Centuries ago, economic prosperity in India was achieved through higher production by deploying more land and labour. Thus, the fertile soils of the Indus and the Ganges encouraged the development of a vast agricultural economy. The pressure to innovate and increase output through productivity was not strong in a land-abundant India. Not so with China¹, for example, where there was less arable land than India but a similar size of population. The Chinese were compelled several centuries ago to innovate and develop methods of agriculture to extract more yield from the same land. To this day, China produces significantly more food than India with less cultivated land.

Turning from agriculture to industry, there is a similar pattern. In the last two centuries, economic growth in several countries has been stimulated by productivity increases rather than merely production increases. Throughout the Asia Pacific region, the post war boom was stimulated by a happy combination of factors – a spectacular rise in industrial productivity, an export orientation, and the adoption of new technologies². In fact, the growth rates of industrial output achieved by these countries have exceeded the growth rates achieved by developed countries 100 years ago at their corresponding stage of development. The pattern of postwar industrial development has been to compress the cycle into a shorter time frame.

However, Indian industrialisation has been characterised by a weak influence of productivity as a factor in growth. It seems that the largest single contributor to industrial growth in India has been the accumulation of physical capital³. Industrialisation had three distinct phases: the first lasted from the early 1950s till 1966, when growth proceeded at a fast pace of about 8 per cent pa. The growth leaders were heavy industries like metals, machinery, chemicals and paper. Consumer goods grew rather slowly.

The second phase lasted from 1966 to 1980, during which period growth dropped to 5 per cent pa. Metals, machinery and like items slowed down, but there was a somewhat better growth in consumer goods industries. By the end of this second phase in 1980, the over-restrictive and self-defeating nature of the regulatory framework began to be evident and there appeared the first signs of deregulation. Mrs Gandhi declared 1982 as 'productivity year'. Industrial policy permitted 133 per cent of highest production to be produced, and the decontrol of cement and fertiliser industries accelerated. During the third phase from 1980 to 1991, in a sort of turnaround, industrial growth picked up back to the levels of the first phase. The third phase was characterised by especially fast growth in consumer durables and some capital goods such as electrical machinery.

These developments most likely reflect the prevalent thinking of those times. It was fashionable in the 50s to think of savings and investment rates as the main determinants of growth. Productivity was perhaps regarded as a given technological parameter. Looking back, it seems as though there was little concern among policy makers for the efficiency with which capital and labour were used, or for ways of improving productivity through organisational or technological upgradation. Influenced by the emerging concept of Total Factor Productivity (TFP), a number of exercises were done in the 80s on the TFP growth of Indian industry. TFP growth is the residual of what is over and above the growth attributable to the inputs, i.e. materials, labour and capital. This residual arises because of technology (new machines) and organisation (how people work). To put it in less arcane language, output equals materials plus labour plus capital plus techno-managerial inputs.

By the early 90s, at least nine studies had been published on the TFP growth for Indian industry for periods from 1946 to 1986. Every single one of those nine studies showed that the TFP growth of the Indian industry was negative or mildly positive. What this means is that growth of industrial output has been achieved by us largely through increased materials, labour and capital inputs, and there has been little or no contribution to the growth from techno-managerial inputs. Now this is quite a stunning statement to have to accept! But it is true. Experientially also, such a statement does not appear to be out of place as one reflects on the state of efficiency and competitiveness of Indian industry right up to the early 90s.

Due to deregulation in the last decade, the industrial economy has seen increased competition, a weaker effect of the public sector and an outward orientation through higher foreign trade intensity. All of us have lived through this decade with fear, wonder, adjustment and hope.

