Decision making in the public sector : a case study of Swaraj Tractor

DOMESTIC FINANCE STUDIES NO.48 DECISION MAKING IN THE PUBLIC SECTOR: A CASE STUDY OF SWARAJ TRACTOR By V.V. Bhatt February 1978 Public and Private Finance Division Development Economics Department Development Policy Staff CONTENTS Page Purpose and Plan of the Paper I. Introduction .. . ............... .. .. .... 3 II. Swaral Tractor: Decision making Process .............. 6 III. Problems-and Conjectures ............................. 19 IV. Decision-Process: Industrial Licencing ............. 26 V. Decision making Process: Some General Observations ............................ . .******** 35 Footnotes .......................................... .** 39 Appendix A: Broad Outline of 'the Swaraj Tractor Project'- March'1972 Appendix B: Statement I. Swaraj Tractor: Performance Indicators. Statement II. Swaral Tractor: Project Cost (Expected and Actual) Statement III. Tractor Capacity and Output: Some Characteristics: 1972 Statement IV. Tractor Demand: Estimates for 1973-74. APPENDIX C: ACA - Project.Promoters Confrontation APPENDIX D: Comments by Chandra Mohan (Managing Direetor of the PTL) FOREWORD The Division has been engaged, since early 1977, in research relating to the managemint and organization structures of public sector manfacurig ntrrIe-P vrtyo objectives such as con- trolling and regulating output and prices of manufactured products of critical significance to the economy - governments in the LDCs have entered the field of industry. The efficiency and effectiveness of these enterprises in relation to the explicit or implicit objectives would depend on their managerial and organizational structures and the policy environment in which they operate. The broad purpose of the study is to identify the characteristics of the structures and the policy environment that are consistent with the efficiency and growth of such enterprises. During the pilot phase of the project, it is proposed to study in depth the decision making process and performance of two or three enterprises in each of the three countries: India, Egypt and Yugoslavia. One of the enterprises in India selected for this study is the Punjab Tractors Limited, with which this paper is concerned. This enter- prise is modest in its financial/economic dimensions but it has much greater significance from the point of view of this research project than any other big enterprise in India; for, it illuminates the multiple facets of the problem and makes it possible for us even to draw some general in- ferences - conjectures - about. the behaviour of public enterprises in the LDCs. The author had the benefit of comments on an earlier draft of the paper by several persons and, in particular, by Professor Little, Professor Streeten, Mr. Kamenetzky, Mr. Chandra Mohan and Mr. Suri. DECISION MAKING IN THE PUBLIC SECTOR: A CASE STUDY OF SWARAJ TRACTOR The characteristic feature of the development process - both in the developed and developing countries - since World War II is the deliber- ate assumption by the State of the function of regulating the pace and pat- I/ tern of socio-economic development. In a large number of the LDCs (less developed countries), the State, in addition, is playing an active role, out of a variety of motives and reasons, in promoting and managing enterprises in the manufacturing sector. The functioning and growth of these enterprises critically depend on the decision making process in the public sector. It is, therefore, essential to understand this process. Without a clear insight and understanding of the problem of public sector decision making, it is hardly possible to suggest any solution or solutions. This process is complex even in the private sector and isjn"--- itably much more complex in the public sector as it is an integral part of 2/ the process of socio-economic evolution. However, the decision making process is somehow not a crucial element in the analytical constructs and techniques developed by the economists - as well as management experts. The static equi- librium theory or the steady-state growth models (which are a relapse into 3/ statics, to use Hicks's expressive phrase), or the empirical (even econo- metric) studies based on the method of comparative statics (the characteris- tics.of different countries at different stages of development) - these analytic tools are congenitally incapable of handling the decision making process and thus inadequate for understanding the vital aspects of the develop- ment problem. In Economics and H1anagement Science, the available tools and - 2- techniques determine the nature of the problem selected for study; the urgent real life problems require much more thinking and understanding of historical processes of change and are not generally the concern of the economists. As a result, the suggested solutions for the problem of public sector decision making are as simple as they are naive - the government end public enterprises should select an objective function - if there are multiple objectives, they should assign appropriate weights to them: they should have a clear idea of the constraints and choice possibilities: given the objective function, constraints and choice possibilities, they'should try to maximise and optimise the objective function. And if they do not do 5/ so, their behaviour obviously must be irrational. Indeed very powerful logic but applied to a problem which we do not understand. And so it is essential to understand the problem - the problem of the agenda of organisations as Arrowputs it. It is not possible to have an in-depth understanding of the problem on the basis of semi-aggregative data - however amenable they may be to sophisticated econometric techniques. To understand the nuances and facets of decision making at several levels - institutional and hierarchical - one has to observe the dynamics of an actual process. It is for these reasons that one should concentrate initially at any rate on such a case study that could provide an insight into and an understanding of the complexity and multiple dimensions of.the problem. Hence we have deliberately selected this case study of the Swaraj tractor for understanding the problem of decision making in public manufac- turing enterprises in India. This enterprise is modest in its financial and economic dimensions but it has much greater significance from our point of -3- view than any other big enterprise in India; for it illuminates the mul- tiple facets of the problem and makes it possible for us even to draw some general inferences - conjectures - about the behaviour of public enterprises in LDCs. It would not have been possible to undertake this study but for the assistance of the Industrial Development Bank of India (IDBI). It made available to us several documents - the detailed project report prepared by the Technical Consultants (M/s. Suri & Associates), the IDBI project apprai- sal reports submitted to the Ad Hoc Committee of Advisers (ASA) as well as its own Board of Directors and its project supervision reports. In addition, the Punjab Tractors Ltd. (PTL) - firm operating the Swaraj tractor project - made available to us, through the Government of India, its progress reports K' 7/ and accounts. Where no references are given, the source of information is IDBI or PTL. The plan of the paper is as follows: the introductory section provides,some information about the characteristics of the tractor industry in general as well as in India. The narrative on the Swaraj tractor is presented in all its richness in Section II. In Sections III and IV some problems about the decision process are raised and some conjectures made about public sector behaviour. In the final section, an attempt is made to formulate some explanatory hypotheses about the public sector decision making process - hypotheses that may have general relevance for the-LDCs with mixed economies. I. Introduction Before we present the Swaraj tractor case, it is essential to give some background with regard to the tractor industry. In North America, tractors replaced draught animals - usually horses - since 1900 and this sub- stitution process was completed before World War II. In Eurbpe, this sub- stitution occurred during the first decade after the war as small versatile 8/ tractors and government support for tractor purchase became widely available.' Most of the technical development of the tractor had taken place by World War II and much of it occurred in the U.S.A. However, the truly revo- lutionary development of the pre-war period, the "Ferguson System", came not from the U.S.A. but from the U.K. and was introduced in the U.S.A. in 1939. By this time tractor-technology was more or less stabilised and there has not been any significant change in this technology. There have been minor addi- tions to the tractor design, like power-steering and automatic transmission. Thus there have been few important patents in the tractor industry since 9/ 1939.- By comparison with an automobile, a tractor is a simple machine. While a car typically has 15,000 parts, a farm tractor has a mere 2,000; of these 1,365 are seldom or never actually manufactured by tractor manu- 10/ facturers. These characteristics of tractor technology and manufacture are worth noting; for they indicate that it should not be difficult for new- comers like LDCs to absorb and master this technology. This point is rele- vant for the Swaraj tractor case. There is another characteristic of the tractor industry that is also relevant to note. In the tractor industry there are economies of scale both in production as well as distribution. It has been estimated for the U.S.A. that approximately the same economies of scale, around 20 percent, would attach to distribution expansion from 20,000 to 90,000 units as would 11/ accrue to a production expansion. This is part of the reason why the industry in the non-communist countries is dominated by a few firms, resulting 512 in oligopolistic competition as well as collusion. In a durable good like a tractor, the farmer essentially buys tractor services and hence is concerned in his purchase decision about after sales service and parts availability. Farmers' loyalties or prefer- ence thus are dealer oriented and sales of tractors thus crucially depend on the quality of distribution and service. As seems to have happened in the U.S.A., this dealership network can reduce competition and work against the interests of the farmers; for farmers generally all over the world have no adequate information to judge the quality of a tractor excepting through the marketing structure. This characteristic of the tractor market suggests the need for public policy in the interests of the farmers - the group in a 13/ weak bargaining position vis-a-vis the production-distribution system. This background is essential to understand the Swaraj tractor case in India. Tractor production and Imports are controlled and regulated by the government as are all industrial investment and imports. Public sector decision making, thus, plays a crucial part with regard to the nature and characteristics of industrial evolution. One would expect, therefore, the decision making organs to be aware of the characteristics of the tractor technology and industry, mentioned earlier. Farm mechanisation in India started only after the War. In 1946-47 there were about 5,000 tractors; the number sharply rose to 20,000 in 1956-57 and by 1964-65, where our story begins, there were about 4D,000. This was the year when the