West Bengal’s Industrial Decline: A Crisis of Capital Creation

Manikantha Nataraj | March 22, 2022 | Published Online

Since independence, the state’s industrial growth has faced a gradual decline which never found back its grip till date (barring a slight improvement in the investment from 2000 to 2005). In the last decade (2011-2016) the compound annual growth rate of gross value added for West Bengal was 2.7 per cent whereas that of all India was 6.4 per cent. Further, according to the Annual Survey of Industries (ASI), the state slipped from 9th rank at All India level to 11th rank in terms of net value addition in the last decade. However, even in the early phase after Independence (1948-1958), West Bengal’s manufacturing industries recorded a compound annual growth rate of 3.3 per cent whereas, that of all India was 2.8 per cent. Standing in the middle of 21st century, West Bengal’s industrial legacy appears as a talk of the antiquity when we see the closed shutters of the jute mill factories and the chemical plants.  

The common misperception behind this gradual decline in the industrial performance is the flight of capital from the state owing to the unattractive government policies towards the large capitalists. But it has been argued extensively elsewhere that the role of independent central governments of India was effectively similar to that of the British Government as far as exploiting the resources of the fertile and the mineral rich state of West Bengal is concerned. In this regard, it is essential to reiterate the findings of eminent scholars like Amiya K Bagchi who have highlighted the detrimental effects on the state of freight cost equalisation policy and the licensing re-distribution strategies to reshape the economic contours of the country by the then Congress Government till the 1970s.  

At this outset, this article seeks to identify the potential reasons behind this industrial crisis in West Bengal, with an emphasis on the industrial performance in the last decade. The predominant notions are twofold: first is the above-mentioned coordination failure between the Centre and the state government and, second is the lack of a comprehensive industrial policy since 1996. It should be highlighted that these factors resulted in a crisis of capital creation, which is the underlying economic reason behind the industrial crisis of West Bengal.

Particularly the following three issues are highlighted here. (1) A decline in the formation of fixed assets for the formal sector firms. (2) This is accompanied by a gradual increase in outstanding loans for the formal sector firms. (3) Prevalence of informal firms in the sector who are suffering from access to capital both in terms of fixed assets and loans. 

Crisis of Capital Creation for the Formal Sector Firms 

Creation of capital is central to industrial growth. This capital is the source of investment for the firm to generate output. Capital comprises of fixed and current capital. Fixed capital comprises of plants and machineries, lands and buildings which are durable and can be used for multiple rounds of production. On the other hand, current capital is the liquid working capital which is non-durable and gets completely utilised with the end of each round of production. In other words, fixed capital indicates the future potentiality to convert the existing capital stock to reinvestable flow of capital, necessary to sustain in the long-run. Current capital indicates the day-to-day operating capacity of the firm. According to ASI, from 2011 to 2017, the average annual growth rate of the current capital for the firms in the formal sector is negative 0.09 per cent in West Bengal. On the other hand, that of net fixed capital is an astounding negative 147 per cent. These figures reflect a twofold crisis for the formal sector firms, first is the crisis of creation of liquid capital which will result into reduction of retained earnings, a potential source of immediate investible funds. Second is a dangerously grave crisis of creation of durable assets. This indicates that the registered manufacturing firms in West Bengal is facing a serious concern of long-term sustainability as they are failing to add machineries and equipment in their assets and also losing the value of their existing plants and machineries. This will eventually hinder the future capacity to generate surplus for investment purposes.      

One would expect that this should reflect in a shrinkage in number of factories. However, in the last decade the registered factories have increased from 7856 to 8901 with an average annual growth rate of 2 per cent. Although this is counterintuitive, but this phenomenon can be explained by the rising outstanding loans, to which we move next.  

Creation of Capital Through Liabilities     

The failure to create capital self-sufficiently by the registered firms lead the firms to rely on borrowing with interest which results into a burden of outstanding loans, to maintain operating capital and production activities. As of 2015, the total outstanding loans for the registered firms in West Bengal is more than 300 crore rupees. This mechanism to generate capital is not sustainable. Since, loans are liabilities that needs to be repaid, it is essential to ensure that the firms are being able to generate revenues at a rate faster than the accumulated loans which will make them capable to repay their loans. However, calculations from ASI data shows that the average annual growth rate of outstanding loans from 2011 to 2016 is an astounding 9 per cent whereas that of gross value added is 4 per cent. The average growth rate of revenues of the firms has been rising at an even lower rate of around 2 per cent. So, it depicts a situation of vicious cycle of credit dependency, where to repay the loan, the firms have to rely on more loans. The inability of the firms to create capital even after external support through loans is a serious concern that needs immediate attention. Unfortunately, the favourite policy of the current central government to privatise the existing public sector units, does not add to creation of any new capital. On the other hand, it reduces the ability of the government to generate capital and provide a valuable support to the distressed sector. The need of the hour is to increase public investment in order to regain the lost stock of fixed capital. 