As managements of companies try to cope, what is the evidence that their collective techno-managerial capability is positively reflected in the industrial economy? My colleagues in the Tata Department of Economics and Statistics (DES) have completed a rather contemporary study⁴ to assess the impact of economic reforms on productivity trends. If techno-managerial inputs have been effective, then it should reflect in a fillip to the TFP growth rate. This could have happened in the aggregate or in segments. The study compared a pre-reform decade with the post-reform decade in the National Factory Sector (public and private) based on the Annual Survey of India (ASI) data. It also evaluated the performance of the private manufacturing sector (774 companies) based on CMIE / Prowess data. Two headlines:

(i) In the national factory sector as a whole, TFP growth has increased from a meager 0.68 per cent pa to 0.97 per cent pa. This is better than before, but way behind what the industrial economy needs. Perhaps it takes time to see a significant shift in the whole sector quite so soon. This is corroborated by a study published by Marcel Timmer of the University of Groningen. India had a TFP of 15.4 per cent of the US in 1987 and 17.2 per cent in 1997.

(ii) Viewing separately the private manufacturing sector during 1992-2001, the TFP growth at 2.56 per cent is higher than the national factory sector as a whole. Further, the top 50 private manufacturing companies have shown a TFP growth of 3.31 per cent, quite an impressive figure, clearly suggesting the positive influence of techno-managerial inputs into the business. Though it is a biased comparison of India's best with others' average, it is reassuring to note that the TFP growth of our best 50 compares well with the average rates of 4.5 per cent achieved by countries like South Korea and Malaysia. This means that someone in India is getting it right!

None of this should come as a surprise. Clearly there is a huge churn with the most adaptive companies responding successfully to the challenge of increased productivity while a huge mass is convulsing and learning how to respond. This means that deregulation is indeed working by compelling industrial firms into the path of productivity improvement. For many years, our culture has not been very productivity oriented, in agriculture until the Green Revolution and in industry until the 90s. Therefore, this evidence of a techno-managerial transformation underway is significant. It demonstrates a changing mindset in our country.

It was only a hundred years ago that for the first time Frederick Winslow Taylor⁵ studied manual work and the worker. At that time, he questioned the well-understood concept of craft skill and demonstrated that manual work was a series of simple motions. From David Ricardo through to Karl Marx, it was accepted that there were enormous differences in skill between workers, but there were none in respect to productivity other than between hard workers and lazy ones.

'Productivity' as an idea did not exist; indeed, the word 'efficiency' entered the management lexicon about a hundred years ago, thanks to Harrington Emerson, who viewed efficiency as a 'natural' rather than a 'mechanical' concept. The most important, and indeed truly unique, contribution to management in the 20th century was the huge increase in the productivity of the manual worker in manufacturing. The most important contribution that management needs to make in the 21st century is, similarly, to increase the productivity of the knowledge worker. Thus, the Indian manufacturing sector is facing and coping with the central challenge of the management profession all over the world. What an exciting time to be a manager in India!

The history of the auto industry⁶ reveals anecdotes and vignettes that embellish this point about techno-managerial value additions to production output. A 1915 survey of the Highland Park workers in Ford revealed that workers spoke more than 50 languages and that many of them could barely speak English. How could this army of strangers co-operate to produce a greater volume of a complex product like the Model T?

In 1949, a collapse in sales forced Toyota to terminate a large part of its workforce, resulting in a strike. Eiji Toyoda became president and he entered the 1950s with a long trip to the US. Later, he reminisced, "They let me see every step of the operations…the gap between their production and ours was so enormous that although I found the knowledge useful, it was not possible to apply their methods right away." Back in Japan, Eiji Toyoda and his production genius, Taiichi Ohno, concluded that the US-style mass production would never work in Japan. From this tentative conclusion was born what the world has come to call the Toyota Production System or Lean Manufacturing.

Honda, which was a tiny upstart in the auto industry⁷ in the 1960s, continues to grow in an industry in which the belief is that unless you are massive, you cannot survive. Honda's "way of managing" has always emphasised innovation. Honda's plant in Maryland, Ohio was among the first plants in the US to be ranked among the most efficient auto factories in the world. This woke up the auto industry because it demonstrated that it was Honda's method of organising that gave Honda its advantage.

When China joined the WTO in 2001, it was expected that the domestic car industry would get a huge shock. The reality has stood conventional wisdom on its head. Unheralded Chinese companies have been very successful, and the big international players like Volkswagen have been surprised. Likewise, in India. Only three years ago, India was considered uncompetitive and lacking scale in automobiles and components, but today, the scenario somehow looks different.