new agricultural strategy - the so-called green revolution - was formulated. The domestic production of tractors started in 1963-64 with a licenced installed capacity on a two shift basis of 8,500 units by two firms - Tractor and Farm Equipment (TAFE) and Eicher Tractors India Ltd. (Eicher), the former with a capacity of 7,000 units and the latter with a -6- capacity of 1,500 units. TAFE was permitted foreign collaboration with Massey-Ferguson, U.K. in 1961 and Eicher with Eicher of the Federal Re- public of Germany in 1961. As against this domestic capacity, it was estimated that the demand for tractors would increase substantially as a result of the adop- tion of new agricultural strategy in Punjab, Haryana and Western U.P. - the parts of India growing wheat on irrigated land.. With large increases in land.productivity, farmers were facing a farm power shortage during the peak season; further, and even more important, cost of animal power was rising sharply. The adoption of high yielding varieties of wheat improved the productivity of land, especially irrigated land. This in turn raised the opportunity cost of using draught animali, as fodder competed for the highly productive irrigated land. Mechanisation - task-wise - thus was 14/ expected to be an inevitable compliment of the green revolution. However, in view of relatively small holdings - 68 percent of holdings in Punjab were below 9 hectares, accounting for about 20 percent of the stock of tractors in 1971 - the problem which the Planning Commis- sion faced was: what type of tractors would suit the budget and the needs 15/ of small-medium farmers. II. Swaral Tractor: Decision Making Process The story begins in 1965. A new team of members was appointed at the Plenning Commission and it was busy formulating the.Fourth Five Year Plan. As a part of the Plan, several new projects required assistance - both financial and technical - from Russia. -One of them was a 20 HP trac- tor project. The Planning Commission had estimated the demand for tractors to be 40,000 units per year by 1968-69 and of this, half the demand was ' expected to be for tractors in the HP range of 20 and below. The Government of India's delegation, headed by the Deputy Chairman of the Planning Com- mission, visited Russia in May 1965 to discuss with the Russian Government the nature and magnitude of assistance for this and the other projects. Mr. M.M. Suri, Director of the Central Mechanical Engineering Research 16/ Institute (CMERI) was one of the members of this delegation. Origin and Development of Swaraj: The Russians were reluctant to comit themselves to the tractor project. Further, Mr. Suri felt that the project as formulated had excessive foreign exchange content and required a large number of Russian experts. Any way, since the Russians were unable to assist this project, Mr. Suri suggested to the Deputy Chairman that CERI could develop an indigenous tractor design that could be produced without external assistance or even imported parts. The CMERT thus started the work on the new tractor design under the direction of a Comittee of Tech- nical Experts (CTE); comprising representatives of the industry, agricul- tural universities, farmers and the Tractor Training and Testing Station (TTTS) of Budni. A team of engineers under the direction of Mr. Suri studied in depth the relative merits of the available designs of agricultural tractors, keeping in view the local manufacturing facilities, skills, raw materials and agro-climatic conditions and developed a tractor component by componentt Since the availability of standard hydraulics was considered as the key requirement for a good tractor, the CMERI engineers successfully developed an original single lever automatic depth-cum-control hydraulic system, patents for which were accepted in India, the U.K., Japan, West Germany, the U.S.A., France, Poland and Yugoslavia. The first proto-type tractor was assembled in November 1967 and was put to extensive endurance tests in CMERI (on specially designed test rigs simulating field conditions), lasting -8- over 1,200 hours non-stop running with 10 percent to 30 percent over-load during the hottest summer months. With the experience gained on this proto- type, three more units were assembled in March 1969 for extensive field trials and performance evaluation at the TTTS, Punjab Agricultural Uni- versity (Ludhiana) and the U.P. Agricultural University (Pant Nagar). As a result of these tests, a number of modifications were incorporated in the hydraulics, steering gear, front axle, engine and its cooling system and the modified tractor was again tested at TTTS in May/June 1971. These tests indicated that its performance was better than most of-the imported tractors in 20-25 HP range in regard to drawbar pull and ratio of the draw- bar HP to the power available at the PTO - which are of primary concern for cultivation. The tractor passed the TTTS test. Thus was born the Swaraj tractor - the product of local technological competence. The design for Swaraj 20 HP was built around the four-stroke, twin cyliader, air-cooled Kirloska engine, that was being produced in the coun- try. Some of the salient features of the Swaraj were the following. It has a 20 HP diesel engine of French design with a rated speed of 2,000 rpm and a compression ratio of 16:1. It has a dual'range four speed transmission so as to cover a wide variety of jobs ranging from heavy duty to fast transport, and a provision for an independent PTO which can be engaged or disengaged when the tractor is in motion and can be used as a prime mover for pumps and other similar equipment. Engine.cooling is effected by an axial blower and fins provided on the engine cylinder block. Hydraulics with finger tip control for both positions and draft control of three point linkage is provided for operating the implements. A foot operated differential lock is provided to improve traction in slippery and - ~ .. .... ....> ~ muddy spots. It is also provided with adjustable front and rear axles, manual steering and vertical exhaust. Lack of Sponsorship by Central Government: Thus by 1971, the Swaraj tractor was ripe for commercial production. But the question was: who would adopt this innovation? Earlier, the proto-type was constructed with the assistance of a public sector concern - the Mining and Allied Machinery Corporation (MAMC) and it was expected that MAMC would be able to undertake the tracto- project with the addition of only some balancing equipment. But in the period of industrial recession in the country - 1967-71 - the MAMC had incurred financial losses and was not willing to take any additional risk involved in the production of the tractor. Because of industrial recession and decline in its sales of. machine tools, the Hindustan Machine Tools (HMT) - another Central Govern- ment concern - wanted to diversify its output by going into tractor pro- 17/ duction. However, it wanted to use its unutilised capacity immediately by first going into assembly of Zeteor tractor parts imported from Czecho- slovakia. Further, it thought that Zeteor was a proved production model, while Swaraj was only a proto-type. In this decision, it was supported by the National Industrial Development Corporation (NIDC), a consultancy organi- zation sponsored by the Central Government. Thus, at the Central Government level, there was no strong sup- port for the Swaraj. The Planning Commission members were changed by 1969 and the new ones had no particular interest in domestic technological com- petence. Mr. Suri had left CMERI by 1969. The NIDC and the Council of Scientific and Industrial Research (CSIR) considered Swaraj a risky venture. - 10 - State Government Unit Becomes a Promoter: It was at this stage that a State Government unit decided to produce the Swaraj tractor. The Punjab State Industrial Development Corporation (PSIDC) was set up in 1966 *with the object of promoting medium and large scale industries in the State. It had already implemented successfully six industrial projects by 1970: Punjab Prestressed Concrete Works Ltd., Punjab Chemi-plants Ltd., Punjab Footwear Ltd., Punjab Nylo-transmission Ltd., Punjab Saltpetre Refinery Ltd. and Punjab Tanneries Ltd. The PSIDC had been familiar with the development of the Swaraj trac- tor; it had observed its field trials in the Punjab and the farmers' favour- able response to the Swaraj. Three characteristics of the Swaraj attracted the PSIDC: its indigenous design, its employment potential in the Punjab and its accptance by the Punjab farmers as a sound dependable tractor. The PSIDC hence obtained an industrial licence to manufacture the Swaraj tractors in 1970. The PSIDC contacted the CMERI and requested the latter to release the five engineers who had worked on the Swaraj design"for its new firm - The Punjab Tractors Ltd. (PTL). Simultaneously, it appointed the consulting firm - M/s. Suri & Associates, organised by Mr. Suri after he left the CMERI - to prepare a detailed project report and undertake the entire installation and commissioning of the plant along with the company's engineers (the CMERI group). The detailed project report was completed by the middle of 1971. The next problem was: how to finance this project? Industrial Development Bank of India: The PSIDC and the Punjab Tractors Ltd. approached the Industrial De- velopment Bank of India (IDBI), owned by the central bank of the country ---- the Reserve Bank of India. The IDBT was set up in 1964 as an apex develop- ment bank to promote industrial development - particularly viable projects - 11 - that cannot obtain financing from the other institutions., Its charter is broad and flexible; it can finance any sound project - irrespective of its ownership, organisation and size. At the time that it was approached by the PSIDC for financial assistance, its top management had changed. This new management had given an assurance to industry that the IDBI would be prepared to finance any sound project that met its selection criteria, irrespective of the assis- tance required. Its selection criteria related to the project's internal rate of return and exchange rate, the cut-off rates being 15 percent and Rnpees 9.5 to one U.S. dollar.1Yurther, it had taken up active promo- tional work with regard to the identification of project ideas in backward states, had a firm policy of supporting domestic technical consultancy services and research and had set up its own technical consultancy service - Kerala Industrial and Technical Consultancy Organisation (KITCO) - in Kerala to prepare feasibility and detailed project reports and provide technical assistance to small and medium enterprises. The new IDBI management be- lieved that for industrial development, it was essential to develop domestic 18/ technological competence in selected areas.- Even with this new IDBI management, the PTL were not completely confident of obtaining financing to the tune of 85-90 percent of the project cost. The lack of sponsorship by the Central Government, and the skepticism about its success expressed by both the CSIR and the NRDC made the PTL some- what diffident about getting the IDBI support. They, therefore, had sug- gested only a modest project (capacity output of 5,000 tractors in 20-30 HP range) with a capital cost of less than Rs. 40 million. They were to buy the Ra-2 engine from another well-established Indian firm, purchase about 80 percent of total component requirements from established and new - 12 - firms - largely small scale engineering firms from Punjab - and concentrate on manufacture .of only 15-20 percent of key components; it was thus that 19/ they were able to reduce the project cost to a fairly modest amount.