Twin Problem for the Informal Sector

Till now, the discussion was confined to the registered and at least theoretically speaking, a comparatively secured formal sector. However, West Bengal’s manufacturing sector is predominantly informal in nature where the firms are not registered by the government. Hence, these firms do not have access to any government securities and support, making them vulnerable to market fluctuations. As on 2015, the informal firms accounted for more than 95 per cent of the total manufacturing firms in the state. These informal firms also host 93 per cent of the total workers working in the manufacturing sector. According to the Unincorporated Enterprise Survey (2015-16), 99 per cent of the informal enterprises possess plants and machineries of value less than Rs. 25 lakh which makes them micro enterprises even in the previous definition of MSMEs. These informal firms who are almost equivalent to the entire manufacturing sector of the state, accounts for a paltry 0.01 per cent of the total gross capital formation of the state. Further, they account for 0.02 per cent of the total gross value added per enterprises of the state. So, it can be said with certain conviction that whatever crisis of capital creation the formal sector faces, the informal sector, being smaller in capital size and also having a lower share of income, the problems are even worse. Further, unlike the formal sector these firms also do not have access to loans as a last resort for operating capital. As per the unincorporated enterprise survey, 2015-16 only 7 per cent of the informal firms got access to loans from any external sources, amounting for a paltry 0.003 per cent of the total outstanding loans of the sector. More importantly not even 1 per cent of the informal enterprises receive any financial support from government, central and state combined. Thus, the informal sector faces a twin crisis of creation of capital and access to credits for acquiring the necessary capital required for investment and generation of surplus. 

More Loans and no Concrete Policy: The Source of Industrial Decline in West Bengal 

According to a 2021 statement of Reserve Bank of India, West Bengal is one of the highest indebted states in India. Only within forty-one days between December 2021 to January 2022, West Bengal has taken loans three times from the open market which is worth around thirteen thousand crore rupees. Besides, in November 2021 and January 2022 West Bengal also took loan amount of 135 million dollars and 125 million dollars from world bank to finance electricity supply and provide social protections services respectively. These loans taken, as have been argued by the State chief minister, is to overcome the adverse consequences of the Covid 19 pandemic. At this outset it is necessity driven, however, it also reflects the dire situation of the state’s inability to create capital self-sufficiently, which is hurting the state at-least for over a decade now. These recent sets of loans acquired by the state reflects the knee-jerk attitude of the government towards resolving the crisis. The lack of capital is addressed by getting further indebted, thus pushing the immediate crisis to the future without actually resolving it. Most of the industrial policies of the state since 2013 has been directed towards marketing and advertising self-employed small and medium enterprises through the flagship programme of Bishwa Bangla. It is no doubt important, but it does not address the elephant in the room. Marketing can increase the sales revenue provided the producers have the capacity to produce it. Without addressing the crisis in production and capital formation, solely focussing on marketing is like putting a cart before the horse. Another flagship programme in this regard is the cash transfer scheme which goes by the name of Shilpa Shathi. Here the problem is two sided. On the one hand, the cash is aided by loans which reflects the impotency of the government to support the industrial sector independently. On the other hand, this cash transfer is not complemented with any sound policy to ensure the conversion of the loans to revenue and retained earnings. The need is to reduce the dependency on loan and ensure targeted policy intervention towards capital formation. It does not mean that the state should immediately stop acquiring loans, because without the liquid cash infused externally into the economy, the state’s economic activity can potentially collapse altogether. But the government has to ensure that the acquired loans are utilised appropriately so that they can break free from this indebtedness in the future. This is only possible if the government takes more proactive steps in capital formation, production, and revenue generation. Mere cash inflow without any coordinated plan and implementation programme can only aggravate the crisis.

In lieu of Conclusion: Aiming at a Concrete Industrial Policy

There has been a popular narrative that left government’s anti-business policy and the rising labour unrest has acted as a disincentive for entry of capital in the state. However, this argument stands untenable because of the following reasons. Firstly, it is under the regime of left government, the state adopted the pro-business industrial policy of 1996. This policy also came as the whole country was going through the neoliberal reforms. Even that failed to revive the sector, although a sporadic phase of jobless growth was witnessed from 2000 to 2005. Secondly, West Bengal eventually lost its crown as the leading state in industrial production to Maharashtra which have also faced labour movements and unionisation. Besides, scholars such as Zaad Mahmood have highlighted that labour organisations and trade union militancy has significantly declined over the years in the state. Another set of arguments highlights a rigidity in the labour laws and insufficient liberalisation of the state as the main cause for the industries to falter. The current change in the labour laws to ‘flexibilise’ the formal sector is based on this strand of argument. However, since majority of the state’s enterprises are in the informal category, they do not fall under the purview of any government regulation or supervision, with no provisions to form unions or get support from the government to settle any dispute between the employer and the employees. In other words, the informal sector already meets the criteria for a liberalised sector with minimum government intervention. At this background, it becomes evident that, it reflects the incapability of the neo-liberal strategy of foreign direct investment and disinvestment of public sector units to revive the sector. 

