices

)


IJSE34,9

618

As can be noted there are no common trends both considering the same country andthe same metal. Furthermore, the EKC path does not seem followed (with the soleexception of Brazilian consumption of copper). Material intensity paths are in somecases raising up, while in other diagrams following the opposite trend.

Within Table I is a summarised scheme of the results obtained through the choice ofthe best possible regression function (shown by a solid line in the diagrams), on thebasis of the original figures (shown as scatter diagrams) (Dretzke, 2001; Ragsdale,2001; Harnett and Horrell, 1998; Christensen, 1996; Bethea et al., 1995; Pindyck andRubinfeld, 1981). At this point, it is necessary to outline that the elaboration in thissection is not intended to estimate the exact material’s Kuznets curve using statisticalmodels, for provisional purposes, nor is it trying to identify the turning-point; it is



currency at 1995 prices)ratio for China

China (Lead)

0.00

50.00

100.00

150.00

200.00

250.00

0 1,000 2,000 3,000 4,000 5,000 6,000


Mat

eria

l Int

ensi

ty (

t/bill

ions

CN

Y a

t 199

5 pr

ices

)




currency at 1995 prices)ratio for China

China (Nickel)

0.00

5.00

10.00

15.00

20.00

25.00

0 1,000 2,000 3,000 4,000 5,000 6,000


Mat

eria

l int

ensi

ty (

t/bill

ions

CN

Y a

t 199

5 pr

ices

)



capita income

619

simply analysing long-term trends by using those functions best fitting existinghistorical figures.

By using the 1995 US$ PPPs to neutralise the effects of expressing real GDP in localcurrencies, resulting trends (Figures 17-31) are not very similar to those with GDPcalculated in national currency. Obviously, the modification of the monetary unit ofaccount used leads to a change in the specific shape of the curves compared with thoseshown in diagrams from 2 to 16. Strong similarities can be outlined only in the cases oflead for Brazil and India and nickel for China (Figures 32-37).

As in the previous case, Table II reports the resulting regression curves of theoriginal figures.

Figure 13.Material intensity (zinc) –per capita income(expressed in localcurrency at 1995 prices)ratio for China

China (Zinc)

0.00

50.00

100.00

150.00

200.00

250.00

0 1,000 2,000 3,000 4,000 5,000 6,000


Mat

eria

l int

ensi

ty (

t/bill

ions

CN

Y a

t 199

5 pr

ices

)


Figure 12.Material intensity (tin) –per capita income(expressed in localcurrency at 1995 prices)ratio for China

China (Tin)

0.00

2.00

4.00

6.00

8.00

10.00

12.00

14.00

16.00

0 1,000 2,000 3,000 4,000 5,000 6,000


Mat

eria

l int

ensi

ty (

t/bill

ions

CN

Y a

t 199

5 pr

ices

)


IJSE34,9

620

As can be noted, the adjusted coefficient of determination (adjusted R 2) has a highvalue only in the cases of China (for aluminium, copper, lead and nickel) and India(lead, tin and zinc). The meaning is a high fitting of the calculated regression to theFigures (as confirmed by the lower values of the coefficients of variation). In the othercases the value of the coefficient of determination is not very high representing a worsefitting of regression curves to empirical data. Also in this calculation, figures for Brazilconfirm previous results having the lowest value in the coefficients of determination.

From the results obtained by using both specific currencies and PPPs it can bedrawn that trends are:

. different from country to country;

. different within a country for the different metals;

Figure 15.Material intensity (copper)


currency at 1995 prices)ratio for India

India (Copper)

0.00

5.00

10.00

15.00

20.00

25.00

30.00

5,000 6,000 7,000 8,000 9,000 10,000 11,000 12,000 13,000 14,000

Per capita Income (INR at 1995 prices)

Mat

eria

l int

ensi

ty (

t/bill

ions

INR

at 1

995

pric

es)


Figure 14.Material intensity

(aluminium) – per capitaincome (expressed in local


India (Aluminium)

0.00

0.01

0.02

0.03

0.04

0.05

0.06

5,000 6,000 7,000 8,000 9,000 10,000 11,000 12,000 13,000 14,000


Mat

eria

l int

ensi

ty (

t/mill

ions

INR

at 1

995

pric

es)



capita income

621

. different among the same metal within different countries; and

. different from the original Kuznets’ curve hypothesis.

As far as Brazil is concerned, it can be noted a weak increasing trend to growth, whilefor China and India both the indicators move downward with a more decisive path.

Type of curve R 2 Adjusted R 2 Standard error Coefficient of variation

BrazilAluminium Polynomial degree 4 0.817 0.784 0.044 0.073Copper Polynomial degree 2 0.179 0.110 0.081 0.205Lead Polynomial degree 1 0.196 0.163 0.038 0.264Nickel Polynomial degree 2 0.823 0.808 3.007 0.180Tin Polynomial degree 1 0.082 0.045 2.016 0.190Zinc Polynomial degree 1 0.022 20.017 0.035 0.139ChinaAluminium Polynomial degree 5 0.529 0.417 0.060 0.192Copper Polynomial degree 5 0.774 0.720 0.025 0.110Lead Polynomial degree 3 0.994 0.993 4.099 0.033Nickel Polynomial degree 5 0.983 0.979 0.643 0.053Tin Polynomial degree 5 0.851 0.809 1.501 0.028Zinc Polynomial degree 6 0.709 0.607 16.96 0.108IndiaAluminium Polynomial degree 4 0.760 0.729 0.006 0.155Copper Polynomial degree 4 0.517 0.454 3.420 0.234Lead Polynomial degree 1 0.507 0.493 1.304 0.129Nickel Polynomial degree 5 0.925 0.909 0.199 0.161Tin Polynomial degree 6 0.820 0.782 0.235 0.329Zinc Polynomial degree 2 0.576 0.550 2.858 0.139

Source: Personal elaboration of figures reported in the graphs

Table I.Summary of the resultsfor material’s Kuznetscurves (expressed in localcurrency at 1995 constantprices)

Figure 16.Material intensity (lead) –per capita income(expressed in localcurrency at 1995 prices)ratio for India

India (Lead)

0.00

2.00

4.00

6.00

8.00

10.00

12.00

14.00

16.00

5,000 6,000 7,000 8,000 9,000 10,000 11,000 12,000 13,000 14,000


Mat

eria

l int

ensi

ty (

t/bill

ions

INR

at 1

995

pric

es)


IJSE34,9

622

5. Main common features and specificities between developed anddeveloping countriesConsidering the above outlined results, it seems a useful task to analyse if there aresome common features between developing and developed countries. The importanceof the question grounds both in the need of carefully assessing the reiteration in lessdeveloped countries of the industrial models already implemented within moreindustrialised ones and, at the same time, in preventing and correcting possibleimitative (and dangerous) behaviours within developing countries linked tothe adoption and diffusion of technological archetypes already constituting theestablished models currently implemented in industrialised ones.

An analysis of the situation in the industrialised countries (France, Italy, Japan, UKand the USA) has been already proposed in a specific previous research work




India (Nickel)

0.00

0.50

1.00

1.50

2.00

2.50

3.00

5,000 6,000 7,000 8,000 9,000 10,000 11,000 12,000 13,000 14,000


Mat

eria

l int

ensi

ty (

t/bill

ions

INR

at 1

995

pric

es)





India (Tin)

0.00

0.20

0.40

0.60

0.80

1.00

1.20

1.40

1.60

1.80

5,000 6,000 7,000 8,000 9,000 10,000 11,000 12,000 13,000 14,000


Mat

eria

l int

ensi

ty (

t/bill

ions

INR

at 1

995

pric

es)



capita income

623

(Focacci, 2005a) and the main features have to be (briefly) resumed here in order tomake a parallelism with the countries included in the present work.

More in detail, as far as those industrial countries analysed is concerned, it has to beoutlined that the empirical relationship between Total consumption-GDP ratio andper-capita income, as hypothesised in strict Environmental Kuznets terms, does nothold true also in the cases of the analysed industrialised countries. Furthermore, ahomogeneous and undisputable trend associated with rising per-capita income levelsfor all the different industrialised countries has not been observed.

On the other side, the economic and social main trends in these Countries arecharacterised by economic growth and socio-economic transformations mainly

Figure 20.Material intensity(aluminium) – per capitaincome (expressed in US$at 1995 prices and PPPs)ratio for Brazil

Brazil (Aluminium)

0.00

0.30

0.59

5,000 5,500 6,000 6,500 7,000 7,500

Per capita income (US $ at 1995 prices and PPPs)

Mat

eria

l Int

ensi

ty (

t/mill

ions

US

$ at

199

5 pr

ices

and

PPP

s)


Figure 19.Material intensity (zinc) –per capita income(expressed in localcurrency at 1995 prices)ratio for India

India (Zinc)

0.00

5.00

10.00

15.00

20.00

25.00

30.00

35.00

5,000 6,000 7,000 8,000 9,000 10,000 11,000 12,000 13,000 14,000Per capita Income (INR at 1995 prices)

Mat

eria

l int

ensi

ty (

t/bill

ions

INR

at 1

995

pric

es)


IJSE34,9

624

fostered by increases in energy consumptions, the mutual interdependence amongeconomic activities (Cassedy and Grossman, 1998; Cluver et al., 1998; Weber andPerrels, 2000) and, finally, the aptitude of modern societies towards low-resourcesconservation.

As far as Brazil, China and India economic systems are concerned, the threecountries are currently based on the same common pillars (even if with some specificdifferences): fast growing GDP rates, sound industrial bases, remarkablemanufacturing exports and new aptitudes coupled with the consolidated traditionsin raw materials exports (Pathak et al., 2000).

At the same time, there has been an increasing industrialisation rate, a risingdemand for development of transport, infra-structure and the modernisation in lifestyles.


per capita income(expressed in US$ at 1995prices and PPPs) ratio for

Brazil

Brazil (Lead)

50.00

60.00

70.00

80.00

90.00

100.00

110.00

120.00

130.00

140.00

150.00

5 6 6 7 7 8 8


Mat

eria

l Int

ensi

ty (

t/bill

ions

US

$ at

199

5 pr

ices

and

PPP

s)



– per capita income(expressed in US$ at 1995prices and PPPs) ratio for

Brazil

Brazil (Copper)

0.00

0.10

0.20

0.30

0.40

5,000 5,500 6,000 6,500 7,000 7,500


Mat

eria

l Int

ensi

ty (

t/mill

ions

US

$ at

199

5 pr

ices

and

PPP

s)



capita income

625

Brazil, for example, has witnessed a more intensive use of electric power in relationwith industrial modernisation and with the development of highly energy-intensiveindustries (plants producing aluminium, ferroalloys, soda-chlorine, pulp and paper,iron and steel) (Tolmasquim et al., 2001). Also the mining sector has witnessed severalcommon features in its growth within the three countries (Singh and Kalirajan, 2003;Ziran, 2002; Machado and de M. Figueiroa, 2001). The prevailing ones are: theincreasing level of deregulation and the progressive implementation of privatisationprocesses.

The speed-up in the latter precisely acquires (both for the companies involved in theproduction phase and the companies involved in the distribution stage of metals)

Figure 24.Material intensity (tin) –per capita income(expressed in US$ at 1995prices and PPPs) ratio forBrazil

Brazil (Tin)

4.00

4.50

5.00

5.50

6.00

6.50

7.00

7.50

8.00

5 6 6 7 7 8 8


Mat

eria

l Int

ensi

ty (

t/bill

ions

US

$ at

199

5 pr

ices

and

PPP

s)


Figure 23.Material intensity (nickel)– per capita income(expressed in US$ at 1995prices and PPPs) ratio forBrazil

Brazil (Nickel)

0.00

2.00

4.00

6.00

8.00

10.00

12.00

14.00

5 6 6 7 7 8 8


Mat

eria

l Int

ensi

ty (

t/bill

ions

US

$ at

199

5 pr

ices

and

PPP

s)


IJSE34,9

626

increasing importance considering that the higher expected investment return rates area correlated result of the higher business risks faced by private companies. Moreover,with the higher inflow of foreign capital, the system tends to increase the globalcompetitive rate of the sector and the mix of available technologies to improve theoperating efficiency level.

Considering these important similarities existing within all transition processes(and within institutional governance models both for the developed countries and forthe developing ones), the main specific features of the developing countries with aconsiderable impact both in economic policy and also in environmental policies are:

Figure 26.Material intensity

(aluminium) – per capitaincome (expressed in US$at 1995 prices and PPPs)

ratio for China

China (Aluminium)

0

1

2

3

4

5

6

7

8

9

10

0 50 100 150 200 250 300

Per capita Income (US $ at 1995 prices and PPPs)

Mat

eria

l Int

ensi

ty (

t/bill

ions

US

$ at

199

5 pr

ices

and

PPP

s)


Figure 25.Material intensity (zinc) –


Brazil

Brazil (Zinc)

100.00

120.00

140.00

160.00

180.00

5 6 6 7 7 8 8


Mat

eria

l Int

ensi

ty (

t/bill

ions

US

$ at

199

5 pr

ices

and

PPP

s)



capita income

627

. the remarkable difference between per-capita income as a consequence of aheterogeneous distribution;

. the large presence of poverty regions;

. the prevailing style of life linked to rural conditions; and

. the existence of many economic and social barriers to the diffusion oftechnologies.

From the analysis proposed in the paper, it can be confirmed that – as already seen forindustrialised countries – for Brazil, China and India there are prevailing trends in thelowering of material intensity with rising per-capita income levels (even if the stricttheoretical path of the EKC is not replicated). All the diagrams combining in time the

Figure 28.Material intensity (lead) –per capita income(expressed in US$ at 1995prices and PPPs) ratio forChina

China (Lead)

0

500

1,000

1,500

2,000

2,500

3,000

3,500

4,000

0 50 100 150 200 250 300


Mat

eria

l Int

ensi

ty (

kg/b

illio

nsU

S $

at 1

995

pric

es a

nd P

PPs)


Figure 27.Material intensity (copper)– per capita income(expressed in US$ at 1995prices and PPPs) ratio forChina

China (Copper)

0

1

2

3

4

5

6

0 50 100 150 200 250 300


Mat

eria

l Int

ensi

ty (

t/bill

ions

US

$ at

199

5 pr

ices

and

PPP

s)


IJSE34,9

628

trends of material intensity for the three developing countries – both with the GDPexpressed in local currency and with the GDP expressed in PPPs – outline that it is notpossible to define a unique pattern.

Such a conclusion holds true in comparisons among industrialised countries anddeveloping ones concerning energy intensities and emission intensities alreadyobserved and outlined in previous research works (Focacci, 2003, 2005b).

6. ConclusionsThis work highlights the main trends resulting in an empirical analysis ofdematerialisation intensities for Brazil, China and India as already proposed in a



China

China (Tin)

0

50

100

150

200

250

0 50 100 150 200 250 300


Mat

eria

l Int

ensi

ty (

kg/b

illio

nsU

S $

at 1

995

pric

es a

nd P

PPs)




China

China (Nickel)

100

150

200

250

300

0 50 100 150 200 250 300


Mat

eria

l Int

ensi

ty (

kg/b

illio

nsU

S $

at 1

995

pric

es a

nd P

PPs)



capita income

629

previously published paper concerning industrialised countries (Australia, France,Italy, UK and the USA) without having the pretension to be exhaustive in this field.

As in the first study, it has to be outlined that empirical results for developingcountries do not closely fit to the “theoretical material Kuznets’ curve” as proposed,even if it has to pointed out that the increase in economic output (measured from GDP)may have a clear effect on the utilised ratios. In fact, if GDP increases are greater – inpercentage terms – than those of apparent materials’ consumption, then the ratios tendto fall (such an effect acquires specific relevance considering expanding economies likethose considered in the present work). As Labys and Waddell (1989) pointed out, in

Figure 32.Material intensity(aluminium) – per capitaincome (expressed in US$at 1995 prices and PPPs)ratio for India

India (Aluminium)

0.00

0.50

1.00

1.50

2.00

2.50

3.00

3.50

4.00

90 110 130 150 170 190


Mat

eria

l Int

ensi

ty (

t/bill

ions

US

$ at

199

5 pr

ices

and

PPP

s)


Figure 31.Material intensity (zinc) –per capita income(expressed in US$ at 1995prices and PPPs) ratio forChina

China (Zinc)

1,500

2,000

2,500

3,000

3,500

4,000

0 50 100 150 200 250 300


Mat

eria

l Int

ensi

ty (

kg/b

illio

nsU

S $

at 1

995

pric

es a

nd P

PPs)


IJSE34,9

630

order to pursue this aim, the wider range of employed materials within the economyhave to be used in order to be more incisive and in the present case the wider number ofminerals data are used. Without doubt, to carry out a more complete analysis, it wouldbe very interesting going back even further in time. Unfortunately comparablehistorical series cover only the reported period and the aim of the work has been togather the greater amount of available public data in order to outline prevailing trends.

Dematerialisation processes must consider – also in the case of developingcountries – both the technological development (substitution between groups ofmaterials, i.e. plastics vs metals) and the uneven distribution of natural resources.



India

India (Lead)

0.00

0.10

0.20

0.30

0.40

0.50

0.60

0.70

0.80

0.90

90 110 130 150 170 190


Mat

eria

l Int

ensi

ty (

t/bill

ions

US

$ at

199

5 pr

ices

and

PPP

s)




India

India (Copper)

0.00

0.20

0.40

0.60

0.80

1.00

1.20

1.40

90 110 130 150 170 190


Mat

eria

l Int

ensi

ty (

t/bill

ions

US

$ at

199

5 pr

ices

and

PPP

s)



capita income

631

Moreover, the relative importance of service sectors and subsequent effects inmanufacturing industry are relevant in trying to explain such paths.

As far as developing countries are concerned, the fast adoption of last technologicaldevelopments jointly to economic growth (if not adequately supported) could hidemany drawbacks in the mining sector too. Widespread technologies in industrialisedcountries, also within materials sector, are the result of decades of researches andunavoidable errors in their adoption. Skill transfert and technology trade towards thetransition economies, hence, do not seem possible to be implemented coeteris paribus,even if they are the main ways to filling the gaps existing between industrialised andless industrialised countries (Vishwasrao and Bosshardt, 2001; Peretto, 1999).

Figure 36.Material intensity (tin) –per capita income(expressed in US$ at 1995prices and PPPs) ratio forIndia

India (Tin)

0.00

5.00

10.00

15.00

20.00

25.00

30.00

35.00

40.00

45.00

50.00

90 110 130 150 170 190


Mat

eria

l Int

ensi

ty (

kg/b

illio

nsU

S $

at 1

995

pric

es a

nd P

PPs)


Figure 35.Material intensity (nickel)– per capita income(expressed in US$ at 1995prices and PPPs) ratio forIndia

India (Nickel)

0.00

20.00

40.00

60.00

80.00

100.00

120.00

140.00

160.00

180.00

200.00

90 110 130 150 170 190


Mat

eria

l Int

ensi

ty (

kg/b

illio

nsU

S $

at 1

995

pric

es a

nd P

PPs)


IJSE34,9

632

Different geographical distribution in natural resources can lead to environmentalproblems linked to exploitation and consumption. As a matter of fact, if the diffusion ofcleaner technologies in transforming them into products coupled with newmanagement styles in business leading should not pervade all economic sectors andcountries in order to encounter the needs of sustainable development, differences

Type of curve R 2 Adjusted R 2 Standard error Coefficient of variation

BrazilAluminium Polynomial degree 3 0.366 0.255 0.036 0.094Copper Polynomial degree 4 0.314 0.142 0.050 0.215Lead Polynomial degree 1 0.007 20.045 23.437 0.258Nickel Polynomial degree 4 0.566 0.458 2.154 0.189Tin Polynomial degree 4 0.313 0.141 1.163 0.192Zinc Polynomial degree 2 0.056 20.049 21.45 0.148ChinaAluminium Polynomial degree 2 0.668 0.631 0.849 0.138Copper Polynomial degree 6 0.914 0.877 0.321 0.078Lead Polynomial degree 5 0.994 0.991 76.701 0.037Nickel Polynomial degree 5 0.987 0.983 7.916 0.040Tin Polynomial degree 6 0.711 0.587 24.637 0.212Zinc Polynomial degree 6 0.612 0.445 337.101 0.121IndiaAluminium Polynomial degree 1 0.221 0.180 0.312 0.106Copper Polynomial degree 2 0.133 0.0367 0.148 0.171Lead Polynomial degree 1 0.681 0.664 0.071 0.110Nickel Polynomial degree 4 0.446 0.308 28.660 0.265Tin Polynomial degree 4 0.878 0.848 4.092 0.163Zinc Polynomial degree 5 0.760 0.679 0.117 0.093

Source: Personal elaboration of figures reported in the graphs

Table II.Summary of the resultsfor material’s Kuznets’

curves (expressed in US$at 1995 prices and PPPs)

Figure 37.Material intensity (zinc) –


India

India (Zinc)

0.00

0.20

0.40

0.60

0.80

1.00

1.20

1.40

1.60

1.80

90 110 130 150 170 190


Mat

eria

l Int

ensi

ty (

t/bill

ions

US

$ at

199

5 pr

ices

and

PPP

s)



capita income

633

between developed and developing countries will raise. This could exacerbate socialand economic problems (loss of democracy and accountability, worsening of positionfor workers) (Miozzo et al., 2005; Coates, 2000) with unpredictable (but probably)further complex effects.

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Corresponding authorAntonio Focacci can be contacted at: [email protected]

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Social responsibility in Indiatowards global compact approach

Aruna Das GuptaWISDOM, Banasthali Vidyapith, A Deemed University, Rajasthan, India

Abstract

Purpose – This paper sets out to explore the trends of social responsibility of the corporate sector inIndia.

Design/methodology/approach – The methodology being followed in the paper is exploratory innature as data are scanty. An analysis has been done on an overall score drawn from a structuredquestionnaire being administered.

Findings – Trends in socially responsible initiatives are both positive and crucial in nature in India.

Research limitations/implications – The vastness of the corporate activities in a big country likeIndia, on the one hand, and the scanty data availability, on the other, lead to issues being restricted insome sectors.

Practical implications – This research has a tremendous effect on society with respect to the CSRapproach being conceived, adopted and initiated by UN Global Compact.

Originality/value – The paper has touched on the cutting-edge research initiatives in the fieldof CSR.

Keywords India, Corporate social responsibility


The Global Compact Programme, launched by Mr Kofi Annan, Secretary General, UN,in July 2000, is designed at the social responsibility of corporates all over the world andits sustainable growth. The global compact is a partnership between the UN, thebusiness community, International Labor Organization, and NGOs. It provides a forumfor them to work together and improve corporate practices though co-operation ratherthan disagreement. The global compact is aimed at responsible corporate citizenship sothat businesses work for social development while creating and spreading wealth andprosperity.

UN’s Global Compact asks companies to embrace, support and enact, within theirsphere of influence, a set of core values in the area of human rights, labor, environmentand anti-corruption and adhere to ten universally accepted principles, which are asfollows:

Human rights:

(1) Business should support and respect the protection of internationallyproclaimed human rights.

(2) Make sure they are not complicit in human rights abuses.

Labour:

(3) Business should uphold the freedom of association and the effectiverecognition of the right to collective bargaining.

(4) The elimination of all forms of force and compulsory labor.



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DOI 10.1108/03068290710778642

(5) The effective abolition of child labor.

(6) Eliminate discrimination in respect of employment and occupation.

Environment:

(7) Business should support a precautionary approach to environmentalchallenges.

(8) Undertake initiatives to promote greater environmental responsibility.

(9) Encourage the development and diffusion of environmentally friendlytechnologies.

Anti-corruption:

(10) Businesses should work against all forms of corruption, including extortionand bribery (Source: www.unglobalcompact.org)

History of CSR in IndiaIndia has a long rich history of close business involvement in social causes for nationaldevelopment. In India CSR is known from ancient time as social duty or charity whichthrough different ages changing its nature in broader aspect, now generally known ascorporate social responsibility (CSR). From the origin of business, which leads towardsexcess wealth, social and environmental issues have deep roots in the history ofbusiness. Over the time four different models have emerged all of which can be foundin India regarding corporate responsibility (Kumar et al., 2001).

India has had a long tradition of corporate philanthropy and industrial welfare hasbeen put to practice since late 1800s. Philanthropy is practice of doing well to one’s fellowmen. It is not a relationship – therefore corporate philanthropy often does not havestakeholder’s interaction and responsibility as a focus, unlike CSR. CSR on the otherhand is under taken by the company not along charitable lines or with the “intent to dogood” but also building of a good public image. It is transnational corporations underglobal ideological influence, and the need to engage with all stakeholders that introducethe concept of CSR on to the India horizon. This process began only in the1800s. Theconcept is not similar to corporate philanthropy, as CSR lays stress on stakeholder’sinvolvement and on clear articulation of the mutuality of benefit. Thus, CSR is acorporate strategy for survival, and not undertaken for the mere “feel good factor.”

The concept of CSR gained global prominence in the last ten or 15 years. The rise ofCSR can be attributed to the process of globalization and to the increase in the reachof transnational corporations. Under the wake of globalization the reach and numbersof the transnational corporations has increased, and new channels of production, laborand marketing have been established across the world. Transnational corporationsnow increasingly deal with multicultural and multi-regulatory environments whilecustomers on the other hand, are increasingly aware and conscious about the meansand methods of production, and demand more than “value for money” while makingproduct choices. CSR therefore to deal with different stakeholders, builds a positivepublic image, and meet customer demands.

Historically, the philanthropy of business people in India has resembled Westernphilanthropy in being rooted in religious belief. Merchants charity took various forms,such as treasury chests for the needy, providing relief in times of famine or floods,

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provision of drinking water, building temples, water tanks, wells, ponds, supportingschools, etc. Merchants gave for charity both individually and collectively throughtheir business and social organization.

At individual level they gave alms to the poor and needy, arranged for their feeding,setup pathshalas (traditional schools) constructed night shelters for the poor andtravelers, built water tanks and bathing ghats (where people are taking bath), madeprovision for drinking water during summer, opened their granaries in times of famine,commissioned artists to prepare religious texts and other works of art for temples,provided for dowries and marriage expenses of poor girls, and so on.

In collective charity a group of families, streets of people, or all the inhabitants of thetown would collect voluntary offerings and present them according to need, like for thehealth, sanitation, education and general welfare of the people in their community.There was a strong tradition of charity in almost all the business communities of India.Tradition of merchant’s charity has continued down the ages, even to present times,where it is still visible among individual businessmen and the unorganized sector.

The arrival of the East India Company in 1620 was a milestone in the history of tradeand of sociopolitical in India. Over the subsequent 200 years, the purely trade and businessinterest of the East India Company changed to social and political management of thecountry by company executives until 1885, when India came under the British crown.

The business leaders of emerging indigenous industry remained rooted in thetradition of philanthropy, which gradually metamorphosed into CSR. Founders ofbusiness families to support schools, colleges, hospitals, orphanages and the promotionof art and culture note the period 1850 to early 1900 for setting up of trusts andendowment. By the third decade of the nineteenth century, merchant charity began tochange from being largely religious, ameliorative in nature and confined to membersof their own community, caste or religion towards being more secular, more inclusivein term of caste, creed and community and more oriented to bringing progress tosociety through Western style modern institutions. Though the more enlightenedmerchants began to diversify their charitable giving in content and intent, theycontinued the older forms of gifting as well. Many did not change at also that there wasa mix of charity and philanthropy throughout the period.

After independent free India struggled to stand on its own feet through indigenousmanufacturing and the creation of jobs, “Temples of Modern India.” Industrialistsparticipated in nation-building programmers by setting up institutes of scientific andtechnical learning. After independence, the need for repaid progress on the part ofgovernment, people an the business community acted as spur for business tocontribute more to social development as business leaders engaged themselves andtheir business in social welfare and reform. The emphasis was on vocational andtechnical training, public health, power and water supply and the Gandhian socialreform movements.

At the time when moneymaking was all-important, Kasturbhai stressed the need formoral leadership and social responsibility. Speaking at the Indian Merchants chamberin 1963, he said; Industry and trade have to discharge many responsibilities to thecommunity. They should provide support – moral personal and financial toinstitutions or cause, which make their towns and villages better for living and whichare intimately connected with out spiritual heritage. We should advertise what weproduce and sell, but in doing so, also convince the public that free enterprise exists to


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serve the community by improving social and economic standards. We should provideleadership to the community[1].

JRD Tata who always laid a great deal of emphasis to go beyond conductingthemselves as honest citizens. He pointed out that there were many ways in whichindustrial and business enterprises can contribute to public welfare beyond the scopeof their normal activities. He advised that:

Apart from the obvious one of donating funds to good causes which has been their normalpractice for years, they could, as some of the companies with which I am connected havedone, use their own financial, managerial and human resourced to provide task forces forundertaking direct relief and reconstruction measures. This form of public communityservice could be expanded by the cooperative effort among members of various industries[2].

In his advocacy of responsibility, JRD was joined by Ramakrishna Bajaj who’sdevotion to Gandhian ideals regarding fair business practices and philanthropy. Hesaid:

The business community is an essential ingredient of our democratic society and it has a dutynot only to create wealth but also to promote the ethical and social goals of the community.Unless it fulfils both these functions and thereby plays its due role as a responsible section, itwill not be able to ensure its own survival (Ramakrishna, 1970).

Arvind Mafatlal, Chairman of Mafatlal Industries, also pleaded for more socialresponsibility on the part of business but pointed out that it was large concept thanphilanthropy and went beyond giving funds to more normative issues such asself-discipline, quality control of consumer of vulgar display of wealth and ostentationsconsumption (Sundar, 2000).

Unless the business community contributed to basic development needs, its verysurvival would be threatened and it was in its own interest to participate in thenation-building effort. Pointing out the need for industry to contribute more tocommunity development, JRD said:

In every village, large or small there is always need for improvement, for help, for relief, forleadership and for guidance. I suggest that the most significant contribution organizedindustry can make is by identifying itself with the life and the problems of the people of thecommunity to which it belongs and also by applying its resources, skills and talents to theextent that it can reasonably spare them, to serve and help them (Tata JRD, 1986).

The cumulative result of all these influences was distinctly visible in the action ofmany business houses. Slowly, it began to be accepted, at least in theory that businesshad to share a part of the social overhead costs of. Economic development if it wishedto share in its fruits. Traditionally, it had discharged its responsibility to societythrough benefactions for education, medical facilities, and scientific research amongother objects. The important change now was that industry accepted socialresponsibility as part of the management of the enterprise itself. The communitydevelopment and social welfare program of the premier Tata Company, Tata Iron andSteel Company was started the concepts of “Social Responsibility.” So on many othercompanies have taken up. The last decades of the twentieth century witnessed a swingaway from charity and traditional philanthropy towards more direct engagement ofbusiness in mainstream development. Most corporate houses have been contributing to

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social cause largely through their own trusts, foundations and societies. Some of thesewere set up long before India achieved independence.

Current scenario of CSR in IndiaThe last decade of the twentieth century witnessed a swing away from charity andtraditional philanthropy towards more direct engagement of business in mainstreamdevelopment and concern for disadvantaged groups in the society. This has beendriven both internally by corporate will and externally by increased governmental andpublic expectations (Mohan, 2001).

It is estimated that India has over 200,000 private sector trusts, a large number ofwhich are set up by Indian businesses, which have been contributing to social causesthrough their trusts, foundations or societies. Many among these were establishedmuch before India became independent. A noticeable change in the move of the focusfrom charitable donations and philanthropy to the issues of ethics, ecology, support forsmall rural enterprises and consumer education became prominent in decades afterindependence. This was evident from a sample survey conducted in 1984 reportingthat of the amount companies spent on social development, the largest sum-47 percentwas spent through company programs, 39 percent was given to outside organizationsas aid and 14 percent was spent through company trusts (Working Document of EUIndia CSR, 2001).

With the challenges of globalization, liberalization and the emerging trend towardsa free market economy facing India, the role of CSR is paramount. Primarily becausethe foreign investment has increased in India, trade links of India and developedcountries grown and extended role of private companies, there has been powerfulinfluence on CSR in India. Companies can benefit from adopting corporateresponsibility policies in response to globalization, through access of markets, costand risk reduction, improved productivity, competitiveness and improved publicimage. When combined with increased competition and commercial pressures,regulatory standards and consumer expectations, concepts of corporate citizenship arebecoming more influential within the business environment. If a company is not a partof the visible supply chain of a larger company with a socially responsible credo, thesestandards have less influence. Lack of information, skills, and technological andfinancial capacity can also limit the scope to respond effectively, especially, in case ofsmall and medium-sized enterprises. A powerful global civil society lobbying andprotesting against poor corporate performance means that companies are underpressure to cooperate with communities and NGOs to tackle problems together. Theformal processes of stakeholder consultancy are still in their infancy and yet to becomepopular (Working Document of EU India CSR, 2001).

Despite the development of Indian CSR from its initial philanthropic focus, there arestill cultural influences to modern CSR. The underlying philosophy is that CSR isresponsibility of business to society at large. Societal expectations in India are thatbusinesses should be involved in wider issues of societal and national concern whilecontinuing to conduct their business responsibly. Both domestic and global forcesencourage a broader understanding of corporate responsibility to develop in India.While some of the impetus may stem from supply chain pressures from internationallinks through trade and investment, there have also been increased governmental andpublic expectations, as well as corporate will involved in post independence drive for


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socially responsible development. The historical influence of colonialism, state plannedeconomic development and vast disparities of income have created unique localconditions in India. There is no single, transferable model of CSR, considering thesefactors into consideration (Working Document of EU India CSR, 2001).

According to a survey done by Partners in Change (2000), which covered600 companies and 20 CEOs for judging Corporate Involvement in Social Developmentin India: 85 percent agreed that companies need to be socially responsible; only 11percent companies had a written policy; over 60 percent of the companies were makingmonetary donations; health, education and infrastructure were most supported issues.A survey by center for social markets reported that the primary reason for changingattitudes to social and environmental responsibility issues was increasing awarenessand protecting reputations. Rising standards, domestically slightly more thaninternationally were also strong influences along with commercial pressures anddomestic regulation. Public and community group pressure figured lower on the scale.These companies identified customers as most important stakeholders. Employees,shareholders and investors were given slightly less priority, followed by employers,community, regulatory bodies and unions.

Social businesses based on models of micro credit, self-help and stakeholdercentered management has grown to become large and successful businesses promotingstakeholders interests. Examples include Amul Milk Cooperative, Sewa India andTilonia, which have illustrated decentralization of management to ensureempowerment and participation of the poor. Large number of corporate houses andcompanies in India are doing tremendous work in CSR, including corporatephilanthropy. Activities include in the area of education, healthcare services, ruralinfrastructure, development, community welfare, environment protection, relief andemergency assistance, preserving art, heritage, culture, religious and a host of otherissues. Prominent examples are – Tata Group, Birla Group, Bajaj, Singhania, Modi,ITC, Mahindra and Mahindra, Shriram, Hero Honda, Godrej, Ranbaxy, Lupin,Dr Reddy’s Foundation, Kanoria, Infosys, Satyam, NIIT, etc. Chambers of Commerceand Industry Associations like Assocham, CII, FICCI, PHD Chamber of Commerce,regional chambers of commerce, are actively engaged in promoting and sensitizingtheir member companies to be socially responsive.

There are several business NGO partnerships where implementation of socialprojects has been undertaken by businesses, including the Chambers of Commerce,Industry Associations, etc. For instance, a response to the major Gujarat earthquaketragedy brought about a partnership of FICCI (Federation of Indian Chambers ofCommerce and Industry) and CARE India. Through the FICCI Socio EconomicDevelopment Foundation, the task was to rebuild the devastated regions of Gujarat,construct houses and economic empowerment to people.

A recent study pointed that Indian companies are doing much better thanmultinational companies, both in scope and content of work in CSR. According to thisstudy, by Businessworld – Indica Research, 1999, out of the top 25 companies that wereperforming CSR activities, 68 percent were Indian companies, 28 percent were MNCsand 4 percent were public sector companies (Businessworld – Indica Research, 1999).

A recent study on CSR in South Asia, by TERI and New Academy of Business, UK,also points out that multinational companies in India are not as socially responsible asIndian companies. According to the snapshot poll conducted by ORG MARG under

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this study, it was felt that more trust is placed in press, media, NGOs than in business;workers and management have sharply diverging perceptions of workingconditions, gender discrimination is an issue and there is a greater need for role byNGOs. It was felt that business NGO partnerships are a potential concrete method forpractice of CSR in India (Kumar et al., 2001).

Globalization has brought significant advantages to countries and business aroundthe world but the benefits have spread unequally both within and among countries.With a rich cultural heritage regarding CSR, the global compact has taken roots inIndia. A large number of key corporates from India have joined. Professionalorganizations and academic institutions have also shown interest. Considering thelarge size of the country and the stage of development at present, it is felt that a longersustainable effort is needed to ensure that global compact is firmly established as apart of corporate vision, mission and activities. In today’s world it is clearlydemonstrated that human and ethical values pay better results in industry andbusiness (Swami Someswarananda, 2000).

While discussing about Vivekananda and his theory with respect to CSR, we findthat Vivekananda is not only a religious leader; he was a patriot, social reformer too.Now his social outlook gives the people of India, a new vision: service to humanity.This changes its nature in due course of time from charity to CSR, corporategovernance to global compact. We can divide his social outlook into six differentmodels:

(1) on Vedanta;

(2) on practical Vedanta;

(3) on humanity;

(4) on society;

(5) on organization; and

(6) on brothers and sisters model.

On VedantaTo Vivekananda the most important teaching for humanity was Vedanta, the summitof Vedic philosophy, which teaches the unity of the self and the absolute. Vivekanandaemphasized the great Vedantic realization of “I am Brahman” or “I am God” as thehighest truth for all people.

According to Vedanta, the essence of all science and religion is the knowledge ofoneself in one’s deeper nature as pure consciousness transcending all time space andmaterial embodiment. Vivekananda emphasized Jnana Yoga or the Yoga ofknowledge, which is the same as Vedanta, the meditation path leading toself-knowledge.

Bhakti Yoga, the Yoga of devotion, was also very important to him and he wasproficient in chants to the different deities of Hinduism like Shiva and Devi. Raja Yoga,emphasizing the development of the will, was significant for him as well. He saw thatthe gaining control of the will and developing the power of self-determination was keyto the growth of mind and character.

He did not neglect karma Yoga or service either. He emphasized the need to workcontinually, not only for our own inner growth but also for the upliftment of allhumanity. Vivekananda was a great patriot and perhaps the central figure in the


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modern Indian renaissance. He spoke proudly and eloquently as an Indian andencouraged India to honor and promote the traditional spiritual culture of their land.He affirmed the unity of the entire tradition through the Vedas, Puranas, Tantras andmodern teachers, as one movement of spiritual culture realization. Unlike manymodern Indian he did not hide his Indianism, make excuses for it, or apologize for it.

Vivekananda was a great reformer against the rigidity of caste, the mistreatment ofwomen, and other social ills that have become associated with Hinduism because ofantiquated social accretions that do not truly represent its spirit. Vivekananda showedHindus that what is wrong with India is not owing to its spiritual and religioustradition but because this tradition has been misunderstood and misapplied.

The universal religion that Vivekananda taught was a modernized form of Vedantaand Hinduism with its broad approach to Truth. According to “Practical Vedanta”none of us are limited or weak. None of us are fallen and in need of redemption. We arenot sick, or in need of comfort or healing. We are not a little body or limited mind.We are not even souls or children of God; we are God. No, we are greater than God.We are, each one of us, the self of all beings. This entire universe of matter and mind isno more than our shadow. It is beneath our dignity as the master of the universe to bedominated by anger, fear or desire, to want anything or to be the slaves of anyone’sopinion.

Practical vedantaPractical Vedanta is a conscious and deliberate way of life leading to realization of truenature. Removing individual ignorance, practical Vedanta has one more function: it hasto clear the way for desirable social change for the better, instill knowledge which triesto etch new lines of selflessness on the minds of humanity. Practically practicalVedanta tries to shake the foundation of ignorance and selfishness that preventshumanity to marked its perfect heavenly glory.

The essence of the teachings of Swami Vivekananda was Advaita Vedanta asrevealed in the life of his Master, Sri Ramakrishna. The main points of his teachingsare:

. that each soul is potentially divine;

. the goal of human birth is to realize this divinity within and manifest it for thewelfare of the humanity; and

. essentially all religions lead to the same realization.

Swami Vivekananda’s insistence on individual liberation, as a priority over the effortsto “do good to the world.” The idea is to strive for special state or plane ofconsciousness that would lead a person to realize his or her true nature. Achieving suchexalted state of altered consciousness forms the basis for human actions. Every humanact should have this aim in sight, even in “service to humanity and renunciation ofsense pleasures.” Thus, religion or spirituality for the Swamiji was an act of inchinghigher and higher on the steps of consciousness, from animal consciousness to humanconsciousness, and from human consciousness to divine consciousness:

Vedanta is everywhere; only you must become conscious of it. These masses of foolish beliefsand superstitions hinder us in our progress. If we can, let us throw them off and understandthat God is spirit to be worshipped in Spirit and in Truth . . . All the different ideas of God,

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which are more or less materialistic, must go. As man becomes more and more spiritual, hehas to throw off all these ideas and leave them behind. If Vedanta – this conscious knowledgethat all is one Spirit – spreads, the whole humanity will become spiritual. But is it possible? Ido not know . . . (Complete Works Volume, VIII, p. 122).

Thus, harmony of religions, universal solidarity, and human being as the highestmanifestation of spiritual consciousness are the basic fundamentals one should not losesight of in reading or understanding Swami Vivekananda. The practical aspects ofthese teachings reflect in renunciation and service. This forms the twin ideal ofSwami Vivekananda’s emphasis for the modern man and woman to strive for. Alongwith excellence and perfection in every field of human endeavor one should keep theseideals before eyes, lest the person should miss the aim.

On humanitySwami Vivekananda – a patriot monk, even a very learned person likePandit Jawaharlal Nehru, in his Discovery of India, had remarked about SwamiVivekananda as one who preached a sort of religious nationalism.

Swami Vivekananda did not come purely for the political freedom of India, ormerely for the economic or social upliftment of this country. He came for the welfare ofthe whole of humanity. Swamiji himself has clarified that on several occasions.Whenever an avatara comes, he comes for the whole world. When Sri Ramakrishnacame, Swamiji carried the message to the whole world. People saw him as a messenger,as a medium, as a carrier of the message of Vedanta.

When Swamiji’s practical Vedanta is applied to the nation, it will lead to theupliftment of the country, to the raising of the standing of the country in the world – aworld much of which looks down upon all Indians as those who have no self-confidence.The self-respect that Swamiji meant is rooted in the idea of divinity. If self-respect iscultivated, social pride, national pride, comes as a matter of course. It is aself-respecting man who values his work.

On societyVivekananda’s love for mankind, his empathy for the poor and downtrodden of alllands, and his great devotion to his Motherland and her depressed masses were themotivating power behind all of his actions. In his social views, whether on caste,education, women’s rights, or the conditions of the masses, the one common factor washis great compassion for all who suffer. It was this sympathy and compassion of heart,which impelled him to accomplish as much as he did in such a short period of time; andit was the same sympathy of heart, which brought so much suffering to his life as well.

Swami Vivekananda waged a steady battle against all types of privilege andexploitation. In his eyes, all distinctions whereby one might distinguish one personfrom another, such as caste, creed, race, or gender, were based, not on the true nature ofthe individual, but on external superimpositions. From the highest point of view, allare pure spirit and, as such, share an essential identity. Thus, all attempts to exerciseexclusive rights at the expense of others were seen by him to be both an affront to thehuman dignity of man and a contradiction of the spiritual fact of unity.