- But the PSIDC was able to contribute only less than 10 percent of the cost, while the IDBI rule of thumb was that the promoters should finance the project at least to the tune of 15 percent of the project cost through their own resources. The PSIDC, hence, was willing to take a pri- vate firm of civil engineering contractors as a co-promoter on condition that it.would provide more than 5 percent of the required resources. The firm was willing to do so if its representative was made the managing director. IDBI Appraisal Process: The Top Management of the IDBI glanced through the detailed project report, prepared by the technical consultants, immediately after it was received in the IDBI. They were impressed by the quality of the report; the IDBI had not received such a high quality pro- ject report from any one of the more than 150 projects that it had financed up to that time. They wanted to satisfy themselves about the commitment to the success of this innovative project by PSIDC, PTL and the technical con- sultants; for-this was to theirmind.crucial 't Ithe-success of -any proet and more particularly for this one. As a result of their discd"ion with them, they were convinced about the management capacity, technical competence and. motivation of the three critical groups. They were impressed by the following characteristics of this project:- (i) It was based on domestic technology, know-how and consul- tancy services and the Swaraj tractor was specially designed to meet the local conditions, had passed the TTTS test and was approved by the farmers; of the existing six producers, the tractor design of only two firms had - 13 - passed the TTTS test and all of them had obsolete models which were of pre-1965 design of their foreign collaborators and were not specially adapted to local conditions. (ii) The three groups associated with the project were strongly motivated to make it a success. The PSIDC's reputation depended on farmers' acceptance of the product and the employment effect of the project in Pun- jab: the technical consultants - in particular Mr. Suri - and the top management team of the PTL had actually identified the problem of tractor design, specially designed the Swaraj tractor over a period of six years and wanted to prove to CSIR, NRDC and the Central Government that their design was superior to all the other tractor models produced in India or imported from abroad. (iii) It would support a large number of engineering ancillary industries in the Punjab - known for its entrepreneurial and mechanical talents - and thus have a large employment impact. In addition, the engine manufacturer was suffering from lack of demand as a result of industrial recession and would now be able to increase his output. (iv) The project envisaged an efficient distribution and service system, which is crucial from the point of view of the farmers' response; no other existing firm had paid adequate attention to distribution and after-sales service. (v) It had already started with the establishment of its own tool room to manufacture jigs, fixtures and inspection gauges; this tool room was also to be used for training its personnel, developmental work and research to improve technology and design other tractor models; no existing firm had research and development facilities and none of them had made any conscious effort to improve the design of their models to suit the - 14 - local conditions. (vi) About 10,000 tractors in the HP range of 20-25 were cur- rently imported, while there was no domestic production of tractors in this range. The demand was expected to grow. (vii) It was expected to produce and sell Swaraj at a competitive price and, as its capacity expanded, to 12,000 tractors after the initial pilot phase, it would be in a position even to export its tractors abroad. However, they did not like the idea of a co-promoter; first be- cause the co-promoter did not have particular experience with regard to tractor industry and secondly and crucially because they did not like the idea of the co-promoter's representative becoming a managing director. The success of the project depended on the CMRI Assistant Director becoming the Managing Director. They, therefore, assured the PTL that the IDBI would not insist on 15 percent contribution by the promoters and arrange to fi- nance 85-90 percent of the project cost in collaboration with the other financial agencies if the project met the IDBI selection criteria. The IDBI project appraisal team then prepared its report within two months. This report was submitted to an Ad Hoc Committee of Advisers (ACA) for critical examination and as was the IDBI's practice, invited the ACA to discuss their comments with the project promoters. Such confronta- tion and dialogue gave the IDBI an additional opportunity to test the mana- gerial and technical competence of the project promoters. The ACA raised several critical questions. These questions and 20/ & 21/ the promoters' responses are given as Q and. A.respectively in Appendix . - 15 - IDBI Approves the Project for Financing: After this exchange, the project promoters left and the IDBI asked the ACA about its views on the pro- ject. The ACA approved the project; in their view, it was technically sound and would be able to produce and sell a good quality tractor at competitive prices. However, they felt that it may take longer than expected to complete the project and in any case, in view of its small size - there are economies of scale in the tractor industry - and government control on tractor prices, the project will not be able to have an internal rate of return of 15 percent - one of the two IDBI selection criteria. The IDBI then prepared a memorandum for its Board, recommending more than 85 percent financial assistance (in collaboration with the other financial institutions) for the project: the memorandum argued that the exchange rate criteria was met - the domestic resource cost of saving one U.S. dollar was less than Rs. 9.5 - and this showed that the project was efficient. Obviously, an innovative project of this small size would not be able to have an internal rate of return of 15 percent or more; but this rate was not very much lower than the cut-off rate - it was 13 percent. The Board approved the project and sanctioned the required financial assistance - partly by way of long-term loan and partly as equity - in February 1972. The technical research for designing this tractor had started only in late 1965 and was completed in May 1970; the PTL was formed in 1970, the project report was completed in September 1971 and was submitted. to the IDBI for assistance in November 1971. Performance of the PTL 1972-77: The construction work as well as the installation of plant and equipment started immediately after the IDBI sanction of financial assistance in March 1972. The performance of the PTL since 1972 has been rematkable with regard to both its cost and time schedules, as well 22/ as the manner in which it faced and tackled the problems as they arose: (i) The project was completed in 105 weeks by the end of March 1974 as was anticipated; the ACA had expressed skepticism about this time schedule. (ii)- The actual project cost was more or less the same as ex- pected - in fact it was somewhat lower - with regard to not only the total cost but also the cost under each head. (iii) The PTL started manufacturing Swaraj tractor - Swaraj-724 - from April 1, 1974 and more or less reached its full capacity output in.1977 again as was anticipated, in spite of raw material shortages, aad inflationary pressures and financial stringency. For the IDBI, this performance was unique. There was hardly any project, financed by the IDBI, that had been completed in time without any cost overrun. Again, there was hardly any project that had reached its capacity output within the planned time frame. Even the way in which the PTL identified its problems and tackled them reflected top management efficiency. During the first fifteen months (April 1974 to June 1975), as was expected, it suffered from irregular sup- plies from the ancillaries at rising costs - this was a period of acute inflationary pressures in India. The PTL suffered a cash loss of Rs. 7.8 - million as a result. The top management was aware that it would have to face this problem; the IDBI and the ACA had drawn pointed attention.to this aspect of the project. But till November 1973, PTL had no inventories and its relationship with its ancillaries had still not been formalised. At this stage, the PTL could not afford more than one source of supply for each component; the initial production was inevitably limited by the available supplies of components and to develop new sources required intensive -17- technical inputs from the PTL. Since November 1973, the PTL concentrated on developing mul- tiple sources of supply for each component. It promoted itself new ancillaries near the location of the Swaraj by providing technical as- sistance to new entrepreneurs. Thus its materials pipeline Improved and it was able to increase its output to full capacity level before the end of 1977. But its production costs rose steadily as input prices rose. Unlike the other manufacturers, its output had no Import content; others imported their inputs to the extent of 20-30 percent of requirements and the prices of imported inputs were significantly lower than those of the domestic inputs. For example, the H.M.T. had started the production of Zeteor 20.by this time with an import content of more than 45 percent. A Ministry of Finance study indicated that the cost of inputs was lower by about Rs. 4,000 per tractor for the Zeteor as compared to that for the Swaraj. Even this figure does not accurately reflect the Zeteor advan- tage. For Zeteor, all imported inputs did not require further processing as the H.M.T. was largely doing assembly operations. Yet the Swaraj price was comparable to that of the Zeteor; but its margin was much lower - the cost of inputs rose from 77.5 percent in June 1973 to 93 percent of ex- factory selling price by March 1975. Hence, the PTL suggested to the Government of India that Swaraj should be exempt from excise duty of 10 percent (about Rs. 3,000 per trac- tor) to offset its higher input prices of domestically bought components. This exemption was granted by the end of 1975 and since then the PTL's financial performance approached the planned level by the middle of 1977 - - 18 - with manufacturing efficiency superior to that of the H.M.T., producing the Zeteor in the Swaraj HP range. In addition, the PTL took several measures to reduce its costs and diversify its products through an intensive R and D work. It de- veloped a new design - Swaraj-735 (35 HP) - during 1974-75 and introduced it by the end of 1975 - ithe second year of its operation. For this 35 HP tractor the additional costs were only Rs. 2,000 per tractor, while the price advantage was of the order of Ra. 4,000 per tractor; because of historical reasons, it appears that the farmers regarded a higher price 23/ product as a superior product (they were used to the Massey-Ferguson tractor of 35 EP - a tractor which had passed the TTTS test and was the most popular tractor since 1961). By 1977, its output composition was 4,200 Swaraj-735 and 800 Swaraj-724. It has started work on developing a-third model and expects to start its production by