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Industrial growth in small and medium towns and their vertical integration:
the case of Gobindgarh, Punjab, India
by
Amitabh Kundu and Sutinder Bhatia

- Chapter 6 -

6. Conclusions and generalisations The analysis of the phenomenal growth of the steel industry and linked activities at Gobindgarh during the five decades leading up to the early 1990s and its subsequent stagnation, as discussed in the preceding sections, helps in understanding the socio-economic factors behind the process. The question that has often been asked is why a small town, not having any perceptible locational advantage – like being a junction of a transport network, being located on the main railway line, being the node of raw material supply etc. – has successfully attracted the secondary steel sector so as to be known as the "mini steel city" of India. This question was posed directly to mill owners, foremen, supervisors and others. It was revealed that the technical factors like soil or water quality etc., often mentioned as being favourable for re-rolling and furnace linked activities, could provide some explanation. Nonetheless, given the technological advancements of today, natural or technical factors could not have an overriding influence on the growth of this industry. Proximity to the demand centres like Patiala, Jalandhar, Ludhiana, that have a concentration of engineering industry in and around them, can also be considered as a partial explanation to the phenomenon. It can nonetheless be argued that only a fraction of the total production of Gobindgarh is consumed within the region or the state of Punjab. The centres that require finished steel, with which the mill owners and traders of Gobindgarh do business, are located in distant parts of the country. The initial development thrust spurred by incentives provided by the local rulers in the "Princely States" during the British can not be ruled out as having an influence. But that certainly would not explain the growth in the post-Independence period as the town or the district of Patiala did not enjoy any special privilege from the state or central government. What then explains the phenomenal growth in the number of the steel rolling mills and the expansion of capacity by the existing units during first four decades after Independence? Undoubtedly, the industrial environment created in the town due to historical reasons has played an important role in attracting investments in recent decades. Despite inertia of the political system, bureaucratic delays, rampant corruption etc, it seems that the entrepreneurs and government officials concerned with licensing and regulating the operation of the units in this region generally understand and respect the prevailing norms. Entrepreneurs are familiar with the formal and informal requirements for setting up a new unit and expanding its capacity, and these are met mostly through a number of intermediaries. If these were to be undertaken independently by the entrepreneurs, it would turn out as very expensive, particularly for the smaller units. The system of subcontracting tasks to middlemen is organized with so much "efficiency" that most mill owners choose to deal with middlemen rather than having direct contact with the government officials for obtaining government clearances, whenever needed. The system of functioning through middlemen or brokers exists not merely for completing the formalities in setting up new units or augmenting the capacity but also for routine, day to day operations. Purchasing raw materials, hiring workers, selling the finished product, for example, become very smooth once the middlemen are engaged in the operations. Even the bulk purchases of the semis from primary producers, including the integrated steel plants are done through a chain of agents. Similar efficiency considerations force the entrepreneurs at Gobindgarh to bring in these agents or brokers for disposal of the finished products. The availability of credit at a reasonable cost in the town for buying inputs or meeting other working expenses as well as making small investments, points towards another local level institution that immensely facilitates the production process. Short-term loans are available at short notice at low interest rates without any collateral or legal formalities. It is surprising that the rate of interest in lean seasons is less than that of institutional sources. During the peak seasons, too, the rates are more or less comparable to those charged by the banking system, if the cost of meeting the formalities for getting the loan, numerous visits, delays, illegal gratification etc. are taken into consideration. The informal credit system thus functions parallel to the formal system with a similar or a higher degree of efficiency. It is indeed true that this informal system is not open to all since loans are given only to people with reliable credit history or a definite reputation in business. Credits are advanced generally on the strength of the introduction or guarantee given by known persons. Caste, community and family based linkages often play an important part in these dealings. Advancing loans to select people covered by an information and kinship network understandably reduces the cost of transaction and minimizes fraudulent practices. The very fact that this informal credit system has survived the test of time, despite a few cases of default in recent years, points out its importance even in the period of globalization. The argument advanced by several international agencies that the success of globalisation in a