India’s rich and mighty, not long ago, worried about building businesses that would cater to the vast consumers at the bottom of the pyramid. That the sight of a family riding a two-wheeler in the rain made Ratan Tata want to build a safer option for those who couldn't afford cars is one of corporate India’s well-known lore.
After toying with the idea of a safer scooter, then an open-sided rural vehicle, Tata finally came up with the idea of a ₹1 lakh car dubbed “the people’s car”. The price tag became a goal by accident when he happened to mention it during an interview with a journalist.
Sure, the idea had a philanthropic ring to it, but it wasn’t a charity project, which the Tata group has several anyway. Tata Motors aimed to make money by launching a small car capable of unlocking the mass market of aspirational, not-so-rich Indians wanting safer and more comfortable lives. For this, the rough-and-tough auto engineering company needed to reinvent its approach. The project, it was decided, would be set up in West Bengal.
The then Left Front government in Bengal had announced plans to acquire 1,000 acres of fertile farmland in Singur for Tata Motors to build the car factory, as it would boost job creation and local economy.
Tata Motors commenced construction of the factory in 2007. But land ownership turned out to be too much of a thing of cultural pride in the area. Local farmers and political leaders opposed the land acquisition, arguing that the nearly 6,000 families that the factory was displacing were not fairly compensated, forcing the project to be shut down in 2008. Chief among them was Trinamool Congress’s (TMC) Mamata Banerjee, who went on to become the chief minister, not as yet dislodged by a political rival.
This Monday, Tata Motors informed the stock exchanges that it has won an arbitration award of ₹766 crore from the West Bengal Industrial Development Corp. Ltd (WBIDC), the state’s industrial development agency. The arbitral tribunal has also ordered WBIDC to pay 11% interest on the amount, starting from September 2016 and extending until the actual recovery of the funds.
Whether the award will bring about resolution of the long-standing dispute isn’t clear. Noises coming out of the ruling TMC in West Bengal suggest that the state government may appeal the award.
There are some signs, though, that the Nano project may have driven home some policy lessons at least.
On an invitation from then Gujarat chief minister Narendra Modi, Tata Motors relocated the manufacturing unit from Singur to Sanand. If Singur became a test case for land acquisition and industrial development in India, the Nano plant at Sanand showcased Gujarat’s industry friendliness, ultimately catapulting Modi to the prime ministerial race for the 2014 elections.
Tata introduced Nano to the world at the 2008 Auto Expo in New Delhi, a launch that announced India’s new economic power, its frugal engineering, low-cost manufacturing capabilities, and its storied demographic dividend, the ‘India Growth Story’. Auto analysts projected that Nano’s success would catalyse 65% growth in the Indian car market. The sheer ambition of the project made the world sit up and take note.
That Gujarat had bagged the Nano project by giving it various incentives bolstered the support for "deal-based" capitalism in India, as opposed to the "rules-based" approach to capitalism.
Sadly, however, the Nano did not live up to its promise. The project was shut down in 2018 although Sanand continues to be a site for Tata Motors’ other passenger vehicles. The Nano failed to disrupt the auto market, could not replace two-wheelers or create a market of first-time car buyers. Experts say that the Nano never really understood its target consumers.
The anticlimax became an important reminder that even a host of concessions, such as those the Gujarat government had provided to the Nano plant, cannot make good basic business mistakes.
Nano’s failure exposed the limitations of the deal-based policy model that promotes discretion-driven systems in which governments sweeten invitations to businesses and investors with tax sops, concessional land prices, relaxations on standard labour welfare and other regulations, in the hope that it would bring investments, new tax revenues and new jobs for their people.
A rules-based system, on the other hand, is governed by laws, is predictable and is procedure-driven with checks and balances. Businesses may fail in such a system, too, but market forces unencumbered by entry or exit barriers ensure that consumer interests remain at the centre.
In discretionary systems (as in Sanand), ad hoc decisions by bureaucrats and their political bosses encourage lobbying, abuse of power, rent-seeking and favouritism. Individual businesses may take political positions to bag policy favours and commercial advantage at the cost of competitors, which upsets the level playing field, and doesn’t serve consumers, taxpayers, or job seekers.
Seen against this backdrop, is Prime Minister Modi’s preference for the PLI scheme, a market-distorting but rules-based framework, a sign that Nano’s failure showed why deal-based capitalism must be shunned?