the end of 1977. No other tractor manufacturer has given such attention to R and D work for product planning - developing new designs and models in response to local conditions and farmers' preferences. Swaraj has been, as was expected, a successful model judging from the farmers' response. The PTL has been able to sell its entire out- put; At a point in time orders booked numbered 500 tractors. Its distribution- cum-service system has been superior to that of any other manufacturer in India. It has, however, one handicap. Swaraj was not included as an eligible tractor for the World Bank line of credit, under which finance is provided to farmers at a concessional rate through the Agricultural Refinance and Development Corporation (ARDC); quite surprisingly, this scheme is meant for tractors in the range of 26 HP and above and this scheme does not mention Swaraj as a tractor worthy of financial support. - 19 - Anyway, the PTL has devised appropriate financing schemes with the help of the ARDC. It is worth mentioning that this new experiment in developing a product based on indigenous technology and know-how won recognition from the Central Government - which was not prepared to sponsor the Swaral project in 1972; in 1975 the PTL was awarded the National Gold Shield - the country's highest award - for its contribution to the development of indig- enous technology, know-how and consultancy services. III. Problems and Conjectures Such is the story of the Swaraj Tractor. It raises several prob- lema for analytic inquiry - problems relating to the behaviour of various units. In this section we try to examine the problems relating to the Swaraj case proper; in the next section we deal with the problems with regard to the industrial licencing process. The following questions arise with regard to the Swaraj story: (i) Why did the Central Government not sponsor this project? (ii) Why did the Punjab Government take the risk of undertaking this project? What were the'nature and characteristics of its decision- making that accounted for its success? (iii) Why was this experiment in the creative adaptation of modern technology fruitful? Let us proceed to examine these questions and try to draw some inferences - conjectures - about the public sector decision-making process. Central Government Behaviour: One part of the Government - the Planning Commission - took the deliberate decision to develop an indigenous rn20 tractor design. The CMERI did successfully evolve the Swaraj tractor; it passed the TTTS test. The H.M.T. - a Central Government enterprise - wanted to dtversify its-output as it was facing the impact of industrial recession on the demand for machine tools; it wanted to undertake a trac- tor project to use its surplus capacity and thus improve its financial results. At this stage, the NIDC considered Swaraj a risky project and advised the H.M.T. to take up the assembly of Zeteor - which had also passed the TTTS test. This suited the H.M.T. as Swaraj would have in- volved a gestation lag of two to three years, while the assembly of Zeteor could start immediately. Doubtless, the H.M.T. decision was a rational one from its own point of view. But then the question is: Why did the Central Government not sponsor another public sector enter- prise to manufacture the Swaraj? One answer could be that the bureaucrats in Delhi had no tech- nical knowledge about the tractor industry and they probably considered an enterprise based on mere research result as a risky venture. They simply did not want to take this risk. However, this explanation does not seem to-be valid; After all, the Central Government had adequate technological competence; did it not have CSIR, NIDG-and even the CMERI, whidh had developed Swaraj? And the CMERI personnel were quite confident about the superiority of the Swaraj tractor in the Indian context. Could it be that the technical personnel in thq CSIR and the NIDe-afd hence the bureaucracy had no confidence or faith not only in the competence of the CMERI personnel but also with regard to indigenous technology and consultancy ability generally? After all, foreigners had experimented with their designs in actual commercial production for a long time and it was much less risky to take their help than to undertake an enterprise on the basis of commercially unproved indigenous know-how. It appears fl:om the available evidence that such indeed was the response of the Central' Government scientists, technologists and the bureau- crats. If this be true, how could India ever creatively adapt modern tech- nology to its local conditions? Again, in that case, what could be the rationale of setting up scientific and technological research set-ups as part of the Central Government machinery for decision-making in the tech- nological field? Another explanation could simply be inter-institutional rivalry and jealousy. Mr. Suri, the record shows, was not much liked by the C.S.I.R. qr N.I.D.C. personnel; with the change in the political set-up after 1968, Mr. Suri did resign from.the CHERI. By 1971, thus, within the Central Government apparatus, there was no,leadership - either at the political level or at the technological level - to sponsor an active technology policy that could raise policy issues above the field of inter-personal and inter- institutional rivalries and jealousies. In this connection, a fact about the World Bank mission is worth mentioning. In 1971, the World Bank sent a mission to study the growth and structure of the tractor industry in India in order to make policy recom- mendations to the Central Government and find out the nature and magnitude of financial assistance that the World Bank should offer. . This was the time when the Swaraj model had already evolved and passed the TTTS test and the PTL was organised to implement the Swaraj project. It is surprising to find that the World Bank mission did not contact either the CMERI personnel or the PTL and, in fact, made no reference to the Swaraj project in its report - 22 - except to mention in a footnote that it was one of the three.tractors that had passed the TTTS test. As a result, the World Bank line of credit was not available to farmers purchasing Swaraj, while it was available for the purchase of all domestic tractors in the HP range above 25. It is somewhat ironical to find this World Bank study recommending improved product plan- ning to upgrade designs by the domestic producers with the technical assis- tance of their foreign collaborators. Strange to note is the following recommendation: "Indigenous capabilities will grow through collaboration agree- ments but, in addition, firms should initiate cooperative programs with indigenous universities and engineering research centers (such as, for example, the Central Mechanical Engineering Research Institute) aimed at. 25/ developing tractor features especially suitable for India". Does this. require any comment? The question is: Why did the Central Government officials keep the World Bank team in the dark about the Swaraj, the CMERI and the PTL? Did one party rpinforce the inferiority complex of the other with regard to indigenous technological competence? Why this emphasis on foreign collaboration in a technologically simple product like a tractor? 26/ This is a research field in the area of economic sociology. Decision-making at the State Level: In spite of the skepticism - for whatever reasons - about the Swaraj project on the part of the various Central Government agencies, how did it come to pass that another unit of the government - the Punjab State Government - decided to undertake this project in 1970? The Punjab Government and the Punjab farmers were familiar with the whole process of evolution of the Swaraj. After all, the field trials were largely undertaken in the Punjab. The farmers had in a sense become a - 23 - part of this venture, and they had approved this new product which was expected to save on both capital and operating costs. Further, the Punjabis are proud of their mechanical talents; one of the farmers had in fact successfully done "reverse engineering" - Japanese style - with regard to an East European tractor and had made a similar tractor in his own workshop. (Patent rights violation prevented this farmer from under- taking small scale production of this tractor). They were, thus, able to judge Swaraj on its merits and had a certain pride in owning a tractor based on technology and know-how developed in India - and more particularly by the Punjabis. (Mr. Suri happened to be from the Punjab). This was one consideration. And the other was the potential, employ- ment impact of the tractor project. The Swaraj was to purchase more than 80 percent of the components from the ancillaries - mostly from the Punjab. And the Punjabis are known for their entrepreneurial and mechanical talents - as a result of which the Punjab has the most thriving small scale industrial sector in India. Thus the PSIDC was confident about the farmers' response, the em- ployment impact and as a result the financial success of the project. The PSIDC is an independent agency of the Punjab Government with the function of promoting industrial development of the State. It is aware that it can per- form this innovating function effectively only if itsprojects.succeed in financial terms. For the Punjab Government would not - could not - provide subsidies on a continuing basis; and even if it did, such subsidies would affect its ability to function with a degree of independence and thus its ability to take risks and innovate. Hard-headed - not romantic - pride in indigenous technology, farmers' response and the potential impact on employment and its own resources - these -24- were the governing factors in the PSIDC's decision to take up this innova- tive project. For the Central Government agencies, Swaraj was an abstraction; it did not have such direct visible impact on them as it had for the Punjab Government and its agencies. Only a well-thought out technology policy integrated with the general development strategy of the country could have induced the Central Government to sponsor this project; but it did not have such a policy then, nor did it have confidence and pride in domestic tech- nological competence. But the Swaraj success has probably taught some lessons. In 1975 the PTL was awarded the Gold Shield for successfully implementing a project based on domestic technology and know-how by the Central Government; this is probably an indication of a new avareness haout the role of indigenous technological competence in the development strategy. How do we account for the remarkable performance of the PTL? The comprehensive and illuminating detailed project report, the timely comple- tion of the construction phase without any cost overrun, the timely reali- zation of capacity output, the ways in which the top management tackled problems as they arose - the problem of sources of supply, and the liquidity and financial problem-- and the ne models developed through continuing R. and D. work - all these characteristics of project performance were indeed unique in the financing experieuce of the IDBI. The factors which seem to account for this performance are the following: 1. Selection of the project by PSIDC on the basis of its visible and direct potential impact on its financial resources, Punjab farmers and employment in small industries; -25- 2. Selection of technical consultants and top management personnel - persons who were associated with the design of the Swaraj; 3. The powerful non-economic motivation of the technical consultants and top management in making a success of the project; the managing director - Mr. Chandra Mohan - was to be paid only a salary fixed a: the-basis of Central Government scales (he was on deputation from the CMRI) and Mr. Surl's fees were much below the fees charged by the other consultants - Indian or foreign; 4. Enlightened development orientation of the IDBI top manage- ment and policies; without the IDBI financial assistance and its own motivation to make it a success, the project would not have seen the light of day. The relationship of these factors with the project comes out clearly in the narrative (Section II) of the Swaraj decision-making process; it is not necessary to repeat what has been mentioned there already. Creative Adaption of Modern Technology: This case has relevance for the decision-making process not only with regard to the Swaraj project but also with regard to the process of creative adaption of modern tech- nology. How do we explain the success of this experiment? The organic and sequential relationship among the following tasks and functions seems to be the crucial factor. Identification of a project idea was the -critical first stage. This was done by the Planning Commission. 