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ISSN 0306-8293
Volume 34 Numbers 9 and 10 2007

International Journal of

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

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International Journal of ISSN 0306-8293

Social Economics Volume 34

Number 9
2007

Special Issue on India: Part 1

Guest Editor
Ananda Das Gupta

Access this journal online _________________________ 575

CONTENTS
Editorial advisory board __________________________ 576

Ethics and values in Indian economy and business

P. Kanagasabapathi ____________________________________________ 577

Financial development, trade and growth triangle:

the case of India
Salih Turan Katircioglu, Neslihan Kahyalar and Hasret Benar _________ 586

Economic size and performance of dispersed and

clustered small scale enterprises in India: recent
evidence and implications
M.R. Narayana ________________________________________________ 599

Empirical analysis of the relationship between total

consumption-GDP ratio and per capita income for
different metals: the cases of Brazil, China and
India
Antonio Focacci _______________________________________________ 612

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 Social responsibility in India towards global compact
CONTENTS approach
continued Aruna Das Gupta ______________________________________________ 637

Critical evaluation of growth strategies: India and

China
Parikshit K. Basu ______________________________________________ 664

Enhancing competitiveness of India Inc.: creating

linkages between organizational and national
competitiveness
Sanjib K. Dutta________________________________________________ 679
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IJSE EDITORIAL ADVISORY BOARD
Dr James Alvey Professor Stylianos A. Sarantides
34,9 Massey University, New Zealand University of Piraeus, Greece
Dr Josef Barat Professor K.K. Seo
Minister of Transportation, São Paulo, Brazil College of Business Administration, University of
Professor Y.S. Brenner Hawaii at Manoa
Department of Economics, University of Utrecht, Professor Udo E. Simonis
576 The Netherlands WZB Science Centre, Berlin, Germany
Professor Tan Chwee-huat Professor Clem Tisdell
Faculty of Business Administration, National University of Queensland, Australia
University of Singapore Dr Matti Viren
Dr Floreal H. Forni University of Turku, Finland
Centro de Estudios e Investigaciones Laborales del Professor Jimmy Weinblatt
CONICET, Buenos Aires, Argentina Department of Economics, Ben Gurion University,
Professor Patrick McNutt Israel
Patrick McNutt & Associates, Dublin and Visiting Professor Zhang Wenxian
Fellow, Manchester Business School, UK Fudan University, Shanghai, China
Dr Daniel O’Neil Professor Laszlo Zsolnai
Department of Political Science, The University of Director, Business Ethics Centre, Budapest
Arizona, USA University of Economic Sciences, Hungary
Professor Doktor Manfred Prisching
Karl-Franzens-University, Graz, Austria

International Journal of Social

Economics
Vol. 34 No. 9, 2007
p. 576
# Emerald Group Publishing Limited
0306-8293
 The current issue and full text archive of this journal is available at
www.emeraldinsight.com/0306-8293.htm

Ethics and
Ethics and values in Indian values
economy and business
P. Kanagasabapathi
Tamil Nadu Institute of Urban Studies, Coimbatore, India 577
Abstract
Purpose – This paper seeks to give an idea about the role of ethics and values in the Indian economy
and 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 discussions
related to the earlier periods. Studies by the author and other scholars are used to analyze the
contemporary situation.
Findings – Ethics and values have guided the Indian economy and business since ancient times. With
the large-scale destruction of the native systems in the eighteenth century, and the failure to recognize
and revive them after independence, ethics and noble values ceased to guide the economic and business
systems. At the local business and society levels, higher human qualities such as help, faith-based
business 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 and
values 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, faith
and 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 wealth

India is an ancient nation. A wrong notion prevails that ancient India was concerned only
with spiritual pursuits and that the attention given to economic activities was insufficient.
But this is not borne out by facts. Archaeological evidences, observations and writings
indicate India as a prosperous and highly performing economy, with people engaged in
diverse productive activities. One could see scriptures and books from different parts of
the country emphasizing the significance of creating wealth. Arthashastra, considered to
be the oldest book on economics in the world, and written about 2300 years ago, said: “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 are in danger of
destruction” (1.19.35,36). Thirukkural, written by the Tamil sage Thiruvalluvar more than
2300 ago, went to the extent of compelling people to earn wealth. (Couplet 759) It also
underscored that a country should have enormous wealth (Couplet 732).
Business historian Agarwala (2001) has noted that India was actively participating
in the international trade since ancient times as a significant trading nation. Maddison International Journal of Social
(2003) shows that India’s share of world GDP was almost one third during 0 CE, and Economics
Vol. 34 No. 9, 2007
India maintained her economic leadership for more than 16 centuries subsequently. pp. 577-585
The prosperity of India seems to have continued almost till the end of the eighteenth q Emerald Group Publishing Limited
0306-8293
century. DOI 10.1108/03068290710778606
IJSE Ethics and values as the basis of all economic activities
34,9 The Thirukkural pointed out that a disease free situation, wealth, fertile lands, happy
life 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 their
activities. The rulers were advised to ensure that different activities were conducted
ethically. Hence, one could notice a higher ideal in all the economic activities of the
578 ancient society which continued almost till the beginning of the nineteenth century. Let
us take for example, agriculture. Taking the case of Chengalpattu region in the State of
Tamil Nadu in the mid-eighteenth century, Bajaj (2001) points out that the farmers
cultivated rice achieving world class production and productivity. But the objective of
the 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 of
food was part of life in the society. Bajaj explains the noble practice of sharing
of agricultural produce in the following lines. To quote:
. . . striking feature of the Chengalpattu information is the extensive sharing of the produce
that was practised then. The sharing arrangements of the Chengalpattu society covered
almost 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 and
sharing of food. The classical texts unanimously insist that abundance of production
and sharing is the essential condition of Dharma. For classical India, a state or a society
tolerating the hunger of even a single individual commits an unthinkable sin. This discipline
of 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 and
sharing of food was insisted as the essential condition of Dharma, the noble ideal that
governs human life in India. The next point is the emphasis on sharing of produce, and
the discipline of taking care of not only human beings, but also animals, birds and
insects. The rulers in those days saw to it that those who traversed through their lands
were provided with good food and staying arrangements. In this connection it is worth
reading the extracts of the letter written by the Sarfojee Maharaja (King) of Thanjavur
in Tamil Nadu in 1801, on the arrangements made for food in the rest houses for
travelers:
All travellers . . . pilgrims of every description . . . are fed with boiled rice; those who do not
choose to eat the boiled rice receive it unboiled with spices, etc. These distributions continue
till midnight when a bell is rung and proclamation made requiring all those who have not
been fed to appear and take the rice prepared for them (Bajaj and Srinivas, 2001).

Inculcation of ethics and values through teachings and books

Even while encouraging wealth creation, the ancient Indian society emphasized ethics
and higher principles. The texts and literature exhorted people to follow higher
principles, while earning wealth and doing business. They cautioned people to avoid
making wealth through wrongful methods. Ancient India emphasized the significance
of earning wealth through proper methods in all possible ways, through texts,
teachings of the sages and common sayings in the local languages. Thiruvalluvar had Ethics and
allotted a separate chapter in his classic, entitled “means of wealth.” Thirukkural said: values
“For those who earn wealth through right means, virtue and happiness follow”
(Couplet 754). It advised that one should avoid using wealth earned without human
considerations and unfair methods (Couplet 755).
The Jainese texts advised their community men “to follow truthful and peaceful
means of earning wealth.” Jain (2001) notes: 579
A large number of traders in western India during the eleventh – thirteenth centuries were
Jainas. They were exhorted by their teachers and preachers to follow truthful and peaceful
means 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 a
merchant should neither weigh less nor charge more. He should deliver the goods of the same
quality as seen and approved by the customer, and should never indulge in adulteration.
Fair practices were advocated as basic principles of trading. Arthasastra noted the
following among the principles of fair trading:
.
Both locally produced and imported gods shall be sold for the benefit of the
public (2.16.5).
.
When there is an excess supply of a commodity, a buffer stock shall be built up
by paying a price higher than the prevailing market price. When the market price
reaches the support level, the buying price shall be changed according to the
situation (2.16.2, 3).
.
When there is a glut in a commodity, its sale shall be canalized (through state
controlled 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 the
benefit 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 constantly
in demand; these shall (be made available at all times and) not be subjected to
restrictions when they may be sold (2.16.7).

Role of the society

Ethical principles and higher values were taught and basic norms were advocated in
the society. The society at different levels functioned as self-regulatory organizations
and involved itself to maintain the basic norms. For example, the villagers were
involved to take care of the merchandise of the traveling merchants so that trade could
continue without disturbances. Arthasastra noted:
Traders may stay inside villages after letting the village officers know of the value of their
merchandise. If any of these is lost or driven away, the village headman shall recompense the
trader, 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 the
travelers, including those with merchandise. Well-defined systems were in place to see
IJSE that those who traveled were not allowed to suffer any expenses, including the carriage
34,9 of 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 state
and the society with regards travelers in Bengal. To quote:
The traveller, either with or without merchandise, becomes the immediate care of the
580 Government, which allots him guards, without any expense, to conduct him from stage to
stage; 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 the
guards of the next, who, after interrogating the traveller as to the usage he had received in his
journey, dismissed the first guard with a written certificate of their behaviour and a receipt
for the traveler and his effects, which certificate and receipt are returnable to the commanding
officer of the first stage, who registers the same and regularly reports it to the Rajah. In this
form the traveller is passed through the country; and if he only passes he is not suffered to be
at any expense for food, accommodation, or carriage for his merchandise or baggage; but it is
otherwise if he is permitted to make any residence in one place above three days, unless
occasioned by sickness, or any unavoidable accident. If anything is lost in this district, For
instance, 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 orders
immediate publication of the same by beat of tomtom, or drum.

Role of the government

The 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 the
society at large. Any misuse or exploitation by the merchants and traders was
considered seriously punishable. The government officials intervened in the market
whenever it was considered necessary in the larger interests of the society:
The testimony of Megasthenes, corroborated by the Arthashastra, shows that in Mauryan
times prices were regulated by market officials. The latter text suggests that, as a further
effort at maintaining a just price, government officers should buy on the open market when
any staple commodity was cheap and plentiful, and release stocks from government stores
when it was in short supply, thus bringing down the price and making a profit for the kind
into the bargain (Basham, 2001).
Thus, it could be seen that moral, social and state mechanisms were used to see that
economics and business worked in the overall interests of the society.

World wide appreciation of the fair business practices and character

of Indians
We could see different scholars and visitors from outside repeatedly emphasizing the
higher human qualities that prevailed among people. Basham had recorded his feelings
of appreciation for these qualities through the following words:
India was a cheerful land, who’s people, each finding a niche in a complex and slowly
evolving social system, reached a higher level of kindliness and gentleness in their mutual
relationships than any other nation of antiquity.
The higher human qualities extended beyond personal relationships to the society at
large. Basham had underlined this aspect when he wrote:
 . . . our overall impression is that in no other part of the ancient world were the relations of Ethics and
man and man, and of man and the state, so fair and humane. In no other early civilization
were slaves so few in number, and in no other ancient law book are their rights so well values
protected as in the ‘Arthasastra’. . . To us the most striking feature of ancient Indian
civilization is its humanity.
Evidences indicate that a fair and humanitarian approach guided the lives of people in
all their activities, including those related to economics and businesses. 581
The conduct of Indians in activities related to business and trade seems to be highly
fair. Quoting sources, Jain (2001) shows us as to how the foreign merchants preferred to
do business with Indians mainly due to their character, helpful tendencies and
value-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 from
foreign travellers. Al Idrisi tells us that a large number of Muslim merchants visited
Nahrwara (Anahilavada) because the people of the town were “noteworthy for their
excellence 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 Polo
bestows yet more generous praise on the merchants of Lata, whom by a curious mistake he
calls Abraiaman or brahmanas. He says, “you must know that these Abraiaman are the best
merchants in the world, and the most truthful, for they would not tell a lie for anything on
earth,” and “if a foreign merchant who does not know the ways of the country applies to them
and entrust his goods to him, they will take charge of these, and sell them in the most loyal
manner, seeking zealously the profit of the foreigner and asking no commission except what
he pleases to bestow. These observations of the foreign travellers may reflect the general
ethos of the mercantile community in western India.”

Decline of the economy and the native mechanisms

The Indian economy suffered serious setbacks since the eighteenth century. Though the
decline 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 the
eighteenth century. Native systems and practices, especially at the administrative levels,
were replaced with newer systems due to the colonial rule and the subsequent changes in
the approach of the rulers. Looking at the situation, Mahatma Gandhi was compelled to
note: “The foreign system, under which India is governed today, has reduced India
to 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 the
economy and changes in the structure and attitudes of the state.
When India got the freedom to frame her policies in 1947, the ruling sections opted
for the western administrative and economic systems. As a result the native Indian
systems that guided the destiny of this ancient nation could not become the pillars of
the modern structure. Subsequently, both the socialistic and the market capitalistic
approaches have neglected the higher ethical orientations of the native Indian systems.
As Korten (1998) has noted both the neo-Marxian as well as neoclassical economists
have advanced experiments that did not have a clear vision. Korten writes:
“Both advanced social experiments on a massive scale that embodied a partial vision of
society, with disastrous consequences.”
In the ancient system, villages were “little republics” with codes of conduct and norms
and systems. But the modern state took away most of their authority and legitimacy.
IJSE In the present circumstances, a system could be implemented only through the state
34,9 mechanism as the native systems have been largely ignored and defaced; but
unfortunately the state is also losing its influence in the market driven scenario. The
influence of the society has become weak in the face of the powerful markets. So the local
societies cannot do much even when they prefer ethical modes of functioning, as the
collective decision making and control lies elsewhere. In a different context, Soros (2004)
582 noted:
Communism abolished the market mechanism and imposed collective control over all
economic activities. Market fundamentalism seeks to abolish collective decision making and
to impose the supremacy of market values over all political and social values. Both extremes
are wrong. What we need is a correct balance between politics and markets, between rule
making and playing by the rules.
As a result there is no legitimate and authoritative system at different levels to
advocate 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 the
introduction of the policies of globalization, more unethical practices have been allowed
into the system in the name of free trade. Modern economic theories emphasize profits
leaving ethics, and money ignoring morals. The ancient economic principles no longer
guide the affairs of the state administration. This is the sad state of affairs in the nation
that emphasized economics through ethics. India was the nation that showed the world
that a country be prosperous even while following ethical principles. India’s economic
superiority in the earlier centuries was achieved through her own efforts, without
exploiting other nations at any time in the course of her long history. It was through
superior products, quality services and fair practices. The noted Gandhian economist
Kumarappa (1997) had earlier noted that Indian civilization could survive so long
because it was built on the principles of altruism and non-violence.

Failure of the state

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

Higher values in contemporary business transactions

Studies conducted in different centers dominated by small and medium enterprises,
including the industrial and business clusters, show the existence of basic
norms, value-based practices and faith-based transactions in varying degrees.
From time immemorial, Indian culture advised people to treat even strangers as their Ethics and
relatives. As a result different sections of people from a wide variety of backgrounds values
live in the society, with mutual respect towards each other. Hence, a higher sense of
fraternity exists in the whole society. Industrial and business clusters and centers
being places with known faces having regular interactions, relationships become
almost natural and easy. In such an atmosphere most of the transactions tend to take
place on the basis of faith. 583
Faith-based transactions find an important place in all businesses, including
the high-risk finance. In a study of the non-corporate finance sector in Karur, the
well-known textile export centre of Tamil Nadu, it was found that almost the entire
financial transactions revolved around goodwill and faith (Kanagasabapathi, 2002).
In fact, the loans were given only on the recommendations of relatives, friends and
business contacts. It was interesting to note that about two thirds of the estimated
financial requirements of Karur were met through the local financing mechanisms,
though there were more than adequate banking facilities. It was learnt that businessmen
preferred to go through the relationship-based mechanisms rather than the institutional
ones. In such a system, the parties would be conscious as any breach of faith would bring
a bad name and consequently continuing in business would involve serious difficulties.
It was also observed that the helping tendency enabled the entrepreneurs and
businessmen to mobilize funds easily. This can be understood when we notice that the
businesses mobilize most of the funds required through their own and personal
sources. In different parts of Gujarat, when people wanted to promote a business, the
local community and the village helped the entrepreneurs by contributing whatever
was possible. The entrepreneurs returned the funds after one or two years. These funds
were given without any documents, mainly with the intention of helping their “own
men.” A study of diamond exporters in Gujarat revealed that 46 percent of the
exporters received more than 30 percent of their initial funds from their relatives (Patel
and Kanagasabapathi, 2004).
Many times the helping tendency extends beyond family relationships to others in
the locality. World Development Report 2001 noted that close community relationships
have enabled businessmen from the textile export of Tirupur to mobilize funds easily
through their networks at cheaper costs. It is common to see businessmen helping their
ex-employees in their new ventures through financial and business support. Such help
goes beyond the narrow relationships and extends to all sections of people, including
those 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 have
helped a person from the lower strata to become a truck owner, by giving necessary
funds and providing him with a guarantee for purchasing the truck.
Most of the industrial and business centers follow higher norms that are strictly
followed irrespective of personal or societal relationships. While writing on the Kanpur
saddlery cluster, Dwivedi (2003) writes:
Norms function in the cluster irrespective of the personal relationship that entrepreneurs
have 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 having
personal experience with the other party. Even in case of new ties, a contract is not demanded
because it is simply not considered a way to do business.
IJSE As far as the corporate sector is concerned, only the listed companies that constitute
34,9 less than 1 percent of the total companies is known outside, and about a few hundred
among them is highly visible. This part of the corporate sector is subject to high
influence of the western theories, practices and even value systems. This sector is
highly competitive and to an extent impersonal. Even here, the higher societal norms,
disrespect in the local community and the overall value systems stop people from
584 venturing far beyond the limits many of the times. As for the smaller companies, much
of their culture is localized in nature, though the operations and outlook extend beyond
their boundaries. Hence, they generally reflect the overall value systems of the local
societies. There are many instances of value-based initiatives at different places.
For example, a company in Coimbatore gives additional salary for all the employees
who keep their parents with them; for those who keep their parents-in-law, the benefit
is still high.

Conclusion
The ancient Indian system emphasized ethical principles in all walks of life, including
economics and business. The society and the state saw to it that the activities were run
on the basis of higher principles of life. The native systems and practices underwent a
drastic change from the eighteenth century. The modern State of Independent India
failed 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 position
that they commanded earlier. During the recent decades, the market ideology has further
worsened the situation. So the present situation cannot be strictly compared with the
ancient systems. The major strength of India is the influence of the age old Indian culture
and ethos. At the family level people try to follow higher values. Even at the business
levels, generally businessmen try to maintain basic norms among themselves. Only
when they deal with outsiders, especially in the cosmopolitan surroundings, are there
failures on the part of businessmen as the state or societal mechanisms have not been
conducive. Studies of business practices in different industrial and business centers
show the prevalence of higher human values and unwritten norms in the contemporary
Indian business systems, especially at the non-corporate sector levels. So the situation is
not as bad as one generally assumes, though India has come a long way from her original
moorings. 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), A Comprehensive History of Business in India – from 3000 BC to 2000 AD,
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 Saddlery
cluster”, paper presented at the Conference on Clusters, Industrial Districts and Firms:
The Challenge of Globalisation, Modena.
Jain, V.K. (2001), “Trading community and merchant corporations”, in Chakravarty, R. (Ed.), Ethics and
Trade in Early India, Oxford University Press, New Delhi, pp. 344-69.
Kanagasabapathi, P. (2002), A Study on the Unorganized Finance Sector in India, Swadeshi
values
Academic Council, Coimbatore.
Kanagasabapathi, P. and Arun Kumar, M.N. (2005), “A study on Sankagiri transport industry
and Thiruchengode rig industry”, unpublished report, PSG Institute of Management,
Coimbatore. 585
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 and
Broadcasting, 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 Academic
Council, 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 author

P. Kanagasabapathi is a Professor at the PSG Institute of Management, PSG College of
Technology, Coimbatore – 641 004, India. He earned his PhD as a UGC Research Fellow, was
associated with the capital markets for a brief period, and had headed a Cooperative Bank as its
President. He has been involved in studying the functioning Indian systems through empirical
and research works in different centers across the country for more than ten years, and has just
completed a work on the Indian economic, business and management models. His areas of
interest include the Indian models, family and community base of economic and business
systems, culture and ethics. P. Kanagasabapathi can be contacted at: pkspathi@yahoo.co.in

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IJSE
34,9 Financial development, trade
and growth triangle: the case
of India
586
Salih Turan Katircioglu
Department of Banking and Finance, Eastern Mediterranean University,
Famagusta, Turkey, and
Neslihan Kahyalar and Hasret Benar
Department of Economics, Eastern Mediterranean University,
Famagusta, Turkey

Abstract
Purpose – This paper aims to investigate the possible co-integration and the direction of causality
between financial development, international trade and economic growth in India.
Design/methodology/approach – Annual data covering the 1965-2004 period have been used to
investigate co-integration and Granger causality tests between financial development, international
trade, 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 financial
development, international trade and real income growth in the case of India. Furthermore, unidirectional
causality 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 causality
has 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-following
hypotheses cannot be inferred for the Indian economy alone themselves. And furthermore, the
export-led and the import-led hypotheses again cannot be inferred for the Indian economy based on the
sample period, 1965-2004.
Originality/value – This study is the first of its kind which investigates the possible co-integration and
the direction of causality between the financial development, international trade and economic growth
triangle 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
Paper type Research paper

International Journal of Social
Economics
Vol. 34 No. 9, 2007
pp. 586-598
q Emerald Group Publishing Limited
0306-8293
DOI 10.1108/03068290710778615
1. Introduction
The fundamental question in the relevant empirical literature is: does financial
development or trade causes economic growth or is financial development or increase
in trade an engine of growth for an economy? One crucial factor that has begun to
receive considerable attention more recently is the role of financial market and banking
sector in the development of growth process. The nexus between economic growth and
financial development has been conducted on number of divergent lines. After the
extensive studies in this field, it is now well recognized that financial development is a
crucial factor for economic growth (Calderon and Liu, 2003) as it is a necessary
condition for achieving a high rate of economic growth (Chang, 2002) and has a strong
positive relationship with economic growth (Mazur and Alexander, 2001). However, Financial
De Gregorio and Guidotti (1995) point out that financial development significantly development,
reduces economic growth for countries (especially in Latin America) experiencing
relatively high-inflation rates. trade and growth
Although, the direction of causality between financial development and economic
growth is in attention of the researchers in the relevant literature, this causal
relationship generally remains unclear (Calderon and Liu, 2003). Patrick (1966) 587
developed two hypotheses testing the possible directions of causality between financial
development and economic growth, that is, the supply-leading hypothesis, where it
posits a causal relationship from financial development to economic growth, and the
demand-following hypothesis, where it postulates a causal relationship from economic
growth to financial development. In the empirical literature, McKinnon (1973), King
and Levine (1993), Neusser and Kugler (1998) and Levine et al. (2000) support the
supply-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 produce
conclusive findings (Giles and Williams, 1999; Deme, 2002). The new trade theory has
contributed to the theoretical relationship between exports and growth regarding
effects on technical efficiency (Doyle, 2001). Rivera-Batiz and Romer (1991) show that
expansion of international trade increases growth by increasing the number of
specialized production inputs. However, this outcome is ambiguous when there is
imperfect competition and increasing returns to scale (Doyle, 2001). Krugman (1979),
Dixit and Norman (1980) and Lancaster (1980) show economies of scale as a major
cause of international trade, hinting the validity of the growth-led exports hypothesis.
Some empirical studies in the literature confirmed the TLG hypothesis for some
countries whereas some others rejected it for some other countries (Deme, 2002). On
the other hand, some studies in the growth literature support the ELG hypothesis while
some others investigate the import-led growth (ILG) hypothesis (Deme, 2002).
Recent empirical literature has also revisited the link between financial
development and trade openness. These two factors are identified as macroeconomic
variables as being highly correlated with economic growth performance across
countries in the empirical growth literature (Beck, 2002). The other empirical studies in
the literature also searched the channels based on the relationship between financial
development and trade openness affecting economic growth. Kletzer and Bardhan
(1987) incorporates financial sector into the Heckscher-Ohlin trade model and show
that financial sector development gives countries a comparative advantage in
industries that rely more on external financing. Additionally, Baldwin (1989) points out
that financial markets are a source of comparative advantage. A number of researchers
and economists argued that the development of the financial sector follows rather than
leads the development of the real sector due to the fact that the specialization of
countries in particular industries would create a demand for a well-developed financial
sector (Beck, 2002).
This paper firstly, examines the possible co-integrating link between financial
development, international trade and economic growth; and secondly, tests the direction
of causality between these three variables based on the supply-leading, the
demand-following and trade-led hypotheses for the Indian economy. The findings of
the study might give interesting conclusions for the literature for three reasons:
IJSE (1) the direction of causality between financial development, trade and economic
34,9 growth nexus needs further investigation;
(2) the relationship between financial development, international trade and
economic growth triangle needs further attention; and
(3) to the best of authors’ knowledge this study is the first of its kind made for the
Indian economy.
588
The remainder of this paper is organized as follows. Section 2 reviews literature review
in the field. Section 3 describes data and methodology, respectively. Section 4 discusses
the findings. Finally, Section 5 provides concluding remarks.

2. Empirical literature review from India

During the 1980 s trade and financial liberalization has been initiated in India. Capital
inflows increased in forms of foreign direct investment (FDI). Indian economy attracted
foreign investors by providing them a proper situation and financial liberalization that
positively affected Indian economy. However, possible negative side effects of the
financial liberalization should not be ignored.
It is notable that there are also studies searching the relationship between economic
growth and financial sector development in India. Agarwal (2000) examined the
financial sector reforms in India and indicated that it is important to consider the
vulnerability of Indian economy to financial crises due to high current account deficits,
high fiscal deficits and slow growth of exports. The study by Bhattacharya and
Sivasubramanian (2003) investigated the causal relationship between financial
development and economic growth in India using causality analysis. They found that
for the period 1970-1999 financial sector development as measured by M3/GDP leads to
GDP growth. The study by Demetriades and Luitel (1996) investigate the relationship
between financial development, economic growth and banking sector controls in India.
They find that there is bi-directional causation between financial development and
economic growth of India. They also points out that policies that affect financial
development, also affect economic growth, and financial sector policies affect financial
deepening by altering the bank behavior.
On the other hand, Topalova (2004) investigated the impact of trade liberalization
on firm’s productivity in India, which found that trade liberalization (especially tariff
reduction) increases the productivity among firms. This study also claimed that
productivity and profitability of firms might lead to economic welfare improvement
with more intensive privatization efforts in India. The study by Bajpai (2001) shows
that there was potential growth of 7-8 percent per year in India because of structural
changes in industrial, financial areas and trade such as the reduction in protection
levels, 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 take
the advantage of export-led growth because of geographical economic performance in
India. The key step was through increased exports to coastal regions and greatly
improved productivity for local production. The study by Bajpai (2002) points out
that with the initiation of economic reforms in India in 1991, the role of private
investment has acquired a great deal of significance. State-level data on FDI approvals
suggest that the relatively fast growing states have attracted higher levels of FDI.
3. Data and methodology Financial
3.1 Data development,
Data used in this paper for the Indian economy are annual figures covering the period
1965-2004. The variables of the study are measured as follows: real gross domestic trade and growth
product (GDP) at 1995 constant US$ prices (lnGDP), the first financial development
measure[1] is the ratio of broad money (M2) to nominal GDP, namely; lnM2 and the
second financial development measure is the ratio of domestic credit to nominal GDP; 589
namely; lnDC. There are many studies in the literature which uses the proxy for trade
openness as the ratio of trade of goods and services including exports and imports
relative to GDP. And there also many studies which uses exports and imports
separately to consider individual effects. This study will use real exports of goods and
services (lnEXP) and real imports of goods and services (lnMP) where both are at 1995
constant US$ prices to capture individual relationships with other variables of the
study. All of the variables in the study are at their natural logarithm. Data were
gathered from World Bank database for World Development Indicators (World Bank,
2005).

3.2 Methodology
The Augmented Dickey-Fuller (ADF) and Phillips-Perron (PP)[2] unit root tests are
employed to test the integration level and the possible co-integration among the
variables (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 test
for unit roots as an alternative to ADF unit root test.
Unless the researcher knows the actual data generating process, there is a question
concerning whether it is most appropriate to include constant term and trend factor in
the unit root process (Enders, 1995). It might seem reasonable to test the existence of a
unit root in the series using the most general of the models. That is:

X
p
Dyt ¼ a0 þ gyt21 þ a2 t þ bj Dyt2i21 þ [t ð1Þ
i¼2

where y is the series; t ¼ time (trend factor); a ¼ constant term (drift); 1t ¼ Gaussian
white noise and p ¼ the lag order. The number of lags “p” in the dependent
variable was chosen by the Akaike Information Criteria (AIC) to ensure that the errors
are white noise. One problem with the presence of the additional estimated parameters
is 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 test
for a unit root when the form of the data generating process is unknown. The general
principle is to choose a specification that is a plausible description of the data under both
the null and alternative hypotheses (Hamilton, 1994). If the intercept or time trend is
inappropriately 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 contains
a unit root when, in fact, none is present” (Enders, 1995, p. 255). A linear combination of
integrated variables are said to be co-integrated if the variables are stationary. Many
economic models entail such co-integrating relationships (Enders, 1995).
IJSE After the order of integration is determined, co-integration between the variables
should be tested to identify any long run relationship. Johansen trace test is used for
34,9 the co-integration test in this paper. Cheung and Lai (1993) mention that the trace test is
more robust than the maximum eigen value test for co-integration. The Johansen trace
test 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. The
590 Johansen (1988) and Johansen and Juselius (1990) approach allows the estimating of all
possible co-integrating vectors between the set of variables and it is the most reliable
test to avoid the problems which stems from Engle and Granger (1987) procedure[3].
This procedure can be expressed in the following VAR model:
X t ¼ P 1 X t21 þ · · · þ P K X t2K þ m þ et ðfor t ¼ 1; . . . ; TÞ ð2Þ
Where Xt, Xt2 1,. . .,Xt2 K are vectors of current and lagged values of P variables which
are I(1) in the model; P1,. . .,PK are matrices of coefficients with (PXP) dimensions; m is
an 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 significantly
autocorrelated. 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 different
from zero. Johansen (1988) and Johansen and Juselius (1990) propose that using the
Eigen values of P ordered from the largest to the smallest is for computation of trace
statistics[5]. The trace statistic (ltrace) is computed by the following formula[6]:
X
ltrace ¼ 2T Lnð1 2 li Þ; i ¼ r þ 1; . . . ; n 2 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 the
development of the theory of non-stationary time series analysis. Empirical studies
have shown that the existence of non-stationarity in the time series considered can
lead to spurious regression results and invalidate the conclusions reached using
Granger causality. Toda and Phillips (1993) have led the methods to deal with
Granger causality in I (1) systems of variables. A causal long run relationship
between non-stationary time series when they are co-integrated could be inferred.
Therefore, if co-integration analysis is omitted, causality tests present evidence of
simultaneous correlations rather than causal relations between variables. The presence
of a co-integrating relation forms the basis of the vector error correction (VEC)
specification. Additionally, standard Granger or Sims tests may provide invalid causal
information due to the omission of error correction terms from the tests (Doyle, 2001).
The simple Granger’s causality test becomes inappropriate when co-integrating
vectors are obtained in the series. According to Granger’s representation theorem, the
results of co-integration imply that X and Y have the following error-correction
representations in equations (4) and (5). These are necessary to augment the simple
Granger causality test with the error correction mechanism (ECM), derived from the Financial
residuals of the appropriate co-integration relationship to test for causality:
development,
X
k X
k trade and growth
DlnY t ¼ C 0 þ bi D ln Y t2i þ ai D ln X t2i þ pi ECTt21 þ ut ð4Þ
i¼1 i¼1

591
X
k X
k
DlnXt ¼ C 0 þ gi DlnXt2i þ 6i DlnYt2i þ hi ECTt21 þ 1t ð5Þ
i¼1 i¼1

where Y and X are the variables under consideration, and ri is the adjustment
coefficient while ECTt2 1 expresses the error correction term of growth equation,
D indicates first difference operator. In equation (4), X Granger causes Y if ai and ri are
significantly different from zero. In equation (5), Y Granger causes X if 6i and hi are
significantly different from zero. F-statistic is used to test the joint null hypothesis of
ai, 6i ¼ 0, and t test is employed to estimate the significance of the error coefficient.

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

Statistics lnGDP Lag lnM2 Lag lnDC Lag lnExp Lag lnImp Lag

Levels
tT (ADF) 2 1.48 (0) 22.55 (1) 2 2.01 (3) 2 1.38 (0) 21.58 (0)
tm (ADF) 1.93 (0) 20.51 (1) 2 1.12 (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) 2 1.18 (4) 22.09 (2) 2 1.29 (3) 2 1.50 (7) 20.61 (22)
tm (PP) 4.09 (7) 0.25 (0) 2 1.04 (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 difference
tT (ADF) 2 5.34 * (3) 24.31 * (1) 2 4.21 * (0) 2 7.98 * (0) 26.34 * (0)
tm (ADF) 2 6.92 * (0) 24.44 * (1) 2 4.22 * (0) 2 7.53 * (0) 25.66 * (0)
t (ADF) 2 0.60 (2) 22.87 * (0) 2 2.56 * * (1) 2 0.52 (3) 22.64 * (1)
tT (PP) 2 8.85 * (6) 23.72 * * (4) 2 4.17 * * (2) 2 8.83 * (12) 27.76 * (12)
tm (PP) 2 6.90 * (1) 23.82 * * (4) 2 4.20 * (2) 2 7.37 * (5) 25.64 * (5)
t (PP) 2 2.09 * * (4) 22.85 * (1) 2 3.69 * (3) 2 4.62 * (2) 24.51 * (1)
Notes: tT represents the most general model with a drift and trend; tm is the model with a drift and
without trend; t is the most restricted model without a drift and trend. Numbers in brackets are lag
lengths used in ADF test (as determined by AIC set to maximum 3) to remove serial correlation in the
residuals. When using PP test, numbers in brackets represent Newey-West bandwith (as determined
by Bartlett-Kernel). *, * * and * * * denote rejection of the null hypothesis at the 1,5 and 10 percent
levels, respectively. GDP stands for gross domestic product, M2 stands for money and quasi money as
percent of GDP, and DC stands for domestic credit provided by banking sector as percent of GDP, Exp Table I.
stands for exports of goods and services and Imp stands for imports of goods and services. Tests for ADF and PP tests for unit
unit roots have been carried out in E-VIEWS 5.1 root
IJSE Having established the necessary conditions for the stationarity of data under
34,9 inspection, we conduct Johansen‘s co-integration test (Johansen, 1988; Johansen and
Juselius, 1990), which is very sensitive to the choice of lag length (Chang, 2002), to
explore any possible long run relationship among the variables under consideration.
We employ both Akaike and Schwartz Criteria to select the number of lags in the
co-integration test where the two criteria suggest a VAR model with 1 lag. The results
592 showing number of co-integrating vectors are reported in Table II that presents only
the trace test results as suggested by Cheung and Lai (1993)[7]. Johansen test results
show that every pair in Table II is co-integrated with each other. This means that long
run equilibrium relationship exists between these pairs. It is also useful to mention that
more 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 are
co-integrated with at most one co-integrating vector.

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

(1) lnGDP and M2

H0: r ¼ 0 29.01 * 15.41 20.04
H0: r # 1 1.93 3.76 6.65
(2) lnGDP and lnDC
H0: r ¼ 0 26.69 * 15.41 20.04
H0: r # 1 2.02 3.76 6.65
(3) lnGDP and lnEXP
H0: r ¼ 0 29.49 * 15.41 20.04
H0: r # 1 6.79 * 3.76 6.65
(4) lnGDP and lnIMP
H0: r ¼ 0 22.53 * 15.41 20.04
H0: r # 1 4.24 * * 3.76 6.65
(5) lnM2 and lnDC
H0: r ¼ 0 15.55 * * 15.41 20.04
H0: r # 1 0.78 3.76 6.65
(6) lnM2 and lnEXP
H0: r ¼ 0 19.02 * * 15.41 20.04
H0: r #1 2.10 3.76 6.65
(7) lnM2 and lnIMP
H0: r ¼ 0 10.16 15.41 20.04
H0: r #1 4.13 * * 3.76 6.65
(8) lnDC and lnEXP
H0: r ¼ 0 23.69 * 15.41 20.04
H0: r # 1 1.84 3.76 6.65
(9) lnDC and lnIMP
H0: r ¼ 0 17.19 * * 15.41 20.04
H0: r #1 3.01 3.76 6.65
(10) lnEXP and lnIMP
H0: r ¼ 0 18.89 * * 15.41 20.04
Table II. H0: r #1 2.03 3.76 6.65
Co-integration tests using
the Johansen (1988) and Notes: r denotes the number of co-integrating vectors; Akaike Information Criterion (AIC) and
Johansen and Juselius Schwartz Criteria (SC) were used to select the number of lags required in the co-integration test. Both
(1990) approach gave the same level of lag order
Since, co-integration relationship is found between the variables under inspection, an Financial
ECM model should be constructed to determine the direction of the causality. Granger development,
(1988) mentions that there should be at least one direction of causality among the
variables if they are co-integrated. The causality model is expressed as an error trade and growth
correction 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 constructed
under the null hypothesis of non-causality. Rejection of the null hypothesis implies that 593
the corresponding variable Granger-Causes the dependent variable. The Granger
causality test results Table III suggest that unidirectional causality runs from GDP to
exports, from GDP to imports, from exports to M2, from M2 to imports, from exports to
domestic credits, from imports to domestic credits, and from exports to imports.
Bi-directional causality has also been obtained between GDP and M2, and between
GDP and domestic credits. Finally, no direction of causality has been obtained between
M2 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 economy
based on VECM analysis. But it is important to note that a change in exports and
imports leads to a change in domestic credits. Furthermore, a change in exports leads
to a change in M2 and imports, where a change in M2 leads to a change in imports in
India.

5. Conclusion
This study has investigated possible co-integration and the direction of causality
between financial development, international trade and economic growth in India
using annual data that covers the period 1965-2004. Results reveal that there is long
run equilibrium relationship between financial development, international trade
and real income growth in the case of India. Granger causality tests show that growth
in real income leads to growth in international trade sector, namely exports and
imports. Thus, there is unidirectional causation that runs from real income growth to
international trade growth. On the other hand, bidirectional causality has been
obtained between real income growth and financial development measures, namely M2
and domestic credits. This is similar to the findings of Demetriades and Luitel (1996)
that they also investigated bidirectional causality between financial development and
economic growth in India. However, Bhattacharya and Sivasubramanian (2003) has
found that by using M3 as financial sector development measure there was
unidirectional causality that runs from financial development to real GDP growth.
Furthermore, this study shows that exports of India leads to a change in financial
development (both M2 and domestic credits) in India. But in the case of imports, there
is uni-directional causality that runs from M2 to imports and from imports to domestic
credits.
If results are to be summarized, findings of this study have shown that the
supply-leading and the demand-following hypotheses cannot be inferred for the Indian
economy alone themselves. And furthermore, the export-led and the import-led
hypotheses cannot again be inferred for the Indian economy based on the sample
period, 1965-2004. But it is important to note that Sachs et al. (2002) have investigated
export-led growth hypothesis for India based on regional analysis in major coastal
regions.
 34,9
IJSE

594

Table III.
Granger causality tests
Lag 1 Lag 2 Lag 3
t-statistic on t-statistic on t-statistic on
Null hypothesis F-statistic ECMt2 1 F-statistic ECMt2 1 F-statistic ECMt2 1 Conclusion

(1) lnGDP and lnM2

M2 does not Granger cause GDP 2.81 * * * 2 2.33 * * 1.72 22.43 * * 1.80 * * * 22.89 * GDP , M2
GDP does not Granger cause M2 14.29 * 2 2.74 * 6.53 * 22.34 * * 4.23 * 21.88 * * *
(2) lnGDP and lnDC
DC does not Granger cause GDP 3.35 * * 2 2.15 * * 1.92 21.94 * * * 1.60 22.03 * * * GDP , DC
GDP does not Granger cause DC 4.17 * * 2 1.80 * * * 2.83 * * 22.42 * * 1.98 * * * 22.36 * *
(3) lnGDP and lnEXP
EXP does not Granger cause 1.27 1.33 0.70 1.53 0.52 1.59 GDP ) EXP
GDP
GDP does not Granger cause 2.74 * * * 2 2.35 * * 1.75 22.46 * * 1.85 * * * 22.59 * *
EXP
(4) lnGDP and lnIMP
IMP does not Granger cause GDP 0.20 0.42 0.39 1.08 0.80 2.10 GDP ) IMP
GDP does not Granger cause IMP 7.60 * 2 4.55 * 3.21 * * 23.38 * 1.81 * * * 22.07 * *
(5) lnM2 and lnDC
DC does not Granger cause M2 2.86 * * * 0.94 2.11 * * * 1.45 1.72 1.11
M2 does not Granger cause DC 2.35 * * * 2 1.49 1.93 22.15 * * 1.47 22.16 * * M2 . . . DC
(6) lnM2 and lnEXP
EXP does not Granger cause M2 7.44 * 2 3.00 * 3.13 * * 22.14 * * 3.16 * 22.91 * EXP ) M2
M2 does not Granger cause EXP 0.44 0.95 0.91 1.51 1.94 2.75
(7) lnM2 and lnIMP
(continued)
 Lag 1 Lag 2 Lag 3
t-statistic on t-statistic on t-statistic on
Null hypothesis F-statistic ECMt2 1 F-statistic ECMt2 1 F-statistic ECMt2 1 Conclusion

IMP does not Granger cause M2 2.90 * * * 2 0.81 2.02 * * * 21.58 * * * 2.41 * * 0.00 M2 ) IMP
M2 does not Granger cause IMP 3.21 2 2.29 * * 1.60 21.77 * * 1.70 22.25 * *
(8) lnDC and lnEXP
EXP does not Granger cause DC 2.93 * * * 2 1.67 * * * 2.07 * * * 22.27 * * 2.23 * * 22.80 * EXP ) DC
DC does not Granger cause EXP 1.81 1.47 1.35 1.28 3.80 * 3.27
(9) lnDC and lnIMP
IMP does not Granger cause DC 1.87 2 1.09 2.50 * * 22.25 * * 2.55 * * 22.01 * * IMP ) DC
DC does not Granger cause IMP 1.34 1.94 0.89 21.25 2.18 * * 21.06
(10) lnEXP and lnIMP
IMP does not Granger cause EXP 0.52 0.90 0.61 20.67 1.23 1.43 EXP ) IMP
EXP does not Granger cause IMP 6.55 * 4.35 * 2.69 * * 23.06 * 2.18 * * 22.68 * *
Notes: *, * * and * * * denote the rejection of the null hypothesis at 1,5 and 10 percent, respectively
development,
Financial

trade and growth

Table III.
595
IJSE Notes
34,9 1. The definition of financial development, which is the improvement in quantity, quality, and
efficiency 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 structural
break in the time series and conditional heteroscedasticity in the error term.
596 3. Kremers et al. (1992) and Gonzalo (1994) for the comments about disadvantages of Engle and
Granger (1987) procedure compared with Johansen and Juselius (1990) co-integration
technique.
4. m is a vector of I(0) variables which represent dummy variables as well. This ensures that
errors 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 no
co-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 no
co-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 test
statistics regarding to skewness and excess kurtosis in the residuals. Therefore, trace
statistic was preferred in this study.