less developed country depends on the speed with which modern trading and banking institutions can be created and new values injected into the business behaviour, must be taken with a certain amount of scepticism. Indeed, many of the institutions built up in India over a long period, have played an extremely useful supportive role in the organisation of production and industrial development in small and medium towns. Building "a new institutional system based on modern values" as attempted in some of the East Asian countries for the success of capitalism can, therefore, be not only expensive but also counter productive. There is no reason why the information available to the financing agents through the informal network about potential borrowers regarding their credit worthiness must not be used. Also, the social pressures that can be effectively exerted within a group can lead to timely repayment of instalments and be an effective deterrent to default. It is true, however, that this informal credit system is not open to all and functions on the basis of the principle of exclusion. It is here that the state has to step in and see that those who do not belong to any of the groups for whom finances are available through the traditional institutions are brought within the system. Public institutions can take care of the credit needs of this section of population including that of the new entrants. One important aspect of the informal institutional system in the town is the sharing of the risk of the production process among a large number of individuals. In the "unholy nexus" between traders or money lenders that existed in the country during the colonial period or exist even now in the rural areas of the backward states of Bihar, Uttar Pradesh, Orissa etc, the interest of the financiers is to see that the borrowers fail in their business. This is not so in Gobindgarh. There is no interlocking of credit, land and product markets so much so that there is a conflict of interest of the entrepreneur with that of his money-lender. Indeed, here, the latter’s interest lie in getting the instalments of interest along with the principle amount. It is seldom that the financier would act in order to make borrowers default in payment or wish a calamity on him. This is because the former knows that the legal battle to recover his dues in case of default may not be very rewarding. As a consequence, if the entrepreneur fails in his business, there is a risk of the financier not getting his money back due to the informality of arrangement. Given this situation, it is in everyone’s long and short-term interest that the system functions and the codes or behaviour are respected by one and all. Risk sharing takes place between the entrepreneurs and foremen as well. The sub-contracting arrangement places a certain amount of risk on the foremen. The latter would have to suffer a loss if the costs of material conversion go beyond the stipulated level, due to exigencies. Foremen, therefore, ensure that there is no labour trouble, no breakdown of machinery, immediate replacement of parts and uninterrupted supply of raw materials. It is observed that most foremen are reasonably well off and willing to share the entrepreneurial risk. Many are willing to get a share of the profit rather than a fixed salary. Indeed, there are few occasions when the foremen have to suffer losses due to problems in the production process. In situations when the costs go up higher than that mutually agreed upon or prevailing in the market, a scheme for apportionment of the deficits is worked out. This is generally quite reasonable and acceptable to both the parties. The risk sharing system thus brings in additional entrepreneurs and thereby injects a dose of efficiency in the production system. The allocation of work and pooling of earning by the workers attached to a thekedar, to be distributed among them equally at the end of the week is a no less significant institution, which enables risk sharing at the lowest rung. The emoluments, received by a casual worker, thus, do not depend on the volume of work done by the person individually, but are based on the average level of work performed by the group as a whole. This is similar to the system of collective farming based on communes, introduced in China in the early phase of the Communist Regime. Unfortunately, the system came under tremendous pressure as farmers lost motivation for work and supervision became extremely difficult. No major problem has, however, been encountered in the thekedari system at Gobindgarh despite there being no legal approval or administrative backing for it. The way accounts of the earnings are kept and distributed and decisions with regard to inclusion or exclusion of members are taken by the groups of illiterate workers is indeed very impressive. The real cause for concern is, however, the conditions of skilled and unskilled labourers working under supervisors. Does the system of sub-contracting to the middlemen – from the mill-owner to foremen and from foremen to supervisors – reduce the wage payment to the working class? Does it result in greater vulnerability and job uncertainty? Does it mean more hazards at work, greater risks of accidents and no or low compensation in case of casualty? The analysis in the paper indicates that the situation is indeed extremely disturbing in all these areas of concern. Back: Table of Contents Continue: Bibliography © UNESCO 2001 The opinions expressed in this publication are those of the author and do not necessarily reflect the views of UNESCO.

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