'The identification of available 'technological cioices for this was, the-second; - 26, - this was the function of a Technical Consultancy Service Centre (TCSC), in this case, the CMERI performed this function. Identification of a research problem by a TCSC, in this case, the CMERI, was the third stage. The re- search on the problem by a Technological Research Centre (TRC), in this case, the CMERI, and the ttansmission of this research result to the TCSC, in this case, M/s. Suri & Associates, was the fourth stage. The detailed project report by the TCSC to the project promoter (PTL) and the financial system (IDBI) was the fifth stage. The association of the TCSC with the top management for project implementation was the final stage. In this organic sequential relationship, the critical functions were performed by the TCSC and the IDBI - the functions of identifying rele- vant research problems, ebodyinngthe research results meaningfully into a cnn- crete project, and facilitating its implementation. Without the TCSC, neither the relevant research problem nor a concrete project would have been identified; and without the link between the TCSC and the IDBI, the project would not have become an operational project. It appears from a priori reasoning as well as from this case study that the critical links in the process of creative adaptation of modern technology are the TCSC and the Financial System (FS); these two provide the essential links between the pro- duction system and the technological research system. Without these two functional agencies, the production system and the technological research 27/ system are likely to evolve on parallel lines. IV. Decision Process: Industrial Licencing In India, the volume and pattern of investment in the manufacturing sector are regulated by the Industrial Licencing System (ILS) in the light of the development objectives and strategy, as worked out by the Planning Comission. In the case of the tractor industry, the actual operation of - 27 - 28/ the ILS raises several questions: 1. After the decision to manufacture tractors was taken (after 1959), why did the ILS issue licences to five units - each to produce on relatively small scale a distinctive foreign model in the'HP range above 26? 2. Why did the ILS issue licences and letters of intent to raise capacity much in excess of potential demand for tractors? 3. After the Swaraj model was developed and had passed the TTTS test in 1970, why did the ILS issue licences to manufacture tractor models of foreign designs during 1970-717 Behaviour of ILS: Pre-1965: It,is true that the demand for tractors in India was growing, particularly after 1955. However, no agency seems to have examined the question: Was it essential to mechanise agricultural opera- tions when employment was a problem? As it turned out, substitution of trac- tor for animal power was worthwhile: for timely and dependable results in areas with multiple cropping and because of rising opportunity cost of animal power with sharp increases in land productivity in irrigated areas as a re- 29/ sult of the green revolution.2 Anyway, it is pertinent to note that an agency in charge of regulating industrial da-velopment did not raise this basic question before issuing licences to five units by 1965. There was a growing demand for tractors by the farmers and farmers would not adopt this mechanical device unless it were profitable - such seems to be the logic of the ILS. Anyway, several further questions arise: in spite of the economies of scale in tractor production and distribution;. why did the ILS licence five units with relatively small capacities? Why did the ILS not insist that each tractor model should pass the TTTS test before applying for a licence? Why did the ILS not examine the suitability of each tractor design to local - 28 - conditions and farmers' resources? The ILS choices were governed by about eleven criteria which the public sector decision-making process had to take into account; briefly 30/ these were:- 1. Promotion of industrial development; 2. Promotion of a self-reliant and self-generating economy; 3. Preventing concentration of economic power; 4. Ensuring balanced regional development; 5. Setting high welfare standards for labour; 6. Increasing employment opportunities; 7. Strengthening the defence potential of the country; 8. Enlarging the cadre of highly trained engineers and technicians; 9. Setting healthy and clear standards of management; 10. Keeping down prices; 11. Financial viability. These were the criteria for the public sector projects; for regulat- ing private sector investment, it appears from the operation of the ILS that it chose the first four and the eleventh from this list. The industrial sectors that need to be promoted were, in a sense, indicated by the Planning Oommission. Thus the operating criteria for the ILS actually were: preven- tion of concentration of economic power, ensuring balanced regional develop- ment and financial viability of the.project. It is pertinent to note that there is no mention of the price/quality suitability of the industrial pro- duct to be produced and the impact of these characteristics on the Indian consumers, costs of import substitution and industrial exports. - 29 - The private firms, it was assumed, would take into account the financial viability of their projects. By this process of elimination, only two criteria of choice effectively remained for the ILS: prevention of con- centration of economic power and the promotion of balanced regional develop- ment. Both these criteria indicated multiplicity and dispersal of firms and limitation on the size of the production capacity of each unit. With these two criteria there was a risk: financiAl viability may not be ensured. The solution was: to issue licences to established well- known firms which could enter into collaboration with established reputable foreign firms. Such firus, it would have been argued, would have adequate management capacity to ensure financial success of their projects. There was thus an obvious bias in the ILS against indigenous technology and know-how, and new entrepreneurs. Such seems to be the logic governing the behaviour of the ILS. But 31/ this logic had the following results by 1971:- (i) Underutilized capacity because of poor management and farmers' rejection of tractor models produced by three out of five firms; (ii) Complete neglect by the majority of producers of the crucial functions: product engineering and planning, and distribution and after sales service; (iii) Lack of resources to expand and diversify tractor output. Behaviour of ILS: 1970-71: Such was the state of the-tractor industry by about 1971. Tractor capacity was underutilized, while imports were substantial (about 40 percent of total supply). The demand for trac- tors, however, was expected to grow to about 90,000 by 1973-74; this was the Ministry of Agriculture's estimate. The solution to this problem was to -30 - licence nine more units and permit six more units (this was the logic of issuing letters of intent) to obtain licences in future if they could finalize their production programs. The potential capacity of the licenced eleven units was raised to 107,000 tractors; while production in 1971-72 was only 23,469 tractors with imports of 14,000 tractors. (See Appendix B - Statement III and IV). The Ministry of Agriculture had the benefit of other demand estimates: estimates of Indian Society of Agricultural Engineers and Tractor Manufac- turers. Both these estimates of demand for 1973-74 were much lower (52,000 and 65,000 respectively) than that of the Ministry of Agriculture. Why did the ILS disregard these estimates? One reason, of course, was that the Ministry of Agriculture was closer to the ILS and, for the ILS, it was probably natural to trust the Ministry's estimate; after all, both were manned by personnel of the administrative service, which had a common outlook and perspective of approaching economic issues. Further, it is quite likely that the ILS may have taken the view that the Ministry was in possession of data relating to registration for tractors - data which were not available to the .outsiders. But these data were in fact crude; in a controlled system, obviously there were multiple registrations - each farmer registering for several tractor models, in the hope of obtaining'whichever was available as early as possible. This obvious fact was disregarded. Further, farmers' demand is a function of tractor prices as well as the nature and terms of credit facilities. These facts, too, were not taken into account. By 1972, the controlled prices of tractors were raised and the credit facilities became scarce in the light of the anti-inflationary stance of monetary and credit policies. The demand for tractors did get affected; - 31 - the new revised demand estimates made in 1972 were nearly 50 percent lower than those made earlier. The question naturally arises: Why did the ILS not set up a sound machinery for making demand projections? Such a maehinery would require a large number of technical experts; after all, the ILS was dealing with a large number of industries and not merely the tractor industry. Besides, such a machinery cannot answer questions without research and research takes time. The decision prpcess cannot wait; its demands were urgent and imediate. But such a machinery could Improve the decision process after the initial gestation lag. However, administrative bureaucracy and poli ticians are not known to take long views; in the long run we are all dead - this Keynesian thought comes naturally to them. The decisive reason, however, is probably different. After all, if experts are to count, there would be less discretionary power of decision- making with the bureaucracy as well as the politicians. Why give up this power? Swaral and the ILS: By 1965 it was known that to suit local con- ditions the farmers required a tractor in the HP range of 20 to 30; such a tractor would mean for the farmers lower capital as well as operating costs. It was because of this reason that Swaraj was developed. By 1970 the Swaraj had passed the TTTS test. In this context one would have expected the ILS to Lssue a licence only to such a firm which could produce the Swaraj. Because of economics of scale in production as well as distribution, the choice should have been in favour of a public sector firm; for the private sector the argu- ment of concentration of economic power would apply. Why did the ILS not -32- suggest such a course of action? Probably, the ILS simply did not know the history of the Swaraj; this information was available elsewhere in the government and there was no com- aunication channel developed for transmission of relevant information to 32/ the ILS.