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Corresponding author
Salih Turan Katircioglu can be contacted at: salihk@emu.edu.tr

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Economic size
Economic size and performance and performance
of dispersed and clustered small of SSEs
scale enterprises in India
599
Recent evidence and implications
M.R. Narayana
Centre 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 and
performance of dispersed and clustered small-scale enterprises (SSEs) in India.
Design/methodology/approach – Methodology is descriptive and comparative, using a
combination of different official databases. Economic size is measured by distribution of SSEs by
employment, output, fixed capital investment, and export variables. Measurement of economic
performance 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 and
performance variations of dispersed and clustered SSEs; and bigger economic size and higher
economic performance of clustered than dispersed SSEs.
Research limitations/implications – Subject to the comparability of economic structure, the
results and implications for India are of relevance for promotion and development of clustered SSEs in
other developing countries.
Practical implications – From the viewpoint of policy formulation, the results offer a strong
empirical basis for a cluster approach rather than a dispersed approach for promotion and
development of SSEs in India. The cluster approach has implications for establishing linkages
between 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 of
the dispersed and clustered SSEs by consolidating the diverse databases in India.
Keywords Small enterprises, Cluster analysis, Economic growth
Paper type Research paper

1. Introduction
India’s small-scale enterprises (SSEs) are developed in the private sector and comprise
both manufacturing and service-oriented units: small scale industries (SSIs), ancillary
undertakings (AUs), tiny units (TUs) export-oriented enterprises (EOEs), women

This paper is substantially modified and extended version of a paper, presented for the Joint
Workshop on evolving areas of research on topics of current relevance, jointly organised by the
Indian Council of Social Science Research (New Delhi) and World Institute of Development
Economic Research (Helsinki) in New Delhi 31 January-1 February 2004. Grateful thanks are due International Journal of Social
Economics
to Professors V.R. Panchamukhi, Gopal K. Kadekodi, L.S. Bhat, and other participants of the Vol. 34 No. 9, 2007
Workshop for constructive suggestions; and Sri Amir Subhani (Joint Development pp. 599-611
q Emerald Group Publishing Limited
Commissioner, Ministry of Small Scale Industries, and Government of India) for sharing with 0306-8293
useful policy documents and data. However, usual disclaimers apply. DOI 10.1108/03068290710778624
IJSE enterprises (WEs), and small-scale service business-oriented (industry-related)
34,9 enterprises (SSSBOEs)[1]. For the regulatory, protective and promotional policies
(except for excise duty concessions, however), these enterprises are defined by the
original 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 and
Rs.2.5 million for TUs[2]. Further, the investment limit is accompanied by additional
600 criteria 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 holding
by 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. Dispersed
SSEs have been supported and developed by deliberate policy interventions with the
objectives of both growth and equity. Growth objectives are evident in terms of
production (or increase in output); employment (or generation of productive
employment); investment (or higher capital formation); exports for earning foreign
exchange; and resource utilisation by exploitation of local resources. Equity objectives
are underlined in terms of broader ownership, management, and financing of economic
development through sectoral and spatial decentralization of economic activities and
social participation.
In contrast, and in general, clustered SSEs have been developed naturally or without
policy inducement[5]. The importance and advantages of clusters for industrial
development of SSEs is recognized, for instance, by the Report of the Expert Committee
on 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 accretion
of skills and is a source of informational economies. From an institutional point of view, the
costs of monitoring and promotion are lowered since news spreads faster in a regional
context. 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 of
SSEs 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 and
comprehensive global surveys on industrial clusters by Nadvi and Schmitz (1998)
and Schmitz and Nadvi (1999)[7]. However, a comparative study on India’s
clustered and dispersed SSEs, as being attempted in this paper, can be an addition
to the current understanding of the working of SSEs in different economic
environments and for suggesting plausible policy interventions.
The main objective of this paper to analyse the economic size and performance of
dispersed and clustered SSEs, as it would provide with empirical evidence on their
comparative growth patterns. This evidence is useful to design for an appropriate
policy strategy for current and future development of SSEs by a choice between, or a
combination of both, dispersed and clustered approaches[8]. Subject to the
comparability of economic structure, these analyses and evidence are of policy
relevance for promotion and development of SSEs in other developing countries.
The rest of the paper is organised as follows. Section 2 presents the secondary
databases and indicators of current economic status and size of dispersed and clustered
SSEs. Section 3 compares the economic performance of dispersed and clustered SSEs.
The main conclusions and policy implications are summarised in Section 4.
2. Current status and economic size Economic size
The current status and economic size of dispersed and clustered SSEs are described by and performance
available 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. of SSEs
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 and
economic size of clustered SSEs[9]. Dispersed SSEs are distinguished by registered 601
(i.e. with the Directorate of Industries and Commerce of a State Government) and
unregistered SSEs[10]. Registration is a necessary condition to avail benefits under the
public 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 for
53.13 percent of SSEs and not interested in registration for 39.86 percent of SSEs.

2.1 Dispersed SSEs

Table II presents the indicators of current status and economic size of dispersed SSEs
by registered, unregistered and total SSEs.
It is evident that the number of unregistered SSEs is about 6.8 times higher than the
registered SSEs. In terms of number of manufactured products and delivery of services,
registered SSEs are more diverse than the unregistered SSEs. Unlike the registered
SSEs, the unregistered SSEs are located more in rural areas. Manufacturing (or service)
activities dominate the registered (or unregistered) SSEs. Exporting SSEs constitute
less than one percent in total number of registered as well as unregistered SSEs.
Ownership pattern by gender and social categories shows that the SSEs
owned/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 registered
sector.

Organizational set up of SSEs include proprietary, partnerships, private company, and

cooperatives. The evidence suggests that proprietary SSEs are dominant, especially in
unregistered 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 registered
SSEs 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 up
to Rs.2.5 million or US$0.052 million. Thus, large number of small investment
enterprises is a dominant feature of India’s SSEs. Further, smallness of SSEs can be
highlighted by determining the proportion of SSEs under a floor and ceiling level of
production and employment. This is highlighted in Table III. The floor (or ceiling) level
of production is given by Rs. 0.1 (or Rs.50) million. Contribution of SSEs to number of
 India
Table I.
and clustered SSEs in
databases on dispersed
Sources, characteristics,
and limitations of recent
Nature of SSEs and source of data
1. Dispersed SSEs
1.1. Third All India Census of Small Scale
Industries 2001-2002, Government of
India
2. Clustered SSEs
2.1. Small Industries Development
Organisation 2003, Government of India survey
2.2. Cluster Development Programme’s
database 2003, Government of India
2.3. Third All India Census of Small Scale
Industries 2001-02, Government of India
Source: Compiled by the author
34,9
IJSE
602
Technique of data
collection Characteristics of data Limitations/remarks on data
Census Most comprehensive data on production, Not comparable with the previous
employment, investment, and exports by census figures due to
registered and unregistered SSEs non-coverage
of unregistered SSEs
Non-random sample Covers 338 clusters. Provides with cluster Data is periodically updated.
level data by (a) main products produced; (b) Annual data is not available
sectoral distribution; (c) potential for exports
and technology upgradation by low, medium
and high categories; and (d) size of clusters
by different ranges of number of enterprises,
employment, and value of annual turnover
Non-random sample Covers 358 clusters (including select artisan Data is periodically updated.
survey clusters). Provides with additional information Annual data is not available
on the above SIDO’s database at the cluster level
by (a) natural or policy induced clusters; (b) nature
of products by reserved/unreserved items, and by
modern and traditional goods; (c) bases for
clustering by market, resource and infrastructure
bases; (d) nature of linkages by large unit based,
vertical, horizontal, and vertical and horizontal; and
(e) existence of competition with large enterprises
Census State level data are presented by cluster of Not comparable with previous
registered census due to their
and unregistered SSEs and by (i) number of non-availability
clusters
and SSEs by clusters; (ii) value of fixed
assets/investment and gross output at current
prices; and (iii) total employment (or number
of employed persons)
 Economic size
Total
Registered Unregistered SSEs and performance
Indicators of current status and economic size SSEs SSEs sector of SSEs
1. Indicators of current status
1.1 Number of SSEs (millions) 1.34 9.15 10.49
1.2 Number of products/services 5,983 2,680 6,003 603
1.3 Percent of SSEs in rural areas 44.33 56.8 55.00
1.4 Percent of tiny industries 97.90 99.90 99.50
1.5 Percent of women enterprises 10.00 10.13 10.11
1.6 Percent of enterprises engaged in
manufacturing/assembling/processing activities 63.45 36.12 39.69
1.7 Percent of exporting enterprises 0.53 0.47 0.48
1.8 Percent of SSEs owned by persons belonging to scheduled or
backward castes/tribes 49.88 56.18 56.20
1.9 Percent of SSEs under proprietary organisation 88.85 96.90 95.80
2. Indicators of economic size
2.1 Employment (or number of persons) per SSE 4.48 2.05 2.37
2.2 Historical/original value of investment (Rs. in million) on plant
and machinery per SSE 0.22 0.03 0.05
2.3 Market value of fixed investment (Rs. in million) per SSE 0.67 0.07 0.12
2.4 Value of gross output (Rs. in million at current prices) per SSE 1.48 0.07 0.15 Table II.
2.5 Value of exports (Rs. in million at current prices) per exporting Current status and
SSE 16.76 0.44 2.81 economic size of
dispersed SSEs in India:
Source: Compiled and computed using the basic data in Government of India (2004) 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) million
1.1 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) persons
2.1 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) Table III.
2.6 Value of exports 10.08 (38.14) 9.57 (0.00) Smallness of India’s
dispersed SSEs by select
Source: Computed using the basic data in Government of India (2004) indicators: 2001-2002

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) level
of production measures the relative smallness (or bigness) of SSEs. Obviously, the
enterprises in between these extreme levels constitute the middle size. The evidence
IJSE suggests that smallness is dominant among the unregistered SSEs, except in regard to
34,9 exports; bigness is dominant among the registered SSEs in regard to exports and gross
output; and middle size is relevant only for registered SSEs in regard to employment
and investment indicators.
On the other hand, the floor (or ceiling) level for employment is given by less than or
equal to ten (or more than 100) persons. The floor level enterprises dominate both the
604 registered 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 unregistered
SSEs 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 of
enterprises, 63.15 (or 95.65) percent in employment, 49.15 (or 95.36) percent in total
market value of fixed investment, 51.61 (or 95.13) percent in total original value of plant
and machinery, and 35.09 (or 88.43) percent in value of gross output. Thus, only in
regard to exports, middle size enterprises are relevant for both registered and
unregistered SSEs.

2.2 Clustered SSEs

Table IV presents the indicators of current status and economic size of clustered SSEs
by using SIDO’s database on 388 clusters in 2003[11]. The indicators reveal the
following:
.
Clusters are marked by product homogeneity, as the single product clusters
constitute about 89 percent.
.
Highest number of clusters (30.15 percent) is concentrated in Sector 7, which
include 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, tobacco
and 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 the
country. On the other hand, the lowest number of clusters is concentrated in
Sector 2 (4.90 percent) comprising ores, minerals, mineral fuels, lubricants, gas
and 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 related
equipment and parts. These three sector account for 23.1 percent of clusters in
the 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 for
technology 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 by
20.9 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.
 Percent of
Economic size
Indicators of current status and economic size clusters and performance
1 SIDO database: total number of clusters ¼ 388 of SSEs
1.1 Single product clusters 88.92

1.2 Sectoral distribution of clusters:

Sector 1 15.98
605
Sector 2 4.90
Sector 3 12.63
Sector 4 5.41
Sector 5 18.81
Sector 6 30.15
Sector 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 32.3
1 billion-10 billion 20.9
100 million-1 billion 32.3
Less than 100 million 14.7

1.5 Distribution of clusters by number of enterprises

More than 10,000 enterprises 37.6
1,000-10,000 enterprises 9.3
500-1,000 enterprises 10.0
100-500 enterprises 35.6
Less than 100 enterprises 7.5

1.6 Distribution of clusters by level of employment

More than 100,000 persons 45.9
10,000-100,000 persons 13.4
1,000-10,000 persons 29.1
Less than 1,000 persons 11.6

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

2.1 Natural clusters 92.73
2.2 Manufacture unreserved product 55.87
2.3 Manufacture modern SSE products 75.42
2.4 Sources of clustering:
2.4.1 Market based 57.82
2.4.2 Resource based 39.94
2.4.3 Infrastructure based 2.24
2.5 Nature of linkages
2.5.1 Horizontally linked 74.02
2.5.2 Horizontally and vertically linked 15.64 Table IV.
2.5.3 Large unit centred or vertically linked 10.34 Current status and
economic size of clusters
(continued) of SSEs in India
IJSE Percent of
34,9 Indicators of current status and economic size clusters

2.6 Competition with large enterprises 57.82

3 Third All India Census of Small Scale Industries’ database Cluster of Cluster of
registered unregistered
606 SSEs SSEs
3.1 Number of clusters 1,223 819
3.2 Number of SSEs per cluster 233 1,527
3.3 Value of fixed assets per cluster (Rs. in million at current prices) 129 70
3.4 Employment per cluster 1,114 3,379
3.5 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 chiefly
used in industry. Sector 2 includes ores, minerals, mineral fuels, lubricants, gas and electricity. Sector 3
includes chemical and allied products, rubber, plastic, leather and products thereof. Sector 4 includes
wood, 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 excluding
transport equipment. Sector 7 includes railways, airways, ships and road surface transport and related
equipment and parts, other manufactured articles and services, not classified elsewhere
Table IV. Sources: Computed by using the basic data in Government of India (2003b, 2004)

.
By size of number of enterprise, clusters with more than 10,000 enterprises are
the highest (37.6 percent). This is followed by 35.6 percent of clusters in between
100 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 clusters
with more than 100,000 persons is highest (45.9 percent), and is followed the
29.1 percent of clusters in between 1,000 persons and 10,000 persons and
12 percent of clusters with less than 1,000 persons.

Using the Cluster Development Programme’s database on 358 clusters, the following
additional 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 rather
than 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 horizontally
and vertically linked (15.64 percent) rather than large unit centred or vertically
linked[14].
.
Market-based (57.82) and resource-based (39.94 percent) rather than
infrastructure-based are the bases for clustering[15].
.
About 57.82 percent of clusters faced competition from large enterprises.
In addition, by using the clustered SSEs data by registered and unregistered SSEs in Economic size
the Third All India Census of the Small Scale Industries 2001-2002, the following and performance
insights 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 of
of SSEs
unregistered SSEs (819).
.
Average size of fixed investments and gross of output per cluster is higher in cluster
of registered SSEs than in unregistered SSEs. For instance, value of fixed 607
investment (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 cluster
of 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 of
internal heterogeneity in the product composition of clusters, as the single product
clusters dominate over dual or multi-product clusters. Second, there are no “missing
middle” level clusters, as the distribution of key size variables are broadly distributed
across different levels. Third, cluster as a unit has a bigger size and capacity as
compared to dispersed individual SMEs.
On the whole, the above analyses clearly imply the vast divergences in current
status and economic size of dispersed and clustered SSEs in India. The implications of
these divergences on their economic performance are analysed below.

3. Comparison of economic performance of dispersed and clustered SSEs

Given the limitations on the comparability between the databases, the following
comparisons of economic performance between the dispersed and clustered SSEs is
limited 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 fixed
assets;
(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 SSEs

Performance indicators Registered Unregistered Total Registered Unregistered Total

1. Gross output per rupee

of 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 per Table V.
Comparative economic
one million rupees
performance of dispersed
of fixed investment 8.85 47.98 19.31 6.71 30.00 16.15
and clustered SSEs in
Source: Computed by using the basic data in Government of India (2004) India
IJSE The evidence suggests that output/capital ratio as well as labour/capital ratio is higher
34,9 for clustered SSEs than the dispersed SSEs. Thus, both output and employment per unit
of fixed assets/investment is higher in clustered SSEs than in dispersed SSEs. On the
contrary, 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 to
608 labour productivity. Or, employment generation per unit of capital is determined by
both capital and labour productivity. From this viewpoint, the results in Table V offer
evidence 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 in
dispersed SSEs.

4. Conclusions and implications

The descriptions and analyses in this paper lead to the following main conclusions.
First, available databases differ in measurement of current status, economic size
and economic performance of dispersed and clustered SSEs. Lack of comparability
between the databases implies that each database is unique in terms of diversity of
information 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 simple
reason that non-registration is a voluntarily accepted situation by the SSEs. Thus, the
current policy approaches for promotion and development of SSEs do not offer
a 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. This
framework 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 employment
generation, and potentialities for exports promotion and technology upgradation,
clustered SSEs eliminate the disadvantages of smallness of dispersed SSEs. Economic
performance 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 of
clusters is contributory for enlarging size and capacity, strengthening of vertical and
horizontal linkages, and for attainment of higher economic performance and
competitiveness of SSEs.
The above conclusions lead to the following policy implications on current and
future strategy for promotion and development of SSEs in India:
.
Development of SSEs must be integrated between cluster and dispersed
approaches. This calls for integration of objectives and goals for promotion and
development of SSEs, such as, increase in production/output, exports,
investment, employment, and utilisation of local resources. Further, policy
co-ordination at all levels of governments is essential for integrated development
of clustered and dispersed SSEs[18].
. India has a long history of natural clusters. Policy support for further growth of
natural clusters is important in view of the advantages of clustered development.
The nature and timing of such policy intervention in different clusters should be
accorded high priority in policy agenda for SSEs. In this regard, lessons from
 global experiences on cluster development may offer useful lessons and Economic size
guidelines for India’s policy initiatives. and performance
.
Subject to the comparability of economic structure, the conclusions and of SSEs
implications of this paper are of relevance for development of clustered SSEs in
other developing countries. In addition, India’s efforts to formulation and
implementation of Small Industry Cluster Development Programmes, in
collaboration with the UNIDO Focal Point Cluster Development Programme, 609
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 village
industries, 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 Development
Commissioner for Handicrafts under Ministry of Textiles (MOT), Development
Commissioner for Handlooms under MOT, Khadi and Village Industries Commission
under Department of SSI and ARI, Coir Board under Department of SSI and ARI, Central Silk
Board under MOT and Textile Commissioner under MOT. In the same way, the modern SSIs
are promoted and administered by Small Industries Development Organisation under
Development Commissioner for Small Scale Industries. Thus, for administrative, promotional
and 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 select
stationary items and ten products in drug and pharmaceutical sector in 2002-2003. The list of
these 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 of
employment 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 (10-49
employees). Further, the Indian criterion is in contrast with a combination of (a) investment
and 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 industrial
consultancy, equipment rental and leasing, zeroxing, industrial R&D and testing labs,
software development, tailoring, ISD/STD booths, weight bridge and laundry and dry
cleaning. 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. Other
approaches include industrial estates, industrial growth centres, export processing zones,
industrial parks, integrated infrastructure development centres and national programme for
rural industrialisation. For details of these non-cluster and infrastructure-based
programmes, 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 a
geographically proximate group of interconnected companies and associated institutions in
a particular field, linked by commonalities and complementarities”.
8. No formal definition exists for a medium enterprise in India. However, in Government of
India (2001, p. 95), investment limit of higher than Rs.10 million but less than or equal to
IJSE Rs.100 million is recommended for medium scale units. More recently, the Small and
Medium Enterprises Development Bill 2005 (Government of India, 2005a) has proposed for
34,9 investment 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 Development
Commissioner (Ministry of Small Scale Industries, Government of India). Based on a small
random sample survey, the Office estimates annual (a) total number of registered and
unregistered enterprises; (b) total employment; (c) total production; and (d) total exports.
610 However, no values for investment (or capital formation) by SSEs are estimated. These data
are published in the annual Economic Survey of Government of India (for instance, see
Chapter 7 in Government of India, 2005b). This data is not used in this paper due to limited
coverage 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 are
called 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 to
protect SSEs from vertical competition from the non-SSIs in domestic economy by erecting
an official entry barrier and from foreign competition by non-tariff barriers (e.g. import
restrictions through licensing) on reserved items. However, the policy has allowed for
horizontal competition between SSIs in the same product.
14. Horizontal clusters comprise units, which process the raw materials, and produce and
market the finished products by themselves with no scope for division of units. Clusters of
units around a large unit or few large units are called large unit based clusters. Vertical
clusters are linked with large units as suppliers or processors of raw materials or as
subcontractors of large units.
15. Resource includes raw materials and skilled labour. Infrastructure is largely in the form of
public 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 Industry
Commodity Classification 2000 (at five digit), is considered as a cluster for that product in
that 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 vertical
linkage 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 for
SSIs and tiny sector, announced on 30-31 August 2000. The Policy offers 12 broad categories of
domestic support measures, viz. policy support, fiscal support, credit support, infrastructure
support, technological support and quality improvement, marketing support, streaming
inspections/ rules and regulation, entrepreneurship development, facilitating prompt
payment, 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 Year
Plan of India 2002-2007 (Government of India, 2003c) envisages adequate credit/loans from
financial institutions/banks, funds for technology upgradation and modernisation, adequate
infrastructure 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.
References Economic size
Buckley, P.J. (2003), “Foreign direct investment by small and medium sized enterprises: the and performance
theoretical background”, in Audretsch, D.B. (Ed.), SMEs in the Age of Globalization,
Edward Elgar Publishing Inc., Northampton, MA, pp. 126-37. of SSEs
Government of India (1997), Report of the Expert Committee on Small Enterprises, Ministry of
Industry, New Delhi.
Government of India (2001), Report of the Study Group on Development of Small Scale 611
Enterprises, 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 & New
Initiatives 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 and
Programmes, Planning Commission, New Delhi.
Government of India (2004), Final Results: Third All India Census of Small Scale Industries
2001-2002, Development Commissioner (Small Scale Industries), Ministry of Small Scale
Industries, 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 of
Finance, New Delhi.
McIntyre, R.J. and Dallago, B. (Eds) (2003), Small and Medium Enterprises in Transitional
Economies, Plagrave Macmillan/UN/WIDER, New York, NY.
Nadvi, K. and Schmitz, H. (1998), “Industrial clusters in less developed countries: review of
experiences and research agenda”, in Cadene, P. and Holmstrom, M. (Eds), Decentralised
Production 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.), SMEs
in the Age of Globalization, Edward Elgar Publishing Inc., Northampton, MA, pp. 163-84.
Schmitz, H. and Nadvi, K. (1999), “Clustering and industrialisation: introduction”, World
Development, 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”, World
Development, Vol. 32 No. 2, pp. 305-26.

Corresponding author
M.R. Narayana can be contacted at: mrnarayana@yahoo.com; mrn@isec.ac.in

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IJSE
34,9 Empirical analysis of the
relationship between total
consumption-GDP ratio and
612
per capita income for different
metals
The cases of Brazil, China and India
Antonio Focacci
Faculty 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 relationship
between total consumption of different key metals (aluminium, copper, lead, nickel, tin and zinc) and
per capita income of some important developing countries (Brazil, China and India) today present in
the 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 explanatory
pattern of past and current trends for these three important countries. Second, whether the observable
trends in industrialised countries is similar to those already implemented in the developing ones. After
a brief, but ineluctable, premise considering the theoretical basic assumptions to define the issue and
regarding 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 for
industrialised countries in previous research work, there is a prevailing trend in the lowering of
material intensities with rising per-capita income levels.
Originality/value – Without pretending to be exhaustive, this paper can be useful in improving the
understanding of such developing economies, considering features not yet included in the
international literature.
Keywords Consumption, Metals, Developing countries, Economic sustainability
Paper type Research paper

International Journal of Social
Economics
Vol. 34 No. 9, 2007
pp. 612-636
q Emerald Group Publishing Limited
0306-8293
DOI 10.1108/03068290710778633
1. Introduction
Concerns about environmental degradation have become an important recurring theme
within the international debates on the sustainability of economic systems also in the
recent period. Nevertheless, the question of availability of minerals and its relationship
with economic growth can certainly be considered of undisputable importance within
the 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 little
attention to the limited nature of natural resources (Tilton et al., 1988) even if the 1973
first energy crisis helped in changing several authoritative opinions.
 For developing countries, the problems of economic growth and resource depletion to Consumption-
sustain 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 in
GDP and per
2050 with the majority of such people living in developing countries. A further problem capita income
is the not homogeneous distribution of such people as a result of social/economic
progressive transformations. As a matter of fact, the rate of inhabitants living in urban
areas – expressed as average level for developed ones – should increase to 60 per cent in 613
2025 while it was only 45 per cent in 1994 (projections consider also a further increase
even more up to 80-90 per cent).
Such aspects have evoked a sizeable literature on the pollution-income per capita
relationship 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 appealing
point of these theoretical assumptions is that environmental quality deteriorates
during the early stages of economic development and improves in the later stages as
economy continues its growth hence, for these reasons, a specific analysis of important
developing countries seems advisable.

2. Economic growth and metals consumption: the same parallelism

between developed and developing countries?
Towards the transition from mainly rural economic system to more industrialised
ones, reciprocal and existing relationships among different environmental elements
acquire complex and increasing interdependent connotations during the various stages
of the process itself (Tucker, 1995; Cluver et al., 1998; Weber and Perrels, 2000).
The raising, unstable and cyclical trend in apparent overall metals’ consumption for
the different uses is a very important element in the analysis of the whole economic
systems of the countries involved in such transformations (Eggert, 1991). As a
consequence, the final effect can be so much relevant as higher are both the impact of
the 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 new
international relationships among countries have gained a renewed attention among a
considerable part of scholars and politicians. The case of China, for example, assumes a
paradigmatic role because its commercial relationships are growing at raising rates after
a 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 two
decades. During 1980-1999 average GDP growth rate was 10.4% annually. The industrial
growth rate was at 12.7% per year in the same period. The average annual growth rate of
GNP per capita was 8.3% during 1985-1995.
Several different positions are currently proposed within the debate over the long-term
economic sustainability of modern societies. Some of them appear to be more optimistic
about physical depletion of natural resources (Tilton, 1999), while others seem
particularly 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 the
use and overall consumption of materials with particular reference to the concepts of
dematerialisation (weak dematerialisation) and resources productivity targets.
IJSE Main assumptions in the various degrees of development, together with the link
34,9 with environmental aspects at the macroeconomic level, are described in literature
from the well-known EKC model. This theoretical model postulates an inverse U-trend
of the economic systems during the transition from rural and pre-industrial phases
towards prevailing industrial and post-industrial ones (Figure 1). The term EKC
originates from Russian-native economist’s analysis (Kuznets, 1955) showing the
614 increasing disparity in income distribution during the early stages of economic
development followed by a more even degree of distribution subsequent to the
stabilisation 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’ work
translating 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 relationships
between environmental burdens and income growth, the Environmental Kuznets’
analysis implies that subsequent rising levels in per-capita income are followed by
improvements in the environmental situation as a result of several structural joint
causes:
.
a different aptitude toward the problem on behalf of the whole society as a
consequence of positive income elasticity towards the value of environmental
quality;
.
more open political systems; and
.
highly structured forms within international commerce frameworks (Selden and
Song, 1994; Atkinson et al., 1997; de Bruyn et al., 1998; Munasinghe, 1999).

3. Theoretical and empirical elements of analysis

In order to accomplish this analysis, it is necessary to construct two series of diagrams
for the three countries taken into consideration in the paper.
In the first group is followed the classical theoretical approach of the EKC
correlating resource consumption to per-capita income (expressed by per-capita GDP
in national currency). Resource consumption is approximated by using apparent
consumption data for different key materials: aluminium, copper, lead, nickel, tin and
zinc (as reported within Metallgesellschaft (1996, 1987, 1977, 1966) publications cited in
the references section). In elaborating the total consumption-GDP ratio, the approach

Indicator of
environmmental
damage

Figure 1.
The classical EKC
Income per capita
already proposed within the paper of Cleveland and Ruth (1998) for intensity of use Consumption-
calculation is assumed. The diagrams showing the trend of metals’ consumption in GDP and per
relation to per-capita income (used as a proxy of dematerialisation index) refer to
different periods, because the available historical series of data do not cover the same capita income
periods of time for the involved countries. More precisely, as far as historical series
expressed in national currencies are concerned:
.
Brazil data cover the period from 1969 to 1995 because the figures about GDP 615
implicit price deflator have a lack in the 1968 year value (even if previous values
are available).
.
China data cover the period from 1969 to 1995 for aluminium and copper, as
already seen for Brazil, while for other metals (lead, nickel, tin and zinc) the series
start from 1972 because there are no previous figures about consumption.
.
India series cover the whole period from 1960 to 1995 for all metals except for
nickel (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 an
appropriate way because of the lack of continuity; hence, their use would invalidate the
whole elaboration process (as above mentioned for the case of Brazil).
As far as the second group of diagrams data expressing GDP is concerned, per-capita
income is expressed in Purchasing Power Parities (as an acronym PPPs). As a matter of
fact, by using PPP coefficients (given in national currency units per 1995 US$) it is
possible to overcome the usual problems related to the use of local/national currency
exchange rates. In fact local exchange rates:
.
refer to goods and services traded on the international markets, that are usually
very different from those exchanged on the domestic markets;
.
do not take into account the effects of custom duties, transport costs among the
main 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 the
purchasing power of different currencies by eliminating the differences in price levels
between countries and all relevant misalignments that would imply the employ of data
of the transformed GDP into the different currencies by using exchange rates. This
calculation permits to obtain homogeneous international data useful for direct
cross-country comparisons.
For these PPPs diagrams the showed period is shorter (1975-1997) than local
currencies GDP series, because of the lack of PPPs coefficients for previous years.
In both series of diagrams (GDP expressed in national currencies and GDP
expressed in PPPs), we had to elaborate the original figures about macroeconomics
data in order to render homogeneous the information recurring to the following
process. First of all, per-capita GDP was calculated from the historical figures for
population and for current GDP (World Bank, 2002); then, current GDP figures were
transformed at 1995 prices (in order to rid them of the inflation factor and render them
homogeneous over time) using the specific deflator for GDP at market prices in the
various local currencies (World Bank, 2002).
IJSE To test the possibility of fitting the gathered data to the EKC model, a multiple
regression analysis has been proposed by recurring polynomial equations having the
34,9 material intensity as the dependent variable and per-capita income as the independent
variable. The statistical models are of the following kind (using at the maximum level a
sixth degree polynomial equation):
MIit ¼ b0 þ b1 Y it þ b2 Y 2it þ b3 Y 3it þ b4 Y 4it þ b5 Y 5it þ b6 Y 6it þ 1it
616
where: MIit represents the value of material intensity for country i and year t; Yit is the
per-capita income for country i and year t; 1it is the general error term (which is
normally 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 findings
The first diagrams (Figures 2-16) show groups of results calculated with values
expressed in local currency at 1995 prices (all graphs show total figures gathered).
Brazil (Aluminium)
0.90
Material Intensity (t/millions

0.80
BRL at 1995 prices)

0.70
0.60
0.50
0.40
0.30
0.20
Figure 2. 0.10
Material intensity
(aluminium) – per capita 0.00
income (expressed in local 1,700 2,200 2,700 3,200 3,700 4,200
currency at 1995 prices) Per capita income (BRL at 1995 prices)
ratio for Brazil
Source: Personal elaborations on data: Metallgesellschaft and World Bank (2002)

Brazil (Copper)
0.60
Material Intensity (t/millions

0.50
BRL at 1995 prices)

0.40

0.30

0.20
Figure 3. 0.10
Material intensity (copper)
– per capita income 0.00
(expressed in local 1,700 2,200 2,700 3,200 3,700 4,200
currency at 1995 prices) Per capita income (BRL at 1995 prices)
ratio for Brazil
Source: Personal elaborations on data: Metallgesellschaft and World Bank (2002)
 Brazil (Lead) Consumption-
0.25 GDP and per
capita income
Material Intensity (t/millions

0.20
BRL at 1995 prices)

0.15
617
0.10

0.05 Figure 4.
Material intensity (lead) –
0.00 per capita income
1,700 2,200 2,700 3,200 3,700 4,200 (expressed in local
Per capita income (BRL at 1995 prices) currency at 1995 prices)
ratio for Brazil
Source: Personal elaborations on data: Metallgesellschaft and World Bank (2002)

Brazil (Nickel)

28.00
Material Intensity (t/billions

23.00
BRL at 1995 prices)

18.00

13.00

8.00 Figure 5.
Material intensity (nickel)
3.00 – per capita income
1,700 2,200 2,700 3,200 3,700 4,200 (expressed in local
Per capita income (BRL at 1995 prices) currency at 1995 prices)
ratio for Brazil
Source: Personal elaborations on data: Metallgesellschaft and World Bank (2002)

Brazil (Tin)
14.00
Material Intensity (t/billions

12.00
BRL at 1995 prices)

10.00
8.00
6.00
4.00 Figure 6.
Material intensity (tin) –
2.00 per capita income
1,700 2,200 2,700 3,200 3,700 4,200 (expressed in local
Per capita income (BRL at 1995 prices) currency at 1995 prices)
ratio for Brazil
Source: Personal elaborations on data: Metallgesellschaft and World Bank (2002)
IJSE Brazil (Zinc)
34,9 0.32

Material Intensity (t/millions

0.30

BRL at 1995 prices)

0.28
618 0.26

0.24

Figure 7. 0.22
Material intensity (zinc) –
per capita income 0.20
(expressed in local 1,700 2,200 2,700 3,200 3,700 4,200
currency at 1995 prices) Per capita income (BRL at 1995 prices)
ratio for Brazil
Source: Personal elaborations on data: Metallgesellschaft and World Bank (2002)

China (Aluminium)
0.50
0.45
Material Intensity (t/millions

0.40
CNY at 1995 prices)

0.35
0.30
0.25
0.20
0.15
Figure 8. 0.10
Material intensity 0.05
(aluminium) – per capita 0.00
income (expressed in local 0 1,000 2,000 3,000 4,000 5,000 6,000
currency at 1995 prices) Per capita Income (CNY at 1995 prices)
ratio for China
Source: Personal elaborations on data: Metallgesellschaft and World Bank (2002)

China (Copper)
0.35
Material Intensity (t/millions

0.30
CNY at 1995 prices)

0.25
0.20

0.15
0.10
Figure 9.
Material intensity (copper) 0.05
– per capita income 0.00
(expressed in local 0 1,000 2,000 3,000 4,000 5,000 6,000
currency at 1995 prices) Per capita Income (CNY at 1995 prices)
ratio for China
Source: Personal elaborations on data: Metallgesellschaft and World Bank (2002)
 China (Lead) Consumption-
250.00 GDP and per
capita income
Material Intensity (t/billions

200.00
CNY at 1995 prices)

150.00 619
100.00

50.00 Figure 10.

Material intensity (lead) –
0.00 per capita income
0 1,000 2,000 3,000 4,000 5,000 6,000 (expressed in local
Per capita Income (CNY at 1995 prices) currency at 1995 prices)
ratio for China
Source: Personal elaborations on data: Metallgesellschaft and World Bank (2002)

China (Nickel)

25.00
Material intensity (t/billions

20.00
CNY at 1995 prices)

15.00

10.00

5.00
Figure 11.
Material intensity (nickel)
0.00 – per capita income
0 1,000 2,000 3,000 4,000 5,000 6,000 (expressed in local
Per capita Income (CNY at 1995 prices) currency at 1995 prices)
ratio for China
Source: Personal elaborations on data: Metallgesellschaft and World Bank (2002)

As can be noted there are no common trends both considering the same country and
the same metal. Furthermore, the EKC path does not seem followed (with the sole
exception of Brazilian consumption of copper). Material intensity paths are in some
cases raising up, while in other diagrams following the opposite trend.
Within Table I is a summarised scheme of the results obtained through the choice of
the best possible regression function (shown by a solid line in the diagrams), on the
basis of the original figures (shown as scatter diagrams) (Dretzke, 2001; Ragsdale,
2001; Harnett and Horrell, 1998; Christensen, 1996; Bethea et al., 1995; Pindyck and
Rubinfeld, 1981). At this point, it is necessary to outline that the elaboration in this
section is not intended to estimate the exact material’s Kuznets curve using statistical
models, for provisional purposes, nor is it trying to identify the turning-point; it is
IJSE China (Tin)
34,9 16.00

14.00

Material intensity (t/billions

12.00

CNY at 1995 prices)

620 10.00
8.00

6.00
4.00
Figure 12. 2.00
Material intensity (tin) –
per capita income 0.00
(expressed in local 0 1,000 2,000 3,000 4,000 5,000 6,000
currency at 1995 prices) Per capita Income (CNY at 1995 prices)
ratio for China
Source: Personal elaborations on data: Metallgesellschaft and World Bank (2002)

China (Zinc)
250.00
Material intensity (t/billions

200.00
CNY at 1995 prices)

150.00

100.00

Figure 13. 50.00

Material intensity (zinc) –
per capita income 0.00
(expressed in local 0 1,000 2,000 3,000 4,000 5,000 6,000
currency at 1995 prices) Per capita Income (CNY at 1995 prices)
ratio for China
Source: Personal elaborations on data: Metallgesellschaft and World Bank (2002)

simply analysing long-term trends by using those functions best fitting existing
historical figures.
By using the 1995 US$ PPPs to neutralise the effects of expressing real GDP in local
currencies, resulting trends (Figures 17-31) are not very similar to those with GDP
calculated in national currency. Obviously, the modification of the monetary unit of
account used leads to a change in the specific shape of the curves compared with those
shown in diagrams from 2 to 16. Strong similarities can be outlined only in the cases of
lead for Brazil and India and nickel for China (Figures 32-37).
As in the previous case, Table II reports the resulting regression curves of the
original figures.
 India (Aluminium) Consumption-
0.06 GDP and per
capita income
Material intensity (t/millions

0.05
INR at 1995 prices)

0.04
621
0.03

0.02

0.01 Figure 14.

Material intensity
0.00 (aluminium) – per capita
5,000 6,000 7,000 8,000 9,000 10,000 11,000 12,000 13,000 14,000 income (expressed in local
Per capita Income (INR at 1995 prices) currency at 1995 prices)
ratio for India
Source: Personal elaborations on data: Metallgesellschaft and World Bank (2002)

India (Copper)
30.00
Material intensity (t/billions

25.00
INR at 1995 prices)

20.00

15.00

10.00

5.00 Figure 15.

Material intensity (copper)
0.00 – per capita income
5,000 6,000 7,000 8,000 9,000 10,000 11,000 12,000 13,000 14,000 (expressed in local
Per capita Income (INR at 1995 prices) currency at 1995 prices)
ratio for India
Source: Personal elaborations on data: Metallgesellschaft and World Bank (2002)

As can be noted, the adjusted coefficient of determination (adjusted R 2) has a high

value 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 the
Figures (as confirmed by the lower values of the coefficients of variation). In the other
cases the value of the coefficient of determination is not very high representing a worse
fitting of regression curves to empirical data. Also in this calculation, figures for Brazil
confirm previous results having the lowest value in the coefficients of determination.
From the results obtained by using both specific currencies and PPPs it can be
drawn that trends are:
.
different from country to country;
.
different within a country for the different metals;
IJSE India (Lead)
34,9 16.00
14.00

Material intensity (t/billions

12.00

INR at 1995 prices)

10.00
622 8.00
6.00
4.00
Figure 16. 2.00
Material intensity (lead) –
per capita income 0.00
(expressed in local 5,000 6,000 7,000 8,000 9,000 10,000 11,000 12,000 13,000 14,000
currency at 1995 prices) Per capita Income (INR at 1995 prices)
ratio for India
Source: Personal elaborations on data: Metallgesellschaft and World Bank (2002)

Type of curve R2 Adjusted R 2 Standard error Coefficient of variation

Brazil
Aluminium Polynomial degree 4 0.817 0.784 0.044 0.073
Copper Polynomial degree 2 0.179 0.110 0.081 0.205
Lead Polynomial degree 1 0.196 0.163 0.038 0.264
Nickel Polynomial degree 2 0.823 0.808 3.007 0.180
Tin Polynomial degree 1 0.082 0.045 2.016 0.190
Zinc Polynomial degree 1 0.022 2 0.017 0.035 0.139
China
Aluminium Polynomial degree 5 0.529 0.417 0.060 0.192
Copper Polynomial degree 5 0.774 0.720 0.025 0.110
Lead Polynomial degree 3 0.994 0.993 4.099 0.033
Nickel Polynomial degree 5 0.983 0.979 0.643 0.053
Tin Polynomial degree 5 0.851 0.809 1.501 0.028
Zinc Polynomial degree 6 0.709 0.607 16.96 0.108
India
Aluminium Polynomial degree 4 0.760 0.729 0.006 0.155
Copper Polynomial degree 4 0.517 0.454 3.420 0.234
Table I. Lead Polynomial degree 1 0.507 0.493 1.304 0.129
Summary of the results Nickel Polynomial degree 5 0.925 0.909 0.199 0.161
for material’s Kuznets Tin Polynomial degree 6 0.820 0.782 0.235 0.329
curves (expressed in local Zinc Polynomial degree 2 0.576 0.550 2.858 0.139
currency at 1995 constant
prices) Source: Personal elaboration of figures reported in the graphs

.
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, while
for China and India both the indicators move downward with a more decisive path.
 India (Nickel) Consumption-
3.00 GDP and per
capita income
Material intensity (t/billions

2.50
INR at 1995 prices)

2.00

1.50 623
1.00

0.50 Figure 17.

Material intensity (nickel)
0.00 – per capita income
5,000 6,000 7,000 8,000 9,000 10,000 11,000 12,000 13,000 14,000 (expressed in local
Per capita Income (INR at 1995 prices) currency at 1995 prices)
ratio for India
Source: Personal elaborations on data: Metallgesellschaft and World Bank (2002)

India (Tin)
1.80
1.60
Material intensity (t/billions

1.40
INR at 1995 prices)

1.20
1.00
0.80
0.60
0.40
0.20
Figure 18.
Material intensity (tin) –
0.00 per capita income
5,000 6,000 7,000 8,000 9,000 10,000 11,000 12,000 13,000 14,000 (expressed in local
Per capita Income (INR at 1995 prices) currency at 1995 prices)
ratio for India
Source: Personal elaborations on data: Metallgesellschaft and World Bank (2002)

5. Main common features and specificities between developed and

developing countries
Considering the above outlined results, it seems a useful task to analyse if there are
some common features between developing and developed countries. The importance
of the question grounds both in the need of carefully assessing the reiteration in less
developed countries of the industrial models already implemented within more
industrialised ones and, at the same time, in preventing and correcting possible
imitative (and dangerous) behaviours within developing countries linked to
the adoption and diffusion of technological archetypes already constituting the
established models currently implemented in industrialised ones.
An analysis of the situation in the industrialised countries (France, Italy, Japan, UK
and the USA) has been already proposed in a specific previous research work
IJSE India (Zinc)
34,9 35.00

30.00

Material intensity (t/billions

INR at 1995 prices)
25.00

624 20.00

15.00

10.00
Figure 19. 5.00
Material intensity (zinc) –
per capita income 0.00
(expressed in local 5,000 6,000 7,000 8,000 9,000 10,000 11,000 12,000 13,000 14,000
currency at 1995 prices) Per capita Income (INR at 1995 prices)
ratio for India
Source: Personal elaborations on data: Metallgesellschaft and World Bank (2002)

Brazil (Aluminium)
0.59
US $ at 1995 prices and PPPs)
Material Intensity (t/millions

0.30

Figure 20.
Material intensity
(aluminium) – per capita 0.00
income (expressed in US$ 5,000 5,500 6,000 6,500 7,000 7,500
at 1995 prices and PPPs) Per capita income (US $ at 1995 prices and PPPs)
ratio for Brazil
Source: Personal elaborations on data: Metallgesellschaft and World Bank (2002)

(Focacci, 2005a) and the main features have to be (briefly) resumed here in order to
make 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 be
outlined that the empirical relationship between Total consumption-GDP ratio and
per-capita income, as hypothesised in strict Environmental Kuznets terms, does not
hold true also in the cases of the analysed industrialised countries. Furthermore, a
homogeneous and undisputable trend associated with rising per-capita income levels
for all the different industrialised countries has not been observed.
On the other side, the economic and social main trends in these Countries are
characterised by economic growth and socio-economic transformations mainly
 Brazil (Copper) Consumption-
0.40 GDP and per
capita income
US $ at 1995 prices and PPPs)
Material Intensity (t/millions

0.30

625
0.20

0.10
Figure 21.
Material intensity (copper)
0.00 – per capita income
5,000 5,500 6,000 6,500 7,000 7,500 (expressed in US$ at 1995
Per capita income (US $ at 1995 prices and PPPs) prices and PPPs) ratio for
Brazil
Source: Personal elaborations on data: Metallgesellschaft and World Bank (2002)

Brazil (Lead)
150.00
140.00
US $ at 1995 prices and PPPs)
Material Intensity (t/billions

130.00
120.00
110.00
100.00
90.00
80.00
70.00
Figure 22.
60.00 Material intensity (lead) –
50.00 per capita income
5 6 6 7 7 8 8 (expressed in US$ at 1995
Per capita income (US $ at 1995 prices and PPPs) prices and PPPs) ratio for
Brazil
Source: Personal elaborations on data: Metallgesellschaft and World Bank (2002)

fostered by increases in energy consumptions, the mutual interdependence among

economic activities (Cassedy and Grossman, 1998; Cluver et al., 1998; Weber and
Perrels, 2000) and, finally, the aptitude of modern societies towards low-resources
conservation.
As far as Brazil, China and India economic systems are concerned, the three
countries are currently based on the same common pillars (even if with some specific
differences): fast growing GDP rates, sound industrial bases, remarkable
manufacturing exports and new aptitudes coupled with the consolidated traditions
in raw materials exports (Pathak et al., 2000).
At the same time, there has been an increasing industrialisation rate, a rising
demand for development of transport, infra-structure and the modernisation in life
styles.
IJSE Brazil (Nickel)
34,9
14.00

US $ at 1995 prices and PPPs)

Material Intensity (t/billions
12.00

10.00
626
8.00

6.00
4.00
Figure 23. 2.00
Material intensity (nickel)
– per capita income 0.00
(expressed in US$ at 1995 5 6 6 7 7 8 8
prices and PPPs) ratio for Per capita income (US $ at 1995 prices and PPPs)
Brazil
Source: Personal elaborations on data: Metallgesellschaft and World Bank (2002)

Brazil (Tin)

8.00
7.50
US $ at 1995 prices and PPPs)
Material Intensity (t/billions

7.00
6.50
6.00
5.50
5.00
Figure 24. 4.50
Material intensity (tin) –
per capita income 4.00
(expressed in US$ at 1995 5 6 6 7 7 8 8
prices and PPPs) ratio for Per capita income (US $ at 1995 prices and PPPs)
Brazil
Source: Personal elaborations on data: Metallgesellschaft and World Bank (2002)

Brazil, for example, has witnessed a more intensive use of electric power in relation
with industrial modernisation and with the development of highly energy-intensive
industries (plants producing aluminium, ferroalloys, soda-chlorine, pulp and paper,
iron and steel) (Tolmasquim et al., 2001). Also the mining sector has witnessed several
common features in its growth within the three countries (Singh and Kalirajan, 2003;
Ziran, 2002; Machado and de M. Figueirôa, 2001). The prevailing ones are: the
increasing level of deregulation and the progressive implementation of privatisation
processes.
The speed-up in the latter precisely acquires (both for the companies involved in the
production phase and the companies involved in the distribution stage of metals)
 Brazil (Zinc) Consumption-
180.00 GDP and per
capita income
US $ at 1995 prices and PPPs)
Material Intensity (t/billions

160.00

627
140.00

120.00
Figure 25.
Material intensity (zinc) –
100.00 per capita income
5 6 6 7 7 8 8 (expressed in US$ at 1995
Per capita income (US $ at 1995 prices and PPPs) prices and PPPs) ratio for
Brazil
Source: Personal elaborations on data: Metallgesellschaft and World Bank (2002)

China (Aluminium)

10
9
US $ at 1995 prices and PPPs)
Material Intensity (t/billions

8
7
6
5
4
3
2
Figure 26.
1 Material intensity
0 (aluminium) – per capita
0 50 100 150 200 250 300 income (expressed in US$
Per capita Income (US $ at 1995 prices and PPPs) at 1995 prices and PPPs)
ratio for China
Source: Personal elaborations on data: Metallgesellschaft and World Bank (2002)

increasing importance considering that the higher expected investment return rates are
a 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 global
competitive rate of the sector and the mix of available technologies to improve the
operating efficiency level.
Considering these important similarities existing within all transition processes
(and within institutional governance models both for the developed countries and for
the developing ones), the main specific features of the developing countries with a
considerable impact both in economic policy and also in environmental policies are:
IJSE China (Copper)
34,9 6

US $ at 1995 prices and PPPs)

Material Intensity (t/billions
5

4
628
3

Figure 27. 1
Material intensity (copper)
– per capita income 0
(expressed in US$ at 1995 0 50 100 150 200 250 300
prices and PPPs) ratio for Per capita Income (US $ at 1995 prices and PPPs)
China
Source: Personal elaborations on data: Metallgesellschaft and World Bank (2002)

China (Lead)

4,000
US $ at 1995 prices and PPPs)
Material Intensity (kg/billions

3,500
3,000
2,500
2,000
1,500
1,000
Figure 28. 500
Material intensity (lead) –
per capita income 0
(expressed in US$ at 1995 0 50 100 150 200 250 300
prices and PPPs) ratio for Per capita Income (US $ at 1995 prices and PPPs)
China
Source: Personal elaborations on data: Metallgesellschaft and World Bank (2002)

.
the remarkable difference between per-capita income as a consequence of a
heterogeneous 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 of
technologies.