In a lecture delivered in London, entitled “Vedanta and Privilege” Swamiji spoke outagainst the phenomenon of privilege at all levels of society: the idea of privilege is thebane of human life. Two forces, as it were, are constantly at work, one making caste,


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and the other breaking caste; in other words, the one making for privilege, and theother breaking down privilege. And whenever privilege is broken down, more andmore light and progress come to a race. This struggle we see all around us.

Of course, there is first the brutal idea of privilege, that of the strong over the weak.There is the privilege of wealth. If a man has more money than another, he wants alittle privilege over those who have less. There is the still subtler and more powerfulprivilege of intellect; because one man knows more than others, he claims moreprivilege. And last have all, and the worst, because the most tyrannical, is the privilegeof spirituality.

If some persons think they know more of spirituality, of God, they claim a superiorprivilege over everyone else. They say, “Come down and worship us, ye commonherds; we are the messengers of God, and you have to worship us.” None can beVedantists, and at the same time admit of privilege for anyone. The same power is inevery man, the one manifesting more, the other less; the same potentiality is ineveryone. Where is the claim to privilege? (CW, I.423).

Swamiji’s opinion on caste in general is not always entirely clear. In some of hiswritings and lectures, especially when responding to criticisms of the caste systemfrom the West, he defends the concept of caste as representing a sensible and necessarydivision of labor. However, he was uncompromising with regard to his hatred ofhereditary caste, of the notion that one’s station in life was to be determined by birthalone rather than by one’s ability or natural propensities. Though he sometimesblamed religion for the modern caste structure, Swamiji’s mature opinion seems tohave been that religion was not to blame and that the earliest references to caste in theHindu scriptures do not contain the notion of hereditary caste.

Swamiji’s sympathy and compassion for the poor and downtrodden was one of hismost outstanding traits and was the dominant motivating force behind many of hisactivities, including his initial visit to USA and his founding of the Ramakrishna Mathand Mission. His utterances regarding the plight of the poor, particularly the depressedmasses of India, are some of his most passionate and inspiring. In a letter to hisMadrasi disciples, Swamiji wrote:

Feel, my children, feel; feel for the poor, the ignorant, the downtrodden; feel till the heart stopsand the brain reels and you think you will go mad – then pour the soul out at the feet of theLord, and then will come power, help, and indomitable energy . . .(CW, IV. 367).

In this same letter, Swami Vivekananda pointed out the two crying needs of the poor:

. . .“bread” and education. He wrote: Material civilization, nay, even luxury, is necessary tocreate work for the poor. Bread! Bread! I do not believe in a God who cannot give me breadhere, giving me eternal bliss in heaven! Pooh! India is to be raised, the poor are to be fed,education is to be spread, and the evil of priest craft is to be removed . . . More bread, moreopportunity for everybody . . . (CW, IV. 368).

And in a lecture delivered in Lahore, he said: What we want is not so much spirituality as alittle of the bringing down of the Advaita into the material world. We stuff them too muchwith religion, when the poor fellows have been starving. No dogmas will satisfy the cravingsof hunger (CW, III. 432).

Swamiji placed great emphasis on education for the upliftment of the Indian masses. Itwas his desire that all aspects of life be covered in this education, so that it would be

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conducive to the material, intellectual, and spiritual development of the individual.Above all, he wanted a “man-making” education that would build character, givethe masses back their “lost individuality” and restore their faith in their own divinepotential. As in all matters of social reform, Swamiji’s motto was “hands off” ashe explained to the Maharaja of Mysore.

The only service to be done for our lower classes is to give them education, todevelop their lost individuality . . . They are to be given ideas; their eyes are to beopened to what is going on in the world around them, and then they will work out theirown salvation. Every nation, every man, every woman, must work out one’s ownsalvation. Give them idea that is the only help they require, and then the rest mustfollow as the effect. Ours is to put the chemicals together, the crystallization comes inthe law of nature. Our duty is to put ideas in their heads and they will do the rest(Letters, pp. 117-18).

Another great concern of Swamiji’s was the condition of women, not as an isolatedsocial issue, but as intimately connected with the well being of society as a whole. Hewrote to Swami Ramakrishnananda, “There is no chance for the welfare of the worldunless the condition of women is improved. It is not possible for a bird to fly on onlyone wing” (CW, VI. 328).

Swamiji was convinced that everyone was, in reality, non-different from the oneuniversal self. As he wrote to his brother disciples, “I shall not rest till I root out thisdistinction of sex. Is there any sex distinction between man and woman – all isAtman!” (CW, VI. 272-73).

On organizationSwamiji observed that Indians do not know how to work in co-operation. Ten of us gettogether to form a society, and in no time we start quarrelling amongst ourselves, andour effort collapses. To solve that problem in the light of practical Vedanta, we have tobegin with the simple step of trying to respect our own being, from which follow theability to work in co-operation and respect for others. It is another application ofatma-shraddha, which Swamiji has stressed for this country or for any society to raise.

Success of any organization depends on proper integration of five tenets on which itrests. These are:

(1) ideology;

(2) program;

(3) strategy;

(4) tactics; and

(5) fieldwork (Source: According to neovedanties of International Forum forNeovedantins Fortnightly E-zine, 2005).

But social organizations concern themselves mostly with selfless work to achieve thisend. Unfortunately, social activity becomes the goal, and the truth of divinity of soul isforgotten. We get involved only in eradication of evils and bringing more comforts tosociety. Higher purpose of social service as “service of Divine” is lost sight of. Meansbecome the goal! This contradiction in approach is responsible for topsy-turvy scenarioin various governmental and non-governmental organizations. Corruption, apathy,


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wastage, alienation, and frustration are a few common problems we encounter inevolution of any organization.

However, it is not easy to incorporate Vedantic values in such activities. For,unconsciously member/s might be using the organizational platform for such reasonsas an antidote to anxiety or stress, enhancing self-esteem, or for gratification of ego.Vedantic insistence on service and sacrifice without expecting any returns is sure torun contrary to the hidden motives mentioned above. Therefore, conscious anddeliberate efforts are required to understand the complexities of Yoga of SelflessAction, and to avoid initial clash of opinions about adopting Vedantic principles.

There is a sort of hierarchy. At every level an attempt is usually made to recruit orselect talented persons with specialized qualifications. Every level acts as the “ideal”for lower level. Analysis of an organizational structure is possible by studyingbehavioral patterns and perceptions of the members as parts of the organization.Therefore, every person should strive to express his or her “shreshttva” –excellence –in his or her work. As Lord Krishna says in the Gita (III. 21):

It should be emphasized that the involved persons can visualize their unity withorganizational set-up and the work they propose to undertake. Any idea of separatenessbetween workers, the work, and the instrument of work (organization in this case) will yieldpartial and distorted result.

Higher the person in organizational hierarchy, less privilege he or she should seek. He shouldequally cherish the idea of mixing with common people, visiting villages, and activelyparticipating in ground level programs as much as he or she likes to attend meetings andconferences.

Without sacrifice and selfless love no social work will be enduring. Corollary is that, whenthese virtues are embedded in the psyche of the organizers the outcome will be a true “model”for others to follow. The task is difficult, but with sincere effort we are bound to succeed.Noble efforts are never completely wasted. However, one should be humble in success.Humility and modesty are desirable virtues.

Vedanta says that opportunity to serve the oppressed is for our own welfare andgrowth. In serving others, we serve ourselves. That is why Swami Vivekananda oncesaid to the effect “one who accepts help from you is greater than you: receiver is greaterthan the giver, for he has given you the chance you to give!”

Our duty is to work ceaselessly to eradicate evil. We need not concern ourselveswith success or failure. Attachment to outcome may be counter-productive. Similarly,too much of emotional involvement makes us result-oriented and then organizationalendeavor loses its effectiveness; for emotions and frustration go hand in hand.

Brothers and sisters modelSwami Vivekananda in his opening and closing addresses at the Parliament ofReligions in Chicago spoke eloquent, powerful and memorable words “Brothersand Sisters” to highlight the importance of inter-religious understanding and respectand expanded the concept of brotherhood and sisterhood to all religions, nations, andcommunities. He closed his maiden speech with the following words: sectarianism,bigotry, and its horrible descendant, fanaticism, have long possessed this beautifulearth. They have filled the earth with violence, drenched it often and often with humanblood, destroyed civilization and sent whole nations to despair. Had it not been for

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these horrible demons, human society would be far more advanced than it is now.But their time is come; and I fervently hope that the bell that tolled this morning inhonor of this convention may be the death-knell of all fanaticism, of all persecutionswith the sword or with the pen, and of all uncharitable feelings between peoplewending their way to the same goal.

Over the years Swami Vivekananda worked out the basics of such a plan andanchored it with this maxim: “Do not destroy.” He urged people to build instead ofpulling anything down. “Help if you can; if you cannot, fold your hands and stand byand see things go on. Do not injure, if you cannot render help.” Secondly, theSwami suggested, “take a man where he stands and from there give him a lift. If it weretrue that God is the center of all religions, and that each of us is moving towards himalong one of these radii, then it is certain that all of us must reach that center. And atthe center, where all the radii meet, all our differences will cease.” And, he insisted, wecould all teach ourselves to get there. “None can make a spiritual man out of you . . .your growth must come from inside.”

Such growth is, according to Swami Vivekananda, the only way to check the latent“tiger” in us. This is vital for human civilization because the fanatic uses not merelyswords but contempt, social hatred and social ostracism against all those who do notagree with him. On the other hand, the rational man is glad that others do not thinkexactly as he does. Since, thinking beings must differ, “variation is the sign of life, andit must be there.” A celebration of this variation would be universal religion. The idealmay seem elusive but Vivekananda believed it to be inherent to human striving. “If thepriests and other people what have taken upon themselves the task of preachingdifferent religions simply cease preaching for a few moments, we shall see it is there.”

Since, the Swami was a man of action, and not just ideas, his energies were severelyover-taxed in this last decade of his life. The magnitude of his spiritual, social andorganizational mission drove him at a pace, which made fatigue inevitable. But theSwami’s disciples believe that exhaustion alone could not overcome that superhumanwill. They recall his Guru Sri Ramakrishna Paramahamsa’s prediction thatNaren would leave his body the day he realized his true self. Perhaps, it was thatrealization which allowed the Swami to slip away one evening in 1902. He had oftenvisualized his own departure from the body, murmuring, “Hara, Hara (The free, thefree).” Yet, the words which resound through his life journey, and perhaps make afitting epithet are these: “Love never fails, my son; today or tomorrow or ages after,truth will conquer . . . Believe in the omnipotent power of love.”

All the work, which started of late with respect to either ethics in business, or in thebroader sense of CSR, have a direct bearing on the six basic models being propoundedby Vivekananda. And number of other factors are motivating CSR practices in thecorporate India. It has not done only for employment practices and the environment.Beyond this, many companies, being a good corporate citizen (GCC) is a very importantaspect of their identity, values, and vision. Far-sighted business leaders like G.R.D.Tata recognize that it is unsustainable for their companies to exist as “islands ofprosperity” in a sea of poverty. “We must do something for the community from whoseland we generate our wealth.” CSR is emerging as a “hard” commercial factor, linkeddirectly to profits and brand value. For example:

. Boosting profits. Gujarat Ambuja, one of the countries’s leading cementmanufacturers, reports that “our efforts to achieve world standards in


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environment protection have had the happy outcome of substantially improvingefficiency and profitability.”

. Cutting costs. Reliance Industries’ energy conservation measures have saved thecompany Rs 1,150 million per annum.

. Increasing revenues. HLL’s Project Shakti creates income-generatingopportunities for the under-privileged rural women, while giving the companyan enhanced access to hitherto unexplored rural areas.

. Strengthening brand value. In February 2004, Infosys was among seveninternational companies to be chosen in the first annual list of “Top Brands witha Conscience.”

. Enhancing reputation. The Oil and Natural Gas Corporation has found that itscommunity development program has “generated tremendous goodwill andearned the company the reputation of being a company that cares.”

. Improving morale. Tata Steel believes that helping the community also providesa new perspective to its employees, thereby strengthening employee morale(Kumar, 2004).

Looking across the present observation of leading Indian corporations, a number ofcore elements emerge:

. Community development. Most large companies either have their ownfoundations or contribute to other initiatives that directly support thecommunity upliftment, notably in health, education, and agriculture.

. Environmental management. Environmental policies and programs are nowstandard, and many companies have implemented the ISO 14 001 systemthroughout their businesses.

. Workplace. Growing out of long-standing commitments to training and safety isa more recent emphasis on knowledge and employee well-being.

Table I presents a selected list of CSR innovations from some of India’s leadingcompanies (Kumar, 2004). Basically Indian corporates are already working on theguideline of global compact, because Indian ethos and religious values teaches us thesedoctrines in a socio-religious aspect (Swami Vivekananda).

Indian companies on UN GC web site – July 15, 2005. Abar Group. Air India. Apollo Hospitals. Artificial Limbs Mfg Corporation. Atlas Cycles (Haryana) Limited. Balmer Lawrie & Co. Ltd. Bharat Aluminium Company Limited. Bharat Heavy Electricals. BIOCON

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. Bongaigaon Refinery & Petrochemicals Limited

. Cement Corporation of India

. Central Cottage Industries Corporation of India Limited

. Central Warehousing Corporation

. Chennai Petroleum

. Comat Technologies

. Dena Bank

. Divgi Warmer Pvt Ltd

. Dredging Corporation of India

. Engineering Projects (India) Limited

. Engineers India Limited

. Excel Industries Limited

. Global Calcium Pvt Ltd

. Global Synergetic Organisation

. Heuback Colour Pvt Ltd

. Hi-Tech Carbon

. Hindalco Industries Limited

Issue Company Action

Community development Hindalco Asian CSR Award for its integrated RuralPoverty Alleviation Program

Corporate giving Indian Oil Corporation Dedication 0.75 percent of net profit tocommunity development initiatives

Health Larsen and Toubro One of first corporates to launch anHIV/AIDS program

Gender equality NTPC One of the few organizations to have apolicy for the grant of paternity leave

Labor standards ITC First company in India to be certified to theSA8000 social accountability standard forits Chirala facility

Human capital Infosys Pioneering evaluation of the human capitalusing an education index for its employees

Environmental management BHEL All BHEL units are certified to the ISO14001 environmental management system

Energy conservation Reliance Energy conservation measures are savingthe company Rs 1,150 million per annum

Water conservation Hindustan Sanitaryware Reduced flushing WCs is estimated to savetwo billion liters of water

Disclosure Tata Iron and Steel First Indian company to publish asustainability report in line with globalreporting initiative guidelines

Source: Complied from published data on company web sites

Table I.India Inc.: selected CSR

innovations


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. Hindustan Aeronautics Limited

. Hindustan Lever Ltd

. Hindustan Organic Chemicals Limited

. Hindustan Paper Corporation Limited

. Hindustan Sanitaryware & Industries Limited

. Housing Development Finance Corporation

. HSCC Hospital Services Consultancy Corporation Limited

. Indian Aluminium Company Limited

. Indian Farmers Fertilizers Cooperative

. Indian Oil Corporation Limited

. Indian Renewable Energy Development Agency Limited

. Indo Gulf Corporation Limited

. Infosys Technologies Limited

. Infrastructure Development Finance Company Limited

. Kolam Information Services Limited

. Konkan Railway Corporation Limited

. Kudremukh Iron Ore Company Limited

. Mahanagar Telephone Nigam Limited

. Mahindra & Mahindra Limited

. Mazagon Dock Limited

. Metalman Auto Pvt. Ltd

. Mineral Exploration Corporation Limited

. Mishra Dhatu Nigam Limited

. MMTC

. National Buildings Construction Corporation Limited

. National Mineral Development Corporation Limited

. National Research Development Corporation

. National Textile Corporation Limited

. North Eastern Electric Power Corporation Limited

. NTPC-National Thermal Power Corporation Limited

. O/E/N India

. Octaga Green Power & Sugar Ltd

. Oil & Natural Gas Corporation

. Oil India Limited

. Paharpur Business Centre and Software Technology

. Parijat Agencies

. Power Finance Corporation Limited

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. Priconser India Pvt. Limited

. Psi

. Punjab National Bank

. Quadra Advisory Private Limited

. Rallis India Limited

. Rashtriya Chemicals and Fertilizers Limited

. Renata Plasatics

. Satluj Jal Vidyut Nigam Ltd

. Scooters India Limited

. Semiconductor Complex Limited

. TAL Manufacturing Solutions Limited

. Tata Autocomp Systems Ltd

. Tata Chemicals Limited

. Tata Industries Limited

. Tata International Ltd

. Tata Metaliks Limited

. Tata Motors Ltd

. Tata Power Company Limited

. Tata Steel Limited

. Tata Tea Limited

. Telco Construction Equipment Company Limited

. The Associated Cement Companies Ltd (ACC)

. The Indian Hotels Company Limited

. The Shipping Corporation of India Limited

. The State Trading Corporation of India

. Titan Industries Limited

. Transnational Supply & Service

. Twenty First Century Battery Limited

. Unit Trust of India

. Voltas Limited

. Wadia Group

. Water & Power Consultancy Services Limited

. Winsome Textile Industries Limited

Participation by NTPCOwing to keenness of UN that this movement takes root in India, some businessleaders took the initiative and organized a meeting of select business leaders inMumbai in December 2000. NTPC as a prominent business and community leader in


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the power sector was also invited to the meeting and thus engage/associate itself withglobal compact.

Following this meeting which was attended by CMD NTPC, NTPC agreed tobe associated with the global compact. In his letter in May 2001 CMD addressed toMr Kofi Annan, Secretary General, UN formally expressed its support for the globalcompact and its commitment to take action in NTPC expresses its continued supportfor the global compact and its commitment to take action in this regard. The principlesof GC are regularly communicated to all employees through in-house magazines,internal training programs and posters.

NTPC along with major corporate in India took the lead and founded GlobalCompact Society of India in the year 2003. Further, NTPC as founder member of GlobalCompact Society took the lead for organizing the 1st national convention on“Excellence in Corporate Citizenship and Global Compact” on July 27, 2004 atNew Delhi.

Communications on progress (2004-2005)Human rights: principle 1-2Most of NTPC’s 20 operating power stations are located in remote rural areas whichare socio-economically backward and deficient in the basic civic amenities. NTPC, asresponsible corporate citizen has been addressing the issue of community developmentin the neighborhood areas of its stations, which had been impacted due toestablishment of the project.

While, this has been initially administered as part of resettlement and rehabilitationeffort, NTPC recognized its social responsibility to continue community and peripheraldevelopment works where the same has been closed under R&R policy. Towards this,NTPC during 2004-2005 adopted “Corporate Social Responsibility – CommunityDevelopment (CSR-CD) Policy” July 2004.

TsunamiThe employee of NTPC with support of company volunteered to contribute a total sumof approximately Rs 15.2 million from their salary, in addition to NTPC contribution ofRs 880 million to Prime Minister Relief Fund as immediate relief measures. The team of52 NTPC employee provided medical treatment and relief material to the affectedpersons. This team treated 7,838 patients and provided food to 18,398 villagers andchildren till alternate arrangements were made by local authorities.

NTPC team assisted for restoration of power supply in 53 relief camps, rectificationof 2 nos. control panel, inspection and suggesting rectification for 33 KV transmissionsystems, installing small DG set, and repairing a number of DG sets of variouscapacities.

Labour standard: principle 3-6For addressing the issue of labor standard in comprehensive manner, NTPC hasdecided to adopt international standards like SA-8000 and OHSAS-18001. During theyear 2004-2005, three of the NTPC stations viz. Anta, Auriaya and Simhadri receivedSA-8000 accreditation while Ramagundam was accredited in the year 2003-2004.Similarly, five of NTPC stations viz. Talcher-Kaniha, Talcher-Thermal, Singrauli,

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Rihand and Vindhyachal were accredited with OHSAS 18001 during 2004-2005,bringing total of 19 stations under accreditation of OHSAS 18001.

Environment: principle 7-9Towards its commitment to environment NTPC has decided to adopt ISO-14001 andobtained accreditation for all its 20 operating stations.

During the year 2004-2005, eight of its stations namely Singrauli, Unchahar,Kayamkulam, Badarpur, Auraiya, Anta, Faridabad and Farakka were re-audited andaccreditation for ISO 14001 was revalidated (Source: www.ntpc.co.in/globalcompact/index.shtml).

Bharat Heavy Electricals LimitedA prominent and active member of the Global Compact Society, Bharat HeavyElectricals Limited (BHEL) joined the value-based platform, for promoting GCC. Thecompany is committed to supporting the global compact and the set of core valuesenshrined in its ten principles in the areas of human rights, labor standards and theenvironment. BHEL publicly advocates the principles of global compact by informingits employees, shareholders, customers and suppliers, besides integrating them into itscorporate development and training programs.

BHEL has been working for the upliftment of weaker sections of society and theirall round development. Especially, in the area of rural development, the company hasbeen playing a proactive role and has adopted 56 villages in the vicinity of its majormanufacturing plants located in different parts of the country, where social welfareactivities are undertaken regularly, benefiting over 80,000 people of these villages.Reaching out to the distressed victims in the Tsunami-affected states of Tamil Nadu,Andhra Pradesh, Kerala, Andaman & Nicobar Islands, employees of Bharat HeavyElectricals Limited (BHEL) have made a humble contribution of Rs 1 crore to thePrime Minister’s National Relief Fund. BHEL’s manufacturing plant at Tiruchi, whichis closest to the affected areas, swung into action by the morning of December 27, 2004and handed over relief material including, clothing and medicines to the districtauthorities by the afternoon of the same day. BHEL and its employees have alwaysrisen to the occasion and contributed its mite rendering relief to victims affected bynatural calamities, like the floods in Assam, earthquake in Gujarat, the super cyclone inOrissa and the drought in Gujarat and Rajasthan, besides the Kargil war (Source:Bharat Heavy Electricals Limited, BHEL House, Siri Fort, New Delhi – 110049, India.Press releases on corporate social responsibility (April 1, 2004 till to date)).

ConclusionYet, for all these signs of progress, CSR in India has yet to realize its full potential.Individual and collaborative initiatives continue to be dominated by self-assertionrather than accountability. There is certainly no lack of CSR programs and projectsin India: what is absent, however, are clear metrics for evaluating their actual impact inimproving social conditions. One quick indicator: of the 95 supporters of the globalcompact from corporate India, only one – Atlas Cycles – has produced the annualcommunication on progress that is expected of the compact’s supporters. And whilemost large corporations now disclose some information on their social orenvironmental programs – with BHEL, Dr Reddy’s, HLL, and TISCO in the


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vanguard – much of this remains highly descriptive and qualitative, lacking the rigorof common, quantified performance information that characterizes the companyfinancial accounts. Companies routinely claim that their employees are their greatestasset – and yet provide little evidence of how this asset is being valued and enhanced.Similarly, there are no generally accepted standards for measuring the success of thearray of community development programs that are now in place. Without this, it isdifficult for companies and their stakeholders to judge the efficiency or effectiveness ofthese well-intentioned interventions.

Beyond the issue of assessing impact are broader questions of the incentives forcompanies to take action. In the language of economics, India’s markets continue toexhibit an unhealthy profusion of negative externalities where the costs of resourceuse, environmental degradation, or community disruption are neither paid by thosewho incur them nor are reflected in actual prices. For example, India is already “waterstressed” and is on course to enter a situation of “water scarcity” in the comingdecades. Yet, the current pricing of water is below its real economic value, giving littleincentive for companies to reduce demand and conserve. Tragically, today’s economicframework gives little encouragement for companies to consider the long-term – theessence of true sustainable development. Indeed, the pressure in financial markets isfor an ever-more insistent focus on short-term shareholder value. Increasingly, it isbecoming clear that the real CSR leadership is not just putting one’s own house inorder, but advocating the right conditions to reward responsible practice (Appendix).

Notes

1. From a speech at the Indian Merchants chamber, Bombay on February 27, 1963 reprinted inTribute to Ethics, Gujarat Chamber of Commerce, Ahmedabad, pp. 108-109.

2. Quoted in Tata JRD (1986, p. 40).

References

Businessworld – Indica Research (1999), Business World – India’s Most Respected Companies.

Gupta, A.D. (2005), Ethics in Business: Concept, Cases and Context, Rawat Publication, Jaipur.

Kumar, R. (2004), “The state of CSR in India 2004: acknowledging progress, prioritizing actionbackground paper”, paper presented at National Seminar on Corporate SocialResponsibility, November 10, Director, TERI-Europe, London, UK.

Kumar, R., Murphy, D.F. and Balsari, V. (2001), “Altered images: the 2001 state of corporateresponsibility in India Poll”, A TERI Report, TERI-India, New Delhi.

Mohan, A. (2001), “Corporate citizenship: perspectives from India”, Journal of CorporateCitizenship, No. 2, pp. 107-17.

Partners in Change (2000) Report on Survey on Corporate Involvement in Social Development inIndia, Partners in Change. New Delhi, (this indicate that through their work we can step-inin the process of making a sacro-civic society).

Ramakrishna, B. (1970), Social Role of Business, Maharashtra Chamber of Commerce,Bombay, p. 52.

Saradananda (1983), Sri Ramakrishna: The Great Master,Vol. I and II, Sri Ramakrishna Math,Chennai.

Sundar, P. (2000), Beyond Business: From Merchant Charity to Corporate Citizenship,Tata McGraw-Hill, New Delhi, p. 249.

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Swami Someswarananda (2000), Business Management Redefined – The Gita Way, Jaico BookHouse Pvt. Ltd, New Delhi, pp. 3, 6, 16-17.

Tata JRD (1986), “The private sector”, Keynote, Tata Press, Bombay, p. 45.

Working Document of EU India CSR (2001), “Comparative analysis of corporate socialresponsibility in India and Europe”, Working Document of EU India CSR.

Further reading

Ananth, N.K. (2003), “A new role for NGOs”, The Hindu, January 28.

BusinessLine (2004), “Corporate social responsibility, the very purpose of business”,BusinessLine, September 25.

Chakraborty, S.K. (1985), Human Response in Organizations, Vivekananda Nidhi, Kolkata.

Chakraborty, S.K. (1987), Managerial Effectiveness & Quality of Work Life – Indian Insights,Tata McGraw-Hill, New Delhi.

Chakraborty, S.K. (1989), Foundation of Managerial Work Contributions from Indian Thought,Himalaya Publishing House, Bombay.

Chakraborty, S.K. (1990a), Human Response Development, Wiley Eastern Ltd, Delhi.

Chakraborty, S.K. (1990b), Value Orientation in the World of Indian Managers/Administrators,Vivekananda Nidhi, Kolkata.

Chakraborty, S.K. (1991), Management by Values – Towards Cultural Congruence, Chapter 8,Oxford University Press, New Delhi.

Chakraborty, S.K. (1993), Managerial Transformation by Values: A Corporate Pilgrimage, Sage,New Delhi.

Chakraborty, S.K. (1995a), Ethics in Management, Oxford University Press, New Delhi.

Chakraborty, S.K. (1995b), Human Values for Managers, Wheeler Publishing Company,New Delhi.

Chakraborty, S.K. (1996), Human Values – The Tagorean Panorama, New Age InternationalPublisher, New Delhi.

Chakraborty, S.K. (1997), Values and Ethics: Theory and Practice, Oxford University Press,New Delhi.

Chakraborty, S.K. (1999a), Wisdom Leadership: Dialogue & Reflections, Wheeler PublishingCompany, New Delhi.

Chakraborty, S.K. (1999b) in Chatterjee, S.R. (Ed.), Applied Ethics in Management: Towards NewPerspectives, Springer Verlag, Berlin.

Chowdherry, S. (n.d.), “Some thoughts on corporate citizenship”.

CII, UNDP, British Council and PriceWaterhouseCoopers (2002), A Survey by CII, UNDP, BritishCouncil and PriceWaterhouseCoopers, September-October.

Floistad, G. (n.d.), “Value management and community building”, Keynote Address at thePlenary Session “Ethics of Creation, Distribution and Consumption of Wealth”, Institute ofthe History of Ideas, University of Oslo, Oslo, available at: www.here-now4u.de

Fridman, M. (1970), “The social responsibility of business is to increase its profits”, The New YorkMagazine, 13 September (as quoted in the article written by Darryl Reed in Journal ofHuman Values, Vol. 4 No. 2, 1998).

Griffiths, B. (1983), Cosmic Revelation, Collins, London, p. 49.

Habermas, J. (1993), Justification and Application: Remarks on Discourse Ethics, The MIT Press,Cambridge, MA, p. 2.


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Irani, J.J. (2002) Session on Corporate Social Responsibility, Keynote Address, US India BusinessCouncil, 27th Annual Meeting, Taking Stock: Indian Industry in 2002, June 17.

Krishna, C.G. (1992), Corporate Social Responsibility, India: A study of Management Attitudes,Mittal Publication, New Delhi.

Rao, S.L. (2004), “CSR goes with good governance”, The Economic Times, February 16.

Reed, D. (1998), “Corporate social responsibility and development in India”, Journal of HumanValues, Vol. 4 No. 2.

Sharma, S. (1996a), Management in New Age: Western Windows and Eastern Doors, New AgeInternational Publisher, New Delhi.

Sharma, S. (1996b), Quantum Hope: Science, Mysticism and Management, New Age InternationalPublisher, New Delhi.

Sharma, S. (1999), “Corporate Gita: lessons for management, administration and leadership”,Journal of Human Values, Vol. 5 No. 2.

Sharma, S. (2001), “Routes to reality: scientific and Rishi approaches”, Journal of Human Values,Vol. 7 No. 1.

Sharma, S. (2003), “Western enlightenment and Eastern awakening: towards a holisticcharacter”, Int. J. Human Resources Development and Management, Vol. 3 No. 1.

Sharma, S. (2004), “Ethicotarian philosophy and Ethicotarian vision as a basis for holisticdevelopment towards the concept of corporate social dharma”, in Ahluwallia, J.S. (Ed.),Catalyzing Public & Private Partnerships for Social & Environmental Change, WorldEnvironment Foundation, New Delhi.

Sharma, S. (2005), “Management thought, social discourse and management education: towardsdevelopment holistic professionals”, IJTD Journal, Vol. XXXV No. 2.

Sri Aurobindo (1975), The Foundations of Indian Culture, Sri Aurobindo Ashram, Pondicherry,p. 63.

Swami Jitatrnananda (2003) The text of the speech delivered by Swami Jitatrnananda at theInternational Ministerial Conference on “Dialogue Among Civilizations – Quest for NewPerspectives”, organized by UNESCO and Government of India on July 9-10, at VigyanBhavan, New Delhi. The speech was delivered in the session on “Spirituality and Ethics”.

Swami Jitatmananda (2005), Indian Ethos for Management, Shri Ramakrishna Ashrama, Rajkot.

Swami Rangananthananda (1993), Eternal Values for a Changing Society, Vol. IV,Bharatiya Vidya Bhavan, Bombay.

Swami Vivekananda (1960), Collected Works, Vol. III, Advaita Ashram, Kolkata, pp.239, 295.

Tagore, R. (1988), A Vision of India’s History, Visva Bharati, Kolkata, pp. 44-5.

Web sites

www.ibe.unesco.orgwww.sriramakrishnamath.orgwww.hindubooks.orgwww.indiatogether.org

AppendixCSR has done by corporate, make it clear that CSR is not merely a buzzword today but is beingrapidly imbibed into the culture of organizations. It is being treated as a process that needs to beunderstood and implemented by employees. Companies are actually undertaking initiatives that

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help improve society and are encouraging their personnel to show a similar commitment. Clearly,CSR will be the way to go in the future and Indian companies are showing the way of making asacro-civic society through sacro-civil management.

In our opinion Sacro means equality, fraternity, liberty and harmony blended withspirituality. People should live their life in a society where they have all short of rights and equalopportunity is available. In Indian scenario thoughts on sacro-civic society come with a cover ofsocialism, before Vivekananda, we know from the Vedic, Puranic, Bhuddhistic literatures, Gita,speeches of Samya for the ancient age and for the modern developments, particularly the viewsof Raja Ram Mohan Roy the vanguard of in renaissance and Bankimchandra in his article“Samya.”

The Samya or equality is to be achieved not only in the spiritual but also in the social level.Whenever there is a social injustice, the Lord incarnates: himself for the protection of the good,for the destruction of the wicked and for the establishment of righteousness. Gita gives the divinemessage of liberalism spiritual equality and social justice.

Swami Vivekananda’s social thoughts which are inseparable from Eastern and Westernphilosophical schools, the thoughts of Isvarachandra Vidyasagar and supreme and divineteachings of Shri Ramakrishna.

Shri Ramakkrishna had mystic experiences about the existence of divinity in the entirecreated world, and his identity with existence. There were occasions when he felt pain whensomebody trampled on the grass or hit a boatman (Saradananda, 1983).

Whenever he saw poor and hungry people, he would insist that rich follower should serve thepoor. (Saradananda, 1983) Vivekananda found in socialism the key to social unity and economicjustice. It is only the principle of justice, social economic and political that inspired him toproclaim himself as a socialist. “I am a socialist not because I think it it’s a perfect system, buthalf a loaf is better than no bread” (Complete Works, Vol. VI, P. 381).

He made the prophetic remark that “Everything goes to show that socialism no some form ofrule by the people, call it what you will, is coming on the boards”(Complete Works, Vol. V, P. 202).

After the failure of Marxist theory of socialism world has got a new idealism, blend ofcapitalism and socialism with a flavor of values, which is known now as CSR. Many companiesare choosing to make a clear declaration to corporate social responsibility in their mission, vision,and values statement. Although list of frauds goes like Union Carbide, Nike, Enron, WorldCom,etc. an organization survives because of society thus business in turn must take care of thesociety. This realization has led to an increasing focus by firms on examining their socialresponsibilities towards development. Indian corporate houses also walk through a long way ofphilanthropy to CSR and ready to do their future duty towards society.

The first model, which has been expounded here, is a combined approach of all theexponents – from Vivekananda to Subhash Sharma. To start with, a Vivekanada put forwardthe theory of serving the “daridra narayan” the approach towards CSR starts from that point,taking a long tour thorough the corridor of Swami Ranganathananda, Swami Jitatmananda,Swami Someswarananda, Professor S.K. Chakraborty and Professor Subhash Sharma, whoultimately propounded the theory that should guide the business and society towards a sacrocivic approach. To highlight the entire route of philosophical progress in the field of developingbusiness through societal commitments, the following models have been chalked out.

To realize the dream of sacro-civic world, Model A, Figure A1 shows an interactive view ofSwami Vivekananda’s ideas and concepts and its interaction with the ideas suggested by Indianmanagement scholars (Table AI).

Swami Vivekananda has given this idea a hundred years back, when whole world wasfighting between the idea of capitalistic and socialistic views. Vivekananda had shown the pathof making a sacro-civic society. Now at this juncture India is realizing that this is the right pathwhere we could achieve our goal towards fulfilling our dream of moving towards the goal ofsacro-civic society.


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Figure A1.Model for sacro-civicsociety derives fromVivekananda’s principlesof management, which areshown in Table I

TOWARDS SACRO – CIVIC SOCIETY

"Brothersand Sister"StakeholdersRelationship

"Each soul ispotentiallydivine"Self -Relalization

"PracticalVedanta"Work - Ethicsand workethics

"DaridraNarayan"Socialupliftment/Devel-opment/Empo-werment to theweakest"

"Arise ansAwake andstop not"GoalOrientation

"Dasaya dasa" "Servant Leadership"

1 “Brothers and Sisters” – Stake holder’s relationship(Theory K)

2 “Arise, Awake and Stop on” – Goal orientation3 “Each Soul is Potentially Divine” – Self-realization4 “Practical Vedanta” – Work ethics and work ethic5 “Daridra Narayan” –Social upliftment/social

development/empowerment to the weakest/“DalitUpliftment”

Table AI.Vivekananda’s principlesof management

Figure A2.Model B

Integrating "Private Wealth for Public service"

Chang

ing

Nature

of S

ociet

y to

wards

Sus

taina

bilit

y

Business growth and changing approach towards society

Society, Mankind and Economy

Closely Held Nobility

No to openness

Indian Renaissance

Awareness at large

Rule BoundTow

ards TransparencyTow

ards Maturity U

ltim

ate

Soci

ety

Cor

pora

te c

itize

nshi

p

Cor

pora

te G

over

nanc

eCSR

Philanthropy

Charity

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In addition of Model A, we also suggest Model B shown as Figure A2. This model integrates“Private Wealth for Public Service” in consonance with Vivekananda’s concepts wherein societybecomes a Sacro-civic society. In this triangular model changing nature of society towardssustainability and changing approach of business towards society, mankind and economyconstruct the foundation for future development of sacro-civic world.

Both models viz. Model A and B, constitute the foundation for development of sacro-civicsociety. These models also have some ancient linkages. During ancient time “King” was only atrustee of public wealth. Under his efficient guidance, society, state, country used to develop. Butthe power or authority changed the concept of kingship. So equal distribution of wealth came to ahalt and society had to face varied socio-economical difficulties. Slowly society changed itsapproach and again a section of the society developed the idea of “giving back to society” indifferent forms which changed its nature in diverse stages of developments of the society.Model B, as shown earlier, depicts the different stages of development of societies past, presentand future.

First comes “charity” the oldest form of giving to the poor. In the time of close door societywealth belonged to upper section of the society. A poor person has no right as a citizen. So theword “charity” means only in the religious concept of salvation. But slowly the word “charity”took a new meaning and several developments social, political and intellectual led to change inthe idea about responsibility, for the poor and needy and transformed the nature of charity(Sundar, 2000). The concept of philanthropy in India is changing. It is not a usual charity; conceptbecame more secular towards society where involvement in social causes for nationaldevelopment blended with nationalism. Founders of many business houses in India werephilanthropic and were motivated towards the need to develop the country strong, socially,economically, and politically. The spirit further deepened with the trusteeship concept by thefather of nation, Mahatma Gandhi and Vivekananda, a transition from individual’s charity tophilanthropy to CSR and then corporate citizenship. The model further explains the contributionof the Indian scholars and religious teachers like Swami Jitatmananda Swami Somesawarananda,Professor S.K. Chakrabarty, Professor Subhash Sharma, etc. are pursuing the same view towardssociety. Through the ages we came to this position where sacro-secular symbiosis slowlychanges towards sacro-civic society. Particularly country like India in the era of globalization,society wants to breathe fresh air. Through education, industrialization young generation wantsto change the society. Government, NGOs, and in the last decade of the twentieth century IndianBusiness became more concerned about the development of society. Indian Business, contributedto social causes through their trusts by setting up a large number of them. With the challenges ofglobalization private companies have been powerful influence on CSR from its initialphilanthropic focus. Still there are cultural influences in modern CSR. The underlying philosophyis that social responsibility is liability of business to society at large. Societal expectations inIndia are that business should be directed towards sacro-civic society. Social awareness surveyconducted by Partners in Change (PiC), Center Social Markets (CSM), TERI, etc. had shown thathow Indian companies are aware in different social works, include in the area of education,healthcare, rural infrastructure, development, community welfare, environment protection, reliefand emergency assistance, preserving art, heritage, culture, religious and many other issues. Bigcompanies (like TATA) to small companies, CII, FICCI, PHD chamber of Commerce, and regionalchambers of Commerce to NGOs, all are actively engaged in socially responsive work. So this isthe right time for India to convert the dream shown by our great souls and scholars into reality.The models mentioned above depict combining factors of changing nature of society along withthe changing trends that are taking place with respect to business growth and the changingapproaches of the business houses towards the society. India was the country, which thought ofthe concept of Vasudaiva Kutumbakam. There is an ancient concept that helping others is goodfor every one. There is also an old Vedantic saying, Atmanam mokshartham jagat hithayachatha.An individual must try for moksha for himself and also see the welfare of the people in the world.


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In the corporate context, the Atmanam mokshartham stands for the responsibility to thestakeholders and jagat hithayachatha stands for social responsibility at large.

We can have an observation that not only established and giant business houses are realizingthe importance of the concept of giving back to society but also the corporates of the newergeneration also increasingly understand its importance. We can hope that Gandhiji’s dream ofRam Rajya and Vivekananda’s wish daridra devo bhava, murkho deve bhava . . . (serve the poor,illiterate and ignorant) will come true in near future. Indian corporate houses, MNCs and NGOslike The Center for Advancement of Philanthropy, The Sampredaan Indian Center forPhilanthropy, The national Foundation for India, Help Age India, Child Relief and You andgovernments help trying to improve the condition of society. It is not a very easy task to makeIndian society a sacro-civic society where population is more than 100 crores. After 58 years ofIndependence India is still facing grass root problems like poverty, illiteracy, social disorder,child labor, ethnic problems, etc. So overcoming all obstacles towards a sacro-civic society is nota very easy task. Therefore, we have to go miles to achieve our desired goal.

For translating the conceptual dream into action we have to make it a formal approach, theway global compact of UNO took the initiative to make mother planet beautiful. Our presentsociety has fundamental structural and institutional problems that we must recognize andmanage to resolve. We must change the basic operating principles and values of the structuresof our society for that we have to move in a more moral, ethical and spiritual direction. Not onlyat individual level, strengthen those values but also equipped with the right kind of operatingprinciples to build a sustainable society. In business level a sense of service to society hasalready been created. Business does not exist just to make money, but also to serve the society.Companies now have a mission, vision and goal towards corporate citizenship. If they areoperating business in India then they have to give more stress on national value and a globalvalue if it is operating in many countries. For that each company should have a clear resourceallocation for GCC. According to “Partners in Change” (2000) report, 85 percent of companieshave GCC. NGO’s are also shaking hands with corporates for implementing and monitoring thesocial activities for converting the civil society into a sacro-civic society through socialmanagement.

Corporate responsibility towards building a sacro-civic society is a vital issue incontemporary business climate. Much of its currency comes from the scale and influence ofthe present day corporates. Some business houses are bigger than many nation states. Theirdomain and economic operation are worldwide. Nevertheless, business houses are subject toconstant and intense scrutiny and surveillance by the state and the society in which theyfunction. It is well established that their freedom to operate is not a license to abuse.

Of course, profit has to be the primary concern of any business: without profit, it is impossibleto carry out any other activity for the welfare of the society at large. However, there are twooverriding criteria, which assume significance in this context. While profit may be the overallobjective, the methods employed to achieve profit have to be above board, they must be ethicaland moral. Secondly, having achieved profit, the company must look around for ways and meansby which it can return to the society some endowments for the welfare of everyone. The summum bonus of any enterprise is the lofty and noble objectives it seeks to serve in and for thesociety, in which it subsists.

The business community has a key role in helping us view life from a systems perspective, aperspective that is essential as we move towards a more sustainable society. We shall achievethat by getting the basic working rules right and then letting the system evolve. If our greatestchallenge lies in the economic arena, it is because the present rules governing its operations are atvariance with society’s real needs. As we build more sustainable business, we create moresustainable economics, and we set in motion the processes necessary to achieve a moresustainable civilization. That is our prime goal to make the global citizens happy and prosperous(Gupta, 2005).

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Finally, it can be observed that to meet economic, legal and ethical responsibilities, businessesare also expected to display a genuine concern for the general welfare of all constituencies. Forexample, society desires a cleaner environment, the preservation of wildlife and their habitats, aswell as living wages for employees, but it also demands low-priced products. Companies mustbalance the costs of these discretionary against the costs of manufacturing and marketing theirproducts in a responsible manner.