- And this channel did not develop because the ILS criteria of 13/ choice,- its agenda - did not require such information. This type of factor was not on the active decision area of the ILS. It is difficult even for a private firm to modify its agenda - taking account of new decision variables - so how much more difficult would it be for the adminis- trative bureaucracy where persons, before they rise to decision-making posi- tions, are already indoctrinated in the virtues of the pre-existing agenda? Not that the ILS was unaware of the Swaraj; the point is that with the availabe transmission channels this new fact did not become a "coercive fact" - to use William James's expressive term - for the ILS decision-making process. And so it was disregarded. And after all, even the technical ex- perts in the Central Government - the CSIR and the NRDC - were skeptical about the potential of the Swaraj; if they had lack of faith or confidence in indigenous technological competence the bureauracy, with compelling reasons to play safe, had naturally even a greater inferiority complex. The agenda selected by the ILS - concentration of economic power, regional balance and foreign collaboration - were eminently rational if one viewed it in the context of the political process and the bureaucratic politics. Concentration of economic power and regional balance were the political issues raised by the politicians in a federal democracy. Any decision based on them would be acceptable to the political process; for it is only thus that the political process could impinge on decision- making with regard to technical issues. Thus, this agenda suited both the - 33 - ministers as well as the bureaucracy; the latter's power and prestige depended on its acceptance of the demands of the political process. And the risk inherent in this agenda was reduced by issuing licences to estab- lished firms with foreign collaboration. Thus, this agenda also suited the interests of big business - in India as well as abroad. There was another merit also. If technical decisions were to be made predominantly on technical grounds, it would be essential to set up an expert machinery for the purpose. Such a machinery, however, would not be set up because of the reasons mentioned earlier in connection with the demand studies. The agenda has the merit that it does not require such expert,machinery. For dealing with the minor technical issues that the administrative bureaucracy may not understand, it is possible to have a technical bureaucracy under the administrative civil service; this, for obvious reasons, would not attract the right type of talents. Its only advantage is that it can talk the language of the industry as well as of the bureaucracy. But industry would obviously have more expertise than this technical wing; the latter's expertise - whatever it had - would become growingly obsolete. So the technical wing too would accept this agenda. Its technical examination and modification of projects would merely relate to such minor technical changes that can be made, given the con- straints of the agenda. This was precisely' the role of the Directorate 35/ General of Technical Development (DGTD) in the ILS. Hence the DGTD did not raise the basic issues relating to economies of scale or farmers' preferences. After all, the farmers would know what they wanted and industry would supply a product that the farmers would demand. In the tractor case, it did not occur to the ILS that farmers' preferences are determined by history; in a durable commodity like this, -34- they cannot afford to experiment. So they demand such products to which they have got used to. They would not know the quality of the other alter- native products; and quite likely lower priced product - with which they are not familiar - would be regarded as an inferior product. In a sense, this is what happened. Farmers had become used to 35 HP Massey-Ferguson and International Harvester tracters; they were dependable. A cheaper trac- tor in HP range below 30 came to be regarded as an inferior product. It was thus that price.difference between 20 HP and 30 HP tractors was much greater than the cost difference. The changeover by the PTL to a 30 HP trac'or in 1975 was largely because of these reasons; its additional cost was only Ra. 2,000 per tractor, while its additional price advantage was Ra. 4,000 per tractor. Neither the ILS nor the Ministry of Agriculture considered it essential to provide full information to the farmers on the relative merits of the different tractor models. It is pertinent to note that the ILS did not insist on the TTTS test before issuing a licence nor did it insist on good distribution and after sales service set-up - key elements for decision- making if the farmers' interests were to be safeguarded. For some such reasons the ILS did not consider the Swaraj development as a key factor for its licencing policy. But for the CMERI, the PSIDC, M/s. Suri & Associates and the IDBI, the Swaraj tractor would not have seen the light of day; this success, however, is likely to become a "coercive fact" and has the potential of modifying the "agenda" - the decision criteria of the Central Government agencies. Whether this potential would be realised depends on so many complex factors of the socio-political-economic process; one cannot be certain about the direction of change. - 35 - V. Decision-making Process: Some General Observations It seems possible to make some conjectures of general relevance about the problem of public sector decision-making in the developing countries. These conjectures point towards some hypotheses around which it may be possible to formulate a theory of public sector behaviour 1. Socio-economic development is not an isolated process; it is an integral part of the process of nation building. Most of the develop- ing countries acquired political independence only in the post-war period. These countries are struggling to become nation-states - to evolve a con- sensus regarding national aims and objectives so that a community can be built; and they are trying to evolve a method of resolving conflict of wills by peaceful and constitutional means. But this effort at nation building does give rise to a variety of tensions and pressures - a conflict among structural principles of social fabric. These conflicts are aggra- vated in a co---try with a federal democracy and a mixed economy. Anyway, the fact to be recognised is that the two processes - process of nation building and the process of socio-economic development - are interrelated and one affects the other. 2. Such is the context for the decision-making process. Obviously, government cannot be a monolithic structure with a given consistent set of objectives. But this does not Imply that each participant in the decision- making process takes irrational decisions. Given his context, he is rational. If the total outcome of the process appears to an outside expert observer as irrational, the reason is not the irrationality of decision-makers but the analyst's incapacity to understand the problem. Because of the nature of the political-bureaucratic structure, the range of choice with regard to - 36 - objectives has to be - must be - very wide. This range can be narrowed in technical terms if the trade-offs - as the economic jargon puts it - among the given objectives can be settled. But this technical requirement can be in some sense met by developing an appropriate institutional framework for decision making. 3. This choice-range for objectives creates even a wider range of choice for policies and policy instruments (projects) for each decision- making unit. Paradoically, this fact makes it possible for each deci§ion- making unit to make a choice on the basis of a limited agenda - limited information that is readily available to him - and thus delimits his search for relevant information even from the other parts of the government. The policy decisions or choice of projects in the same broad field may appear to be inconsistent - one with another - to an outsider but may still be based on rational considerations from the point of view of each decision- making unit. 4. In a socio-economic process with these choice characteristics, plurality of decision-making units (Project Promoters, ICSCs and financial 39/ institutions) with different agendas seems to be essential. Such plurality makes creative experimentation possible and since the results of such experiments are concrete and easily observable, the information con- tent of the decision-making process would improve and this may tend to narrow the range of choice with regard to both objectives ahd instruments (projects). Thus a learning process based on experience and experimentation can be set in motion. 5. This study suggests that for effective and efficient choices, it may be advisable to evolve an institutional structure, where actual decision - 37 - with regard to projects and policies are made by units, whose growth, development and vitality critically depend on the results of choices made. 6. It is possible -to improve the decision-making process, as this study indicates, by institutionalising certain key functions and thus delimiting the range of purely political decision-making. The institutions that seem to be essential are: Project Promoting agencies, Industrial Development Banks, Technical Consultancy Service Centres (TCSCs), and Technological Research Centres (TRCs); each of these institutions should have an identity and a function, distinct from the administrative bureauc- 40/ racy. 7. Such an institutional structure is essential also for the process of creative adaptation of modern technology; from this point o view, the roles of TCSCs and the FS (Industrial Development Banks) are critical - they provide the effective link between the technological research system 41/ and the production system.- 8. Industrial Licencing System (ILS) is a very blunt policy instru- ment and is bound to lead to arbitrary decisions and corrupt practices; the magnitude and the complexity of the task of licencing are such that no licencing authority, however competent, can handle it effectively and efficiently. What are indeed requirdd are an efficient project evaluation machinery and non-discretionary policy instruments that can promote such industrial development as is consistent with broad development objectives.42/ The project evaluation machinery, to be operationally relevant and effec- tive, should be functionally related with the financing agencies. 9. This study also suggests that implementation and operation of a manufacturing project is likely to be more effective and efficient if its - 38 - top management is vitally associated with the selection and formulation of the project, which it has to administer, than if it is not. 10. The performance of a public enterprise crucially depends on the quality and stability of the top management and its structure. Theselec- tion of top management is the critical decision. The basic functions of the project promoting agencies should relate to (a) the wise selection of top management and (b) evaluation of its overall performance; for the rest, the top management should have a free hand in taking such decisions as are essential for the effective and efficient functioning of the enterprise and for which it should be held responsible. There should be agreement between the project promoting agencies and the top management with regard to the overall performance criteria as well as the structure of rewards and penalties. 