From the analysis proposed in the paper, it can be confirmed that – as already seen for
industrialised countries – for Brazil, China and India there are prevailing trends in the
lowering of material intensity with rising per-capita income levels (even if the strict
theoretical path of the EKC is not replicated). All the diagrams combining in time the
 China (Nickel) Consumption-
GDP and per
300 capita income
US $ at 1995 prices and PPPs)
Material Intensity (kg/billions

250
629
200

150
Figure 29.
Material intensity (nickel)
100 – per capita income
0 50 100 150 200 250 300 (expressed in US$ at 1995
Per capita Income (US $ at 1995 prices and PPPs) prices and PPPs) ratio for
China
Source: Personal elaborations on data: Metallgesellschaft and World Bank (2002)

China (Tin)

250
US $ at 1995 prices and PPPs)
Material Intensity (kg/billions

200

150

100

50
Figure 30.
Material intensity (tin) –
0 per capita income
0 50 100 150 200 250 300 (expressed in US$ at 1995
Per capita Income (US $ at 1995 prices and PPPs) prices and PPPs) ratio for
China
Source: Personal elaborations on data: Metallgesellschaft and World Bank (2002)

trends of material intensity for the three developing countries – both with the GDP
expressed in local currency and with the GDP expressed in PPPs – outline that it is not
possible to define a unique pattern.
Such a conclusion holds true in comparisons among industrialised countries and
developing ones concerning energy intensities and emission intensities already
observed and outlined in previous research works (Focacci, 2003, 2005b).

6. Conclusions
This work highlights the main trends resulting in an empirical analysis of
dematerialisation intensities for Brazil, China and India as already proposed in a
IJSE China (Zinc)
34,9 4,000

US $ at 1995 prices and PPPs)

Material Intensity (kg/billions
3,500

630 3,000

2,500

2,000
Figure 31.
Material intensity (zinc) –
per capita income 1,500
(expressed in US$ at 1995 0 50 100 150 200 250 300
prices and PPPs) ratio for Per capita Income (US $ at 1995 prices and PPPs)
China
Source: Personal elaborations on data: Metallgesellschaft and World Bank (2002)

India (Aluminium)

4.00
US $ at 1995 prices and PPPs)

3.50
Material Intensity (t/billions

3.00
2.50
2.00
1.50
1.00
Figure 32. 0.50
Material intensity
(aluminium) – per capita 0.00
income (expressed in US$ 90 110 130 150 170 190
at 1995 prices and PPPs) Per capita Income (US $ at 1995 prices and PPPs)
ratio for India
Source: Personal elaborations on data: Metallgesellschaft and World Bank (2002)

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 developing
countries 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 – in
percentage terms – than those of apparent materials’ consumption, then the ratios tend
to fall (such an effect acquires specific relevance considering expanding economies like
those considered in the present work). As Labys and Waddell (1989) pointed out, in
 India (Copper) Consumption-
1.40 GDP and per
capita income
US $ at 1995 prices and PPPs)

1.20
Material Intensity (t/billions

1.00

0.80
631
0.60

0.40

0.20 Figure 33.

Material intensity (copper)
0.00 – per capita income
90 110 130 150 170 190 (expressed in US$ at 1995
Per capita Income (US $ at 1995 prices and PPPs) prices and PPPs) ratio for
India
Source: Personal elaborations on data: Metallgesellschaft and World Bank (2002)

India (Lead)

0.90
0.80
US $ at 1995 prices and PPPs)
Material Intensity (t/billions

0.70
0.60
0.50
0.40
0.30
0.20
0.10 Figure 34.
Material intensity (lead) –
0.00 per capita income
90 110 130 150 170 190 (expressed in US$ at 1995
Per capita Income (US $ at 1995 prices and PPPs) prices and PPPs) ratio for
Source: Personal elaborations on data: Metallgesellschaft and World Bank (2002)
India

order to pursue this aim, the wider range of employed materials within the economy
have to be used in order to be more incisive and in the present case the wider number of
minerals data are used. Without doubt, to carry out a more complete analysis, it would
be very interesting going back even further in time. Unfortunately comparable
historical series cover only the reported period and the aim of the work has been to
gather the greater amount of available public data in order to outline prevailing trends.
Dematerialisation processes must consider – also in the case of developing
countries – both the technological development (substitution between groups of
materials, i.e. plastics vs metals) and the uneven distribution of natural resources.
IJSE India (Nickel)
34,9 200.00
180.00

US $ at 1995 prices and PPPs)

Material Intensity (kg/billions
160.00
140.00
632 120.00
100.00
80.00
60.00
40.00
Figure 35.
Material intensity (nickel) 20.00
– per capita income 0.00
(expressed in US$ at 1995 90 110 130 150 170 190
prices and PPPs) ratio for Per capita Income (US $ at 1995 prices and PPPs)
India
Source: Personal elaborations on data: Metallgesellschaft and World Bank (2002)

India (Tin)

50.00
45.00
US $ at 1995 prices and PPPs)
Material Intensity (kg/billions

40.00
35.00
30.00
25.00
20.00
15.00
10.00
Figure 36.
Material intensity (tin) – 5.00
per capita income 0.00
(expressed in US$ at 1995 90 110 130 150 170 190
prices and PPPs) ratio for Per capita Income (US $ at 1995 prices and PPPs)
India
Source: Personal elaborations on data: Metallgesellschaft and World Bank (2002)

Moreover, the relative importance of service sectors and subsequent effects in

manufacturing industry are relevant in trying to explain such paths.
As far as developing countries are concerned, the fast adoption of last technological
developments jointly to economic growth (if not adequately supported) could hide
many drawbacks in the mining sector too. Widespread technologies in industrialised
countries, also within materials sector, are the result of decades of researches and
unavoidable errors in their adoption. Skill transfert and technology trade towards the
transition 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 and
less industrialised countries (Vishwasrao and Bosshardt, 2001; Peretto, 1999).
 India (Zinc) Consumption-
1.80 GDP and per
1.60 capita income
US $ at 1995 prices and PPPs)
Material Intensity (t/billions

1.40
1.20
633
1.00
0.80
0.60
0.40
0.20 Figure 37.
Material intensity (zinc) –
0.00 per capita income
90 110 130 150 170 190 (expressed in US$ at 1995
Per capita Income (US $ at 1995 prices and PPPs) prices and PPPs) ratio for
India
Source: Personal elaborations on data: Metallgesellschaft and World Bank (2002)

Type of curve R2 Adjusted R 2 Standard error Coefficient of variation

Brazil
Aluminium Polynomial degree 3 0.366 0.255 0.036 0.094
Copper Polynomial degree 4 0.314 0.142 0.050 0.215
Lead Polynomial degree 1 0.007 2 0.045 23.437 0.258
Nickel Polynomial degree 4 0.566 0.458 2.154 0.189
Tin Polynomial degree 4 0.313 0.141 1.163 0.192
Zinc Polynomial degree 2 0.056 2 0.049 21.45 0.148
China
Aluminium Polynomial degree 2 0.668 0.631 0.849 0.138
Copper Polynomial degree 6 0.914 0.877 0.321 0.078
Lead Polynomial degree 5 0.994 0.991 76.701 0.037
Nickel Polynomial degree 5 0.987 0.983 7.916 0.040
Tin Polynomial degree 6 0.711 0.587 24.637 0.212
Zinc Polynomial degree 6 0.612 0.445 337.101 0.121
India
Aluminium Polynomial degree 1 0.221 0.180 0.312 0.106
Copper Polynomial degree 2 0.133 0.0367 0.148 0.171
Lead Polynomial degree 1 0.681 0.664 0.071 0.110
Nickel Polynomial degree 4 0.446 0.308 28.660 0.265 Table II.
Tin Polynomial degree 4 0.878 0.848 4.092 0.163 Summary of the results
Zinc Polynomial degree 5 0.760 0.679 0.117 0.093 for material’s Kuznets’
curves (expressed in US$
Source: Personal elaboration of figures reported in the graphs at 1995 prices and PPPs)

Different geographical distribution in natural resources can lead to environmental

problems linked to exploitation and consumption. As a matter of fact, if the diffusion of
cleaner technologies in transforming them into products coupled with new
management styles in business leading should not pervade all economic sectors and
countries in order to encounter the needs of sustainable development, differences
IJSE between developed and developing countries will raise. This could exacerbate social
34,9 and economic problems (loss of democracy and accountability, worsening of position
for workers) (Miozzo et al., 2005; Coates, 2000) with unpredictable (but probably)
further complex effects.

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Corresponding author
Antonio Focacci can be contacted at: antonio.focacci@unibo.it

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Social
Social responsibility in India responsibility
towards global compact approach in India
Aruna Das Gupta
WISDOM, Banasthali Vidyapith, A Deemed University, Rajasthan, India 637
Abstract
Purpose – This paper sets out to explore the trends of social responsibility of the corporate sector in
India.
Design/methodology/approach – The methodology being followed in the paper is exploratory in
nature as data are scanty. An analysis has been done on an overall score drawn from a structured
questionnaire 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 like
India, on the one hand, and the scanty data availability, on the other, lead to issues being restricted in
some sectors.
Practical implications – This research has a tremendous effect on society with respect to the CSR
approach being conceived, adopted and initiated by UN Global Compact.
Originality/value – The paper has touched on the cutting-edge research initiatives in the field
of CSR.
Keywords India, Corporate social responsibility
Paper type Research paper

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 and
its sustainable growth. The global compact is a partnership between the UN, the
business community, International Labor Organization, and NGOs. It provides a forum
for them to work together and improve corporate practices though co-operation rather
than disagreement. The global compact is aimed at responsible corporate citizenship so
that businesses work for social development while creating and spreading wealth and
prosperity.
UN’s Global Compact asks companies to embrace, support and enact, within their
sphere of influence, a set of core values in the area of human rights, labor, environment
and anti-corruption and adhere to ten universally accepted principles, which are as
follows:
Human rights:
(1) Business should support and respect the protection of internationally
proclaimed human rights.
(2) Make sure they are not complicit in human rights abuses.

Labour: International Journal of Social

Economics
(3) Business should uphold the freedom of association and the effective Vol. 34 No. 9, 2007
pp. 637-663
recognition of the right to collective bargaining. q Emerald Group Publishing Limited
0306-8293
(4) The elimination of all forms of force and compulsory labor. DOI 10.1108/03068290710778642
IJSE (5) The effective abolition of child labor.
34,9 (6) Eliminate discrimination in respect of employment and occupation.

Environment:
(7) Business should support a precautionary approach to environmental
challenges.
638 (8) Undertake initiatives to promote greater environmental responsibility.
(9) Encourage the development and diffusion of environmentally friendly
technologies.

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

History of CSR in India

India has a long rich history of close business involvement in social causes for national
development. In India CSR is known from ancient time as social duty or charity which
through different ages changing its nature in broader aspect, now generally known as
corporate social responsibility (CSR). From the origin of business, which leads towards
excess wealth, social and environmental issues have deep roots in the history of
business. Over the time four different models have emerged all of which can be found
in India regarding corporate responsibility (Kumar et al., 2001).
India has had a long tradition of corporate philanthropy and industrial welfare has
been put to practice since late 1800s. Philanthropy is practice of doing well to one’s fellow
men. It is not a relationship – therefore corporate philanthropy often does not have
stakeholder’s interaction and responsibility as a focus, unlike CSR. CSR on the other
hand is under taken by the company not along charitable lines or with the “intent to do
good” but also building of a good public image. It is transnational corporations under
global ideological influence, and the need to engage with all stakeholders that introduce
the concept of CSR on to the India horizon. This process began only in the1800s. The
concept is not similar to corporate philanthropy, as CSR lays stress on stakeholder’s
involvement and on clear articulation of the mutuality of benefit. Thus, CSR is a
corporate 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 of
CSR can be attributed to the process of globalization and to the increase in the reach
of transnational corporations. Under the wake of globalization the reach and numbers
of the transnational corporations has increased, and new channels of production, labor
and marketing have been established across the world. Transnational corporations
now increasingly deal with multicultural and multi-regulatory environments while
customers on the other hand, are increasingly aware and conscious about the means
and methods of production, and demand more than “value for money” while making
product choices. CSR therefore to deal with different stakeholders, builds a positive
public image, and meet customer demands.
Historically, the philanthropy of business people in India has resembled Western
philanthropy 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,
provision of drinking water, building temples, water tanks, wells, ponds, supporting Social
schools, etc. Merchants gave for charity both individually and collectively through responsibility
their business and social organization.
At individual level they gave alms to the poor and needy, arranged for their feeding, in India
setup pathshalas (traditional schools) constructed night shelters for the poor and
travelers, built water tanks and bathing ghats (where people are taking bath), made
provision for drinking water during summer, opened their granaries in times of famine, 639
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 the
town would collect voluntary offerings and present them according to need, like for the
health, 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 trade
and of sociopolitical in India. Over the subsequent 200 years, the purely trade and business
interest of the East India Company changed to social and political management of the
country by company executives until 1885, when India came under the British crown.
The business leaders of emerging indigenous industry remained rooted in the
tradition of philanthropy, which gradually metamorphosed into CSR. Founders of
business families to support schools, colleges, hospitals, orphanages and the promotion
of art and culture note the period 1850 to early 1900 for setting up of trusts and
endowment. By the third decade of the nineteenth century, merchant charity began to
change from being largely religious, ameliorative in nature and confined to members
of their own community, caste or religion towards being more secular, more inclusive
in term of caste, creed and community and more oriented to bringing progress to
society through Western style modern institutions. Though the more enlightened
merchants began to diversify their charitable giving in content and intent, they
continued the older forms of gifting as well. Many did not change at also that there was
a mix of charity and philanthropy throughout the period.
After independent free India struggled to stand on its own feet through indigenous
manufacturing and the creation of jobs, “Temples of Modern India.” Industrialists
participated in nation-building programmers by setting up institutes of scientific and
technical learning. After independence, the need for repaid progress on the part of
government, people an the business community acted as spur for business to
contribute more to social development as business leaders engaged themselves and
their business in social welfare and reform. The emphasis was on vocational and
technical training, public health, power and water supply and the Gandhian social
reform movements.
At the time when moneymaking was all-important, Kasturbhai stressed the need for
moral leadership and social responsibility. Speaking at the Indian Merchants chamber
in 1963, he said; Industry and trade have to discharge many responsibilities to the
community. They should provide support – moral personal and financial to
institutions or cause, which make their towns and villages better for living and which
are intimately connected with out spiritual heritage. We should advertise what we
produce and sell, but in doing so, also convince the public that free enterprise exists to
IJSE serve the community by improving social and economic standards. We should provide
34,9 leadership to the community[1].
JRD Tata who always laid a great deal of emphasis to go beyond conducting
themselves as honest citizens. He pointed out that there were many ways in which
industrial and business enterprises can contribute to public welfare beyond the scope
of their normal activities. He advised that:
640 Apart from the obvious one of donating funds to good causes which has been their normal
practice for years, they could, as some of the companies with which I am connected have
done, use their own financial, managerial and human resourced to provide task forces for
undertaking direct relief and reconstruction measures. This form of public community
service 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’s
devotion to Gandhian ideals regarding fair business practices and philanthropy. He
said:
The business community is an essential ingredient of our democratic society and it has a duty
not 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, it
will not be able to ensure its own survival (Ramakrishna, 1970).
Arvind Mafatlal, Chairman of Mafatlal Industries, also pleaded for more social
responsibility on the part of business but pointed out that it was large concept than
philanthropy and went beyond giving funds to more normative issues such as
self-discipline, quality control of consumer of vulgar display of wealth and ostentations
consumption (Sundar, 2000).
Unless the business community contributed to basic development needs, its very
survival would be threatened and it was in its own interest to participate in the
nation-building effort. Pointing out the need for industry to contribute more to
community development, JRD said:
In every village, large or small there is always need for improvement, for help, for relief, for
leadership and for guidance. I suggest that the most significant contribution organized
industry can make is by identifying itself with the life and the problems of the people of the
community to which it belongs and also by applying its resources, skills and talents to the
extent 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 of
many business houses. Slowly, it began to be accepted, at least in theory that business
had to share a part of the social overhead costs of. Economic development if it wished
to share in its fruits. Traditionally, it had discharged its responsibility to society
through benefactions for education, medical facilities, and scientific research among
other objects. The important change now was that industry accepted social
responsibility as part of the management of the enterprise itself. The community
development and social welfare program of the premier Tata Company, Tata Iron and
Steel Company was started the concepts of “Social Responsibility.” So on many other
companies have taken up. The last decades of the twentieth century witnessed a swing
away from charity and traditional philanthropy towards more direct engagement of
business in mainstream development. Most corporate houses have been contributing to
social cause largely through their own trusts, foundations and societies. Some of these Social
were set up long before India achieved independence. responsibility
in India
Current scenario of CSR in India
The last decade of the twentieth century witnessed a swing away from charity and
traditional philanthropy towards more direct engagement of business in mainstream
development and concern for disadvantaged groups in the society. This has been 641
driven both internally by corporate will and externally by increased governmental and
public expectations (Mohan, 2001).
It is estimated that India has over 200,000 private sector trusts, a large number of
which are set up by Indian businesses, which have been contributing to social causes
through their trusts, foundations or societies. Many among these were established
much before India became independent. A noticeable change in the move of the focus
from charitable donations and philanthropy to the issues of ethics, ecology, support for
small rural enterprises and consumer education became prominent in decades after
independence. This was evident from a sample survey conducted in 1984 reporting
that of the amount companies spent on social development, the largest sum-47 percent
was spent through company programs, 39 percent was given to outside organizations
as aid and 14 percent was spent through company trusts (Working Document of EU
India CSR, 2001).
With the challenges of globalization, liberalization and the emerging trend towards
a free market economy facing India, the role of CSR is paramount. Primarily because
the foreign investment has increased in India, trade links of India and developed
countries grown and extended role of private companies, there has been powerful
influence on CSR in India. Companies can benefit from adopting corporate
responsibility policies in response to globalization, through access of markets, cost
and risk reduction, improved productivity, competitiveness and improved public
image. When combined with increased competition and commercial pressures,
regulatory standards and consumer expectations, concepts of corporate citizenship are
becoming more influential within the business environment. If a company is not a part
of the visible supply chain of a larger company with a socially responsible credo, these
standards have less influence. Lack of information, skills, and technological and
financial capacity can also limit the scope to respond effectively, especially, in case of
small and medium-sized enterprises. A powerful global civil society lobbying and
protesting against poor corporate performance means that companies are under
pressure to cooperate with communities and NGOs to tackle problems together. The
formal processes of stakeholder consultancy are still in their infancy and yet to become
popular (Working Document of EU India CSR, 2001).
Despite the development of Indian CSR from its initial philanthropic focus, there are
still cultural influences to modern CSR. The underlying philosophy is that CSR is
responsibility of business to society at large. Societal expectations in India are that
businesses should be involved in wider issues of societal and national concern while
continuing to conduct their business responsibly. Both domestic and global forces
encourage a broader understanding of corporate responsibility to develop in India.
While some of the impetus may stem from supply chain pressures from international
links through trade and investment, there have also been increased governmental and
public expectations, as well as corporate will involved in post independence drive for
IJSE socially responsible development. The historical influence of colonialism, state planned
34,9 economic development and vast disparities of income have created unique local
conditions in India. There is no single, transferable model of CSR, considering these
factors into consideration (Working Document of EU India CSR, 2001).
According to a survey done by Partners in Change (2000), which covered
600 companies and 20 CEOs for judging Corporate Involvement in Social Development
642 in India: 85 percent agreed that companies need to be socially responsible; only 11
percent companies had a written policy; over 60 percent of the companies were making
monetary donations; health, education and infrastructure were most supported issues.
A survey by center for social markets reported that the primary reason for changing
attitudes to social and environmental responsibility issues was increasing awareness
and protecting reputations. Rising standards, domestically slightly more than
internationally were also strong influences along with commercial pressures and
domestic 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 stakeholder
centered management has grown to become large and successful businesses promoting
stakeholders interests. Examples include Amul Milk Cooperative, Sewa India and
Tilonia, which have illustrated decentralization of management to ensure
empowerment and participation of the poor. Large number of corporate houses and
companies in India are doing tremendous work in CSR, including corporate
philanthropy. Activities include in the area of education, healthcare services, rural
infrastructure, development, community welfare, environment protection, relief and
emergency assistance, preserving art, heritage, culture, religious and a host of other
issues. 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 Commerce
and Industry Associations like Assocham, CII, FICCI, PHD Chamber of Commerce,
regional chambers of commerce, are actively engaged in promoting and sensitizing
their member companies to be socially responsive.
There are several business NGO partnerships where implementation of social
projects has been undertaken by businesses, including the Chambers of Commerce,
Industry Associations, etc. For instance, a response to the major Gujarat earthquake
tragedy brought about a partnership of FICCI (Federation of Indian Chambers of
Commerce and Industry) and CARE India. Through the FICCI Socio Economic
Development 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 than
multinational companies, both in scope and content of work in CSR. According to this
study, by Businessworld – Indica Research, 1999, out of the top 25 companies that were
performing CSR activities, 68 percent were Indian companies, 28 percent were MNCs
and 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 as
Indian companies. According to the snapshot poll conducted by ORG MARG under
this study, it was felt that more trust is placed in press, media, NGOs than in business; Social
workers and management have sharply diverging perceptions of working responsibility
conditions, gender discrimination is an issue and there is a greater need for role by
NGOs. It was felt that business NGO partnerships are a potential concrete method for in India
practice of CSR in India (Kumar et al., 2001).
Globalization has brought significant advantages to countries and business around
the world but the benefits have spread unequally both within and among countries. 643
With a rich cultural heritage regarding CSR, the global compact has taken roots in
India. A large number of key corporates from India have joined. Professional
organizations and academic institutions have also shown interest. Considering the
large size of the country and the stage of development at present, it is felt that a longer
sustainable effort is needed to ensure that global compact is firmly established as a
part of corporate vision, mission and activities. In today’s world it is clearly
demonstrated that human and ethical values pay better results in industry and
business (Swami Someswarananda, 2000).
While discussing about Vivekananda and his theory with respect to CSR, we find
that 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, corporate
governance to global compact. We can divide his social outlook into six different
models:
(1) on Vedanta;
(2) on practical Vedanta;
(3) on humanity;
(4) on society;
(5) on organization; and
(6) on brothers and sisters model.

On Vedanta
To Vivekananda the most important teaching for humanity was Vedanta, the summit
of Vedic philosophy, which teaches the unity of the self and the absolute. Vivekananda
emphasized the great Vedantic realization of “I am Brahman” or “I am God” as the
highest truth for all people.
According to Vedanta, the essence of all science and religion is the knowledge of
oneself in one’s deeper nature as pure consciousness transcending all time space and
material embodiment. Vivekananda emphasized Jnana Yoga or the Yoga of
knowledge, which is the same as Vedanta, the meditation path leading to
self-knowledge.
Bhakti Yoga, the Yoga of devotion, was also very important to him and he was
proficient 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 that
the gaining control of the will and developing the power of self-determination was key
to the growth of mind and character.
He did not neglect karma Yoga or service either. He emphasized the need to work
continually, not only for our own inner growth but also for the upliftment of all
humanity. Vivekananda was a great patriot and perhaps the central figure in the
IJSE modern Indian renaissance. He spoke proudly and eloquently as an Indian and
34,9 encouraged 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 and
modern teachers, as one movement of spiritual culture realization. Unlike many
modern 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 of
644 women, and other social ills that have become associated with Hinduism because of
antiquated social accretions that do not truly represent its spirit. Vivekananda showed
Hindus that what is wrong with India is not owing to its spiritual and religious
tradition but because this tradition has been misunderstood and misapplied.
The universal religion that Vivekananda taught was a modernized form of Vedanta
and 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 are
not 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 is
no more than our shadow. It is beneath our dignity as the master of the universe to be
dominated by anger, fear or desire, to want anything or to be the slaves of anyone’s
opinion.

Practical vedanta
Practical Vedanta is a conscious and deliberate way of life leading to realization of true
nature. Removing individual ignorance, practical Vedanta has one more function: it has
to clear the way for desirable social change for the better, instill knowledge which tries
to etch new lines of selflessness on the minds of humanity. Practically practical
Vedanta tries to shake the foundation of ignorance and selfishness that prevents
humanity to marked its perfect heavenly glory.
The essence of the teachings of Swami Vivekananda was Advaita Vedanta as
revealed in the life of his Master, Sri Ramakrishna. The main points of his teachings
are:
.
that each soul is potentially divine;
.
the goal of human birth is to realize this divinity within and manifest it for the
welfare of the humanity; and
.
essentially all religions lead to the same realization.

Swami Vivekananda’s insistence on individual liberation, as a priority over the efforts

to “do good to the world.” The idea is to strive for special state or plane of
consciousness that would lead a person to realize his or her true nature. Achieving such
exalted state of altered consciousness forms the basis for human actions. Every human
act should have this aim in sight, even in “service to humanity and renunciation of
sense pleasures.” Thus, religion or spirituality for the Swamiji was an act of inching
higher and higher on the steps of consciousness, from animal consciousness to human
consciousness, and from human consciousness to divine consciousness:
Vedanta is everywhere; only you must become conscious of it. These masses of foolish beliefs
and superstitions hinder us in our progress. If we can, let us throw them off and understand
that God is spirit to be worshipped in Spirit and in Truth . . . All the different ideas of God,
 which are more or less materialistic, must go. As man becomes more and more spiritual, he Social
has to throw off all these ideas and leave them behind. If Vedanta – this conscious knowledge
that all is one Spirit – spreads, the whole humanity will become spiritual. But is it possible? I responsibility
do not know . . . (Complete Works Volume, VIII, p. 122). in India
Thus, harmony of religions, universal solidarity, and human being as the highest
manifestation of spiritual consciousness are the basic fundamentals one should not lose
sight of in reading or understanding Swami Vivekananda. The practical aspects of 645
these teachings reflect in renunciation and service. This forms the twin ideal of
Swami Vivekananda’s emphasis for the modern man and woman to strive for. Along
with excellence and perfection in every field of human endeavor one should keep these
ideals before eyes, lest the person should miss the aim.

On humanity
Swami Vivekananda – a patriot monk, even a very learned person like
Pandit Jawaharlal Nehru, in his Discovery of India, had remarked about Swami
Vivekananda as one who preached a sort of religious nationalism.
Swami Vivekananda did not come purely for the political freedom of India, or
merely for the economic or social upliftment of this country. He came for the welfare of
the whole of humanity. Swamiji himself has clarified that on several occasions.
Whenever an avatara comes, he comes for the whole world. When Sri Ramakrishna
came, 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 the
upliftment of the country, to the raising of the standing of the country in the world – a
world 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 is
cultivated, social pride, national pride, comes as a matter of course. It is a
self-respecting man who values his work.

On society
Vivekananda’s love for mankind, his empathy for the poor and downtrodden of all
lands, and his great devotion to his Motherland and her depressed masses were the
motivating 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 was
his 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; and
it 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 and
exploitation. In his eyes, all distinctions whereby one might distinguish one person
from another, such as caste, creed, race, or gender, were based, not on the true nature of
the individual, but on external superimpositions. From the highest point of view, all
are pure spirit and, as such, share an essential identity. Thus, all attempts to exercise
exclusive rights at the expense of others were seen by him to be both an affront to the
human dignity of man and a contradiction of the spiritual fact of unity.
In a lecture delivered in London, entitled “Vedanta and Privilege” Swamiji spoke out
against the phenomenon of privilege at all levels of society: the idea of privilege is the
bane of human life. Two forces, as it were, are constantly at work, one making caste,
IJSE and the other breaking caste; in other words, the one making for privilege, and the
34,9 other breaking down privilege. And whenever privilege is broken down, more and
more 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 a
little privilege over those who have less. There is the still subtler and more powerful
646 privilege of intellect; because one man knows more than others, he claims more
privilege. And last have all, and the worst, because the most tyrannical, is the privilege
of spirituality.
If some persons think they know more of spirituality, of God, they claim a superior
privilege over everyone else. They say, “Come down and worship us, ye common
herds; we are the messengers of God, and you have to worship us.” None can be
Vedantists, and at the same time admit of privilege for anyone. The same power is in
every man, the one manifesting more, the other less; the same potentiality is in
everyone. Where is the claim to privilege? (CW, I.423).
Swamiji’s opinion on caste in general is not always entirely clear. In some of his
writings and lectures, especially when responding to criticisms of the caste system
from the West, he defends the concept of caste as representing a sensible and necessary
division of labor. However, he was uncompromising with regard to his hatred of
hereditary caste, of the notion that one’s station in life was to be determined by birth
alone rather than by one’s ability or natural propensities. Though he sometimes
blamed religion for the modern caste structure, Swamiji’s mature opinion seems to
have been that religion was not to blame and that the earliest references to caste in the
Hindu scriptures do not contain the notion of hereditary caste.
Swamiji’s sympathy and compassion for the poor and downtrodden was one of his
most outstanding traits and was the dominant motivating force behind many of his
activities, including his initial visit to USA and his founding of the Ramakrishna Math
and Mission. His utterances regarding the plight of the poor, particularly the depressed
masses of India, are some of his most passionate and inspiring. In a letter to his
Madrasi disciples, Swamiji wrote:
Feel, my children, feel; feel for the poor, the ignorant, the downtrodden; feel till the heart stops
and the brain reels and you think you will go mad – then pour the soul out at the feet of the
Lord, 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 to
create work for the poor. Bread! Bread! I do not believe in a God who cannot give me bread
here, 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, more
opportunity for everybody . . . (CW, IV. 368).
And in a lecture delivered in Lahore, he said: What we want is not so much spirituality as a
little of the bringing down of the Advaita into the material world. We stuff them too much
with religion, when the poor fellows have been starving. No dogmas will satisfy the cravings
of hunger (CW, III. 432).
Swamiji placed great emphasis on education for the upliftment of the Indian masses. It
was his desire that all aspects of life be covered in this education, so that it would be
conducive to the material, intellectual, and spiritual development of the individual. Social
Above all, he wanted a “man-making” education that would build character, give responsibility
the masses back their “lost individuality” and restore their faith in their own divine
potential. As in all matters of social reform, Swamiji’s motto was “hands off” as in India
he explained to the Maharaja of Mysore.
The only service to be done for our lower classes is to give them education, to
develop their lost individuality . . . They are to be given ideas; their eyes are to be 647
opened to what is going on in the world around them, and then they will work out their
own salvation. Every nation, every man, every woman, must work out one’s own
salvation. Give them idea that is the only help they require, and then the rest must
follow as the effect. Ours is to put the chemicals together, the crystallization comes in
the 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 isolated
social issue, but as intimately connected with the well being of society as a whole. He
wrote to Swami Ramakrishnananda, “There is no chance for the welfare of the world
unless the condition of women is improved. It is not possible for a bird to fly on only
one wing” (CW, VI. 328).
Swamiji was convinced that everyone was, in reality, non-different from the one
universal self. As he wrote to his brother disciples, “I shall not rest till I root out this
distinction of sex. Is there any sex distinction between man and woman – all is
Atman!” (CW, VI. 272-73).

On organization
Swamiji observed that Indians do not know how to work in co-operation. Ten of us get
together to form a society, and in no time we start quarrelling amongst ourselves, and
our effort collapses. To solve that problem in the light of practical Vedanta, we have to
begin with the simple step of trying to respect our own being, from which follow the
ability to work in co-operation and respect for others. It is another application of
atma-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 it
rests. These are:
(1) ideology;
(2) program;
(3) strategy;
(4) tactics; and
(5) fieldwork (Source: According to neovedanties of International Forum for
Neovedantins Fortnightly E-zine, 2005).

But social organizations concern themselves mostly with selfless work to achieve this
end. Unfortunately, social activity becomes the goal, and the truth of divinity of soul is
forgotten. We get involved only in eradication of evils and bringing more comforts to
society. Higher purpose of social service as “service of Divine” is lost sight of. Means
become the goal! This contradiction in approach is responsible for topsy-turvy scenario
in various governmental and non-governmental organizations. Corruption, apathy,
IJSE wastage, alienation, and frustration are a few common problems we encounter in
34,9 evolution 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 reasons
as 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 to
648 run contrary to the hidden motives mentioned above. Therefore, conscious and
deliberate efforts are required to understand the complexities of Yoga of Selfless
Action, 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 or
select talented persons with specialized qualifications. Every level acts as the “ideal”
for lower level. Analysis of an organizational structure is possible by studying
behavioral 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 with
organizational set-up and the work they propose to undertake. Any idea of separateness
between workers, the work, and the instrument of work (organization in this case) will yield
partial and distorted result.
Higher the person in organizational hierarchy, less privilege he or she should seek. He should
equally cherish the idea of mixing with common people, visiting villages, and actively
participating in ground level programs as much as he or she likes to attend meetings and
conferences.
Without sacrifice and selfless love no social work will be enduring. Corollary is that, when
these 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 and
growth. In serving others, we serve ourselves. That is why Swami Vivekananda once
said to the effect “one who accepts help from you is greater than you: receiver is greater
than 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 ourselves
with success or failure. Attachment to outcome may be counter-productive. Similarly,
too much of emotional involvement makes us result-oriented and then organizational
endeavor loses its effectiveness; for emotions and frustration go hand in hand.

Brothers and sisters model

Swami Vivekananda in his opening and closing addresses at the Parliament of
Religions in Chicago spoke eloquent, powerful and memorable words “Brothers
and Sisters” to highlight the importance of inter-religious understanding and respect
and expanded the concept of brotherhood and sisterhood to all religions, nations, and
communities. He closed his maiden speech with the following words: sectarianism,
bigotry, and its horrible descendant, fanaticism, have long possessed this beautiful
earth. They have filled the earth with violence, drenched it often and often with human
blood, destroyed civilization and sent whole nations to despair. Had it not been for
these horrible demons, human society would be far more advanced than it is now. Social
But their time is come; and I fervently hope that the bell that tolled this morning in responsibility
honor of this convention may be the death-knell of all fanaticism, of all persecutions
with the sword or with the pen, and of all uncharitable feelings between people in India
wending their way to the same goal.
Over the years Swami Vivekananda worked out the basics of such a plan and
anchored it with this maxim: “Do not destroy.” He urged people to build instead of 649
pulling anything down. “Help if you can; if you cannot, fold your hands and stand by
and see things go on. Do not injure, if you cannot render help.” Secondly, the
Swami suggested, “take a man where he stands and from there give him a lift. If it were
true that God is the center of all religions, and that each of us is moving towards him
along one of these radii, then it is certain that all of us must reach that center. And at
the center, where all the radii meet, all our differences will cease.” And, he insisted, we
could 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 merely
swords but contempt, social hatred and social ostracism against all those who do not
agree with him. On the other hand, the rational man is glad that others do not think
exactly as he does. Since, thinking beings must differ, “variation is the sign of life, and
it must be there.” A celebration of this variation would be universal religion. The ideal
may seem elusive but Vivekananda believed it to be inherent to human striving. “If the
priests and other people what have taken upon themselves the task of preaching
different 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 severely
over-taxed in this last decade of his life. The magnitude of his spiritual, social and
organizational mission drove him at a pace, which made fatigue inevitable. But the
Swami’s disciples believe that exhaustion alone could not overcome that superhuman
will. They recall his Guru Sri Ramakrishna Paramahamsa’s prediction that
Naren would leave his body the day he realized his true self. Perhaps, it was that
realization which allowed the Swami to slip away one evening in 1902. He had often
visualized his own departure from the body, murmuring, “Hara, Hara (The free, the
free).” Yet, the words which resound through his life journey, and perhaps make a
fitting 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 the
broader sense of CSR, have a direct bearing on the six basic models being propounded
by Vivekananda. And number of other factors are motivating CSR practices in the
corporate 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 important
aspect 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 of
prosperity” in a sea of poverty. “We must do something for the community from whose
land we generate our wealth.” CSR is emerging as a “hard” commercial factor, linked
directly to profits and brand value. For example:
.
Boosting profits. Gujarat Ambuja, one of the countries’s leading cement
manufacturers, reports that “our efforts to achieve world standards in
IJSE environment protection have had the happy outcome of substantially improving
34,9 efficiency and profitability.”
.
Cutting costs. Reliance Industries’ energy conservation measures have saved the
company Rs 1,150 million per annum.
.
Increasing revenues. HLL’s Project Shakti creates income-generating
opportunities for the under-privileged rural women, while giving the company
650 an enhanced access to hitherto unexplored rural areas.
.
Strengthening brand value. In February 2004, Infosys was among seven
international companies to be chosen in the first annual list of “Top Brands with
a Conscience.”
.
Enhancing reputation. The Oil and Natural Gas Corporation has found that its
community development program has “generated tremendous goodwill and
earned the company the reputation of being a company that cares.”
.
Improving morale. Tata Steel believes that helping the community also provides
a new perspective to its employees, thereby strengthening employee morale
(Kumar, 2004).

Looking across the present observation of leading Indian corporations, a number of

core elements emerge:
.
Community development. Most large companies either have their own
foundations or contribute to other initiatives that directly support the
community upliftment, notably in health, education, and agriculture.
.
Environmental management. Environmental policies and programs are now
standard, and many companies have implemented the ISO 14 001 system
throughout their businesses.
.
Workplace. Growing out of long-standing commitments to training and safety is
a more recent emphasis on knowledge and employee well-being.

Table I presents a selected list of CSR innovations from some of India’s leading
companies (Kumar, 2004). Basically Indian corporates are already working on the
guideline of global compact, because Indian ethos and religious values teaches us these
doctrines 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
 Social
Issue Company Action
responsibility
Community development Hindalco Asian CSR Award for its integrated Rural in India
Poverty Alleviation Program
Corporate giving Indian Oil Corporation Dedication 0.75 percent of net profit to
community development initiatives
Health Larsen and Toubro One of first corporates to launch an 651
HIV/AIDS program
Gender equality NTPC One of the few organizations to have a
policy for the grant of paternity leave
Labor standards ITC First company in India to be certified to the
SA8000 social accountability standard for
its Chirala facility
Human capital Infosys Pioneering evaluation of the human capital
using an education index for its employees
Environmental management BHEL All BHEL units are certified to the ISO14
001 environmental management system
Energy conservation Reliance Energy conservation measures are saving
the company Rs 1,150 million per annum
Water conservation Hindustan Sanitaryware Reduced flushing WCs is estimated to save
two billion liters of water
Disclosure Tata Iron and Steel First Indian company to publish a
sustainability report in line with global
reporting initiative guidelines Table I.
India Inc.: selected CSR
Source: Complied from published data on company web sites innovations

.
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
IJSE .
Hindustan Aeronautics Limited
34,9 .
Hindustan Lever Ltd
.
Hindustan Organic Chemicals Limited
. Hindustan Paper Corporation Limited
.
Hindustan Sanitaryware & Industries Limited
652 .
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
 .
Priconser India Pvt. Limited Social
. Psi responsibility
.
Punjab National Bank in India
.
Quadra Advisory Private Limited
. Rallis India Limited
.
Rashtriya Chemicals and Fertilizers Limited 653
.
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 NTPC
Owing to keenness of UN that this movement takes root in India, some business
leaders took the initiative and organized a meeting of select business leaders in
Mumbai in December 2000. NTPC as a prominent business and community leader in
IJSE the power sector was also invited to the meeting and thus engage/associate itself with
34,9 global compact.
Following this meeting which was attended by CMD NTPC, NTPC agreed to
be associated with the global compact. In his letter in May 2001 CMD addressed to
Mr Kofi Annan, Secretary General, UN formally expressed its support for the global
compact and its commitment to take action in NTPC expresses its continued support
654 for the global compact and its commitment to take action in this regard. The principles
of 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 Global
Compact Society of India in the year 2003. Further, NTPC as founder member of Global
Compact Society took the lead for organizing the 1st national convention on
“Excellence in Corporate Citizenship and Global Compact” on July 27, 2004 at
New Delhi.

Communications on progress (2004-2005)

Human rights: principle 1-2
Most of NTPC’s 20 operating power stations are located in remote rural areas which
are socio-economically backward and deficient in the basic civic amenities. NTPC, as
responsible corporate citizen has been addressing the issue of community development
in the neighborhood areas of its stations, which had been impacted due to
establishment of the project.
While, this has been initially administered as part of resettlement and rehabilitation
effort, NTPC recognized its social responsibility to continue community and peripheral
development works where the same has been closed under R&R policy. Towards this,
NTPC during 2004-2005 adopted “Corporate Social Responsibility – Community
Development (CSR-CD) Policy” July 2004.