To conclude vision of sacro-civic society is a realistic vision and could be achieved through anew corporate model rooted in three fillers of profit, CSR and good governance.

Corresponding authorAruna Das Gupta can be contacted at: [email protected]


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Critical evaluation of growthstrategies: India and China

Parikshit K. BasuSchool of Marketing and Management, Charles Sturt University,

Bathurst, Australia

Abstract

Purpose – This paper aims to attempt to compare the development strategies and achievements ofIndia and China in the last 50 years and to analyse the challenges lying ahead if the trend continues.

Design/methodology/approach – The paper critically evaluates the growth strategies of the twoeconomies. Changes in approaches, achievements and failures are analysed using materials from pastresearch and secondary data. Impacts of economic reform process and economic managementcapabilities have been evaluated. Critical analysis is the main approach of the paper.

Findings – Based on the experiences of economic growth so far with reformed and open economies,India can learn several things from China. China has achieved better results based oninvestment-driven export-oriented policies that may not be sustainable in the long run. It has so farignored the socio-political issues, which can have very serious consequences in the future. Relativelyslower economic growth in India is based on stronger socio-economic foundations. Mutually beneficialeconomic cooperation between the two economies and rising interdependence with regional and globalpowers should provide a better future.

Originality/value – The paper provides a comprehensive picture of strategies, outcomes andpossibilities. It links past development strategies to future challenges. It may be of value to researchersand policy makers in both economies while considering future directions.

Keywords Economic growth, Economic doctrines, Economic cooperation, Strategic choices, China, India


1. IntroductionRapid economic transformations in India and China in recent years have turned theminto two of the world’s most vigorous and eye-catching economic entities. Theirprospects, possibilities of cooperation and rivalries are being discussed by academics,journalists, experts and politicians. Analysts believe that the two countries have lots tocontribute to the world economy as they move forward. Although the two gianteconomies have potentialities to dominate the global economic scene in the currentcentury, there are several challenges in the process of converting the potentialities intorealities. The two most populous economies in the world have more differences thansimilarities in the process of economic growth. Most of the similarities are common tothose of populous and developing economies in general. But they had differenteconomic systems in the past and that should significantly influence their economicachievements in the future. With different socio-economic-political set-ups China andIndia followed different development approaches so far. It is not possible to commenton superiority of one above the other, as their backgrounds are different. It is certainlybeneficial for both economies to cooperate rather than compete in the internationalmarket. In that case China and India may well create economic, trade and exportpotential for their neighbours in Asia which may find the two countries to be lucrativemarkets instead of rivals.



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India belongs to one of the most densely populated and poverty-stricken regionsin the world, i.e. South Asia. This region occupies only 3.8 per cent of the world’ssurface area and 22.6 per cent of world population. None of the South Asianeconomies is resource rich and, except for Sri Lanka, all are categorised aslow-income developing countries. South Asia is also a region of poverty. More than40 per cent of the world’s poor live in this region. As large majority of populationlive and work in rural areas in South Asia poverty is primarily a rural problemhere. In contrast, China is surrounded by economies that have been experiencingbooming economic growth since 1970s. In addition to mighty economic power likeJapan, the “four tigers” – South Korea, Singapore, Hong Kong and Taiwan grewfrom low levels of income per head to among the highest in the world within a fewdecades. The newly industrialised economies like Malaysia, Thailand and Indonesiaalso grew at very high rates during the period.

This paper attempts to compare development strategies and achievements ofIndia and China in the last 50 years and analyse the challenges lying ahead if thetrend continues. The paper critically evaluates the growth strategies of the twoeconomies. Changes in approaches, achievements and failures are analysed usingmaterials from past research and secondary data. Impacts of economic reformprocess and economic management capabilities have been evaluated. Criticalanalysis is the main approach of the paper. The paper concludes that the Chineseeconomy is growing at a much faster rate at present but its growth strategy in itspresent form is less likely to be sustainable. One way of achieving better results byboth economies is economic and social cooperation and not rivalry. The two gianteconomies have several areas to complement each other. The paper provides acomprehensive picture of strategies, outcomes and possibilities. It links pastdevelopment strategies to future challenges.

2. Overview of economic strategies2.1 IndiaThe Indian economy is potentially very strong with its large industrial output,technological knowledge and extensive reserve of skilled manpower. In recent years itis growing significantly in technology-related areas. In overall terms, India is stillpredominantly an agricultural economy where about two-thirds of the populationearns its livelihood from the land although the sector accounts for slightly more thanone-thirds of national income (GOI, 2005).

Since, independence in 1947, India has maintained an enviable political stabilityas compared to its neighbours in the region. India introduced centralised planningsystem in 1951 within the democratic set up. The core principle of economicplanning was “democratic socialism” – public-sector led growth with strongindustrial licensing and controls and restrictive foreign trade (Basu, 1998). Majorobjectives of initial Five Year Plans were to achieve self-reliance and alleviation ofpoverty. The approach continued without any major deviation until mid-1980s.During this period, India had seen series of nationalisations. Industrial, financialand foreign trade (including foreign investment) sectors were heavily controlled bythe government. Agriculture sector was broadly kept outside the controls forpolitical reasons (GOI, 2005). Results of these policies were mixed. After followingeconomic planning continuously for 40 years, India achieved self-sufficiency in

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food-grain production and considerable increase in industrial production. Butgrowth rates in its national income and per-capita income were very moderate ascompared to its population growth rate. Targets set in most of the Five Year Planswere not achieved.

Direction of economic policies in India started changing from mid-1980s whenthe government started initiating industrial and trade deregulation measures.However, these unplanned and to a certain extent, random measures resulted fewerbenefits and foreign exchange reserves gradually exhausted (GOI, 2005). The crisisreached its peak in 1990 when the Indian Government had to approach the IMF forassistance. As a loan condition, the IMF-World Bank prescribed the so-calledstabilisation and structural adjustment programmes that resulted in India’s “NewEconomic Policies” in 1991 (Dutta, 1998). Since, then the Indian economy hasundergone substantial changes with comprehensive liberalisation measures in everysector of the economy.

After experiencing very moderate growth till 1980s India largely liberalised itseconomy in the early 1990s. The reforms undertaken by the Indian Government in 1991have resulted in an increase in the economic growth rate as well as the inflow of FDI.Average annual rate of growth of real GNP jumped from 3.3 per cent during 1990-1992to 6.8 per cent during 1992-1997. The growth rates were slowed down in thesubsequent years to 5.6 per cent during 1997-2002 and further to 4.2 per cent during2002-2003. It jumped again to 8.5 per cent in 2003-2004 due to strong growth inagriculture and industry sectors (GOI, 2005). Per-capita GDP also increased at muchfaster rate during 1990s as compared to the previous four decades (GOI, 2005). Thecrude indicator of overall average productivity, as measured by GDP per personemployed in US dollars, had increased significantly in India since the late 1970s. Timeseries forecasting suggested that steep growth in productivity is likely to continue inIndia in the near future (Anwar and Basu, 2004).

Although the pace of overall reform was slowed down in India in the second-halfof 1990s due to change in governments at the national level and in some of thestates[1], FDI inflows continued at a satisfactory pace. Foreign investments ingeneral and FDI in particular primarily financed private sector units in India. Theinflows of FDI have significant positive impacts on growth of employment andproductivity in the private sector (Anwar and Basu, 2007). During the period1980-1990, annual rate of growth of employment in the private sector was about 0.4per cent. This rate went up to about 3 per cent in the subsequent decade(1991-1998). Employment growth in the public sector remained more or less stableduring the entire period (1.25 and 1.62 per cent, respectively, in the two periodsmentioned above). Using a crude measure of labour productivity (real wages perworker) it was observed that the private sector had improved its position since FDIflows started whereas the public sector’s position had remained unchanged. UsingASI data, it was estimated that the real wage in the private sector had grown at anannual rate of 4.7 per cent during 1991-1998 as against 2.3 per cent during1979-1990. Growth in the public sector real wage rate remained unchanged at about3.8 per cent in both periods (Dater and Basu, 2003).

Along with economic growth the export sector in India had also improved itsperformance in the 1990s. During the period 1991-1992 to 2003-2004, India’s total exportshad grown at an annual average rate of 11.3 per cent, from US$ 18,143 million to

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63,843 million. In recent years exports had grown at more than 20 per cent rate annually.However, during the same period, imports also had grown at an annual rate of15.8 per cent (from US$ 24,075 million to US$ 78,149 million) and, thus worsenedthe trade balance situation in recent years (GOI, 2005). India consistently has trade andcurrent account deficits due to high imports of petroleum products (including crude oil).The export growth in recent period certainly looks promising as compared to the annualgrowth rates of 6.1 per cent during 1980s and 6.8 per cent during 1970s (Krueger andChinoy, 2002, p. 13). However, share of India’s exports in world exports remainedinsignificant at around 0.5 per cent during the last three decades (Krueger and Chinoy,2002, p. 13).

The higher macro-economic growth since 1990s has created several unfavourableimpacts in the Indian economy as well. Patnaik (2000) observed that the Indianeconomy had been transformed into a demand – constrained system during the 1990s:

When this happens, then either the actual output falls short of potential output (as in arecession) or there are unwanted inventories of commodities, or a combination of the two(Patnaik, 2000, p. 193).

The system has generated paradoxes and ultimately affected income distributionadversely. The head-count poverty ratio had increased in India during 1990s,particularly for the rural sector (Patnaik, 2000, p. 199, Table I). The overall reformprocess had increased the inter-regional disparity as well in India. Ahluwalia (2002,p. 93) showed that the Gini coefficient of inter-state inequality in India had gone upfrom 0.152 in 1980-1981 to 0.175 in 1989-1990 and then jumped to 0.233 in1998-1999. Thus, whatever was achieved at the macro level was not evenlydistributed either among the people or among the regions. It was not entirelyunexpected either. While commenting on the nature of political economy in India,Dutta (2002, p. 16) commented:

It would, however, be naıve to believe that the Indian State could effectively function in theinterest of the “society as a whole” or more specifically in the interest of the vast majority ofthe poor people.

Jha (2001) also observed that even in the post-reform period the performance of theIndian economy was inadequate to reduce the level of poverty due to low savings andinvestments and low productivity in the public sector. India is facing a complexchallenge in economic front. On the one hand, it has a large number of highly qualifiedprofessionals as well as several internationally established industrial groups, but onthe other hand, it has some of the lowest human development indicators in the worldand abject poverty, particularly in rural areas (Economist Online).

While India is moving ahead with a moderate agenda of economic reforms, thepolitical institutions are apparently getting weaker. Since, mid-1980s the federalpolitical leadership in India started loosing a strong national focus due to growth ofregional political parties. Multi-party coalition governments have become commonfeature at federal and state levels in India in recent years. Ideological differencesbetween political parties within the same government had seriously affected theirabilities to follow clear and strong economic policies in any particular direction in therecent past (Basu, 1998). Moreover, characteristics of the political leadership have notchanged along with social and economic transformations. The emerging middle-classpopulation of the post-reform period has not yet represented in the policy-making area


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(Wadhva, 2000). India’s pace of future economic growth depends much on stable andrepresentative political leadership.

2.2 ChinaThe People’s Republic of China (China) has several similarities as well asdissimilarities with India in the process of economic growth. India becameindependent from the British colonial control in 1947. China started journey in itspresent form in 1949 following the Communist Party’s accession to power. While Indiaresorted to mixed-economy approach for economic growth, China followed thesocialistic pattern from the very beginning. Thus, China belonged to the “socialist”second world category (also referred to in different places as “centrally planned”“soviet type” or “command” economies) since 1949 while India remained as ademocratic third world economy.

When the Communist Party came to power in China in 1949, it introduced a centralplanning system. Under that system, production resources were allocated by centralplanners and not decided by market forces. Prices were administratively determinedrather than by the market mechanism. All enterprises (agricultural, industrial andservice sectors) were state owned. They were given target levels of output to achieveand were not motivated by the profit maximising objective. (Basu et al., 2002)

The system generally worked well. The economy did not face any serious economiccrisis. During the period 1960-1978, real GDP nearly doubled according to World Bankdata (DX). This was despite, the adverse impact on economic growth during theCultural Revolution of the early 1960s, which saw real GDP decline in 1961 and 1962before recovering in 1963 and rising to the level first achieved in 1960 by 1965(Pyle, 1997). During the period 1960-1978, GDP per-capita at constant prices in Chinaincreased by more than seven times (World Bank DX). Notwithstanding the stronggrowth in output over these years, inflation never appeared to be a problem. Althoughthe GDP deflator rose by 12 per cent in 1961, for the rest of the period through to 1978 itdid not get above 3 per cent per annum and in six of the 13 years prices actually fell(Pyle, 1997). However, during the period 1952-1978 the economy was fairly closed tothe rest of the world. Total trade (exports plus imports) as a proportion of nationalincome gradually declined during the period to its lowest level of 5.2 per cent in 1973(Pyle, 1997, pp. 4-5).

In spite of the satisfactory level of economic growth in absolute terms and withoutsigns of any imminent economic crisis, the Chinese authorities felt the necessity topursue economic reform. Several economic, political and social factors motivated thedecision. Economically, the Chinese growth rate was often perceived as being muchlower than neighbouring East Asian countries (e.g. Japan, South Korea, Singapore)(Pyle, 1997). In the socio-political field, Chinese society apparently “wanted a changefrom the Maoist dogma of the 1950s, 1960s and 1970s” (Pyle, 1997, p. 6). Thus, thepopular mood was said to be in favour of some sort of less administered economicsystem and it was argued that the post-Mao political authority of China went for it.

Thus, the decision was taken by the all-powerful Communist Party of China inDecember 1978 to initiate economic reform process in a planned manner. The processof implementing China’s economic reform was substantially different from theapproach taken in most other reforming countries (Basu et al., 2002). To avoid majorimbalance within the socio-economic-political system, China introduced reforms

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gradually following its own strategy. At the very beginning of the reform process itwas made clear that the reforms would not deviate the economy from the principalobjective of creating a socialist state and that reform must be carried out under theleadership of the Communist Party (Shen, 2000).

The economic reform process in China since 1979 can be broadly divided into threephases (Pyle, 1997; Shen, 2000). During the first five years (1979-1984), the emphasis wasmainly on agricultural reforms. Attempts were made to restore material incentives andprivate initiatives and thereby to improve allocative efficiency. The attempts were fairlysuccessful without experiencing any major problems. The second period (1985-1990)was mainly concerned with urban and industrial reforms. During this period, theintroduction of the market mechanism was attempted. A dual pricing mechanism(administrative and market prices) and an enterprise contract responsibility systemwere introduced. In essence, private production was permitted and this saw theestablishment of the first privately-owned companies in China selling into an entirelyfree enterprise market. The Government gave up its monopoly over industrialproduction and this resulted in a flood of new entrants into the market in search of profits(Naughton, 1995). The new firms included cooperatives, privately-owned firms, foreignfirms and firms established or sponsored by local governments. In addition, the SOEs,whilst still required to satisfy the needs of the central plan (both in terms of productionand the price at which that production was sold) could sell any excess production in theopen market at market prices. The application of the process was, in the event,more complicated than initially thought. The development of a market sector exposedthe inefficiency of the SOEs, which began to stagnate, and social unrest appeared asunemployment of disposed rural workers and, eventually laid-off SOE workers (Basuet al., 2002). Thus, the reform process created imbalances between different sectors. In aneffort to redress this situation, the early 1990s saw official attention shifted to bankingand financial sector reforms (including foreign trade and investment areas) in the thirdphase (Pyle, 1997; Shen, 2000).

The Chinese economy has witnessed some remarkable economic achievements sincethe market-oriented economic reform process began in 1978. During the period1978-2004, China’s GDP increased from US$ 147.3 billion to 1.65 trillion with an averageannual growth rate of 9.4 per cent. Its foreign trade rose from US$ 20.6 billion to1.15 trillion, averaging an annual growth rate of over 16 per cent. China’s foreignexchange reserve increased from US$ 167 million to US$ 609.9 billion (NBSC Online).The growth rate slowed down slightly in recent years. During the period 1999-2003,China’s GDP grew at an annual rate of 8 per cent (Economist Online). During the period1978-2000, despite increase in population by 306 million, real GDP per-capita increased5.5 times (World Bank online). By 2003, GDP per-capita in China had risen to $US 1,100(Economist Online). This is significant because it indicates that China, on the basis ofWorld Bank definitions, had transformed itself from a “low income country” to a “middleincome country” (World Bank Online, “Country Classification”).

However, China’s rapid economic growth has not been shared equally by its entirepopulation. As a result, of rapid economic growth, the average income of theChinese people of different segments rose significantly and differently. During1978-2000, the annual average real income of urban residents had increased by4.8 times, from RMB 343.4 to 1,636.7 at 1978 prices, while that of rural residents hadincreased by 3.5 times, from RMB 133.6 to 466.1 (NBSC Online). Although large cities


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and towns are growing at unprecedented rates in recent years, in poverty-stricken ruralcommunities and low-income urban neighbourhoods, seeing a doctor or supporting aschool-age child is becoming an unaffordable burden. In 2002, only 27 per cent ofChina’s population lived in urban areas as against the world average of about 50 percent (Hyland, 2003).

One of the most amazing features of China’s economic reform is the volume offoreign direct investment that has been attracted into the country. Over the period1983-2000, FDI grew at a staggering annual average rate of 22 per cent. At present,China is second only to the USA in attracting FDI (Yeung, 2001). As per the officialstatistics (NBSC Online), by the end of 2004, China had approved the establishment ofmore than 500,000 foreign-funded enterprises. These created an estimated importsdemand of some US$ 560 billion annually. Over 400 firms out of the Fortune 500 havealready made investments in China. The number of R&D centres set up by foreigninvestors in China has exceeded 700.

Foreign direct investment provided an important stimulus to the Chinese economy for anumber of reasons. First it provided impetus to the development of China’s trade. Exportswere encouraged because most of the firms established on the basis of FDI were exportoriented. Because these same firms tended to import both their capital equipment andintermediate goods for further processing, imports were also stimulated. It is reported thatby 1998 exports and imports of both joint venture and foreign-owned firms accounted for44.1 per cent of China’s exports and 54.7 per cent of China’s imports (NSBC Online).Second, such an enormous inflow of foreign capital for direct investment purposes couldnot fail to stimulate significant jobs growth. Song (1999) reports that in 1997 there wereover 300,000 overseas financed enterprises. These firms employed in excess of 17 millionworkers. Third, as is usually the case with direct capital inflow, the economy was boostedby the expertise and skill that flowed into China with the capital. This advancedknowledge was not only put to work in the new industries being established but alsoflowed into the economy in general through training and demonstration. This led to anenhancement of the competitive position of the Chinese economy (Song, 1999).

Another significant feature of post-reform economic growth in China is its highgrowth in foreign trade. During the period 1979-2003, its total trade (exports plusimports) grew at an average annual rate of 16 per cent. Exports grew at faster rate(16.4 per cent) than imports (15.7 per cent) during the period resulting comfortabletrade and current account balance situations (NBSC, 2004). It may be interesting toobserve the reversal of its foreign trade structure over the period. With very lowvolume of trade with other countries, in 1978, only 46.5 per cent of China’s tiny exportbasket of US$ 9.7 billion was of manufactured goods. In 2003, manufactured goodsconstituted about 92.1 per cent of its massive exports of US$ 438 billion (NBSC, 2004).Composition of imports however remained more or less similar over the years.

3. Challenges ahead3.1 Similarities among diversitiesIndia and China are compared and contrasted in terms of their size, past growth, politicalsystems and development approaches in recent years. Apparent similarities in followingclosed models of economic growth in the initial years and then policies towardsderegulation and openness to trade, foreign capital, and imported technologies are some ofthe widely discussed areas. The US Government had recognised high economic

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potentialities of these two countries long back and included them in “big emerging”markets list (Garten, 1996). However, led by significantly higher flow of foreigninvestments, China is marching ahead of India in economic growth in the recent years. Asevident from Figure 1, growth of per-capita GDP in China since late 1980s was far higherthan that of India and the gap is widening. It may continue for some time in the future.

Economic potentials of both economies have been recognised. Where China has beenconsidered as a favoured destination by international investors, India is more popularamong the multinational corporations (Turcq, 1995). Both economies have high rates ofeconomic growth in recent years as they started from relatively low bases. Access tointernational markets and flow of investments always surge economic growth in theinitial period, but it is a more difficult task to sustain it. Moreover, it is not justthe macroeconomic growth that matters for an economy; the well-being of its entirepopulation should be considered as the true yardstick of development. Both China andIndia have encountered problems in ensuring even distribution of economic benefits.One needs to understand the social objectives and values that the public policiespromoted as part of the reform process. As Sen (2005) observed, three R’s should beconsidered – reach, range, and reason. “The reach of the results to be achieved, the rangeof the ways and means to be used, and the reason for choosing the priorities we pursue.”He strongly recommended that along with achieving national economic growth it isessential the growth process does not ignore any group of people, particularly of thosewho are disadvantaged and downtrodden – at the bottom of the pyramid.

High population pressure is one of the obvious challenges the two giant economieshave been facing. Although total population in China is higher than India,concentration of population was much higher in India at 333 persons per squarekilometre against 135 for China (World Bank online) in 2003 (Table I). Highconcentration of population certainly adds pressure to India’s already scarce naturalresources and overburdened infrastructure. Moreover, while China with its uniquepolitical-economic system could introduce and manage “one-child policy” it may beimpossible for India to follow such a drastic measure in population control (Basu, 1998).

Figure 1.GDP per-capita: 1962-2000(Source: World bank DX

tables)

0

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US$

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China

Notes: World Bank DX Tables

India


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During 1999-2003, average annual growth rates of population in India and China were1.5 per cent and 0.7 per cent, respectively, (Economist Online). At this rate, India is mostlikely become the most populous country in the world by the year 2030.

Both economies are still predominantly rural. So a sustainable development shouldideally target rural areas. Both Chinese and Indian Government policies towards ruraldevelopment brought certain improvements. According to an IFPRI (2002) study,government expenditures in three areas, R&D on agriculture, education andinfrastructure had particularly benefited the two nations in recent years. R&Dexpenditures benefited both the countries in reducing rural poverty and achievingagricultural growth. Investments in education benefited Chinese rural population morewhereas infrastructure investments improved India’s rural sector more. But as per theindications, growth is becoming more and more urban oriented and widening economicgaps between rural and urban areas (Thapa, 2004).

Prompted by high economic growths both economies are facing high pressure forinfrastructure development. With quicker growth, the intensity of the problem is likelyto be more in China in the coming years. Demand for resources to keep pace witheconomic growth is on the rise as well. Recent rise in oil prices to record high has beenblamed partly due to excessive rise in demand from China, in particular. As per the USAEnergy Department estimates, demand for oil was about 7.4 million barrels per day forChina and about 2.2 million barrels per day for India in 2003 (China Daily, 2005).

As already indicated, with rapid macroeconomic growth both India and China arefacing the problem of rising regional and personal inequalities of income. Inequality ofspatial income in China had declined in the early years of reform and then went upsignificantly in recent years. In India, inequality was consistently on the rise during thereform period (Kanbur et al., 2005). The first phase of reforms in China resulted in rapidincrease in rural production and incomes. But the focus of growth during the secondphase shifted more towards urban areas. As a result, vast sections of rural populationwere largely kept out of the benefits of fast economic growth (Sen, 2005). Policy shiftsin two major areas of social life also contributed towards increasing the rich-poor gapin China in recent years. During the pre-reform period, health and education werepractically free and universal in China, provided by the state, collectives orcooperatives. Now people need to buy such basic facilities and costs are prohibitive forlarge sections of population. Denial of such social facilities can lead to slow down theprogress of the economy in the long run (Sen, 2005). Conditions of primary amenities oflife such as availability of drinking water, sanitation facilities, basic infrastructuresuch as road and electricity, healthcare and education are still deplorable in rural India(Anwar and Basu, 2004).

China India

Population (billion) 1.3 1.1Population/km2 135.4 333.3GDP per-capita (US$) 1,100 530GDP per-capita – PPP (US$) 5,225 2,834Trade as per cent of GDP 49 20.8

Table I.China and India – 2003:at a glance

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A controversial area of commonality between China and India appears to be in thearea of corruption. High levels of government controls and strong bureaucraticsystems in both economies had given rise to high levels of corruption. As per the“Corruption Perception Index” (CPI), China ranked 71 in 2004 as against 90thposition for India. Both ranks indicated very high levels of perceptions ofcorruption[2]. However, structures of corruption are different in two economies. Thenature and impacts of “top-down” structure of corruption in China may be quitedifferent from the “bottom-up” structure in India (Waller et al., 2002)[3]. However, itis difficult to argue in favour of either structure. Both can be equally harmful.According to Bardhan (1997), the structure of corruption had changed fromtop-down level in former USSR to bottom-up level in present Russia, and theproblem had become much more acute. The situation may be similar in China. It isgenerally accepted that the economic costs of corruption are high. It is virtuallyimpossible for individuals to remove or even to reduce the level of corruption whenit is widespread in the economy (Mauro, 2004).

3.2 Differences in approachesThere are strong and clear differences in development approaches and economicmanagement systems between China and India and that can make all the differences infuture. Foreign investment dependant and export-oriented growth approach of China isquite different from domestic demand driven approach followed by India. Judging bythe results achieved so far, the authoritarian control of the economy in China enabled itto have a better and efficient economic management than the multi-party democraticsystem in India. Again, the underlying policy of maintaining clear distinctions betweeneconomic, socio-cultural and political sectors may be unique in China, but may not befeasible for India.

One of the major features of the Chinese growth approach in recent years was itshigh dependence on investments, more specifically on foreign investments (Lal,1995). China is the second highest recipient of FDI in the world at present, onlybehind the USA. During the period 1999-2003, inflows of FDI as percentage of GDPfor China stood at 3.9 per cent against a meagre 0.9 per cent for India (EconomistOnline). The attractiveness of China as a destination of FDI inflows is attributed toits huge domestic market; increased wages of consumers; political pragmatism toliberalise China’s regulatory framework (making foreign investment easier); andmembership of the World Trade Organisation (Anwar and Basu, 2004). Theinvestment-led model does have its advantages as it could quickly accumulatelarge amounts of capital and by using cheaper resources like land and labour canproduce very high economic growth in the short run. This is what is happening inChina. However, it can have serious consequences. The economy is more likely toface instabilities. As international flow of funds is subjected to swings, the nationaleconomy over-dependant on such flows is also subjected to economic cycles morefrequently. Thus, the government would always face policy dilemma (Tianyong,2004). Moreover, the investment-led development structure could underutilise labourcausing a high unemployment rate and thereby leading to a widening income gapbetween rich and poor. With easy flow of capital heavy investments have beenmade in capital-intensive industries in China and that had dramatically increasedproduction (Tianyong, 2004). As compared to investments and production, domestic


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consumption growth was very moderate due to limited increase in income of themassive farming sector and growing unemployment. This imbalance in growths ofinvestments and consumption has made the economy automatically over-dependenton exports.

As an automatic consequence of investment-driven growth process, China hasbecome significantly dependent on foreign trade (Nageswaran, 2004). China’s opennessindicator (trade in goods as a share of GDP) reached to 49 per cent in 2003, within 25years of opening up (World Bank online). For India, the ratio was 20.8 per cent in thesame year although India was always involved in international trade in the past.During the period 1979-2003, China’s average annual growth rate of foreign trade was16 per cent as against GDP growth rate of 9.4 per cent (NBSC, 2004). The applicabilityof an external demand driven growth process for a large economy like China canvery well be questioned. High trade dependence could make the national economyvulnerable to global fluctuations. The exchange rate system in China is one of the mostcontroversial issues at present. There have been regular claims that existing system isproviding undue advantage for Chinese exporters although there was no conclusiveevidence to prove or disprove such claims. The export-focussed strategy wassuccessful for smaller East and South-East Asian economies in the past, but they endedup in a crisis. Nageswaran (2004) reminded that China was in the same situation in2003-2004 as the East (and South-East) Asian countries were in the 1990s – highinvestment ratio, improving but low productivity, high FDI and high degree of exportreliance for a large economy.

Differences in political systems between the two countries can have significantimpacts on their future developments. The Communist Party of China has thecomplete control over the Chinese economy. It can direct the economy towards its“socialistic” targets by means of economic policies that could be implemented withlittle opposition. Questioning the appropriateness of policies initiated by officialauthorities is still extremely unlikely under the Chinese system of management. Ithas its own benefits in the short-run as exemplified by the experience of China’seconomic growth. But in the long-run, for overall development of a nation, theinformational and incentive roles of open democracy cannot be denied. For effectiveimplementation of public policies that generates maximum social welfare, openpublic discussions are extremely important (Sen, 2005). The strong democraticset-up in India involving public opinion in every strategic issue can be of enormousvalue for a sustainable development process. Open and multiparty democraticsystem has its own problems, particularly in countries like India where the numberof political parties are innumerable and the level of political corruption is arguablyextremely high (Basu, 1998). Thus, both the countries have to improve efficiencies intheir respective systems. China has a controlled set-up that may not survive in thelong-run with growing socio-cultural pressures. India has an efficient system onpaper but too inefficient and loose while applying in the practical context.

Where China’s long-term growth perspective is based on expansion ofmanufacturing activities, India’s emphasis so far is on new technology in theinformation sector and other ventures in the broad service sector (Klein, 2004).World-class businesses that have emerged in knowledge-based industries aretransforming India into a key global player. Exports of IT software services wereequivalent to about 20 per cent of export values in India in 2003 (GOI, 2005).

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However, India needs to develop the high potential IT activities as a mainstreamindustry, not just as supplier to a handful of major producers in the world(Saxenian, 2002).

4. ConclusionsWith economic globalization, China and India are becoming new global growthengines in the current century. Mutually-beneficial economic cooperation betweenthe two economies and rising interdependence with regional and global powers willprovide an even better future. The rising giants in Asia may challenge the existingworld domination by the trans-Atlantic community in the coming years. AlthoughChina and India are considered as predominantly manufacturer and consumereconomies, respectively, both are developing the areas they are lacking. With hugedomestic markets and abundance of skilled manpower the nations havepotentialities to pose a serious challenge to the global economy. But they needcooperation and not competition among themselves. That would enable them tocompete more effectively with the existing superpowers. After long periods ofindifference, positive beginnings have been initiated by the two economies veryrecently to open up areas of economic cooperation. The knowledge-based industriesare emerging as the focus of world business for the current century, and India andChina can have tremendous scope of supporting each other in this particular area.The strong growth of software activities in India can match very well withhardware production facilities in China.

Based on the experiences of economic growth so far with reformed and openeconomies, India can learn several things from China. China has so far managed theeconomy very well and utilised its resources and skills to the best possible manner. Ithas achieved better results based on investment-driven export-oriented policies thatmay not be sustainable in the long run. But it has ignored the socio-political issues andthat can have very serious consequences in the process of future economicdevelopments. India has its strength in this particular area. Its relatively slower growthrate is based on stronger socio-economic foundations. On mutually beneficial terms,development could be fastened in both economies and they can become true economicpowerhouses in terms of manufacturing and consumption capacities.

Notes

1. There have been two types of important political changes in India since mid-1990s. Rightistand more nationalist political parties have gained power and that slowed down the processof opening up of the economy. At the same time, coalition governments (of very largenumber of political parties in some cases) of diversified interest groups have become quitecommon in recent years. That also has slowed down the process of any active policyinitiatives in every area.

2. The most widely known relative indicator of national level corruption is the (CPI) preparedby the Transparency International (TI). Although it doesn’t measure the actual extent ofcorruption (that may be impossible as well) the CPI provides comparative picture ofcorruption levels in a wide range of countries in the world annually. This index indicatesthe “perceptions of corruption among public officials and politicians as seen by businesspeople, academics and risk analysts”. As per the latest reports, China ranked 71 in 2004with a score of 3.4 (out of a maximum of ten); and India was ranked 90 with 2.8 score.


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The perception of corruption in India seems to be more uniform than China as reflected instandard deviation of scores (0.5 for India and 1.0 for China).

3. Under the top-down structure, decisions are made at the highest level of the hierarchy andlower-level officials get whatever is given to them. The other structure is decentralised.Lower-level officials collect corruption rents (e.g. bribes) and the highest ranking official isjust one of the recipients. The first structure was mostly prevalent in former socialisteconomies, whereas a freer economy tends to have a decentralised system.

References

Ahluwalia, M. (2002), “State-level performance under economic reforms in India”, in Krueger, A.O.(Ed.), Economic Policy Reforms and the Indian Economy, University of Chicago Press,Chicago, IL, pp. 91-125.

Anwar, S. and Basu, P.K. (2004), “Economic growth in South Asia: a preliminary analysis”, paperpresented at Conference Volume CD-7th Annual International Conference of the AmericanSociety of Business and Behavioural Sciences, Cairns, August.

Anwar, S. and Basu, P.K. (2007), “Foreign investment and economic growth: a case study ofIndia”, in Siddiqui, A. (Ed.), India and South Asia: Economic Developments in the Age ofGlobalization, M E Sharp, New York, NY.

Bardhan, P. (1997), “Corruption and development: a review of issues”, Journal of EconomicLiterature, Vol. 35 No. 3, pp. 1320-46.

Basu, P.K. (1998), “Political ideologies and economic development in India: emerging trends andfuture directions”, in Basu, P.K., Karunaratne, N.D. and Tisdell, C.A. (Eds), Fifty Years ofIndian Development: India in Retrospect, FutureDirections and Investment Outlook,University of Queensland, Brisbane, pp. 37-52.

Basu, P.K., Hicks, J. and Mao, M. (2002), “The macroeconomy in China: an overview of the systemand performances since 1979”, paper presented at the Faculty of Commerce, CSU Seminar,Bathurst in November.

China Daily (2005), “China Daily reports”, China Daily, 18 May.

Dater, M.K. and Basu, P.K. (2003), “Role of ownership and organisational forms in labour marketoutcomes: an exploratory analysis”, The Indian Journal of Labour Economics, Vol. 46 No. 4,pp. 537-48.

Dutta, D. (1998), “Fifty years of economic development in India: rhetoric and reality”, inBasu, P.K., Karunaratne, N.D. and Tisdell, C.A. (Eds), Fifty Years of Indian Development:India in Retrospect, FutureDirections and Investment Outlook, University of Queensland,Brisbane, pp. 5-22.

Dutta, D. (2002), “Effects of globalisation on employment and poverty in dualistic economies: thecase of India”, ASARC’s Working Paper no. 2002/08, Australian National University,Canberra, available at: http://rspas.anu.edu.au/papers/asarc/dutta2002.pdf

Garten, J.E. (1996), “The big emerging markets”, Columbia Journal of World Business, Vol. 31No. 2, p. 6.

GOI (2005), Economic Survey 2004-05, Ministry of Finance, Government of India, New Delhi.

Hyland, A. (2003), “Hit and myth”, The Australian Financial Review Magazine, March,pp. 35-42.

IFPRI (2002), Sound Choices for Development: The Impact of Public Investments in Rural Indiaand China, International Food Policy Research Institute, Washington, DC.

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Jha, R. (2001), “The challenge of fiscal reform in India”, ASARC’s Working Paper no. 2001/11,Australian National University, Canberra, available at: http://rspas.anu.edu.au/papers/asarc/jha_1.pdf

Kanbur, R., Venables, A.J. and Wan, G. (2005), “Introduction to the special issue: spatialinequality and development in Asia”, Review of Development Economics, Vol. 9 No. 1.

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Krueger, A. and Chinoy, S. (2002), “The Indian economy in the global context”, in Krueger, A.O.(Ed.), Economic Policy Reforms and the Indian Economy, University of Chicago Press,Chicago, IL, pp. 9-45.

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Mauro, P. (2004), “The persistence of corruption and slow economic growth”, IMF StaffPapers,Vol. 51 No. 1, pp. 1-18.

Nageswaran, V.A. (2004), “China’s growth model slows Asia’s rise”, The Hindu – Business Line,September, p. 27.

Naughton, B. (1995), Growing Out of the Plan: Chinese Economic Reform, 1978-1993, CambridgeUniversity Press, New York, NY.

NBSC (2004), China Statistical Yearbook 2004, National Bureau of Statistics of China, ChinaStatistics Press, Beijing.

Patnaik, P. (2000), “The performance of the Indian Economy in the 1990s”, South Asia, Vol. 23,Special Issue, pp. 193-205.

Pyle, D.J. (1997), China’s Economy – from Revolution to Reform, Macmillan, Hampshire/London.

Saxenian, A. (2002), “Bangalore: the silicon valley of Asia?”, in Krueger, A.O. (Ed.), EconomicPolicy Reforms and the Indian Economy, University of Chicago Press, Chicago, IL.

Sen, A. (2005), “The three R’s of reform”, Economic and Political Weekly, Vol. 40 No. 19, SpecialArticles.

Shen, R. (2000), China’s Economic Reform – An Experience in Pragmatic Socialism, Praeger,Westport, CN/London.

Song, L-G. (1999), “Trade liberalisation and development of China’s foreign trade”, in Wan, G-H.,MacAulay, G., Zhou, Z-Y. and Chudleigh, J. (Eds), Chinese Economy Towards the 21stCentury, University of Sydney, Sydney.

Thapa, G. (2004), Rural Poverty Reduction Strategy for South Asia, ASARC’s Working Paperno. 2004/06, Australian National University, Canberra, available at: http://rspas.anu.edu.au/papers/asarc/2004_06.pdf

Tianyong, Z. (2004), “Finding a better growth model”, China Daily, October 27.

Turcq, D. (1995), “Asia’s non-identical twins”, The McKinsey Quarterly, No. 2, pp. 4-19.

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Waller, C.J., Verdier, T. and Gardner, R. (2002), “Corruption: top-down or bottom-up”, EconomicInquiry, Vol. 40 No. 4, pp. 688-703.

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Further reading

EconData Pty Ltd (2004), World Tables, EconData Pty. Ltd, Melbourne, World Bank (electronicresource – provided in CD to subscribers).

Economist Intelligence Unit (2002), Country Profile: India, The Economist Group, EconomistIntelligence Unit, London.

(The) Economist Online (2005), The Economist Online, available at www.economist.com/countries/ (accessed May).

NBSC Online (2005) Online source of official national statistics and reports, available at: www.stats.gov.cn/english/ (accessed May), National Bureau of Statistics of China Online.

World Bank Online (2005), available at: http://devdata.worldbank.org (accessed May).

Corresponding authorParikshit K. Basu can be contacted at [email protected]


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Enhancing competitivenessof India Inc.

Creating linkages between organizationaland national competitiveness

Sanjib K. DuttaConfederation of Indian Industry, Bangalore, India

Abstract

Purpose – Quality and business excellence awards that recognize excellent organizationalperformance have become a major driving force in enhancing the competitiveness of Indian firmsin the global economy. While the frameworks underlying these awards have been used extensively byorganizations, little empirical evidence exists regarding the validity of these frameworks as a predictorof building competitiveness. This paper aims to address this issue.

Design/methodology/approach – This study critically examines the framework of one of theleading awards of India by testing the relationship between stakeholder results and enabling practicesusing regression analysis, structural equation model and data envelopment analysis.

Findings – The results of the study reveal that the framework is used by the organizations toenhance firm level competitiveness but not as a tool to contribute to national competitiveness.

Research limitations/implications – There is scope for further research to review the effectivenessand validity of this model by applying the model in selected organizations and to examine whether thereis any significant improvement in results and practices over a period of time. The findings can also becompared with results and practices of those organizations not practising this model.

Practical implications – This study suggests a framework that not only helps an organization inpositioning existing initiatives and identifying gaps in its journey of competitiveness but also links itsenabling practices and planned results to the growth process of the country.

Originality/value – Global competitiveness serves as the starting-point for instituting theConfederation of Indian Industry’s (CII) theme of “Competitiveness of India Inc.” and initiating CIIInstitute of Quality’s (IQ) task of developing a model of competitiveness that aspires to integrate theprocess of building competitiveness of an organization with that of a country. These two become thedriving factors for forming a basis of the model of competitiveness that aims to build competitivenessat the organizational level contributing to competitiveness at the country level.

Keywords India, Competitive strategy, Globalization


IntroductionGlobal competition is the name of the game today. The pressure of competition is beingfelt with increasing intensity as the world opens up to trade and commerce in the postWTO regime (Bhaumik, 1999). Although in such a fiercely competitive environment,companies are under tremendous pressure to offer consistent quality of internationalstandard at a competitive price to provide value for money competition has contributedto the economic growth of a nation. Sakakibara and Porter (2001), while exploring theinfluence of domestic competition on international trade performance, using data froma broad sample of Japanese industries have found that domestic competition has apositive and significant relationship with trade performance measured by world exportshare.



Enhancingcompetitiveness

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Vol. 34 No. 9, 2007pp. 679-711


DOI 10.1108/03068290710778660

While examining the finer elements of competition, Prof. Garelli (2004) hasdescribed competition and competitiveness as the two faces of the same coin.According to him, competition is an external and environmental factor andcompetitiveness is an intrinsic feature of an entity that can be developed andnurtured. In today’s perspectives, competitiveness has become a fundamental force ineconomics like gravity in physics. Across countries and regions, there is a drive toenhance competitiveness. This includes competitiveness of nations, industry sectorsand individual units. Competitiveness describes economic strength of a country orindustry or organization with respect to its competitors in the global market economyin which goods, services, people, skills, and ideas move freely across geographicalborders. Highly competitive entities are winners in global competitiveness game.

The biggest challenge for an Indian organization today is to be competitive, not onlyin the country but globally also. Competitiveness, being a multi-dimensional concept,can be enhanced through many ways. An effective and proven way is through thequality way, which is a major source for creating sustainable competitive advantage fororganizations. There are prominent examples among countries and their organizationsthat have become competitive through the quality way.

Competitiveness of India IncGarelli, in his work, explored that a new breed of competitors is emerging to reshapethe world where Asia is attracting 60 percent of the investments going to developingcountries and China has become the first recipient of direct investment and the4th largest exporter of manufactured goods in the world (Garelli, 2004). In this scenario,it is good to do a reality check on where India stands.

According to the Global Competitiveness Report (GCR) 2003-2004 released by theWorld Economic Forum (WEF), India is ranked 56th place on the WEF’s GrowthCompetitiveness Index (Global Competitiveness Report, 2003-2004). At the industrylevel, clearly much needs to be done to enhance competitiveness to meet the onslaughtof competition from around the world.

In 2002, Confederation of Indian Industry (CII), introduced its theme for 2002-2003as “Competitiveness of India Inc.” and set a target for all those representing Indian Inc.to ensure that India reaches the top 20 on the WEF’s Growth Competitiveness Index by2010. “India Inc.” represents the national government, State governments, business andindustry, voluntary services/NGOs, Agriculture, Services and infrastructure (TheHindu, April 30, 2002).

“India Inc.” stands for India as a whole – representing government at the nationaland State level and representing Indian industry. Therefore, the focus lies on two keyelements of competitiveness:

(1) competitiveness of the nation as a whole; and

(2) competitiveness of Indian industry (Conference Papers of Quality Summit,2002).

Major events in the 1990s such as globalization of world markets and economicreforms undertaken by the Government of India changed the business environment inthe country. This is further getting accentuated with the recent development in Eastand South Asia like Beijing declaration between India and China, start of economicdialogue between India and Pakistan, talk of the formation of Regional Trade Blocks in

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the region, etc. All these opened up unlimited business opportunities to India Inc., ofcourse, with increased competition.