11. The advice of outside experts and international agencies can be effective in 'improving' the decision-making process only if it is based on a sound understanding of the socio-economic process in a given country. The international agencies and other experts can make a crucial contri- bution in accelerating the process of change if they helped these coun- tries in evolving a sound institutional structure of the nature indicated earlier. But for this they need to understand the rationality and meaning of this process of change; just to say that it is irrational is not to 44' understand it.- What requires understanding is the Problem; without this, solutions offered are likely to be solutions to non-problems or pseudo-problems, however sophisticated the language in which they are clothed. - 39 - Notes 1/ For the role of the State in economic development, see V.V. Bhatt, Employment And Capital Formation in Underdeveloped Economics, (Bombay, Orient Longmans, 1960), Chapter VI. 2/ On the complexity of the motivation pattern and the decision-making process see: (i) Richard V. Clemence (ed), Essays of J.A. Schum- peter (Cambridge$ Massachusetts: Addison-Wesky Press, 1951), pp. 216-227; (ii) Kenneth J. Arrow, The Limits of Organisation (New York: W.W. Norton & Co., 1974), Chapters 3 & 4; (iii) Janus Kornai, Anti- Equilibrium (London: North-Holland, 1971), Chapters 7, 11 & 13. 3/ John Hicks, Economic Perspectives (Oxford: Clarendon Press, 1977) p. xv. 4/ In this connection, see Martin Rein & Sheldon H. White, 'Can Policy Research Help Policy', The-Public Interest. Number 49 (Fall 1977) pp. 119-136. To quote: "The long-standing problem-solving model is in large part a myth... .According to the problem-solving model, policy making begins with articulated and self-evident problems, about which it is possible to hypothesize different courses of action and develop goals. But there is actually an earlier stage, often quite extended,*during which various indications of stress emerge.... -There are indications that a problem exists, but as yet no one knows. what it is....Problem setting is a form of pattern..recognition; it involves finding or imposing an order or structure on incipient events. It is an integral part of the work of the scientist, perhaps the most crucial part, but it has traditionally been the,least codified aspect of research in the canons of methodology and "normal science". There is, in fact, no orderly atid prescribed way of problem setting." pp. 130-431. See also Karl R. Popper, Conjectures and Refutations (London: Victor Gollanez Ltd. 1964). What Popper says about philosophy is probably true also of social sciences. He says about Philosophy: "Genuine philosophical problems are always rooted in urgent problems outside philosophy, and they die if these roots decay. In their efforts to solve them, philosophers are liable to pursue what looks.like a philosophical method or technique or an unfailing key to philo- sophical success. But no such techniques or methods exist: in phil- osophy methods are unimportant; any method is legitimate if it leads to results capable of being rationally discussed. What matters is not methods or techniques but a sensitivity to problems, and a con- suming passion for them....But there are others who do not feel this urge,. who have no serious or pressing problem but who nevertheless produce exercises in fashionable methods, and for whom philosophy is application.... rather than search. They are luring philosophy into the bog of pseudo-problems and verbal puzzles; either by offer- ing us pseudo-problems for real ones....or by pursuading us to con- centrate upon the endless and pointless task of unmasking what they rightly or wrongly take for pseudo-problems or puzzles....", p.72. The following Nasrudin Mulla story makes the point quite sharply: A man saw Nasrudin searching for something on the ground: "What have you lost, Mulla?", he,asked. "My key", said the Mulla. So the man went down on his knees too, and they both looked for it. After a time, the other man asked: "Where exactly did you drop it?" "In my own house." "Then why are you looking here?" "There is more light here than inside my own house." See, Idries Shah, The Pleasantries of the Incredible Mulla Nasrudin (New York: E.P. Dutton & do.l971). On Management Science, see Peter F. Drucker, Management: Tasks, Responsibilities, Practices (New York: Harper & Row, 1973). Drucker writes: "Throughout the management science - in the literature as well as in the work in progress - the emphasis is on techniques rather than on principles, on mechanics rather than on decisions, on tools rather than on results, and above all, on efficiency of the part rather than on performance of the whole") p. 509. 5/ In this context, see Martin Rein & Sheldon H. White, op. cit. 6/ Arrow, op. cit. Arrow writesV "In classical maximising theory it is implicit that the values of all relevant variables are at all moments under consideration. All variables are therefore agenda of the organi- sation, that is, their values have always to be chosen. On the other hand it is a commonplace of everyday observation and of studies of organisation that the difficulty of arranging that a potential decision variable be recognised as such may be much greater than that of choosing a value for it", 'p. 47. On his major theme, he writes: "The theme to be presented is that the combination'of uncertainty, indivisibility, and capital intensity associated with information channels and their use imply (a) that the actual structure and behaviour of an organisation may depend heavily upon random events, in other words on history, and (b) the very pur- suit of efficiency may lead to rigidity and unresponsiveness to further change", p. 49, 7/ In addition, the author had the benefit of intensive discussions with (a) the members of the project appraisal and supervision teams of the IDBI, (b) Mr. Suri of M/s. Suri & Associates, (c) Mr. Chandra.Mohan, the Managing Director of the PTL and (d) the members of the Ad Hoc Committee of Advisers (ACA) to the IDBI. Of course, the authentic grasp of details and nuances of the project would not have been possible but for the fact that the author happened to be the General Manager of the IDBI, when the decision to finamce the project was taken. 8/ Robert T. Kudrle, Agricultural Tractors: A World Industry Study (Cam- bridge, Massachusetts: Ballinger Publishing Co., 1975), p.3. - 41 - 9/ ibid. pp. 49 to 53. To quote: "It appears that the improvement in farm machinery before World War II, so much admired by Schumpeter, has continued apace with some types of equipment while tractor design virtually stagnated. Once the Ferguson system was completely diffused, however, informed opinion has not been able to point to important areas of design neglect....; the lack of advance is usually assigned to the rather simple nature of the product and the limited number of areas of possible design improvement. Continuing refinement of the hydraulic system has probably been the single most important area of advance", p. 203. 10/ ibid pp. 32-34. 11/ ibid pp. 208. 12/ ibid pp. 4 to 8. 13/ ibid, Chapter 13. To quote: "If the farmer could be made aware by his own organisations of the persistent and substantial discrimina- tion practised against him in the past, it is not unreasonable to assume that he would become at least somewhat annoyed (his Canadian counterparts certainly did!), and the trust which is such a large part of the product differentiation barrier carefully nurtured by the companies over the years would be diminished thereby. A demonstration that fully comparable tractors have been sold for up to two decades in other parts of the world for vastly lower prices than offered to the U.S. farmer should help convince him that a bargain tractor price is something to be carefully considered and not necessarily a sign of inferior design or manufacture". p. 222. 14/ See Inderjit Singh and Richard H. Day, 'Factor Utilization and Sub- stitution in Economic Development: A Green Revolution Case Study', The Journal of Development Studies, Volume II, (April 1975), pp. 155-177. 15/ The capital and -operating cost of a tractor is a function of its horse-power; these costs are lower for tractors in the HP range below 35 than those in the HP range above 35. The horse-power requirement depends on the size of the farm, the cost of animal power and labour, and the characteristics of the soil and terrain. In North America and the U.K., in 1970, only 10 percent of tractbrs sold were units of less than 35 HP, while this proportion was 33 percent in Germany and 23 percent for Italy. In East European countries and Japan, this proportion is even higher than 50 percent. See Robert T. Kudrle, . op. cit., pp. 21-25, 87 and 90. 16/ See G.S. Aurora and Ward Morehouse, 'Dilemma of Technological Choice - The Case of the Small Tractor', Economic and Political Weekly, Volume 7 (Special Number, 1972), pp, 1633-1644. 17/ See A. Besant,C. Raj, Public Enterprise Investment Decisions in India (Bombay: The MacMillan Co. of India, 1977), pp. 115-117. -42- 18/ For the evolving role and functions of the IDBI, see (i) Annual Report of the Industrial Development Bank'of India, 1970-71 and 1971-72 (Bombay, August 1971 and August 1972); V.V. Bhatt, 'Industrial Development Bank of India (IDBI): Recent Evolution of its Role and Functions', PRAJNAN, Volume 1, Number 3 (July-September 1972). The IDBI was one of the few development banks which had adopted social benteit-cost criteria for-pro- ject appraisal. Its exchange rate criterion was a simplified version of the Bruno domestic resource cost criterion. See Michael Bruno, 'The Optimal Selection of Export Promoting and Import Substituting Projects' in the United Nations publication - Planning the External Sector: Techniques _P.roblems and_- Policies, NewYork,19 5'. *At that -time theTDBI was not 'aware of the much more refined technique evolved by Little and Mirrlees in their OECD publica- t-ion-(1968}>.-See-also---I-.D.-Littl-e- and-bJYA-. Mirrlees, Proj-ect Appraisal and Planning, (London: Heinemann: 1974). It is now developing the expertise and information system suited for the adoption of the Little-Mirrlees criterl.a. - 19/ For a brief outline of the PTL Swaraj tractor project, see Appendix A. 20/ For details regarding manufacturing firms, capacity output, actual production, tractor prices, and the industrial licences, see Appendix B - Statement III. 21/ For the various demand estimates, see Appendix a- - Statement IV.. 22/ For the performance indicators of the PTL, see Appendix A and Appendix B - Statements I and II. 23/ The U.S. farmers seem to have behaved in a similar fashion; see Kudrle, op. cit., Chapter. 13,. 24/ In addition, the PTL have initiated research, in collaboration with the Punjab Agricultural University, Ludhiana, on the development of a tractor- drawn paddy transplanter capable of handling six rows of paddy seeding at a time - that is, it could cover four acres of transplanting a day. Field trials of the proto-type transplanter are completed. 