Tsunami
The employee of NTPC with support of company volunteered to contribute a total sum
of approximately Rs 15.2 million from their salary, in addition to NTPC contribution of
Rs 880 million to Prime Minister Relief Fund as immediate relief measures. The team of
52 NTPC employee provided medical treatment and relief material to the affected
persons. This team treated 7,838 patients and provided food to 18,398 villagers and
children till alternate arrangements were made by local authorities.
NTPC team assisted for restoration of power supply in 53 relief camps, rectification
of 2 nos. control panel, inspection and suggesting rectification for 33 KV transmission
systems, installing small DG set, and repairing a number of DG sets of various
capacities.

Labour standard: principle 3-6

For addressing the issue of labor standard in comprehensive manner, NTPC has
decided to adopt international standards like SA-8000 and OHSAS-18001. During the
year 2004-2005, three of the NTPC stations viz. Anta, Auriaya and Simhadri received
SA-8000 accreditation while Ramagundam was accredited in the year 2003-2004.
Similarly, five of NTPC stations viz. Talcher-Kaniha, Talcher-Thermal, Singrauli,
Rihand and Vindhyachal were accredited with OHSAS 18001 during 2004-2005, Social
bringing total of 19 stations under accreditation of OHSAS 18001. responsibility
Environment: principle 7-9 in India
Towards its commitment to environment NTPC has decided to adopt ISO-14001 and
obtained accreditation for all its 20 operating stations.
During the year 2004-2005, eight of its stations namely Singrauli, Unchahar, 655
Kayamkulam, Badarpur, Auraiya, Anta, Faridabad and Farakka were re-audited and
accreditation for ISO 14001 was revalidated (Source: www.ntpc.co.in/globalcompact/
index.shtml).

Bharat Heavy Electricals Limited

A prominent and active member of the Global Compact Society, Bharat Heavy
Electricals Limited (BHEL) joined the value-based platform, for promoting GCC. The
company is committed to supporting the global compact and the set of core values
enshrined in its ten principles in the areas of human rights, labor standards and the
environment. BHEL publicly advocates the principles of global compact by informing
its employees, shareholders, customers and suppliers, besides integrating them into its
corporate development and training programs.
BHEL has been working for the upliftment of weaker sections of society and their
all round development. Especially, in the area of rural development, the company has
been playing a proactive role and has adopted 56 villages in the vicinity of its major
manufacturing plants located in different parts of the country, where social welfare
activities 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 Heavy
Electricals Limited (BHEL) have made a humble contribution of Rs 1 crore to the
Prime Minister’s National Relief Fund. BHEL’s manufacturing plant at Tiruchi, which
is closest to the affected areas, swung into action by the morning of December 27, 2004
and handed over relief material including, clothing and medicines to the district
authorities by the afternoon of the same day. BHEL and its employees have always
risen to the occasion and contributed its mite rendering relief to victims affected by
natural calamities, like the floods in Assam, earthquake in Gujarat, the super cyclone in
Orissa 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)).

Conclusion
Yet, 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-assertion
rather than accountability. There is certainly no lack of CSR programs and projects
in India: what is absent, however, are clear metrics for evaluating their actual impact in
improving social conditions. One quick indicator: of the 95 supporters of the global
compact from corporate India, only one – Atlas Cycles – has produced the annual
communication on progress that is expected of the compact’s supporters. And while
most large corporations now disclose some information on their social or
environmental programs – with BHEL, Dr Reddy’s, HLL, and TISCO in the
IJSE vanguard – much of this remains highly descriptive and qualitative, lacking the rigor
34,9 of common, quantified performance information that characterizes the company
financial accounts. Companies routinely claim that their employees are their greatest
asset – 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 the
array of community development programs that are now in place. Without this, it is
656 difficult for companies and their stakeholders to judge the efficiency or effectiveness of
these well-intentioned interventions.
Beyond the issue of assessing impact are broader questions of the incentives for
companies to take action. In the language of economics, India’s markets continue to
exhibit an unhealthy profusion of negative externalities where the costs of resource
use, environmental degradation, or community disruption are neither paid by those
who incur them nor are reflected in actual prices. For example, India is already “water
stressed” and is on course to enter a situation of “water scarcity” in the coming
decades. Yet, the current pricing of water is below its real economic value, giving little
incentive for companies to reduce demand and conserve. Tragically, today’s economic
framework gives little encouragement for companies to consider the long-term – the
essence of true sustainable development. Indeed, the pressure in financial markets is
for an ever-more insistent focus on short-term shareholder value. Increasingly, it is
becoming clear that the real CSR leadership is not just putting one’s own house in
order, 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 in
Tribute to Ethics, Gujarat Chamber of Commerce, Ahmedabad, pp. 108-109.
2. Quoted in Tata JRD (1986, p. 40).

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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 action
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Kumar, R., Murphy, D.F. and Balsari, V. (2001), “Altered images: the 2001 state of corporate
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Mohan, A. (2001), “Corporate citizenship: perspectives from India”, Journal of Corporate
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Partners in Change (2000) Report on Survey on Corporate Involvement in Social Development in
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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,
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Sundar, P. (2000), Beyond Business: From Merchant Charity to Corporate Citizenship,
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Swami Someswarananda (2000), Business Management Redefined – The Gita Way, Jaico Book Social
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Tata JRD (1986), “The private sector”, Keynote, Tata Press, Bombay, p. 45.
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Working Document of EU India CSR (2001), “Comparative analysis of corporate social
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Further reading 657

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 International
Publisher, 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 Publishing
Company, New Delhi.
Chakraborty, S.K. (1999b) in Chatterjee, S.R. (Ed.), Applied Ethics in Management: Towards New
Perspectives, Springer Verlag, Berlin.
Chowdherry, S. (n.d.), “Some thoughts on corporate citizenship”.
CII, UNDP, British Council and PriceWaterhouseCoopers (2002), A Survey by CII, UNDP, British
Council and PriceWaterhouseCoopers, September-October.
Floistad, G. (n.d.), “Value management and community building”, Keynote Address at the
Plenary Session “Ethics of Creation, Distribution and Consumption of Wealth”, Institute of
the 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 York
Magazine, 13 September (as quoted in the article written by Darryl Reed in Journal of
Human 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.
IJSE Irani, J.J. (2002) Session on Corporate Social Responsibility, Keynote Address, US India Business
Council, 27th Annual Meeting, Taking Stock: Indian Industry in 2002, June 17.
34,9 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 Human
658 Values, Vol. 4 No. 2.
Sharma, S. (1996a), Management in New Age: Western Windows and Eastern Doors, New Age
International Publisher, New Delhi.
Sharma, S. (1996b), Quantum Hope: Science, Mysticism and Management, New Age International
Publisher, 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 holistic
character”, Int. J. Human Resources Development and Management, Vol. 3 No. 1.
Sharma, S. (2004), “Ethicotarian philosophy and Ethicotarian vision as a basis for holistic
development towards the concept of corporate social dharma”, in Ahluwallia, J.S. (Ed.),
Catalyzing Public & Private Partnerships for Social & Environmental Change, World
Environment Foundation, New Delhi.
Sharma, S. (2005), “Management thought, social discourse and management education: towards
development 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 the
International Ministerial Conference on “Dialogue Among Civilizations – Quest for New
Perspectives”, organized by UNESCO and Government of India on July 9-10, at Vigyan
Bhavan, 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.org
www.sriramakrishnamath.org
www.hindubooks.org
www.indiatogether.org

Appendix
CSR has done by corporate, make it clear that CSR is not merely a buzzword today but is being
rapidly imbibed into the culture of organizations. It is being treated as a process that needs to be
understood and implemented by employees. Companies are actually undertaking initiatives that
help improve society and are encouraging their personnel to show a similar commitment. Clearly, Social
CSR will be the way to go in the future and Indian companies are showing the way of making a
sacro-civic society through sacro-civil management. responsibility
In our opinion Sacro means equality, fraternity, liberty and harmony blended with in India
spirituality. People should live their life in a society where they have all short of rights and equal
opportunity is available. In Indian scenario thoughts on sacro-civic society come with a cover of
socialism, 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 views 659
of 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 divine
message of liberalism spiritual equality and social justice.
Swami Vivekananda’s social thoughts which are inseparable from Eastern and Western
philosophical schools, the thoughts of Isvarachandra Vidyasagar and supreme and divine
teachings of Shri Ramakrishna.
Shri Ramakkrishna had mystic experiences about the existence of divinity in the entire
created world, and his identity with existence. There were occasions when he felt pain when
somebody 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 the
poor. (Saradananda, 1983) Vivekananda found in socialism the key to social unity and economic
justice. It is only the principle of justice, social economic and political that inspired him to
proclaim himself as a socialist. “I am a socialist not because I think it it’s a perfect system, but
half 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 of
rule 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 of
capitalism and socialism with a flavor of values, which is known now as CSR. Many companies
are 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 the
society. This realization has led to an increasing focus by firms on examining their social
responsibilities towards development. Indian corporate houses also walk through a long way of
philanthropy 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 the
exponents – from Vivekananda to Subhash Sharma. To start with, a Vivekanada put forward
the 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, who
ultimately propounded the theory that should guide the business and society towards a sacro
civic approach. To highlight the entire route of philosophical progress in the field of developing
business 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 of
Swami Vivekananda’s ideas and concepts and its interaction with the ideas suggested by Indian
management scholars (Table AI).
Swami Vivekananda has given this idea a hundred years back, when whole world was
fighting between the idea of capitalistic and socialistic views. Vivekananda had shown the path
of making a sacro-civic society. Now at this juncture India is realizing that this is the right path
where we could achieve our goal towards fulfilling our dream of moving towards the goal of
sacro-civic society.
IJSE TOWARDS SACRO – CIVIC SOCIETY
34,9

660
"Each soul is
potentially
"Arise ans
divine" "Practical
Awake and
"Brothers Self - Vedanta"
stop not" "Daridra
and Sister" Relalization Work - Ethics
Goal Narayan"
Stakeholders Orientation and work
Figure A1. ethics Social
Relationship upliftment/Devel
Model for sacro-civic
society derives from -opment/Empo-
Vivekananda’s principles werment to the
weakest"
of management, which are
shown in Table I
"Dasaya dasa" "Servant Leadership"

1 “Brothers and Sisters” – Stake holder’s relationship

(Theory K)
2 “Arise, Awake and Stop on” – Goal orientation
3 “Each Soul is Potentially Divine” – Self-realization
4 “Practical Vedanta” – Work ethics and work ethic
Table AI. 5 “Daridra Narayan” –Social upliftment/social
Vivekananda’s principles development/empowerment to the weakest/“Dalit
of management Upliftment”

Integrating "Private Wealth for Public service"

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Figure A2. Closely Held Nobility

Model B
Society, Mankind and Economy
In addition of Model A, we also suggest Model B shown as Figure A2. This model integrates Social
“Private Wealth for Public Service” in consonance with Vivekananda’s concepts wherein society
becomes a Sacro-civic society. In this triangular model changing nature of society towards responsibility
sustainability and changing approach of business towards society, mankind and economy in India
construct the foundation for future development of sacro-civic world.
Both models viz. Model A and B, constitute the foundation for development of sacro-civic
society. These models also have some ancient linkages. During ancient time “King” was only a
trustee of public wealth. Under his efficient guidance, society, state, country used to develop. But 661
the power or authority changed the concept of kingship. So equal distribution of wealth came to a
halt and society had to face varied socio-economical difficulties. Slowly society changed its
approach and again a section of the society developed the idea of “giving back to society” in
different 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, present
and future.
First comes “charity” the oldest form of giving to the poor. In the time of close door society
wealth belonged to upper section of the society. A poor person has no right as a citizen. So the
word “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 in
the 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; concept
became more secular towards society where involvement in social causes for national
development blended with nationalism. Founders of many business houses in India were
philanthropic and were motivated towards the need to develop the country strong, socially,
economically, and politically. The spirit further deepened with the trusteeship concept by the
father of nation, Mahatma Gandhi and Vivekananda, a transition from individual’s charity to
philanthropy to CSR and then corporate citizenship. The model further explains the contribution
of the Indian scholars and religious teachers like Swami Jitatmananda Swami Somesawarananda,
Professor S.K. Chakrabarty, Professor Subhash Sharma, etc. are pursuing the same view towards
society. Through the ages we came to this position where sacro-secular symbiosis slowly
changes towards sacro-civic society. Particularly country like India in the era of globalization,
society wants to breathe fresh air. Through education, industrialization young generation wants
to change the society. Government, NGOs, and in the last decade of the twentieth century Indian
Business became more concerned about the development of society. Indian Business, contributed
to social causes through their trusts by setting up a large number of them. With the challenges of
globalization private companies have been powerful influence on CSR from its initial
philanthropic focus. Still there are cultural influences in modern CSR. The underlying philosophy
is that social responsibility is liability of business to society at large. Societal expectations in
India are that business should be directed towards sacro-civic society. Social awareness survey
conducted by Partners in Change (PiC), Center Social Markets (CSM), TERI, etc. had shown that
how Indian companies are aware in different social works, include in the area of education,
healthcare, rural infrastructure, development, community welfare, environment protection, relief
and emergency assistance, preserving art, heritage, culture, religious and many other issues. Big
companies (like TATA) to small companies, CII, FICCI, PHD chamber of Commerce, and regional
chambers of Commerce to NGOs, all are actively engaged in socially responsive work. So this is
the 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 with
the changing trends that are taking place with respect to business growth and the changing
approaches of the business houses towards the society. India was the country, which thought of
the concept of Vasudaiva Kutumbakam. There is an ancient concept that helping others is good
for 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.
IJSE In the corporate context, the Atmanam mokshartham stands for the responsibility to the
stakeholders and jagat hithayachatha stands for social responsibility at large.
34,9 We can have an observation that not only established and giant business houses are realizing
the importance of the concept of giving back to society but also the corporates of the newer
generation also increasingly understand its importance. We can hope that Gandhiji’s dream of
Ram 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 NGOs
662 like The Center for Advancement of Philanthropy, The Sampredaan Indian Center for
Philanthropy, The national Foundation for India, Help Age India, Child Relief and You and
governments help trying to improve the condition of society. It is not a very easy task to make
Indian society a sacro-civic society where population is more than 100 crores. After 58 years of
Independence 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 not
a 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, the
way global compact of UNO took the initiative to make mother planet beautiful. Our present
society has fundamental structural and institutional problems that we must recognize and
manage to resolve. We must change the basic operating principles and values of the structures
of our society for that we have to move in a more moral, ethical and spiritual direction. Not only
at individual level, strengthen those values but also equipped with the right kind of operating
principles to build a sustainable society. In business level a sense of service to society has
already 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 are
operating business in India then they have to give more stress on national value and a global
value if it is operating in many countries. For that each company should have a clear resource
allocation for GCC. According to “Partners in Change” (2000) report, 85 percent of companies
have GCC. NGO’s are also shaking hands with corporates for implementing and monitoring the
social activities for converting the civil society into a sacro-civic society through social
management.
Corporate responsibility towards building a sacro-civic society is a vital issue in
contemporary business climate. Much of its currency comes from the scale and influence of
the present day corporates. Some business houses are bigger than many nation states. Their
domain and economic operation are worldwide. Nevertheless, business houses are subject to
constant and intense scrutiny and surveillance by the state and the society in which they
function. 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 impossible
to carry out any other activity for the welfare of the society at large. However, there are two
overriding criteria, which assume significance in this context. While profit may be the overall
objective, the methods employed to achieve profit have to be above board, they must be ethical
and moral. Secondly, having achieved profit, the company must look around for ways and means
by which it can return to the society some endowments for the welfare of everyone. The sum
mum bonus of any enterprise is the lofty and noble objectives it seeks to serve in and for the
society, in which it subsists.
The business community has a key role in helping us view life from a systems perspective, a
perspective that is essential as we move towards a more sustainable society. We shall achieve
that by getting the basic working rules right and then letting the system evolve. If our greatest
challenge lies in the economic arena, it is because the present rules governing its operations are at
variance with society’s real needs. As we build more sustainable business, we create more
sustainable economics, and we set in motion the processes necessary to achieve a more
sustainable civilization. That is our prime goal to make the global citizens happy and prosperous
(Gupta, 2005).
 Finally, it can be observed that to meet economic, legal and ethical responsibilities, businesses Social
are also expected to display a genuine concern for the general welfare of all constituencies. For
example, society desires a cleaner environment, the preservation of wildlife and their habitats, as responsibility
well as living wages for employees, but it also demands low-priced products. Companies must in India
balance the costs of these discretionary against the costs of manufacturing and marketing their
products in a responsible manner.
To conclude vision of sacro-civic society is a realistic vision and could be achieved through a
new corporate model rooted in three fillers of profit, CSR and good governance. 663

Corresponding author
Aruna Das Gupta can be contacted at: adg_iipm@vsnl.net

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IJSE
34,9 Critical evaluation of growth
strategies: India and China
Parikshit K. Basu
664 School of Marketing and Management, Charles Sturt University,
Bathurst, Australia

Abstract
Purpose – This paper aims to attempt to compare the development strategies and achievements of
India 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 two
economies. Changes in approaches, achievements and failures are analysed using materials from past
research and secondary data. Impacts of economic reform process and economic management
capabilities 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 on
investment-driven export-oriented policies that may not be sustainable in the long run. It has so far
ignored the socio-political issues, which can have very serious consequences in the future. Relatively
slower economic growth in India is based on stronger socio-economic foundations. Mutually beneficial
economic cooperation between the two economies and rising interdependence with regional and global
powers should provide a better future.
Originality/value – The paper provides a comprehensive picture of strategies, outcomes and
possibilities. It links past development strategies to future challenges. It may be of value to researchers
and policy makers in both economies while considering future directions.
Keywords Economic growth, Economic doctrines, Economic cooperation, Strategic choices, China, India
Paper type Research paper

International Journal of Social
Economics
Vol. 34 No. 9, 2007
pp. 664-678
q Emerald Group Publishing Limited
0306-8293
DOI 10.1108/03068290710778651
1. Introduction
Rapid economic transformations in India and China in recent years have turned them
into two of the world’s most vigorous and eye-catching economic entities. Their
prospects, possibilities of cooperation and rivalries are being discussed by academics,
journalists, experts and politicians. Analysts believe that the two countries have lots to
contribute to the world economy as they move forward. Although the two giant
economies have potentialities to dominate the global economic scene in the current
century, there are several challenges in the process of converting the potentialities into
realities. The two most populous economies in the world have more differences than
similarities in the process of economic growth. Most of the similarities are common to
those of populous and developing economies in general. But they had different
economic systems in the past and that should significantly influence their economic
achievements in the future. With different socio-economic-political set-ups China and
India followed different development approaches so far. It is not possible to comment
on superiority of one above the other, as their backgrounds are different. It is certainly
beneficial for both economies to cooperate rather than compete in the international
market. In that case China and India may well create economic, trade and export
potential for their neighbours in Asia which may find the two countries to be lucrative
markets instead of rivals.
 India belongs to one of the most densely populated and poverty-stricken regions Critical
in the world, i.e. South Asia. This region occupies only 3.8 per cent of the world’s evaluation of
surface area and 22.6 per cent of world population. None of the South Asian
economies is resource rich and, except for Sri Lanka, all are categorised as growth strategies
low-income developing countries. South Asia is also a region of poverty. More than
40 per cent of the world’s poor live in this region. As large majority of population
live and work in rural areas in South Asia poverty is primarily a rural problem 665
here. In contrast, China is surrounded by economies that have been experiencing
booming economic growth since 1970s. In addition to mighty economic power like
Japan, the “four tigers” – South Korea, Singapore, Hong Kong and Taiwan grew
from low levels of income per head to among the highest in the world within a few
decades. The newly industrialised economies like Malaysia, Thailand and Indonesia
also grew at very high rates during the period.
This paper attempts to compare development strategies and achievements of
India and China in the last 50 years and analyse the challenges lying ahead if the
trend continues. The paper critically evaluates the growth strategies of the two
economies. Changes in approaches, achievements and failures are analysed using
materials from past research and secondary data. Impacts of economic reform
process and economic management capabilities have been evaluated. Critical
analysis is the main approach of the paper. The paper concludes that the Chinese
economy is growing at a much faster rate at present but its growth strategy in its
present form is less likely to be sustainable. One way of achieving better results by
both economies is economic and social cooperation and not rivalry. The two giant
economies have several areas to complement each other. The paper provides a
comprehensive picture of strategies, outcomes and possibilities. It links past
development strategies to future challenges.

2. Overview of economic strategies

2.1 India
The Indian economy is potentially very strong with its large industrial output,
technological knowledge and extensive reserve of skilled manpower. In recent years it
is growing significantly in technology-related areas. In overall terms, India is still
predominantly an agricultural economy where about two-thirds of the population
earns its livelihood from the land although the sector accounts for slightly more than
one-thirds of national income (GOI, 2005).
Since, independence in 1947, India has maintained an enviable political stability
as compared to its neighbours in the region. India introduced centralised planning
system in 1951 within the democratic set up. The core principle of economic
planning was “democratic socialism” – public-sector led growth with strong
industrial licensing and controls and restrictive foreign trade (Basu, 1998). Major
objectives of initial Five Year Plans were to achieve self-reliance and alleviation of
poverty. The approach continued without any major deviation until mid-1980s.
During this period, India had seen series of nationalisations. Industrial, financial
and foreign trade (including foreign investment) sectors were heavily controlled by
the government. Agriculture sector was broadly kept outside the controls for
political reasons (GOI, 2005). Results of these policies were mixed. After following
economic planning continuously for 40 years, India achieved self-sufficiency in
IJSE food-grain production and considerable increase in industrial production. But
34,9 growth rates in its national income and per-capita income were very moderate as
compared to its population growth rate. Targets set in most of the Five Year Plans
were not achieved.
Direction of economic policies in India started changing from mid-1980s when
the government started initiating industrial and trade deregulation measures.
666 However, these unplanned and to a certain extent, random measures resulted fewer
benefits and foreign exchange reserves gradually exhausted (GOI, 2005). The crisis
reached its peak in 1990 when the Indian Government had to approach the IMF for
assistance. As a loan condition, the IMF-World Bank prescribed the so-called
stabilisation and structural adjustment programmes that resulted in India’s “New
Economic Policies” in 1991 (Dutta, 1998). Since, then the Indian economy has
undergone substantial changes with comprehensive liberalisation measures in every
sector of the economy.
After experiencing very moderate growth till 1980s India largely liberalised its
economy in the early 1990s. The reforms undertaken by the Indian Government in 1991
have 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 1990-1992
to 6.8 per cent during 1992-1997. The growth rates were slowed down in the
subsequent years to 5.6 per cent during 1997-2002 and further to 4.2 per cent during
2002-2003. It jumped again to 8.5 per cent in 2003-2004 due to strong growth in
agriculture and industry sectors (GOI, 2005). Per-capita GDP also increased at much
faster rate during 1990s as compared to the previous four decades (GOI, 2005). The
crude indicator of overall average productivity, as measured by GDP per person
employed in US dollars, had increased significantly in India since the late 1970s. Time
series forecasting suggested that steep growth in productivity is likely to continue in
India in the near future (Anwar and Basu, 2004).
Although the pace of overall reform was slowed down in India in the second-half
of 1990s due to change in governments at the national level and in some of the
states[1], FDI inflows continued at a satisfactory pace. Foreign investments in
general and FDI in particular primarily financed private sector units in India. The
inflows of FDI have significant positive impacts on growth of employment and
productivity in the private sector (Anwar and Basu, 2007). During the period
1980-1990, annual rate of growth of employment in the private sector was about 0.4
per 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 stable
during the entire period (1.25 and 1.62 per cent, respectively, in the two periods
mentioned above). Using a crude measure of labour productivity (real wages per
worker) it was observed that the private sector had improved its position since FDI
flows started whereas the public sector’s position had remained unchanged. Using
ASI data, it was estimated that the real wage in the private sector had grown at an
annual rate of 4.7 per cent during 1991-1998 as against 2.3 per cent during
1979-1990. Growth in the public sector real wage rate remained unchanged at about
3.8 per cent in both periods (Dater and Basu, 2003).
Along with economic growth the export sector in India had also improved its
performance in the 1990s. During the period 1991-1992 to 2003-2004, India’s total exports
had grown at an annual average rate of 11.3 per cent, from US$ 18,143 million to
63,843 million. In recent years exports had grown at more than 20 per cent rate annually. Critical
However, during the same period, imports also had grown at an annual rate of evaluation of
15.8 per cent (from US$ 24,075 million to US$ 78,149 million) and, thus worsened
the trade balance situation in recent years (GOI, 2005). India consistently has trade and growth strategies
current 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 annual
growth rates of 6.1 per cent during 1980s and 6.8 per cent during 1970s (Krueger and 667
Chinoy, 2002, p. 13). However, share of India’s exports in world exports remained
insignificant 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 unfavourable
impacts in the Indian economy as well. Patnaik (2000) observed that the Indian
economy 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 a
recession) 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 distribution
adversely. The head-count poverty ratio had increased in India during 1990s,
particularly for the rural sector (Patnaik, 2000, p. 199, Table I). The overall reform
process 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 up
from 0.152 in 1980-1981 to 0.175 in 1989-1990 and then jumped to 0.233 in
1998-1999. Thus, whatever was achieved at the macro level was not evenly
distributed either among the people or among the regions. It was not entirely
unexpected either. While commenting on the nature of political economy in India,
Dutta (2002, p. 16) commented:
It would, however, be naı̈ve to believe that the Indian State could effectively function in the
interest of the “society as a whole” or more specifically in the interest of the vast majority of
the poor people.
Jha (2001) also observed that even in the post-reform period the performance of the
Indian economy was inadequate to reduce the level of poverty due to low savings and
investments and low productivity in the public sector. India is facing a complex
challenge in economic front. On the one hand, it has a large number of highly qualified
professionals as well as several internationally established industrial groups, but on
the other hand, it has some of the lowest human development indicators in the world
and abject poverty, particularly in rural areas (Economist Online).
While India is moving ahead with a moderate agenda of economic reforms, the
political institutions are apparently getting weaker. Since, mid-1980s the federal
political leadership in India started loosing a strong national focus due to growth of
regional political parties. Multi-party coalition governments have become common
feature at federal and state levels in India in recent years. Ideological differences
between political parties within the same government had seriously affected their
abilities to follow clear and strong economic policies in any particular direction in the
recent past (Basu, 1998). Moreover, characteristics of the political leadership have not
changed along with social and economic transformations. The emerging middle-class
population of the post-reform period has not yet represented in the policy-making area
IJSE (Wadhva, 2000). India’s pace of future economic growth depends much on stable and
34,9 representative political leadership.

2.2 China
The People’s Republic of China (China) has several similarities as well as
dissimilarities with India in the process of economic growth. India became
668 independent from the British colonial control in 1947. China started journey in its
present form in 1949 following the Communist Party’s accession to power. While India
resorted to mixed-economy approach for economic growth, China followed the
socialistic 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 a
democratic third world economy.
When the Communist Party came to power in China in 1949, it introduced a central
planning system. Under that system, production resources were allocated by central
planners and not decided by market forces. Prices were administratively determined
rather than by the market mechanism. All enterprises (agricultural, industrial and
service sectors) were state owned. They were given target levels of output to achieve
and were not motivated by the profit maximising objective. (Basu et al., 2002)
The system generally worked well. The economy did not face any serious economic
crisis. During the period 1960-1978, real GDP nearly doubled according to World Bank
data (DX). This was despite, the adverse impact on economic growth during the
Cultural Revolution of the early 1960s, which saw real GDP decline in 1961 and 1962
before 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 China
increased by more than seven times (World Bank DX). Notwithstanding the strong
growth in output over these years, inflation never appeared to be a problem. Although
the GDP deflator rose by 12 per cent in 1961, for the rest of the period through to 1978 it
did 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 to
the rest of the world. Total trade (exports plus imports) as a proportion of national
income 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 without
signs of any imminent economic crisis, the Chinese authorities felt the necessity to
pursue economic reform. Several economic, political and social factors motivated the
decision. Economically, the Chinese growth rate was often perceived as being much
lower than neighbouring East Asian countries (e.g. Japan, South Korea, Singapore)
(Pyle, 1997). In the socio-political field, Chinese society apparently “wanted a change
from the Maoist dogma of the 1950s, 1960s and 1970s” (Pyle, 1997, p. 6). Thus, the
popular mood was said to be in favour of some sort of less administered economic
system 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 in
December 1978 to initiate economic reform process in a planned manner. The process
of implementing China’s economic reform was substantially different from the
approach taken in most other reforming countries (Basu et al., 2002). To avoid major
imbalance within the socio-economic-political system, China introduced reforms
gradually following its own strategy. At the very beginning of the reform process it Critical
was made clear that the reforms would not deviate the economy from the principal evaluation of
objective of creating a socialist state and that reform must be carried out under the
leadership of the Communist Party (Shen, 2000). growth strategies
The economic reform process in China since 1979 can be broadly divided into three
phases (Pyle, 1997; Shen, 2000). During the first five years (1979-1984), the emphasis was
mainly on agricultural reforms. Attempts were made to restore material incentives and 669
private initiatives and thereby to improve allocative efficiency. The attempts were fairly
successful without experiencing any major problems. The second period (1985-1990)
was mainly concerned with urban and industrial reforms. During this period, the
introduction of the market mechanism was attempted. A dual pricing mechanism
(administrative and market prices) and an enterprise contract responsibility system
were introduced. In essence, private production was permitted and this saw the
establishment of the first privately-owned companies in China selling into an entirely
free enterprise market. The Government gave up its monopoly over industrial
production 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, foreign
firms 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 production
and the price at which that production was sold) could sell any excess production in the
open market at market prices. The application of the process was, in the event,
more complicated than initially thought. The development of a market sector exposed
the inefficiency of the SOEs, which began to stagnate, and social unrest appeared as
unemployment of disposed rural workers and, eventually laid-off SOE workers (Basu
et al., 2002). Thus, the reform process created imbalances between different sectors. In an
effort to redress this situation, the early 1990s saw official attention shifted to banking
and financial sector reforms (including foreign trade and investment areas) in the third
phase (Pyle, 1997; Shen, 2000).
The Chinese economy has witnessed some remarkable economic achievements since
the market-oriented economic reform process began in 1978. During the period
1978-2004, China’s GDP increased from US$ 147.3 billion to 1.65 trillion with an average
annual growth rate of 9.4 per cent. Its foreign trade rose from US$ 20.6 billion to
1.15 trillion, averaging an annual growth rate of over 16 per cent. China’s foreign
exchange 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 period
1978-2000, despite increase in population by 306 million, real GDP per-capita increased
5.5 times (World Bank online). By 2003, GDP per-capita in China had risen to $US 1,100
(Economist Online). This is significant because it indicates that China, on the basis of
World Bank definitions, had transformed itself from a “low income country” to a “middle
income country” (World Bank Online, “Country Classification”).
However, China’s rapid economic growth has not been shared equally by its entire
population. As a result, of rapid economic growth, the average income of the
Chinese people of different segments rose significantly and differently. During
1978-2000, the annual average real income of urban residents had increased by
4.8 times, from RMB 343.4 to 1,636.7 at 1978 prices, while that of rural residents had
increased by 3.5 times, from RMB 133.6 to 466.1 (NBSC Online). Although large cities
IJSE and towns are growing at unprecedented rates in recent years, in poverty-stricken rural
34,9 communities and low-income urban neighbourhoods, seeing a doctor or supporting a
school-age child is becoming an unaffordable burden. In 2002, only 27 per cent of
China’s population lived in urban areas as against the world average of about 50 per
cent (Hyland, 2003).
One of the most amazing features of China’s economic reform is the volume of
670 foreign direct investment that has been attracted into the country. Over the period
1983-2000, FDI grew at a staggering annual average rate of 22 per cent. At present,
China is second only to the USA in attracting FDI (Yeung, 2001). As per the official
statistics (NBSC Online), by the end of 2004, China had approved the establishment of
more than 500,000 foreign-funded enterprises. These created an estimated imports
demand of some US$ 560 billion annually. Over 400 firms out of the Fortune 500 have
already made investments in China. The number of R&D centres set up by foreign
investors in China has exceeded 700.
Foreign direct investment provided an important stimulus to the Chinese economy for a
number of reasons. First it provided impetus to the development of China’s trade. Exports
were encouraged because most of the firms established on the basis of FDI were export
oriented. Because these same firms tended to import both their capital equipment and
intermediate goods for further processing, imports were also stimulated. It is reported that
by 1998 exports and imports of both joint venture and foreign-owned firms accounted for
44.1 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 could
not fail to stimulate significant jobs growth. Song (1999) reports that in 1997 there were
over 300,000 overseas financed enterprises. These firms employed in excess of 17 million
workers. Third, as is usually the case with direct capital inflow, the economy was boosted
by the expertise and skill that flowed into China with the capital. This advanced
knowledge was not only put to work in the new industries being established but also
flowed into the economy in general through training and demonstration. This led to an
enhancement of the competitive position of the Chinese economy (Song, 1999).
Another significant feature of post-reform economic growth in China is its high
growth in foreign trade. During the period 1979-2003, its total trade (exports plus
imports) 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 comfortable
trade and current account balance situations (NBSC, 2004). It may be interesting to
observe the reversal of its foreign trade structure over the period. With very low
volume of trade with other countries, in 1978, only 46.5 per cent of China’s tiny export
basket of US$ 9.7 billion was of manufactured goods. In 2003, manufactured goods
constituted 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 ahead
3.1 Similarities among diversities
India and China are compared and contrasted in terms of their size, past growth, political
systems and development approaches in recent years. Apparent similarities in following
closed models of economic growth in the initial years and then policies towards
deregulation and openness to trade, foreign capital, and imported technologies are some of
the widely discussed areas. The US Government had recognised high economic
potentialities of these two countries long back and included them in “big emerging” Critical
markets list (Garten, 1996). However, led by significantly higher flow of foreign evaluation of
investments, China is marching ahead of India in economic growth in the recent years. As
evident from Figure 1, growth of per-capita GDP in China since late 1980s was far higher growth strategies
than 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 been
considered as a favoured destination by international investors, India is more popular 671
among the multinational corporations (Turcq, 1995). Both economies have high rates of
economic growth in recent years as they started from relatively low bases. Access to
international markets and flow of investments always surge economic growth in the
initial period, but it is a more difficult task to sustain it. Moreover, it is not just
the macroeconomic growth that matters for an economy; the well-being of its entire
population should be considered as the true yardstick of development. Both China and
India have encountered problems in ensuring even distribution of economic benefits.
One needs to understand the social objectives and values that the public policies
promoted as part of the reform process. As Sen (2005) observed, three R’s should be
considered – reach, range, and reason. “The reach of the results to be achieved, the range
of 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 is
essential the growth process does not ignore any group of people, particularly of those
who are disadvantaged and downtrodden – at the bottom of the pyramid.
High population pressure is one of the obvious challenges the two giant economies
have been facing. Although total population in China is higher than India,
concentration of population was much higher in India at 333 persons per square
kilometre against 135 for China (World Bank online) in 2003 (Table I). High
concentration of population certainly adds pressure to India’s already scarce natural
resources and overburdened infrastructure. Moreover, while China with its unique
political-economic system could introduce and manage “one-child policy” it may be
impossible for India to follow such a drastic measure in population control (Basu, 1998).

900
800
700
600
US$ 1995

500
400
300
200
100
0
Figure 1.
62

64

66

68

70

72

74

76

78

80

82

84

86

88

90

92

94

96

98

00
19

19

19

19

19

19

19

19

19

19

19

19

19

19

19

19

19

19

19

20

GDP per-capita: 1962-2000

China India (Source: World bank DX
tables)
Notes: World Bank DX Tables
IJSE During 1999-2003, average annual growth rates of population in India and China were
34,9 1.5 per cent and 0.7 per cent, respectively, (Economist Online). At this rate, India is most
likely become the most populous country in the world by the year 2030.
Both economies are still predominantly rural. So a sustainable development should
ideally target rural areas. Both Chinese and Indian Government policies towards rural
development brought certain improvements. According to an IFPRI (2002) study,
672 government expenditures in three areas, R&D on agriculture, education and
infrastructure had particularly benefited the two nations in recent years. R&D
expenditures benefited both the countries in reducing rural poverty and achieving
agricultural growth. Investments in education benefited Chinese rural population more
whereas infrastructure investments improved India’s rural sector more. But as per the
indications, growth is becoming more and more urban oriented and widening economic
gaps between rural and urban areas (Thapa, 2004).
Prompted by high economic growths both economies are facing high pressure for
infrastructure development. With quicker growth, the intensity of the problem is likely
to be more in China in the coming years. Demand for resources to keep pace with
economic growth is on the rise as well. Recent rise in oil prices to record high has been
blamed partly due to excessive rise in demand from China, in particular. As per the USA
Energy Department estimates, demand for oil was about 7.4 million barrels per day for
China 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 are
facing the problem of rising regional and personal inequalities of income. Inequality of
spatial income in China had declined in the early years of reform and then went up
significantly in recent years. In India, inequality was consistently on the rise during the
reform period (Kanbur et al., 2005). The first phase of reforms in China resulted in rapid
increase in rural production and incomes. But the focus of growth during the second
phase shifted more towards urban areas. As a result, vast sections of rural population
were largely kept out of the benefits of fast economic growth (Sen, 2005). Policy shifts
in two major areas of social life also contributed towards increasing the rich-poor gap
in China in recent years. During the pre-reform period, health and education were
practically free and universal in China, provided by the state, collectives or
cooperatives. Now people need to buy such basic facilities and costs are prohibitive for
large sections of population. Denial of such social facilities can lead to slow down the
progress of the economy in the long run (Sen, 2005). Conditions of primary amenities of
life such as availability of drinking water, sanitation facilities, basic infrastructure
such as road and electricity, healthcare and education are still deplorable in rural India
(Anwar and Basu, 2004).

China India

Population (billion) 1.3 1.1

Population/km2 135.4 333.3
Table I. GDP per-capita (US$) 1,100 530
China and India – 2003: GDP per-capita – PPP (US$) 5,225 2,834
at a glance Trade as per cent of GDP 49 20.8
A controversial area of commonality between China and India appears to be in the Critical
area of corruption. High levels of government controls and strong bureaucratic evaluation of
systems 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 90th growth strategies
position for India. Both ranks indicated very high levels of perceptions of
corruption[2]. However, structures of corruption are different in two economies. The
nature and impacts of “top-down” structure of corruption in China may be quite 673
different from the “bottom-up” structure in India (Waller et al., 2002)[3]. However, it
is difficult to argue in favour of either structure. Both can be equally harmful.
According to Bardhan (1997), the structure of corruption had changed from
top-down level in former USSR to bottom-up level in present Russia, and the
problem had become much more acute. The situation may be similar in China. It is
generally accepted that the economic costs of corruption are high. It is virtually
impossible for individuals to remove or even to reduce the level of corruption when
it is widespread in the economy (Mauro, 2004).

3.2 Differences in approaches

There are strong and clear differences in development approaches and economic
management systems between China and India and that can make all the differences in
future. Foreign investment dependant and export-oriented growth approach of China is
quite different from domestic demand driven approach followed by India. Judging by
the results achieved so far, the authoritarian control of the economy in China enabled it
to have a better and efficient economic management than the multi-party democratic
system in India. Again, the underlying policy of maintaining clear distinctions between
economic, socio-cultural and political sectors may be unique in China, but may not be
feasible for India.
One of the major features of the Chinese growth approach in recent years was its
high dependence on investments, more specifically on foreign investments (Lal,
1995). China is the second highest recipient of FDI in the world at present, only
behind the USA. During the period 1999-2003, inflows of FDI as percentage of GDP
for China stood at 3.9 per cent against a meagre 0.9 per cent for India (Economist
Online). The attractiveness of China as a destination of FDI inflows is attributed to
its huge domestic market; increased wages of consumers; political pragmatism to
liberalise China’s regulatory framework (making foreign investment easier); and
membership of the World Trade Organisation (Anwar and Basu, 2004). The
investment-led model does have its advantages as it could quickly accumulate
large amounts of capital and by using cheaper resources like land and labour can
produce very high economic growth in the short run. This is what is happening in
China. However, it can have serious consequences. The economy is more likely to
face instabilities. As international flow of funds is subjected to swings, the national
economy over-dependant on such flows is also subjected to economic cycles more
frequently. Thus, the government would always face policy dilemma (Tianyong,
2004). Moreover, the investment-led development structure could underutilise labour
causing a high unemployment rate and thereby leading to a widening income gap
between rich and poor. With easy flow of capital heavy investments have been
made in capital-intensive industries in China and that had dramatically increased
production (Tianyong, 2004). As compared to investments and production, domestic
IJSE consumption growth was very moderate due to limited increase in income of the
34,9 massive farming sector and growing unemployment. This imbalance in growths of
investments and consumption has made the economy automatically over-dependent
on exports.
As an automatic consequence of investment-driven growth process, China has
become significantly dependent on foreign trade (Nageswaran, 2004). China’s openness
674 indicator (trade in goods as a share of GDP) reached to 49 per cent in 2003, within 25
years of opening up (World Bank online). For India, the ratio was 20.8 per cent in the
same 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 was
16 per cent as against GDP growth rate of 9.4 per cent (NBSC, 2004). The applicability
of an external demand driven growth process for a large economy like China can
very well be questioned. High trade dependence could make the national economy
vulnerable to global fluctuations. The exchange rate system in China is one of the most
controversial issues at present. There have been regular claims that existing system is
providing undue advantage for Chinese exporters although there was no conclusive
evidence to prove or disprove such claims. The export-focussed strategy was
successful for smaller East and South-East Asian economies in the past, but they ended
up in a crisis. Nageswaran (2004) reminded that China was in the same situation in
2003-2004 as the East (and South-East) Asian countries were in the 1990s – high
investment ratio, improving but low productivity, high FDI and high degree of export
reliance for a large economy.
Differences in political systems between the two countries can have significant
impacts on their future developments. The Communist Party of China has the
complete control over the Chinese economy. It can direct the economy towards its
“socialistic” targets by means of economic policies that could be implemented with
little opposition. Questioning the appropriateness of policies initiated by official
authorities is still extremely unlikely under the Chinese system of management. It
has its own benefits in the short-run as exemplified by the experience of China’s
economic growth. But in the long-run, for overall development of a nation, the
informational and incentive roles of open democracy cannot be denied. For effective
implementation of public policies that generates maximum social welfare, open
public discussions are extremely important (Sen, 2005). The strong democratic
set-up in India involving public opinion in every strategic issue can be of enormous
value for a sustainable development process. Open and multiparty democratic
system has its own problems, particularly in countries like India where the number
of political parties are innumerable and the level of political corruption is arguably
extremely high (Basu, 1998). Thus, both the countries have to improve efficiencies in
their respective systems. China has a controlled set-up that may not survive in the
long-run with growing socio-cultural pressures. India has an efficient system on
paper but too inefficient and loose while applying in the practical context.
Where China’s long-term growth perspective is based on expansion of
manufacturing activities, India’s emphasis so far is on new technology in the
information sector and other ventures in the broad service sector (Klein, 2004).
World-class businesses that have emerged in knowledge-based industries are
transforming India into a key global player. Exports of IT software services were
equivalent to about 20 per cent of export values in India in 2003 (GOI, 2005).
However, India needs to develop the high potential IT activities as a mainstream Critical
industry, not just as supplier to a handful of major producers in the world evaluation of
(Saxenian, 2002).
growth strategies
4. Conclusions
With economic globalization, China and India are becoming new global growth
engines in the current century. Mutually-beneficial economic cooperation between 675
the two economies and rising interdependence with regional and global powers will
provide an even better future. The rising giants in Asia may challenge the existing
world domination by the trans-Atlantic community in the coming years. Although
China and India are considered as predominantly manufacturer and consumer
economies, respectively, both are developing the areas they are lacking. With huge
domestic markets and abundance of skilled manpower the nations have
potentialities to pose a serious challenge to the global economy. But they need
cooperation and not competition among themselves. That would enable them to
compete more effectively with the existing superpowers. After long periods of
indifference, positive beginnings have been initiated by the two economies very
recently to open up areas of economic cooperation. The knowledge-based industries
are emerging as the focus of world business for the current century, and India and
China can have tremendous scope of supporting each other in this particular area.
The strong growth of software activities in India can match very well with
hardware production facilities in China.
Based on the experiences of economic growth so far with reformed and open
economies, India can learn several things from China. China has so far managed the
economy very well and utilised its resources and skills to the best possible manner. It
has achieved better results based on investment-driven export-oriented policies that
may not be sustainable in the long run. But it has ignored the socio-political issues and
that can have very serious consequences in the process of future economic
developments. India has its strength in this particular area. Its relatively slower growth
rate is based on stronger socio-economic foundations. On mutually beneficial terms,
development could be fastened in both economies and they can become true economic
powerhouses in terms of manufacturing and consumption capacities.