Need for a modelDespite many decades of prodding by pioneers and relentless competitive pressure,progress in achieving high levels of quality till the last decade was very slow. Concernswere raised about whether total quality management (TQM) programs have generatedreal economic gains and/or improvements in operating performance. Hayes and Pisano(1994) questioned the ability of TQM to improve and sustain performance. Porter(1996) has raised the doubt about the value creation potential of TQM. Fuchberg (1992)proclaimed “Total Quality is Termed Only Partial Success.” “Why Most QualityEfforts Fail” was the question posed by Szwergold (1992).

While analysing the underlying reasons for the slow progress of qualitymovement, Chatterjee and Yilmaz (1993) have concluded that organizations are notable to link their quality initiatives to business results due to the contradictoryprescriptions of the leading gurus. Tonk (2000) has argued that no single qualitysystem, set of quality criteria or even quality philosophy is ever going to be solutionby itself to a firm’s quality problems. However, there seems to be a little doubt thatregardless of sector, size, structure, or maturity, to be successful, organisations needto establish appropriate management framework with clear purpose. In other words,there was a need for a practical and holistic business excellence model synthesing thepropositions of the quality gurus that can be used as a structure for the organisation’smanagement system. In this connection, it may be said that the pioneers in this arealike Deming (1982), Crosby (1979), Feigenbaum (1983), Taguchi, Ishikawa (1985) andJuran (1998) – in spite of the differences in presenting their views have consensus inthe core concepts like continuous improvement or customer satisfaction. Thus,quality and business excellence awards that recognize excellent organizationalperformance have emerged as a significant component of the competitivenessbuilding strategies of many countries based on the unified theories of the qualitygurus. Tummala and Tang (1996) acknowledges the important contributions ofquality gurus like Deming, Juran, Crosby, Feigenbaum, Ishikawa which led to theevolutionary development of strategic quality management and also provides aframework for Baldrige and European quality awards (EQAs).

2.4 Existing quality awardsCompetition today is global. It is intense and accelerating. For long-term survival,organisations need to strive for nothing less than world-class standards of businessexcellence. There has been an increasingly widespread recognition that quality will bethe cornerstone of developing the much-needed global competitiveness. Quality andbusiness excellence awards that recognize excellent organizational performance haveemerged as a significant component of the productivity and quality promotionstrategies of many countries. Several national and regional quality awards have beenestablished to promote quality and serve as models of TQM. These awards areestablished to promote the awareness of business excellence as an increasinglyimportant element in competitiveness. Not only do they recognize excellent businesses,but also increase the understanding of the elements critical for business excellence. Oneof the best practices associated with continuous improvement is that self-assessment


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techniques using a recognized business excellence model help identify opportunitiesfor improvement areas across the organization and promote a holistic approach tocontinuous improvement. Developments in the quality award assessment process inorganizations can make a contribution, within a wider framework of organizationallearning.

During the last ten years, the three most frequently used self-assessment models havebeen Japan’s Deming Application Prize, the Malcolm Baldrige National Quality Awardand the EQA. Established in 1951, the Deming Prize was created by the Union ofJapanese Scientists and Engineers (JUSE) to commemorate Dr W. Edwards Deming’scontribution to Japanese industry and to promote further the continued development ofcompany-wide quality control in Japan. The Baldrige Award is an annual, national,American Quality Award that was established in 1987 to promote quality awarenessand understanding of the requirements for quality and performance excellence, torecognize quality achievements of American companies, and to publicize successfulquality and performance management strategies. The EQA was established in 1991,with the support of the European Organization for Quality (EOQ) and the EuropeanCommission (EC), to enhance the position of Western-European companies in the worldmarket by accelerating the acceptance of quality as a strategy for global competitiveadvantage and by stimulating and assisting the development of quality improvementactivities. This award is based on a widely adopted framework known as “BusinessExcellence” or “Excellence” Model, promoted by the European Foundation for QualityManagement (EFQM). Recently, there are at least 77 quality and business excellenceawards being implemented in at least 69 countries and economies worldwide (Report ofthe Symposium on Quality and Business Excellence Awards, 2001)

While conducting a comparative analysis of national and regional quality awards, ithas been observed by Vokura et al. (2000) that as different quality awards beingperiodically reviewed and updated, further similarities between their models andcriteria should result as these quality award models continue to evolve and mature.

Application of business excellence models in IndiaTo pace with this changed scenario, during the last ten years, Indian organizations puttheir efforts to use an aligned approach to these model criteria and also to seek recognitionin their journey of excellence. Sundaram Clayton India and Sundaram Brake Linings havealready bagged the overseas Deming Award (JUSE, 2002). The Tatas evolved theTata Business Excellence Model (TBEM) and introduced the JRDQV award for businessexcellence in 1994. The TBEM framework mostly features the aspects covered in theMalcolm Baldrige Award (2005). The objective is to ensure that the 100-odd Tata GroupCompanies achieved well-defined levels of business excellence and qualified to becomeworld-class. The CII and Export Import Bank of India, to promote the awareness ofbusiness excellence as an increasingly important element in competitiveness, institutedthe CII-EXIM Bank Award for Business Excellence jointly in 1994. It is based on theEFQM Excellence Model (2004) and perceived as the most prestigious award in India forBusiness Excellence that an Indian company can aspire for.

The scoring process requires that an organization present its achievements across arange of specific areas relating to each criterion in the assessment model. The nine criteriaare written in a non-prescriptive terms, to allow an organization the freedom to put into itsapplication self-assessment information which is relevant to its business situation.

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The business excellence model is a non-prescriptive framework based on ninecriteria. Five of them are enablers and four are results. The enabler criteria cover whatan organization does. The results criteria cover what an organization achieves. Resultsare caused by enables.

The model recognises that there are many approaches to achieving sustainableexcellence in all aspects of performance. It is based on the premise that: excellent resultswith respect to performance, customers, people and society are achieved throughleadership driving policy and strategy, people, partnerships and resources, and processes.

The business excellence model is presented above in a diagrammatic form (Figure 1).The arrows emphasise the dynamic nature of the model. They show innovation andlearning helping to improve enablers that in turn lead to improved results.

The model criteriaThe model’s nine boxes, shown above, represent the criteria against which to assess anorganisation’s progress towards excellence. Each of the nine criteria has a definition,which explains the high-level meaning of that criterion.

To develop the high-level meaning further, each criterion is supported by a numberof criterion parts. Criterion parts pose a number of questions that should be consideredin the course of an assessment.

To develop the high-level meaning further each criterion is supported by a numberof sub-criteria parts. Criterion parts pose a number of questions that should beconsidered in the course of an assessment.

Finally, below each sub-criterion are lists of guidance points. Use of these guidancepoints is not mandatory nor is they exhaustive lists. Those are intended to furtherexemplify the meaning of the sub-criteria.

Assessment process

(1) Senior managers from industry are selected as assessors. They go throughfour-day training programme on understanding the award criteria andassessment process.

(2) Applicants send 75 pages (maximum) application document to CII.

(3) Assessor team is appointed for each applicant. Assessors individually liststrength, opportunities for improvement and score. The assessor teamindividually meets to reach consensus score.

Figure 1.

People Results90 points (9%)

Customer Results200 points (20%)

Society Results60 points (6%)

KeyPerformance

Results150 points

(15%)

Processes140 points

(14%)

Leadership100 points

(10%)

People90 points (9%)

Policy & Strategy80 points (8%)

Partnerships & Resources90 points (9%)

I N N O V A T I O N A N D L E A R N I N G

Enablers 500 points (50%) Results 500 points (50%)


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(4) Distinguished individuals (about nine) from business and academic appointedas jurors. Jurors are trained on the award model and the process. On the basis ofassessor team reports, jurors decide on applicants to be site visited.

(5) Assessor teams are appointed to make site visits. assessors meet to plan sitevisits. Site visits (4-6 days typically) are made to check the validity ofapplication and clarify issues. Applications are re-scored and reports arefinalized.

(6) The application is assessed and scored on a scale of 0-1,000 points using ninecriteria of The Business Excellence Model, which are also the criteria for TheEQA.

(7) Based on reports from site-visit teams, jurors decide on the winners of theaward, prizes and commendation certificates.

Scoring methodology of an individual assessor (CII-EXIM Bank Award for BusinessExcellence, 2006)

(1) Scoring logic:. Sub-criterion. The first step of scoring is to allocate a percentage score to

each sub-criterion:

(1) Enablers. While scoring for an enabler sub-criterion approach,deployment and assessment and review elements need to beaddressed.

. Approach. This covers what an organization plans to do andthe reasons for it. It includes two sub-elements:

(1) A sound approach. It is scored by considering thefollowing:

† approach has a clear rationale;

† there are well defined and developed processes; and

† approach focuses on stakeholder needs.

(2) An integrated approach. It is scored by considering thefollowing:

† approach supports policies and strategies; and

† approach is linked to other approaches as appropriate.. Deployment. This covers what an organization does to deploy

the approach. it includes two sub-elements:

(1) how approach is implemented; and

(2) how approach is deployed in a structured way.. Assessment and review. This covers what an organization does

to review and improve both the approach and the deploymentof the approach. It includes three sub-elements:

(1) Measurement. Regular measurement of the effectivenessof the approach and deployment is carried out.

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(2) Learning. Learning activities are used to identify andshare best practices and improvement opportunities.

(3) Improvement. Output from measurement and learning isanalyzed and used to identify, prioritize, plan, andimplement improvements.

(2) Results. While scoring for a results sub-criterion, results elementneed to be addressed:

. The first element of results sub-criterion covers what anorganization is achieving. It includes four sub-elements:

(1) Trends. Trends are positive and/or there is sustainedgood performance.

(2) Targets. Targets are achieved. Targets are appropriate.

(3) Comparison. Comparisons with external organizationstakes place and results compare well with industryaverages or acknowledged best in class.

(4) Causes. Results are caused by approaches.. The second element of results sub-criterion addresses the

relevant areas. It includes one sub-element:

(1) Scope. It includes the following:

† results address relevant areas;

† results are appropriately segmented.. † Criterion. The next step of scoring is to allocate a percentage

score to each criterion by adding the weighted percentage scoreawarded to the sub-criteria under the criteria.

. † Overall score. It is determined by adding the weightedpercentage score awarded to the criteria.

(2) Scoring methodology:. Sub-criterion. The first step of scoring is to allocate a percentage score to

each sub-criterion.

(1) Enablers:Overall score of an applicant is S.Overall score of an enabler criterion is Ei (i ¼ 1, 5).Overall score of an enabler sub-criterion is Ei,j ( j ¼ 1 to 5 for i ¼ 1, 3,4, 5; j ¼ 1 to 4 for i ¼ 2).

. Approach:Score of an enabler sub-criterion for the approach element isEAi,j

(1) A sound approach: score of an enabler sub-criterion forthe sub-element is EASi,j

(2) An integrated approach: score of an enabler sub-criterionfor the sub-element is EAIi,j


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EAi;j ¼1

2ðEASi;j þ EAIi;jÞ ð1Þ

. Deployment. Score of an enabler sub-criterion for thedeployment element is EDi,j:

(1) How approach is implemented: score of an enablersub-criterion for the sub-element is EDIi,j.

(2) How approach is deployed in a structured way: score ofan enabler sub-criterion for the sub-element is EDSi,j:

EDi;j ¼1

2ðEDIi;j þ EDSi;jÞ ð2Þ

. Assessment and review. Score of an enabler sub-criterion forthe assessment and review element is ERi,j.

(1) Measurement: score of an enabler sub-criterion for thesub-element is ERMi,j.

(2) Learning: score of an enabler sub-criterion for thesub-element is ERLi,j.

(3) Improvement: score of an enabler sub-criterion for thesub-element is ERIi,j:

ERi;j ¼1

3ðERMi;j þ ERLi;j þ ERIi;jÞ ð3Þ

Ei;j ¼1

3ðEAi;j þ EDi;j þ ERi;jÞ ð4Þ

(2) Results:Overall score of a results criterion is Ri (i ¼ 6, 9).Overall score of a results sub-criterion is Ri,j ( j ¼ 1, 2).

. Score of the first element of results sub-criterion is R1i,j:

(1) Trends: the existence of positive trends and/or sustainedgood performance. Score for the sub-element is R1Ti,j.

(2) Targets: whether targets are set and achieved. Score forthe sub-element is R1Ri,j.

(3) Comparison: comparisons with external organizationsincluding “best in class” are undertaken. Score for thesub-element is R1Ci,j.

(4) Causes: the visibility of results caused by approach.Score for the sub-element is R1Ai,j:

R1i;j ¼1

4ðR1Ti;j þ R1Ri;j þ R1Ci;j þ R1Ai;jÞ ð5Þ

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. Score of the second element of results sub-criterion is R2i,j:

(1) Scope. Results address relevant areas. Score for thesub-element is R2Si,j:

R2i;j ¼ R2Si;j ð6Þ

Ri;j ¼1

2ðR1i;j þ R2i;jÞ ð7Þ

. † Criterion. The next step of scoring is to allocate a percentagescore to each criterion by adding the weighted percentage scoreawarded to the sub-criteria under the criteria:

(1) Enablers:

Ei ¼X

WjðEijÞ ð8Þ

Wj is the weight allocated to each sub-criterion under a criterion.Each sub-criterion is allocated equal weight under a criterion.Wj ¼ 0.2 for all the sub criteria under criteria 1, 3, 4, 5Wj ¼ 0.25 for all the sub criteria under criteria 2.

(2) Results:

Ri ¼X

WjðRijÞ ð9Þ

Wj is the weight allocated to each sub-criterion under a criterion.W1 ¼ 0.75 for all the sub criteria under criteria 6, 7W1 ¼ 0.25 for all the sub criteria under criterion 8W1 ¼ 0. 5 for all the sub criteria under criteria 9W2 ¼ 0.25 for all the sub criteria under criteria 6, 7W2 ¼ 0.75 for all the sub criteria under criterion 8W2 ¼ 0. 5 for all the sub criteria under criteria 9.

(3) Overall score. It is determined by adding the weighted percentagescore awarded to the criteria:

S ¼X

WiðEiÞ þX

WiðRiÞ ð10Þ

Wi is the weight allocated to each criterion.Wi ¼ 1.0 for i ¼ 1Wi ¼ 0.8 for i ¼ 2Wi ¼ 0.9 for i ¼ 3Wi ¼ 0.9 for i ¼ 4Wi ¼ 1.4 for i ¼ 5Wi ¼ 2.0 for i ¼ 6Wi ¼ 0.9 for i ¼ 7Wi ¼ 0.6 for i ¼ 8Wi ¼ 1.5 for i ¼ 9


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Establishing the relationship between model criteriaGhosh et al. (2003) used structural equation model to test the relationships betweenstrategic and operational quality planning implied by the framework, and their impacton performance. Similarly, we analyzed the scores obtained by 45 applicantorganizations for the CII EXIM Bank Award for Business Excellence in 2004. Thescoring profiles of the applicant organizations are listed in Table I in an ascendingorder on the basis of overall scores. The scores obtained by these organizations for theCII EXIM Bank Award for Business Excellence are studied using structural equationmodelling (SEM) (Hoyle, 1995) technique with the help of AMOS software to estimate,analyze and test the model for specifying relationships among criteria. SEM servespurposes similar to multiple regression, but in a more powerful way which takes intoaccount the modelling of interactions, nonlinearities, correlated independents,measurement error, correlated error terms, multiple latent independentseach measured by multiple indicators, and one or more latent dependents also eachwith multiple indicators (Hoyle, 1995). The overall scores are not taken intoconsideration for the following reasons:

. The overall score does not form an integral part of the excellence model. They aredetermined using the scores of the individual criteria.

. The overall score obtained by an organization helps in administering the awardassessment process for the sake of recognition. However, scoring profile acrossthe different criteria of the model provides more meaningful information onpractices and potential of an organization with respect to its performance in themarket and sector in which it operates.

The path diagram and the fit measures are shown in Figure 2 and Table II,respectively.

The fit measures show that the model is inadequate. This is for the followingreasons:

. The first measure is the x 2 statistic (discrepancy). The value (x 2 ¼ 92.03145770for 20 degrees of freedom) is above the minimum level of 0.05.

. The root mean square error of approximation (RMSEA) value was found to be0.2861010126 which is much above the threshold value of 0.08.

To assess the model fit in a meaningful manner, it is worthwhile to screen the applicantorganizations from the point of view of effective implementation of TQM. Essentially,the model conveys that excellent results with respect to performance, customers,people and society are achieved through leadership driving policy and strategy,people, partnerships and resources, and processes. From the viewpoint of effectiveimplementation of TQM, we propose to include only those organizations where there isno significant imbalance between the scores awarded between enablers and results.

The performance of an organization can be described along a large number ofdimensions relating to outputs produced, aspects of the quality of those outputs, andthe inputs used. Data envelopment analysis (DEA) is a “data oriented” approach forevaluating the performance of a set of peer entities called decision-making units(DMUs) which convert multiple inputs into multiple outputs (Charnes et al., 1995). Eachapplicant organization is considered as a DMU. Five enabler criteria are considered asinputs and four result criteria are taken as outputs. The DEA efficiency scores are

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2525

2525

2525

1525

225

225

2525

2525

2525

3525

275

325

2535

2525

2525

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275

425

2535

3525

1525

2535

275

535

3535

3535

3535

3535

325

625

1525

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735

3535

3535

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325

835

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1345

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1435

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1635

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1845

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1935

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2035

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2245

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2345

3545

4545

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2445

3545

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6555

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4545

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2645

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3545

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2745

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2835

4545

3545

4545

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425

(continued

)

Table I.The scoring profiles of

the applicantorganizations for the CII

EXIM Bank Award forBusiness Excellence in

2004


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Table I.

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calculated using the DEA Solver software with input orientation and variable returnsto scale. The ranking of the DMUs along with the efficiency scores are given inTable III.

We find 28 DMUs are ranked first with an efficiency score of 1 (100 percentefficient). A DMU is rated as fully (100 percent) efficient on the basis of availableevidence if the performances of other DMUs does not show that some of its inputs oroutputs can be improved without worsening some of its other inputs or outputs(Cooper et al., 2000):

. We select these 100 percent efficient DMUs for further analsis. As we see theseDMUs are distributed from the lowest to the highest scorers as per the overall scoresobtained from the assessment process of CII-EXIM Bank Award for BusinessExcellence indicating the varied maturity level. Therefore, the organizations are

Figure 2.Path diagram

E1

E2

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R2R3

R4

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0.1 Enhancingcompetitiveness

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selected not on the basis of maturity in is journey of excellence but how efficiently

they leverage the enablers to maximize results at a given maturity level.

. The scores obtained by 28 prioritized organizations for the CII EXIM Bank

Award for Business Excellence are further studied using SEM technique with the

help of AMOS software.

The fit measures for the new set of data are given in Table IV.

However, the fit measures show that the model is still inadequate. This is for the

following reasons:

Fit measures Default model Saturated Independence Macro

Discrepancy 92.03145770 0.00000000 1,496.68275300 CMINDegrees of freedom 20 0 45 DFP 0.00000000 0.00000000 PNumber of parameters 34 54 9 NPARDiscrepancy/df 4.60157289 33.25961673 CMINDFRMR RMRGFI GFIAdjusted GFI AGFIParsimony-adjusted GFI PGFINormed fit index 0.93850971 1.00000000 0.00000000 NFIRelative fit index 0.86164685 0.00000000 RFIIncremental fit index 0.95122076 1.00000000 0.00000000 IFITucker-Lewis index 0.88835661 0.00000000 TLIComparative fit index 0.95038072 1.00000000 0.00000000 CFIParsimony ratio 0.44444444 0.00000000 1.00000000 PRATIOParsimony-adjusted NFI 0.41711543 0.00000000 0.00000000 PNFIParsimony-adjusted CFI 0.42239143 0.00000000 0.00000000 PCFINoncentrality parameter estimate 72.03145770 0.00000000 1,451.68275300 NCPNCP lower bound 45.92235565 0.00000000 1,329.02083600 NCPLONCP upper bound 105.68265530 0.00000000 1,581.72321300 NCPHIFMIN 2.09162404 0.00000000 34.01551711 FMINFO 1.63707858 0.00000000 32.99278984 FOFO lower bound 1.04368990 0.00000000 30.20501900 FOLOFO upper bound 2.40187853 0.00000000 35.94825485 FOHIRMSEA 0.28610126 0.85625528 RMSEARMSEA lower bound 0.22843926 0.81928179 RMSEALORMSEA upper bound 0.34654571 0.89378415 RMSEAHIP for test of close fit 0.00000026 0.00000214 PCLOSEAkaike information criterion (AIC) 160.03145770 108.00000000 1,514.68275300 AICBrowne-Cudeck criterion 180.03145770 139.76470590 1,519.97687100 BCCBayes information criterion BICConsistent AIC CAICExpected cross validation index 3.63707858 2.45454546 34.42460802 ECVIECVI lower bound 3.04368990 2.45454546 31.63683718 ECVILOECVI upper bound 4.40187853 2.45454546 37.38007303 ECVIHIMECVI 4.09162404 3.17647059 34.54492888 MECVIHoelter .05 index 16 2 HFIVEHoelter .01 index 18 3 HONE

Table II.Fit measures

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. The x 2 value calculated was found to be 64.0302100. This means that there is

considerable difference between the estimated values and the observed values.

Hence, some amounts of discrepancies exist while the model is applied in an

organization.

Rank DMU Efficiency score

1 45 11 1 11 2 11 3 11 4 11 44 11 6 11 7 11 43 11 41 11 10 11 40 11 12 11 39 11 14 11 15 11 35 11 33 11 18 11 19 11 20 11 32 11 30 11 23 11 24 11 25 11 26 11 28 129 36 0.96296330 5 0.93650630 11 0.93650632 13 0.92857133 27 0.90123334 8 0.88571134 17 0.88571136 31 0.88095236 16 0.88095238 29 0.85093139 21 0.84795340 22 0.84615241 34 0.81481541 38 0.81481543 37 0.80952144 42 0.845 9 0.714284

Table III.The ranking of the DMUsalong with the efficiency

scores


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. The RMSEA value was found to be 0.28554759 which is much above thethreshold value of 0.08.

As explained above, we cannot conclude that the model fits the data well. In otherwords, the adequacy of the model is not satisfactorily established from the scoring dataon the different criteria of the relatively efficient organizations.

To further investigate, we see the path diagram is constructed based on the explicitlinkages given in the model. Considering both the explicit and the obvious linkages, thepath diagram takes the shape, shown in Figure 3. The associate fit measures are givenin Table V.

Fit measures Default model Saturated Independence Macro

Discrepancy 64.03021000 0.00000000 945.37174000 CMINDegrees of freedom 20 0 45 DFP 0.00000166 0.00000000 PNumber of parameters 34 54 9 NPARDiscrepancy/df 3.20151050 21.00826089 CMINDFRMR RMRGFI GFIAdjusted GFI AGFIParsimony-adjusted GFI PGFINormed fit index 0.93226981 1.00000000 0.00000000 NFIRelative fit index 0.84760707 0.00000000 RFIIncremental fit index 0.95241889 1.00000000 0.00000000 IFITucker-Lewis index 0.88996992 0.00000000 TLIComparative fit index 0.95109774 1.00000000 0.00000000 CFIParsimony ratio 0.44444444 0.00000000 1.00000000 PRATIOParsimony-adjusted NFI 0.41434214 0.00000000 0.00000000 PNFIParsimony-adjusted CFI 0.42271011 0.00000000 0.00000000 PCFINoncentrality parameter estimate 44.03021000 0.00000000 900.37174000 NCPNCP lower bound 23.55364227 0.00000000 804.09868620 NCPLONCP upper bound 72.11708832 0.00000000 1,004.05283400 NCPHIFMIN 2.37148926 0.00000000 35.01376815 FMINFO 1.63074852 0.00000000 33.34710148 FOFO lower bound 0.87235712 0.00000000 29.78143282 FOLOFO upper bound 2.67100327 0.00000000 37.18714198 FOHIRMSEA 0.28554759 0.86084069 RMSEARMSEA lower bound 0.20884888 0.81351682 RMSEALORMSEA upper bound 0.36544516 0.90905497 RMSEAHIP for test of close fit 0.00000729 0.00000062 PCLOSEAkaike information criterion (AIC) 132.03021000 108.00000000 963.37174000 AICBrowne-Cudeck criterion 172.03021000 171.52941180 973.95997530 BCCBayes information criterion BICConsistent AIC CAICExpected cross validation index 4.89000778 4.00000000 35.68043482 ECVIECVI lower bound 4.13161638 4.00000000 32.11476616 ECVILOECVI upper bound 5.93026253 4.00000000 39.52047532 ECVIHIMECVI 6.37148926 6.35294118 36.07259168 MECVIHoelter .05 index 14 2 HFIVEHoelter .01 index 16 3 HONE

Table IV.Fit measures for the newset of data

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The assessment of model fit with respect the revised model is as follows:. The first measure is the x 2 statistic (discrepency). The value (x 2 ¼ 16.31750640

for 14 degrees of freedom) is well within the minimum level of 0.05.. The RMSEA value ( ¼ 0.07830051) falls within the threshold value of 0.08.. Both Tucker-Lewis index ( ¼ 0.99172661) and comparative fit index

( ¼ 0.99742606) exceed the recommended level of 0.90.

We further investigate to explore the relationship between two or more explanatoryvariables and a response variable by fitting a linear equation to observed dataemploying simple or multiple linear regressions using Minitab software. Results aregiven Table VI.

Simple linear regression examines the linear relationship between two continuousvariables: one response (y) and one predictor (x), whereas multiple linear regressionsexamine the linear relationships between one continuous response and two or morepredictors (Hair et al., 1998).

Figure 3.Modified path diagram

E1

E2

E3E4

E5

R1

R2R3

R4

er_r1

er_r2

er_r3

er_r4

1

1

1

1

0.

0.

0.

0.

er_e5

er_e3

er_e1

er_e2

er_e4

10.

10.

0.

1

0.

0.1

1


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Hypothesized working of the model based on the path diagram is as follows:. A significant relationship between key performance results (R4), customer

results (R1), people results (R2) and society results (R3) exist.. People results are directly enabled by leadership (E1), people (E3) and processes

(E5).. Society results are directly enabled by leadership and processes.. Key performance results are directly enabled by policy and strategy,

partnerships and resources (E4) and processes.. Customer results are directly enabled by policy and strategy and processes.

File measure Default model Saturated Independence Macro

Discrepancy 16.31750640 0.00000000 945.37174000 CMINDegrees of freedom 14 0 45 DFP 0.29437152 0.00000000 PNumber of parameters 40 54 9 NPARDiscrepancy/df 1.16553617 21.00326089 CMINDFRMR RMRGR GRAdjusted GFI AGFIParsimony-adjusted GFI PGFINormed fit index 0.98273959 1.00000000 0.00000000 NFIRelative fit index 0.94452010 0.00000000 RFIIncremental fit index 0.99751173 1.00000000 0.00000000 IFITucker-Lewis index 0.99172661 0.00000000 TUComparative fit index 0.99742606 1.00000000 0.00000000 CFIParsimony ratio 0.31111111 0.00000000 1.00000000 PRATIOParsimony-adjusted NFI 0.30574120 0.00000000 0.00000000 PNFIParsimony-adjusted CFI 0.31031033 0.00000000 0.00000000 PCFINoncentrality parameter estimate 2.31750640 0.00000000 900.37174000 NCPNCP lower bound 0.00000000 0.00000000 804.09868620 NCPLONCP upper bound 16.62001801 0.00000000 1,004.05283400 NCPHFMIN 0.60435209 0.00000000 35.01376315 FMINFO 0.06583357 0.00000000 33.34710148 FOFO lower bound 0.00000000 0.00000000 29.78143282 FOLOFO upper bound 0.61555622 0.00000000 37.18714198 FOHIRMSEA 0.07830051 0.86084069 RMSEARMSEA lower bound 0.00000000 0.81351682 RMSEALORMSEA upper bound 0.20968620 0.90905497 RMSEAHIP for test of close fit 0.35858003 0.00000062 PCLOSEAkaika information criterion (AIC) 96.31750640 106.00000000 963.37174000 AICBrowne-Cudeck criterion 143.37632990 171.52941110 973.55997530 BCCBayes information criterion BICConsistent AIC CAICExpected cross validation index 3.56731505 4.00000000 35.68043482 ECVIECVI lower bound 3.48148143 4.00000000 32.11476616 ECVILOECVI upper bound 4.09703770 4.00000000 39.52047532 ECVIHIMECVI 5.31023444 6.35294118 36.17259168 MECVIHoelter .05 index 40 2 HFIVEHoelter .01 index 49 2 HONE

Table V.The associate fitmeasures

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Regression analysis: R4 versus R1, R2, R3The regression equation is: R4 ¼ 5.95 þ 0.953 R1 2 0.281 R2 þ 0.328 R3Predictor Coef SE coef T PConstant 5.955 5.095 1.17 0.254R1 0.9532 0.1446 6.59 0.000R2 20.2806 0.1639 21.71 0.100R3 0.3275 0.1001 3.27 0.003S ¼ 5.918 R 2 ¼ 74.3 percent R 2 (adj) ¼ 71.1 percentAnalysis of varianceSource DF SS MS F PRegression 3 2,430.97 810.32 23.14 0.000Residual error 24 840.46 35.02Total 27 3,271.43Source DF Seq SSR1 1 2,054.57R2 1 1.24R3 1 375.15Unusual observationsObs R1 R4 Fit SE fit Residual St resid4 15.0 35.00 21.43 2.83 13.57 2.61R

Notes: R denotes an observation with a large standardized residual

Regression analysis: R1 versus R2, R3The regression equation is: R1 ¼ 16.3 þ 0.621 R2 2 0.102 R3Predictor Coef SE Coef T PConstant 16.311 6.248 2.61 0.015R2 0.6215 0.1896 3.28 0.003R3 20.1019 0.1369 20.74 0.464S ¼ 8.187 R 2 ¼ 34.1 percent R 2 (adj) ¼ 28.8 percentAnalysis of varianceSource DF SS MS F PRegression 2 867.15 433.58 6.47 0.005Residual error 25 1,675.71 67.03Total 27 2,542.86Source DF Seq SSR2 1 830.03R3 1 37.12Unusual observationsObs R2 R1 Fit SE fit Residual St resid20 35.0 55.00 36.53 3.41 18.47 2.48R23 25.0 45.00 28.28 2.77 16.72 2.17R


Regression analysis: R2 versus E3The regression equation is: R2 ¼ 21.99 þ 0.971 E3Predictor Coef SE coef T PConstant 21.993 6.029 20.33 0.744E3 0.9710 0.1403 6.92 0.000S ¼ 6.230 R 2 ¼ 64.8 percent R 2 (adj) ¼ 63.5 percent

(continued )Table VI.

Regression results


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Regression analysis: R2 versus E1The regression equation is: R2 ¼ 11.2 þ 0.694 E1Predictor Coef SE coef T PConstant 11.187 5.406 2.07 0.049E1 0.6935 0.1307 5.31 0.000S ¼ 7.277 R 2 ¼ 52.0 percent R 2 (adj) ¼ 50.1 percentAnalysis of varianceSource DF SS MS F PRegression 1 1,491.1 1,491.1 28.16 0.000Residual error 26 1,376.7 53.0Total 27 2,867.9Unusual observationsObs E1 R2 Fit SE fit Residual St resid1 15.0 25.00 21.59 3.54 3.41 0.54 X23 45.0 25.00 42.40 1.52 217.40 22.44R

Notes: R denotes an observation with a large standardized residual; X denotes an observation whoseX value gives it large influence

Analysis of varianceSource DF SS MS F PRegression 1 1,858.8 1,858.8 47.89 0.000Residual error 26 1,009.1 38.8Total 27 2,867.9Unusual observationsObs E3 R2 Fit SE fit Residual St resid9 45.0 25.00 41.70 1.24 216.70 22.74R22 45.0 55.00 41.70 1.24 13.30 2.18R


Regression analysis: R2 versus E5The regression equation is: R2 ¼ 12.9 þ 0.645 E5Predictor Coef SE coef T PConstant 12.890 6.957 1.85 0.075E5 0.6452 0.1678 3.84 0.001S ¼ 8.386 R 2 ¼ 36.2 percent R 2 (adj) ¼ 33.8 percentAnalysis of varianceSource DF SS MS F PRegression 1 1,039.2 1,039.2 14.78 0.001Residual error 26 1,828.6 70.3Total 27 2,867.9Unusual observationsObs E5 R2 Fit SE fit Residual St resid8 25.0 45.00 29.02 3.03 15.98 2.04R9 45.0 25.00 41.92 1.77 216.92 22.06R23 45.0 25.00 41.92 1.77 216.92 22.06R

Notes: R denotes an observation with a large standardized residual; a significant relationship betweenpeople results and processes exists with R 2 value as 36.2 percentTable VI. (continued)

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Regression analysis: R3 versus E5The regression equation is: R3 ¼ 6.9 þ 0.821 E5Predictor Coef SE coef T PConstant 6.86 10.05 0.68 0.501E5 0.8212 0.2425 3.39 0.002S ¼ 12.12 R 2 ¼ 30.6 percent R 2 (adj) ¼ 27.9 percentAnalysis of varianceSource DF SS MS F PRegression 1 1,683.4 1,683.4 11.47 0.002Residual error 26 3,816.6 146.8Total 27 5,500.0Unusual observationsObs E5 R3 Fit SE fit Residual St resid8 25.0 55.00 27.39 4.37 27.61 2.44R20 45.0 15.00 43.81 2.55 228.81 22.43R


Regression analysis: R3 versus E1The regression equation is: R3 ¼ 21.29 þ 1.03 E1Predictor Coef SE coef T PConstant 21.290 6.828 20.19 0.852E1 1.0323 0.1651 6.25 0.000S ¼ 9.192 R 2 ¼ 60.1 percent R 2 (adj) ¼ 58.5 percentAnalysis of varianceSource DF SS MS F PRegression 1 3,303.2 3,303.2 39.10 0.000Residual error 26 2,196.8 84.5Total 27 5,500.0Unusual observationsObs E1 R3 Fit SE Fit Residual St resid1 15.0 15.00 14.19 4.48 0.81 0.10 X15 45.0 65.00 45.16 1.92 19.84 2.21R20 35.0 15.00 34.84 1.92 219.84 22.21R


Regression analysis: R4 versus E4The regression equation is: R4 ¼ 7.79 þ 0.869 E4Predictor Coef SE coef T PConstant 7.794 7.265 1.07 0.293E4 0.8688 0.1760 4.94 0.000S ¼ 8.060 R 2 ¼ 48.4 percent R 2 (adj) ¼ 46.4 percentAnalysis of varianceSource DF SS MS F PRegression 1 1,582.5 1,582.5 24.36 0.000

(continued ) Table VI.


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Residual Error 26 1,688.9 65.0Total 27 3,271.4Unusual observationsObs E4 R4 Fit SE fit Residual St resid8 45.0 25.00 46.89 1.73 221.89 22.78R24 45.0 65.00 46.89 1.73 18.11 2.30R


Regression analysis: R4 versus E2The regression equation is: R4 ¼ 9.18 þ 0.916 E2Predictor Coef SE coef T PConstant 9.178 5.359 1.71 0.099E2 0.9156 0.1413 6.48 0.000S ¼ 6.936 R 2 ¼ 61.8 percent R 2 (adj) ¼ 60.3 percentAnalysis of varianceSource DF SS MS F PRegression 1 2,020.8 2,020.8 42.01 0.000Residual error 26 1,250.7 48.1Total 27 3,271.4Unusual observationsObs E2 R4 Fit SE fit Residual St resid5 15.0 35.00 22.91 3.34 12.09 1.99 X8 35.0 25.00 41.22 1.33 216.22 22.38R15 35.0 55.00 41.22 1.33 13.78 2.02R


Regression analysis: R4 versus E5The regression equation is: R4 ¼ 3.71 þ 0.970 E5Predictor Coef SE coef T PConstant 3.712 4.942 0.75 0.459E5 0.9700 0.1192 8.13 0.000S ¼ 5.957 R 2 ¼ 71.8 percent R 2 (adj) ¼ 70.7 percentAnalysis of varianceSource DF SS MS F PRegression 1 2,348.7 2,348.7 66.18 0.000Residual error 26 922.7 35.5Total 27 3,271.4Unusual observationsObs E5 R4 Fit SE fit Residual St resid11 45.0 35.00 47.36 1.25 212.36 22.12R19 45.0 35.00 47.36 1.25 212.36 22.12R


Regression analysis: R1 versus E2The regression equation is: R1 ¼ 7.00 þ 0.800 E2Predictor Coef SE coef T PConstant 7.000 4.792 1.46 0.156E2 0.8000 0.1263 6.33 0.000


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S ¼ 6.202 R 2 ¼ 60.7 percent R 2 (adj) ¼ 59.2 percentAnalysis of varianceSource DF SS MS F PRegression 1 1,542.9 1,542.9 40.11 0.000Residual error 26 1,000.0 38.5Total 27 2,542.9Unusual observationsObs E2 R1 Fit SE fit Residual St resid4 25.0 15.00 27.00 1.89 212.00 22.03R5 15.0 25.00 19.00 2.99 6.00 1.10 X


Regression analysis: R1 versus E5The regression equation is: R1 ¼ 5.94 þ 0.755 E5Predictor Coef SE coef T PConstant 5.944 5.441 1.09 0.285E5 0.7554 0.1313 5.75 0.000S ¼ 6.559 R 2 ¼ 56.0 percent R 2 ¼ 54.3 percentAnalysis of varianceSource DF SS MS F PRegression 1 1,424.4 1,424.4 33.11 0.000Residual error 26 1,118.5 43.0Total 27 2,542.9Unusual observationsObs E5 R1 Fit SE fit Residual St resid20 45.0 55.00 39.94 1.38 15.06 2.35R


Regression analysis: R1 versus E1The regression equation is: R1 ¼ 18.4 þ 0.452 E1Predictor Coef SE coef T PConstant 18.364 6.368 2.88 0.008E1 0.4516 0.1540 2.93 0.007S ¼ 8.572 R 2 ¼ 24.9 percent R 2 (adj) ¼ 22.0 percentAnalysis of varianceSource DF SS MS F PRegression 1 632.26 632.26 8.60 0.007Residual error 26 1,910.60 73.48Total 27 2,542.86Unusual observationsObs E1 R1 Fit SE fit Residual St resid1 15.0 25.00 25.14 4.18 20.14 20.02 X20 35.0 55.00 34.17 1.79 20.83 2.48R


(continued) Table VI.


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Regression analysis: R4 versus E1The regression equation is: R4 ¼ 15.8 þ 0.677 E1Predictor Coef SE coef T PConstant 15.760 6.264 2.52 0.018E1 0.6774 0.1515 4.47 0.000S ¼ 8.433 R 2 ¼ 43.5 percent R 2 (adj) ¼ 41.3 percentAnalysis of varianceSource DF SS MS F PRegression 1 1,422.6 1,422.6 20.01 0.000Residual error 26 1,848.8 71.1Total 27 3,271.4Unusual observationsObs E1 R4 Fit SE fit Residual St resid1 15.0 25.00 25.92 4.11 20.92 20.13 X8 45.0 25.00 46.24 1.76 221.24 22.58R


Regression analysis: R3 versus E2The regression equation is: R3 ¼ 13.3 þ 0.726 E2Predictor Coef SE coef T PConstant 13.296 9.855 1.35 0.189E2 0.7259 0.2598 2.79 0.010S ¼ 12.75 R 2 ¼ 23.1 percent R 2 (adj) ¼ 20.1 percentAnalysis of varianceSource DF SS MS F PRegression 1 1,270.4 1,270.4 7.81 0.010Residual error 26 4,229.6 162.7Total 27 5,500.0Unusual observationsObs E2 R3 Fit SE fit Residual St resid5 15.0 25.00 24.19 6.15 0.81 0.07 X15 35.0 65.00 38.70 2.45 26.30 2.10R20 45.0 15.00 45.96 3.22 230.96 22.51R


Regression analysis: R3 versus E5The regression equation is: R3 ¼ 6.9 þ 0.821 E5Predictor Coef SE coef T PConstant 6.86 10.05 0.68 0.501E5 0.8212 0.2425 3.39 0.002S ¼ 12.12 R 2 ¼ 30.6 percent R 2 (adj) ¼ 27.9 percentAnalysis of varianceSource DF SS MS F PRegression 1 1,683.4 1,683.4 11.47 0.002


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The outcome of regression analysis is listed in Table VII.

Inference:

(1) A significant and highly correlated relationship between key performance results,customer results and society results exist. key performance results is highlycorrelated with processes and moderately correlated with policy and strategy.

Residual error 26 3,816.6 146.8Total 27 5,500.0Unusual observationsObs E5 R3 Fit SE fit Residual St resid8 25.0 55.00 27.39 4.37 27.61 2.44R20 45.0 15.00 43.81 2.55 228.81 22.43R


Regression analysis: R3 versus E3The regression equation is: R3 ¼ 27.0 þ 1.12 E3Predictor Coef SE coef T PConstant 27.03 10.47 20.67 0.508E3 1.1159 0.2437 4.58 0.000S ¼ 10.82 R 2 ¼ 44.6 percent R 2 (adj) ¼ 42.5 percentAnalysis of varianceSource DF SS MS F PRegression 1 2,455.1 2,455.1 20.96 0.000Residual error 26 3,044.9 117.1Total 27 5,500.0Unusual observationsObs E3 R3 Fit SE fit Residual St resid15 45.0 65.00 43.19 2.16 21.81 2.06R


Regression analysis: R3 versus E4The regression equation is: R3 ¼ 4.4 þ 0.882 E4Predictor Coef SE coef T PConstant 4.39 10.99 0.40 0.693E4 0.8825 0.2664 3.31 0.003S ¼ 12.20 R 2 ¼ 29.7 percent R2 (adj) ¼ 27.0 percentAnalysis of varianceSource DF SS MS F PRegression 1 1,632.5 1,632.5 10.98 0.003Residual error 26 3,867.5 148.7Total 27 5,500.0Unusual observationsObs E4 R3 Fit SE fit Residual St resid20 45.0 15.00 44.10 2.62 229.10 22.44R

Notes: R denotes an observation with a large standardized residual Table VI.


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(2) Customer results is moderately correlated with policy and strategy andprocesses.

(3) People results is moderately correlated with people and leadership.

(4) Society results are moderately correlated with leadership.

Key issuesThe sum up points may be summarized as follows:

. Relationship between key performance results and partnerships and resources isnot established. It appears that the organizations are not able to set the rightfocus on two stakeholders (partners and investors) through one result criterion.Separating out key performance results into investors results and partnersresults would help the organization to fulfil the requirements of these twostakeholders in a focussed manner.

. The relationship between people results and processes are low. This is basicallydue to the fact that people related processes are addressed in the enabler criterioncalled people. To give a more generic and meaningful shape to the model, thepeople-related processes could be included in the processes criterion.People-related resources might be included in partnership and resources.

. Society results has a little relationship with policy and strategy, a lowrelationship with processes and a moderate relationship with leadership. We can

Response Predictor P Significant relationship R 2 Correlation

The results of multiple regressionR4 R1 0 Yes 0.743 HighR4 R3 0.003 YesR4 R2 0.1 NoR1 R2 0.003 Yes 0.341 LowR1 R3 0.464 NoResponse Predictor R2

The results of simple linear regressionR2 R3 0.35 LowR2 E3 0.648 ModerateR2 E1 0.52 ModerateR2 E5 0.362 LowR3 E5 0.306 LowR3 E1 0.601 ModerateR3 E2 0.231 LittleR3 E5 0.306 LowR3 E3 0.446 LowR3 E4 0.297 LittleR4 E4 0.484 LowR4 E2 0.618 ModerateR4 E5 0.718 HighR1 E2 0.607 ModerateR1 E5 0.56 ModerateR1 E1 0.249 LittleR4 E1 0.435 LowTable VII.