From 2011 to 2019, according to the Employment and Unemployment Survey and Periodic labour Force Survey, the employment in the manufacturing sector also fell from 23 per cent to 18 per cent. The typical argument that industries are over time becoming more capital intensive, thus resulting into a labour displacing effect, is untenable, given the industries in West Bengal, remain with low capital intensity in comparison to many States. Adding to this, capital intensive production techniques require the capacity to create and accumulate capital. This article has argued that the crisis of the industries in West Bengal lies in the crisis of capital creation itself which makes this argument of labour displacing effect even less tenable, if not completely refutable. 

Considering that West Bengal is a state with the highest number of micro and small scale enterprises (MSMEs), comprising of 11 per cent of the total country’s MSMEs, the crisis of the MSMEs will inevitably reflect in the crisis of the entire manufacturing sector. As already argued above, these MSMEs, being the reflection of the state’s informal non-farm economy, face the twin crisis of lack of capital creation and unavailability of loan advances. The consequence of this ‘petty production’ of the MSMEs is reflected in the fact that most of these enterprises are home-based enterprises where the enterprise is located either in their own dwelling unit or adjacent to it. These enterprises are run by themselves or unpaid family workers. According to the periodic labour force survey (2019), 52 per cent of the non-farm sectors are home-based enterprises and 95% are working with less than 6 workers. The average daily returns of these workers are Rs 3867, which is 70% lower than the daily minimum wage of Rs 373 of the state. These workers, falling into the category of self-employment covers 48% of the total states labour force and 58% of the state’s rural labour force. In the current regime, both state and centre, have been formally adopting a policy phase, where self-employment is seen as a modern ‘entrepreneurship’. However, the reality of the state reveals that these self-employed workers are struggling to generate enough returns to meet their standard of living, leave aside generating retained earnings or operational surplus to make their enterprises sustainable. Due to lack of capital, they are compelled to rely on themselves and family members to work for the enterprise as a necessary strategy to avoid the cost of wage required for hiring workers. This adds a disproportionate burden towards the female members of the family as their engagement with the business coupled with the conservative patriarchal norms adds extra responsibility on them over and after taking care of the family and doing household activities necessary for reproduction of labour power. 

The article reiterates and highlights the need to create a sound industrial policy with a specific focus on creation of regional capital by empowering the MSMEs. There is an utter need to re-evaluate the potential of public investment, rather than provision of loans in the MSME sector. With a proactive and progressive intervention from the government, the capacity of the large enterprise can be utilised to compliment the MSMEs. This will ensure a sustainable source of capital creation and would also create a potential avenue for decent jobs. 

Further, as industrial policies largely lie in the domain of central government, which is vehemently going for privatisation of the public resources and systematically diluting the state’s capacity to revive the sector, an active intervention from the state government, to keep the state’s ability to support the marginalised industries alive, is of upmost importance. Unfortunately, all efforts of the current TMC government is getting drained in repackaging and advertising the past declared schemes, where there is not even a mention of this long-lasting crisis of capital creation in the industrial sector, let alone any concrete policy solution to address it. A populist regime often relies on knee-jerk schemes while reinforcing the crisis of neoliberal times without actually addressing the structural crisis. TMC government unfortunately is failing even to become a populist welfarist government, as the proposed industrial schemes are binding millions of small and marginal enterprises to an endless loop of credit and the so-called cash transfer is meagre as the levels of earning of the petty production sector workers have declined to an astoundingly low level. Government cannot shy away from taking a much more proactive and concrete role in creation of capital and participation in production activities. They need to actively participate in production activities and ensure planned intervention in capital formation and revenue generation. Acting only externally through cash transfer schemes and credit advancement is inadequate and will aggravate the crisis even further.     

About Author

Manikantha Nataraj is a Research Scholar at the University of Strathclyde, Glasgow, UK. Correspondence at manikanthanataraj@gmail.com.  

References

Bagchi, A. K. (1998). Studies on the economy of West Bengal since independence. Economic and Political Weekly, 2973-2978.

Mahmood, Z. (2016). Trade unions, politics & reform in India. Indian Journal of Industrial Relations, 531-549.