Notes
1. There have been two types of important political changes in India since mid-1990s. Rightist
and more nationalist political parties have gained power and that slowed down the process
of opening up of the economy. At the same time, coalition governments (of very large
number of political parties in some cases) of diversified interest groups have become quite
common in recent years. That also has slowed down the process of any active policy
initiatives in every area.
2. The most widely known relative indicator of national level corruption is the (CPI) prepared
by the Transparency International (TI). Although it doesn’t measure the actual extent of
corruption (that may be impossible as well) the CPI provides comparative picture of
corruption levels in a wide range of countries in the world annually. This index indicates
the “perceptions of corruption among public officials and politicians as seen by business
people, academics and risk analysts”. As per the latest reports, China ranked 71 in 2004
with a score of 3.4 (out of a maximum of ten); and India was ranked 90 with 2.8 score.
IJSE The perception of corruption in India seems to be more uniform than China as reflected in
standard deviation of scores (0.5 for India and 1.0 for China).
34,9
3. Under the top-down structure, decisions are made at the highest level of the hierarchy and
lower-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 is
just one of the recipients. The first structure was mostly prevalent in former socialist
676 economies, whereas a freer economy tends to have a decentralised system.

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IJSE Further reading
34,9 EconData Pty Ltd (2004), World Tables, EconData Pty. Ltd, Melbourne, World Bank (electronic
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Corresponding author
Parikshit K. Basu can be contacted at pbasu@csu.edu.au

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www.emeraldinsight.com/0306-8293.htm

Enhancing
Enhancing competitiveness competitiveness
of India Inc. of India Inc.
Creating linkages between organizational
and national competitiveness 679
Sanjib K. Dutta
Confederation of Indian Industry, Bangalore, India

Abstract
Purpose – Quality and business excellence awards that recognize excellent organizational
performance have become a major driving force in enhancing the competitiveness of Indian firms
in the global economy. While the frameworks underlying these awards have been used extensively by
organizations, little empirical evidence exists regarding the validity of these frameworks as a predictor
of building competitiveness. This paper aims to address this issue.
Design/methodology/approach – This study critically examines the framework of one of the
leading awards of India by testing the relationship between stakeholder results and enabling practices
using regression analysis, structural equation model and data envelopment analysis.
Findings – The results of the study reveal that the framework is used by the organizations to
enhance 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 effectiveness
and validity of this model by applying the model in selected organizations and to examine whether there
is any significant improvement in results and practices over a period of time. The findings can also be
compared with results and practices of those organizations not practising this model.
Practical implications – This study suggests a framework that not only helps an organization in
positioning existing initiatives and identifying gaps in its journey of competitiveness but also links its
enabling practices and planned results to the growth process of the country.
Originality/value – Global competitiveness serves as the starting-point for instituting the
Confederation of Indian Industry’s (CII) theme of “Competitiveness of India Inc.” and initiating CII
Institute of Quality’s (IQ) task of developing a model of competitiveness that aspires to integrate the
process of building competitiveness of an organization with that of a country. These two become the
driving factors for forming a basis of the model of competitiveness that aims to build competitiveness
at the organizational level contributing to competitiveness at the country level.
Keywords India, Competitive strategy, Globalization
Paper type Research paper

Introduction
Global competition is the name of the game today. The pressure of competition is being
felt with increasing intensity as the world opens up to trade and commerce in the post
WTO regime (Bhaumik, 1999). Although in such a fiercely competitive environment,
companies are under tremendous pressure to offer consistent quality of international
standard at a competitive price to provide value for money competition has contributed
to the economic growth of a nation. Sakakibara and Porter (2001), while exploring the International Journal of Social
influence of domestic competition on international trade performance, using data from Economics
Vol. 34 No. 9, 2007
a broad sample of Japanese industries have found that domestic competition has a pp. 679-711
positive and significant relationship with trade performance measured by world export q Emerald Group Publishing Limited
0306-8293
share. DOI 10.1108/03068290710778660
IJSE While examining the finer elements of competition, Prof. Garelli (2004) has
34,9 described competition and competitiveness as the two faces of the same coin.
According to him, competition is an external and environmental factor and
competitiveness is an intrinsic feature of an entity that can be developed and
nurtured. In today’s perspectives, competitiveness has become a fundamental force in
economics like gravity in physics. Across countries and regions, there is a drive to
680 enhance competitiveness. This includes competitiveness of nations, industry sectors
and individual units. Competitiveness describes economic strength of a country or
industry or organization with respect to its competitors in the global market economy
in which goods, services, people, skills, and ideas move freely across geographical
borders. Highly competitive entities are winners in global competitiveness game.
The biggest challenge for an Indian organization today is to be competitive, not only
in the country but globally also. Competitiveness, being a multi-dimensional concept,
can be enhanced through many ways. An effective and proven way is through the
quality way, which is a major source for creating sustainable competitive advantage for
organizations. There are prominent examples among countries and their organizations
that have become competitive through the quality way.

Competitiveness of India Inc

Garelli, in his work, explored that a new breed of competitors is emerging to reshape
the world where Asia is attracting 60 percent of the investments going to developing
countries and China has become the first recipient of direct investment and the
4th 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 the
World Economic Forum (WEF), India is ranked 56th place on the WEF’s Growth
Competitiveness Index (Global Competitiveness Report, 2003-2004). At the industry
level, clearly much needs to be done to enhance competitiveness to meet the onslaught
of competition from around the world.
In 2002, Confederation of Indian Industry (CII), introduced its theme for 2002-2003
as “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 by
2010. “India Inc.” represents the national government, State governments, business and
industry, voluntary services/NGOs, Agriculture, Services and infrastructure (The
Hindu, April 30, 2002).
“India Inc.” stands for India as a whole – representing government at the national
and State level and representing Indian industry. Therefore, the focus lies on two key
elements 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 economic
reforms undertaken by the Government of India changed the business environment in
the country. This is further getting accentuated with the recent development in East
and South Asia like Beijing declaration between India and China, start of economic
dialogue between India and Pakistan, talk of the formation of Regional Trade Blocks in
the region, etc. All these opened up unlimited business opportunities to India Inc., of Enhancing
course, with increased competition.
competitiveness
Need for a model
of India Inc.
Despite many decades of prodding by pioneers and relentless competitive pressure,
progress in achieving high levels of quality till the last decade was very slow. Concerns
were raised about whether total quality management (TQM) programs have generated 681
real 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 Quality
Efforts Fail” was the question posed by Szwergold (1992).
While analysing the underlying reasons for the slow progress of quality
movement, Chatterjee and Yilmaz (1993) have concluded that organizations are not
able to link their quality initiatives to business results due to the contradictory
prescriptions of the leading gurus. Tonk (2000) has argued that no single quality
system, set of quality criteria or even quality philosophy is ever going to be solution
by itself to a firm’s quality problems. However, there seems to be a little doubt that
regardless of sector, size, structure, or maturity, to be successful, organisations need
to establish appropriate management framework with clear purpose. In other words,
there was a need for a practical and holistic business excellence model synthesing the
propositions of the quality gurus that can be used as a structure for the organisation’s
management system. In this connection, it may be said that the pioneers in this area
like Deming (1982), Crosby (1979), Feigenbaum (1983), Taguchi, Ishikawa (1985) and
Juran (1998) – in spite of the differences in presenting their views have consensus in
the core concepts like continuous improvement or customer satisfaction. Thus,
quality and business excellence awards that recognize excellent organizational
performance have emerged as a significant component of the competitiveness
building strategies of many countries based on the unified theories of the quality
gurus. Tummala and Tang (1996) acknowledges the important contributions of
quality gurus like Deming, Juran, Crosby, Feigenbaum, Ishikawa which led to the
evolutionary development of strategic quality management and also provides a
framework for Baldrige and European quality awards (EQAs).

2.4 Existing quality awards

Competition today is global. It is intense and accelerating. For long-term survival,
organisations need to strive for nothing less than world-class standards of business
excellence. There has been an increasingly widespread recognition that quality will be
the cornerstone of developing the much-needed global competitiveness. Quality and
business excellence awards that recognize excellent organizational performance have
emerged as a significant component of the productivity and quality promotion
strategies of many countries. Several national and regional quality awards have been
established to promote quality and serve as models of TQM. These awards are
established to promote the awareness of business excellence as an increasingly
important element in competitiveness. Not only do they recognize excellent businesses,
but also increase the understanding of the elements critical for business excellence. One
of the best practices associated with continuous improvement is that self-assessment
IJSE techniques using a recognized business excellence model help identify opportunities
34,9 for improvement areas across the organization and promote a holistic approach to
continuous improvement. Developments in the quality award assessment process in
organizations can make a contribution, within a wider framework of organizational
learning.
During the last ten years, the three most frequently used self-assessment models have
682 been Japan’s Deming Application Prize, the Malcolm Baldrige National Quality Award
and the EQA. Established in 1951, the Deming Prize was created by the Union of
Japanese Scientists and Engineers (JUSE) to commemorate Dr W. Edwards Deming’s
contribution to Japanese industry and to promote further the continued development of
company-wide quality control in Japan. The Baldrige Award is an annual, national,
American Quality Award that was established in 1987 to promote quality awareness
and understanding of the requirements for quality and performance excellence, to
recognize quality achievements of American companies, and to publicize successful
quality and performance management strategies. The EQA was established in 1991,
with the support of the European Organization for Quality (EOQ) and the European
Commission (EC), to enhance the position of Western-European companies in the world
market by accelerating the acceptance of quality as a strategy for global competitive
advantage and by stimulating and assisting the development of quality improvement
activities. This award is based on a widely adopted framework known as “Business
Excellence” or “Excellence” Model, promoted by the European Foundation for Quality
Management (EFQM). Recently, there are at least 77 quality and business excellence
awards being implemented in at least 69 countries and economies worldwide (Report of
the Symposium on Quality and Business Excellence Awards, 2001)
While conducting a comparative analysis of national and regional quality awards, it
has been observed by Vokura et al. (2000) that as different quality awards being
periodically reviewed and updated, further similarities between their models and
criteria should result as these quality award models continue to evolve and mature.

Application of business excellence models in India

To pace with this changed scenario, during the last ten years, Indian organizations put
their efforts to use an aligned approach to these model criteria and also to seek recognition
in their journey of excellence. Sundaram Clayton India and Sundaram Brake Linings have
already bagged the overseas Deming Award (JUSE, 2002). The Tatas evolved the
Tata Business Excellence Model (TBEM) and introduced the JRDQV award for business
excellence in 1994. The TBEM framework mostly features the aspects covered in the
Malcolm Baldrige Award (2005). The objective is to ensure that the 100-odd Tata Group
Companies achieved well-defined levels of business excellence and qualified to become
world-class. The CII and Export Import Bank of India, to promote the awareness of
business excellence as an increasingly important element in competitiveness, instituted
the CII-EXIM Bank Award for Business Excellence jointly in 1994. It is based on the
EFQM Excellence Model (2004) and perceived as the most prestigious award in India for
Business Excellence that an Indian company can aspire for.
The scoring process requires that an organization present its achievements across a
range of specific areas relating to each criterion in the assessment model. The nine criteria
are written in a non-prescriptive terms, to allow an organization the freedom to put into its
application self-assessment information which is relevant to its business situation.
 The business excellence model is a non-prescriptive framework based on nine Enhancing
criteria. Five of them are enablers and four are results. The enabler criteria cover what competitiveness
an organization does. The results criteria cover what an organization achieves. Results
are caused by enables. of India Inc.
The model recognises that there are many approaches to achieving sustainable
excellence in all aspects of performance. It is based on the premise that: excellent results
with respect to performance, customers, people and society are achieved through 683
leadership 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 and
learning helping to improve enablers that in turn lead to improved results.

The model criteria

The model’s nine boxes, shown above, represent the criteria against which to assess an
organisation’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 number
of criterion parts. Criterion parts pose a number of questions that should be considered
in the course of an assessment.
To develop the high-level meaning further each criterion is supported by a number
of sub-criteria parts. Criterion parts pose a number of questions that should be
considered in the course of an assessment.
Finally, below each sub-criterion are lists of guidance points. Use of these guidance
points is not mandatory nor is they exhaustive lists. Those are intended to further
exemplify the meaning of the sub-criteria.

Assessment process
(1) Senior managers from industry are selected as assessors. They go through
four-day training programme on understanding the award criteria and
assessment process.
(2) Applicants send 75 pages (maximum) application document to CII.
(3) Assessor team is appointed for each applicant. Assessors individually list
strength, opportunities for improvement and score. The assessor team
individually meets to reach consensus score.

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

People People Results

90 points (9%) 90 points (9%)
Key
Leadership Processes Performance
Policy & Strategy Customer Results
100 points 140 points Results
80 points (8%) 200 points (20%)
(10%) (14%) 150 points
(15%)
Partnerships & Resources Society Results
90 points (9%) 60 points (6%)

I NNOVAT I O N AND L E A R N IN G
Figure 1.
IJSE (4) Distinguished individuals (about nine) from business and academic appointed
34,9 as jurors. Jurors are trained on the award model and the process. On the basis of
assessor team reports, jurors decide on applicants to be site visited.
(5) Assessor teams are appointed to make site visits. assessors meet to plan site
visits. Site visits (4-6 days typically) are made to check the validity of
application and clarify issues. Applications are re-scored and reports are
684 finalized.
(6) The application is assessed and scored on a scale of 0-1,000 points using nine
criteria of The Business Excellence Model, which are also the criteria for The
EQA.
(7) Based on reports from site-visit teams, jurors decide on the winners of the
award, prizes and commendation certificates.

Scoring methodology of an individual assessor (CII-EXIM Bank Award for Business

Excellence, 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 be
addressed.
.
Approach. This covers what an organization plans to do and
the reasons for it. It includes two sub-elements:
(1) A sound approach. It is scored by considering the
following:
† 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 the

following:
† 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 deployment
of the approach. It includes three sub-elements:
(1) Measurement. Regular measurement of the effectiveness
of the approach and deployment is carried out.
 (2) Learning. Learning activities are used to identify and Enhancing
share best practices and improvement opportunities. competitiveness
(3) Improvement. Output from measurement and learning is of India Inc.
analyzed and used to identify, prioritize, plan, and
implement improvements.
(2) Results. While scoring for a results sub-criterion, results element
need to be addressed:
685
.
The first element of results sub-criterion covers what an
organization is achieving. It includes four sub-elements:
(1) Trends. Trends are positive and/or there is sustained
good performance.
(2) Targets. Targets are achieved. Targets are appropriate.
(3) Comparison. Comparisons with external organizations
takes place and results compare well with industry
averages 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 score
awarded to the sub-criteria under the criteria.
. † Overall score. It is determined by adding the weighted
percentage 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 is
EAi,j
(1) A sound approach: score of an enabler sub-criterion for
the sub-element is EASi,j
(2) An integrated approach: score of an enabler sub-criterion
for the sub-element is EAIi,j
IJSE 1
EAi;j ¼ ðEASi;j þ EAIi;j Þ ð1Þ
34,9 2
.
Deployment. Score of an enabler sub-criterion for the
deployment element is EDi,j:
(1) How approach is implemented: score of an enabler
686 sub-criterion for the sub-element is EDIi,j.
(2) How approach is deployed in a structured way: score of
an enabler sub-criterion for the sub-element is EDSi,j:
1
EDi;j ¼ ðEDIi;j þ EDSi;j Þ ð2Þ
2
.
Assessment and review. Score of an enabler sub-criterion for
the assessment and review element is ERi,j.
(1) Measurement: score of an enabler sub-criterion for the
sub-element is ERMi,j.
(2) Learning: score of an enabler sub-criterion for the
sub-element is ERLi,j.
(3) Improvement: score of an enabler sub-criterion for the
sub-element is ERIi,j:

1
ERi;j ¼ ðERMi;j þ ERLi;j þ ERIi;j Þ ð3Þ
3

1
Ei;j ¼ ðEAi;j þ EDi;j þ ERi;j Þ ð4Þ
3

(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 sustained
good performance. Score for the sub-element is R1Ti,j.
(2) Targets: whether targets are set and achieved. Score for
the sub-element is R1Ri,j.
(3) Comparison: comparisons with external organizations
including “best in class” are undertaken. Score for the
sub-element is R1Ci,j.
(4) Causes: the visibility of results caused by approach.
Score for the sub-element is R1Ai,j:

1
R1i;j ¼ ðR1T i;j þ R1Ri;j þ R1C i;j þ R1Ai;j Þ ð5Þ
4
 . Score of the second element of results sub-criterion is R2i,j: Enhancing
(1) Scope. Results address relevant areas. Score for the competitiveness
sub-element is R2Si,j: of India Inc.
R2i;j ¼ R2S i;j ð6Þ
687
1
Ri;j ¼ ðR1i;j þ R2i;j Þ ð7Þ
2

.
†Criterion. The next step of scoring is to allocate a percentage
score to each criterion by adding the weighted percentage score
awarded to the sub-criteria under the criteria:
(1) Enablers:
X
Ei ¼ W j ðE ij Þ 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, 5
Wj ¼ 0.25 for all the sub criteria under criteria 2.
(2) Results:
X
Ri ¼ W j ðRij Þ 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, 7
W1 ¼ 0.25 for all the sub criteria under criterion 8
W1 ¼ 0. 5 for all the sub criteria under criteria 9
W2 ¼ 0.25 for all the sub criteria under criteria 6, 7
W2 ¼ 0.75 for all the sub criteria under criterion 8
W2 ¼ 0. 5 for all the sub criteria under criteria 9.
(3) Overall score. It is determined by adding the weighted percentage
score awarded to the criteria:
X X
S¼ W i ðE i Þ þ W i ðRi Þ ð10Þ

Wi is the weight allocated to each criterion.

Wi ¼ 1.0 for i ¼ 1
Wi ¼ 0.8 for i ¼ 2
Wi ¼ 0.9 for i ¼ 3
Wi ¼ 0.9 for i ¼ 4
Wi ¼ 1.4 for i ¼ 5
Wi ¼ 2.0 for i ¼ 6
Wi ¼ 0.9 for i ¼ 7
Wi ¼ 0.6 for i ¼ 8
Wi ¼ 1.5 for i ¼ 9
IJSE Establishing the relationship between model criteria
Ghosh et al. (2003) used structural equation model to test the relationships between
34,9 strategic and operational quality planning implied by the framework, and their impact
on performance. Similarly, we analyzed the scores obtained by 45 applicant
organizations for the CII EXIM Bank Award for Business Excellence in 2004. The
scoring profiles of the applicant organizations are listed in Table I in an ascending
688 order on the basis of overall scores. The scores obtained by these organizations for the
CII EXIM Bank Award for Business Excellence are studied using structural equation
modelling (SEM) (Hoyle, 1995) technique with the help of AMOS software to estimate,
analyze and test the model for specifying relationships among criteria. SEM serves
purposes similar to multiple regression, but in a more powerful way which takes into
account the modelling of interactions, nonlinearities, correlated independents,
measurement error, correlated error terms, multiple latent independents
each measured by multiple indicators, and one or more latent dependents also each
with multiple indicators (Hoyle, 1995). The overall scores are not taken into
consideration for the following reasons:
.
The overall score does not form an integral part of the excellence model. They are
determined using the scores of the individual criteria.
.
The overall score obtained by an organization helps in administering the award
assessment process for the sake of recognition. However, scoring profile across
the different criteria of the model provides more meaningful information on
practices and potential of an organization with respect to its performance in the
market 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 following
reasons:
.
The first measure is the x 2 statistic (discrepancy). The value (x 2 ¼ 92.03145770
for 20 degrees of freedom) is above the minimum level of 0.05.
.
The root mean square error of approximation (RMSEA) value was found to be
0.2861010126 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 applicant
organizations 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 effective
implementation of TQM, we propose to include only those organizations where there is
no significant imbalance between the scores awarded between enablers and results.
The performance of an organization can be described along a large number of
dimensions relating to outputs produced, aspects of the quality of those outputs, and
the inputs used. Data envelopment analysis (DEA) is a “data oriented” approach for
evaluating the performance of a set of peer entities called decision-making units
(DMUs) which convert multiple inputs into multiple outputs (Charnes et al., 1995). Each
applicant organization is considered as a DMU. Five enabler criteria are considered as
inputs and four result criteria are taken as outputs. The DEA efficiency scores are
 Policy and Partnerships and Customer People Society Key performance
Leadership strategy People resources Processes results results results results
Criterion Criterion Criterion Criterion Criterion Criterion Criterion Criterion Criterion
Serial 1 2 3 4 5 6 7 8 9 Overall
number E1 E2 E3 E4 E5 R1 R2 R3 R4 score

1 15 25 25 25 25 25 25 15 25 225
2 25 25 25 25 25 25 25 35 25 275
3 25 25 35 25 25 25 25 15 25 275
4 25 25 35 35 25 15 25 25 35 275
5 35 35 35 35 35 35 35 35 35 325
6 25 15 25 35 35 25 25 25 35 325
7 35 35 35 35 35 25 35 45 35 325
8 35 35 35 35 35 25 15 25 35 325
9 35 35 35 55 55 25 25 5 25 325
10 45 25 45 25 35 25 35 35 35 325
11 45 45 35 35 45 35 35 35 25 375
12 45 35 45 45 25 25 45 55 25 375
13 45 35 35 45 45 35 35 35 35 375
14 35 45 45 35 45 35 25 35 45 375
15 35 35 45 35 35 35 45 45 35 375
16 35 35 45 45 45 35 25 25 45 375
17 35 35 35 45 35 35 25 25 25 375
18 45 35 35 45 45 35 35 45 35 375
19 35 35 45 35 35 45 45 25 45 375
20 35 35 45 45 45 45 35 45 45 425
21 45 45 45 45 45 35 35 45 45 425
22 45 35 45 45 45 35 35 35 45 425
23 45 35 45 45 45 35 45 45 45 425
24 45 35 45 45 45 35 35 65 55 425
25 35 35 45 35 35 45 45 45 45 425
26 45 35 45 45 35 35 35 35 45 425
27 45 45 45 45 55 35 45 35 45 425
28 35 45 45 35 45 45 45 25 45 425
(continued)
competitiveness

the applicant
Enhancing

2004
Business Excellence in
organizations for the CII
The scoring profiles of
of India Inc.

EXIM Bank Award for

689

Table I.
 34,9
IJSE

690

Table I.
Policy and Partnerships and Customer People Society Key performance
Leadership strategy People resources Processes results results results results
Criterion Criterion Criterion Criterion Criterion Criterion Criterion Criterion Criterion
Serial 1 2 3 4 5 6 7 8 9 Overall
number E1 E2 E3 E4 E5 R1 R2 R3 R4 score

29 45 35 45 45 45 35 35 45 45 425
30 45 35 45 45 45 35 45 35 35 425
31 35 35 45 45 55 35 25 25 45 425
32 35 45 35 45 45 55 35 15 55 425
33 55 35 45 45 45 35 45 55 45 475
34 45 45 55 45 45 45 45 45 45 475
35 45 45 45 45 45 45 55 45 45 475
36 55 45 45 45 45 45 35 45 45 475
37 55 55 45 45 55 35 25 35 45 475
38 45 55 55 45 45 45 45 45 45 475
39 45 45 35 55 45 45 25 35 55 475
40 55 55 55 45 55 45 45 65 65 525
41 55 45 55 45 55 45 55 55 55 525
42 55 55 55 55 55 45 45 45 45 525
43 55 45 55 45 55 45 55 55 55 525
44 45 45 45 55 45 45 45 45 55 525
45 55 55 55 55 55 45 55 55 55 525
 0.1
Enhancing
competitiveness
E1 er_e1
0. of India Inc.
er_e4
1
691
0.1

E4 E3 er_e3

E2
1
0.
er_e2

0.
1
0. E5 er_e5
er_r3

0.
1
R3 R2 er_r2

R1
1
0.
er_r1

0.
1
R4 er_r4 Figure 2.
Path diagram

calculated using the DEA Solver software with input orientation and variable returns
to scale. The ranking of the DMUs along with the efficiency scores are given in
Table III.
We find 28 DMUs are ranked first with an efficiency score of 1 (100 percent
efficient). A DMU is rated as fully (100 percent) efficient on the basis of available
evidence if the performances of other DMUs does not show that some of its inputs or
outputs 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 these
DMUs are distributed from the lowest to the highest scorers as per the overall scores
obtained from the assessment process of CII-EXIM Bank Award for Business
Excellence indicating the varied maturity level. Therefore, the organizations are
IJSE
Fit measures Default model Saturated Independence Macro
34,9
Discrepancy 92.03145770 0.00000000 1,496.68275300 CMIN
Degrees of freedom 20 0 45 DF
P 0.00000000 0.00000000 P
Number of parameters 34 54 9 NPAR
692 Discrepancy/df 4.60157289 33.25961673 CMINDF
RMR RMR
GFI GFI
Adjusted GFI AGFI
Parsimony-adjusted GFI PGFI
Normed fit index 0.93850971 1.00000000 0.00000000 NFI
Relative fit index 0.86164685 0.00000000 RFI
Incremental fit index 0.95122076 1.00000000 0.00000000 IFI
Tucker-Lewis index 0.88835661 0.00000000 TLI
Comparative fit index 0.95038072 1.00000000 0.00000000 CFI
Parsimony ratio 0.44444444 0.00000000 1.00000000 PRATIO
Parsimony-adjusted NFI 0.41711543 0.00000000 0.00000000 PNFI
Parsimony-adjusted CFI 0.42239143 0.00000000 0.00000000 PCFI
Noncentrality parameter estimate 72.03145770 0.00000000 1,451.68275300 NCP
NCP lower bound 45.92235565 0.00000000 1,329.02083600 NCPLO
NCP upper bound 105.68265530 0.00000000 1,581.72321300 NCPHI
FMIN 2.09162404 0.00000000 34.01551711 FMIN
FO 1.63707858 0.00000000 32.99278984 FO
FO lower bound 1.04368990 0.00000000 30.20501900 FOLO
FO upper bound 2.40187853 0.00000000 35.94825485 FOHI
RMSEA 0.28610126 0.85625528 RMSEA
RMSEA lower bound 0.22843926 0.81928179 RMSEALO
RMSEA upper bound 0.34654571 0.89378415 RMSEAHI
P for test of close fit 0.00000026 0.00000214 PCLOSE
Akaike information criterion (AIC) 160.03145770 108.00000000 1,514.68275300 AIC
Browne-Cudeck criterion 180.03145770 139.76470590 1,519.97687100 BCC
Bayes information criterion BIC
Consistent AIC CAIC
Expected cross validation index 3.63707858 2.45454546 34.42460802 ECVI
ECVI lower bound 3.04368990 2.45454546 31.63683718 ECVILO
ECVI upper bound 4.40187853 2.45454546 37.38007303 ECVIHI
MECVI 4.09162404 3.17647059 34.54492888 MECVI
Table II. Hoelter .05 index 16 2 HFIVE
Fit measures Hoelter .01 index 18 3 HONE

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:
 Enhancing
Rank DMU Efficiency score
competitiveness
1 45 1 of India Inc.
1 1 1
1 2 1
1 3 1
1 4 1 693
1 44 1
1 6 1
1 7 1
1 43 1
1 41 1
1 10 1
1 40 1
1 12 1
1 39 1
1 14 1
1 15 1
1 35 1
1 33 1
1 18 1
1 19 1
1 20 1
1 32 1
1 30 1
1 23 1
1 24 1
1 25 1
1 26 1
1 28 1
29 36 0.962963
30 5 0.936506
30 11 0.936506
32 13 0.928571
33 27 0.901233
34 8 0.885711
34 17 0.885711
36 31 0.880952
36 16 0.880952
38 29 0.850931
39 21 0.847953
40 22 0.846152
41 34 0.814815
41 38 0.814815 Table III.
43 37 0.809521 The ranking of the DMUs
44 42 0.8 along with the efficiency
45 9 0.714284 scores

.
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.
IJSE
Fit measures Default model Saturated Independence Macro
34,9
Discrepancy 64.03021000 0.00000000 945.37174000 CMIN
Degrees of freedom 20 0 45 DF
P 0.00000166 0.00000000 P
Number of parameters 34 54 9 NPAR
694 Discrepancy/df 3.20151050 21.00826089 CMINDF
RMR RMR
GFI GFI
Adjusted GFI AGFI
Parsimony-adjusted GFI PGFI
Normed fit index 0.93226981 1.00000000 0.00000000 NFI
Relative fit index 0.84760707 0.00000000 RFI
Incremental fit index 0.95241889 1.00000000 0.00000000 IFI
Tucker-Lewis index 0.88996992 0.00000000 TLI
Comparative fit index 0.95109774 1.00000000 0.00000000 CFI
Parsimony ratio 0.44444444 0.00000000 1.00000000 PRATIO
Parsimony-adjusted NFI 0.41434214 0.00000000 0.00000000 PNFI
Parsimony-adjusted CFI 0.42271011 0.00000000 0.00000000 PCFI
Noncentrality parameter estimate 44.03021000 0.00000000 900.37174000 NCP
NCP lower bound 23.55364227 0.00000000 804.09868620 NCPLO
NCP upper bound 72.11708832 0.00000000 1,004.05283400 NCPHI
FMIN 2.37148926 0.00000000 35.01376815 FMIN
FO 1.63074852 0.00000000 33.34710148 FO
FO lower bound 0.87235712 0.00000000 29.78143282 FOLO
FO upper bound 2.67100327 0.00000000 37.18714198 FOHI
RMSEA 0.28554759 0.86084069 RMSEA
RMSEA lower bound 0.20884888 0.81351682 RMSEALO
RMSEA upper bound 0.36544516 0.90905497 RMSEAHI
P for test of close fit 0.00000729 0.00000062 PCLOSE
Akaike information criterion (AIC) 132.03021000 108.00000000 963.37174000 AIC
Browne-Cudeck criterion 172.03021000 171.52941180 973.95997530 BCC
Bayes information criterion BIC
Consistent AIC CAIC
Expected cross validation index 4.89000778 4.00000000 35.68043482 ECVI
ECVI lower bound 4.13161638 4.00000000 32.11476616 ECVILO
ECVI upper bound 5.93026253 4.00000000 39.52047532 ECVIHI
Table IV. MECVI 6.37148926 6.35294118 36.07259168 MECVI
Fit measures for the new Hoelter .05 index 14 2 HFIVE
set of data Hoelter .01 index 16 3 HONE

.
The RMSEA value was found to be 0.28554759 which is much above the
threshold value of 0.08.

As explained above, we cannot conclude that the model fits the data well. In other
words, the adequacy of the model is not satisfactorily established from the scoring data
on the different criteria of the relatively efficient organizations.
To further investigate, we see the path diagram is constructed based on the explicit
linkages given in the model. Considering both the explicit and the obvious linkages, the
path diagram takes the shape, shown in Figure 3. The associate fit measures are given
in Table V.
 0. Enhancing
E1
1
er_e1 competitiveness
0.
of India Inc.
er_e4
1

0. 695
1
E4 E3 er_e3
E2
0.
1
er_e2

0.
1
0. E5 er_e5
er_r3

0.
1
R3 R2 er_r2
R1
1
0.
er_r1

1 0.
R4 er_r4 Figure 3.
Modified path diagram

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 explanatory

variables and a response variable by fitting a linear equation to observed data
employing simple or multiple linear regressions using Minitab software. Results are
given Table VI.
Simple linear regression examines the linear relationship between two continuous
variables: one response (y) and one predictor (x), whereas multiple linear regressions
examine the linear relationships between one continuous response and two or more
predictors (Hair et al., 1998).
IJSE
File measure Default model Saturated Independence Macro
34,9
Discrepancy 16.31750640 0.00000000 945.37174000 CMIN
Degrees of freedom 14 0 45 DF
P 0.29437152 0.00000000 P
Number of parameters 40 54 9 NPAR
696 Discrepancy/df 1.16553617 21.00326089 CMINDF
RMR RMR
GR GR
Adjusted GFI AGFI
Parsimony-adjusted GFI PGFI
Normed fit index 0.98273959 1.00000000 0.00000000 NFI
Relative fit index 0.94452010 0.00000000 RFI
Incremental fit index 0.99751173 1.00000000 0.00000000 IFI
Tucker-Lewis index 0.99172661 0.00000000 TU
Comparative fit index 0.99742606 1.00000000 0.00000000 CFI
Parsimony ratio 0.31111111 0.00000000 1.00000000 PRATIO
Parsimony-adjusted NFI 0.30574120 0.00000000 0.00000000 PNFI
Parsimony-adjusted CFI 0.31031033 0.00000000 0.00000000 PCFI
Noncentrality parameter estimate 2.31750640 0.00000000 900.37174000 NCP
NCP lower bound 0.00000000 0.00000000 804.09868620 NCPLO
NCP upper bound 16.62001801 0.00000000 1,004.05283400 NCPH
FMIN 0.60435209 0.00000000 35.01376315 FMIN
FO 0.06583357 0.00000000 33.34710148 FO
FO lower bound 0.00000000 0.00000000 29.78143282 FOLO
FO upper bound 0.61555622 0.00000000 37.18714198 FOHI
RMSEA 0.07830051 0.86084069 RMSEA
RMSEA lower bound 0.00000000 0.81351682 RMSEALO
RMSEA upper bound 0.20968620 0.90905497 RMSEAHI
P for test of close fit 0.35858003 0.00000062 PCLOSE
Akaika information criterion (AIC) 96.31750640 106.00000000 963.37174000 AIC
Browne-Cudeck criterion 143.37632990 171.52941110 973.55997530 BCC
Bayes information criterion BIC
Consistent AIC CAIC
Expected cross validation index 3.56731505 4.00000000 35.68043482 ECVI
ECVI lower bound 3.48148143 4.00000000 32.11476616 ECVILO
ECVI upper bound 4.09703770 4.00000000 39.52047532 ECVIHI
Table V. MECVI 5.31023444 6.35294118 36.17259168 MECVI
The associate fit Hoelter .05 index 40 2 HFIVE
measures Hoelter .01 index 49 2 HONE

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.
Regression analysis: R4 versus R1, R2, R3
Enhancing
The regression equation is: R4 ¼ 5.95 þ 0.953 R1 2 0.281 R2 þ 0.328 R3 competitiveness
Predictor
Constant
Coef
5.955
SE coef
5.095
T
1.17
P
0.254
of India Inc.
R1 0.9532 0.1446 6.59 0.000
R2 20.2806 0.1639 21.71 0.100
R3 0.3275 0.1001 3.27 0.003 697
S ¼ 5.918 R 2 ¼ 74.3 percent R 2 (adj) ¼ 71.1 percent
Analysis of variance
Source DF SS MS F P
Regression 3 2,430.97 810.32 23.14 0.000
Residual error 24 840.46 35.02
Total 27 3,271.43
Source DF Seq SS
R1 1 2,054.57
R2 1 1.24
R3 1 375.15
Unusual observations
Obs R1 R4 Fit SE fit Residual St resid
4 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, R3

The regression equation is: R1 ¼ 16.3 þ 0.621 R2 2 0.102 R3
Predictor Coef SE Coef T P
Constant 16.311 6.248 2.61 0.015
R2 0.6215 0.1896 3.28 0.003
R3 2 0.1019 0.1369 2 0.74 0.464
S ¼ 8.187 R 2 ¼ 34.1 percent R 2 (adj) ¼ 28.8 percent
Analysis of variance
Source DF SS MS F P
Regression 2 867.15 433.58 6.47 0.005
Residual error 25 1,675.71 67.03
Total 27 2,542.86
Source DF Seq SS
R2 1 830.03
R3 1 37.12
Unusual observations
Obs R2 R1 Fit SE fit Residual St resid
20 35.0 55.00 36.53 3.41 18.47 2.48R
23 25.0 45.00 28.28 2.77 16.72 2.17R
Notes: R denotes an observation with a large standardized residual

Regression analysis: R2 versus E3

The regression equation is: R2 ¼ 2 1.99 þ 0.971 E3
Predictor Coef SE coef T P
Constant 2 1.993 6.029 20.33 0.744
E3 0.9710 0.1403 6.92 0.000
S ¼ 6.230 R 2 ¼ 64.8 percent R 2 (adj) ¼ 63.5 percent Table VI.
(continued) Regression results
IJSE Analysis of variance
34,9 Source DF SS MS F P
Regression 1 1,858.8 1,858.8 47.89 0.000
Residual error 26 1,009.1 38.8
Total 27 2,867.9
Unusual observations
Obs E3 R2 Fit SE fit Residual St resid
698 9 45.0 25.00 41.70 1.24 2 16.70 22.74R
22 45.0 55.00 41.70 1.24 13.30 2.18R
Notes: R denotes an observation with a large standardized residual

Regression analysis: R2 versus E1

The regression equation is: R2 ¼ 11.2 þ 0.694 E1
Predictor Coef SE coef T P
Constant 11.187 5.406 2.07 0.049
E1 0.6935 0.1307 5.31 0.000
S ¼ 7.277 R 2 ¼ 52.0 percent R 2 (adj) ¼ 50.1 percent
Analysis of variance
Source DF SS MS F P
Regression 1 1,491.1 1,491.1 28.16 0.000
Residual error 26 1,376.7 53.0
Total 27 2,867.9
Unusual observations
Obs E1 R2 Fit SE fit Residual St resid
1 15.0 25.00 21.59 3.54 3.41 0.54 X
23 45.0 25.00 42.40 1.52 217.40 2 2.44R
Notes: R denotes an observation with a large standardized residual; X denotes an observation whose
X value gives it large influence

Regression analysis: R2 versus E5

The regression equation is: R2 ¼ 12.9 þ 0.645 E5
Predictor Coef SE coef T P
Constant 12.890 6.957 1.85 0.075
E5 0.6452 0.1678 3.84 0.001
S ¼ 8.386 R 2 ¼ 36.2 percent R 2 (adj) ¼ 33.8 percent
Analysis of variance
Source DF SS MS F P
Regression 1 1,039.2 1,039.2 14.78 0.001
Residual error 26 1,828.6 70.3
Total 27 2,867.9
Unusual observations
Obs E5 R2 Fit SE fit Residual St resid
8 25.0 45.00 29.02 3.03 15.98 2.04R
9 45.0 25.00 41.92 1.77 2 16.92 22.06R
23 45.0 25.00 41.92 1.77 2 16.92 22.06R
Notes: R denotes an observation with a large standardized residual; a significant relationship between
Table VI. people results and processes exists with R 2 value as 36.2 percent (continued)
 Enhancing
Regression analysis: R3 versus E5
The regression equation is: R3 ¼ 6.9 þ 0.821 E5 competitiveness
Predictor Coef SE coef T P of India Inc.
Constant 6.86 10.05 0.68 0.501
E5 0.8212 0.2425 3.39 0.002
S ¼ 12.12 R 2 ¼ 30.6 percent R 2 (adj) ¼ 27.9 percent
Analysis of variance 699
Source DF SS MS F P
Regression 1 1,683.4 1,683.4 11.47 0.002
Residual error 26 3,816.6 146.8
Total 27 5,500.0
Unusual observations
Obs E5 R3 Fit SE fit Residual St resid
8 25.0 55.00 27.39 4.37 27.61 2.44R
20 45.0 15.00 43.81 2.55 2 28.81 22.43R
Notes: R denotes an observation with a large standardized residual

Regression analysis: R3 versus E1

The regression equation is: R3 ¼ 2 1.29 þ 1.03 E1
Predictor Coef SE coef T P
Constant 21.290 6.828 20.19 0.852
E1 1.0323 0.1651 6.25 0.000
S ¼ 9.192 R 2 ¼ 60.1 percent R 2 (adj) ¼ 58.5 percent
Analysis of variance
Source DF SS MS F P
Regression 1 3,303.2 3,303.2 39.10 0.000
Residual error 26 2,196.8 84.5
Total 27 5,500.0
Unusual observations
Obs E1 R3 Fit SE Fit Residual St resid
1 15.0 15.00 14.19 4.48 0.81 0.10 X
15 45.0 65.00 45.16 1.92 19.84 2.21R
20 35.0 15.00 34.84 1.92 219.84 2 2.21R
Notes: R denotes an observation with a large standardized residual; X denotes an observation whose
X value gives it large influence

Regression analysis: R4 versus E4

The regression equation is: R4 ¼ 7.79 þ 0.869 E4
Predictor Coef SE coef T P
Constant 7.794 7.265 1.07 0.293
E4 0.8688 0.1760 4.94 0.000
S ¼ 8.060 R 2 ¼ 48.4 percent R 2 (adj) ¼ 46.4 percent
Analysis of variance
Source DF SS MS F P
Regression 1 1,582.5 1,582.5 24.36 0.000
(continued) Table VI.
IJSE Residual Error 26 1,688.9 65.0
Total 27 3,271.4
34,9 Unusual observations
Obs E4 R4 Fit SE fit Residual St resid
8 45.0 25.00 46.89 1.73 221.89 22.78R
24 45.0 65.00 46.89 1.73 18.11 2.30R
Notes: R denotes an observation with a large standardized residual
700
Regression analysis: R4 versus E2
The regression equation is: R4 ¼ 9.18 þ 0.916 E2
Predictor Coef SE coef T P
Constant 9.178 5.359 1.71 0.099
E2 0.9156 0.1413 6.48 0.000
S ¼ 6.936 R 2 ¼ 61.8 percent R 2 (adj) ¼ 60.3 percent
Analysis of variance
Source DF SS MS F P
Regression 1 2,020.8 2,020.8 42.01 0.000
Residual error 26 1,250.7 48.1
Total 27 3,271.4
Unusual observations
Obs E2 R4 Fit SE fit Residual St resid
5 15.0 35.00 22.91 3.34 12.09 1.99 X
8 35.0 25.00 41.22 1.33 2 16.22 2 2.38R
15 35.0 55.00 41.22 1.33 13.78 2.02R
Notes: R denotes an observation with a large standardized residual; X denotes an observation whose
X value gives it large influence

Regression analysis: R4 versus E5

The regression equation is: R4 ¼ 3.71 þ 0.970 E5
Predictor Coef SE coef T P
Constant 3.712 4.942 0.75 0.459
E5 0.9700 0.1192 8.13 0.000
2 2
S ¼ 5.957 R ¼ 71.8 percent R (adj) ¼ 70.7 percent
Analysis of variance
Source DF SS MS F P
Regression 1 2,348.7 2,348.7 66.18 0.000
Residual error 26 922.7 35.5
Total 27 3,271.4
Unusual observations
Obs E5 R4 Fit SE fit Residual St resid
11 45.0 35.00 47.36 1.25 2 12.36 22.12R
19 45.0 35.00 47.36 1.25 2 12.36 22.12R
Notes: R denotes an observation with a large standardized residual

Regression analysis: R1 versus E2

The regression equation is: R1 ¼ 7.00 þ 0.800 E2
Predictor Coef SE coef T P
Constant 7.000 4.792 1.46 0.156
E2 0.8000 0.1263 6.33 0.000
Table VI. (continued)
S ¼ 6.202 R 2 ¼ 60.7 percent R 2 (adj) ¼ 59.2 percent Enhancing
Analysis of variance
Source DF SS MS F P competitiveness
Regression 1 1,542.9 1,542.9 40.11 0.000 of India Inc.
Residual error 26 1,000.0 38.5
Total 27 2,542.9
Unusual observations
Obs E2 R1 Fit SE fit Residual St resid 701
4 25.0 15.00 27.00 1.89 212.00 2 2.03R
5 15.0 25.00 19.00 2.99 6.00 1.10 X
Notes: R denotes an observation with a large standardized residual; X denotes an observation whose
X value gives it large influence

Regression analysis: R1 versus E5

The regression equation is: R1 ¼ 5.94 þ 0.755 E5
Predictor Coef SE coef T P
Constant 5.944 5.441 1.09 0.285
E5 0.7554 0.1313 5.75 0.000
S ¼ 6.559 R 2 ¼ 56.0 percent R 2 ¼ 54.3 percent
Analysis of variance
Source DF SS MS F P
Regression 1 1,424.4 1,424.4 33.11 0.000
Residual error 26 1,118.5 43.0
Total 27 2,542.9
Unusual observations
Obs E5 R1 Fit SE fit Residual St resid
20 45.0 55.00 39.94 1.38 15.06 2.35R
Notes: R denotes an observation with a large standardized residual

Regression analysis: R1 versus E1

The regression equation is: R1 ¼ 18.4 þ 0.452 E1
Predictor Coef SE coef T P
Constant 18.364 6.368 2.88 0.008
E1 0.4516 0.1540 2.93 0.007
S ¼ 8.572 R 2 ¼ 24.9 percent R 2 (adj) ¼ 22.0 percent
Analysis of variance
Source DF SS MS F P
Regression 1 632.26 632.26 8.60 0.007
Residual error 26 1,910.60 73.48
Total 27 2,542.86
Unusual observations
Obs E1 R1 Fit SE fit Residual St resid
1 15.0 25.00 25.14 4.18 20.14 2 0.02 X
20 35.0 55.00 34.17 1.79 20.83 2.48R
Notes: R denotes an observation with a large standardized residual; X denotes an observation whose
X value gives it large influence
(continued) Table VI.
IJSE
Regression analysis: R4 versus E1
34,9 The regression equation is: R4 ¼ 15.8 þ 0.677 E1
Predictor Coef SE coef T P
Constant 15.760 6.264 2.52 0.018
E1 0.6774 0.1515 4.47 0.000
S ¼ 8.433 R 2 ¼ 43.5 percent R 2 (adj) ¼ 41.3 percent
702 Analysis of variance
Source DF SS MS F P
Regression 1 1,422.6 1,422.6 20.01 0.000
Residual error 26 1,848.8 71.1
Total 27 3,271.4
Unusual observations
Obs E1 R4 Fit SE fit Residual St resid
1 15.0 25.00 25.92 4.11 2 0.92 2 0.13 X
8 45.0 25.00 46.24 1.76 221.24 2 2.58R
Notes: R denotes an observation with a large standardized residual; X denotes an observation whose
X value gives it large influence

Regression analysis: R3 versus E2

The regression equation is: R3 ¼ 13.3 þ 0.726 E2
Predictor Coef SE coef T P
Constant 13.296 9.855 1.35 0.189
E2 0.7259 0.2598 2.79 0.010
S ¼ 12.75 R 2 ¼ 23.1 percent R 2 (adj) ¼ 20.1 percent
Analysis of variance
Source DF SS MS F P
Regression 1 1,270.4 1,270.4 7.81 0.010
Residual error 26 4,229.6 162.7
Total 27 5,500.0
Unusual observations
Obs E2 R3 Fit SE fit Residual St resid
5 15.0 25.00 24.19 6.15 0.81 0.07 X
15 35.0 65.00 38.70 2.45 26.30 2.10R
20 45.0 15.00 45.96 3.22 230.96 2 2.51R
Notes: R denotes an observation with a large standardized residual; X denotes an observation whose
X value gives it large influence

Regression analysis: R3 versus E5

The regression equation is: R3 ¼ 6.9 þ 0.821 E5
Predictor Coef SE coef T P
Constant 6.86 10.05 0.68 0.501
E5 0.8212 0.2425 3.39 0.002
2 2
S ¼ 12.12 R ¼ 30.6 percent R (adj) ¼ 27.9 percent
Analysis of variance
Source DF SS MS F P
Regression 1 1,683.4 1,683.4 11.47 0.002
Table VI. (continued)
Residual error 26 3,816.6 146.8 Enhancing
Total 27 5,500.0
Unusual observations competitiveness
Obs E5 R3 Fit SE fit Residual St resid of India Inc.
8 25.0 55.00 27.39 4.37 27.61 2.44R
20 45.0 15.00 43.81 2.55 2 28.81 22.43R
Notes: R denotes an observation with a large standardized residual 703

Regression analysis: R3 versus E3

The regression equation is: R3 ¼ 2 7.0 þ 1.12 E3
Predictor Coef SE coef T P
Constant 27.03 10.47 2 0.67 0.508
E3 1.1159 0.2437 4.58 0.000
S ¼ 10.82 R 2 ¼ 44.6 percent R 2 (adj) ¼ 42.5 percent
Analysis of variance
Source DF SS MS F P
Regression 1 2,455.1 2,455.1 20.96 0.000
Residual error 26 3,044.9 117.1
Total 27 5,500.0
Unusual observations
Obs E3 R3 Fit SE fit Residual St resid
15 45.0 65.00 43.19 2.16 21.81 2.06R
Notes: R denotes an observation with a large standardized residual

Regression analysis: R3 versus E4

The regression equation is: R3 ¼ 4.4 þ 0.882 E4
Predictor Coef SE coef T P
Constant 4.39 10.99 0.40 0.693
E4 0.8825 0.2664 3.31 0.003
S ¼ 12.20 R 2 ¼ 29.7 percent R2 (adj) ¼ 27.0 percent
Analysis of variance
Source DF SS MS F P
Regression 1 1,632.5 1,632.5 10.98 0.003
Residual error 26 3,867.5 148.7
Total 27 5,500.0
Unusual observations
Obs E4 R3 Fit SE fit Residual St resid
20 45.0 15.00 44.10 2.62 2 29.10 22.44R
Notes: R denotes an observation with a large standardized residual Table VI.