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conclude organizations are not integrating society results with strategicinitiatives. However, those results are emerging due to the leadership initiatives.

. Also we see, except society results, none of the results have a meaningfulrelationship with leadership. It raises the question whether a stakeholder resultcan be linked to the criteria, which is inspirational, visionary, and aim to achieveorganizational purpose. Purpose justifies the existence of the organization.Therefore, leadership needs to be linked with appropriate beneficiary results thatjustify its existence whereas policy and strategy needs to be treated as the keydriver to manage its existence. Society results may be split into two parts – onepart needs to be sprouted from policy and strategy to support key performanceresults and the other emerges from leadership initiatives to ensure purposefulfilment. We elaborate this discussion in the next sections.

The role of business excellence model in terms of building nationalcompetitivenessIn the last sections, we have discussed that national quality and business excellenceawards have been a beacon and blueprint for driving a wide variety of organizations totheir highest levels of sustainable achievement. In this section, we will evaluate therelevance of these models towards the development of the model of competitivenessthat not only measures the performance of an organization for its survival and growthbut also contributes to the growth process of the country.

Tracing into the two key elements of competitiveness described earlier, based on theanalysis of data, it is clearly seen all these models contribute to enhancecompetitiveness at the organizational level by building the ability to design, produceand or market products superior to those offered by competitors, considering the priceand non-price qualities. However, in order to integrate the two elements ofcompetitiveness, an organization need to transform itself from the status of narrowself-interested and competitive killer to a responsible corporate citizen that wouldparticipate in the growth process of the country. Goyder has argued that businessneeds to be seen as a legitimate and integral part of society, where the former issubordinate to latter (Goyder, 1999). This is only possible by looking into the purposeof the organization that justifies its existence. The term “purpose” refers to thefundamental reason that an organization exists. Its primary role is to inspire anorganization and guide its setting of values (Criteria for Performance Excellence,Baldrige National Quality Program, 2005). Ghoshal et al. (1999) have highlighted theorganizations that are striving for higher order goal in the presence of a sufficientlyinspiring purpose level statement. Rouse and Putterill (2003) have addressed this issueof broader evaluation perspectives appropriate to stakeholder requirements andorganisation purpose.

A careful examination of the models of different quality awards, such as MalcolmBaldrige National Quality Award (2005), the EQA (2004), the Deming Prize from Japan(JUSE, 2002), the Australian Business Excellence Award (2004), the Canadian QualityAward (2000), indicates that in one form or another the issue of purpose is addressed ineach of these models. However, it is observed that most organizations (especially, theprofit making ones) do not evaluate the degree of attainment towards the higher-levelpurpose vis-a-vis the stakeholder requirements. They use these models to achieveexcellence at the organizational level. In the next section, we would explore the


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underlying reasons behind this and suggest a model that not only measuresthe performance of an organization but also contributes to the growth process of thecountry.

Latent customers – the conceptual frameworkVarious quality gurus like Deming, Crosby, Feigenbaum, Taguchi, Ishikawa, andJuran agree on the core concept of customer satisfaction. A customer is defined as anorganization or person that receives a product. Various interest groups like consumer,client, end-user, retailer, beneficiary and purchasers constitute the example of acustomer (ISO 9000: 2005). Bose and Dutta (1997) have argued that customer may beknown partly when the seeker seeks with a purpose. An organization focuses on theneeds and expectations of the appropriate set of customers from these interest groupsto maximize customer loyalty, retention and gain in market share. However, whiledoing so, the growth and prosperity of the country are ignored.

Let us examine the way an organization that runs a channel in the televisionnetwork for the teenagers, identifies its customers. The interest groups here includeviewers, parents, future employers as well as the wider community. The organizationmay remain very competitive by:

. putting its best efforts to fulfill the viewer’s needs; or

. additionally, considering the requirements of the appropriate beneficiaries, suchas parents, future employers, and community at large and striving to fulfill thoserequirements. Requirements may include character building, reinforcement ofpositive attitude of the viewers. In the first case, the organization remainscompetitive for its own survival and growth only. In such a case, the process maylack depth and a sense of direction. However, in the second case, the sense ofcompetitiveness is driven from a higher order purpose of aligning theorganizational goal to that of the country.

Many times an organization builds its competitiveness for its own survival andgrowth, the results of which do not necessarily contribute to the growth anddevelopment of the country. Addressing the requirements of the appropriate interestgroup(s) whose interests are aligned to those of the country only ensures the growthprocess of a country. In this paper, the interest group that may or may not receive orconsume the products of an organization but assimilates its effect would be termed aslatent customers (Dutta, 1999). Prevalent approaches to strategy formulation lose sightof the latent customers and thereby ignore the higher order goal. However, the questionremains as to what extent the organization explores its latent customers. Takingnational policy into consideration while formulating purpose statement of theorganization is a key to enrich the methodology.

The proposed model – an overviewIn line with the arguments made in preceding sections, we propose a model ofcompetitiveness that addresses both the local goal of survival and growth of anorganization and the global goal of contributing to the growth of the nation based onDutta’s (1998) work. The framework of the model is shown in Figure 4:

(1) Model contents. The framework of the model is based on ten criteria. First fourof these are termed as enablers and remaining ones are results. The enabler

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criteria cover what an organization does. The result criteria cover what anorganization achieves. A brief description of the ten criteria is given herewith:

. Enablers:

– Purpose. The purpose statement justifies the existence of anorganization. It is formulated based on the effects the organizationwould like to generate and control. This provides the overall direction foran organization.

– Policy and strategy. The organization converts its overall directioninto a clear strategic direction supported by relevant plans andpolicies.

– Resources. The organization plans and manages external partnerships,suppliers and internal resources (human, infrastructural, information,material, technology, etc.) in order to support policy and strategy and theeffective operation of the processes.

– Processes. The organization designs, manages and improves processes,in order to satisfy and generate value for its stakeholders.

. Results:

(1) Fulfillment of the requirements of the customers. The organizationcomprehensively measures and achieves results with respect to itsdirect customers.

Figure 4.Proposed model of

competitiveness

Fulfillment ofSocietal

requirements (9)

Purpose(1)

PurposeFulfillment

(10)

Fulfillment of therequirements of the

employees (7)

Policy&

Strategy(3)

Fulfillment therequirements of the

partners (8)

Resources(4)

Planned businessperformance

Processes(5)

Fulfillment of therequirements of the

customers (6)

INNERLOOP


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(2) Fulfillment of the requirements of the employees. The organizationcomprehensively measures and achieves results with respect to itsdirect employees.

(3) Fulfillment of the requirements of the partners. The organizationcomprehensively measures and achieves results with respect to itsdirect partners.

(4) Fulfillment of the societal requirements. The organizationcomprehensively measures and achieves results with respect to itssociety.

(5) Planned business performance. The organization comprehensivelymeasures and achieves results with respect to its investors.

(6) Purpose fulfilment. The organization comprehensively measures andachieves results with respect to its latent customers. Theorganization ensures that the desired effects that contribute to thecompetitiveness of the nation have been generated.

(2) The model structure. The proposed model works on two broad loops:. An inner loop, spanning criteria 2 through 9 where the organization focuses

on its own survival and growth. This is steered from “Policy & Strategy”and achieved by fulfilling the requirements of its stakeholders (e.g. directcustomers, shareholders, employees, partners, and society at large) focusingat the competitiveness at the organizational level.

. An outer loop, spanning criteria 1 through 10 where the organization looksbeyond its narrow self-interests and focuses on the attainment of somehigher-level purpose like country level competitiveness. This is steered from“Purpose” and the achievement level is evaluated by the degree to which anorganization fulfils the requirements of the appropriate beneficiaries(including latent customers).

It is needless to mention that both the loops should be properly integrated and alignedthrough a robust management system.

The following example throws some light how both the loops work in anorganization. Maruti Udyog Limited (MUL), which was set up in 1981 by theGovernment of India, established the following objectives at the time of inception by anAct of Parliament:

. modernization of Indian industry;

. production of fuel-efficient vehicles; and

. Large output of motor vehicle (Winner’s Application Document for CII-EXIMAward for Business Excellence, 1995).

By the last two objectives, MUL focuses on its own survival and growth and thoseform the constituents of the inner loop, whereas the first objective focuses on theattainment of some higher level purpose and thus form an element of outer loop.Therefore, MUL exists not only to produce large number fuel-efficient motor vehiclesbut also to facilitate the modernization of Indian automobile industry which hadstagnated over the years due to a total lack of technological innovation and up gradation.

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In other words, this is the effect MUL is supposed to generate. To ascertain whether thefavorable and appropriate effect has been generated measures and targets for“modernization of Indian Automobile Industry” need to be established.

ConclusionThe above is an extension of Ackoff’s proposition of an idealized design, where cleardistinction has been made among goals-ends that are expected to be obtained withinthe period obtained by a plan, objectives-ends that are not expected to be obtained untilafter the period planned for, but toward which progress is expected within the periodand ideals-ends that are believed to be unattainable but toward which progress isbelieved to be possible (Ackoff, 1981). Goldratt and Cox (1992) theory of systemthinking states local improvement should contribute to the global. Ramasubramanian(2002) has elaborated the concepts on authority, responsibility and accountabilityproposed by Professor Tsuda’s, a renowned Deming Prize examiner from Japan. Theseare interpreted at the organizational level in the following way:

. Authority of an organization indicates its right of defining the market, marketsegment and decides upon its products.

. The organization should also be responsible to meet the requirements of all itsstakeholders.

. Above all, the organization is also accountable for the attainment of somehigher-level purpose.

This emphasizes that the growth of an individual organization should contribute to theoverall growth of the country. Sharma and Talwar (2004) have explored the relevanceof Indian Vedantik views in the journey of business excellence.

Sharma (1996) has suggested that the phrase “spirit behind the matter” captures theessence of Karma Theory which is indicative of intentionality of an action. If the spiritbehind the matter is sattavik (i.e. divine like good or positive), the consequent actionsgenerate synergy. On the other hand, if the spirit behind the matter is tamasik (i.e.demonic, malicious, asurik, bad, or negative), the consequent actions generate highnegergy. Elsewhere, Sharma (2004) proposed that a balance is required between thespiritual and materialistic achievement. Here lies the significance of the two loops,inner and outer, where former focuses at the firm-level competitiveness and the laterworks for the country level competitiveness in an integrated and seamless manner(Dutta et al., 2005)

References

Ackoff, R.L. (1981), Creating the Corporate Culture, Willey, New York, NY.

Australian Business Excellence Award (2004) Australian Business Excellence Award, StandardsAustralia International, Australia.

Bhaumik, T.K. (1999), “Understanding WTO with TQM”, paper presented at Conference Papersof Quality Summit, Confederation of Indian Industry.

Bose, S. and Dutta, S.K. (1997), “Total quality management by inculcation of values in people”,Survey, Vol. XXXVII Nos 1/2.

Canada Award for Excellence (2000) Canada Award for Excellence, Administered by NationalQuality Institute, Toronto.


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Charnes, A., Cooper, W.W., Lewin, A.Y. and Seiford, L.M. (1995), Data Envelopment Analysis:Theory, Methodology and Applications, Kluwer Academic Publishers, Dordrecht.

Chatterjee, S. and Yilmaz, M. (1993), “Quality confusion: too many gurus, not enough disciples”,Business Horizons, May/June.

CII-EXIM Bank Award for Business Excellence (2006), Application Brochure & the Business,Excellence Model.

Competitiveness of India Inc. (2002) paper presented at Conference Papers of Quality Summit,Confederation of Indian Industry, Bangalore.

Cooper, W.W., Seiford, L.M. and Tone, K. (2000), Data Envelopment Analysis: A ComprehensiveText withModels, Applications, References and DEA-Solver Software, Kluwer, Boston, MA.

Crosby, P.B. (1979), Quality is Free, McGraw-Hill, New York, NY.

Deming, W.E. (1982), Quality, Productivity and Competitive Position, MIT Press, Boston, MA.

Dutta, S.K. (1998), “Total quality management – a journey from strategy to purpose”, Survey,Vol. XXXVIII Nos 1/2.

Dutta, S.K. (1999), Establishing Purpose of a Business Organization by Exploring the Needs andRequirements of its Latent Customers, paper presented at Annual Quality Convention inBangladesh, December.

Dutta, S.K., Srinivasan, N. and Mohapatra, P.K.J. (2005), “Enhancing competitiveness of IndiaInc.: examining the contribution of an organization to build the competitiveness of India”,International Journal of Global Business and Competitiveness, Vol. 1, pp. 33-47.

EFQM (2004) EFQM Excellence Model, European Foundation for Quality Management,Brussels.

Feigenbaum, A.V. (1983), Total Quality Control, 3rd ed., McGraw-Hill, New York, NY.

Fuchberg, G. (1992), “Total quality is termed only partial success”, Wall Street Journal, Vol. B1,October 1.

Garelli, S. (2004), IMD World Competitiveness Yearbook 2004, The International Institute forManagement Development, Lausanne.

Ghosh, S., Handfield, R.B., Kannan, V.R. and Tan, C. (2003), “A structural model analysis of theMalcolm Baldrige National Quality Award framework”, International Journal ofManagement and Decision Making, Vol. 4 No. 4.

Ghoshal, S., Bartlett, C.A. and Moran, P. (1999), “A new manifesto for management”, SloanManagement Review, Spring.

Global Competitiveness Report (2003-2004), World Economic Forum, Geneva.

Goldratt, E.M. and Cox, J. (1992), The Goal, North River Press, Great Barrington, MA.

Goyder, M. (1999), “Value and values: lessons for tomorrow’s company”, Long Range Planning,Vol. 32 No. 2.

Hair, J., Tatham, R., Anderson, R. and Black, W. (1998), Multivariate Data Analysis,Pearson Education Inc., Upper Saddle River, NJ.

Hayes, R.H. and Pisano, G.P. (1994), “Beyond world class: the new manufacturing strategy”,Harvard Business Review, January/February, pp. 77-86.

(The) Hindu (2002), CII Wish List to Take India Inc. to Greater Heights, Online edition of TheHindu, available at: www.hinduonnet.com/thehindu/2002/04/30/06hdline.htm (accessedApril 30, 2002).

Hoyle, R.H. (Ed.) (1995), Structural Equation Modeling: Concepts, Issues, and Applications, Sage,Thousand Oaks, CA.

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Ishikawa, K. (1985), What is Total Quality Control? The Japanese Way, Prentice-Hall, EnglewoodCliffs, NJ.

ISO 9000: 2005 (2005), ISO 9000: 2005 – Quality Management System and Vocabulary,International Organization for Standardization, Geneva.

Juran, J.M. (1998), Quality Control Handbook, McGraw-Hill, New York, NY.

JUSE (2002) Deming Prize Criteria, Union of Japanese Scientists and Engineers, Tokyo.

Malcolm Baldrige National Quality Award (2005), The Malcolm Baldrige National QualityAward: Criteria for Performance Excellence, National Institute of Standards andTechnology, Gaithersburg.

Porter, M.E. (1996), “What is strategy?”, Harvard Business Review, November/December,pp. 61-78.

Ramasubramanian, R. (2002), Making Sundaram Brake Linings A Globally CompetitiveOrganisation – The Deming Prize Experience (Daily Work Management In Production &Procurement), paper presented at Conference Papers of Quality Summit, Confederation ofIndian Industry.

Report of the Symposium on Quality and Business Excellence Awards (2001), Nadi, Fiji,18-20 September.

Rouse, P. and Putterill, M. (2003), “An integral framework for performance measurement”,Management Decision, Vol. 41 No. 8, pp. 791-805.

Sakakibara, M. and Porter, M.E. (2001), “Competing at home to win abroad: evidence fromJapanese industry”, The Review of Economics and Statistics, Vol. 83 No. 2, pp. 310-22.

Sharma, A.K. and Talwar, B. (2004), “Business excellence enshrined in Vedic (Hindu)philosophy”, Singapore Management Review, Vol. 26 No. 1, First half.

Sharma, S. (1996), “Total quality of management (TQOM): an endological basis for human valuesin corporate management”, Ashigyan, Summer.

Sharma, S. (2004), Indian Ethics and the Spirit of Development: The VEDA Model of Leadershipand Management, Human Values in Management, Ashgate Publishing Limited,Aldershot, pp. 49-57.

Szwergold, J. (1992), “Why most quality efforts fail”, Management Review, August.

Tonk, H.S. (2000), “Integrating ISO 9001:2000 and the Baldrige criteria: a proposal for a 21stcentury quality paradigm”, Quality Progress, August, pp. 51-5.

Tummala, V.M.R. and Tang, C.L. (1996), “Strategic quality management, Malcolm Baldrige andEuropean quality awards and ISO 9000 Certification core concepts and comparativeanalysis”, International Journal of Quality & Reliability Management, Vol. 13 No. 4, pp. 8-38.

Vokura, R.J., Standing, G.L. and Brazeal, J. (2000), “A comparative analysis of national regionalquality awards”, Quality Progress, August, pp. 41-9.

Winner’s Application Document for CII-EXIM Award (1995), p. 17.

Corresponding authorSanjib K. Dutta can be contacted at: [email protected]


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The economic function in the Hindu worldview: itsperennial social relevanceS.K. Chakraborty and D. Chakraborty ______________________________ 714

Exogenous technological change and wage inequalityin rural India: a theoretical noteArindam Banik, Pradip K. Bhaumik and Sundayo Iyare _______________ 735

The nexus between stock market and economicactivity: an empirical analysis for IndiaPurna Chandra Padhan _________________________________________ 741

A case of inappropriately targeted vulnerabilityreduction initiatives in Andhra Pradesh, India?Lee Bosher____________________________________________________ 754

Commonweal vs. free market capitalism: the case ofIndia and ChinaAppa Rao Korukonda___________________________________________ 772

Book reviews_____________________________________ 781


Social Economics

Special Issue on India: Part 2

Guest EditorAnanda Das Gupta

ISSN 0306-8293

Volume 34Number 102007

CONTENTS

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The economic function in theHindu worldview: its perennial

social relevanceS.K. Chakraborty

Indian Institute of Management, Kolkata, India, and

D. ChakrabortyBirla Institute of Technology (Mesra), Kolkata Extension Centre,

Kolkata, India

Abstract

Purpose – Among the several sub-themes for this Special Issue this paper aims to deal, broadly, withthe Hindu view of economics and allied matters.

Design/methodology/approach – The approach is a conceptual one that highlights a few crucialaspects of the “positive” flank of Hinduism vis-a-vis its “normative” dimension. Researchers, thinkers,scholars and, above all, some important but ignored realizers of Hindu psycho-philosophy, have beendug into for materials comprising the paper.

Findings – The findings clearly show that the amazing sustainability of Bharat’s (i.e. India’s)socio-economic processes, structures and systems, despite the tortures of history visiting her, can beexplained by her abiding fidelity to the eternal as the basis of the temporal. This is the very foundationof the sacro-secular character of Hindu culture.

Practical implications – The expected impact is long-term through deep-structure germination ona wide tract. Hurried practical application in tiny fractions is not intended as this will be prematureand superficial.

Originality/value – The contents of this paper are meant to generate a holistic and respectfulorientation to the forging of constructive links between culture and economics in the context of Hinduism.

Keywords Economics, Philosophical concepts, Religion

Paper type Conceptual paper

IntroductionMost authorities in oriental studies tend to agree that Hinduism represents the longestsurviving civilization and culture, though it may not be the earliest (Basham, 1999). Thisimplies that the economic function must have played an integral part in the total schemeof life. Deeper examination reveals that the Hindu worldview with respect to the economicfunction has been practical yet sublime, logical yet noble. Thus, explains Bose (1970):

. . . the Vedas accept earth and material existence to the fullest extent, but subject them to thefundamental moral and spiritual laws. Here, lies the difference between the positive and“this-worldly” and active outlook of the Vedas, and the exclusively ascetic, negative and inactiveattitude of certain post-Vedic cults.

This holistic keynote could be extended:

Wealth, however, was never regarded as an end in itself, but as a means to an end. Contraryto common notions, they condemned asceticism and held those seeking to embrace the asceticorder without discharging their duties liable to punishment (Pusalkar, 1964).



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Both the statements are in spirit identical. They view material wealth as a support only toattain a higher goal in life. Not only that. Those who wanted to embrace asceticism wereconsidered guilty of non-performance of their respective secular duties as son/daughter,husband/wife, father/mother, etc. invited censure. This prioritized harmony between the“here” (aihik) and “here after” (paramarthik) is the fundamental factor behind theendurance of the Hindu culture.

That material well-being was always accorded due importance for a well-appointedlife, and not considered to be antithetical to achieving spiritual goals, in life has beensubstantiated by Sri Aurobindo (1975) further:

. . . ancient Indian thought admitted, that material and economic capacity and prosperity are acommon though not the highest or most essential part of the total effort of human civilization.In that respect India can claim equality with any ancient or mediaeval country. No peoplebefore modern times reached a higher splendour of wealth, commercial prosperity, materialappointment . . . That is the record of history, of ancient documents . . .

Sri Aurobindo, the most respected and versatile seer-philosopher of modern India,declares unambiguously that the economic function was never neglected in ancientIndia. This truth explains why India and the Hindu culture have attracted so manygreedy invasions.

Once again, going back to the “this-worldly” versus the “other-worldly” debate,Sarkar (1985) has opined:

Rather it is in and through the positive, the secular and the material that the transcendental,the religious and the metaphysical have been allowed to display themselves in Indiaculture-history.

Sarkar, too, re-emphasizes that, instead of considering the desire for a decent materiallife as a hurdle, it was viewed as an enabling factor for fulfilling the supra-materialaspirations of life. But for this priority to the supra-material in the total scheme,Hinduism could have perished due to material decline caused by external invasionsand internal neglect in certain epochs in her very long history.

However, some mainstream economic historians attribute the cause of India’spoverty to her “other-worldly” temperament supposedly espoused by Hinduism. Thisargument is primarily derived from a narrow interpretation of the philosophical conceptof mayavad (illusionism) propounded by Shankaracharya in the eighth century AD.Since, this material world is illusory, a human being’s primary aim of life should be toattain permanent bliss and joy which is independent of fluctuating material-sensualsatisfactions. Accordingly, the economic function becomes marginal, with no seriousthought or effort behind it. Much earlier to Shankaracharya, Buddhism too hadadvocated sunyavad (nihilism) which had tended to make large masses in society toresort to monkhood. However, these two philosophies never comprised the core of theHindu worldview.

The sacro-secular symbiosis – some detailsThe introduction section has just clarified that the Hindu culture was fashioned by theancient sociocentric rishis (seers) to function like a pair of scissors with two blades:pursuit of the supra-material or sacred, with the support of the material or the secular.This pairing maybe called sacro-secular symbiosis. This perceptual clarity and

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amplitude of Hinduism in tracing the economic functions or the secular dimension isbest captured through the classification shown in Figure 1 (Pusalkar, 1964).

The comprehensive approach of the ancient Hindu mind in identifying such anensemble of economic functions is noteworthy. They wisely realized that generation ofwealth without proper allocation would only mean lopsided economic growth withoutsocial harmony. Hence, care was taken to channelize wealth for organic development ofthe society.

Against the backdrop of the above scheme, it will now be helpful to understand howthe sacro-secular symbiosis had been attempted since the days of the Vedas(Chakraborty, 1991).

(A) The Rig-Veda (3000 BC or earlier), the oldest sacred text in the world, containsthe following verses which capture the spirit of the sacro-secular approach towards theeconomic function in Hinduism (Bose, 1970):

Let a man think well on wealthAnd strive to win it by the path ofLaw and by Worship:And let him take counselWith his own Inner Wisdom,And grasp with Spirit still greater ability.

O God! Bestow on us the best treasures:The efficient mind, and spiritual lustre,The increase of wealth, the health of bodies,The sweetness of speech and fairness of days.

The following points emerge from the couple of verses quoted above:. Acts of honesty should underlie generation of wealth, and prayer is also

recommended.

Figure 1.

KNOWLEDGE

Philosophy Three Vedas Economics Polity

(anviksiki) (trayi) (varta) (dandaniti)

Generation of wealth Allocation of wealth

Trade Banking Industry Consumption Distribution TaxationAgriculture

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. If dilemmas or conflicts arise in the pursuit of wealth then one’s conscience orspiritual power should be employed. In other words, the sacred goal cannot beundermined in the pursuit of secular wealth.

. While praying to the Divine for good health, spiritual upliftment, efficient mind,etc. increase in wealth is also sought.

Thus, in both the verses the secular pursuit of wealth has been yoked and subjected tothe sacred. For, this is the way to wholesome human development – as the rishis haddeclared on the basis of time-transcending, supra-mental vision.

(B) In the post-Vedic period up to the time of the Buddha, the concept of wealth wasfurther elaborated (Mahadevan, 1958). The most notable development during theperiod was the formulation of a comprehensive scheme encompassing the four goals ofhuman life (i.e. purusarthas) namely:

(1) (D) Dharma. Rectitude, righteousness, morality, ethics, etc.

(2) (A) Artha. Pursuit of wealth or money.

(3) (K) Kama. Fulfillment of legitimate desires with moderation.

(4) (M) Moksha. Permanent emancipation into the state of eternal consciousnessand bliss.

Of the four goals of life D-M are considered to be the foundation and apex, respectively.The A-K are the inter-mediate levels in the structure of social life of householders(grihastha). Thus, ethics forms the very foundation of material existence. Wealth thusgenerated is then sanctioned to fulfill the legitimate earthly desires with moderation.Thus, universal insistence on ascetic life was ruled out. Yet the final goal did lie in theattainment of moksha. Therefore, in this scheme of existence opportunity had beenprovided for those who wished to skip the second and third goals to pursue mokshadirectly. The renunciants fall in this category. The following philosophical keynotes ofthe economic function emerge from the framework of purusarthas:

. D-M provide solid embankments on two sides to contain the persistentturbulence associated with the intoxication of A-K.

. There is no indication to suggest that wealth creation was discouraged, orsatisfaction of (needs) worldly desires was frowned upon.

. Like in the Vedic period, here too A-K were not considered to be ends in themselves,but as facilitators towards moksha. The latter was held as the common potentialdestiny of all human beings, whether a householder or a renunciant.

Another two-dimensional concept emerged during this period. These two dimensionswere:

(1) (Ab) Abhyudaya. material development.

(2) (Ni) Nihsreyas. supreme good.

Ab embraces both A-K. Correspondingly, Ni comprises D-M. The lesson is: pursue Abwithout losing sight of Ni. The latter acts as the pole star.

The frameworks of purusarthas and Ab-Ni have been put into practice, albeit invarying degrees, at different times right up to this day. They were not just theoretical


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constructs like Plato’s philosopher-king (Chakraborty and Chakraborty, 2003).The following narratives demonstrate the integration of these frameworks ineducation for social life:

. The Katha Upanishad contains dialogues between Yama, the King of Death, andNachiketa, a mere boy. Of the three boons sought by the boy from Yama, the lastone related to the knowledge of existence after death. Yama tried to deflect himfrom this query by promising all kinds of wealth, progeny, women, long life, etc.Indeed, all that comprised A-K were offered to him. Yet an unrelenting Nachiketaresponded by uttering:

Man is not to be satisfied with wealth. Now that I have met you, I shall get wealth.I shall live as long you will rule it. But the boon that is worth praying for by me is thatalone (Gambhirananda, 1980).

This shows that even a young boy like Nachiketa had the strength of character toprioritize D-M over A-K. This stand of Nachiketa demonstrates the principle thatin Hinduism the economic function is not allowed to over-rule the spiritualaspiration of human life. The Upanishadic rishi produces a telling effect byputting across these principles in the words of a boy.

. In the Mahabharata, the biggest epic of the world, the third section in SabhaParva provides an elaborate description of the palace of the Pandavas. Some ofthe verses are quoted below (Lal, 2005):

It covered an areaOf five hundred square cubits;

It was beautiful to see;It shone with the radiance

Of fire, with the radianceOf the sun, with the radiance

Of the moon; its splendour shamedThe rays of the sun . . .

With the finest craftsmanshipOn jeweled walks and portals

In paintings and luxuries –It was Viswakarma’s handiwork!

Soft breezes stirred the flowersIn the pool; all around it

Were slabs of expensive marbles,Inlaid with pearls.

Many kings, seeing it for the first time,So richly decked

With stones and pearls,Mistook it for land, and fell in.

The above stanzas indicate the level of both technical excellence and material affluenceachieved in the bygone era. At the same time, towards the end of the Mahabharata,after victory, these very Pandavas renounced the secular life in search for of moksha(mahaprasthan – the great departure).

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(C) Kautilya’s Arthshastra is one of the most important economic treatises of thepost-Buddhist era (about 300 BC) (Sastri, 1967). The salient features pertaining to theeconomic function furnished in the book are (Rangarajan, 1992):

. The term artha used by Kautilya has a broader meaning beyond personalwealth. In this sense, Kautilya’s artha seems to be more all-embracing than A inthe D-A-K-M framework. In the latter the individual is the prime focus, thesociety follows. In the former this priority appears to be reversed.

. Unlike in the Vedic or post-Vedic period, Kautilya’s Arthashastra recognized thecrucial role played by the state or government for the material well-being of thenation and its people. For example, it includes guidelines on foreign policy,taxation, revenue collection, budget accounts, defence, etc. In the earlier twophases the emphasis was exclusively on individuals, guiding them how and whythey should mould their lives for ethical wealth generation.

. Kautilya is silent about M. Since, he was focusing on the King’s role, this silenceis understandable. However, with D at the base of A-K, the door to M is not shut.Epics like the Ramayana, the Mahabharata, Kings like Harshavardhana, evenChandragupta-Kautilya themselves have upheld the goal of M by going forvanaprastha after handing over the reins to able successors.

The following passage enunciates a major duty to be pursued by the king:

Hence, the king shall be ever-active in the management of the economy. The root of wealth is[economic] activity and lack of it [brings] material distress. In the absence of [fruitful economic]activity, both current prosperity and future growth will be destroyed (Rangarajan, 1992).

This quote again reinforces the basic proposition of this paper that Hinduism has notbeen exclusively ascetic in principle. While discharging his duty on the economic front,the following guiding principles of administration are expected to be adhered to by theking: to run a diversified economy actively, efficiently, prudently and profitably(Rangarajan, 1992).

One cannot help but appreciate the farsight of Kautilya in sensing the benefits ofdiverse economic functions. It is equally true that while economic functions wereencouraged, the king was expected to act with “prudence” which is the cornerstone ofdharma. This is how the scope of sacro-secular symbiosis (Chakraborty, 1991) at thestate level was formulated by Kautilya.

(D) The Bhagavad Gita, containing the gist of the Vedas and the Upanishads, toore-emphasizes the principle of sacro-secular reciprocity between God and mankind.The following verses elaborate this process of mutual exchange (Sri Aurobindo, 2003):

. With sacrifice the Lord of the creatures of old created creatures and said, By thisshall you bring forth (fruits or offspring), let this be your milker of desires (3.10).

. Foster by this the gods and let the gods foster you; fostering each other, you shallattain to the supreme good (3.11).

. Fostered by sacrifice the gods shall give you desired enjoyments; who enjoystheir given enjoyments and has not given to them, he is a thief (3.12).

The fundamental law conveyed through these verses is that the basic requirements(like water, air, light, etc.) for the performance of economic function are bestowed


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upon us by what we may call Gods. In Hinduism, the many Gods and Goddessesmean the supra-human powers and forces of Nature. Personification helps humans torelate to these Cosmic powers with humility. By utilizing these Cosmic gifts thehuman world creates usable things through multifarious ways of conversion. Hence,human beings should gratefully offer their works and worship to these Cosmic agentsor Gods. This could also be done by physical acts of sacrifice ( yajna), with fire (agni )as the central deity. Thus, propitiated, these very powers of Nature would nourishhumanity with more wealth. It is in this way that the sacred cosmic dimension ismarried with the secular economic function. The snowballing ecological problems dueto lopsided economic activities can be addressed only by restoring the abovesacro-secular philosophy. The economic function in Hinduism has always maintainedfidelity to this holistic truth. It is only now that a major departure from this is beingenforced on it.

Similarly, the sage in the Isa Upanishad advises:

All this – whatsoever moves on the earth – should be covered by the Lord. Protect (your Self)through that detachment. Do not covet anybody’s wealth (Gambhirananda, 1983).

Thus, caution has once again been sounded to exalt the pursuit of A-K by notsuccumbing to the wrongful envy of someone else’s wealth. Otherwise, an attachedmind will remain a servant of artha and kama only. For him the pursuit of SupremeGood (or Self) as the true goal will remain otiose. Not only moksha becomes impossiblefor him; even dharma or ethicality in secular affairs is under constant threat.

It is perhaps relevant to conclude this section by suggesting an importantconnection between the four-goal system explained above and the other quartets forthe conduct of life and society, i.e. four stages (ashrams) of life and the four classes orfunctionaries in society. The four-ashram framework clearly admits that. Yet, inprinciple, it is not supposed to intrude into the first, third and fourth stages(brahmacharya, vanaprastha and sannyasa). Thus, only the second ashram, thehouseholder stage, is where A-K goals have their true and full scope. Similarly, in thefour-class system, the Brahmins in principle are expected to be almost wholly free fromembroilment with A-K, the society supporting them. Kshatriyas too are to beincidentally preoccupied with A-K. It is the vaishyas who have the prime role in A-Kmatters for society as a whole. But today all these principles are being discarded fast.Greed for money and sensual pursuits has been invading the first brahmacharya stage,as well as the third and fourth stages of life. Similarly, brahmins and kshatriyas aregetting as much mired in A-K as vaishyas or shudras. No sound, saving theoryunderpins the present mode of economic activities.

Modern Indian savants on the economic functionSo far, the ancient Hindu outlook about the economic function has been highlighted. Inthis section, observations by some of the greatest contemporary Indian minds on thesubject shall be presented. They are some of the best flowers of the sanatan Indianculture. They had both thought and lived Hinduism in its varied aspects. Their chiefcontributions were made during the second half of the nineteenth century and the firsthalf of the twentieth century. Besides, they were thoroughly familiar with the westernculture also. Having studied and/or worked there for long periods, the bulk of theirwritings is available in English.

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(A) Rabindranath Tagore:

(i) Our Laxmi[1] is not the goddess of the cash balance in the bank: she is the symbol of thatideal plenitude which is never dissociated from goodness and beauty.

(ii) In the old time when commerce was a member of the normal life of man, there ruled thespirit of Laxmi, who with her divine touch of humanity saved wealth from the unseemlinessof rampant individualism, mean both in motive and method.

(iii) In former times the intellectual and spiritual powers of this earth upheld their dignity ofindependence, but to-day, as in the fatal stage of disease, the influence of money has got intoour brain and affected our heart (Tagore, 1988).

Tagore, Nobel Laureate in literature in 1913, reminds us that the Hindu concept ofwealth bore the signet of divine sanctity. It is also noteworthy that invocation ofgoddess Laxmi’s blessings for wealth generation has been a part of normal life insociety. Tagore had prophesied way back in 1920 one of the greatest problems ofmodern society: the dictating of terms by money power over the spiritual andintellectual capacities of man. This is a topsy-turvy situation, the tail wagging the dog!

(B) Swami Vivekananda:

(i) In the West they are trying to solve the problem how much a man can possess, and we aretrying here to solve the problem on how little a man can live . . . if history has any truth in it,and if my prognostications ever prove true, it must be that those who train themselves to liveon the least and control themselves well will in the end gain the battle (Vivekananda, 1963).

(ii) Whenever any religion succeeds, it must have economic value. Thousands of similar sectswill be struggling for power, but only those who meet the real economic problem will have it.Man is guided by stomach (Vivekananda, 1960).

Vivekanada’s (the most successful orator at the 1893 Chicago Parliament of Religions)words are striking. He articulates two worldviews which are diametrically opposite.With an obtuse reference to greed and consumerism, propelled by contemporaryeconomic activities, he had predicted them to be unsustainable. He believes that thephilosophy of “plain living and high thinking” is the answer. Later, we will find thatpoint (i) is a perfect forecast (made in 1897) of the entropy problem to be cited in thenext section:

Vivekananda’s second quote is a seeming contradiction to the first one. But the latter hadbeen uttered in the specific context of the-then poverty among large masses in the country. Itwas the agonized out burst of a soul bleeding for the poor. But he could also see far beyondthe immediate present. So, present poverty must be solved, but not at the cost of man’s futuredestiny.

(C) Mahatma Gandhi:

(i) I offer the economics of God as opposed to the economics of the Devil which is gainingground in the world-to-day. The latter aims at or results in concentrating a million rupees inone man’s hands, whereas the former in distributing them among a million or thousands; . . .(Gandhi, 1998).

(ii) True economics never militates against the highest ethical standard, . . . An economics thatinculcates Mammon worship, . . . spells death (Gandhi, 2001a, b).


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(iii) The real value of acquired wealth depends on the moral sign attached to it, just as sternlyas that of a mathematical quantity depends on the algebraical sign attached to it (Gandhi,2001a, b).

Although much in the same spirit as the preceding savants, Gandhi (the leading figurein India’s struggle for independence) has been a little more down-to-earth andcategorical. He understands that all of us may not be successful in winning wealth. Butthose who will be successful should act as trustees, and plough-back as much wealth aspossible to the masses. The secret behind ancient India’s richness and minimal povertywas also this ideal of sacred trusteeship. Self-centered pursuit of wealth will inviteinequity of wealth distribution which is immoral. But the spirit of trusteeship lendsmoral sanction to wealth generation. These remarks were made in 1920s. Could this bea benchmark for self-introspection by those Indian graduates who are now walkingaway with jobs paying Rs. 2 lacs per month or more in their mid-1920s?

(D) Sri Aurobindo:

(i) A full and well-appointed life is desirable for man living in society, but on condition that it isalso a true and beautiful life. Neither the life nor the body exist for their own sake, but asvehicle and instrument of a good higher than their own. They must be subordinated to thesuperior needs of the mental being, . . . (Sri Aurobindo, 1985).

(ii) All the economic development of life itself takes on as its end the appearance of an attemptto get rid of the animal squalor and bareness . . . It is pursued in a wrong way, no doubt, andwith many ugly circumstances, but still the ideal is darkly there (Sri Aurobindo, 1985).

(iii) The aim of . . . economics would be not to create a huge engine of production, whether ofthe competitive or the cooperative kind but to give men – not only to some but all men each inhis highest possible measure – the joy of work according to their own nature and free leisureto grow inwardly . . . (Sri Aurobindo, 1985).

Aurobindo (the most comprehensive and experientially the richest modernpsycho-philosopher of India) too does not negate the desirability of a well-appointedlife. But he emphasize that there should still be a higher goal of life which is ennoblingand joyous. Wealth, to him symbolizes power. Man being its custodian, shouldmentally offer it to the Divine before utilizing it. Otherwise, it will soon regress towards“economic barbarism” (Sri Aurobindo, 1985). The signs of this are aplenty nowadays.

(E) S. Radhakrishnan:

(i) The Hindu code of practice links up the human world of natural desires and social aims,and the spiritual life with its discipline and aspiration on the other. It condemns only naturalexistence which is unrelated to the background. Such a life . . . dissolve(es) into emptiness . . .

(ii) Unfortunately at the present day in almost all parts of the world the strain ofmoney-making has been so great that many people are breaking down under it . . . Hinduismhas no sympathy with the view that “to mix religion and business is to spoil two good things”(Radhakrishnan, 1957).

Radhakrishnan, a Philosopher and one of the past Presidents of India, observes that amaterialistic life led without any higher aim has been looked down upon in Hinduism.However, in doing so the fulfillment of mundane needs has never been in doubt. It isalso noteworthy that as far back as 1926 he too had expressed his about single-minded

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pursuit of money making people are becoming psychologically more vulnerable. In thelast sentence, he approves the “sacro-secular symbiosis” thesis of this paper.

(F) Swami Nikhilananda:

(i) . . . Hinduism has never condemned a rich and full life in the world or extolled poverty as avirtue in itself – though the case is different with monks, who voluntarily take the view ofmendicancy.

(ii) It was India’s fabulous wealth that invited foreign invaders, . . . Religion has never been thecause of India’s poverty; it is indifference to religious precepts that has been largelyresponsible for her general backwardness.

(iii) the history of India shows that when the country was spiritually great it was alsomaterially prosperous and culturally creative (Nikhilananda, 1968).

Nikhilananda, who had been the head of the Ramakrishna Vedanta Centre in NewYork, reiterates in point (i) the aspect emphasized by Sri Aurobindo in point (ii) above.He also adds a new dimension while analyzing the causes of India’s poverty:non-adherence to D in the pursuit of A-K. Both foreign exploitations and deviationfrom D had led to economic decline of varying degrees at different times.

The third point is a masterly statement about the central, symbiotic drift of theHindu culture in India.

(G) Ananda K. Coomaraswamy:

(i) Thus, the ideal society is thought of as a kind of co-operative work-shop in whichproduction is to be for use and not for profit, and all human needs, both of the body and thesoul, are to be provided for.

(ii) On the one hand, the inspired tradition rejects ambition, competition and quantitativestandards; on the other, our modern “civilization” is based on the notions of socialadvancement, free enterprise (devil take the hindmost) and production in quantity. The oneconsiders man’s needs, . . . the other considers his wants (Coomaraswamy, 1989).

Coomaraswamy, (the renowned art critic and philosopher) upholds the view thattraditional society (which includes Hinduism) encouraged economic practices with thepurpose of nourishing body, mind as well as the soul. That apart, social advancementby performing economic function was defined in terms of fulfilling man’s essentialneeds, and not his unlimited wants.

Some extra-orbital views from the westSome of the extra-orbital from the west on the philosophy of economic functions willnow be considered. Their views have been compiled because, hailing from rich westernnations as they are, their opinions may appear to be more acceptable to the presentreaders. Although they represent the best, yet none of them is a professional economist.Therefore, they have been able to take a more detached view about the consequences ofthe economic function than mainstream economists. It will also be explored if theirassessments and remedies corroborate in spirit the ancient framework (D-A-K-M) forthe economic functions in Hinduism. Their views will cover a period spanning1912-2006 to capture the evolutionary trend of the critical western thought-process.


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The extra-orbital views of Indian savants will also find quthentic echoes in whatfollows.

(A) R. H.Tawney:

(i) Tawney has observed the domination of “economic egotis” in modern societies. Accordingto him, therefore, Such societies maybe called acquisitive societies because their wholetendency and interest and preoccupation is to promote the acquisition of wealth.

(ii) Society . . . must rearrange its scale of values. It must regard economic interests as oneelement in life . . . the instrumental character of economic activity is (to be) emphasized by itssubordination to the social purpose for which it is carried out (Tawney, 1942).

About 85 years since Tawney had written these words, the universal mania foracquiring money, as speedily as possible, has become more acute. Therefore, hisconcluding words are a faithful echo of the Hindu worldview about subordinatingeconomic activities to higher social and spiritual causes.

(B) A. Carrel:

(i) Economists would realize that human beings think, feel, and suffer, that they should begiven other things than work, food, and leisure, that they have spiritual as well as physiologicalneeds . . . Economics would no longer appear as the ultimate reason of everything. It isobvious that the liberation of man from the materialistic creed would transform most of theaspects of our existence. Therefore, modern society will oppose with all its might thisprogress in our conceptions.