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 highly
correlated with processes and moderately correlated with policy and strategy.
IJSE (2) Customer results is moderately correlated with policy and strategy and
34,9 processes.
(3) People results is moderately correlated with people and leadership.
(4) Society results are moderately correlated with leadership.

704 Key issues

The sum up points may be summarized as follows:
.
Relationship between key performance results and partnerships and resources is
not established. It appears that the organizations are not able to set the right
focus on two stakeholders (partners and investors) through one result criterion.
Separating out key performance results into investors results and partners
results would help the organization to fulfil the requirements of these two
stakeholders in a focussed manner.
.
The relationship between people results and processes are low. This is basically
due to the fact that people related processes are addressed in the enabler criterion
called people. To give a more generic and meaningful shape to the model, the
people-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 low
relationship with processes and a moderate relationship with leadership. We can

Response Predictor P Significant relationship R2 Correlation

The results of multiple regression

R4 R1 0 Yes 0.743 High
R4 R3 0.003 Yes
R4 R2 0.1 No
R1 R2 0.003 Yes 0.341 Low
R1 R3 0.464 No
Response Predictor R2
The results of simple linear regression
R2 R3 0.35 Low
R2 E3 0.648 Moderate
R2 E1 0.52 Moderate
R2 E5 0.362 Low
R3 E5 0.306 Low
R3 E1 0.601 Moderate
R3 E2 0.231 Little
R3 E5 0.306 Low
R3 E3 0.446 Low
R3 E4 0.297 Little
R4 E4 0.484 Low
R4 E2 0.618 Moderate
R4 E5 0.718 High
R1 E2 0.607 Moderate
R1 E5 0.56 Moderate
R1 E1 0.249 Little
Table VII. R4 E1 0.435 Low
 conclude organizations are not integrating society results with strategic Enhancing
initiatives. However, those results are emerging due to the leadership initiatives. competitiveness
.
Also we see, except society results, none of the results have a meaningful of India Inc.
relationship with leadership. It raises the question whether a stakeholder result
can be linked to the criteria, which is inspirational, visionary, and aim to achieve
organizational purpose. Purpose justifies the existence of the organization.
Therefore, leadership needs to be linked with appropriate beneficiary results that 705
justify its existence whereas policy and strategy needs to be treated as the key
driver to manage its existence. Society results may be split into two parts – one
part needs to be sprouted from policy and strategy to support key performance
results and the other emerges from leadership initiatives to ensure purpose
fulfilment. We elaborate this discussion in the next sections.

The role of business excellence model in terms of building national

competitiveness
In the last sections, we have discussed that national quality and business excellence
awards have been a beacon and blueprint for driving a wide variety of organizations to
their highest levels of sustainable achievement. In this section, we will evaluate the
relevance of these models towards the development of the model of competitiveness
that not only measures the performance of an organization for its survival and growth
but also contributes to the growth process of the country.
Tracing into the two key elements of competitiveness described earlier, based on the
analysis of data, it is clearly seen all these models contribute to enhance
competitiveness at the organizational level by building the ability to design, produce
and or market products superior to those offered by competitors, considering the price
and non-price qualities. However, in order to integrate the two elements of
competitiveness, an organization need to transform itself from the status of narrow
self-interested and competitive killer to a responsible corporate citizen that would
participate in the growth process of the country. Goyder has argued that business
needs to be seen as a legitimate and integral part of society, where the former is
subordinate to latter (Goyder, 1999). This is only possible by looking into the purpose
of the organization that justifies its existence. The term “purpose” refers to the
fundamental reason that an organization exists. Its primary role is to inspire an
organization and guide its setting of values (Criteria for Performance Excellence,
Baldrige National Quality Program, 2005). Ghoshal et al. (1999) have highlighted the
organizations that are striving for higher order goal in the presence of a sufficiently
inspiring purpose level statement. Rouse and Putterill (2003) have addressed this issue
of broader evaluation perspectives appropriate to stakeholder requirements and
organisation purpose.
A careful examination of the models of different quality awards, such as Malcolm
Baldrige National Quality Award (2005), the EQA (2004), the Deming Prize from Japan
(JUSE, 2002), the Australian Business Excellence Award (2004), the Canadian Quality
Award (2000), indicates that in one form or another the issue of purpose is addressed in
each of these models. However, it is observed that most organizations (especially, the
profit making ones) do not evaluate the degree of attainment towards the higher-level
purpose vis-à-vis the stakeholder requirements. They use these models to achieve
excellence at the organizational level. In the next section, we would explore the
IJSE underlying reasons behind this and suggest a model that not only measures
34,9 the performance of an organization but also contributes to the growth process of the
country.

Latent customers – the conceptual framework

Various quality gurus like Deming, Crosby, Feigenbaum, Taguchi, Ishikawa, and
706 Juran agree on the core concept of customer satisfaction. A customer is defined as an
organization or person that receives a product. Various interest groups like consumer,
client, end-user, retailer, beneficiary and purchasers constitute the example of a
customer (ISO 9000: 2005). Bose and Dutta (1997) have argued that customer may be
known partly when the seeker seeks with a purpose. An organization focuses on the
needs and expectations of the appropriate set of customers from these interest groups
to maximize customer loyalty, retention and gain in market share. However, while
doing so, the growth and prosperity of the country are ignored.
Let us examine the way an organization that runs a channel in the television
network for the teenagers, identifies its customers. The interest groups here include
viewers, parents, future employers as well as the wider community. The organization
may remain very competitive by:
.
putting its best efforts to fulfill the viewer’s needs; or
.
additionally, considering the requirements of the appropriate beneficiaries, such
as parents, future employers, and community at large and striving to fulfill those
requirements. Requirements may include character building, reinforcement of
positive attitude of the viewers. In the first case, the organization remains
competitive for its own survival and growth only. In such a case, the process may
lack depth and a sense of direction. However, in the second case, the sense of
competitiveness is driven from a higher order purpose of aligning the
organizational goal to that of the country.

Many times an organization builds its competitiveness for its own survival and
growth, the results of which do not necessarily contribute to the growth and
development of the country. Addressing the requirements of the appropriate interest
group(s) whose interests are aligned to those of the country only ensures the growth
process of a country. In this paper, the interest group that may or may not receive or
consume the products of an organization but assimilates its effect would be termed as
latent customers (Dutta, 1999). Prevalent approaches to strategy formulation lose sight
of the latent customers and thereby ignore the higher order goal. However, the question
remains as to what extent the organization explores its latent customers. Taking
national policy into consideration while formulating purpose statement of the
organization is a key to enrich the methodology.

The proposed model – an overview

In line with the arguments made in preceding sections, we propose a model of
competitiveness that addresses both the local goal of survival and growth of an
organization and the global goal of contributing to the growth of the nation based on
Dutta’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 four
of these are termed as enablers and remaining ones are results. The enabler
 criteria cover what an organization does. The result criteria cover what an Enhancing
organization achieves. A brief description of the ten criteria is given herewith: competitiveness
.
Enablers: of India Inc.
– Purpose. The purpose statement justifies the existence of an
organization. It is formulated based on the effects the organization
would like to generate and control. This provides the overall direction for 707
an organization.
– Policy and strategy. The organization converts its overall direction
into a clear strategic direction supported by relevant plans and
policies.
– 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 the
effective 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 organization
comprehensively measures and achieves results with respect to its
direct customers.

Purpose Policy Resources Processes Fulfillment of the Purpose

(1) & (4) (5) requirements of the Fulfillment
Strategy customers (6) (10)
(3)
Fulfillment of the
requirements of the
employees (7)

Fulfillment the
requirements of the
partners (8)

Fulfillment of
Societal
requirements (9)
INNER
LOOP
Planned business Figure 4.
performance Proposed model of
competitiveness
IJSE (2) Fulfillment of the requirements of the employees. The organization
34,9 comprehensively measures and achieves results with respect to its
direct employees.
(3) Fulfillment of the requirements of the partners. The organization
comprehensively measures and achieves results with respect to its
direct partners.
708 (4) Fulfillment of the societal requirements. The organization
comprehensively measures and achieves results with respect to its
society.
(5) Planned business performance. The organization comprehensively
measures and achieves results with respect to its investors.
(6) Purpose fulfilment. The organization comprehensively measures and
achieves results with respect to its latent customers. The
organization ensures that the desired effects that contribute to the
competitiveness 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. direct
customers, shareholders, employees, partners, and society at large) focusing
at the competitiveness at the organizational level.
.
An outer loop, spanning criteria 1 through 10 where the organization looks
beyond its narrow self-interests and focuses on the attainment of some
higher-level purpose like country level competitiveness. This is steered from
“Purpose” and the achievement level is evaluated by the degree to which an
organization fulfils the requirements of the appropriate beneficiaries
(including latent customers).

It is needless to mention that both the loops should be properly integrated and aligned
through a robust management system.
The following example throws some light how both the loops work in an
organization. Maruti Udyog Limited (MUL), which was set up in 1981 by the
Government of India, established the following objectives at the time of inception by an
Act of Parliament:
.
modernization of Indian industry;
.
production of fuel-efficient vehicles; and
.
Large output of motor vehicle (Winner’s Application Document for CII-EXIM
Award for Business Excellence, 1995).

By the last two objectives, MUL focuses on its own survival and growth and those
form the constituents of the inner loop, whereas the first objective focuses on the
attainment 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 vehicles
but also to facilitate the modernization of Indian automobile industry which had
stagnated over the years due to a total lack of technological innovation and up gradation.
In other words, this is the effect MUL is supposed to generate. To ascertain whether the Enhancing
favorable and appropriate effect has been generated measures and targets for competitiveness
“modernization of Indian Automobile Industry” need to be established.
of India Inc.
Conclusion
The above is an extension of Ackoff’s proposition of an idealized design, where clear
distinction has been made among goals-ends that are expected to be obtained within 709
the period obtained by a plan, objectives-ends that are not expected to be obtained until
after the period planned for, but toward which progress is expected within the period
and ideals-ends that are believed to be unattainable but toward which progress is
believed to be possible (Ackoff, 1981). Goldratt and Cox (1992) theory of system
thinking states local improvement should contribute to the global. Ramasubramanian
(2002) has elaborated the concepts on authority, responsibility and accountability
proposed by Professor Tsuda’s, a renowned Deming Prize examiner from Japan. These
are interpreted at the organizational level in the following way:
.
Authority of an organization indicates its right of defining the market, market
segment and decides upon its products.
.
The organization should also be responsible to meet the requirements of all its
stakeholders.
. Above all, the organization is also accountable for the attainment of some
higher-level purpose.

This emphasizes that the growth of an individual organization should contribute to the
overall growth of the country. Sharma and Talwar (2004) have explored the relevance
of Indian Vedantik views in the journey of business excellence.
Sharma (1996) has suggested that the phrase “spirit behind the matter” captures the
essence of Karma Theory which is indicative of intentionality of an action. If the spirit
behind the matter is sattavik (i.e. divine like good or positive), the consequent actions
generate 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 high
negergy. Elsewhere, Sharma (2004) proposed that a balance is required between the
spiritual and materialistic achievement. Here lies the significance of the two loops,
inner and outer, where former focuses at the firm-level competitiveness and the later
works for the country level competitiveness in an integrated and seamless manner
(Dutta et al., 2005)

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in corporate management”, Ashigyan, Summer.
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and Management, Human Values in Management, Ashgate Publishing Limited,
Aldershot, pp. 49-57.
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Tonk, H.S. (2000), “Integrating ISO 9001:2000 and the Baldrige criteria: a proposal for a 21st
century quality paradigm”, Quality Progress, August, pp. 51-5.
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European quality awards and ISO 9000 Certification core concepts and comparative
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Corresponding author
Sanjib K. Dutta can be contacted at: sanjib.k.dutta@ciionline.org

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International Journal of ISSN 0306-8293

Social Economics Volume 34

Number 10
2007

Special Issue on India: Part 2

Guest Editor
Ananda Das Gupta

The economic function in the Hindu worldview: its

perennial social relevance CONTENTS
S.K. Chakraborty and D. Chakraborty ______________________________ 714

Exogenous technological change and wage inequality

in rural India: a theoretical note
Arindam Banik, Pradip K. Bhaumik and Sundayo Iyare _______________ 735

The nexus between stock market and economic

activity: an empirical analysis for India
Purna Chandra Padhan _________________________________________ 741

A case of inappropriately targeted vulnerability

reduction initiatives in Andhra Pradesh, India?
Lee Bosher____________________________________________________ 754

Commonweal vs. free market capitalism: the case of

India and China
Appa Rao Korukonda___________________________________________ 772

Book reviews_____________________________________ 781

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IJSE
34,10 The economic function in the
Hindu worldview: its perennial
social relevance
714
S.K. Chakraborty
Indian Institute of Management, Kolkata, India, and
D. Chakraborty
Birla 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, with
the Hindu view of economics and allied matters.
Design/methodology/approach – The approach is a conceptual one that highlights a few crucial
aspects of the “positive” flank of Hinduism vis-à-vis its “normative” dimension. Researchers, thinkers,
scholars and, above all, some important but ignored realizers of Hindu psycho-philosophy, have been
dug 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 be
explained by her abiding fidelity to the eternal as the basis of the temporal. This is the very foundation
of the sacro-secular character of Hindu culture.
Practical implications – The expected impact is long-term through deep-structure germination on
a wide tract. Hurried practical application in tiny fractions is not intended as this will be premature
and superficial.
Originality/value – The contents of this paper are meant to generate a holistic and respectful
orientation to the forging of constructive links between culture and economics in the context of Hinduism.
Keywords Economics, Philosophical concepts, Religion
Paper type Conceptual paper

International Journal of Social
Economics
Vol. 34 No. 10, 2007
pp. 714-734
q Emerald Group Publishing Limited
0306-8293
DOI 10.1108/03068290710816856
Introduction
Most authorities in oriental studies tend to agree that Hinduism represents the longest
surviving civilization and culture, though it may not be the earliest (Basham, 1999). This
implies that the economic function must have played an integral part in the total scheme
of life. Deeper examination reveals that the Hindu worldview with respect to the economic
function 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 the
fundamental 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 inactive
attitude 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. Contrary
to common notions, they condemned asceticism and held those seeking to embrace the ascetic
order without discharging their duties liable to punishment (Pusalkar, 1964).
Both the statements are in spirit identical. They view material wealth as a support only to The economic
attain a higher goal in life. Not only that. Those who wanted to embrace asceticism were function in the
considered guilty of non-performance of their respective secular duties as son/daughter,
husband/wife, father/mother, etc. invited censure. This prioritized harmony between the Hindu worldview
“here” (aihik) and “here after” ( paramarthik) is the fundamental factor behind the
endurance of the Hindu culture.
That material well-being was always accorded due importance for a well-appointed 715
life, and not considered to be antithetical to achieving spiritual goals, in life has been
substantiated by Sri Aurobindo (1975) further:
. . . ancient Indian thought admitted, that material and economic capacity and prosperity are a
common 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 people
before modern times reached a higher splendour of wealth, commercial prosperity, material
appointment . . . 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 ancient
India. This truth explains why India and the Hindu culture have attracted so many
greedy 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 India
culture-history.
Sarkar, too, re-emphasizes that, instead of considering the desire for a decent material
life as a hurdle, it was viewed as an enabling factor for fulfilling the supra-material
aspirations 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 invasions
and internal neglect in certain epochs in her very long history.
However, some mainstream economic historians attribute the cause of India’s
poverty to her “other-worldly” temperament supposedly espoused by Hinduism. This
argument is primarily derived from a narrow interpretation of the philosophical concept
of 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 to
attain permanent bliss and joy which is independent of fluctuating material-sensual
satisfactions. Accordingly, the economic function becomes marginal, with no serious
thought or effort behind it. Much earlier to Shankaracharya, Buddhism too had
advocated sunyavad (nihilism) which had tended to make large masses in society to
resort to monkhood. However, these two philosophies never comprised the core of the
Hindu worldview.

The sacro-secular symbiosis – some details

The introduction section has just clarified that the Hindu culture was fashioned by the
ancient 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
IJSE amplitude of Hinduism in tracing the economic functions or the secular dimension is
34,10 best captured through the classification shown in Figure 1 (Pusalkar, 1964).
The comprehensive approach of the ancient Hindu mind in identifying such an
ensemble of economic functions is noteworthy. They wisely realized that generation of
wealth without proper allocation would only mean lopsided economic growth without
social harmony. Hence, care was taken to channelize wealth for organic development of
716 the society.
Against the backdrop of the above scheme, it will now be helpful to understand how
the 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, contains
the following verses which capture the spirit of the sacro-secular approach towards the
economic function in Hinduism (Bose, 1970):
Let a man think well on wealth
And strive to win it by the path of
Law and by Worship:
And let him take counsel
With 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.

KNOWLEDGE

Philosophy Three Vedas Economics Polity

(anviksiki) (trayi) (varta) (dandaniti)

Generation of wealth Allocation of wealth

Figure 1.
Agriculture Trade Banking Industry Consumption Distribution Taxation
 .
If dilemmas or conflicts arise in the pursuit of wealth then one’s conscience or The economic
spiritual power should be employed. In other words, the sacred goal cannot be function in the
undermined in the pursuit of secular wealth.
Hindu worldview
.
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 to 717
the sacred. For, this is the way to wholesome human development – as the rishis had
declared 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 was
further elaborated (Mahadevan, 1958). The most notable development during the
period was the formulation of a comprehensive scheme encompassing the four goals of
human 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 consciousness
and 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 thus
generated 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 the
attainment of moksha. Therefore, in this scheme of existence opportunity had been
provided for those who wished to skip the second and third goals to pursue moksha
directly. The renunciants fall in this category. The following philosophical keynotes of
the economic function emerge from the framework of purusarthas:
.
D-M provide solid embankments on two sides to contain the persistent
turbulence associated with the intoxication of A-K.
.
There is no indication to suggest that wealth creation was discouraged, or
satisfaction 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 potential
destiny of all human beings, whether a householder or a renunciant.

Another two-dimensional concept emerged during this period. These two dimensions
were:
(1) (Ab) Abhyudaya. material development.
(2) (Ni) Nihsreyas. supreme good.

Ab embraces both A-K. Correspondingly, Ni comprises D-M. The lesson is: pursue Ab
without losing sight of Ni. The latter acts as the pole star.
The frameworks of purusarthas and Ab-Ni have been put into practice, albeit in
varying degrees, at different times right up to this day. They were not just theoretical
IJSE constructs like Plato’s philosopher-king (Chakraborty and Chakraborty, 2003).
34,10 The following narratives demonstrate the integration of these frameworks in
education for social life:
. The Katha Upanishad contains dialogues between Yama, the King of Death, and
Nachiketa, a mere boy. Of the three boons sought by the boy from Yama, the last
one related to the knowledge of existence after death. Yama tried to deflect him
718 from 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 Nachiketa
responded 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 that
alone (Gambhirananda, 1980).
This shows that even a young boy like Nachiketa had the strength of character to
prioritize D-M over A-K. This stand of Nachiketa demonstrates the principle that
in Hinduism the economic function is not allowed to over-rule the spiritual
aspiration of human life. The Upanishadic rishi produces a telling effect by
putting across these principles in the words of a boy.
.
In the Mahabharata, the biggest epic of the world, the third section in Sabha
Parva provides an elaborate description of the palace of the Pandavas. Some of
the verses are quoted below (Lal, 2005):
It covered an area
Of five hundred square cubits;
It was beautiful to see;
It shone with the radiance
Of fire, with the radiance
Of the sun, with the radiance
Of the moon; its splendour shamed
The rays of the sun . . .
With the finest craftsmanship
On jeweled walks and portals
In paintings and luxuries –
It was Viswakarma’s handiwork!
Soft breezes stirred the flowers
In 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 affluence
achieved 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).
 (C) Kautilya’s Arthshastra is one of the most important economic treatises of the The economic
post-Buddhist era (about 300 BC ) (Sastri, 1967). The salient features pertaining to the function in the
economic function furnished in the book are (Rangarajan, 1992):
Hindu worldview
.
The term artha used by Kautilya has a broader meaning beyond personal
wealth. In this sense, Kautilya’s artha seems to be more all-embracing than A in
the D-A-K-M framework. In the latter the individual is the prime focus, the
society follows. In the former this priority appears to be reversed. 719
.
Unlike in the Vedic or post-Vedic period, Kautilya’s Arthashastra recognized the
crucial role played by the state or government for the material well-being of the
nation and its people. For example, it includes guidelines on foreign policy,
taxation, revenue collection, budget accounts, defence, etc. In the earlier two
phases the emphasis was exclusively on individuals, guiding them how and why
they should mould their lives for ethical wealth generation.
.
Kautilya is silent about M. Since, he was focusing on the King’s role, this silence
is 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, even
Chandragupta-Kautilya themselves have upheld the goal of M by going for
vanaprastha 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 not
been 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 the
king: 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 of
diverse economic functions. It is equally true that while economic functions were
encouraged, the king was expected to act with “prudence” which is the cornerstone of
dharma. This is how the scope of sacro-secular symbiosis (Chakraborty, 1991) at the
state level was formulated by Kautilya.
(D) The Bhagavad Gita, containing the gist of the Vedas and the Upanishads, too
re-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 this
shall 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 shall
attain to the supreme good (3.11).
.
Fostered by sacrifice the gods shall give you desired enjoyments; who enjoys
their 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
IJSE upon us by what we may call Gods. In Hinduism, the many Gods and Goddesses
34,10 mean the supra-human powers and forces of Nature. Personification helps humans to
relate to these Cosmic powers with humility. By utilizing these Cosmic gifts the
human world creates usable things through multifarious ways of conversion. Hence,
human beings should gratefully offer their works and worship to these Cosmic agents
or Gods. This could also be done by physical acts of sacrifice ( yajna), with fire (agni )
720 as the central deity. Thus, propitiated, these very powers of Nature would nourish
humanity with more wealth. It is in this way that the sacred cosmic dimension is
married with the secular economic function. The snowballing ecological problems due
to lopsided economic activities can be addressed only by restoring the above
sacro-secular philosophy. The economic function in Hinduism has always maintained
fidelity to this holistic truth. It is only now that a major departure from this is being
enforced 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 not
succumbing to the wrongful envy of someone else’s wealth. Otherwise, an attached
mind will remain a servant of artha and kama only. For him the pursuit of Supreme
Good (or Self) as the true goal will remain otiose. Not only moksha becomes impossible
for him; even dharma or ethicality in secular affairs is under constant threat.
It is perhaps relevant to conclude this section by suggesting an important
connection between the four-goal system explained above and the other quartets for
the conduct of life and society, i.e. four stages (ashrams) of life and the four classes or
functionaries in society. The four-ashram framework clearly admits that. Yet, in
principle, it is not supposed to intrude into the first, third and fourth stages
(brahmacharya, vanaprastha and sannyasa). Thus, only the second ashram, the
householder stage, is where A-K goals have their true and full scope. Similarly, in the
four-class system, the Brahmins in principle are expected to be almost wholly free from
embroilment with A-K, the society supporting them. Kshatriyas too are to be
incidentally preoccupied with A-K. It is the vaishyas who have the prime role in A-K
matters 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 are
getting as much mired in A-K as vaishyas or shudras. No sound, saving theory
underpins the present mode of economic activities.

Modern Indian savants on the economic function

So far, the ancient Hindu outlook about the economic function has been highlighted. In
this section, observations by some of the greatest contemporary Indian minds on the
subject shall be presented. They are some of the best flowers of the sanatan Indian
culture. They had both thought and lived Hinduism in its varied aspects. Their chief
contributions were made during the second half of the nineteenth century and the first
half of the twentieth century. Besides, they were thoroughly familiar with the western
culture also. Having studied and/or worked there for long periods, the bulk of their
writings is available in English.
 (A) Rabindranath Tagore: The economic
(i) Our Laxmi[1] is not the goddess of the cash balance in the bank: she is the symbol of that function in the
ideal plenitude which is never dissociated from goodness and beauty. Hindu worldview
(ii) In the old time when commerce was a member of the normal life of man, there ruled the
spirit of Laxmi, who with her divine touch of humanity saved wealth from the unseemliness
of rampant individualism, mean both in motive and method. 721
(iii) In former times the intellectual and spiritual powers of this earth upheld their dignity of
independence, but to-day, as in the fatal stage of disease, the influence of money has got into
our brain and affected our heart (Tagore, 1988).
Tagore, Nobel Laureate in literature in 1913, reminds us that the Hindu concept of
wealth bore the signet of divine sanctity. It is also noteworthy that invocation of
goddess Laxmi’s blessings for wealth generation has been a part of normal life in
society. Tagore had prophesied way back in 1920 one of the greatest problems of
modern society: the dictating of terms by money power over the spiritual and
intellectual 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 are
trying 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 live
on 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 sects
will 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 contemporary
economic activities, he had predicted them to be unsustainable. He believes that the
philosophy of “plain living and high thinking” is the answer. Later, we will find that
point (i) is a perfect forecast (made in 1897) of the entropy problem to be cited in the
next section:
Vivekananda’s second quote is a seeming contradiction to the first one. But the latter had
been uttered in the specific context of the-then poverty among large masses in the country. It
was the agonized out burst of a soul bleeding for the poor. But he could also see far beyond
the immediate present. So, present poverty must be solved, but not at the cost of man’s future
destiny.

(C) Mahatma Gandhi:

(i) I offer the economics of God as opposed to the economics of the Devil which is gaining
ground in the world-to-day. The latter aims at or results in concentrating a million rupees in
one 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 that
inculcates Mammon worship, . . . spells death (Gandhi, 2001a, b).
IJSE (iii) The real value of acquired wealth depends on the moral sign attached to it, just as sternly
as that of a mathematical quantity depends on the algebraical sign attached to it (Gandhi,
34,10 2001a, b).
Although much in the same spirit as the preceding savants, Gandhi (the leading figure
in India’s struggle for independence) has been a little more down-to-earth and
categorical. He understands that all of us may not be successful in winning wealth. But
722 those who will be successful should act as trustees, and plough-back as much wealth as
possible to the masses. The secret behind ancient India’s richness and minimal poverty
was also this ideal of sacred trusteeship. Self-centered pursuit of wealth will invite
inequity of wealth distribution which is immoral. But the spirit of trusteeship lends
moral sanction to wealth generation. These remarks were made in 1920s. Could this be
a benchmark for self-introspection by those Indian graduates who are now walking
away 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 is
also a true and beautiful life. Neither the life nor the body exist for their own sake, but as
vehicle and instrument of a good higher than their own. They must be subordinated to the
superior 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 attempt
to get rid of the animal squalor and bareness . . . It is pursued in a wrong way, no doubt, and
with 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 of
the competitive or the cooperative kind but to give men – not only to some but all men each in
his highest possible measure – the joy of work according to their own nature and free leisure
to grow inwardly . . . (Sri Aurobindo, 1985).
Aurobindo (the most comprehensive and experientially the richest modern
psycho-philosopher of India) too does not negate the desirability of a well-appointed
life. But he emphasize that there should still be a higher goal of life which is ennobling
and joyous. Wealth, to him symbolizes power. Man being its custodian, should
mentally 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 natural
existence 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 of
money-making has been so great that many people are breaking down under it . . . Hinduism
has 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 a
materialistic 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 is
also noteworthy that as far back as 1926 he too had expressed his about single-minded
pursuit of money making people are becoming psychologically more vulnerable. In the The economic
last sentence, he approves the “sacro-secular symbiosis” thesis of this paper. function in the
(F) Swami Nikhilananda:
Hindu worldview
(i) . . . Hinduism has never condemned a rich and full life in the world or extolled poverty as a
virtue in itself – though the case is different with monks, who voluntarily take the view of
mendicancy.
723
(ii) It was India’s fabulous wealth that invited foreign invaders, . . . Religion has never been the
cause of India’s poverty; it is indifference to religious precepts that has been largely
responsible for her general backwardness.
(iii) the history of India shows that when the country was spiritually great it was also
materially prosperous and culturally creative (Nikhilananda, 1968).
Nikhilananda, who had been the head of the Ramakrishna Vedanta Centre in New
York, 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 deviation
from 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 the
Hindu culture in India.

(G) Ananda K. Coomaraswamy:

(i) Thus, the ideal society is thought of as a kind of co-operative work-shop in which
production is to be for use and not for profit, and all human needs, both of the body and the
soul, are to be provided for.
(ii) On the one hand, the inspired tradition rejects ambition, competition and quantitative
standards; on the other, our modern “civilization” is based on the notions of social
advancement, free enterprise (devil take the hindmost) and production in quantity. The one
considers man’s needs, . . . the other considers his wants (Coomaraswamy, 1989).
Coomaraswamy, (the renowned art critic and philosopher) upholds the view that
traditional society (which includes Hinduism) encouraged economic practices with the
purpose of nourishing body, mind as well as the soul. That apart, social advancement
by performing economic function was defined in terms of fulfilling man’s essential
needs, and not his unlimited wants.

Some extra-orbital views from the west

Some of the extra-orbital from the west on the philosophy of economic functions will
now be considered. Their views have been compiled because, hailing from rich western
nations as they are, their opinions may appear to be more acceptable to the present
readers. 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 of
the economic function than mainstream economists. It will also be explored if their
assessments and remedies corroborate in spirit the ancient framework (D-A-K-M) for
the economic functions in Hinduism. Their views will cover a period spanning
1912-2006 to capture the evolutionary trend of the critical western thought-process.
IJSE The extra-orbital views of Indian savants will also find quthentic echoes in what
34,10 follows.
(A) R. H.Tawney:
(i) Tawney has observed the domination of “economic egotis” in modern societies. According
to him, therefore, Such societies maybe called acquisitive societies because their whole
tendency and interest and preoccupation is to promote the acquisition of wealth.
724
(ii) Society . . . must rearrange its scale of values. It must regard economic interests as one
element in life . . . the instrumental character of economic activity is (to be) emphasized by its
subordination to the social purpose for which it is carried out (Tawney, 1942).
About 85 years since Tawney had written these words, the universal mania for
acquiring money, as speedily as possible, has become more acute. Therefore, his
concluding words are a faithful echo of the Hindu worldview about subordinating
economic activities to higher social and spiritual causes.
(B) A. Carrel:
(i) Economists would realize that human beings think, feel, and suffer, that they should be
given other things than work, food, and leisure, that they have spiritual as well as physiological
needs . . . Economics would no longer appear as the ultimate reason of everything. It is
obvious that the liberation of man from the materialistic creed would transform most of the
aspects of our existence. Therefore, modern society will oppose with all its might this
progress in our conceptions.
(ii) When our activity is set toward a precise end, our mental and organic functions become
completely harmonized. The unification of the desires, the application of the mind to a single
purpose, produce a sort of inner peace. Man integrates himself by meditation, just as by
action (Carrel, 1961).
From the tenor of Carrel’s observations, who was a Nobel Laureate in Medicine, it is
evident that by “activity” he meant the economic function and by “precise end” implied
a higher goal in life. His implicit opinion is that economic activities and higher goals in
life are essentially contradictory. He feels that harmony can be established between the
two if economic philosophy admits its neglect of the urge for fulfillment of spiritual
goals as well. But he also expresses his doubt if modern society would encourage the
creation 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 a
corresponding ennoblement of human conduct is largely a myth.
(ii) They may remain materialistic and mechanistic within the legitimate limits of these
aspects of the Infinite Manifold . . . they should clearly emphasize their partial and
subordinate role, that there are non-material, nonmechanistic, rational, and superrational
aspects transcending the material appearance . . .
Sorokin (a social scientist) asserts that improvement in economic conditions will not
automatically ensure the sacred aspect of life. In other words, conscious
acknowledgement and effort are called for appreciating the supra-material aspects of
integral life. He even goes to the length of stating that materialistic (A-K) pursuits should
remain subservient to the trans-material aspects of true human development (moksha).
Otherwise, he apprehends, that man would remain confined to a sensate worldview The economic
(Sorokin, 1962). Refinement of human conduct will then be ignored. function in the
(D) Schumacher (1997):
Hindu worldview
(i) The hope that the pursuit of goodness and virtue can be postponed until we have attained
universal prosperity and that by the single-minded pursuit of wealth, without bothering our
heads about spiritual and moral questions, we could establish peace on earth, is an unrealistic,
unscientific, and irrational hope. 725
(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 any
civilization, but what is most needed today is a revision of the ends . . . which accords to
material things their proper, legitimate place, which is secondary and not primary.
Schumacher believes that single-minded pursuit of wealth will not by itself pave the
way for peace and happiness. He too feels that since economic functions have enabled
some nations to become materially affluent, it is now all the more important to get
connected with our spiritual bearings. Otherwise it will only invite misery. He also
agrees with Sorokin. Thus, all the three authors quoted so far agree with the Hindu
scheme of priorities, i.e. the material aspects of life (A-K) should remain secondary in
relation to the higher order goals (D-M).
(E) Toynbee (1987):
(i) Present-day society sees success and happiness in terms of ever-increasing economic
affluence. This objective is not only economically unattainable but also spiritually
unsatisfying. 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 average
standard of self-mastery, which is the key to spiritual welfare . . . The last test gauges the
extent to which the society has succeeded in giving spiritual welfare priority over material
welfare.
Toynbee, a historian, admits the futility of the attempt to seek happiness by means of
economic affluence only at the cost of spiritual aspiration. He too unambiguously
prioritizes the importance of gross national welfare over gross national product, i.e. the
sacred 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 preceding
authorities.
(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 being
considered as part of a divinely directed organism.
(ii) Believing that men and women are basically egoists in pursuit of economic gain, Smith’s
theories subordinate all human desires to the quest for material abundance to satisfy physical
needs. There are no ethical choices to be made, only utilitarian judgements exercised by each
individual pursuing self-interest.
(iii) The illusion of material progress is exemplified over and over again in every major
economic and social activity simply because the second law is swept under the rug . . . we have
IJSE convinced ourselves that we have made tremendous progress . . . On closer examination such
claims turn out to be pure bunkum. The debunker turns out to be the second law.
34,10
(iv) Speeding up the physical flow doesn’t insure greater spiritual development; quite the
contrary. Transcendence comes out of quietude and the recognition of the beauty in “being,”
not out of discord and the travails of “doing.”

726 Rifkin holds a few western philosophers responsible for dissociating modern
economics from the Divine. He also holds Adam Smith equally instrumental in
encouraging exclusively utilitarian judgments in the realm of economic functions.
Thus, interpreting progress from the perspective of economic growth only brings us
face to face with the “second law” (that is entropy).
This law needs a little explanation. By combining the two laws of thermodynamics
we get: the total energy content of the universe is constant and the total entropy is
continually increasing. This implies, “Every time something occurs in the natural world
some 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 it
becomes unusable. Therefore, the greater the rate of conversion of energy, the higher
the rate of entropy. Hence, rapid economic progress pursued through increased
exploitation of non-renewable sources of energy within a closed earth-system is
eventually bringing forward a state of unusable energy only. To decelerate the pace of
entropy, which is otherwise inevitable, he suggests a look within to find the true
meaning 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 to
show that they are really great people. They make far more money than they need for
whatever they want to do. They keep on making money. And if the mere making of money
isn’t enough, then they buy all sorts of things – far more than they need – to show that they
are great people.”
Bohm, a Nobel physicist, laments the modern-day tendency to judge greatness on the
basis of how much wealth a person has amassed. For example, ranking of world’s
richest persons. He points to the displacement of higher goals of life which can foster a
sense of proportion in wealth acquisition. Vivekananda (1963) had once made an
insightful observation, “Isn’t it man that makes money? Where did you ever hear of
money making man?” Bohm too points out the fallacy of regarding money as the cause
of 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. It
attempted to replace God by man, to put man at the center of the universe, to deify him. Its
ambition was to found a human order on earth, . . . without any transcendental or supernatural
supports – an entirely human order.

(ii) So the humanist fathers put their founding axiom: man is all-powerful, if his will is strong
enough 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,” exclusively
through pursuit of economic activities, openness and access to the transcendental
was denied. He attributes this mentality to man’s egoistic self-magnification – in the name The economic
of humanism. function in the
(I) Korten (1998):
Hindu worldview
(i) Modern economics turned the Hobbesian ideology of rational materialism into an applied
science of human behaviour and social organization that embraces hedonism as the goal and
measure of human progress, and absolves the individual of responsibility for moral choice.
727
(ii) Life’s song calls us to engage fully the wonder, joy, and love of life inherent within our
being. . . . The song of money calls us to experience life through the pursuit of material
diversions . . .
Korten, a management thinker, also echoes a sentiment similar to that of Bohm. But he
is more critical. He considers adoption of hedonism as the key process of human
progress a faulty step. This makes man morally irresponsible and also snatches away
the inner rhythm of life.
Korten’s last sentence is reminiscent of Tagore’s statement about the philosophy of
his school at Shantiniketan: “Wealth is a golden cage in which the children . . . are bred
into 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 you
make, it’s still only walking-around money.” The statement is both arrogant and accurate. His
remark underscores the increased importance of unearned income . . . that wealth
accumulates in the form of financial assets, and the more those shares and other securities
appreciate 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 economic
function by calling its “unearned income”. Essentially it means creation of artificial
income by speculating in the stock market. This does not add anything to the real
economy.
(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 ills
brought about by the scientific-rational endeavour.
(ii) Risk society means that risk-thinking has become not only pervasive but also routinized: it
is a part of everyday thinking processes of individuals in their private and organizational
lives (Hudson, 2003).
The essence of Hudson’s argument is that science and technology on the one hand, and
business and economics on the other, have formed an inter-twining spiral. They have
been mutually reinforcing each other. The psychological impact of this marriage of
convenience 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 of
it 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. Not
just progress, but meanness, obsessive self-interest, a callousness towards others
increasingly reflected in our public institutions, seems to be on the march. Mental illness
and spiritual malaise are endemic.
IJSE (ii) The trouble with corporations is that they were designed to reproduce only one aspect of
the multifaceted human psyche – in a word, greed.
34,10
Rowland endorses the same viewpoint as that of some other fellow-westerners quoted
above. Although he agrees that on the material front there has been progress, but the
underlying driving force has been greed. This has undermined the ethical-spiritual and
mental health aspects of human beings.
728 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 no
stimulus from modern economics.
.
Measurement of development in terms of gross national product should be
cross-checked against gross national welfare which includes spiritual welfare
too.
.
Methodical attempts to learn and develop the spiritual faculty is a pre-condition
for wholesome management of economic affluence.
.
Greatness of a man is wrongly assessed in terms of material wealth and not his
character wealth.
.
Embracing hedonism has devalued morality.
.
It is essential to understand and appreciate the inevitability and consequences of
entropy. Therefore, tempering the one-track economic function with a taste and
search for intrinsic happiness is imperative.

Thus, it is clear that some of the perceptive contemporary westerners, who could go
beyond the orbit, are concerned about the prevailing skewed temper of the economic
function. They unanimously declare that pursuit of economic activities without a
spiritual anchorage will not be sustainable. Thus, these opinions reinforce the same
worldview as propounded and practised in Hinduism. In other words, D and M should
set the limits for A and K. Many Indian savants and thinkers have largely foretold
what some honest thinkers from the West are now saying.