(ii) When our activity is set toward a precise end, our mental and organic functions becomecompletely harmonized. The unification of the desires, the application of the mind to a singlepurpose, produce a sort of inner peace. Man integrates himself by meditation, just as byaction (Carrel, 1961).

From the tenor of Carrel’s observations, who was a Nobel Laureate in Medicine, it isevident that by “activity” he meant the economic function and by “precise end” implieda higher goal in life. His implicit opinion is that economic activities and higher goals inlife are essentially contradictory. He feels that harmony can be established between thetwo if economic philosophy admits its neglect of the urge for fulfillment of spiritualgoals as well. But he also expresses his doubt if modern society would encourage thecreation of such a favourable environment. Carrel’s misgiving, as events now show,was not idle.

(C) Sorokin:

(i) The widespread notion that an improvement of economic conditions necessarily leads to acorresponding ennoblement of human conduct is largely a myth.

(ii) They may remain materialistic and mechanistic within the legitimate limits of theseaspects of the Infinite Manifold . . . they should clearly emphasize their partial andsubordinate role, that there are non-material, nonmechanistic, rational, and superrationalaspects transcending the material appearance . . .

Sorokin (a social scientist) asserts that improvement in economic conditions will notautomatically ensure the sacred aspect of life. In other words, consciousacknowledgement and effort are called for appreciating the supra-material aspects ofintegral life. He even goes to the length of stating that materialistic (A-K) pursuits shouldremain subservient to the trans-material aspects of true human development (moksha).

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Otherwise, he apprehends, that man would remain confined to a sensate worldview(Sorokin, 1962). Refinement of human conduct will then be ignored.

(D) Schumacher (1997):

(i) The hope that the pursuit of goodness and virtue can be postponed until we have attaineduniversal prosperity and that by the single-minded pursuit of wealth, without bothering ourheads about spiritual and moral questions, we could establish peace on earth, is an unrealistic,unscientific, and irrational hope.

(ii) The modern economy is propelled by a frenzy of greed and indulges in an orgy of envy,and these are not accidental features but the very causes of its expansionist success.

(iii) Needless to say, wealth, education, research, and many other things are needed for anycivilization, but what is most needed today is a revision of the ends . . . which accords tomaterial things their proper, legitimate place, which is secondary and not primary.

Schumacher believes that single-minded pursuit of wealth will not by itself pave theway for peace and happiness. He too feels that since economic functions have enabledsome nations to become materially affluent, it is now all the more important to getconnected with our spiritual bearings. Otherwise it will only invite misery. He alsoagrees with Sorokin. Thus, all the three authors quoted so far agree with the Hinduscheme of priorities, i.e. the material aspects of life (A-K) should remain secondary inrelation to the higher order goals (D-M).

(E) Toynbee (1987):

(i) Present-day society sees success and happiness in terms of ever-increasing economicaffluence. This objective is not only economically unattainable but also spirituallyunsatisfying. It does, however, provide an incentive for exertion and zest for work.

(ii) I agree that we ought to aim not at gross national product but at gross national welfare.My tests of welfare would be . . . the average per capita spiritual welfare, . . . the averagestandard of self-mastery, which is the key to spiritual welfare . . . The last test gauges theextent to which the society has succeeded in giving spiritual welfare priority over materialwelfare.

Toynbee, a historian, admits the futility of the attempt to seek happiness by means ofeconomic affluence only at the cost of spiritual aspiration. He too unambiguouslyprioritizes the importance of gross national welfare over gross national product, i.e. thesacred over the secular as a correct approach for measuring society’s quality level.Thus, once again, Toynbee’s stand too is similar to that of the three precedingauthorities.

(F) Rifkin (1981):

(i) Having removed God from the affairs of people – as Bacon had removed Him from nature– Locke was left with human beings, all alone in the universe. No longer was the human beingconsidered as part of a divinely directed organism.

(ii) Believing that men and women are basically egoists in pursuit of economic gain, Smith’stheories subordinate all human desires to the quest for material abundance to satisfy physicalneeds. There are no ethical choices to be made, only utilitarian judgements exercised by eachindividual pursuing self-interest.

(iii) The illusion of material progress is exemplified over and over again in every majoreconomic and social activity simply because the second law is swept under the rug . . . we have


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convinced ourselves that we have made tremendous progress . . . On closer examination suchclaims turn out to be pure bunkum. The debunker turns out to be the second law.

(iv) Speeding up the physical flow doesn’t insure greater spiritual development; quite thecontrary. Transcendence comes out of quietude and the recognition of the beauty in “being,”not out of discord and the travails of “doing.”

Rifkin holds a few western philosophers responsible for dissociating moderneconomics from the Divine. He also holds Adam Smith equally instrumental inencouraging exclusively utilitarian judgments in the realm of economic functions.Thus, interpreting progress from the perspective of economic growth only brings usface to face with the “second law” (that is entropy).

This law needs a little explanation. By combining the two laws of thermodynamicswe get: the total energy content of the universe is constant and the total entropy iscontinually increasing. This implies, “Every time something occurs in the natural worldsome amount of energy ends up being unavailable for future work.” (Rifkin, 1981, p. 35).That is, at the time of conversion of energy from one state to another, some amount of itbecomes unusable. Therefore, the greater the rate of conversion of energy, the higherthe rate of entropy. Hence, rapid economic progress pursued through increasedexploitation of non-renewable sources of energy within a closed earth-system iseventually bringing forward a state of unusable energy only. To decelerate the pace ofentropy, which is otherwise inevitable, he suggests a look within to find the truemeaning of happiness and development. This matches well with the Hindu tenet that“objective entropy” can be prevented or remedied only by “subjective affluence.”

(G) D. Bohm (1994):

(i) We try to produce situations, such as acquiring wealth – people will make a lot of money toshow that they are really great people. They make far more money than they need forwhatever they want to do. They keep on making money. And if the mere making of moneyisn’t enough, then they buy all sorts of things – far more than they need – to show that theyare great people.”

Bohm, a Nobel physicist, laments the modern-day tendency to judge greatness on thebasis of how much wealth a person has amassed. For example, ranking of world’srichest persons. He points to the displacement of higher goals of life which can foster asense of proportion in wealth acquisition. Vivekananda (1963) had once made aninsightful observation, “Isn’t it man that makes money? Where did you ever hear ofmoney making man?” Bohm too points out the fallacy of regarding money as the causeof greatness, and man the effect. A humane outlook would place man before money.

(H) J. Carroll (1993):

(i) Humanism sought to turn the treasure laden galleon of Western culture around. Itattempted to replace God by man, to put man at the center of the universe, to deify him. Itsambition was to found a human order on earth, . . . without any transcendental or supernaturalsupports – an entirely human order.

(ii) So the humanist fathers put their founding axiom: man is all-powerful, if his will is strongenough he can create himself . . . He is creator and creature in one.

Carroll’s remark imply that an attempt to establish “a human order on earth,” exclusivelythrough pursuit of economic activities, openness and access to the transcendental

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was denied. He attributes this mentality to man’s egoistic self-magnification – in the nameof humanism.

(I) Korten (1998):

(i) Modern economics turned the Hobbesian ideology of rational materialism into an appliedscience of human behaviour and social organization that embraces hedonism as the goal andmeasure of human progress, and absolves the individual of responsibility for moral choice.

(ii) Life’s song calls us to engage fully the wonder, joy, and love of life inherent within ourbeing. . . . The song of money calls us to experience life through the pursuit of materialdiversions . . .

Korten, a management thinker, also echoes a sentiment similar to that of Bohm. But heis more critical. He considers adoption of hedonism as the key process of humanprogress a faulty step. This makes man morally irresponsible and also snatches awaythe inner rhythm of life.

Korten’s last sentence is reminiscent of Tagore’s statement about the philosophy ofhis school at Shantiniketan: “Wealth is a golden cage in which the children . . . are bredinto artificial deadening of their power” (Tagore, 2002).

(J) Davis and Meyer (2000):

Not long ago, a lawyer brought this home to us by saying, “No matter how much or little youmake, it’s still only walking-around money.” The statement is both arrogant and accurate. Hisremark underscores the increased importance of unearned income . . . that wealthaccumulates in the form of financial assets, and the more those shares and other securitiesappreciate in value, the more wealth is created, not as earned, but as unearned income.

Davis and Meyer have once again highlighted the money dimension of the economicfunction by calling its “unearned income”. Essentially it means creation of artificialincome by speculating in the stock market. This does not add anything to the realeconomy.

(K) B. Hudson:

(i) . . . modernist optimistic idea that science and rational government can deliver security,prosperity and general welfare has been replaced by a pessimistic awareness of the illsbrought about by the scientific-rational endeavour.

(ii) Risk society means that risk-thinking has become not only pervasive but also routinized: itis a part of everyday thinking processes of individuals in their private and organizationallives (Hudson, 2003).

The essence of Hudson’s argument is that science and technology on the one hand, andbusiness and economics on the other, have formed an inter-twining spiral. They havebeen mutually reinforcing each other. The psychological impact of this marriage ofconvenience on the human mind is one of rising insecurity and threat.

(L) Rowland (2003):

(i) Progress is on the march. At the same time there is an undeniable melancholy at the core ofit all. Something seems amiss. For one thing, we are making a mess of the planet. For another,the eternal goals of justice and equity seem to be receding, and at an accelerating rate. Notjust progress, but meanness, obsessive self-interest, a callousness towards othersincreasingly reflected in our public institutions, seems to be on the march. Mental illnessand spiritual malaise are endemic.


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(ii) The trouble with corporations is that they were designed to reproduce only one aspect ofthe multifaceted human psyche – in a word, greed.

Rowland endorses the same viewpoint as that of some other fellow-westerners quotedabove. Although he agrees that on the material front there has been progress, but theunderlying driving force has been greed. This has undermined the ethical-spiritual andmental health aspects of human beings.

The key points emerging from the above section are summarized below:. There is an intrinsic dormant urge in us for the fulfillment of spiritual goals

which are higher than merely material sustenance. But this urge receives nostimulus from modern economics.

. Measurement of development in terms of gross national product should becross-checked against gross national welfare which includes spiritual welfaretoo.

. Methodical attempts to learn and develop the spiritual faculty is a pre-conditionfor wholesome management of economic affluence.

. Greatness of a man is wrongly assessed in terms of material wealth and not hischaracter wealth.

. Embracing hedonism has devalued morality.

. It is essential to understand and appreciate the inevitability and consequences ofentropy. Therefore, tempering the one-track economic function with a taste andsearch for intrinsic happiness is imperative.

Thus, it is clear that some of the perceptive contemporary westerners, who could gobeyond the orbit, are concerned about the prevailing skewed temper of the economicfunction. They unanimously declare that pursuit of economic activities without aspiritual anchorage will not be sustainable. Thus, these opinions reinforce the sameworldview as propounded and practised in Hinduism. In other words, D and M shouldset the limits for A and K. Many Indian savants and thinkers have largely foretoldwhat some honest thinkers from the West are now saying.

Globalization and the Hindu economic philosophyIt will now be indicated how the economic function fuelled by globalization fares withrespect to the D-A-K-M framework of Hinduism. Here, are some of the latest facts(Human Development Report, 2005):

(i) For most of the world’s poorest countries the past decade has continued a dishearteningtrend: not only have they failed to reduce poverty, but they are falling further behind richcountries . . . In 1990 the average American was 38 times richer than the average Tanzanian.Today the average American is 61 times richer.

(ii) Most developing regions are falling behind, not catching up with rich countries . . .Absolute income inequalities between rich and poor countries are increasing even whendeveloped countries have higher growth rates – precisely because initial income gaps are solarge.

(iii) Measured in 2000 purchasing power parity terms, the cost of ending extreme poverty –the amount needed to lift 1 billion people above the $1 a day poverty line – is $300 billion.

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Expressed in absolute terms, this sounds like a large amount. But it is equivalent to less than2% of the income of the richest 10% of the world’s population.

It is worthwhile to note although the era of globalization has been marked byadvancement in technology, trade and investment originating from the affluentnations, yet the key indices measuring human development have fallen relatively farbehind in the poorer parts of the world (Human Development Report, 2005). Theemerging picture is far from encouraging. First, the report testifies to the fact that therich are becoming richer and the poor poorer by the day. Although it is true that manydeveloping countries are registering higher growth rates, but those of the developedcountries are higher still. Second, this inequality can be substantially mitigated if theworld’s richest 10 per cent population have the heart to share even 2 per cent of theirincome in charity. But the reality is not as noble as that. A Shylock mentality seems torule in aid negotiations. As the Mother of Sri Aurobindo Ashram at Pondicherryexplains (through the monologue of an industrialist):

And what have I contributed to humanity? Men travel more easily. Do they understand eachother better? Following my example, all sorts of labour-saving gadgets have been massproduced and made available to an increasing number of customers. How far has this doneanything more than to create new needs and a corresponding greed for gain? . . . I feel thatthere is a secret yet to be discovered; and without this discovery all our efforts are in vain”(The Mother, 2005).

It seems the Mother could anticipate 50 years ago the role that might be played bytoday’s globalization. Although globalization is being done in a calculated andcomprehensive manner, yet the “secret” to be discovered as confessed in the monologueis still elusive. By “secret” she implies a Consciousness in humans which canappreciate that the spirit of D-M has to govern the motive of A-K.

One of the causes underlying the above problem is the acceleration of a “sensateculture” (quoted earlier) implemented through globalization. A sensate society holdsthe following maxim: more is less. However, as mentioned earlier, the basicsacro-secular philosophy of Hinduism is: less is more. This view was echoed in thewords of Vivekananda (quoted earlier) where he had compared the two differentworldviews about managing society. However, the storm of globalization is cloudingthis enduring and sustainable basis of the economic function of Hinduism. Withgreater entanglement in complex external life, the higher goals (D-M), whichintrinsically encourage living on less, are disappearing faster. Almost nine decadeslater Rifkin has endorsed the capital insight of Vivekananda. The former has put itsuccinctly:

The more energy each of us uses up, the less is available for all life that comes after us. Theultimate moral imperative, then, is to waste as little as possible. By so doing we are expressingour love of life and our loving commitment to the continued unfolding of all of life (Rifkin,1981, p. 255).

Harmann corroborates this sacred logic in his own language:

Progress is the driving force behind all the assumptions at the heart of oureconomy-dominated society. Material progress assumes that what we have is never enough.

Thus, the Hindu view of the economic function receives both scientific and socialvalidation from these extra-orbital thinkers of the West. The 2005 UNDP Report,


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highlighting the consequences of the worldview upholding “more is less” had beenanticipated in the following terms:

(i) In 1750 the per capita incomes of what are now called developed countries andunderdeveloped countries were equal. In 1930, the developed per capita incomes were fourtimes higher. By 1980, they were seven times higher (McLaughlin, 1998).

(ii) Today, industrial civilization has increased the reach of human beings, at least thewealthier peoples, far beyond their own lands to the entire world. Tropical forests in Brazilhave been razed to grow soyabeans which are fed to cows in Germany . . . This artificialecosystem has increased Germany’s carrying capacity but drastically lowered it for the onemillion displaced forest settlers (Hawken, 1993).

(iii) The buy-now-pay later epidemic has caught on. An entire generation of consumers isliving life close to the economy taking a turn for the worse, they are a step closer to theprecipice (Carvalho and Prasad, 2001).

In search of “more” under the guise of choice and capability, powerful economic entities(that is the corporate houses) are marginalizing the indigenous people. Not only that.Consumers are also being increasingly seduced to purchase on credit. This haslegitimized greed with unhealthy social and moral implications.

Besides, India has special psychological reasons for India to be cautious andon-guard against the above influences. The nation’s subconscious preserves thememory of the impoverishment and exploitation of her wealth during two centuries ofBritish colonization. Globalization after all is a movement which has originated fromthe wealthier nations. Massive R & D investments lead to large-scale industry,followed by mass production which requires huge markets worldwide. Thus, thenorms of sustainable living in mature cultures like India are being pushed aside. In anycase let us have a glimpse of some data about the colonial period which bear the samecharacter as mentioned by the three writers quoted above.

Some data from the nineteenth century when India was a British colony, are offeredbelow (Dutt, 1989a, b):

(i) Every nation reasonably expects that the proceeds of axes raised in the country should bemainly spent in the country . . . But a change came over India under the rule of the East Indiacompany. They considered India as a vast estate or plantation, the profits of which were to bewithdrawn from India and deposited in Europe.

(ii) The East India Company’s trade was abolished in 1833, and the Company was abolishedin 1858, but their policy remains. Their capital was paid off by loans which were made into anIndian Debt, on which interest is paid by Indian taxes. The empire was transferred from theCompany to the Crown, but the people of India paid the purchase money. The Indian debtwhich was £51,000,000 in 1857, rose to £97,000,000 in 1862 . . . in 1902 (it) amounts to£200,000,000.

(iii) Given these conditions, any fertile, industrious, peaceful country in the world would bewhat India is today. If manufacturers were crippled, agriculture over-taxed, and a third of therevenue remitted out of the country, any nation on earth would suffer from permanentpoverty and recurring famines . . . If India is poor today, it is through the operation ofeconomic causes.

Against this backdrop India’s brush with the gospel “more is less” is of no less concerntoday.

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Another reason why it is hard to take globalization at its face-value is the advocacyby some economists for breaking-down the supposed cultural barriers of sustainablecultures. This position ignores that such worldviews have been much more holisticthan the one-sided materialism of globalization. Let us sample one of the currentwriters:

. . . Globalization does and will pose cultural challenges. But it would be to the advantage of adeveloping country to accept these challenges, as the greater diversity in culture and socialtradition created with the interaction of foreign cultures and people can enrich local societiesand cultures. Since, in developing countries, culture consisting of many centuries-old greatesthindrance to their development . . . they need to shed some aspects of their culture which arenot conducive to economic growth and development, as well as absorb those aspects offoreign culture which are pro-growth and development . . . For the first time in theinternational economy, a global society has emerged . . . (Roy and Sideras, 2006).

Roy charts the path for economic development of the developing countriesunambiguously. He argues that globalization is the panacea for many of the illswhich are plaguing developing countries due to their respective age-old traditions andcultures. He adds further that the process of globalization will revitalize such societiesby removing cultural impediments.

A reputed economist like Stiglitz (2002), though mores moderate, also defendsglobalization as an allround positive approach for development:

(i) Globalization can be reshaped, and when it is, when it is properly, fairly run, with allcountries having a voice in policies affecting them there is possibility that it will help create anew global economy in which growth is not only more sustainable and less volatile but thefruits of this growth are more equitably shared.

(ii) I believe that globalization can be reshaped to realize its potential for good and I believethat the international economic institutions can be reshaped in ways that will help ensure thatthis is accomplished. But to understand how these institutions should be reshaped, we need tounderstand better why they have failed, and failed so miserably.

The optimism of Stiglitz maybe noted in the above quotes. However, it is well-knownthat every package of change in the past has been preceded by many pious hopes, ofwhich the IMF, WB, WTO, etc. are good examples. Stiglitz himself has acknowledgedthis in his book. Therefore, there is not much convincing reason for hope after anotherfresh round of changes in these institutions and their policies. Above all, the mostimportant philosophical underpinning of sustainable holistic development cannot beanything but local. Thus, globalization is always likely to be an unsustainable strategyfor reducing poverty, promoting economic equality and improving cultural standards.Two concrete examples maybe cited. In the cultural sphere, the mushrooming ofcall-centres (or BPOs) has made sexual permissiveness acceptable so-long as itmotivates the young workforce. On the economic front small scale units are facing ableak future because they are no match for the MNCs who come to India armed withadvanced technology. Large numbers of such unit have been forced to close down theiroperations due to liberalization and removal of import quotas.

However, if we pay careful attention to the “Report of the World Commission onCulture and Development” on Our Creative Diversity in 1995, it appears that economicexperts are continuing to be oblivious of several fundamental principles of humandevelopment. Here, are a few excerpts from the above report:


Hindu worldview

731

(i) Clearly, there was a need to transcend economics, without abandoning it. The notion ofdevelopment itself had broadened, as people realized that economic criteria alone could notprovide a programme for human dignity and well-being.

(ii) The logic of rejection . . . to diminish each society’s faith in its own resources and tothreaten the diversity of cultures that is vital to the well-being of the human race.

(iii) The challenge is to promote different paths of development, informed by a recognition ofhow cultural factors shape the way in which societies conceive their own futures and choosethe means to attain these futures.

Evidently the intra-orbital perspective of economists and men of business seems to beincapable of taking into account the many subtleties of human existence in a world ofvaried cultures. It thus becomes imperative to listen respectfully to the voices ofwisdom and caution about the character of the economic function overwhelming theworld for the last one and half centuries. There is therefore a strong case for the nutureof the future economic function to turn towards spirinomics away from capinomics orcommunomics (Chakraborty, 2003).

ConclusionIt should be realized that from the time of “knowledge is power” to that of the “invisiblehand” of the “acquisitive society” of the “affluent society” of the “predatory society” of the“narcissistic society” of the “risk society” the day of reckoning for us may not be toodistant. The ostrich-mentality of the conceited modern mind is tending to become suicidal.The ruling “greed-speed” symbiosis should begin to make room for the “sacred-secular”symbiosis. Hindu thought preserves the integral blueprint and the detailed mapping ofthis saving sojourn of humility:

The ultimate end never being in doubt, trade and commerce, education and medicine . . .everything was integrated into the hub of human life: to realize the Spirit . . . Thisprioritization forced economic activities (artha) to observe limits. Secular desires werelegitimized but subjected to careful moderation (Chakraborty, 2003).

Note

1. The Hindu goddess of abundance and fortune.

References

Basham, A.L. (1999), A Cultural History of India, Oxford University Press, New Delhi, p. 2.

Bohm, D. (1994), Thought as a System, Routledge, London, p. 165.

Bose, A.C. (1970) in Munshi, K.M. and Diwakar, R.R. (Eds), The Call of the Vedas, BharatiyaVidya Bhavan, Bombay, pp. 249, 244.

Carrel, A. (1961), Man, The Unknown, Hamish Hamilton, London, pp. 142, 263.

Carroll, J. (1993), Humanism: The Wreck of Western Culture, Fontana, London, pp. 2-3.

Carvalho, B. and Prasad, S. (2001), “The credit cripples”, Business Today, September, p. 39.

Chakraborty, D. and Chakraborty, S.K. (2003), Leadership and Motivation: Cultural Comparisons,Rupa, New Delhi.

Chakraborty, S.K. (1991), Management by Values: Towards Cultural Congruence, OxfordUniversity Press, New Delhi, pp. 173-4.

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Chakraborty, S.K. (2003), Against the Tide, Oxford University Press, New Delhi, p. 136.

Coomaraswamy, A. (1989), What is Civilization?, Oxford University Press, New Delhi, pp. 6-7.

Davis, S. and Meyer, C. (2000), Future Wealth, Harvard Business School Press, Boston, MA, p. 10.

Dutt, R.C. (1989a), The Economic History of India,Vol. I, Ministry of Information andBroadcasting, New Delhi, p. XXV.

Dutt, R.C. (1989b), The Economic History of India,Vol. II, Ministry of Information andBroadcasting, New Delhi, p. XII.

Gambhirananda, S. (1980), Katha Upanishad, Advaita Ashram, Calcutta, pp. 24-5.

Gambhirananda, S. (1983), Isa Upanishad, Advaita Ashram, Calcutta, p. 4.

Gandhi, M.K. (1998), Man v. Machine, Bharatiya Vidya Bhavan, Mumbai, p. 34.

Gandhi, M.K. (2001a), The Selected Works of Mahatma Gandhi,Vol. III, Navajivan,Ahmedabad, p. 54.

Gandhi, M.K. (2001b), The Selected Works of Mahatma Gandhi,Vol. V, Navajivan, Ahmedabad,p. 275.

Hawken, P. (1993), The Ecology of Commerce, Harper Collins, New York, NY, p. 25.

Hudson, B. (2003), Justice in the Risk Society, Sage, London, pp. 43-4.

Human Development Report (2005), International Cooperation at a Crossroads, OxfordUniversity Press, New Delhi, pp. 36-39, 19.

Korten, D. (1998), The Post-Corporate World: Life After Capitalism, Berrett-Koehler,San Francisco, CA, pp. 27, 36.

Lal, P. (2005), The Mahabhrata of Vyasa, Writers Workshop, Calcutta, pp. 18-19.

McLaughlin, A. (1998), “End of development”, Resurgence, September-October, p. 22.

Mahadevan, T.M.P. (1958), “The religio-philosophic culture of India”, The Cultural Heritage ofIndia, Vol. I, The Ramakrishna Mission Institute of Culture, Calcutta, pp. 163-6, 179-80.

(The) Mother (2005), The Great Secret, Sri Aurobindo Society, Pondicherry, pp. 18-19.

Nikhilananda, S. (1968), Hinduism: Its Meaning for the Liberation of the Spirit, Sri RamakrishnaMath, Madras, pp. 25-7, 14.

Pusalkar, A.D. (1964), Economic Ideas of the Hindus, in the Cultural Heritage of India, TheRamakrishna Mission Institute of Culture, Calcutta, p. 655.

Radhakrishnan, S. (1957), Hindu View of Life, George Allen and Unwin, London, pp. 79, 110.

Rangarajan, L.N. (1992), The Arthashastra, Penguin, New Delhi, pp. 13-14, 149, 74.

Rifkin, J. (1981), Entropy: A New World View, Bantam, Toronto, pp. 24, 27, 137, 255, 253-4.

Rowland, W. (2003), Greed Inc.: Why Corporations Rule Our World?, Arcade, New York, NY,p. XX.

Roy, K.C. and Sideras, J. (2006), Institutions, Globalization and Empowerment, Edward Elgar,Cheltenham, p. 8.

Sarkar, B.K. (1985), The Positive Background of Hindu Sociology, Motilal Banrasidass,New Delhi, p. 6.

Sastri, K.A.N. (1967), Manusmriti and Kautilya, in History of Philosophy: Eastern and Western,Vol. II, George Allen and Unwin, London, p. 107.

Schumacher, E.F. (1997), Small is Beautiful, Radhakrishna, New Delhi, pp. 28, 26-7, 276.

Sorokin, P.A. (1962) in Munshi, K.M. and Diwakar, R.R. (Eds), Reconstruction of Humanity,Bharatiya Vidya Bhavan, Bombay, pp. 80, 110.


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Sri Aurobindo (1985), “Civilisation and barbarism”, The Human Cycle, VIII, Sri AurobindoAshram, Pondicherry, pp. 93-6.

Sri Aurobindo (1975), The Foundations of Indian culture, Sri Aurobindo Ashram,Pondicherry, p. 63.

Sri Aurobindo (1985), The Human Cycle, Sri Aurobindo Ashram, Pondicherry, pp.73, 155,241, 72-3.

Sri Aurobindo (2003), The Bhagavad Gita, Sri Aurobindo Divine Life Trust, Jhunjhunu, pp. 86-7.

Stiglitz, J. (2002), Globalization and its Discontents, Penguin, New Delhi, pp. 22, 215.

Tagore, R. (1988), Lectures and Addresses, Macmillan, Madras, pp. 66, 71.

Tagore, R. (2002), Personality, Macmillan, New Delhi, p. 131.

Tawney, R.H. (1942), The Acquisitive Society, Wheatsheaf, Brighton, pp. 30, 32, 191.

Toynbee, A. and Daisaku, I. (1987), Choose Life: A Dialogue, Oxford University press, New Delhi,pp. 103, 106.

Vivekananda, S. (1960), Complete Works of Swami Vivekananda,Vol.I, Advaita Ashram,Calcutta, pp. 454-5.

Vivekananda, S. (1963), Selections from Complete Works, Advaita Ashram, Calcutta, p. 199.

Further reading

Report of the World Commission on Culture and Development (1995), Creative Diversity, Reportof the World Commission on Culture and Development, Unesco, Paris.

Sri Aurobindo (2005), Money-Power and Prosperity, Sri Aurobindo Society, Pondicherry, p. 19.

Toynbee, A. (1976), Mankind and Mother Earth, A Narrative History of the World, OUP, Oxford.

Corresponding authorS.K. Chakraborty can be contacted at: [email protected]

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Exogenous technological changeand wage inequality in rural India:

a theoretical noteArindam Banik and Pradip K. Bhaumik

International Management Institute, New Delhi, India, and

Sundayo IyareDepartment of Economics, University of the West Indies,

Barbados, West Indies

Abstract

Purpose – The purpose of this paper is to develop a theoretical model to explore the economicconsequences of an exogenous skill-biased technological change.

Design/methodology/approach – The paper develops a theoretical model based on assumptionsand conditions that replicate those of a government-sponsored poverty reduction programme in India.

Findings – The paper finds that, under certain stated conditions, wage inequality between artisanswith improved toolkits and those without is likely to increase, while, under a different set of conditions,this is likely to decrease.

Research limitations/implications – Actual wage inequality implications of specific exogenousskill-biased technological changes need to be studied to take the theoretical model further.

Practical implications – One major implication is that, when government help is provided by wayof an exogenous skill-biased technological change to a fraction of workers, it may have the unintendedconsequence of increasing wage inequality between the beneficiary and the non-beneficiary workers.In extreme cases, it may even lower the equilibrium wages of the non-beneficiary workers.

Originality/value – The paper brings out the critical role of efficiency units of workers withskill-biased technology (artisans with improved toolkits) and those without these in determining thewage inequality between these categories of workers (artisans) based on a theoretical model of thetrajectory along which the rural economy moves.

Keywords Change management, India, Skills, Labour efficiency

Paper type Conceptual paper

IntroductionStudies on supply of skilled labour can broadly be divided into two groups: thosethat assume that skill-biased technological change is exogenous versus those thatare based on the assumption that the adoption of skill or unskilled-biased technologiesis endogenous. The overwhelming majority of papers belong to the first group andhave argued that skill-biased technological change have played a central role onthe increased inequality in the incomes of skilled workers as well as countering theslowdown in productivity. Central to this argument is the assumption that skill-biasedtechnological change is exogenous (Bound and Johnson, 1992, 1995; Katz and Murphy,1992; Mincer, 1988, 1995; Egger and Grossmann, 2001). Endogenous analysis of supplyof skilled labour and skill-biased technologies has been carried out in a number ofpapers (Barro and Sala-i-Martin, 1999; Acemoglu, 1996) but only recently has thisphenomenon been given special treatment by Kiley (1997). Kiley concentrates on the



Exogenoustechnological

change

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Vol. 34 No. 10, 2007pp. 735-740


DOI 10.1108/03068290710816865

endogenous growth model and argues that an increase in the supply of skilled labourleads to temporary stagnation in the wages of skilled and unskilled workers. Further,an increase in the supply of skilled labour accelerates skill-biased technological changeand under plausible conditions, lowers output growth, at least temporarily.

The improved toolkits were provided to poor, rural artisans by the Government ofIndia (GoI, 2000) at a 90 per cent subsidy under its supply of improved toolkits to ruralartisans (SITRA) programme. In accounting for the role of improved toolkits in bothproduction activities of the artisans and rural economic activities, the aims at thefollowing: first the decision to supply improved toolkits affects the rural areas intwo principal ways – by way of direct and indirect benefits. Second, an increase in thesupply of skilled labour with improved toolkits fosters organizational change andraises the employment share of artisans within the rural economy, without loweringrelative incomes. Third, the improved toolkits raise income inequality by affecting theorganization of production (Egger and Grossmann, 2001).

The modelDecision to supply improved toolkitsWe begin with the following assumptions:

. the economic conditions of the rural artisans in the developing country are starkenough during the period [0, T];

. at any given time t, the economic conditions have reached a certain position x(t);and

. for fixed t there is nothing the government can do to change this position.

Consider now that the decision of the government to supply improved toolkits over asmall time interval [t, t þ dt ] provide an opportunity for the rural artisans to changetheir economic condition by a small amount, say dx. This change in position ordecision, dx can affect the benefits accruing to the artisans in two ways:

The first is the direct effect, which will be:

U t; x;dx

dt

� �dx ð1Þ

where U t; x; dx=dt� �

is the social utility per unit of transfer at x(t), which is regarded asindependent of the amount of transfer as dx is small.

In order to determine the indirect effect, the entire stream of marginal benefitgenerated by the small change in position dx must be known, i.e.:

Ux t; x;dx

dt

� �t [ ½t;T� ð2Þ

where Uxðt; x; dx=dtÞ is the present value of the future social utility per unit of transfermade at time t from the indirect benefit generated at time t.

Let trajectory or extremal along which the rural economy moves be denoted byE. Thus, the present value of the stream of benefits generated by the decision dx isgiven by:

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736

E

Z T

t

Ux t; x;dx

dt

� �›t

� �dx ¼

XJ

j¼1

Xnji¼1

E

Z T

t

Ujxij

t; xijdxijdt

� �›t

� �dxij

� �ð3Þ

where the subscript ij refers to the ith person in the jth social group, both for the socialutility function and the change in the economic position. The social utility functions forbackward classes and castes may be different – for example, under the SITRAprogramme, 50 per cent of the beneficiary artisans were to be from the scheduled castes(SC) and scheduled tribes (ST) communities.

The total indirect benefit (present value) can be further separated into current andfuture indirect benefits. This gives:Z tþdt

t

Ux t; x;dx

dt

� �›t

� �dxþ E

Z T

tþdt

Ux t; x;dx

dt

� �›t

� �dx ð4Þ

Since, the future indirect benefits are of major importance, the total benefit accruing tothe rural economy during time interval [t, T ] as a result of the decision to supplyimproved toolkits is then the sum of equations (1) and (4).

Toolkits technologyThe rural economy consists of three categories of labour:

(1) skilled labour with toolkit (L st);

(2) skilled labour without toolkit (L s); and

(3) unskilled labour (L u).

We define the toolkit as a labour-augmenting technical progress that enhances thevalue of skilled labour to more than that of skilled labour without toolkits andunskilled labour, respectively. This is due to the assumption that skilled labour withtoolkits are more productive than skilled labour without toolkits and unskilled labour.

Consider now n identical artisans who produce a homogeneous good. Let theartisans differ in toolkits technology, such that there will be a segmented labourmarket and inelastic supply of L st and L s, respectively. We assume that L s

complements either L st or L u, not both. L s complements L st by selling services andwork as per customer’s need. We shall treat skilled labour without toolkits assupporting labour. Production with L s and L st is a perfect substitute for productionwith L st. Kiley (1997) has argued that the assumption of perfect substitution reflectsthe idea that there are different ways to produce a good, and that the choice of the mixof production processes is endogenous. Given these assumptions, the output Yi ofartisan i is given by the linear homogeneous production function F:

Yi ¼ FðUi;ViÞ ; Uif ðkiÞ; ð5Þ

where UiðLsi Þ and ViðL

sti Þ are the efficiency units of artisan labour without and with

improved toolkits, respectively, ki ; Vi=Ui represents the skill-intensity inproduction of the ith artisan while f ðkiÞ, as an indicatrix, is a strictly increasing andstrictly concave function. In the economic enterprise of a rural artisan, the only relevantfactor of production is labour. There is virtually no capital or land or any other factor ofproduction committed to the artisanal economic enterprise.

The efficiency unit of labour in production depends on the artisans withoutimproved toolkits and those with toolkits. Although, artisans without improved


change

737

toolkits enter the production function as productivity-augmenting through theexpansion of say N (the goods available for production with skilled labour), they areemployed at the same intensity level as those artisans with improved toolkits.By implication, production is linear in Ui and Vi, respectively. The constant returns toproduction mix imply that expansion of N goods allows for endogenous technologicalprogress, as in the well-known “AK” model of endogenous growth (Kiley, 1997; Barroand Sala-i-Martin, 1999). However, we are differentiating between categories of skilledlabour in terms of tools or technology.

Consider now where additional units of improved toolkits greatly improve theartisans’ productivity. Then the efficiency units of artisans without improved toolkitsand artisans with toolkits are given as:

Ui ¼ U1i þ aU2

i and Vi ¼ V1i þ bV2

i ð6Þ

where a and b are relative efficiencies and both are assumed to be greater than oneimplying a productivity gain, i.e. additional supply of improved toolkits to artisansleads to higher productivity of both artisans without toolkits and those with the same.It should be noted that U1

i and V2i are the additional units of labour in production by

artisans without and with toolkits, respectively, after the additional toolkits aresupplied and do not imply the physical continuation of previous labour and an add-onto the same.

It can be argued (Nadiri, 1987) that the supply of additional toolkits will lead to ajoint production function. Let m represent the additional toolkit which can be used toproduce outputs by artisans not having a toolkit earlier or those having a toolkitearlier. The physical units of labour supplied by the ith artisan are U1

i and V2i ,

respectively, whereas the efficiency units of labour would be aU1i and bV2

i . Then:

mi ¼ v:GðaU2i ;bV2

i Þ ; vU2i :gðxiÞ ð7Þ

G is a linear homogeneous function; xi ; V2i =U

2i represents skill-intensity in

production due to the additional improved toolkits, v is the fraction of production orshift in efficiency parameter due to the additional toolkit, and g(xi) is assumed to bestrictly increasing and strictly concave.

The implication of equation (7) is that every additional improved toolkit suppliedcreates an effect on skilled artisans in two ways: first, if it is used by an artisan withouta toolkit, mi ¼ v:GðaU2

i Þ and second, if it is used by an artisan with toolkit thenmi ¼ v:GðbV2

i Þ.It may be noted that a maximum of one improved toolkit is suppliedby the government under SITRA but artisans can purchase additional unsubsidizedtoolkits from the market.

Next consider the wages and profit structures in the rural economy. Let final goodsoutput produced by different artisans be identical. There are no market imperfections,i.e. sales of final product does not depend on whether it was produced with subsidizedtoolkit or not. To maximize profits artisans take all wages w1

U;w2U;w

1V;w2

V and wm

� �paid to U1

i ;U2i ;V

1i ;V

2i and mi as a datum. We can write the decision facing a given

artisan as:

U1i$0;U2

i$0;V1

i$0;V2

i$0

Max FðU1i þ aU2

i ;V1i þ aV2

i Þ2 w1UU

1i

2 w2UU

2i 2 w1

VV1i 2 w2

VV2i 2 wm:mi

ð8Þ

IJSE34,10

738

Let ki ¼ k and xi ¼ x for all i given that all artisans are identical. The first–orderconditions for the profit-maximizing employment levels are:

f 0ðkÞ # w1U ð9Þ

af 0ðkÞ # w2U þ wmvg

0ðxÞ ð10Þ

f ðkÞ2 kf 0ðkÞ # w1V ð11Þ

bð f ðkÞ2 kf 0ðkÞÞ # w2V þ wmvðg

0ðxÞ2 xg0ðxÞÞ ð12Þ

Conditions (9)-(12), respectively, show the marginal product of labour on the left-hand;and the marginal costs on the right-hand. The marginal costs for labour afteradditional improved toolkits are supplied U1

i andV1i equal the sum of their wage rate

(w2U and w2

V, respectively) and marginal wage costs for the skilled labour withouttoolkits.

Wages and skill-biased technology changeIn this section, we treat improved toolkits of all types as skill-biased technology. Since,in our model we are distinguishing between different categories of skilled labour interms of tools or technology, it has endogenous and exogenous implications for relativewages. First, our model implies that more improved toolkits for the artisans raise theskill wage premium for both artisans with and without improved toolkits. This is due tothe endogenous development of more toolkits for skilled labour. The endogenousdevelopment arises from our assumption that skilled artisans without improvedtoolkits can sell services or work as per customer’s need. In effect, more investment inimproved toolkits will shift the demand for artisans and lead to higher share ofartisans’ labour in the rural economy. Second, our model also implies an exogenouschange in the share of the artisans on the growth of each type of improved toolkitand the relative wages of both artisans with or without toolkits. The relative supply oftoolkits is expected to rise dramatically due to government’s support for improvedtoolkits. For example, to suit the needs of the artisans from varying trades, manydifferent toolkits have been developed by the research and development (R&D)organizations of the GoI and also the state governments. About 22 types of toolkitshave already been developed since 1992. Also, the artisans can directly purchase theimproved toolkits from the market and this provides another possible exogenouschange. This then leads to the research question: will exogenous skill-biasedtechnology lead to relative high wages of artisans with or without improved toolkits?Following Egger and Grossmann (2001) and the model developed above, this woulddepend on whether the efficiency units of labour of artisans with toolkits relative tothat of artisans without toolkits result in:

. increasing a;

. increasing b;

. decreasing v; and

. does not depend on Ui and Vi.

If a increases, the relative demand for artisans without toolkits and thus wagedispersion will increase. An increase in b means that the relative demand for artisans


change

739

with toolkits become more attractive. As a result, equilibrium wage inequalityincreases. An increase in v implies that cost of buying toolkit is rising and supportingskilled labour without toolkits becomes more expensive. Thus, the wage dispersiondeclines. Finally, the effect of both increase in Ui and decline in Vi cancel out inequilibrium due to the linear homogeneity of GðaU2

i ;bV2i Þ.

ConclusionsThroughout this paper we have looked at how exogenous technological change maycause wage inequality in rural areas. There are two categories of skill population in therural areas; one with toolkits and the others are with out toolkits. The underlyingforces of demand and supply of skill labours may explain by the toolkits technologysupplied to them. In such a situation the relative demand for artisans with toolkitsbecome more attractive. As a consequence, equilibrium wage inequality increases.This may be considered as an equilibrium outcome in the skill category in a ruralmarket setting. The inequality may disperse as more and more poor take advantage ofthe intervention.

References

Acemoglu, D. (1996), “Changes in unemployment and wage inequality: an alternative theory andsome evidence”, Working Paper No. 96-15, Department of Economics, MIT, Cambridge,MA, Mimeo.

Barro, R. and Sala-i-Martin, X. (1999), Economic Growth, The MIT Press, Cambridge, MA.

Bound, J. and Johnson, G. (1992), “Changes in the structure of wages in the 1980s: an evaluationsof alternative explanations”, American Economic Review, Vol. 62, pp. 371-92.

Bound, J. and Johnson, G. (1995), “What are the causes of rising wage inequality in the UnitedStates?”, Federal Reserve Bank of New York Economic Policy Review, Vol. 1, pp. 9-17.

Egger, H. and Grossmann, V. (2001), “The double role of skilled labour, new technologies andwage inequality”, paper presented at the Annual Meeting of German Economists, Berlin.

Government of India (2000), Quick Evaluation of Supply of Improved Toolkits to Rural ArtisansProgramme, Ministry of Rural Development, New Delhi, Mimeo.

Katz, L. and Murphy, K. (1992), “Changes in relative wages 1963-1987: supply and demandfactors”, Quarterly Journal of Economics, Vol. 107, pp. 35-78.

Kiley, T.M. (1997), The Supply of Skilled Labour and Skill-biased Technological Progress, Divisionof Research and Statistics Federal Reserve Board, New York, NY.

Mincer, J. (1988), “Human capital, technology and the wage structure”, in Mincer, J. (Ed.), Studiesin Human Capital, E. Elgar Publishing, London.

Mincer, J. (1995), “Economic development, growth of human capital, and the dynamics of thewage structure”, Journal of Economic Growth, Vol. 1, pp. 29-48.

Nadiri, M.I. (1987), “Joint production”, in Eatwell, S., Milgate, M. and Newman, P. (Eds), TheNew Palgrave: A Dictionary of Economics, Macmillan, London.

Corresponding authorArindam Banik can be contacted at: [email protected]

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The nexus between stock marketand economic activity: anempirical analysis for India

Purna Chandra PadhanSchool of Business and Human Resources,

Xaviers Labour Relations Institute (XLRI), Jamshedpur, India

Abstract

Purpose – An understanding on the linkages between financial development and economic growthin general and the stock market with economic activity in particular is imperative in emergingeconomies. The objective of this paper is to find out the causal linkages between stock market andeconomic activity in India.