Globalization and the Hindu economic philosophy

It will now be indicated how the economic function fuelled by globalization fares with
respect 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 disheartening
trend: not only have they failed to reduce poverty, but they are falling further behind rich
countries . . . 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 when
developed countries have higher growth rates – precisely because initial income gaps are so
large.
(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.
 Expressed in absolute terms, this sounds like a large amount. But it is equivalent to less than The economic
2% of the income of the richest 10% of the world’s population.
function in the
It is worthwhile to note although the era of globalization has been marked by Hindu worldview
advancement in technology, trade and investment originating from the affluent
nations, yet the key indices measuring human development have fallen relatively far
behind in the poorer parts of the world (Human Development Report, 2005). The
emerging picture is far from encouraging. First, the report testifies to the fact that the 729
rich are becoming richer and the poor poorer by the day. Although it is true that many
developing countries are registering higher growth rates, but those of the developed
countries are higher still. Second, this inequality can be substantially mitigated if the
world’s richest 10 per cent population have the heart to share even 2 per cent of their
income in charity. But the reality is not as noble as that. A Shylock mentality seems to
rule in aid negotiations. As the Mother of Sri Aurobindo Ashram at Pondicherry
explains (through the monologue of an industrialist):
And what have I contributed to humanity? Men travel more easily. Do they understand each
other better? Following my example, all sorts of labour-saving gadgets have been mass
produced and made available to an increasing number of customers. How far has this done
anything more than to create new needs and a corresponding greed for gain? . . . I feel that
there 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 by
today’s globalization. Although globalization is being done in a calculated and
comprehensive manner, yet the “secret” to be discovered as confessed in the monologue
is still elusive. By “secret” she implies a Consciousness in humans which can
appreciate 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 “sensate
culture” (quoted earlier) implemented through globalization. A sensate society holds
the following maxim: more is less. However, as mentioned earlier, the basic
sacro-secular philosophy of Hinduism is: less is more. This view was echoed in the
words of Vivekananda (quoted earlier) where he had compared the two different
worldviews about managing society. However, the storm of globalization is clouding
this enduring and sustainable basis of the economic function of Hinduism. With
greater entanglement in complex external life, the higher goals (D-M), which
intrinsically encourage living on less, are disappearing faster. Almost nine decades
later Rifkin has endorsed the capital insight of Vivekananda. The former has put it
succinctly:
The more energy each of us uses up, the less is available for all life that comes after us. The
ultimate moral imperative, then, is to waste as little as possible. By so doing we are expressing
our 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 our
economy-dominated society. Material progress assumes that what we have is never enough.
Thus, the Hindu view of the economic function receives both scientific and social
validation from these extra-orbital thinkers of the West. The 2005 UNDP Report,
IJSE highlighting the consequences of the worldview upholding “more is less” had been
34,10 anticipated in the following terms:
(i) In 1750 the per capita incomes of what are now called developed countries and
underdeveloped countries were equal. In 1930, the developed per capita incomes were four
times higher. By 1980, they were seven times higher (McLaughlin, 1998).

730 (ii) Today, industrial civilization has increased the reach of human beings, at least the
wealthier peoples, far beyond their own lands to the entire world. Tropical forests in Brazil
have been razed to grow soyabeans which are fed to cows in Germany . . . This artificial
ecosystem has increased Germany’s carrying capacity but drastically lowered it for the one
million displaced forest settlers (Hawken, 1993).
(iii) The buy-now-pay later epidemic has caught on. An entire generation of consumers is
living life close to the economy taking a turn for the worse, they are a step closer to the
precipice (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 has
legitimized greed with unhealthy social and moral implications.
Besides, India has special psychological reasons for India to be cautious and
on-guard against the above influences. The nation’s subconscious preserves the
memory of the impoverishment and exploitation of her wealth during two centuries of
British colonization. Globalization after all is a movement which has originated from
the wealthier nations. Massive R & D investments lead to large-scale industry,
followed by mass production which requires huge markets worldwide. Thus, the
norms of sustainable living in mature cultures like India are being pushed aside. In any
case let us have a glimpse of some data about the colonial period which bear the same
character as mentioned by the three writers quoted above.
Some data from the nineteenth century when India was a British colony, are offered
below (Dutt, 1989a, b):
(i) Every nation reasonably expects that the proceeds of axes raised in the country should be
mainly spent in the country . . . But a change came over India under the rule of the East India
company. They considered India as a vast estate or plantation, the profits of which were to be
withdrawn from India and deposited in Europe.
(ii) The East India Company’s trade was abolished in 1833, and the Company was abolished
in 1858, but their policy remains. Their capital was paid off by loans which were made into an
Indian Debt, on which interest is paid by Indian taxes. The empire was transferred from the
Company to the Crown, but the people of India paid the purchase money. The Indian debt
which 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 be
what India is today. If manufacturers were crippled, agriculture over-taxed, and a third of the
revenue remitted out of the country, any nation on earth would suffer from permanent
poverty and recurring famines . . . If India is poor today, it is through the operation of
economic causes.
Against this backdrop India’s brush with the gospel “more is less” is of no less concern
today.
 Another reason why it is hard to take globalization at its face-value is the advocacy The economic
by some economists for breaking-down the supposed cultural barriers of sustainable function in the
cultures. This position ignores that such worldviews have been much more holistic
than the one-sided materialism of globalization. Let us sample one of the current Hindu worldview
writers:
. . . Globalization does and will pose cultural challenges. But it would be to the advantage of a
developing country to accept these challenges, as the greater diversity in culture and social 731
tradition created with the interaction of foreign cultures and people can enrich local societies
and cultures. Since, in developing countries, culture consisting of many centuries-old greatest
hindrance to their development . . . they need to shed some aspects of their culture which are
not conducive to economic growth and development, as well as absorb those aspects of
foreign culture which are pro-growth and development . . . For the first time in the
international economy, a global society has emerged . . . (Roy and Sideras, 2006).
Roy charts the path for economic development of the developing countries
unambiguously. He argues that globalization is the panacea for many of the ills
which are plaguing developing countries due to their respective age-old traditions and
cultures. He adds further that the process of globalization will revitalize such societies
by removing cultural impediments.
A reputed economist like Stiglitz (2002), though mores moderate, also defends
globalization as an allround positive approach for development:
(i) Globalization can be reshaped, and when it is, when it is properly, fairly run, with all
countries having a voice in policies affecting them there is possibility that it will help create a
new global economy in which growth is not only more sustainable and less volatile but the
fruits of this growth are more equitably shared.
(ii) I believe that globalization can be reshaped to realize its potential for good and I believe
that the international economic institutions can be reshaped in ways that will help ensure that
this is accomplished. But to understand how these institutions should be reshaped, we need to
understand better why they have failed, and failed so miserably.
The optimism of Stiglitz maybe noted in the above quotes. However, it is well-known
that every package of change in the past has been preceded by many pious hopes, of
which the IMF, WB, WTO, etc. are good examples. Stiglitz himself has acknowledged
this in his book. Therefore, there is not much convincing reason for hope after another
fresh round of changes in these institutions and their policies. Above all, the most
important philosophical underpinning of sustainable holistic development cannot be
anything but local. Thus, globalization is always likely to be an unsustainable strategy
for reducing poverty, promoting economic equality and improving cultural standards.
Two concrete examples maybe cited. In the cultural sphere, the mushrooming of
call-centres (or BPOs) has made sexual permissiveness acceptable so-long as it
motivates the young workforce. On the economic front small scale units are facing a
bleak future because they are no match for the MNCs who come to India armed with
advanced technology. Large numbers of such unit have been forced to close down their
operations due to liberalization and removal of import quotas.
However, if we pay careful attention to the “Report of the World Commission on
Culture and Development” on Our Creative Diversity in 1995, it appears that economic
experts are continuing to be oblivious of several fundamental principles of human
development. Here, are a few excerpts from the above report:
IJSE (i) Clearly, there was a need to transcend economics, without abandoning it. The notion of
development itself had broadened, as people realized that economic criteria alone could not
34,10 provide a programme for human dignity and well-being.
(ii) The logic of rejection . . . to diminish each society’s faith in its own resources and to
threaten the diversity of cultures that is vital to the well-being of the human race.

732 (iii) The challenge is to promote different paths of development, informed by a recognition of
how cultural factors shape the way in which societies conceive their own futures and choose
the means to attain these futures.
Evidently the intra-orbital perspective of economists and men of business seems to be
incapable of taking into account the many subtleties of human existence in a world of
varied cultures. It thus becomes imperative to listen respectfully to the voices of
wisdom and caution about the character of the economic function overwhelming the
world for the last one and half centuries. There is therefore a strong case for the nuture
of the future economic function to turn towards spirinomics away from capinomics or
communomics (Chakraborty, 2003).

Conclusion
It should be realized that from the time of “knowledge is power” to that of the “invisible
hand” 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 too
distant. 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 of
this 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 . . . This
prioritization forced economic activities (artha) to observe limits. Secular desires were
legitimized but subjected to careful moderation (Chakraborty, 2003).

Note
1. The Hindu goddess of abundance and fortune.

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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 of
India, 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 Ramakrishna
Math, Madras, pp. 25-7, 14.
Pusalkar, A.D. (1964), Economic Ideas of the Hindus, in the Cultural Heritage of India, The
Ramakrishna 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.
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Bharatiya Vidya Bhavan, Bombay, pp. 80, 110.
IJSE Sri Aurobindo (1985), “Civilisation and barbarism”, The Human Cycle, VIII, Sri Aurobindo
Ashram, Pondicherry, pp. 93-6.
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734 Sri Aurobindo (2003), The Bhagavad Gita, Sri Aurobindo Divine Life Trust, Jhunjhunu, pp. 86-7.
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Further reading
Report of the World Commission on Culture and Development (1995), Creative Diversity, Report
of 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 author
S.K. Chakraborty can be contacted at: debu_0876@rediffmail.com

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Exogenous
Exogenous technological change technological
and wage inequality in rural India: change
a theoretical note
735
Arindam Banik and Pradip K. Bhaumik
International Management Institute, New Delhi, India, and
Sundayo Iyare
Department 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 economic
consequences of an exogenous skill-biased technological change.
Design/methodology/approach – The paper develops a theoretical model based on assumptions
and 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 artisans
with 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 exogenous
skill-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 way
of an exogenous skill-biased technological change to a fraction of workers, it may have the unintended
consequence 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 with
skill-biased technology (artisans with improved toolkits) and those without these in determining the
wage inequality between these categories of workers (artisans) based on a theoretical model of the
trajectory along which the rural economy moves.
Keywords Change management, India, Skills, Labour efficiency
Paper type Conceptual paper

Introduction
Studies on supply of skilled labour can broadly be divided into two groups: those
that assume that skill-biased technological change is exogenous versus those that
are based on the assumption that the adoption of skill or unskilled-biased technologies
is endogenous. The overwhelming majority of papers belong to the first group and
have argued that skill-biased technological change have played a central role on
the increased inequality in the incomes of skilled workers as well as countering the
slowdown in productivity. Central to this argument is the assumption that skill-biased
technological change is exogenous (Bound and Johnson, 1992, 1995; Katz and Murphy, International Journal of Social
1992; Mincer, 1988, 1995; Egger and Grossmann, 2001). Endogenous analysis of supply Economics
Vol. 34 No. 10, 2007
of skilled labour and skill-biased technologies has been carried out in a number of pp. 735-740
papers (Barro and Sala-i-Martin, 1999; Acemoglu, 1996) but only recently has this q Emerald Group Publishing Limited
0306-8293
phenomenon been given special treatment by Kiley (1997). Kiley concentrates on the DOI 10.1108/03068290710816865
IJSE endogenous growth model and argues that an increase in the supply of skilled labour
34,10 leads to temporary stagnation in the wages of skilled and unskilled workers. Further,
an increase in the supply of skilled labour accelerates skill-biased technological change
and under plausible conditions, lowers output growth, at least temporarily.
The improved toolkits were provided to poor, rural artisans by the Government of
India (GoI, 2000) at a 90 per cent subsidy under its supply of improved toolkits to rural
736 artisans (SITRA) programme. In accounting for the role of improved toolkits in both
production activities of the artisans and rural economic activities, the aims at the
following: first the decision to supply improved toolkits affects the rural areas in
two principal ways – by way of direct and indirect benefits. Second, an increase in the
supply of skilled labour with improved toolkits fosters organizational change and
raises the employment share of artisans within the rural economy, without lowering
relative incomes. Third, the improved toolkits raise income inequality by affecting the
organization of production (Egger and Grossmann, 2001).

The model
Decision to supply improved toolkits
We begin with the following assumptions:
.
the economic conditions of the rural artisans in the developing country are stark
enough 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 a
small time interval [t, t þ dt ] provide an opportunity for the rural artisans to change
their economic condition by a small amount, say dx. This change in position or
decision, dx can affect the benefits accruing to the artisans in two ways:
The first is the direct effect, which will be:


dx
U t; x; dx ð1Þ
dt
 
where U t; x; dx=dt is the social utility per unit of transfer at x(t), which is regarded as
independent of the amount of transfer as dx is small.
In order to determine the indirect effect, the entire stream of marginal benefit
generated by the small change in position dx must be known, i.e.:


dx
U x t; x; t [ ½t; T
ð2Þ
dt

where U x ðt; x; dx=dtÞ is the present value of the future social utility per unit of transfer
made at time t from the indirect benefit generated at time t.
Let trajectory or extremal along which the rural economy moves be denoted by
E. Thus, the present value of the stream of benefits generated by the decision dx is
given by:
  Z T
  XJ X nj 
Z T
   Exogenous
dx dxij
E U x t; x; ›t dx ¼ E U jxij t; xij ›t dxij ð3Þ technological
t dt j¼1 i¼1 t dt
change
where the subscript ij refers to the ith person in the jth social group, both for the social
utility function and the change in the economic position. The social utility functions for
backward classes and castes may be different – for example, under the SITRA 737
programme, 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 and
future indirect benefits. This gives:
Z tþdt
   Z T
 
dx dx
U x t; x; ›t dx þ E U x t; x; ›t dx ð4Þ
t dt tþdt dt
Since, the future indirect benefits are of major importance, the total benefit accruing to
the rural economy during time interval [t, T ] as a result of the decision to supply
improved toolkits is then the sum of equations (1) and (4).

Toolkits technology
The 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 the
value of skilled labour to more than that of skilled labour without toolkits and
unskilled labour, respectively. This is due to the assumption that skilled labour with
toolkits are more productive than skilled labour without toolkits and unskilled labour.
Consider now n identical artisans who produce a homogeneous good. Let the
artisans differ in toolkits technology, such that there will be a segmented labour
market 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 and
work as per customer’s need. We shall treat skilled labour without toolkits as
supporting labour. Production with L s and L st is a perfect substitute for production
with L st. Kiley (1997) has argued that the assumption of perfect substitution reflects
the idea that there are different ways to produce a good, and that the choice of the mix
of production processes is endogenous. Given these assumptions, the output Yi of
artisan i is given by the linear homogeneous production function F:
Y i ¼ FðUi ; Vi Þ ; Ui f ðki Þ; ð5Þ
where Ui ðLsi Þ and Vi ðLst
i Þ are the efficiency units of artisan labour without and with
improved toolkits, respectively, ki ; Vi =Ui represents the skill-intensity in
production of the ith artisan while f ðki Þ, as an indicatrix, is a strictly increasing and
strictly concave function. In the economic enterprise of a rural artisan, the only relevant
factor of production is labour. There is virtually no capital or land or any other factor of
production committed to the artisanal economic enterprise.
The efficiency unit of labour in production depends on the artisans without
improved toolkits and those with toolkits. Although, artisans without improved
IJSE toolkits enter the production function as productivity-augmenting through the
expansion of say N (the goods available for production with skilled labour), they are
34,10 employed at the same intensity level as those artisans with improved toolkits.
By implication, production is linear in Ui and Vi, respectively. The constant returns to
production mix imply that expansion of N goods allows for endogenous technological
progress, as in the well-known “AK” model of endogenous growth (Kiley, 1997; Barro
738 and Sala-i-Martin, 1999). However, we are differentiating between categories of skilled
labour in terms of tools or technology.
Consider now where additional units of improved toolkits greatly improve the
artisans’ productivity. Then the efficiency units of artisans without improved toolkits
and artisans with toolkits are given as:
Ui ¼ U1i þ a U2i and Vi ¼ V1i þ b V2i ð6Þ
where a and b are relative efficiencies and both are assumed to be greater than one
implying a productivity gain, i.e. additional supply of improved toolkits to artisans
leads to higher productivity of both artisans without toolkits and those with the same.
It should be noted that U1i and V2i are the additional units of labour in production by
artisans without and with toolkits, respectively, after the additional toolkits are
supplied and do not imply the physical continuation of previous labour and an add-on
to the same.
It can be argued (Nadiri, 1987) that the supply of additional toolkits will lead to a
joint production function. Let m represent the additional toolkit which can be used to
produce outputs by artisans not having a toolkit earlier or those having a toolkit
earlier. The physical units of labour supplied by the ith artisan are U1i and V2i ,
respectively, whereas the efficiency units of labour would be a U1i and b V2i . Then:

mi ¼ v:Gða U2i ; b V2i Þ ; v U2i :gðxi Þ ð7Þ

G is a linear homogeneous function; xi ; V2i =U2i represents skill-intensity in
production due to the additional improved toolkits, v is the fraction of production or
shift in efficiency parameter due to the additional toolkit, and g(xi) is assumed to be
strictly increasing and strictly concave.
The implication of equation (7) is that every additional improved toolkit supplied
creates an effect on skilled artisans in two ways: first, if it is used by an artisan without
a toolkit, mi ¼ v:Gða U2i Þ and second, if it is used by an artisan with toolkit then
mi ¼ v:Gðb V2i Þ.It may be noted that a maximum of one improved toolkit is supplied
by the government under SITRA but artisans can purchase additional unsubsidized
toolkits from the market.
Next consider the wages and profit structures in the rural economy. Let final goods
output 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 subsidized
toolkit or not. To maximize profits artisans take all wages w1U ; w2U ; w1V ; w2V and wm
paid to U1i ; U2i ; V1i ; V2i and mi as a datum. We can write the decision facing a given
artisan as:

Max FðU1i þ a U2i ; V1i þ a V2i Þ 2 w1U U1i

U1i $0;U2i $0;V1i $0;V2i $0
ð8Þ
2 w2U U2i 2 w1V V1i 2 w2V V2i 2 wm :mi
Let ki ¼ k and xi ¼ x for all i given that all artisans are identical. The first– order Exogenous
conditions for the profit-maximizing employment levels are:
technological
f 0 ðkÞ # w1U ð9Þ change
af 0 ðkÞ # w2U þ wm vg 0 ðxÞ ð10Þ
0
f ðkÞ 2 kf ðkÞ # w1V ð11Þ 739
bð f ðkÞ 2 kf 0 ðkÞÞ # w2V þ wm vðg 0 ðxÞ 2 xg0 ðxÞÞ 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 after
additional improved toolkits are supplied U1i and V1i equal the sum of their wage rate
(w2U and w2V , respectively) and marginal wage costs for the skilled labour without
toolkits.

Wages and skill-biased technology change

In 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 in
terms of tools or technology, it has endogenous and exogenous implications for relative
wages. First, our model implies that more improved toolkits for the artisans raise the
skill wage premium for both artisans with and without improved toolkits. This is due to
the endogenous development of more toolkits for skilled labour. The endogenous
development arises from our assumption that skilled artisans without improved
toolkits can sell services or work as per customer’s need. In effect, more investment in
improved toolkits will shift the demand for artisans and lead to higher share of
artisans’ labour in the rural economy. Second, our model also implies an exogenous
change in the share of the artisans on the growth of each type of improved toolkit
and the relative wages of both artisans with or without toolkits. The relative supply of
toolkits is expected to rise dramatically due to government’s support for improved
toolkits. For example, to suit the needs of the artisans from varying trades, many
different toolkits have been developed by the research and development (R&D)
organizations of the GoI and also the state governments. About 22 types of toolkits
have already been developed since 1992. Also, the artisans can directly purchase the
improved toolkits from the market and this provides another possible exogenous
change. This then leads to the research question: will exogenous skill-biased
technology lead to relative high wages of artisans with or without improved toolkits?
Following Egger and Grossmann (2001) and the model developed above, this would
depend on whether the efficiency units of labour of artisans with toolkits relative to
that 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 wage
dispersion will increase. An increase in b means that the relative demand for artisans
IJSE with toolkits become more attractive. As a result, equilibrium wage inequality
increases. An increase in v implies that cost of buying toolkit is rising and supporting
34,10 skilled labour without toolkits becomes more expensive. Thus, the wage dispersion
declines. Finally, the effect of both increase in Ui and decline in Vi cancel out in
equilibrium due to the linear homogeneity of Gða U2i ; b V2i Þ.

740 Conclusions
Throughout this paper we have looked at how exogenous technological change may
cause wage inequality in rural areas. There are two categories of skill population in the
rural areas; one with toolkits and the others are with out toolkits. The underlying
forces of demand and supply of skill labours may explain by the toolkits technology
supplied to them. In such a situation the relative demand for artisans with toolkits
become more attractive. As a consequence, equilibrium wage inequality increases.
This may be considered as an equilibrium outcome in the skill category in a rural
market setting. The inequality may disperse as more and more poor take advantage of
the intervention.

References
Acemoglu, D. (1996), “Changes in unemployment and wage inequality: an alternative theory and
some 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 evaluations
of 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 United
States?”, 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 and
wage inequality”, paper presented at the Annual Meeting of German Economists, Berlin.
Government of India (2000), Quick Evaluation of Supply of Improved Toolkits to Rural Artisans
Programme, Ministry of Rural Development, New Delhi, Mimeo.
Katz, L. and Murphy, K. (1992), “Changes in relative wages 1963-1987: supply and demand
factors”, Quarterly Journal of Economics, Vol. 107, pp. 35-78.
Kiley, T.M. (1997), The Supply of Skilled Labour and Skill-biased Technological Progress, Division
of Research and Statistics Federal Reserve Board, New York, NY.
Mincer, J. (1988), “Human capital, technology and the wage structure”, in Mincer, J. (Ed.), Studies
in Human Capital, E. Elgar Publishing, London.
Mincer, J. (1995), “Economic development, growth of human capital, and the dynamics of the
wage 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), The
New Palgrave: A Dictionary of Economics, Macmillan, London.

Corresponding author
Arindam Banik can be contacted at: arindambanik@imi.edu

To purchase reprints of this article please e-mail: reprints@emeraldinsight.com

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 The current issue and full text archive of this journal is available at
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Stock market
The nexus between stock market and economic
and economic activity: an activity
empirical analysis for India
741
Purna Chandra Padhan
School of Business and Human Resources,
Xaviers Labour Relations Institute (XLRI), Jamshedpur, India

Abstract
Purpose – An understanding on the linkages between financial development and economic growth
in general and the stock market with economic activity in particular is imperative in emerging
economies. The objective of this paper is to find out the causal linkages between stock market and
economic activity in India.
Design/methodology/approach – The paper applies recently developed Granger non-causality
tests by Toda-Yamamota, Dolado and Lutkephol (popularly known as the TYDL model) for an
empirical exercise.
Findings – The notable finding of the paper is that both the stock price (BSE Sensex) and economic
activity (IIP) are integrated of order one, i.e. I (1). The Johansen-Juselius co-integration tests suggest the
existence of one co-integrating vector. This rules out spurious relations and suggests the presence of at
least one direction of causality. The TYDL model suggests that there is bi-directional causality
between stock price and economic activity during the post-liberalization period, implying that a
well-developed stock market could enhance economic activity and vice-versa.
Research limitations/implications – In the broader framework of financial markets, the presence
and role of the stock market is minuscule in the context of India. Despite this, it could play a
considerable role in the process of the economic development of the country. However, to analyze the
cause and effect relationship between stock market and economic activity, it is essential to analyze the
issue in greater detail and depth. The main limitation of the paper is the use of IIP as a proxy for
economic activity, which neglects the agricultural sector, being the primary sector in India and also the
service sector. This is of course due to the non-availability of GDP data on a monthly basis. Further, a
detailed 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 some
insight for policy makers about the possible linkages between stock market and the economy. Coming
to empirical parts, this is perhaps the first paper in the context of India to apply the TYDL model to
examine the relationship between stock price and economic activity.
Keywords Stock markets, Economic growth, Modelling, Developing countries, India
Paper type Research paper

1. Introduction
One of the most enduring debates and stifling issues in economics is the nexus between
financial development and economic growth. It is often discussed both at theoretical
and policy levels that whether financial development causes economic growth or it is a
consequence of increased economic activity. Way back to Schumpeter (1912), perhaps International Journal of Social
the first, identified the force underlying long-run economic growth is the technological Economics
Vol. 34 No. 10, 2007
innovation, which may arise as a result of financial development. Gurley and Shaw pp. 741-753
(1955) studied the relationship between financial markets and real activity, later on q Emerald Group Publishing Limited
0306-8293
more rigorously analyzed by Goldsmith (1969) and Schwarz (1978) and others. A more DOI 10.1108/03068290710816874
IJSE difficult question often arises with respect to whether the forward-looking nature of
34,10 stock prices could be a driving apparent causality between stock markets and growth.
In principle, a well-developed stock market should increase savings and efficiently
allocate capital for productive investment, which can lead to increase in economic
activity (especially economic growth). Stock market also significantly affects corporate
sector in allocating capital, which have a real effect in the economy aggregately.
742 The counter argument to this is that a well-developed financial system and higher
economic growth could create a conducive atmosphere for smooth performance of the
stock market. However, empirical investigations of the link between financial
development in general, and stock markets and growth in particular have been
relatively limited. Various empirical researches have suggested a possible connection
between stock market development and economic growth, but are far from definitive.
Although the relationship postulated is a causal one, most empirical studies have failed
to 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 debate
among economists. With reference to the role of stock market in economic growth, it has been
widely debated. It is well recognized that stock market influence economic growth through
creation of liquidity. It has also been widely agreed and believed through empirical
investigation that economic growth and its fluctuations could influence the stock price. The
primary objective of this paper is to study the underlying causality between stock market and
economic growth, applying the augmented VAR model with integrated and cointegrated
series as developed by Toda and Yamamoto (1995) and Dolado and Lütkepohl (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 of
the literature of the causality between stock market and economic growth. Section 3
specification of the empirical model. Section 4 describes the data and empirical results.
Section 5 concludes.

2. Review of literature
The relationship between stock market and economic growth has been studied
across economies on various aspects. Several theoretical and empirical papers such as
Levine (1991), Levine and Zevos (1995), Demirgue-Kunt (1994) and Demirgue-Kunt
and Levine (1996) have suggested that stock market development affect economic
growth in developing countries. Several other studies examine the short run relationship
between stock returns and with some macroeconomic and financial variables such as
inflation, 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), Chen
et 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) and
Anari and Kolari (2001) and so on. Applying either to USA or other country data, the
studies find varying degrees of relationship between stock returns and other
macroeconomic and financial variables. Few other studies examine the long run
relationship among these variables. The prominent among them are Campbell and
Shiller (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
dimension of it such as, the predictability of stock returns on real economic activity. Stock market
They are Estrella and Hardouvelis (1991), Estrella and Mishkin (1996) and Domain and and economic
Louton (1997) to name a few. Several other large bodies of literature have examined the
integration of stock market across economies, such as King and Wadhwani (1990), Jeon activity
and 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 relationship 743
between stock market and economic growth. Perhaps, one study worth mentioning is
Levine and Zevos (1988), who reported a very strong and positive correlation between
stock market development and economic growth. Caporale et al. (2004) examined the
linkages between stock market, financial development and economic growth for seven
countries and found that well developed stock market can faster economic growth in
the long run[1]. Keeping an eye on the paucity of the empirical investigations the paper
investigates the causal nexus between stock market and economic growth in the
context of India.

3. Empirical methodology
Modeling the dynamic relationship among times series variables could be well established
through various time series techniques. Perhaps, the simplest one to examine the cause
and effect relationship between variables is the simple regression model. However, it fails
to capture the underlying dynamic causality between variables, which is subsequently
analyzed by Granger (1969) in terms of Granger Causality tests. The Granger Causality
test requires that underlying variables must be stationary. In the absence of cointegrating
vector Granger Causality test could be done through first differentiating the variables of
Vector Auto-regression Model (VAR) Model. However, with cointegration Granger
Causality 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 causally
related. Thus, it is important to tests the stationary properties of series before proceeding
the Granger Causality tests in either way.
Subsequently, Sims (1972) argued that Granger Causality test in a bi-variate system is
mainly due to an omitted variable, which may causes either or both variables in the
univariate system. In such cases the causal inferences are invalid. Therefore, testing for
causality in a possibly unstable VARs with possibility that co-integration also exists has
become a serious issue. Sims et al. (1990) were perhaps the first to address such issue in a
trivariate VAR model, which was later on extended to more dimension by Toda and
Phillips (1993). Accordingly, they have proposed Wald tests statistics for testing Granger
non-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 distribution
only if there is sufficient cointegration (Toda and Phillips, 1993). However,
estimation procedure of causality tests proposed by Toda and Phillips (1993) requires
the estimation of cointegration rank (number of cointegrating vector) which suffers from
severe pre-testing bias. In this regard, Giles and Mirza (1990) pointed out that as the testing
of Granger Causality requires pre-testing of non-stationarity and co-integration, the result
might lead to over rejection of null hypothesis of non-causality and can provide wrong
notion about causality. In order to avoid the distortion in such inference procedure Toda
and Yamamoto (1995) and Dolado and Lütkepohl (1996) – (popularly known as TYDL
Model) suggested an alternative approach to causality testing. In the present paper we
IJSE have applied the TYDL Model to tests the Granger Causality between stock market and
34,10 economic growth. The model may be discussed in brief as follows.
The TYDL model does not require the pre-testing of unit root tests and
cointegration. However, this does not implies that it replace the conventional
hypothesis testing of the same, rather it is a complementary method. According to
TYDL model, even though the series are integrated and co-integrated of an arbitrary
744 order, the Granger Causality tests can be tested by estimating an augmented VAR
procedure in levels and applying the standard Wald criterion. The VAR model in levels
may be specified as follows:
X
p21
X t ¼ mt þ Gi X t2k þ 1t ð1Þ
i¼1

where Xt is a r £ 1 column vector of p variable, m is an n £ 1 vector of constant term, G

is coefficient matrix, k denotes maximum lag length and 1t is i.i.d. of p dimensional
Gaussian error terms with non-zero and variance matrix L.
The application of TYDL model involves two steps. The first step involves the
determination of the lag length, k, of VAR model at level and the maximum order of
integration, 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. The
diagnostic checking of the VAR model can be done applying normality, autocorrelation
and hetroscedasticity tests. Given that VAR (k) is selected, and the order of integration
d (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 VAR
coefficient matrix (but not all lagged coefficient) to make Granger causal inference. The
TYDL procedure uses a modified-wald test for restrictions on the parameter of the
VAR (k) model. This test has an asymptotic x distributions with k degrees of freedom
in the limit when the VAR [(k þ d (max)] is estimated (where d (max) is the maximal
order of integration for the series in the system).

4. Empirical analysis
4.1 Data
The study has been carried out for post liberalization period as after this period several
changes has been taken place in Indian economy including stock market. The data used
for the study are monthly, spreading from 1991:04 to 2005:03, the latest available, collected
from 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 for
real economic activity, as the GDP is not available on monthly frequency. Real stock price
is considered by deflating nominal stock price with wholesale price index (WPI). The data
sets are expressed in natural logarithms and the first difference provides the stock returns
and 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 variable
expressed in real terms, logarithmic and first difference, respectively.

4.2 Empirical results

In the first step, we have carried out the unit root tests applying Augmented Dickey
and 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,
Variables ADF PP KPSS
Lrbse Constant Constant and trend Constant Constant and trend Constant Constant and trend

22.364 (4) (0.175) 22.218 (4) (0.165) 2 1.753 (4) (0.063) 22.325 (4) (0.753) 0.661 (1) 0.690 (1)
Ly 20.202 (13) (0.934) 21.944 (13) (0.626) 2 0.422 (12) (0.901) 28.124 (4) 0.000 * 1.732 (10) 0.201 (7)
Dlrbse 29.557 (0) (0.000) * 29.559 (0) 0.0000 * 2 9.201 (13) (0.0000) * 29.185 (13) 0.0000 * 0.143 (5) * 0.0989 (5)
Dly 23.460 (12) (0.003) * 23.421 (12) 0.0000 * 2 33.60 (14) (0.0001) * 233.608 (14) (0.000) * 0.069 (18) * 0.064 (19)
Notes: * and * * implies 1 and 5 percent significance levels. The critical values for ADF and PP test with constant and no trend are 23.4386, 22.856, and
22.568, whereas with constant and trend are 24.032, 2 3.45, 2 3.147 for 1, 5, 10 percent significance level, respectively. Whereas for KPSS test (drawn
from Kwiatkowski et al., 1992, Table I) the critical values are 0.739, 0.463 and 0.347 with constant, whereas with constant and trend are 0. 216, 0.146, 0.119
at 1, 5, 10 percent significance level, respectively. Figures in the parenthesis show the MacKinnon (1996) one-sided p-value for ADF and PP test. Figures in
the brackets show the maximum lag length. The lag length for ADF test is selected based on minimum of AIC (Akaike, 1973) and SBC (Schwarz, 1978)
starting with a higher lag length. Whereas for PP and KPSS tests it is decided according to Newey and West, 1994) bandwidth using Bartlett kernel
and economic
activity

Unit root tests

Stock market

745

Table I.
IJSE the variables are non-stationary at level but stationary at first difference. The tests
34,10 have been carried out both at levels and first difference with constant and with
constant 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 are
cointegrated or not[2]. Johansen (1988) and Johansen and Juselius (1990) co-integration
746 tests give better results and test the cointegration by applying maximum likelihood
estimation 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 of
the largest lag. Using individual significance level, a lag length of k ¼ 14 is suggested
based on these criteria’s.
Moreover, some misspecification tests of error process of the VAR (14) Model at
level have been carried out. The results (Table III) reveals that the residuals of both the
equation accept the existence of no auto correlation by LM (1) and LM (14) tests
and also jointly. There is no ARCH effect in both the equations as revealed from
ARCH (1) and ARCH (14). The error terms of stock price is hetroscedasticity whereas
economic activity (growth) it is homoscedastic. In addition to it, null hypothesis of
residuals are multivariate normal are accepted as revealed from the probability values
of Skewness and rejected at 1 percent significance level with kurtosis. The inference
is that residuals of both the stock price and economic activity seem to be normal. The
normality problem is not severe, as according to Gonzalo (1994), Johansen’s
co-integration method is robust even when the errors are non-normal. As VAR model
well specifies the data we can estimate the Johansen Juselius cointegration test based
on VAR model with a lag of 14 periods[4].
The results in terms of the l trace and l max statistic of Johansen-Juselius
cointegration tests (Table IV) suggest the existence of one cointegrating vector. The l
trace statistics rejects the null hypothesis of no cointegrating vector at 1 percent
significance level and accept the alternative hypothesis of more than zero cointegrating
vectors. Again it accepts the null hypothesis of r # 1 cointegrating vector and rejects the
alternative of r $ 1 cointegrating vector. Similarly, l max statistics rejects the null
hypothesis of r ¼ 0 cointegrating vector at 1 percent significance level and accept
the alternative hypothesis of one cointegrating vector. It also rejects the alternative
hypothesis of r ¼ 2 co-integrating vector. Since, both the test statistics suggest the
presence of one cointegrating vector, we can conclude that variables are cointegrated
and follow long run equilibrium relationship. The evidence of co-integration implies that

VAR lag order Log LR LR FPE AIC SC HQ

27
1 703.791 805.33 7.27 £ 10 28.458 2 8.345 2 8.412
13 917.321 82.415 9.84 £ 102 7 210.464 2 9.471 2 10.1200
14 929.467 20.022a 8.93 £ 102 8a 210.563a 2 9.471a 2 10.120a
15 931.776 3.750 9.13 £ 102 8 210.542 2 9.3156 2 10.068
Table II. Notes: Here, LR – sequential modified LR test statistic (each test at 5 percent level), FPE – final
Lag length selection for prediction error, AIC – Akaike information criterion, SC – Schwarz information criterion, HQ –
the VAR model Hannan-Quinn information criterion; a Implies the selected lag length based on the respective criteria
VAR LM LM ARCH Hetroscedasticity
(14) (1) x 2 (14) x 2 ARCH(1) (14) Skewness Kurtosis (White’s tests)

Lrbse 2.423 (0.273) 12.374 (0.300) 1.989 (0.158) 1.238 (0.2549) 0.129 (0.496) 1.718 * (0.0007) 1.471 * * (0.044)
Ly 0.496 (0.536) 11.234 (0.458) 1.032 (0.311) 1.155 (0.317) 0.004 (0.994) 1.918 * (0.007) 0.978 (0.526)
(Joint tests) x 2 4.107 (0.391) 0.793 (0.939) 0.462 (0.794) 18.589 * (0.0001) 221.919 * (0.0034)
Notes: LM (1) is the Lagrange multiplier tests for residual serial auto correlation of order 1. LM (14) up to order 14. ARCH (1) and ARCH (14) is the order
autoregressive conditional heteroscedasticity of order 1and 14. Normality is tested based on Skewness and Kurtosis. Heteroscedasticity is tested based on
whites’ test. All test statistics are asymptotically distributed as x 2. The figure in the parentheses shows the p value; * and * * denotes statistically
significant at the 1 and 5 percent significance level
and economic
activity

VAR model
Stock market

Misspecification tests for

Table III.
747
IJSE variable rule out spurious correlation and suggests the presence of at least one directions
34,10 of Granger Causality[5].
The next step is to apply the Toda and Yamamoto (1995) and Dolado and Lütkepohl
(1996) together called as TYDL model to estimate the Granger non-causality tests. As
suggested by TYDL model, the first step is to determine the order integration of the
series and then order of the VAR model. The next step was to augment the VAR at
748 level by maximum order of integration in the series. Since, the variables are integrated
of order one I (1), we can augment the VAR at level by one more lag. Then we go for
testing the non-causality zero restrictions on the parameters of the original VAR by
carrying out Wald tests on the first k coefficients matrix. The results of the Granger
Causality tests (Table V) between stock price and economic activity suggest the
bi-directional Granger Causality between both the variables. The TYDL model
formulates the null hypothesis of no-causality among the variables and it is rejected
here. Thus, the empirical results suggest that there is bi-directional Granger Causality
between stock market (price) and economic activity (growth). It means a well
development stock market could lead to higher economic activity (growth) and
similarly better economic growth could be significant factor for good performance of
the stock market.

5. Conclusion
The paper addresses the issues of causal nexus between stock market and economic
activity in a different dimension. The recent advances in econometric times series allow
us to test the Granger non-causality tests even in the presence of unit root and the
series are cointegrated, such techniques has been developed by Toda and Yamamoto
(1995) and Dolado and Lütkepohl (1996) (popularly known as TYDL). Applying TYDL
Model, the dynamic causal nexus between stock market and economic activity
has been examined in the context of India over the post-liberalization period from

Hypothesis Critical value Hypothesis Critical Value

Eigen values H0 H1 Trace value 5 percent H0 H1 Max value 5 percent

0.0915 r¼0 r$0 16.369 * 15.496 r¼0 r¼1 15.834 * 14.265

0.0032 R#1 r$1 0.5356 3.841 R¼1 r¼2 0.5356 3.841
Table IV.
Results of Notes: * ( * *) Denotes the rejection of the hypothesis at the 5 percent (1 percent level). The critical
Johansen-Juselius values are from Osterwald-Lenum (1992, Table I). The cointegration equation specified with linear
cointegration test deterministic trend as the data specifies the presence of linear deterministic trend

Null hypothesis Lag length/VAR order M-Wald tests (x 2) value P value

Lrbse 7! ly 14/15 4.73 * 0.04

Table V. ly 7! lrbse 14/15 5.46 * * 0.067
Granger Causality tests
(TYDL augmented Note: The symbol 7! denoted “does not cause”; * and * * denotes 5 and 10 percent significance level,
Model) respectively
1991:04 to 2005:03. Empirical result supports the evidence of bi-directional Granger Stock market
Causality between stock market and economic activity. Therefore, the results suggest and economic
that a well-developed stock market could enhance economic activity (growth) and
vice versa. activity

Notes
1. The countries are Argentina, Chile, Greece, Korea, Malaysia, Philippines, and Portugal.
749
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 is
found 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 first
difference. If there is n co-integrating vector, then the level data are already stationary, then
there 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 model
well then VAR model can be estimated at level. In this case our data well species the
VAR (14) model and there is one cointegrating vector so, we can estimate the VAR (14) at
level.
5. Engel and Granger (1987) argue that if the two time series are co-integrated then they are
necessarily causally related.

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Corresponding author
Purna Chandra Padhan can be contacted at: pcpadhan@xlri.ac.in

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IJSE
34,10 A case of inappropriately targeted
vulnerability reduction initiatives
in Andhra Pradesh, India?
754
Lee Bosher
Department of Civil & Building Engineering, Loughborough University,
Loughborough, UK

Abstract
Purpose – The paper seeks to assess the influence and effectiveness of non-governmental
organisations (NGOs) in targeting and aiding “communities” to reduce their socio-economic
vulnerability to infrequent large-scale and common everyday crises in coastal Andhra Pradesh.
Design/methodology/approach – Data collection included 342 questionnaires with village
inhabitants, local and regional government officials and personnel managing and working for local
NGOs. 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-caste
villages, 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 Pradesh
with the consequence that the findings are potentially very context-specific. Nonetheless, the findings
highlight a fundamental flaw in the way many NGOs operate in this region, through the targeting of
perceived “easy cases”, and this is a matter that development agencies should consider and further
investigate.
Originality/value – This paper will be of value to researchers and practitioners seeking to gain a
better understanding of NGOs and the way some of them operate. The paper recommends a number of
ways that the observed inefficiencies could be addressed.
Keywords India, Non-governmental organizations, Disasters, Economic development
Paper type Research paper

Introduction
Over recent years disaster management has moved away from relief and disaster
preparedness, towards a more sustainable approach involving the management of risks,
incorporating hazard mitigation and vulnerability reduction strategies. The
multi-disciplinary range of such disaster risk management (DRM) strategies are
based on long-term social, economic and environmental adaptations that draw upon

International Journal of Social
Economics
Vol. 34 No. 10, 2007
pp. 754-771
q Emerald Group Publishing Limited
0306-8293
DOI 10.1108/03068290710816883
The author is grateful to the Flood Hazard Research Centre, Middlesex University for financing
this study and to Edmund Penning-Rowsell, Sue Tapsell, Peter Winchester and Sarah Bradshaw
for 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 provided
valuable assistance during field work in Andhra Pradesh. Most importantly, the author would
like 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 nature
of socio-economic vulnerability and resilience in the context of social interactions.
assessments of risk, vulnerability and resilience of the individual and the “community”. Vulnerability
Organisations such as the United Nations and the Government of the UK’s Department reduction
for International Development (DFID, 2006) have highlighted the importance of
“mainstreaming” DRM as part of an initiative to build collaboration between initiatives
stakeholders in order to reduce the impact of disasters by integrating disaster risk
reduction into long-term development policies.
Inbuilt community level survival strategies, such as neighbourly assistance, can 755
provide levels of resilience to crisis events but without support from civil society and social
institutions the plight of the rural poor may never improve. This is the philosophy that
supports contemporary initiatives in targeting the most socio-economically vulnerable
members 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 that
inequalities 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 or
marginalisation, and that these inequalities have, to varying degrees, been blamed for the
inefficiency of vulnerability reduction initiatives throughout India (Winchester, 2000;
O’Hare, 2001).
Ideally, social institutions such as non-governmental organisations (NGOs) are open
to anyone, irrespective of caste, class, religion and positions of respect and
responsibility but in reality can be restricted to a narrow social base (Béteille, 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 they
define the differing domains of control in state-society-community relations (Davies and
Hossain, 1997, p. 12).
However, in the case of India it is not exclusion from society that affects poverty but
rather inclusion in a society based on strict hierarchical structures (IILS, 1996)
resulting in degrees of marginalisation and varying levels of socio-economic
vulnerability (Bosher et al., 2007). Issues regarding marginalisation may underpin the
observations that despite efforts by policy makers, development agencies and NGOs
over the past two decades the vulnerability of some coastal communities in
Andhra Pradesh to the impacts of hazards such as tropical cyclones has not been
significantly reduced (Winchester, 2000; O’Hare, 2001). This paper focuses on the
influence and effectiveness of NGOs in targeting and aiding “communities” in coastal
Andhra Pradesh to reduce their socio-economic vulnerability to infrequent large-scale
and common everyday crises.