Design/methodology/approach – The paper applies recently developed Granger non-causalitytests by Toda-Yamamota, Dolado and Lutkephol (popularly known as the TYDL model) for anempirical exercise.

Findings – The notable finding of the paper is that both the stock price (BSE Sensex) and economicactivity (IIP) are integrated of order one, i.e. I (1). The Johansen-Juselius co-integration tests suggest theexistence of one co-integrating vector. This rules out spurious relations and suggests the presence of atleast one direction of causality. The TYDL model suggests that there is bi-directional causalitybetween stock price and economic activity during the post-liberalization period, implying that awell-developed stock market could enhance economic activity and vice-versa.

Research limitations/implications – In the broader framework of financial markets, the presenceand role of the stock market is minuscule in the context of India. Despite this, it could play aconsiderable role in the process of the economic development of the country. However, to analyze thecause and effect relationship between stock market and economic activity, it is essential to analyze theissue in greater detail and depth. The main limitation of the paper is the use of IIP as a proxy foreconomic activity, which neglects the agricultural sector, being the primary sector in India and also theservice sector. This is of course due to the non-availability of GDP data on a monthly basis. Further, adetailed study on the issue could be highly appreciable from the perspective of policy implications.

Originality/value – The findings of the paper have some valuable implications. It could give someinsight for policy makers about the possible linkages between stock market and the economy. Comingto empirical parts, this is perhaps the first paper in the context of India to apply the TYDL model toexamine the relationship between stock price and economic activity.

Keywords Stock markets, Economic growth, Modelling, Developing countries, India


1. IntroductionOne of the most enduring debates and stifling issues in economics is the nexus betweenfinancial development and economic growth. It is often discussed both at theoreticaland policy levels that whether financial development causes economic growth or it is aconsequence of increased economic activity. Way back to Schumpeter (1912), perhapsthe first, identified the force underlying long-run economic growth is the technologicalinnovation, which may arise as a result of financial development. Gurley and Shaw(1955) studied the relationship between financial markets and real activity, later onmore rigorously analyzed by Goldsmith (1969) and Schwarz (1978) and others. A more



Stock marketand economic

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Vol. 34 No. 10, 2007pp. 741-753


DOI 10.1108/03068290710816874

difficult question often arises with respect to whether the forward-looking nature ofstock prices could be a driving apparent causality between stock markets and growth.In principle, a well-developed stock market should increase savings and efficientlyallocate capital for productive investment, which can lead to increase in economicactivity (especially economic growth). Stock market also significantly affects corporatesector in allocating capital, which have a real effect in the economy aggregately.The counter argument to this is that a well-developed financial system and highereconomic growth could create a conducive atmosphere for smooth performance of thestock market. However, empirical investigations of the link between financialdevelopment in general, and stock markets and growth in particular have beenrelatively limited. Various empirical researches have suggested a possible connectionbetween stock market development and economic growth, but are far from definitive.Although the relationship postulated is a causal one, most empirical studies have failedto addressed causality unanimously:

Since, the inception of new economic policy in India, so-called liberalization and globalization,the role of financial development in economic growth has been a subject of intellectual debateamong economists. With reference to the role of stock market in economic growth, it has beenwidely debated. It is well recognized that stock market influence economic growth throughcreation of liquidity. It has also been widely agreed and believed through empiricalinvestigation that economic growth and its fluctuations could influence the stock price. Theprimary objective of this paper is to study the underlying causality between stock market andeconomic growth, applying the augmented VAR model with integrated and cointegratedseries as developed by Toda and Yamamoto (1995) and Dolado and Lutkepohl (1996).The results support bi-directional Granger Causality between both the variables.

The remaining part of the paper is organized as follows. Section 2 provides a review ofthe literature of the causality between stock market and economic growth. Section 3specification of the empirical model. Section 4 describes the data and empirical results.Section 5 concludes.

2. Review of literatureThe relationship between stock market and economic growth has been studiedacross economies on various aspects. Several theoretical and empirical papers such asLevine (1991), Levine and Zevos (1995), Demirgue-Kunt (1994) and Demirgue-Kuntand Levine (1996) have suggested that stock market development affect economicgrowth in developing countries. Several other studies examine the short run relationshipbetween stock returns and with some macroeconomic and financial variables such asinflation, interest rate, output, etc. The prominent studies among them are Kessel (1956),Firth (1979), Fama (1981, 1990), French et al. (1987), Mandelker and Tandon (1985), Chenet al. (1986), Jain (1988), Pearce and Roley (1988), Asperm (1989), Barro (1990), Schwert(1990), Chen (1991), Ferson and Harvey (1991, 1993), Lee (1992), Boudoukh and Matthew(1993), Piero (1996), Cheung and Ng (1997), Gjerde and Saettem (1999), Spyros (2001) andAnari and Kolari (2001) and so on. Applying either to USA or other country data, thestudies find varying degrees of relationship between stock returns and othermacroeconomic and financial variables. Few other studies examine the long runrelationship among these variables. The prominent among them are Campbell andShiller (1988), Bulmash and Trivoli (1991), Cheung and Lai (1999), Cheung and Ng (1998),Brooks et al. (1999) and Kim and Sheen (1998). While few others have studied the other

IJSE34,10

742

dimension of it such as, the predictability of stock returns on real economic activity.They are Estrella and Hardouvelis (1991), Estrella and Mishkin (1996) and Domain andLouton (1997) to name a few. Several other large bodies of literature have examined theintegration of stock market across economies, such as King and Wadhwani (1990), Jeonand Chiang (1991), Kasa (1992), Arshanapalli and Doukas (1993), Longin and Solnik(1995), Becker et al. (1995) and Engsted and Lund (1997).

There are not much empirical research investigations about the causal relationshipbetween stock market and economic growth. Perhaps, one study worth mentioning isLevine and Zevos (1988), who reported a very strong and positive correlation betweenstock market development and economic growth. Caporale et al. (2004) examined thelinkages between stock market, financial development and economic growth for sevencountries and found that well developed stock market can faster economic growth inthe long run[1]. Keeping an eye on the paucity of the empirical investigations the paperinvestigates the causal nexus between stock market and economic growth in thecontext of India.

3. Empirical methodologyModeling the dynamic relationship among times series variables could be well establishedthrough various time series techniques. Perhaps, the simplest one to examine the causeand effect relationship between variables is the simple regression model. However, it failsto capture the underlying dynamic causality between variables, which is subsequentlyanalyzed by Granger (1969) in terms of Granger Causality tests. The Granger Causalitytest requires that underlying variables must be stationary. In the absence of cointegratingvector Granger Causality test could be done through first differentiating the variables ofVector Auto-regression Model (VAR) Model. However, with cointegration GrangerCausality tests can be tested through error correction mechanism. As Engel and Granger(1987) argue that if the two time series are co-integrated then they are necessarily causallyrelated. Thus, it is important to tests the stationary properties of series before proceedingthe Granger Causality tests in either way.

Subsequently, Sims (1972) argued that Granger Causality test in a bi-variate system ismainly due to an omitted variable, which may causes either or both variables in theunivariate system. In such cases the causal inferences are invalid. Therefore, testing forcausality in a possibly unstable VARs with possibility that co-integration also exists hasbecome a serious issue. Sims et al. (1990) were perhaps the first to address such issue in atrivariate VAR model, which was later on extended to more dimension by Toda andPhillips (1993). Accordingly, they have proposed Wald tests statistics for testing Grangernon-causality test in an unrestricted VAR which will have a limiting x 2 distributions.When estimating a VAR model in levels, a Wald tests will have a limiting x 2 distributiononly if there is sufficient cointegration (Toda and Phillips, 1993). However,estimation procedure of causality tests proposed by Toda and Phillips (1993) requiresthe estimation of cointegration rank (number of cointegrating vector) which suffers fromsevere pre-testing bias. In this regard, Giles and Mirza (1990) pointed out that as the testingof Granger Causality requires pre-testing of non-stationarity and co-integration, the resultmight lead to over rejection of null hypothesis of non-causality and can provide wrongnotion about causality. In order to avoid the distortion in such inference procedure Todaand Yamamoto (1995) and Dolado and Lutkepohl (1996) – (popularly known as TYDLModel) suggested an alternative approach to causality testing. In the present paper we


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have applied the TYDL Model to tests the Granger Causality between stock market andeconomic growth. The model may be discussed in brief as follows.

The TYDL model does not require the pre-testing of unit root tests andcointegration. However, this does not implies that it replace the conventionalhypothesis testing of the same, rather it is a complementary method. According toTYDL model, even though the series are integrated and co-integrated of an arbitraryorder, the Granger Causality tests can be tested by estimating an augmented VARprocedure in levels and applying the standard Wald criterion. The VAR model in levelsmay be specified as follows:

Xt ¼ mt þXp21

i¼1

GiXt2k þ 1t ð1Þ

where Xt is a r £ 1 column vector of p variable, m is an n £ 1 vector of constant term, Gis coefficient matrix, k denotes maximum lag length and 1t is i.i.d. of p dimensionalGaussian error terms with non-zero and variance matrix L.

The application of TYDL model involves two steps. The first step involves thedetermination of the lag length, k, of VAR model at level and the maximum order ofintegration, d, of the variables in the system. Various alternative criteria such as AIC,SBC, HQ criteria can be used to determine the appropriate lag structure of VAR. Thediagnostic checking of the VAR model can be done applying normality, autocorrelationand hetroscedasticity tests. Given that VAR (k) is selected, and the order of integrationd (max) is determined, a levels VAR can then be estimated with a total of p ¼ [k þ d(max)] lags. The second step is to apply standard Wald tests to the first k VARcoefficient matrix (but not all lagged coefficient) to make Granger causal inference. TheTYDL procedure uses a modified-wald test for restrictions on the parameter of theVAR (k) model. This test has an asymptotic x distributions with k degrees of freedomin the limit when the VAR [(k þ d (max)] is estimated (where d (max) is the maximalorder of integration for the series in the system).

4. Empirical analysis4.1 DataThe study has been carried out for post liberalization period as after this period severalchanges has been taken place in Indian economy including stock market. The data usedfor the study are monthly, spreading from 1991:04 to 2005:03, the latest available, collectedfrom Handbook of Statistics on Indian Economy, 2005. Bombay Stock Exchange (BSE)Sensex is used for stock price and index of industrial production (IIP) is used as a proxy forreal economic activity, as the GDP is not available on monthly frequency. Real stock priceis considered by deflating nominal stock price with wholesale price index (WPI). The datasets are expressed in natural logarithms and the first difference provides the stock returnsand growth rates of real economic activity. Through out the study abbreviation “bse”stands for BSE Sensex and “y” for iip. The prefix “r, l, and d” stands for the variableexpressed in real terms, logarithmic and first difference, respectively.

4.2 Empirical resultsIn the first step, we have carried out the unit root tests applying Augmented Dickeyand Fuller (1979), PP (Phillips and Perron, 1988) and KPSS (Kwiatkowski et al., 1992)tests. The test results (Table I) reveal that both the variables are I (1). Therefore,

IJSE34,10

744

Var

iab

les

AD

FP

PK

PS

SL

rbse

Con

stan

tC

onst

ant

and

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dC

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ant

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stan

tan

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end

Con

stan

tC

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ant

and

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d

22.

364

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(0.1

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01)

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Notes

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are

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94)

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idth

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ng

Bar

tlet

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ern

el

Table I.Unit root tests


activity

745

the variables are non-stationary at level but stationary at first difference. The testshave been carried out both at levels and first difference with constant and withconstant and trend.

Given that all the series are I (1), we can apply cointegration tests of Johansen (1988),and Johansen and Juselius (1990) at the level data to ensure whether variables arecointegrated or not[2]. Johansen (1988) and Johansen and Juselius (1990) co-integrationtests give better results and test the cointegration by applying maximum likelihoodestimation procedure. The estimation procedure is based on VAR model. However,prior to the application of VAR model the selection of lag length is important. The AIC,SC, HQ, FPE and LR Statistics (Table II) determine the VAR order (lag length k)[3].We have started the upper bound for k ¼ 20 and successively tested the coefficient ofthe largest lag. Using individual significance level, a lag length of k ¼ 14 is suggestedbased on these criteria’s.

Moreover, some misspecification tests of error process of the VAR (14) Model atlevel have been carried out. The results (Table III) reveals that the residuals of both theequation accept the existence of no auto correlation by LM (1) and LM (14) testsand also jointly. There is no ARCH effect in both the equations as revealed fromARCH (1) and ARCH (14). The error terms of stock price is hetroscedasticity whereaseconomic activity (growth) it is homoscedastic. In addition to it, null hypothesis ofresiduals are multivariate normal are accepted as revealed from the probability valuesof Skewness and rejected at 1 percent significance level with kurtosis. The inferenceis that residuals of both the stock price and economic activity seem to be normal. Thenormality problem is not severe, as according to Gonzalo (1994), Johansen’sco-integration method is robust even when the errors are non-normal. As VAR modelwell specifies the data we can estimate the Johansen Juselius cointegration test basedon VAR model with a lag of 14 periods[4].

The results in terms of the l trace and l max statistic of Johansen-Juseliuscointegration tests (Table IV) suggest the existence of one cointegrating vector. The ltrace statistics rejects the null hypothesis of no cointegrating vector at 1 percentsignificance level and accept the alternative hypothesis of more than zero cointegratingvectors. Again it accepts the null hypothesis of r# 1 cointegrating vector and rejects thealternative of r $ 1 cointegrating vector. Similarly, l max statistics rejects the nullhypothesis of r ¼ 0 cointegrating vector at 1 percent significance level and acceptthe alternative hypothesis of one cointegrating vector. It also rejects the alternativehypothesis of r ¼ 2 co-integrating vector. Since, both the test statistics suggest thepresence of one cointegrating vector, we can conclude that variables are cointegratedand follow long run equilibrium relationship. The evidence of co-integration implies that

VAR lag order Log LR LR FPE AIC SC HQ

1 703.791 805.33 7.27 £ 1027 28.458 28.345 28.41213 917.321 82.415 9.84 £ 1027 210.464 29.471 210.120014 929.467 20.022a 8.93 £ 1028a 210.563a 29.471a 210.120a

15 931.776 3.750 9.13 £ 1028 210.542 29.3156 210.068

Notes: Here, LR – sequential modified LR test statistic (each test at 5 percent level), FPE – finalprediction error, AIC – Akaike information criterion, SC – Schwarz information criterion, HQ –Hannan-Quinn information criterion; a Implies the selected lag length based on the respective criteria

Table II.Lag length selection forthe VAR model

IJSE34,10

746

VA

R(1

4)L

M(1

)x

2L

M(1

4)x

2A

RC

H(1

)A

RC

H(1

4)S

kew

nes

sK

urt

osis

Het

rosc

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tici

ty(W

hit

e’s

test

s)

Lrb

se2.

423

(0.2

73)

12.3

74(0

.300

)1.

989

(0.1

58)

1.23

8(0

.254

9)0.

129

(0.4

96)

1.71

8*

(0.0

007)

1.47

1*

*(0

.044

)L

y0.

496

(0.5

36)

11.2

34(0

.458

)1.

032

(0.3

11)

1.15

5(0

.317

)0.

004

(0.9

94)

1.91

8*

(0.0

07)

0.97

8(0

.526

)(J

oin

tte

sts)x

24.

107

(0.3

91)

0.79

3(0

.939

)0.

462

(0.7

94)

18.5

89*

(0.0

001)

221.

919

*(0

.003

4)

Notes:

LM

(1)

isth

eL

agra

ng

em

ult

ipli

erte

sts

for

resi

du

alse

rial

auto

corr

elat

ion

ofor

der

1.L

M(1

4)u

pto

ord

er14

.AR

CH

(1)

and

AR

CH

(14)

isth

eor

der

auto

reg

ress

ive

con

dit

ion

alh

eter

osce

das

tici

tyof

ord

er1a

nd

14.N

orm

alit

yis

test

edb

ased

onS

kew

nes

san

dK

urt

osis

.Het

eros

ced

asti

city

iste

sted

bas

edon

wh

ites

’te

st.

All

test

stat

isti

csar

eas

ym

pto

tica

lly

dis

trib

ute

das

x2.

Th

efi

gu

rein

the

par

enth

eses

show

sth

ep

val

ue;

*an

d*

*d

enot

esst

atis

tica

lly

sig

nifi

can

tat

the

1an

d5

per

cen

tsi

gn

ifica

nce

lev

el

Table III.Misspecification tests for

VAR model


activity

747

variable rule out spurious correlation and suggests the presence of at least one directionsof Granger Causality[5].

The next step is to apply the Toda and Yamamoto (1995) and Dolado and Lutkepohl(1996) together called as TYDL model to estimate the Granger non-causality tests. Assuggested by TYDL model, the first step is to determine the order integration of theseries and then order of the VAR model. The next step was to augment the VAR atlevel by maximum order of integration in the series. Since, the variables are integratedof order one I (1), we can augment the VAR at level by one more lag. Then we go fortesting the non-causality zero restrictions on the parameters of the original VAR bycarrying out Wald tests on the first k coefficients matrix. The results of the GrangerCausality tests (Table V) between stock price and economic activity suggest thebi-directional Granger Causality between both the variables. The TYDL modelformulates the null hypothesis of no-causality among the variables and it is rejectedhere. Thus, the empirical results suggest that there is bi-directional Granger Causalitybetween stock market (price) and economic activity (growth). It means a welldevelopment stock market could lead to higher economic activity (growth) andsimilarly better economic growth could be significant factor for good performance ofthe stock market.

5. ConclusionThe paper addresses the issues of causal nexus between stock market and economicactivity in a different dimension. The recent advances in econometric times series allowus to test the Granger non-causality tests even in the presence of unit root and theseries are cointegrated, such techniques has been developed by Toda and Yamamoto(1995) and Dolado and Lutkepohl (1996) (popularly known as TYDL). Applying TYDLModel, the dynamic causal nexus between stock market and economic activityhas been examined in the context of India over the post-liberalization period from

Hypothesis Critical value Hypothesis Critical ValueEigen values H0 H1 Trace value 5 percent H0 H1 Max value 5 percent

0.0915 r ¼ 0 r $ 0 16.369 * 15.496 r ¼ 0 r ¼ 1 15.834 * 14.2650.0032 R # 1 r $ 1 0.5356 3.841 R ¼ 1 r ¼ 2 0.5356 3.841

Notes: * ( * *) Denotes the rejection of the hypothesis at the 5 percent (1 percent level). The criticalvalues are from Osterwald-Lenum (1992, Table I). The cointegration equation specified with lineardeterministic trend as the data specifies the presence of linear deterministic trend

Table IV.Results ofJohansen-Juseliuscointegration test

Null hypothesis Lag length/VAR order M-Wald tests (x 2) value P value

Lrbse 7! ly 14/15 4.73 * 0.04ly 7! lrbse 14/15 5.46 * * 0.067

Note: The symbol 7! denoted “does not cause”; * and * * denotes 5 and 10 percent significance level,respectively

Table V.Granger Causality tests(TYDL augmentedModel)

IJSE34,10

748

1991:04 to 2005:03. Empirical result supports the evidence of bi-directional GrangerCausality between stock market and economic activity. Therefore, the results suggestthat a well-developed stock market could enhance economic activity (growth) andvice versa.

Notes

1. The countries are Argentina, Chile, Greece, Korea, Malaysia, Philippines, and Portugal.

2. Gonzalo (1994) analyzed the statistical performance of three cointegration tests such as,Engel-Granger, the Stock and Watson tests, and Johansen’s test and found that Johansen’s isfound to be superiors to the other tests under consideration.

3. All these estimation has been carried out with Eviews 5.0 software

4. If there are zero cointegrating vectors, then we do in fact have a VAR process in firstdifference. If there is n co-integrating vector, then the level data are already stationary, thenthere is no need of cointegration and error correction tests, we can estimate the VAR at level.However, if there is less than n 2 1 cointegrating vector and data specifies the VAR modelwell then VAR model can be estimated at level. In this case our data well species theVAR (14) model and there is one cointegrating vector so, we can estimate the VAR (14) atlevel.

5. Engel and Granger (1987) argue that if the two time series are co-integrated then they arenecessarily causally related.

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Demirgue-Kunt, A. and Levine, R. (1996), “Stock market development and financialintermediaries: stylized facts”, The World Bank Economic Review, Vol. 10, pp. 291-321.

Dickey, D.A. and Fuller, W.A. (1979), “Distribution of the estimators for autoregression timeseries with a unit root”, Journal of the American Statistical Association, Vol. 74, pp. 427-31.

Dolado, J.J. and Lutkepohl, H. (1996), “Making Wald test work for cointegrated VAR systems”,Econometrics Reviews, Vol. 15, pp. 369-86.

Domain, D.L. and Louton, D.A. (1997), “A threshold autoregressive of stock returns and realeconomic activity”, International Review of Economics and Finance, Vol. 6, pp. 169-79.

Engel, R.E. and Granger, C.W.J. (1987), “Cointegration and error correction: representation,estimation and testing”, Econometrica, Vol. 55, pp. 251-76.

Engsted, T. and Lund, J. (1997), “Common stochastic trends in international stock prices anddividends: an example of testing over identifying restrictions on multiple cointegrationvectors”, Applied Financial Economics, Vol. 7, pp. 659-65.

Estrella, A. and Hardouvelis, G.A. (1991), “The term structure of interest rate as predictor of realeconomic activity”, The Journal of Finance, Vol. 46 No. 2, pp. 555-76.

Estrella, A. and Mishkin, F. (1996), “Predicting US recession: financial variables as leadingindicators”, Federal Reserve Bank of New York Research Papers, No 9609.

Fama, E.F. (1981), “Stock returns, real activity, inflation and money”, American EconomicReview, Vol. 71, pp. 545-65.

Fama, E.F. (1990), “Stock returns, expected returns, and real activity”, Journal of Finance, Vol. 45,pp. 1089-108.

Ferson, W.E. and Harvey, C.R. (1991), “The variation of economic risk premiums”, Journal ofPolitical Economy, Vol. 99, pp. 385-415.

Ferson, W.E. and Harvey, C.R. (1993), “The risk and predictability of international equityreturns”, Review of Financial Studies, Vol. 6, pp. 527-66.

Firth, M. (1979), “The relationship between stock market returns and rates of inflation”, Journalof Finance, Vol. 34, pp. 743-9.

French, K.R., William, S.G. and Stambaugh, R.F. (1987), “Expected stock returns and volatility”,Journal of Financial Economics, Vol. 19, pp. 3-29.

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Giles, J.A. and Mirza, S. (1990), “Some pretesting issues on testing for granger non-causality”,Econometrics Working Papers Series, No. 9914, Department of Economics, University ofVictoria, Victoria, BC.

Gjerde, O. and Saettem, F. (1999), “Causal relations among stock returns and macroeconomicvariables in a small open economy”, Journal of International Financial Markets,Institutions and Money, Vol. 9, pp. 61-74.

Goldsmith, R.W. (1969), Financial Structure and Development, Yale University Press,New Havana.

Gonzalo, J. (1994), “Five alternative methods of estimating long run equilibrium relationships”,Journal of Econometrics, Vol. 60, pp. 203-33.

Granger, C.W.J. (1969), “Investigating causal relations by econometric methods andcross-spectral methods”, Econometrica, Vol. 34, pp. 424-38.

Gurley, J.G. and Shaw, E.S. (1955), “Financial aspects of economic development”, AmericanEconomic Review, Vol. 45, pp. 515-37.

Jain, P.C. (1988), “Response of hourly stock prices and trading volume to economic news”, Journalof Business, Vol. 61, pp. 219-31.

Jeon, B.N. and Chiang, T.C. (1991), “A system of stock prices in world stock exchanges: commonstochastic trends for 1975-1990”, Journal of Economics and Business, Vol. 43 No. 4,pp. 329-38.

Johansen, S. (1988), “Statistical analysis of cointegration vectors”, Journal of Economic Dynamicsand Control, Vol. 12, pp. 231-54.

Johansen, S. and Juselius, K. (1990), “Maximum likelihood estimation and inference oncointegration-with applications to the demand for money”, Oxford Bulletin of Economicsand Statistics, Vol. 51, pp. 169-210.

Kasa, K. (1992), “Common stochastic trends in international stock markets”, Journal of MonetaryEconomics, Vol. 29, pp. 95-124.

Kessel, R.A. (1956), “Inflation caused wealth redistribution: a test of hypothesis”, AmericanEconomics Review, Vol. 46 No. 1, pp. 128-41.

Kim, S.J. and Sheen, J. (1998), “International linkages and macroeconomic news effects on interestrate volatility-Australia and the US”, Department of Economics Working Paper 98-11, TheUniversity of Sydney, Sydney.

King, M.A. and Wadhwani, S. (1990), “Transmission of volatility between stock markets”, Reviewof Financial Studies, Vol. 3, pp. 5-33.

Kwiatkowski, D., Phillips, P.C.B., Schmidt, P. and Shin, Y. (1992), “Testing the null hypothesis ofstationarity against the alternative of a unit root: how sure are we that economic timeseries have a unit root”, Journal of Econometrics, Vol. 54, pp. 159-78.

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MacKinnon, J.G. (1996), “Numerical distributions functions for unit root and cointegration tests”,Journal of Applied Econometrics, Vol. 11, pp. 601-18.

Mandelker, G. and Tandon, K. (1985), “Common stock returns, real activity, money, and inflation:some international evidence”, Journal of International Money and Finance, Vol. 4,pp. 267-86.

Newey, W.K. and West, K.D. (1987), “A simple, positive semi-definite, and auto correlationcovariance matrix”, Econometrica, Vol. 55, pp. 703-8.

Osterwald-Lenum, M. (1992), “A note with quantiles of the asymptotic distribution of themaximum likelihood cointegration rank test statistics: four cases”, Oxford Bulletin ofEconomics and Statistics, Vol. 54, pp. 461-72.

Pearce, D.K. and Roley, V.V. (1988), “Firm characteristics, unanticipated inflation, and stockreturns”, Journal of Finance, Vol. 43 No. 4, pp. 965-81.

Phillips, P.C.B. and Perron, P. (1988), “Testing for a unit root in time series regression”,Biometrika, Vol. 75, pp. 335-46.

Piero, A. (1996), “Stock price, productions and interest rates: comparison of three Europeancountries with USA”, Empirical Economics, Vol. 2, pp. 221-34.

Schumpeter, J. (1912), Theorie Der Wirtschaftlichen Entwicklung (The Theory Of EconomicDevelopment), Harvard University Press/Dunker & Humblot, Cambridge, MA/Leipzig,Translated By Redvers Opie, 1934.

Schwarz, G. (1978), “Estimating the dimension of a model”, Annals of Statistics, Vol. 6, pp. 461-4.

Schwert, W.G. (1990), “Stock returns and real activity: a century of evidence”, Journal of Finance,Vol. 45, pp. 1237-57.

Sims, C.A. (1972), “Money, income and causality”, American Economic Review, Vol. 62, pp. 540-52.

Sims, C.A., Stock, J.H. and Watson, M.W. (1990), “Inference in linear time series models withsome unit roots”, Econometrica, Vol. 58 No. 1, pp. 113-44.

Spyros, I.S. (2001), “Stock returns and inflation: evidence from an emerging market”, AppliedEconomics Letters, Vol. 8, pp. 447-50.

Toda, H.Y. and Phillips, P.C.B. (1993), “Vector autoregression and causality”, Econometrica,Vol. 61, pp. 1367-93.

Toda, H.Y. and Yamamoto, T. (1995), “Statistical inference in vector autoregression withpossibly integrated processes”, Journal of Econometrics, Vol. 66, pp. 225-50.

Further reading

Corhay, A., Rad, A.T. and Urbain, J.P. (1993), “Common stochastic trends in European stockmarkets”, Economics Letters, Vol. 42, pp. 385-90.

Fama, E.F. and Kenneth, R. (1989), “Business conditions and expected returns on stocks andbonds”, Journal of Financial Economics, Vol. 25, pp. 23-49.

Geske, R. and Richard, R. (1983), “The fiscal and monetary linkages between stock returns andinflation”, Journal of Finance, Vol. 38, pp. 1-31.

Glosten, L.R., Jaganathan, R. and Runkle, D.E. (1989), “On the relation between the expectedvalue and the volatility of the nominal excess return on stocks”, Journal of Finance, Vol. 48No. 5, pp. 1779-801.

Gultekin, N.B. (1983), “Stock market returns and inflation: evidence from other countries”,Journal of Finance, Vol. 38 No. 1, pp. 49-65.

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Lutkepohl, H. (1993), Introduction to Multiple Time Series Analysis, 2nd ed., Springer-Verlag,Berlin.

MacKinnon, J.G. (1991), “Critical values for cointegration tests, in long run economicrelationships”, in Engel, R.F. and Granger, C.W.J. (Eds), Readings in Cointegration, OxfordUniversity Press, Oxford, pp. 267-76.

McKinnon, R.I. (1973), Money and Capital in Economic Development, The Brookings Institution,Washington, DC.

McQueen, G. and Roley, V.V. (1993), “Stock prices, news and business conditions”, Review ofFinancial Studies, Vol. 6, pp. 683-707.

Richards, A.J. (1995), “Comovements in national stock market returns: evidence of predictability,but not cointegration”, Journal of Monetary Economics, Vol. 36, pp. 631-54.

Shaw, E.S. (1973), Financial Deepening in Economic Development, Oxford University Press,New York, NY.

Corresponding authorPurna Chandra Padhan can be contacted at: [email protected]


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A case of inappropriately targetedvulnerability reduction initiatives

in Andhra Pradesh, India?Lee Bosher

Department of Civil & Building Engineering, Loughborough University,Loughborough, UK

Abstract

Purpose – The paper seeks to assess the influence and effectiveness of non-governmentalorganisations (NGOs) in targeting and aiding “communities” to reduce their socio-economicvulnerability to infrequent large-scale and common everyday crises in coastal Andhra Pradesh.

Design/methodology/approach – Data collection included 342 questionnaires with villageinhabitants, local and regional government officials and personnel managing and working for localNGOs. To add qualitative detail to the quantitative data that were collected, 308 “everyday”sociograms, 294 “crisis” sociograms, and 34 semi-structured interviews were also conducted.

Findings – The research identifies that NGOs in the study areas do not operate in multi-castevillages, apparently because they prefer to operate in relatively homogeneous single-caste villages.The implications are that some of the most vulnerable members of society, such as the marginalised“communities” that partially constitute multi-caste villages, do not receive the support they need.

Research limitations/implications – This study focuses on a specific region of Andhra Pradeshwith the consequence that the findings are potentially very context-specific. Nonetheless, the findingshighlight a fundamental flaw in the way many NGOs operate in this region, through the targeting ofperceived “easy cases”, and this is a matter that development agencies should consider and furtherinvestigate.

Originality/value – This paper will be of value to researchers and practitioners seeking to gain abetter understanding of NGOs and the way some of them operate. The paper recommends a number ofways that the observed inefficiencies could be addressed.

Keywords India, Non-governmental organizations, Disasters, Economic development


IntroductionOver recent years disaster management has moved away from relief and disasterpreparedness, towards a more sustainable approach involving the management of risks,incorporating hazard mitigation and vulnerability reduction strategies. Themulti-disciplinary range of such disaster risk management (DRM) strategies arebased on long-term social, economic and environmental adaptations that draw upon



The author is grateful to the Flood Hazard Research Centre, Middlesex University for financingthis study and to Edmund Penning-Rowsell, Sue Tapsell, Peter Winchester and Sarah Bradshawfor advice and support throughout the duration of the research that has contributed to this paper.In addition, the author would like to thank the individuals and organisations that providedvaluable assistance during field work in Andhra Pradesh. Most importantly, the author wouldlike to extend heartfelt gratitude to all the villagers involved in this study, for their time, patience,hospitality and generosity. The research was undertaken to more clearly understand the natureof socio-economic vulnerability and resilience in the context of social interactions.

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assessments of risk, vulnerability and resilience of the individual and the “community”.Organisations such as the United Nations and the Government of the UK’s Departmentfor International Development (DFID, 2006) have highlighted the importance of“mainstreaming” DRM as part of an initiative to build collaboration betweenstakeholders in order to reduce the impact of disasters by integrating disaster riskreduction into long-term development policies.

Inbuilt community level survival strategies, such as neighbourly assistance, canprovide levels of resilience to crisis events but without support from civil society and socialinstitutions the plight of the rural poor may never improve. This is the philosophy thatsupports contemporary initiatives in targeting the most socio-economically vulnerablemembers of vulnerable communities (DFID, 1999; Hearn Morrow, 1999; Buckle et al., 2000;Boyce, 2000; Loughhead et al., 2001; Wisner et al., 2004). However, literature indicates thatinequalities found in rural India (Srinivas, 1962; Mendelsohn, 1993; Robbins, 2000; DFID,1999; World Bank, 1999, 2001) are replicated in Andhra Pradesh (Elliott, 1986; Kohli, 1990;Bosher, 2007; Bosher et al., 2007), such as social, political and economic exclusion ormarginalisation, and that these inequalities have, to varying degrees, been blamed for theinefficiency of vulnerability reduction initiatives throughout India (Winchester, 2000;O’Hare, 2001).

Ideally, social institutions such as non-governmental organisations (NGOs) are opento anyone, irrespective of caste, class, religion and positions of respect andresponsibility but in reality can be restricted to a narrow social base (Beteille, 2000).Additionally, some aspects of social institutional control are resistant to change,especially those that perpetuate social exclusion (Davies and Hossain, 1997):

Institutions matter because they determine who is included or excluded and because theydefine the differing domains of control in state-society-community relations (Davies andHossain, 1997, p. 12).

However, in the case of India it is not exclusion from society that affects poverty butrather inclusion in a society based on strict hierarchical structures (IILS, 1996)resulting in degrees of marginalisation and varying levels of socio-economicvulnerability (Bosher et al., 2007). Issues regarding marginalisation may underpin theobservations that despite efforts by policy makers, development agencies and NGOsover the past two decades the vulnerability of some coastal communities inAndhra Pradesh to the impacts of hazards such as tropical cyclones has not beensignificantly reduced (Winchester, 2000; O’Hare, 2001). This paper focuses on theinfluence and effectiveness of NGOs in targeting and aiding “communities” in coastalAndhra Pradesh to reduce their socio-economic vulnerability to infrequent large-scaleand common everyday crises.

Non-governmental organisationsNGOs are typically non-profit, non-official (and sometimes unregulated) organisationsthat are actively involved in the process of socio-economic development and relief aid(Tisch and Wallace, 1994). The last decade has witnessed a growth of “Southern”NGOs (those created and based in developing countries), with India being no exception(Sooryamoorthy and Gangrade, 2001). Emphasis has changed from ploughing fundsinto large international NGOs towards supporting the growing legions of “grass roots”local NGOs. As a consequence, international NGOs have concentrated on specialising

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in key disciplines and initiating stronger partnerships with local NGOs. The use ofNGOs as a conduit for resources by the government is a form of decentralisation.Roy and Tisdell (1998, p. 1311), suggest that decentralisation can take three forms,being:

(1) deconcentration (transferring resources and decision-making to other branchesof central government);

(2) devolution (the devolution of resources and power to municipalities and localgovernment); and

(3) delegation (the delegation of resources and power to organisations outsideregular bureaucratic structures such as public corporations, developmentagencies or NGOs).

Through these forms of decentralisation, and particularly delegation, it isenvisaged that vulnerability reduction initiatives can be delivered in a way that canintegrate the coping mechanisms of the target recipients, avoid injustice and recognisethe pre-disaster constraints of vulnerable communities. NGOs can offer an alternativeapproach to resource allocation and distribution and may hold some advantage overGovernment agencies due to their apparent disengagement from local socio-politicalpower relationships (Winchester, 2000). However, this perspective has been challenged:

NGOs may be assumed to be less bureaucratic, wasteful or corrupt than governments, butunder scrutinised groups can suffer from the same chief failing, they can get into bad waysbecause they are not accountable to anyone (The Economist, 2000, p. 28)

Therefore, the initiatives of NGOs can be restricted at the grassroots level if they fallinto conflict with people who control the local political economies (Lewis, 1991; Deepaet al., 2000; Bosher, 2007). Consequently, the success of a NGO will depend has much ontheir relationship with the local power structures than the suitability of their initiatives(Hartmann and Boyce, 1983; Beck, 1995).

Non-governmental initiativesThe work and motives of some NGOs can be viewed with scepticism by the local powerholders, especially on the back of experiences in the early 1980s when some NGOs inIndia promoted social activism and civil rights as an alternative to providing economicresources (Sheth, 1987; Lewis, 1991). This scepticism can also be found in the highestlevels of government. For example, in India the Foreign Exchange Management Actwas introduced to restrict the receipt of foreign funds for development projects toIndian NGOs. Some representatives of the NGOs and voluntary bodies feel that thegovernment is attempting to choke the voluntary sector by tightening the flow offoreign funds for development projects in the country (The Hindu, 2002). However,despite some uneasy relationships between various levels of government and NGOs,particularly the way in which NGOs and the state “fall in and out of love with eachother” (Sen, 1999, p. 346), NGOs proliferate and many undertake important andappropriate work. Jain (2000) has highlighted the potential roles of NGOs in disasterrisk reduction, being:

. address disaster vulnerability;

. engage local people in disaster reduction;

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. recognise potential of NGOs and other organisations;

. harness traditional knowledge and approaches;

. build-up local community capabilities;

. recognise the multi-disciplinary approach; and

. cope with disasters in line with sustainable development.

Programmes designed by the central and regional (state) government’s in India toreduce people’s vulnerability to the impacts of tropical cyclones for instance, typicallyinclude measures such as the construction of community cyclone shelters, stormwarning systems, improved evacuation procedures, hazard mapping and enhancedcommunity preparedness through education programmes in cyclone prone areas(Parasuraman and Unnikrishnan, 2000; Reddy et al., 2000). It is pertinent to suggestthat individuals and communities that benefit from these initiatives are likely to findtheir levels of vulnerability reduced. However, it is also applicable to suggest thatindividuals and communities that do not benefit from these initiatives, possiblybecause they have been marginalised due to caste or gender, may find their relativelevels of vulnerability increased. When resources are finite and the government’spolicies and/or mechanisms are ineffective (through lack of interaction withstakeholders and the recipients of development projects or simply due to corruptionand nepotism), it is important that NGOs target the most needy individuals andcommunities, based on rigorous needs assessments, rather than the promulgation ofreligious-, political-, caste- or gender-related inequalities.

The study areasThe research reported here was conducted in eight coastal villages in East Godavaridistrict and four coastal villages in Nellore district between February and November2003. Qualitative and quantitative data[1] were obtained from 308 villagers and from34 respondents from local NGOs and members of local (Zilla Parishad ) and mandal[2]level government administrations. Andhra Pradesh is the third largest state in India,located on the east coast bordering the Bay of Bengal (Figure 1). The historicalrelationship between Andhra Pradesh and tropical cyclones has proved to be arelationship of large-scale losses of human life, livestock, crops, property andinfrastructure, with the concurrent deleterious affects upon the localised and nationaleconomies. Despite the threats of cyclones and floods to the livelihoods and lives ofmillions of people along the Andhra Pradesh coastline, many inhabitants persist,through poverty and lack of choices, in eking out a living in the mangrove swamps,brackish rivulets and paddy fields along the coastline of one of the most disaster proneregions of the world.

East GodavariThe district of East Godavari has not historically been one of the most disaster affectedcoastal districts in the state but was affected by a severe tropical cyclone in November1996. The district-wide damage caused by the cyclone and associated storm surgeaffected over 4.5 million people, left 1,683 dead, 257,000 houses fully damaged anddestroyed 25,335 hectares of crops (Reddy et al., 2000). East Godavari district waschosen as one of the case study districts because it had been extensively affected by the1996 cyclones and therefore the events were relatively recent. The two mandals


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Figure 1.Location ofAndhra Pradesh and thecase study districts

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(administrative districts) of Tallarevu and Katrenikona were chosen because they hadbeen affected by the 1996 cyclone and were areas in which the Andhra Pradesh StateGovernment had constructed “Cyclone Resistant Housing” as part of their cyclonehazard mitigation initiatives and where NGOs were involved with vulnerabilityreduction programmes.

Nellore (Pottisriramulu)Nellore was chosen as a case study area because historically it is the district that hasbeen affected by the most disasters; between 1892 and end of 1996 the Nellore coastwas directly struck by 22 cyclones out of the total of 70 cyclones that struckAndhra Pradesh during the same period (Reddy et al., 2000). Nellore was affected by11 cyclones of varying intensities between 1977 and 1996[3]. Thotapalligudur mandalhas also been the scene of government programmes related to vulnerability reductionand many of the coastal villages are supported by the work of local NGOs that aresupported to varying degrees by funding from international donors.

The 12 villages (four in each mandal ) included in the study were all located within15 kilometre of the seashore and have been categorised into four distinct types ofvillage to enable the analysis to make inter and intra mandal comparisons regardinghow the experiences of respondents in villages with NGO support compare to thosewithout such support. The villages were categorised thus;

(1) village with long-term (over five years) NGO activity;

(2) village with recent (less than two years) NGO activity only;

(3) village with no current NGO activity; and

(4) village with relatively well established public amenities and services but noNGO activity.

Case study NGOsThe four NGOs involved with the case study villages (who upon request will not beidentified) have initiated programmes aimed at facilitating the collective action of“fisherfolk”[4] (mainly the Agnikulakshatriya caste) in projects including capacitybuilding, health care, disaster preparedness, and cyclone rehabilitation. All four NGOswere established and managed by executives that consider the operations of the NGOsthey run to be a “family business”. During the fieldwork, the people that managed theNGOs and the people they employed displayed that they possess very good knowledgeand understanding of the needs and problems of the villages in which they operate.

An example of one of the key disaster preparedness initiatives has been theformation of “task force groups”. The “task force groups” have been formed as ameans of helping the villagers threatened by cyclones and other hazards, to helpthemselves, before, during and after a high-impact crisis event. The training providedby the NGOs offers villagers education regarding awareness of the threats of cyclonesand floods, practical first-aid training (along with basic medical equipment) andcyclone warning dissemination at the village level. The roles and responsibilities ofeach group that constitutes the “task force groups” are outlined here:

. First-aid group. Provide basic first-aid in the event of a disaster and ensure thatfirst-aid boxes are appropriately stocked. These groups are also responsible fortraining other villagers in basic first-aid skills.


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. Warning group. On a daily basis group members should check “All India Radio”weather reports, maintain transistor radios and ensure stocks of batteries(if necessary) are available. Ultimately, group members are responsible for thedissemination of warnings to everyone in the village.

. Evacuation group. Responsible for evacuating villagers, particularly elderly,disabled or otherwise immobile villagers to safe areas such as cyclone shelters,concrete ( pukka) houses or inland villages.

. Shelter group. Responsible for keeping the village “vulnerability identification”maps up to date and in the event of a disaster should liaise with the warning andevacuation groups to identify most appropriate shelters.

. Rescue group. In the event of a disaster members of this group (typically men)will search for lost villagers and rescue villagers in trouble. Rescue groupsmembers are trained in basic manual handling and body retrieval methods usinglocally available material.

A large proportion of the projects that the case study NGOs undertake are designed tobenefit “fisherfolk” such as the Agnikulakshatriya and the Pattapu castes (classified asbackwards castes (BC)[5]. The explanation for this is provided by the NGOs, whostated that funding is available for NGOs who wish to work with “fisherfolk” as theyhave been designated as particularly vulnerable due to the location of their villages andthe nature of their occupation. These assertions have arisen in a report, published bythe “Food and Agriculture Organisation of the United Nations” (FAO) in partnershipwith the Government of India and the State Government of Andhra Pradesh, whichhighlights how the economically and geographically marginalized members of coastalAndhra Pradesh were those who suffered the most deaths from the 1996 East Godavaricyclone (FAO, 2000). Those particularly affected were the “fisherfolk” working at seain mechanised boats (569 deaths) and “shrimp seed” collectors (830 deaths), whorecorded high-death rates due to poor access to transistor radios, that could be used toreceive warnings, and their exposure to the hazard (FAO, 2000).

Nonetheless, the International Institute for Labour Studies (IILS, 1996) has arguedthat inclusion for some (such as the “fisherfolk”) will inevitably mean exclusion forothers. It was therefore an element of this study to assess how villages that benefitfrom the work of NGOs compared to those who do not have such support.

The concept of communityThe NGOs involved in this study all declare that a central tenet of their work iscommunity-based participation or collective action:

Collective action at the community level has been achieved through the cooperation of villagelevel institutions and through the use of Participatory Rural Appraisal (PRA) exercises . . .our activities have been based on organising the community to take up collective action forsustainable livelihoods (From NGO publicity brochure).

Arguably the reasoning behind the NGOs focus on “community participation” is thatcollective action is a requirement of the funding that the NGOs have secured.Yugandhar and Raju (1992, p. 1312) believe that the justification of the localcommunity’s participation is based on the arguments that local people organise best

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around the problems they consider most important such as in assessing needs andfinding solutions:

. . . local people make rational economic decisions in the context of their own environment andcircumstances providing appropriately for the risks associated with change; and that localparticipation also ensures voluntary commitment of resources and local control over thequality and distribution of benefits.

However, as Buckle et al. (2003) state, it is important to know how a concept such as“community”[6] is defined:

(T)here is agreement that community is a core disaster management concept, but whether inpractice this refers to issues such as community as locality, community as interest group orcommunity as demographic group (gender or age, for example) is often not clear (Buckle et al.,2003, p. 81).

Consequently, an important element of the research process was to obtain an insightinto the views of the respondents regarding feelings and experiences related to a keyconcept such as “community”. This element of the research was particularly critical asa respondent’s perception of their “community” may influence which social institutions(including the NGOs) they possessed social networks with.

Village level perceptionsThe majority (63 per cent) of the respondents based their concept of community oncaste or caste classification. Additionally, 31 per cent of the respondents based theirconcept of community on occupation, which some argue is also intrinsically linkedwith the caste system (FAO, 2000; Geetha and Kiran Kumar, 2001) because it is rare forrespondents to identify themselves with occupations that transcend caste boundaries.A concept of community based on geography (i.e. a neighbourhood, village, town, etc.)was only perceived by 1 per cent of the respondents (all belonging to the BCclassification and living in single-caste villages). Therefore, it is pertinent to state that avast majority (94 per cent) of the respondents based their concept of community oncaste/caste category, which may (i.e. a single-caste village) or may not (i.e. part of amulti-caste village) equate to the whole village geographically.

NGO perceptionsNGOs in this study focused on the reduction of socio-economic vulnerability in cycloneprone areas and have to work within the context of the interrelationships between the maindeterminants of Indian social institutions that include caste ties and affiliations and familyand kinship ties. These organisations also have to work within the prevailing “politicalrealities”; these are to some extent determined by social institutions but are alsodetermined by the phenomena of the impact of the dominant caste on politics and politicalfactionalism and the effects of social institutions on these realities, and vice versa. It istherefore important to ascertain what perceptions of a concept like community theseimportant institutions hold. Any possible differences in the perceptions held by thevillagers and NGOs that operate in those villages may highlight fundamental problemswith the ways in which these organisations have designed their “community based”vulnerability reduction initiatives.

Ten NGO managers and employees (from four different NGOs) were asked what theythought their working definition of community was and also which communities they


761

worked with. Seven NGO managers/employees stated that their concept of community wasbased on caste classification and the other three believed that “communities” were definedby occupation type. In all the cases when NGO employees defined communities byoccupation type, they were referring to, “fisherfolk” being the Agnikulakshatriya orPattapu castes (BC). Therefore, as we have already discussed, caste and occupation aretypically interlinked and consequently the definitions of the NGO managers and employeesare very closely linked to those of the village level respondents in that in the majority ofcases, the perception of a community is based on caste or caste related determinants.

The perceptions of all stakeholders regarding working concepts such as “community”are important to assess and acknowledge when undertaking “participatory projects” inIndian villages, especially heterogeneous (multi-caste) villages. For example, a NGO mayonly cater for a selective section of the village in which it operates, thereby someindividuals, families or communities will be included in projects and invariably some willbe excluded. Consequently, it is important to recognise that NGOs may not involveeveryone who lives in the village, but it is arguably just as important to understand whysome are included and why some are excluded.

Involvement with NGOsConcerted attempts were made during the course of the research to study somemulti-caste villages where NGOs operated but none were found in the case study areas.All the NGOs that were operating in the case study areas targeted the BC “fisherfolk”castes that typically inhabit single-caste villages. This observation may besymptomatic of funding being made available to NGOs that target “fisherfolk”communities and that typically the “fisherfolk” live in single-caste communities.However, another explanation may be attributed to the possible operational benefits ofNGOs operating in single-caste villages, in contrast to multi-caste villages where issuesover inter-caste relations may cause operational problems.

For example, the Executive Secretary of a local NGO stated that the central IndianGovernment and the Andhra Pradesh State Government provide their funding towardsdevelopmental assistance and vulnerability reduction to communities in terms oftargeting “fisherfolk” and Scheduled Tribals (ST), rather than specifically assessingthe most vulnerable. The Executive Secretary in question wished to remainanonymous because he said such statements may jeopardise any future funding hisorganisation applied for but he did go on to state the following:

Of course, running a NGO is a business and I have my duties to secure the employment of mystaff and to feed my family. Consequently, if funding is available to work with the “fisherfolk”for example, this is what we will endeavour to do, even if those particular people are not themost needy people in the region. Also “fisherfolk” villages tend to be single-caste villages andif we are to achieve the targets expected of us to obtain future funding, it is these single-castevillages that we will work with because we do not then have the inter-caste related barriers tocontend with, that you would find in many mixed caste villages (Comments by ExecutiveSecretary of a local NGO).

This observation may highlight a fundamental flaw in not just the way many NGOsoperate in this region through the targeting of possible “easy cases” but moreimportantly it may mean that the most vulnerable members of multi-caste villages donot receive support from NGOs that could be essential in augmenting support fromformal governmental and institutional mechanisms. In view of this, the influence of

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NGOs on providing access to resources, distributing relief aid and participation withwomen will be assessed.

Influence on access to resourcesThe levels of respondents’ access to key socio-economic resources were assessed duringthis study (Bosher et al., 2007). These resources were categorised into “assets” “publicresources” “political networks” and “social networks”. Respondents with the least accessto these resources were considered to be the most vulnerable and least resilient toinfrequent large-scale crises and regularly occurring small-scale crises. The influence ofinvolvement with NGOs on the levels of access to these socio-economic resources isshown in Figure 2, which shows that in villages where a NGO operates, 47 per cent ofrespondents involved with a NGO have relatively high access to resources while only26 per cent of those who are not involved with a NGO have high access to resources. Incontrast, in villages where no NGOs operate, only 12 per cent of respondents have highaccess to resources with 28 per cent having low access to resources. This implies thateven if a respondent does not participate with a NGO, they can benefit indirectly fromhaving a NGO operating in their village. However, this may only be the case because, asstated earlier, the NGOs involved in this study only operated in single-caste villages.

Influence of genderTable I indicates that when NGOs are operating in villages, women were four timesmore likely than men to be involved with NGO activities. It is likely that women

Figure 2.Access to resources by the

presence of NGOs andinvolvement with NGOs0

5

10

15

20

25

30

35

40

45

50

Involved with NGO Not involved with NGO No NGO in village

Perc

enta

ge a

cces

s to

res

ourc

es (

%) Low Access to Resources

High Access to Resources

Are you involved with the NGO?Gender Yes No Not aware of NGO

Male (per cent) 18 48 34Female (per cent) 72 20 8Average (per cent) 46 34 20

Notes: x 2 ¼ 33.994; p , 0.01

Table I.Involvement with NGOs

by gender


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participate with NGOs because many programmes designed by NGOs are targeted atfemales, through the foundation of women’s groups (mahila sanghas) with the intentionof providing women with improved education and general knowledge and increasingtheir access to formal financial services, such as credit and savings schemes. Men wereless likely to participate with NGOs due to scepticism of participatory “pro-women”projects that fundamentally challenge the traditional power structures withinhouseholds and communities in many parts of rural India.

Another interesting observation from Table I is related to the responses regarding thebelief that there were no NGOs operating in the villages where NGOs were operational.The figures suggest that not only were males least likely to participate with NGOs butthey were also least likely to be aware of their activities within the village. For example,61 per cent of the men that were interviewed in villages with only recent NGO activitywere not aware of the NGO activities in their village. Eight out of ten females that wereinterviewed in the same villages were aware of NGO activities, even if they did notparticipate. It is likely that because women have struggled on an “everyday” basis theyhave consequently established networks and strategies to enable them to cope withrelatively small-scale but recurrent crises (Moore, 1990; Agarwal, 1991; Moore, 1998;Enarson, 2000). These networks and strategies provide useful support during infrequentbut large-scale crisis events such as tropical cyclones and therefore have contributed“informally” to increasing the resilience of women, in comparison to men.

During the relief phase of a crisisAn element of the research included an assessment (using Sociograms; for details referto Bosher, 2007) of the difference in social networks utilised by the respondentsbetween an everyday scenario and a crisis scenario. The analysis identified anincreased presence of NGOs during crisis periods such as the 1996 tropical cyclone andthe 1999 floods. The increased presence (a 65 per cent increase in utilised networks) ofNGOs during large-scale crisis events was significant and corresponds well with theactive role that many NGOs adopt in helping to distribute relief aid after a disaster hasoccurred. The analysis also identified NGOs as the only institution that actuallyincreased their presence in the village during the relief phase of crisis events (withmany institutions becoming almost impotent with a 60 per cent or more reduction intheir network scores). However, it should also be noted that this apparent increasein NGO networks could largely be attributed to the presence of international NGOsduring relief stages of large-scale disaster events.

The efforts of NGOs to distribute relief were generally received favourably by therespondents with 24 out of 36 (67 per cent) interview accounts of post event activitiesrelaying positive accounts of the work of NGOs:

It was mainly the international NGOs and local NGOs that helped us. For over two months wewere dependant upon their relief food (Interviewee 27, male (backward caste) PanchayatPresident in single-caste village).

However, when resources are finite it will be impossible to distribute all the resourcesthat people require and inevitably opportunities arise for situations where some peoplereceive relief at the expense of others, particularly in multi-caste villages. During theseoccasions some NGOs have been accused of inappropriate relief distribution, asthe following account is testimony to:

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I think the NGOs were not useful for all the villagers, they provided help for a limited amountof people, like Scheduled Caste and Backwards Caste people. The NGOs thought that the areamost affected was in Konaseema, in the surroundings of Amalapuram, that’s why they didn’thelp our village very much (Interviewee 15, male (forward caste (FC)) Landlord in multi-castevillage).

This comment highlights one of the potential problems of operating in a multi-caste villagebecause in reality the “high” castes are as likely to complain about “low” castes receivingassistance than “low” castes complaining about “high” castes receiving assistance(Bosher, 2005). A major concern is that multi-caste villages are as likely to be affected by alarge-scale crisis, such as a tropical cyclone, as a neighbouring single-caste “fisherfolk”villages, but the multi-caste village will not necessarily receive the potentially criticalsupport of local and international NGOs that would augment relief supplied by thegovernment. Fieldwork accounts suggested that international NGOs that respond to crisisevents were liable to overlook low profile villages (i.e. villages that were not involved withlocal NGOs) when distributing relief (Bosher, 2005). This is a problem that has been notedby other studies in India (Jaspers and Shoham, 1999; Reddy et al., 2000).

Despite these concerns, the influence of NGOs on a respondent’s access to resourcescan be very significant, because as highlighted earlier, people with high access toresources have strong networks with NGOs, while those with low access to resourceshave the lowest networks with NGOs. However, it is difficult to ascertain the causalelements of such a relationship; for example, do people have high access to resourcesbecause of their networks with a NGO (indicating that NGOs are working effectively)?Alternatively, is it the case of NGOs working with the easy options (people thatoriginally possessed resources) resulting in interventions by NGOs that appear to havebeen relatively successful but in reality are inappropriately targeted (becausethose with the least resources are not being targeted). If this last point is the case, thenthe NGOs involved in this study are not operating effectively.

What is apparent is that NGOs have targeted single-caste “fisherfolk” villages suchas those inhabited by Agnikulakshatriya and Pattapu “Backward Castes” a pointreinforced by Table II, which highlights the disparity between the caste classificationsregarding active involvement with NGOs with the “fisherfolk” BC castes monopolisingthe “everyday” social interactions. This observation is marginally different in a “crisis”

Social networks with NGOsEveryday network (per cent) Crisis network (per cent)

FC castes * 0 (n ¼ 12) 0 (n ¼ 12)BC castes * 35 (n ¼ 229) 35 (n ¼ 217)Agnikulakshatriya * * 39 (n ¼ 130) 39 (n ¼ 119)Pattapu * * 59 (n ¼ 49) 57 (n ¼ 49)Other BC castes * * 0 (n ¼ 50) 2 (n ¼ 49) a

SC castes * 0 (n ¼ 31) 7 (n ¼ 29)b

ST castes * 0 (n ¼ 34) 0 (n ¼ 34)Average * 26 (n ¼ 306) 27 (n ¼ 292)

Notes: *x2 ¼ 30.484; * *x2 ¼ 72.940; aOne Chakkali (BC) respondent residing in predominatelyAgnikulakshatriya village; btwo Mala (SC) respondents residing in a multi-caste agricultural village;p , 0.01; p , 0.01

Table II.Percentage of

respondents possessingsocial networks with

NGOs by casteclassification


765

scenario with two Mala (scheduled castes (SC)) families and one Chakkali (BC)respondent benefiting from social networks with NGOs while the “everyday” socialnetworks possessed by the “fisherfolk” respondents remain largely unaltered. Thisincrease in networks with NGOs is to be expected, as these types of organisations areinvariably involved with the distribution of relief supplies after a crisis event.However, if the NGOs’ attempts at advocating appropriate relief distributionpost-crisis event were successful, one would expect to see a more significant increase inNGO networks, particularly with respondents with low access to the key resources,such as SC and ST classifications (Bosher et al., 2007). The following accounthighlights the important role of local NGOs during the aftermath of a disaster, but alsoillustrates the practical problems of relief distribution:

Some relief was distributed in Tallarevu but there was a big rush, so the people who benefitedthe most were those who had lots of strength, and of course, many old people didn’t receivethat relief. The government provided us with compensation of one thousand two hundredRupees for house repairs. Private organisations such as NGOs were the most helpful becausethey had no partiality, they look at everyone as equal and they provided lots of food, clothesand oil for cooking. At the time those items were the most useful things we could get(Interview 11, Female (scheduled caste) from multi-caste village).

Therefore, the perception of the way relief was distributed by the NGOs has largelybeen positive, with only three respondents out of the 34 interviewees voicinggrievances regarding the appropriateness of relief distribution by NGOs:

I think the NGOs were not useful for all the villagers, they provided help for a limited amountof people, like SC and BC people (Interview 15, Male (forward caste) landlord from multi-castevillage).

The account given above is typical of the other two accounts by respondents frommulti-caste villages, in that concerns over the appropriateness of relief distribution byNGOs were typically based on lines of caste classification. What is key to note here isthat it is difficult to accuse the NGOs of inappropriate relief distribution but the datasupport the contention that where the NGOs do fail is in the restricted manner in whichthey only target single-caste villages and more specifically the fisherfolk(Agnikulakshatriya and Pattapu) communities in this region.

ConclusionsThe scope of this study has been limited to relatively small and specific regions ofcoastal Andhra Pradesh and will undoubtedly need to be expanded to test whether thefindings highlighted below can be generalised across the state and other regions ofIndia. Therefore, the findings presented here should not be seen as conclusive, butrather as a foundation for further research and for the development of practicalinitiatives to understand the effectiveness of NGOs that undertake socio-economicvulnerability reduction activities. Nonetheless, the findings provide an insight into thepotentially important (and under assessed) relationships between NGOs, the recipientsof NGO projects and those excluded from NGO projects. The findings of this researchsupport the assertions of Deepa et al. (2000) who conclude (amongst other issues) that:

. NGOs have only a limited presence; and

. redistributing power is not high on the agenda.

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Deepa et al. (2000, p. 127) state that:

NGOs are not as widely prevalent as sometimes appears. While they do much to supportbasic survival, their track record in accountability to their poor clients is not strong. FewNGOs have successfully addressed local capacity or underlying power and justice issues.Pressure from governments and international donors for quick service delivery coupled withunstable, short-term financing appears to be undermining the capacity of NGOs, where itexists, to work effectively with poor communities.

The NGOs involved in the case study areas have developed programmes that canassist people to reduce their socio-economic vulnerability to large-scale disasters andsmall-scale crises events. The work of NGOs related to task force groups and educationregarding disaster preparedness can provide essential knowledge and augment copingcapabilities. The findings from this study suggests that women are most likely tobenefit from participation with NGOs because:

. women are more likely to actively participate with NGOs than men (becausewomen are predominately targeted by NGOs); and

. women can benefit from increased access to important resources and knowledgethat they may otherwise have been excluded from (Bosher, 2007; Bosher et al.,2007).

However, this paper finds that NGO operations in the case study regions are restrictedto single-caste (relatively homogeneous) “fisherfolk” villages with the result that theirinfluence on the overall reduction of vulnerability in the coastal region is limited.Involvement with an NGO can be a significant factor in determining not only whatresources a respondent can have access to but also importantly what resources areavailable to be accessed by the respondents, particularly women (Bosher et al., 2007).Bosher et al. (2007) have found that marginalised communities (who are typically thelower castes) in multi-caste villages invariably have low access to assets, publicfacilities and political networks and therefore are the most socio-economicallyvulnerable. It is these marginalised communities within multi-caste villages whoshould receive more assistance from NGOs than they currently receive. For that reason,the means through which NGOs target their recipient villages need to be improved,pointing towards an increased focus on reducing vulnerability in the most vulnerablecommunities, irrespective of the caste composition of a village. These improvementscan be encouraged via policy changes by donor agencies and the NGOs themselves,such as:

. Audits by donor agencies should be aimed at assessing the appropriateness ofthe recipient communities selected by NGOs. Evidence from the NGOs thatoperate in the case study villages suggests that this is not currently occurring.Just because a NGO operates in a village that is deemed worthy of assistance bythe donor agency, it does not necessarily mean that the most vulnerable people ofthat village will benefit from the assistance.

. Careful assessment of which NGO interactions have and have not beenappropriate and effective should be conducted by donor agencies and the NGOsthemselves. Nonetheless, it is also important for the donor agencies to keep theirexpectations “real” and achievable.


767

. Governmental and NGO initiatives aimed at targeting specific communitiesbased on caste/caste classification (i.e. fisherfolk, BCs and STs) should bereconsidered. When a single-caste village receives developmental assistancebecause of its caste classification, it is possible that conflict will arise fromneighbouring villages that have not received assistance because they are not thesame caste (irrespective of whether the complainants are perceived as being from“higher” or “lower” castes). This problem will inevitably be exacerbated whenrespondents are selected in a multi-caste village based on their caste/casteclassification, thereby leaving the excluded villagers resentful and leading todisharmony within the village. It is apparent that the NGOs involved in thisstudy are more than aware of this last scenario and it appears to be a factor inwhy they target single-caste villages. Consequently, it is important for NGOs tomake explicit what they actually mean by “community” or “community basedparticipation”; which communities are being included and which communitiesare being excluded.

Notes

1. The methods of data collection included 342 questionnaires, 308 “everyday” sociograms, 294“crisis” sociograms, 34 semi-structured interviews and 12 detailed village cartographicsurveys.

2. A mandal is an administrative section of a district, there are 1,104 in Andhra Pradesh. Alsobe referred to as Taluk or Taluka.

3. It is worthwhile noting that although some cyclones have not crossed the Nellore coastline,the district has been affected by cyclones that have crossed the coastlines of other districts,such as the cyclones of October 1994 and June 1996. The last significant cyclone that crossedthe Nellore coast was in November 1989.

4. Referring to families involved in fishing activities as “fisherfolk” is the acceptednomenclature in governmental and sociological texts within India.

5. The author acknowledges that “caste” is a contested and complex concept and that somecommentators will be at odds with the relatively simple version of caste that has beenpresented in this paper (i.e. not including the influence of jatis or sub-castes). Nonetheless, theauthor also believes that it was an important aspect of the study to ground the concepts thatwere to be used on the perspectives of the respondents, not the researcher, consequently thecast classifications of the respondents were self-defined. If this perspective of caste turns outto be at odds with other research on caste issues, it should not be viewed as simplistic, but asevidence that the real life manifestations of the caste hierarchy can be extremely differentfrom one location to another. Therefore, in practical terms the caste classifications werestratified along the lines of the Hindu Varna caste hierarchy, with FC at the top, followed byBC and SC with ST at the bottom. The information obtained from questionnaire surveys andinterviews made it clear that the “caste classifications” were accepted by the village levelrespondents and were also those used by the NGOs and the local and state level governmentrespondents.

6. The word “community” has a number of different meanings that are context specific (Marshand Buckle, 2001). In the context of this research 94 per cent of the respondents based theirconcept of community on caste/caste category, which may (i.e. a single-caste village) or maynot (i.e. part of a multi-caste village) equate to the whole village geographically (Bosher,2005).

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Corresponding authorLee Bosher can be contacted at: [email protected]


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Commonweal vs. free marketcapitalism: the case of India

and ChinaAppa Rao Korukonda

College of Business, Bloomsburg University of Pennsylvania,Bloomsburg, Pennsylvania, USA

Abstract

Purpose – China and India, increasingly referred to as the world’s emerging giants among emergingeconomies, represent the second and fourth largest economies in the world, respectively. This paperseeks to provide a comparative assessment of these two countries on selected measures on economicgrowth and social development.

Design/methodology/approach – The paper’s approach is a discussion, providing a briefintroduction to the approach taken by India and China in pursuing economic growth and social welfaremeasures. The discussion then focuses on the relationship between economic liberalization and socialdevelopment against a backdrop of relevant concepts and arguments from the literature. Comparativeprofiles of India and China on select dimensions using data from World Economic Indicators and othersources are provided.

Findings – The paper finds that it is clear that there are areas where India can learn from China andvice versa.

Originality/value – The paper illustrates that these two countries offer a potentially rich and usefulcanvas for exploring the social implications of free market capitalism.

Keywords India, China, Economic growth, Free markets


The question of whether commonweal is a natural casualty of free market capitalismhas always attracted intense controversy, ideological conflict and rhetoric. At oneextreme, it is argued that unfettered free market capitalism, by itself, is the means forachievement of rewards consistent with efforts, and in that sense, serves the cause ofsocial justice as measured by the notion of equity rather than equality. At the otherextreme, it is posited that absent conscious planning and intervention by public policymeasures, social welfare would be among the long-term casualties from unconditionalembrace of liberalization of financial systems.

China and India, increasing referred to as the world’s emerging giants amongemerging economies, represent the second and fourth largest economies in the world,respectively. Despite their relatively low per-capita incomes of just $1,740 and 720 as of2005, they represent the fourth and eleventh largest economies in the world at nominalexchange rates. Furthermore, they are both growing at more than three times fasterthan the world average. Thus, these two countries offer a potentially rich and usefulcanvass for exploring the social implications of free market capitalism. This paperseeks to provide a comparative assessment of these two countries on a number of



An earlier version of this paper was presented at the International Conference on Business andFinance, ICFAI University, Hyderabad, India, December 22-23, 2006.

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measures of public spending, business prosperity, infrastructure, and socialdevelopment. Implications for other developing countries are presented.

Schumacher, the celebrated author of Small is Beautiful, once remarked during alecture at Cornell University that the world’s richest countries are the most addicted togrowth. He further offered a stark example to illustrate how growth can be disastrous:If a child grows, it is a good thing; if an adult suddenly starts growing, it could be aserious sign of something gone astray. Thus, the concept of growth needs to betempered with an examination of the accompanying social costs.

Stated differently, the question of free market capitalism paving the way forcommonweal and public good has never been an open-and-shut case; on the other hand,it has been a subject of intense controversy, ideological posturing and rhetoric. At oneextreme, it is argued that unfettered free market capitalism, by itself, is the means forachievement of rewards consistent with efforts, and in that sense, serves the cause ofsocial justice as measured by the notion of equity rather than equality. At the otherextreme, it is posited that absent conscious planning and intervention by public policymeasures, social welfare would be among the long-term casualties from unconditionalembrace of liberalization of financial systems. Lux (1990), in his intriguingly titledbook, Adam Smith’s Mistake: How a Moral Philosopher Invented Economics and EndedMorality, strikes a blow to the foundation of Adam Smith’s core idea of self-interest asthe means of achievement of common good. In Lux’s words:

Smith’s forthright talk of businessmen cheating and oppressing the public seems to stand indirect contradiction to his advocacy of self-interest as the sole principle necessary for theachievement of the public good. The saving grace was supposed to be the “invisible hand” ofcompetition. It was competition that would keep these instincts and “expensive vanities” ofthe merchants, dealers, and landlords in line.... Smith had essentially (p. 83) overlooked thepossibility that self-interest would work to undermine and eliminate competition and thus totie up the invisible hand. It is this outcome of unrestrained self-interest that is thefundamental flaw in any absolute policy of laissez-faire (p. 84).

Thus, even as all developing countries are rushing to jump on to the globalizationbandwagon, it is important to realize that the problems of mankind are primarilyeconomic and social, not financial or political. While the trends towards liberalization ofeconomic policies and integration of financial markets might seem to point toward theultimate triumph of the “magic of the market and free enterprise,” a little reflection willreveal a number of undercurrents, dilemmas, and difficult choices waiting to be resolved.

Such choices and dilemmas cannot be discussed in the absence of a social context. Inthis paper, we use China and India as the primary context for our discussion. Thereason for this choice is clear. China and India, increasingly referred to as the world’semerging giants among emerging economies, represent the large-scale andfast-growing economies in the world. The metaphor of the Elephant and the Dragonare invoked by a number of authors (Korukonda et al., 2006; Meredith, 2007) to refer toIndia and China, respectively. Meredith (2007), in her discussion of these two risingeconomies, labels China and India as “factory to the world” and “back office to theworld”, respectively, and effectively uses them as exemplars to the USA by concludingthat “if inward-facing India and communist China can transform themselves, so canthe United States of America.” The two countries’ transformation from the backwatersof poverty and hunger to the mainstream status of major economic powers is hardly amatter of dispute anymore.

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As Dahlman (2007) points out, despite their relatively low per-capita incomes of just$1,740 and 720 as of 2005, China and India represent the fourth and eleventh largesteconomies in the world at nominal exchange rates. Furthermore, they are both growingat more than three times faster than the world average. It is particularly worthy of notethat since about 1980s, starting with approximately similar per-capita income levels,both of these countries have embraced liberalization of trade, though neither of themdid so with unconditional enthusiasm. Part of the reason for their reluctance lay in therecognition that globalization comes at a social cost. However, as time progressed,India seemed to have shed its inhibitions at a much faster pace and seems poised toembrace market mechanisms with open arms as compared to China, which, in amanner of speaking, seems to have earned the title of being the most capitalisticcommunist country in the world.

India and China thus offer stark examples of countries suddenly moving atbreak-neck pace on the economic growth and globalization bandwagon though theirmeans of adoption have been different. Accordingly, they offer a potentially rich anduseful canvass for exploring enduring similarities as well as shark contrasts inapproaches to governance, development, financial systems, public policy measures,civil rights, and attitudes toward free trade. This paper seeks to provide a comparativeassessment of these two countries on select measures of economic growth and socialdevelopment.

The discussion is organized as follows. First, we provide a brief introduction to theapproach taken by India and China in pursuing economic growth and social welfare.Second, we provide a summary comparison of the two emerging giants on selectdemographic, economic, welfare measures. Third, we discuss the relationship betweeneconomic liberalization and social development against a backdrop of relevant conceptsand arguments from the literature. Fourth, we present comparative profiles of India andChina on select dimensions using data from World Economic Indicators and othersources. Specifically, we focus our discussion on overall GDP growth rates, GDP growthrates by sector, and select measures of social well-being. Throughout the discussion, weattempt to provide an explanation of the source of the differences. Finally, we concludethe discussion with a summary of the analysis.

1. IntroductionOn a purchasing power parity basis, China and India represent the second and fourthlargest economies in the world, respectively, (Henley, 2003; World Bank, 2003). It is nosurprise that they are increasingly being referred to as the emerging giants. Further,although an overarching agenda of overcoming the common problems of poverty,literacy, and healthcare can be discerned behind the drive for development, the twocountries’ gaps in accomplishments and outcomes are no less remarkable than thedisparity approaches.

Much of the discrepancies that one observes in the relative performance of the twocountries can be traced to the differences in ideology, political clout, and historicalfocus on means vs ends. In this paper, we shall attempt to present a comparison ofIndia on a number of dimensions relevant to both financial performance andcommonweal principles.

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2. Means and measures of comparisonCurrent literature comparing India and China reflects a broad diversity of approachesranging from the metaphorical to the statistical, from the qualitative to thequantitative, and from the ideological to the practical. None of these approaches byitself captures the complete story although each will present an interesting and anilluminating part of the overall picture. The following examples are worthy of note:

. In a matter of 15 years, China was able to clear a province of nearly two millionpeople and complete the Three Gorges Dam capable of generating 18,000megawatts of electricity annually – a feat virtually unimaginable in theslow-moving bureaucracy of India (Welch and Welch, 2007).

. China has ten times as many express highways as India and its power costs are40 percent less (Welch and Welch, 2007).

. The magnetic levitation train between Pudong International Airport andShanghai downtown, which also happens to be the world’s first commercialmaglev, takes about 7 minutes to cover the 35 kilometer distance whereas it takesanywhere from 75 minutes to a couple of hours to cover about the same distancefrom Mumbai’s International Airport and Nariman point (Rajwade, 2005).

. China won 65 gold medals in the last Olympics as compared to India’s singlemedal (Rajwade, 2005).

. India’s GDP of $425 billion, foreign exchange reserves of $170 billion, and foreigntrade inclusive of exports and imports $75 billion cannot really hold candle toChina’s performance in these areas (GDP of $1,067, forex reserves of $170 billion,and foreign trade of $260 billion) (Sumbly, 2002).

. In 2003 and 2004, China’s investment in domestic plant and equipment wasalmost equal to India’s entire GDP (Huang, 2006).

. India’s democratic traditions and laissez-faire approach in political and publicpolicy dialog are in stark contrast to China’s track-record in censorship,suppression of dissent, and repression of civil liberties. In the long run, manyconsider this to be India’s “ace in the hole.”

A country’s economic and social performance is a complex, multi-dimensionalconstruct that is difficult to neatly capture in terms of summary variables. With thiscaveat firmly entrenched in mind, it is still useful to review an overall comparativeprofiles of these countries using select financial and social welfare measures culledfrom World Economic Indicators (World Bank, 2005) and other sources (see Acharya,2005 for a detailed discussion).

Figure 1 shows a graphical comparison of economic and demographical variables ofIndia and China. As can be seen, the most significant contrast between the countriescan be seen in the relative emphasis placed on the manufacturing sector, with China’srelative share of GDP from manufacturing being dramatically high in comparison toIndia’s.

Figure 2, which shows a similar comparison on different measures of livingstandards, shows that China is way ahead of India in virtually all measures except forlife expectancy where India still does trail China by some 12 years. In such measures asinfant mortality rate, adult female literacy rate, and malnutrition, India can be seen tolag way behind China.


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Figures 1 and 2 serve a useful purpose as a broad-brush comparison of the twocountries on select financial and welfare measures. Some further drill-down analysis ofthese broad trends in terms of specific measures would seem to be in order. It is to sucha discussion that we now turn.

3. Specific measures3.1 Agricultural infrastructureIn a recent column on dispatches from India, Elliott (2006, p. 51) has this to say aboutIndia’s agricultural infrastructure marked by lack of facilities for refrigeration,regional distribution system or a transportation network:

Here’s a business-school case study waiting to be written: a national distribution system thatguarantees that a third of its goods never make it to market. That has been the problem withagriculture in India – a place that likes to tell the world these days that it is as efficient andgrowth-oriented as China.

Elliott cites an estimate by one of India’s agriculture experts that 30-40 percent ofIndia’s agricultural produce “would rot before it got to market.” The contrast withChina cannot be overemphasized.

Figure 1.India vs China:comparison ofdemographic andeconomic variables

0

5

10

15

20

25

30

35

40

45

Demographic & Economic Variables and Units of Measure [based on Acharya (2005)]

China 12.88 6.09 8.2 39

India 10.64 2.908 3.7 16

Population in100s Millionn for

2003

GDP (PPP) in 1000s Billion $

for 2003

Per capita GDP growth in % for

1980-2004

% Share of manufacturing in

GDP for 2003

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Besides, the obvious role of infrastructure in achieving market efficiencies, the impactof liberalization on agricultural prices is also relevant to the current discussion.

3.2 Agriculture value addedIn contrast to agricultural infrastructure, India has made tremendous strides inagriculture value added per worker. As Figure 3 shows, India’s agriculture valued

Figure 2.India vs China:

comparison of socialwelfare measures

0

10

20

30

40

50

60

70

80

90

100

Variables and Units of Measure

China 49.8 71 87 37 12.1 16.6India 28.8 63 45 87 45.8 34.7

Per capita GNP(PPP) for 2003 in

100s $

Life expectancyfor 2002 in Years

Female adultliteracy rate as %

for 2003

Under 5 mortalityper 1000 for 2003

Under 5 malnutrition as %

for 1995-2003

Poverty ratio (% below $1 a day)for 2000 & 2001

Figure 3.Agriculture value added

per worker: India vs China

Agriculture value added per worker (constant 2000 US$)

0

100

200

300

400

500

1990 1995 2002

China

India


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added per worker has been consistently on the rise, though at a slightly slower pacethan that of China. However, as Figure 4 shows, part of the reason for the improvementlies in the fact that the full potential is far from being realized in either India or China ascompared to more developed countries such as Australia where the agriculture valueadded per worker has been relatively stable. Additionally, India’s protectionist policiesin agriculture, including restrictions on ownership of farmland, have attracted somecriticism with some catch phrases such as “Small might be beautiful, but it also createspoverty.”

3.3 Gross domestic savingsDuring the period of 1990-2002, as Figure 5 shows, the gross domestic savings havebeen pretty much similar for both India and China. The traditional Asian emphasis onthrift, savings can be readily discerned from this pattern, but as the emphasis onconsumption grows, credit-card debt and bankruptcies could reverse the trend in apurely market-driven economy.

Figure 4.Agriculture value addedper worker for 1990, 1995,and 2002

Agriculture Value Added per Worker

0

5000

10000

15000

20000

25000

30000

35000

Year

Val

ue A

dded

per

Wor

ker

Australia 21487 22894 22847

China 245 295 366

India 348 365 383

Japan 19845 20478 26417

Malaysia 3675 3777 4520

New Zealand 22465 24820 29450

Singapore 25090 32239 32267

Thailand 473 485 568

1990 1995 2002

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4. Summary and conclusionThe analysis undertaken in this paper is admittedly preliminary and can be expandedto include a number of other measures of social welfare and economic growth.That said, it is clear that there are areas where India can learn from China and viceversa. As Huang (2006) has pointed out:

China’s hidden weakness is the massive and often centrally planned investments, which areoften less productive than the Indian investments. In the long run, that’s not going to workwithout more open competition, creativity and entrepreneurship. India’s hidden strength isthat the country is already extremely entrepreneurial – but in the informal sector . . .[In India]most of the cars we see on the roads, and many computers in the offices, are assembled insmall, informal factories, outside the law, to avoid the many regulations and taxes that stillcurbs the Indian economy.

The economic progress of China and India, combined with the gradual assertion byJapan of its military profile, the centre of gravity of global politics has shifted fromEurope to the Asia-Pacific. Lessons in doing business in India and China are nowlegion. Gupta and Wang (2007), for example, discuss the experiences of Microsoft inChina and of Metro Group in India to offer lessons for multinationals in doing businessin China and India.

With the tables turned, India and China are now witnessing the world powersjockeying for influence in the region. As the two countries are preoccupied with theirpre-eminent role in the world economy, there is a danger that the issues of humanwelfare could be relegated to the background. Ironically, the potential for such ascenario is more prominent in India rather than in China where political ideology tendsto ensure that issues of public welfare are not completely relegated to the backburner.

Accumulation of resources, political clout, determined public policy at the expenseof civil liberties seem to characterize the phenomenal growth of China whilecommitment to democratic values, exceptional focus on education, and an unrelentingentrepreneurial spirit in the face of remarkable shortcomings of infrastructure seem tohold the key to India’s success. In the long run, one would expect the elephant, to catchup with, if not overtake the quick and efficient dragon. However, whether suchcatch-up will result in the winner’s curse in terms of social costs and commonwealremains to be seen.

Figure 5.Gross domestic savings:

India vs China

Gross Domestic Savings (current LCU)

0

1E+12

2E+12

3E+12

4E+12

5E+12

6E+12

1990 1995 2002

China

India


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References

Acharya, S. (2005), “India is China’s economic equal? Bah!”, available at: www.rediff.com/money/2005/sep/27china.htm

Dahlman, C.J. (2007), “China and India emerging technological powers”, Issues in Science &Technology, Vol. 23 No. 3, pp. 45-53.

Elliott, J. (2006), “Field of greens”, Fortune, October 2, pp. 51-5.

Gupta, A.K. and Wang, H. (2007), “How to get China and India right”, Wall Street Journal –Eastern Edition, Vol. 249 No. 99, p. R4.

Henley, J.S. (2003), “Chasing the dragon: accounting for the underperformance of India bycomparison with China in attracting foreign direct investment”, available at: www.devstud.org.uk/publications/papers/conf03/dsaconf03henley.pdf

Huang, Y. (2006), “China could learn from India’s slow and quiet rise”, The Financial Times,available at: http://yaleglobal.yale.edu/display.article?id ¼ 6887 (accessed January 27).

Korukonda, A.R., Bathala, C.G., Bathala, C. and Afza, M. (2006), “The dragon and the elephant: acomparative study of financial systems, commerce, and commonweal in India and China(2006)”, paper presented at the IV International Conference on Business and Finance heldin Hyderabad, India, December 22-23.

Lux, K. (1990), Adam Smith’s Mistake: How a Moral Philosopher Invented Economics and EndedMorality, Shambala, Boston, MA.

Meredith, R. (2007), The Elephant and the Dragon: The Economic Rise of India and China, andWhat it Means for the Rest of Us, Norton, W.W. & Company, Inc., New York, NY.

Rajwade, A.V. (2005), available at: http://in.rediff.com/money/2005/jan/18guest.htm

Sumbly, V. (2002), “Comparison between India, China not fair”, The Tribune Online Edition,available at: www.tribuneindia.com/2002/20021218/biz.htm#2 (accessed December 17).

Welch, J. and Welch, S. (2007), “Choosing China or India”, Business Week, No. 4026, p. 110.

World Bank (2003), “India: sustaining reform, reducing poverty”, World Bank DevelopmentPolicy Review Report No. 25797, 14 July.

World Bank (2005), World Development Indicators, International Bank for Reconstruction andDevelopment, Washington, DC.

Corresponding authorAppa Rao Korukonda can be contacted at: [email protected]; [email protected]

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Book reviews

The High Performing Entrepreneur: Golden Rules for Success inToday’s WorldSubroto BagchiPortfolio, Penguin GroupNew Delhi2006244 pp.

Globalization and AfterSamir Dasgupta and Ray Kiely (Editors)SageNew Delhi2006443 pp.

Foreign Capital, Inflows to China, India and the Caribean: Trends,Assessment and DeterminamtsArindam Banik and Pradip K. BhaumikPalgrave-MacmillanHampshire2006209 pp.Review DOI 10.1108/03068290710816900

Entrepreneurship, globalization and innovationsIn the first book, Subroto Bagchi, Co-founder and Chief Operating Officer of MindTreeConsulting, an upcoming IT-solutions enterprise, based in Bangalore, India, drawsupon his own experience to offer guidance from the initial stage to the operational level.This includes, according to Bagchi, taking decisions, selecting a team,defining thevalues and objectives of the organizations, charting-out the business plan, managingadversity and building the brand.

Bagchi is convinced that high performance entrepreneurs create great wealth asthey drive innovation. Citing his own company MindTree, he further elucidates thatas entrepreneurship is a creative process, it can deeply be rewarding simply as ajourney itself.

He highlights some lessons, 12 in number, in entrepreneurship from the IndianIT-sector and he sums-up by observing that the great value is born out of the feelingthat an enterprise is like a piece of land we all have been give. Our charter is to createunusual, lasting value out of it – value that nourishes other lives.

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Vol. 34 No. 10, 2007pp. 781-782


This book gives a very good reading. Spontaneous, free flowing and true to thepoints.

The second book, edited by two eminent sociologists, one from India, another fromEngland, emphasized that globalization has far reaching consequences for the worldcommunity. Analyzing the issue from a variety of theoretical and disciplinaryperspectives, the contributors from different parts of the world, address a number ofimportant questions which include:

(1) Does globalization involve integration on a worldwide scale or will there be aleaving-off, or even a reversal?

(2) Encouraged by market forces, will privatization and deregulation of economiesincrease, or will there be a shift in direction, or even a reaction?

(3) Will globalization lead to a new world order?

(4) Is there an alternative to globalization?

With these potential questions in mind, the editors have, very aptly, raised a platformto throw open a debate from the contributors. This edited volume captures the essenceof both the empirical and conceptual reflections, which leads the reader to concludethat the process of globalization is far from uni-linear and there is no turning back.

The third book highlights the facts that revolve round the issues relating to foreigncapital and their inflows, which are large and diverse in the context of both developingand developed countries. While a substantial fraction of foreign capital can beexplained by select economic variables, the country-specific factors account for more ofinvestment inflows in China, India and the Carribeans.

India and China have often been compared in terms of their performance. In recenttimes, foreign direct investment (FDI) and economic growth has been a common focusof comparison between these two countries.

On the other hand, studies on the Carribeans reveal an interesting contrast due to itsclose geographical proximity to the developed economies.

The immense diverse pictures in India, China and the Carribeans enable us toanalyze the subject from different perspectives.

Though it is very difficult to make any predictions regarding the future, one thing isvery clear, the authors claimed. The pace at which changes are taking place in theworld economy, including changes in the market structures, technology, customerpreference and the new product development requires the companies and the countriesas well, respond to these changes. The authors further conclude that by bringing alarge part of their population to the economic market place, Indian China and theCarribeans along with other developing economies will set free their innovationpotential. When this happens, the authors observe, the world will surely be a differentplace.

The book is well articulated, properly chiseled and adds no pepper to the product.There lies the strength of a book on economics.

Ananda Das GuptaGuest Editor, Special Issue on India, IJSE

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