Non-governmental organisations
NGOs are typically non-profit, non-official (and sometimes unregulated) organisations
that 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 funds
into large international NGOs towards supporting the growing legions of “grass roots”
local NGOs. As a consequence, international NGOs have concentrated on specialising
IJSE in key disciplines and initiating stronger partnerships with local NGOs. The use of
34,10 NGOs 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 branches
of central government);
756 (2) devolution (the devolution of resources and power to municipalities and local
government); and
(3) delegation (the delegation of resources and power to organisations outside
regular bureaucratic structures such as public corporations, development
agencies or NGOs).

Through these forms of decentralisation, and particularly delegation, it is

envisaged that vulnerability reduction initiatives can be delivered in a way that can
integrate the coping mechanisms of the target recipients, avoid injustice and recognise
the pre-disaster constraints of vulnerable communities. NGOs can offer an alternative
approach to resource allocation and distribution and may hold some advantage over
Government agencies due to their apparent disengagement from local socio-political
power relationships (Winchester, 2000). However, this perspective has been challenged:
NGOs may be assumed to be less bureaucratic, wasteful or corrupt than governments, but
under scrutinised groups can suffer from the same chief failing, they can get into bad ways
because 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 fall
into conflict with people who control the local political economies (Lewis, 1991; Deepa
et al., 2000; Bosher, 2007). Consequently, the success of a NGO will depend has much on
their relationship with the local power structures than the suitability of their initiatives
(Hartmann and Boyce, 1983; Beck, 1995).

Non-governmental initiatives
The work and motives of some NGOs can be viewed with scepticism by the local power
holders, especially on the back of experiences in the early 1980s when some NGOs in
India promoted social activism and civil rights as an alternative to providing economic
resources (Sheth, 1987; Lewis, 1991). This scepticism can also be found in the highest
levels of government. For example, in India the Foreign Exchange Management Act
was introduced to restrict the receipt of foreign funds for development projects to
Indian NGOs. Some representatives of the NGOs and voluntary bodies feel that the
government is attempting to choke the voluntary sector by tightening the flow of
foreign 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 each
other” (Sen, 1999, p. 346), NGOs proliferate and many undertake important and
appropriate work. Jain (2000) has highlighted the potential roles of NGOs in disaster
risk reduction, being:
. address disaster vulnerability;
.
engage local people in disaster reduction;
 .
recognise potential of NGOs and other organisations; Vulnerability
.
harness traditional knowledge and approaches; reduction
.
build-up local community capabilities; initiatives
.
recognise the multi-disciplinary approach; and
.
cope with disasters in line with sustainable development.
757
Programmes designed by the central and regional (state) government’s in India to
reduce people’s vulnerability to the impacts of tropical cyclones for instance, typically
include measures such as the construction of community cyclone shelters, storm
warning systems, improved evacuation procedures, hazard mapping and enhanced
community preparedness through education programmes in cyclone prone areas
(Parasuraman and Unnikrishnan, 2000; Reddy et al., 2000). It is pertinent to suggest
that individuals and communities that benefit from these initiatives are likely to find
their levels of vulnerability reduced. However, it is also applicable to suggest that
individuals and communities that do not benefit from these initiatives, possibly
because they have been marginalised due to caste or gender, may find their relative
levels of vulnerability increased. When resources are finite and the government’s
policies and/or mechanisms are ineffective (through lack of interaction with
stakeholders and the recipients of development projects or simply due to corruption
and nepotism), it is important that NGOs target the most needy individuals and
communities, based on rigorous needs assessments, rather than the promulgation of
religious-, political-, caste- or gender-related inequalities.
The study areas
The research reported here was conducted in eight coastal villages in East Godavari
district and four coastal villages in Nellore district between February and November
2003. Qualitative and quantitative data[1] were obtained from 308 villagers and from
34 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 historical
relationship between Andhra Pradesh and tropical cyclones has proved to be a
relationship of large-scale losses of human life, livestock, crops, property and
infrastructure, with the concurrent deleterious affects upon the localised and national
economies. Despite the threats of cyclones and floods to the livelihoods and lives of
millions 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 prone
regions of the world.

East Godavari
The district of East Godavari has not historically been one of the most disaster affected
coastal districts in the state but was affected by a severe tropical cyclone in November
1996. The district-wide damage caused by the cyclone and associated storm surge
affected over 4.5 million people, left 1,683 dead, 257,000 houses fully damaged and
destroyed 25,335 hectares of crops (Reddy et al., 2000). East Godavari district was
chosen as one of the case study districts because it had been extensively affected by the
1996 cyclones and therefore the events were relatively recent. The two mandals
 IJSE

758
34,10

Figure 1.
Location of

case study districts

Andhra Pradesh and the
N
China
(Tibet)

Pakistan

Delhi Nepal
Bhutan

Maharashtra N Orissa
Bangla-
INDIA desh
Myanmar Adilabad Chhatisgarh
Godavari (Burma)
River

Nizamabad Srikakulam
Krishna Karimnagar
River
Arabian Bay
Sea Of Medak Warangal
Bengal Visakhapatnam Vizianagaram
Hyderabad
ANDHRA Khammam East
PRADESH Rangareddi Godavari
Nalgonda West Yanam
Godavari (Pondicherry)

Sri
Lanka Mahbubnagar Krishna
0 ~600km Guntur

Kurnool Prakasam
Andhra Pradesh

Bay
Of
Anantapur Nellore Case Study
Cuddapah Bengal
Districts

Karnataka Chittoor

0 ~200km
Tamil Nadu
(administrative districts) of Tallarevu and Katrenikona were chosen because they had Vulnerability
been affected by the 1996 cyclone and were areas in which the Andhra Pradesh State reduction
Government had constructed “Cyclone Resistant Housing” as part of their cyclone
hazard mitigation initiatives and where NGOs were involved with vulnerability initiatives
reduction programmes.

Nellore (Pottisriramulu) 759

Nellore was chosen as a case study area because historically it is the district that has
been affected by the most disasters; between 1892 and end of 1996 the Nellore coast
was directly struck by 22 cyclones out of the total of 70 cyclones that struck
Andhra Pradesh during the same period (Reddy et al., 2000). Nellore was affected by
11 cyclones of varying intensities between 1977 and 1996[3]. Thotapalligudur mandal
has also been the scene of government programmes related to vulnerability reduction
and many of the coastal villages are supported by the work of local NGOs that are
supported to varying degrees by funding from international donors.
The 12 villages (four in each mandal ) included in the study were all located within
15 kilometre of the seashore and have been categorised into four distinct types of
village to enable the analysis to make inter and intra mandal comparisons regarding
how the experiences of respondents in villages with NGO support compare to those
without 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 no
NGO activity.

Case study NGOs

The four NGOs involved with the case study villages (who upon request will not be
identified) have initiated programmes aimed at facilitating the collective action of
“fisherfolk”[4] (mainly the Agnikulakshatriya caste) in projects including capacity
building, health care, disaster preparedness, and cyclone rehabilitation. All four NGOs
were established and managed by executives that consider the operations of the NGOs
they run to be a “family business”. During the fieldwork, the people that managed the
NGOs and the people they employed displayed that they possess very good knowledge
and 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 the
formation of “task force groups”. The “task force groups” have been formed as a
means of helping the villagers threatened by cyclones and other hazards, to help
themselves, before, during and after a high-impact crisis event. The training provided
by the NGOs offers villagers education regarding awareness of the threats of cyclones
and floods, practical first-aid training (along with basic medical equipment) and
cyclone warning dissemination at the village level. The roles and responsibilities of
each 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 that
first-aid boxes are appropriately stocked. These groups are also responsible for
training other villagers in basic first-aid skills.
IJSE .
Warning group. On a daily basis group members should check “All India Radio”
34,10 weather reports, maintain transistor radios and ensure stocks of batteries
(if necessary) are available. Ultimately, group members are responsible for the
dissemination 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,
760 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 and
evacuation 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 groups
members are trained in basic manual handling and body retrieval methods using
locally available material.

A large proportion of the projects that the case study NGOs undertake are designed to
benefit “fisherfolk” such as the Agnikulakshatriya and the Pattapu castes (classified as
backwards castes (BC)[5]. The explanation for this is provided by the NGOs, who
stated that funding is available for NGOs who wish to work with “fisherfolk” as they
have been designated as particularly vulnerable due to the location of their villages and
the nature of their occupation. These assertions have arisen in a report, published by
the “Food and Agriculture Organisation of the United Nations” (FAO) in partnership
with the Government of India and the State Government of Andhra Pradesh, which
highlights how the economically and geographically marginalized members of coastal
Andhra Pradesh were those who suffered the most deaths from the 1996 East Godavari
cyclone (FAO, 2000). Those particularly affected were the “fisherfolk” working at sea
in mechanised boats (569 deaths) and “shrimp seed” collectors (830 deaths), who
recorded high-death rates due to poor access to transistor radios, that could be used to
receive warnings, and their exposure to the hazard (FAO, 2000).
Nonetheless, the International Institute for Labour Studies (IILS, 1996) has argued
that inclusion for some (such as the “fisherfolk”) will inevitably mean exclusion for
others. It was therefore an element of this study to assess how villages that benefit
from the work of NGOs compared to those who do not have such support.

The concept of community

The NGOs involved in this study all declare that a central tenet of their work is
community-based participation or collective action:
Collective action at the community level has been achieved through the cooperation of village
level 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 for
sustainable livelihoods (From NGO publicity brochure).
Arguably the reasoning behind the NGOs focus on “community participation” is that
collective action is a requirement of the funding that the NGOs have secured.
Yugandhar and Raju (1992, p. 1312) believe that the justification of the local
community’s participation is based on the arguments that local people organise best
around the problems they consider most important such as in assessing needs and Vulnerability
finding solutions: reduction
. . . local people make rational economic decisions in the context of their own environment and initiatives
circumstances providing appropriately for the risks associated with change; and that local
participation also ensures voluntary commitment of resources and local control over the
quality and distribution of benefits.
However, as Buckle et al. (2003) state, it is important to know how a concept such as
761
“community”[6] is defined:
(T)here is agreement that community is a core disaster management concept, but whether in
practice this refers to issues such as community as locality, community as interest group or
community 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 insight
into the views of the respondents regarding feelings and experiences related to a key
concept such as “community”. This element of the research was particularly critical as
a respondent’s perception of their “community” may influence which social institutions
(including the NGOs) they possessed social networks with.

Village level perceptions

The majority (63 per cent) of the respondents based their concept of community on
caste or caste classification. Additionally, 31 per cent of the respondents based their
concept of community on occupation, which some argue is also intrinsically linked
with the caste system (FAO, 2000; Geetha and Kiran Kumar, 2001) because it is rare for
respondents 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 BC
classification and living in single-caste villages). Therefore, it is pertinent to state that a
vast majority (94 per cent) of the respondents based their concept of community on
caste/caste category, which may (i.e. a single-caste village) or may not (i.e. part of a
multi-caste village) equate to the whole village geographically.

NGO perceptions
NGOs in this study focused on the reduction of socio-economic vulnerability in cyclone
prone areas and have to work within the context of the interrelationships between the main
determinants of Indian social institutions that include caste ties and affiliations and family
and kinship ties. These organisations also have to work within the prevailing “political
realities”; these are to some extent determined by social institutions but are also
determined by the phenomena of the impact of the dominant caste on politics and political
factionalism and the effects of social institutions on these realities, and vice versa. It is
therefore important to ascertain what perceptions of a concept like community these
important institutions hold. Any possible differences in the perceptions held by the
villagers and NGOs that operate in those villages may highlight fundamental problems
with 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 they
thought their working definition of community was and also which communities they
IJSE worked with. Seven NGO managers/employees stated that their concept of community was
34,10 based on caste classification and the other three believed that “communities” were defined
by occupation type. In all the cases when NGO employees defined communities by
occupation type, they were referring to, “fisherfolk” being the Agnikulakshatriya or
Pattapu castes (BC). Therefore, as we have already discussed, caste and occupation are
typically interlinked and consequently the definitions of the NGO managers and employees
762 are very closely linked to those of the village level respondents in that in the majority of
cases, 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” in
Indian villages, especially heterogeneous (multi-caste) villages. For example, a NGO may
only cater for a selective section of the village in which it operates, thereby some
individuals, families or communities will be included in projects and invariably some will
be excluded. Consequently, it is important to recognise that NGOs may not involve
everyone who lives in the village, but it is arguably just as important to understand why
some are included and why some are excluded.

Involvement with NGOs

Concerted attempts were made during the course of the research to study some
multi-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 be
symptomatic 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 of
NGOs operating in single-caste villages, in contrast to multi-caste villages where issues
over inter-caste relations may cause operational problems.
For example, the Executive Secretary of a local NGO stated that the central Indian
Government and the Andhra Pradesh State Government provide their funding towards
developmental assistance and vulnerability reduction to communities in terms of
targeting “fisherfolk” and Scheduled Tribals (ST), rather than specifically assessing
the most vulnerable. The Executive Secretary in question wished to remain
anonymous because he said such statements may jeopardise any future funding his
organisation 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 my
staff 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 the
most needy people in the region. Also “fisherfolk” villages tend to be single-caste villages and
if we are to achieve the targets expected of us to obtain future funding, it is these single-caste
villages that we will work with because we do not then have the inter-caste related barriers to
contend with, that you would find in many mixed caste villages (Comments by Executive
Secretary of a local NGO).
This observation may highlight a fundamental flaw in not just the way many NGOs
operate in this region through the targeting of possible “easy cases” but more
importantly it may mean that the most vulnerable members of multi-caste villages do
not receive support from NGOs that could be essential in augmenting support from
formal governmental and institutional mechanisms. In view of this, the influence of
NGOs on providing access to resources, distributing relief aid and participation with Vulnerability
women will be assessed. reduction
Influence on access to resources initiatives
The levels of respondents’ access to key socio-economic resources were assessed during
this study (Bosher et al., 2007). These resources were categorised into “assets” “public
resources” “political networks” and “social networks”. Respondents with the least access 763
to these resources were considered to be the most vulnerable and least resilient to
infrequent large-scale crises and regularly occurring small-scale crises. The influence of
involvement with NGOs on the levels of access to these socio-economic resources is
shown in Figure 2, which shows that in villages where a NGO operates, 47 per cent of
respondents involved with a NGO have relatively high access to resources while only
26 per cent of those who are not involved with a NGO have high access to resources. In
contrast, in villages where no NGOs operate, only 12 per cent of respondents have high
access to resources with 28 per cent having low access to resources. This implies that
even if a respondent does not participate with a NGO, they can benefit indirectly from
having a NGO operating in their village. However, this may only be the case because, as
stated earlier, the NGOs involved in this study only operated in single-caste villages.

Influence of gender
Table I indicates that when NGOs are operating in villages, women were four times
more likely than men to be involved with NGO activities. It is likely that women

50
45 Low Access to Resources
Percentage access to resources (%)

High Access to Resources

40
35
30
25
20
15
10 Figure 2.
5 Access to resources by the
presence of NGOs and
0 involvement with NGOs
Involved with NGO Not involved with NGO No NGO in village

Are you involved with the NGO?

Gender Yes No Not aware of NGO

Male (per cent) 18 48 34

Female (per cent) 72 20 8
Average (per cent) 46 34 20 Table I.
Involvement with NGOs
Notes: x 2 ¼ 33.994; p , 0.01 by gender
IJSE participate with NGOs because many programmes designed by NGOs are targeted at
34,10 females, through the foundation of women’s groups (mahila sanghas) with the intention
of providing women with improved education and general knowledge and increasing
their access to formal financial services, such as credit and savings schemes. Men were
less likely to participate with NGOs due to scepticism of participatory “pro-women”
projects that fundamentally challenge the traditional power structures within
764 households and communities in many parts of rural India.
Another interesting observation from Table I is related to the responses regarding the
belief 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 but
they 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 activity
were not aware of the NGO activities in their village. Eight out of ten females that were
interviewed in the same villages were aware of NGO activities, even if they did not
participate. It is likely that because women have struggled on an “everyday” basis they
have consequently established networks and strategies to enable them to cope with
relatively small-scale but recurrent crises (Moore, 1990; Agarwal, 1991; Moore, 1998;
Enarson, 2000). These networks and strategies provide useful support during infrequent
but 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 crisis

An element of the research included an assessment (using Sociograms; for details refer
to Bosher, 2007) of the difference in social networks utilised by the respondents
between an everyday scenario and a crisis scenario. The analysis identified an
increased presence of NGOs during crisis periods such as the 1996 tropical cyclone and
the 1999 floods. The increased presence (a 65 per cent increase in utilised networks) of
NGOs during large-scale crisis events was significant and corresponds well with the
active role that many NGOs adopt in helping to distribute relief aid after a disaster has
occurred. The analysis also identified NGOs as the only institution that actually
increased their presence in the village during the relief phase of crisis events (with
many institutions becoming almost impotent with a 60 per cent or more reduction in
their network scores). However, it should also be noted that this apparent increase
in NGO networks could largely be attributed to the presence of international NGOs
during relief stages of large-scale disaster events.
The efforts of NGOs to distribute relief were generally received favourably by the
respondents with 24 out of 36 (67 per cent) interview accounts of post event activities
relaying positive accounts of the work of NGOs:
It was mainly the international NGOs and local NGOs that helped us. For over two months we
were dependant upon their relief food (Interviewee 27, male (backward caste) Panchayat
President in single-caste village).
However, when resources are finite it will be impossible to distribute all the resources
that people require and inevitably opportunities arise for situations where some people
receive relief at the expense of others, particularly in multi-caste villages. During these
occasions some NGOs have been accused of inappropriate relief distribution, as
the following account is testimony to:
 I think the NGOs were not useful for all the villagers, they provided help for a limited amount Vulnerability
of people, like Scheduled Caste and Backwards Caste people. The NGOs thought that the area
most affected was in Konaseema, in the surroundings of Amalapuram, that’s why they didn’t reduction
help our village very much (Interviewee 15, male (forward caste (FC)) Landlord in multi-caste initiatives
village).
This comment highlights one of the potential problems of operating in a multi-caste village
because in reality the “high” castes are as likely to complain about “low” castes receiving 765
assistance 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 a
large-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 critical
support of local and international NGOs that would augment relief supplied by the
government. Fieldwork accounts suggested that international NGOs that respond to crisis
events were liable to overlook low profile villages (i.e. villages that were not involved with
local NGOs) when distributing relief (Bosher, 2005). This is a problem that has been noted
by 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 resources
can be very significant, because as highlighted earlier, people with high access to
resources have strong networks with NGOs, while those with low access to resources
have the lowest networks with NGOs. However, it is difficult to ascertain the causal
elements of such a relationship; for example, do people have high access to resources
because 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 that
originally possessed resources) resulting in interventions by NGOs that appear to have
been relatively successful but in reality are inappropriately targeted (because
those with the least resources are not being targeted). If this last point is the case, then
the NGOs involved in this study are not operating effectively.
What is apparent is that NGOs have targeted single-caste “fisherfolk” villages such
as those inhabited by Agnikulakshatriya and Pattapu “Backward Castes” a point
reinforced by Table II, which highlights the disparity between the caste classifications
regarding active involvement with NGOs with the “fisherfolk” BC castes monopolising
the “everyday” social interactions. This observation is marginally different in a “crisis”

Social networks with NGOs

Everyday 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) Table II.
Average * 26 (n ¼ 306) 27 (n ¼ 292) Percentage of
respondents possessing
Notes: *x2 ¼ 30.484; * *x2 ¼ 72.940; aOne Chakkali (BC) respondent residing in predominately social networks with
Agnikulakshatriya village; btwo Mala (SC) respondents residing in a multi-caste agricultural village; NGOs by caste
p , 0.01; p , 0.01 classification
IJSE scenario with two Mala (scheduled castes (SC)) families and one Chakkali (BC)
34,10 respondent benefiting from social networks with NGOs while the “everyday” social
networks possessed by the “fisherfolk” respondents remain largely unaltered. This
increase in networks with NGOs is to be expected, as these types of organisations are
invariably involved with the distribution of relief supplies after a crisis event.
However, if the NGOs’ attempts at advocating appropriate relief distribution
766 post-crisis event were successful, one would expect to see a more significant increase in
NGO networks, particularly with respondents with low access to the key resources,
such as SC and ST classifications (Bosher et al., 2007). The following account
highlights the important role of local NGOs during the aftermath of a disaster, but also
illustrates the practical problems of relief distribution:
Some relief was distributed in Tallarevu but there was a big rush, so the people who benefited
the most were those who had lots of strength, and of course, many old people didn’t receive
that relief. The government provided us with compensation of one thousand two hundred
Rupees for house repairs. Private organisations such as NGOs were the most helpful because
they had no partiality, they look at everyone as equal and they provided lots of food, clothes
and 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 largely
been positive, with only three respondents out of the 34 interviewees voicing
grievances 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 amount
of people, like SC and BC people (Interview 15, Male (forward caste) landlord from multi-caste
village).
The account given above is typical of the other two accounts by respondents from
multi-caste villages, in that concerns over the appropriateness of relief distribution by
NGOs were typically based on lines of caste classification. What is key to note here is
that it is difficult to accuse the NGOs of inappropriate relief distribution but the data
support the contention that where the NGOs do fail is in the restricted manner in which
they only target single-caste villages and more specifically the fisherfolk
(Agnikulakshatriya and Pattapu) communities in this region.

Conclusions
The scope of this study has been limited to relatively small and specific regions of
coastal Andhra Pradesh and will undoubtedly need to be expanded to test whether the
findings highlighted below can be generalised across the state and other regions of
India. Therefore, the findings presented here should not be seen as conclusive, but
rather as a foundation for further research and for the development of practical
initiatives to understand the effectiveness of NGOs that undertake socio-economic
vulnerability reduction activities. Nonetheless, the findings provide an insight into the
potentially important (and under assessed) relationships between NGOs, the recipients
of NGO projects and those excluded from NGO projects. The findings of this research
support 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.
Deepa et al. (2000, p. 127) state that: Vulnerability
NGOs are not as widely prevalent as sometimes appears. While they do much to support reduction
basic survival, their track record in accountability to their poor clients is not strong. Few initiatives
NGOs have successfully addressed local capacity or underlying power and justice issues.
Pressure from governments and international donors for quick service delivery coupled with
unstable, short-term financing appears to be undermining the capacity of NGOs, where it
exists, to work effectively with poor communities. 767
The NGOs involved in the case study areas have developed programmes that can
assist people to reduce their socio-economic vulnerability to large-scale disasters and
small-scale crises events. The work of NGOs related to task force groups and education
regarding disaster preparedness can provide essential knowledge and augment coping
capabilities. The findings from this study suggests that women are most likely to
benefit from participation with NGOs because:
.
women are more likely to actively participate with NGOs than men (because
women are predominately targeted by NGOs); and
.
women can benefit from increased access to important resources and knowledge
that 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 restricted
to single-caste (relatively homogeneous) “fisherfolk” villages with the result that their
influence 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 what
resources a respondent can have access to but also importantly what resources are
available to be accessed by the respondents, particularly women (Bosher et al., 2007).
Bosher et al. (2007) have found that marginalised communities (who are typically the
lower castes) in multi-caste villages invariably have low access to assets, public
facilities and political networks and therefore are the most socio-economically
vulnerable. It is these marginalised communities within multi-caste villages who
should 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 vulnerable
communities, irrespective of the caste composition of a village. These improvements
can 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 of
the recipient communities selected by NGOs. Evidence from the NGOs that
operate 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 by
the donor agency, it does not necessarily mean that the most vulnerable people of
that village will benefit from the assistance.
.
Careful assessment of which NGO interactions have and have not been
appropriate and effective should be conducted by donor agencies and the NGOs
themselves. Nonetheless, it is also important for the donor agencies to keep their
expectations “real” and achievable.
IJSE .
Governmental and NGO initiatives aimed at targeting specific communities
34,10 based on caste/caste classification (i.e. fisherfolk, BCs and STs) should be
reconsidered. When a single-caste village receives developmental assistance
because of its caste classification, it is possible that conflict will arise from
neighbouring villages that have not received assistance because they are not the
same caste (irrespective of whether the complainants are perceived as being from
768 “higher” or “lower” castes). This problem will inevitably be exacerbated when
respondents are selected in a multi-caste village based on their caste/caste
classification, thereby leaving the excluded villagers resentful and leading to
disharmony within the village. It is apparent that the NGOs involved in this
study are more than aware of this last scenario and it appears to be a factor in
why they target single-caste villages. Consequently, it is important for NGOs to
make explicit what they actually mean by “community” or “community based
participation”; which communities are being included and which communities
are 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 cartographic
surveys.
2. A mandal is an administrative section of a district, there are 1,104 in Andhra Pradesh. Also
be 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 crossed
the Nellore coast was in November 1989.
4. Referring to families involved in fishing activities as “fisherfolk” is the accepted
nomenclature in governmental and sociological texts within India.
5. The author acknowledges that “caste” is a contested and complex concept and that some
commentators will be at odds with the relatively simple version of caste that has been
presented in this paper (i.e. not including the influence of jatis or sub-castes). Nonetheless, the
author also believes that it was an important aspect of the study to ground the concepts that
were to be used on the perspectives of the respondents, not the researcher, consequently the
cast classifications of the respondents were self-defined. If this perspective of caste turns out
to be at odds with other research on caste issues, it should not be viewed as simplistic, but as
evidence that the real life manifestations of the caste hierarchy can be extremely different
from one location to another. Therefore, in practical terms the caste classifications were
stratified along the lines of the Hindu Varna caste hierarchy, with FC at the top, followed by
BC and SC with ST at the bottom. The information obtained from questionnaire surveys and
interviews made it clear that the “caste classifications” were accepted by the village level
respondents and were also those used by the NGOs and the local and state level government
respondents.
6. The word “community” has a number of different meanings that are context specific (Marsh
and Buckle, 2001). In the context of this research 94 per cent of the respondents based their
concept of community on caste/caste category, which may (i.e. a single-caste village) or may
not (i.e. part of a multi-caste village) equate to the whole village geographically (Bosher,
2005).
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Corresponding author
Lee Bosher can be contacted at: l.bosher@lboro.ac.uk

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www.emeraldinsight.com/0306-8293.htm

IJSE
34,10 Commonweal vs. free market
capitalism: the case of India
and China
772
Appa 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 emerging
economies, represent the second and fourth largest economies in the world, respectively. This paper
seeks to provide a comparative assessment of these two countries on selected measures on economic
growth and social development.
Design/methodology/approach – The paper’s approach is a discussion, providing a brief
introduction to the approach taken by India and China in pursuing economic growth and social welfare
measures. The discussion then focuses on the relationship between economic liberalization and social
development against a backdrop of relevant concepts and arguments from the literature. Comparative
profiles of India and China on select dimensions using data from World Economic Indicators and other
sources are provided.
Findings – The paper finds that it is clear that there are areas where India can learn from China and
vice versa.
Originality/value – The paper illustrates that these two countries offer a potentially rich and useful
canvas for exploring the social implications of free market capitalism.
Keywords India, China, Economic growth, Free markets
Paper type Research paper

The question of whether commonweal is a natural casualty of free market capitalism

International Journal of Social
Economics
Vol. 34 No. 10, 2007
pp. 772-780
q Emerald Group Publishing Limited
0306-8293
DOI 10.1108/03068290710816892
has always attracted intense controversy, ideological conflict and rhetoric. At one
extreme, it is argued that unfettered free market capitalism, by itself, is the means for
achievement of rewards consistent with efforts, and in that sense, serves the cause of
social justice as measured by the notion of equity rather than equality. At the other
extreme, it is posited that absent conscious planning and intervention by public policy
measures, social welfare would be among the long-term casualties from unconditional
embrace of liberalization of financial systems.
China and India, increasing referred to as the world’s emerging giants among
emerging 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 of
2005, they represent the fourth and eleventh largest economies in the world at nominal
exchange rates. Furthermore, they are both growing at more than three times faster
than the world average. Thus, these two countries offer a potentially rich and useful
canvass for exploring the social implications of free market capitalism. This paper
seeks 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 and
Finance, ICFAI University, Hyderabad, India, December 22-23, 2006.
measures of public spending, business prosperity, infrastructure, and social Commonweal vs.
development. Implications for other developing countries are presented. free market
Schumacher, the celebrated author of Small is Beautiful, once remarked during a
lecture at Cornell University that the world’s richest countries are the most addicted to capitalism
growth. 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 a
serious sign of something gone astray. Thus, the concept of growth needs to be 773
tempered with an examination of the accompanying social costs.
Stated differently, the question of free market capitalism paving the way for
commonweal 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 one
extreme, it is argued that unfettered free market capitalism, by itself, is the means for
achievement of rewards consistent with efforts, and in that sense, serves the cause of
social justice as measured by the notion of equity rather than equality. At the other
extreme, it is posited that absent conscious planning and intervention by public policy
measures, social welfare would be among the long-term casualties from unconditional
embrace of liberalization of financial systems. Lux (1990), in his intriguingly titled
book, Adam Smith’s Mistake: How a Moral Philosopher Invented Economics and Ended
Morality, strikes a blow to the foundation of Adam Smith’s core idea of self-interest as
the means of achievement of common good. In Lux’s words:
Smith’s forthright talk of businessmen cheating and oppressing the public seems to stand in
direct contradiction to his advocacy of self-interest as the sole principle necessary for the
achievement of the public good. The saving grace was supposed to be the “invisible hand” of
competition. It was competition that would keep these instincts and “expensive vanities” of
the merchants, dealers, and landlords in line.... Smith had essentially (p. 83) overlooked the
possibility that self-interest would work to undermine and eliminate competition and thus to
tie up the invisible hand. It is this outcome of unrestrained self-interest that is the
fundamental flaw in any absolute policy of laissez-faire (p. 84).
Thus, even as all developing countries are rushing to jump on to the globalization
bandwagon, it is important to realize that the problems of mankind are primarily
economic and social, not financial or political. While the trends towards liberalization of
economic policies and integration of financial markets might seem to point toward the
ultimate triumph of the “magic of the market and free enterprise,” a little reflection will
reveal 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. In
this paper, we use China and India as the primary context for our discussion. The
reason for this choice is clear. China and India, increasingly referred to as the world’s
emerging giants among emerging economies, represent the large-scale and
fast-growing economies in the world. The metaphor of the Elephant and the Dragon
are invoked by a number of authors (Korukonda et al., 2006; Meredith, 2007) to refer to
India and China, respectively. Meredith (2007), in her discussion of these two rising
economies, labels China and India as “factory to the world” and “back office to the
world”, respectively, and effectively uses them as exemplars to the USA by concluding
that “if inward-facing India and communist China can transform themselves, so can
the United States of America.” The two countries’ transformation from the backwaters
of poverty and hunger to the mainstream status of major economic powers is hardly a
matter of dispute anymore.
IJSE As Dahlman (2007) points out, despite their relatively low per-capita incomes of just
34,10 $1,740 and 720 as of 2005, China and India represent the fourth and eleventh largest
economies in the world at nominal exchange rates. Furthermore, they are both growing
at more than three times faster than the world average. It is particularly worthy of note
that since about 1980s, starting with approximately similar per-capita income levels,
both of these countries have embraced liberalization of trade, though neither of them
774 did so with unconditional enthusiasm. Part of the reason for their reluctance lay in the
recognition 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 to
embrace market mechanisms with open arms as compared to China, which, in a
manner of speaking, seems to have earned the title of being the most capitalistic
communist country in the world.
India and China thus offer stark examples of countries suddenly moving at
break-neck pace on the economic growth and globalization bandwagon though their
means of adoption have been different. Accordingly, they offer a potentially rich and
useful canvass for exploring enduring similarities as well as shark contrasts in
approaches to governance, development, financial systems, public policy measures,
civil rights, and attitudes toward free trade. This paper seeks to provide a comparative
assessment of these two countries on select measures of economic growth and social
development.
The discussion is organized as follows. First, we provide a brief introduction to the
approach taken by India and China in pursuing economic growth and social welfare.
Second, we provide a summary comparison of the two emerging giants on select
demographic, economic, welfare measures. Third, we discuss the relationship between
economic liberalization and social development against a backdrop of relevant concepts
and arguments from the literature. Fourth, we present comparative profiles of India and
China on select dimensions using data from World Economic Indicators and other
sources. Specifically, we focus our discussion on overall GDP growth rates, GDP growth
rates by sector, and select measures of social well-being. Throughout the discussion, we
attempt to provide an explanation of the source of the differences. Finally, we conclude
the discussion with a summary of the analysis.

1. Introduction
On a purchasing power parity basis, China and India represent the second and fourth
largest economies in the world, respectively, (Henley, 2003; World Bank, 2003). It is no
surprise 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 two
countries’ gaps in accomplishments and outcomes are no less remarkable than the
disparity approaches.
Much of the discrepancies that one observes in the relative performance of the two
countries can be traced to the differences in ideology, political clout, and historical
focus on means vs ends. In this paper, we shall attempt to present a comparison of
India on a number of dimensions relevant to both financial performance and
commonweal principles.
2. Means and measures of comparison Commonweal vs.
Current literature comparing India and China reflects a broad diversity of approaches
ranging from the metaphorical to the statistical, from the qualitative to the
free market
quantitative, and from the ideological to the practical. None of these approaches by capitalism
itself captures the complete story although each will present an interesting and an
illuminating 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 million 775
people and complete the Three Gorges Dam capable of generating 18,000
megawatts of electricity annually – a feat virtually unimaginable in the
slow-moving bureaucracy of India (Welch and Welch, 2007).
.
China has ten times as many express highways as India and its power costs are
40 percent less (Welch and Welch, 2007).
.
The magnetic levitation train between Pudong International Airport and
Shanghai downtown, which also happens to be the world’s first commercial
maglev, takes about 7 minutes to cover the 35 kilometer distance whereas it takes
anywhere from 75 minutes to a couple of hours to cover about the same distance
from Mumbai’s International Airport and Nariman point (Rajwade, 2005).
.
China won 65 gold medals in the last Olympics as compared to India’s single
medal (Rajwade, 2005).
.
India’s GDP of $425 billion, foreign exchange reserves of $170 billion, and foreign
trade inclusive of exports and imports $75 billion cannot really hold candle to
China’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 was
almost equal to India’s entire GDP (Huang, 2006).
.
India’s democratic traditions and laissez-faire approach in political and public
policy dialog are in stark contrast to China’s track-record in censorship,
suppression of dissent, and repression of civil liberties. In the long run, many
consider this to be India’s “ace in the hole.”
A country’s economic and social performance is a complex, multi-dimensional
construct that is difficult to neatly capture in terms of summary variables. With this
caveat firmly entrenched in mind, it is still useful to review an overall comparative
profiles of these countries using select financial and social welfare measures culled
from 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 of
India and China. As can be seen, the most significant contrast between the countries
can be seen in the relative emphasis placed on the manufacturing sector, with China’s
relative share of GDP from manufacturing being dramatically high in comparison to
India’s.
Figure 2, which shows a similar comparison on different measures of living
standards, shows that China is way ahead of India in virtually all measures except for
life expectancy where India still does trail China by some 12 years. In such measures as
infant mortality rate, adult female literacy rate, and malnutrition, India can be seen to
lag way behind China.
IJSE 45
34,10
40

35
776
30

25

20

15

10

0
Population in GDP (PPP) in Per capita GDP % Share of
100s Millionn for 1000s Billion $ growth in % for manufacturing in
Figure 1. 2003 for 2003 1980-2004 GDP for 2003
India vs China:
comparison of China 12.88 6.09 8.2 39
demographic and India 10.64 2.908 3.7 16
economic variables
Demographic & Economic Variables and Units of Measure [based on Acharya (2005)]

Figures 1 and 2 serve a useful purpose as a broad-brush comparison of the two

countries on select financial and welfare measures. Some further drill-down analysis of
these broad trends in terms of specific measures would seem to be in order. It is to such
a discussion that we now turn.

3. Specific measures
3.1 Agricultural infrastructure
In a recent column on dispatches from India, Elliott (2006, p. 51) has this to say about
India’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 that
guarantees that a third of its goods never make it to market. That has been the problem with
agriculture in India – a place that likes to tell the world these days that it is as efficient and
growth-oriented as China.
Elliott cites an estimate by one of India’s agriculture experts that 30-40 percent of
India’s agricultural produce “would rot before it got to market.” The contrast with
China cannot be overemphasized.
 100 Commonweal vs.
free market
90
capitalism
80

777
70

60

50

40

30

20

10

0
Per capita GNP Life expectancy Female adult Under 5 mortality Under 5 Poverty ratio (%
(PPP) for 2003 in for 2002 in Years literacy rate as % per 1000 for 2003 malnutrition as % below $1 a day)
100s $ for 2003 for 1995-2003 for 2000 & 2001 Figure 2.
China 49.8 71 87 37 12.1 16.6 India vs China:
India 28.8 63 45 87 45.8 34.7 comparison of social
welfare measures
Variables and Units of Measure

Besides, the obvious role of infrastructure in achieving market efficiencies, the impact
of liberalization on agricultural prices is also relevant to the current discussion.

3.2 Agriculture value added

In contrast to agricultural infrastructure, India has made tremendous strides in
agriculture value added per worker. As Figure 3 shows, India’s agriculture valued

Agriculture value added per worker (constant 2000 US$)

500

400

300 China
200 India

100 Figure 3.
Agriculture value added
0
per worker: India vs China
1990 1995 2002
IJSE added per worker has been consistently on the rise, though at a slightly slower pace
34,10 than that of China. However, as Figure 4 shows, part of the reason for the improvement
lies in the fact that the full potential is far from being realized in either India or China as
compared to more developed countries such as Australia where the agriculture value
added per worker has been relatively stable. Additionally, India’s protectionist policies
in agriculture, including restrictions on ownership of farmland, have attracted some
778 criticism with some catch phrases such as “Small might be beautiful, but it also creates
poverty.”

3.3 Gross domestic savings

During the period of 1990-2002, as Figure 5 shows, the gross domestic savings have
been pretty much similar for both India and China. The traditional Asian emphasis on
thrift, savings can be readily discerned from this pattern, but as the emphasis on
consumption grows, credit-card debt and bankruptcies could reverse the trend in a
purely market-driven economy.

Agriculture Value Added per Worker

35000

30000

25000
Value Added per Worker

20000

15000

10000

5000

0
1990 1995 2002
Australia 21487 22894 22847
China 245 295 366
India 348 365 383
Japan 19845 20478 26417
Malaysia 3675 3777 4520
Figure 4. New Zealand 22465 24820 29450
Agriculture value added Singapore 25090 32239 32267
per worker for 1990, 1995, Thailand 473 485 568
and 2002
Year
 Gross Domestic Savings (current LCU) Commonweal vs.
6E+12 free market
5E+12
capitalism
4E+12
China 779
3E+12
India
2E+12

1E+12
Figure 5.
Gross domestic savings:
0
India vs China
1990 1995 2002

4. Summary and conclusion

The analysis undertaken in this paper is admittedly preliminary and can be expanded
to 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 vice
versa. As Huang (2006) has pointed out:
China’s hidden weakness is the massive and often centrally planned investments, which are
often less productive than the Indian investments. In the long run, that’s not going to work
without more open competition, creativity and entrepreneurship. India’s hidden strength is
that 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 in
small, informal factories, outside the law, to avoid the many regulations and taxes that still
curbs the Indian economy.
The economic progress of China and India, combined with the gradual assertion by
Japan of its military profile, the centre of gravity of global politics has shifted from
Europe to the Asia-Pacific. Lessons in doing business in India and China are now
legion. Gupta and Wang (2007), for example, discuss the experiences of Microsoft in
China and of Metro Group in India to offer lessons for multinationals in doing business
in China and India.
With the tables turned, India and China are now witnessing the world powers
jockeying for influence in the region. As the two countries are preoccupied with their
pre-eminent role in the world economy, there is a danger that the issues of human
welfare could be relegated to the background. Ironically, the potential for such a
scenario is more prominent in India rather than in China where political ideology tends
to ensure that issues of public welfare are not completely relegated to the backburner.
Accumulation of resources, political clout, determined public policy at the expense
of civil liberties seem to characterize the phenomenal growth of China while
commitment to democratic values, exceptional focus on education, and an unrelenting
entrepreneurial spirit in the face of remarkable shortcomings of infrastructure seem to
hold the key to India’s success. In the long run, one would expect the elephant, to catch
up with, if not overtake the quick and efficient dragon. However, whether such
catch-up will result in the winner’s curse in terms of social costs and commonweal
remains to be seen.
IJSE References
34,10 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.
780 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 by
comparison 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: a
comparative study of financial systems, commerce, and commonweal in India and China
(2006)”, paper presented at the IV International Conference on Business and Finance held
in Hyderabad, India, December 22-23.
Lux, K. (1990), Adam Smith’s Mistake: How a Moral Philosopher Invented Economics and Ended
Morality, Shambala, Boston, MA.
Meredith, R. (2007), The Elephant and the Dragon: The Economic Rise of India and China, and
What 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.
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Policy Review Report No. 25797, 14 July.
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Development, Washington, DC.

Corresponding author
Appa Rao Korukonda can be contacted at: akorukon@bloomu.edu; arkorukonda@gmail.com

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 Book reviews Book reviews

The High Performing Entrepreneur: Golden Rules for Success in

Today’s World
Subroto Bagchi 781
Portfolio, Penguin Group
New Delhi
2006
244 pp.

Globalization and After

Samir Dasgupta and Ray Kiely (Editors)
Sage
New Delhi
2006
443 pp.

Foreign Capital, Inflows to China, India and the Caribean: Trends,

Assessment and Determinamts
Arindam Banik and Pradip K. Bhaumik
Palgrave-Macmillan
Hampshire
2006
209 pp.
Review DOI 10.1108/03068290710816900

Entrepreneurship, globalization and innovations

In the first book, Subroto Bagchi, Co-founder and Chief Operating Officer of MindTree
Consulting, an upcoming IT-solutions enterprise, based in Bangalore, India, draws
upon 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 the
values and objectives of the organizations, charting-out the business plan, managing
adversity and building the brand.
Bagchi is convinced that high performance entrepreneurs create great wealth as
they drive innovation. Citing his own company MindTree, he further elucidates that
as entrepreneurship is a creative process, it can deeply be rewarding simply as a
journey itself.
He highlights some lessons, 12 in number, in entrepreneurship from the Indian International Journal of Social
Economics
IT-sector and he sums-up by observing that the great value is born out of the feeling Vol. 34 No. 10, 2007
that an enterprise is like a piece of land we all have been give. Our charter is to create pp. 781-782
q Emerald Group Publishing Limited
unusual, lasting value out of it – value that nourishes other lives. 0306-8293
IJSE This book gives a very good reading. Spontaneous, free flowing and true to the
points.
34,10 The second book, edited by two eminent sociologists, one from India, another from
England, emphasized that globalization has far reaching consequences for the world
community. Analyzing the issue from a variety of theoretical and disciplinary
perspectives, the contributors from different parts of the world, address a number of
782 important questions which include:
(1) Does globalization involve integration on a worldwide scale or will there be a
leaving-off, or even a reversal?
(2) Encouraged by market forces, will privatization and deregulation of economies
increase, 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 platform
to throw open a debate from the contributors. This edited volume captures the essence
of both the empirical and conceptual reflections, which leads the reader to conclude
that 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 foreign
capital and their inflows, which are large and diverse in the context of both developing
and developed countries. While a substantial fraction of foreign capital can be
explained by select economic variables, the country-specific factors account for more of
investment inflows in China, India and the Carribeans.
India and China have often been compared in terms of their performance. In recent
times, foreign direct investment (FDI) and economic growth has been a common focus
of comparison between these two countries.
On the other hand, studies on the Carribeans reveal an interesting contrast due to its
close geographical proximity to the developed economies.
The immense diverse pictures in India, China and the Carribeans enable us to
analyze the subject from different perspectives.
Though it is very difficult to make any predictions regarding the future, one thing is
very clear, the authors claimed. The pace at which changes are taking place in the
world economy, including changes in the market structures, technology, customer
preference and the new product development requires the companies and the countries
as well, respond to these changes. The authors further conclude that by bringing a
large part of their population to the economic market place, Indian China and the
Carribeans along with other developing economies will set free their innovation
potential. When this happens, the authors observe, the world will surely be a different
place.
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 Gupta
Guest Editor, Special Issue on India, IJSE