25/ World Bank, Survey of Tractor Manufacturing Industry: India (Washington: Mimeographed, May 16, 1973), p. 23. 26/ On economic sociology, see Joseph A. Schumpeter, History of Economic Analysis (London: Oxford University Press, 1954). Schumpeter writes: "To use a - felicitous phrase: economic analysis deals with the questions how people behave at any time and what the economic effects are which they produce by so behaving; economic sociology deals with the question how they come to behave as they do." p. 21. 27/ On the role of the ICSC and the FS in technology policy, see V.V. Bhatt, 'On Technology Policy and Its Institutional Frame', World Development, Volume 3, No. 9 (September 1975), pp. 651-663. 28/ See Appendix B - Statements III and IV with regard to industrial licences. 29/ See Inderjit Singh and Richard H. Day, op. cit. -43- 30/ Government of India, Ministry of Information and Broadcasting, Toward Prosperity Through Public Sector: Public Sector for Public Good (Delhi, 1971); see also A. Besant, C. Raj, Public Enterprise Investment Decisions in India (Bombay, MacMillan, 1977), pp. 109-111. 31/ See Appendix B - Statement III. 32/ See in this connection Raj, op. cit. for an illuminating case study with regard to the Manual of Feasibility Studies. To quote: .... the major guidelines for capital budgeting decisions of public enterprises are contained in a Manual of Feasibility ,Studies prepared in 1966 by the Committee on Plan Projects of the Planning Commission..." "The Manual was issued in 1966 and we conducted our interviews in 1970 and 1971. We expected that most of the senior executives of the public enterprises, particularly the senior financial executives, would be very familiar with this Manual. To our great surprise, we realised that many of them had not even heard of the existence of such a Manual. As a means of cross-checking, we often referred to this Manual while conducting program- mes on management for senior executives from the public enterprises. Except for a few, on the whole, many of these executives were not aware of this Manual. Responses received to the questionnaire mailed to enterprises were most often categorical that no Manual or guidelines existed for capital budgeting decisions. Due to this consistent response, we decided to raise this issue in the interview we had with the Unit of the Planning Commission which was responsible for the preparation and circulation of the Manual. We were told that more than 1,500 copies of this Manual had been released for use by the various public enterprises. We can only conclude that while a large number of copies of this Manual have been prepared and released by the Committee on Plan Projects of the Planning Commission, neither the existence of this Manual nor its contents are known at this level of execu- tives in the public enterprises. It is likely that the copies of the Manual sent by the Committee on Plan Projects have remained mainly at the level of the administrative ministries and Chairmen/Managing Directors of these enter- prises." "....However, the initiative and active interest of only one of the members of the Planning Commission was responsible for the birth of the Manual. Since this particular member of the Planning Commission had a strained relationship with other senior Secretaries of the administrative ministries, and the Finance Ministry, it became necessary to persuade the Deputy Prime Minister, who also happened to be the Minister of Finance, to issue that letter. Here is an instance of personality conflict among the top officials of the Government, which blocks the effective use of a system conceived for the purpose of improving capital budgeting practices and pro- cedures by the administrative ministries. This also demonstrates the re- sistance of the sub-units of a large organization even to use a control system, designed and developed by another sub-unit of the total system." pp. 183-184. 33/ See Arrow, op. cit. 34/ ibid. -44- 35/ See Raj, op. cit., on the DGTD. To quote: "The Directorate General of Technical Development, which is a part of the Ministry of Industrial Develop- ment, is conceived as a body to provide expert advice with regard to indus- trial development to administrative ministries concerned...." "One would expect that such an important organisation entrusted with the planning, coordination and control of industrial projects in the country would be staffed with the best technical talent available within the country. But, as a matter of fact, the study team of the ARC on personnel administra- tion found that most of the eleven Industrial Advisers and the eighty Develop- ment Officers of this organisation, either in terms of their education or experience, were not competent to provide technical consultancy services of the highest order to the Government.", pp. 85-87. 36/ The U.S. experience is similar. See Kudrle, op. cit., Chapter 13. 37/ V.V. Bhatt, 'Perspectives on External Assistance', Economic and Political Weekly, Annual Number (February 1967). 38/ See Joseph A. Schumpeter, Capitalism, Socialism and Democracy (New York: Harper & Row, Third Edition, 1975). To quote: "It is not a question of rationality versus irrationality....It is the kind and scope of rationality that makes the difference." p. 196. Again, "Rationality of thought and rationality of action are two dif- ferent things. Rationality of thought does not always guarantee rationality of action. And the-latter may be present without any conscious-deliberation and irrespective of any ability to formulate the rationale of one's action correctly. The observer, particularly the observer who uses interview and questionnaire methods, often overlooks this and hence acquires an exaggerated idea of the importance of irrationality in behaviour." p. 259. 39/ See P.D. Henderson, 'Two British Errors: Their Probable Size and Some Possible Lessons', Oxford Economic Papers, Vol. 29, Number 2 (July 1977). 40/ See Schumpeter, Capitalism, Socialism and Democracy, op. cit. To quote: "The second condition for the success of democracy is that the effective range of political decision should not be extended too far....Democracy does not require that every function of the State be subject to its politi- cal method ....Thus, almost any type of human affairs may conceivably be made to enter the sphere of the State without becoming part of the material of the competitive struggle for political leadership beyond what is implied in pass- ing the measure that grants the power and sets up the agency to weild it and the contact that is implied in the government's role of general supervisor." pp. 291-293. See also John Hicks, op. cit. What Hicks says about the function of a government bank as a monetary regulator also applies to other fields we are discussing. To quote: "This, perhaps, is a dream; I do not claim to be a judge of political possibilities. But I am not afraid to draw the moral, which emerges rather clearly from the line of thought I have tried to follow out, that the issue with which we have been concerned is political - even constitutional - as well as economic. There is the technical economic -45- problem of the Instrument; but it is tied up with the political problem of how to secure that it is used decisively. This is a problem which Keynesian economics, so it seems to me, has refused to face; while the monetarists, who have seen it, have not faced the political implications. For myself, I would face it. I think we should say that monetary regula- tion is a major function of Government; but we should emphasise that if it is to be exercised decisively, it needs to be separated, in what is in fact the constitutional sense, from other fun-tions. We need to remember the ancient doctrine of the Separation of Powers. The judicial function, in well-ordered States, is recognised to be a function of Government, but a function that is better separated. So it is with the monetary function." pp. 132-133. And so it is, we may add, with the function of promoting and manag- ing industrial enterprises. See also in connection with the role of the institutional structure and the National Development Bank, V.V. Bhatt, Structure of Financial Institutions, (Vora & Co., Bombay 1972). 41/ See V.V. Bhatt, 'On Technology Policy and Its Institutional Frame', op. cit. See also V.V. Bhatt, 'Development Banking: Top Management Tasks and Structure', World Development, Volume 4, Number 6 (1976), pp. 519-527. 42/ See in this connection B.S. Minhas, 'Design of Economic Policy and the Phenomenon of Corruption: Some Suggestions for Economic Reform', Journal of Social and Economic Studies, (Vol. III, No.2, September 1975); pp. 271-96. 43/ On the importance of the prestige motive and real incomes essential for efficient functioning of the top management see Schumpeter, Capitalism, Socialism and Democracy, op. cit., pp. 207-209. To quote: "We had better recognize from the start that exclusive reliance on a purely altruistic sense of duty is as unrealistic as would be a wholesale denial of its importance and its possibilities. Even if full allowance be made for the various elements that are cognate to sense of duty, such as the satisfac- tion derived from working and directing, some system of rewards at least in the form of social recognition and prestige would presumably prove advantageous... .the prestige motive, more than any other, can be molded by simple reconditioning: successful performers,may conceivably be satisfied nearly as well with the privilege - if granted with judicious economy - of being allowed to stick a penny stamp on their trousers as they are by receiving a million a year....Why-not? Trotsky himself accepted the Order of the Red Flag....Just as race horses and prize bulls are the grateful recipients of attentions which it would be neither rational nor possible to bestow on every horse and bull, so the supernormal human performer has to be accorded preferential treatment if the rules of economic rationality are to prevail... .Many incomes high enough to evoke adverse comment do not give their receivers more than the conditions of life and work - distance and freedom from minor worries 'included - that are sufficient to keep them fit for the kind of thing they are doing....These devices... .have been. greatly developed in Russia. Essentially they amount to a combination of payments in kind with a liberal provision in money for what are supposed to be expenses of the proper discharging of certain duties." (pp. 207-209). - 46 - 44/ See Martin Rein & Sheldon H. White, op. cit. To tho problem of public sector decision making, some simple panaceas are being advocated by economists of the neo-classical tra- dition as well as the Marxian tradition. The former recommend the abolition of the public sector and the latter, the abolition of the private sector. These panaceas, of course, emerge from the Scriptures and not from the understanding of historical processes of socio-economic change. It does not occur to these interpreters of the Scriptures that there is a problem which needs to be understood: What is the logic and dynamics of the situation that has created mixed economics and, in par- ticular, are responsible for the expanding role of the public sector in the field of industrial development. Of course, to examine this problem requires much more thinking than to churn out solutions to irrelevant problems on the basis of equally irrelevant econometric or theoretical models. APPENDIX - A Broad Outline of the Swaral Tractor ProJ ect - March 1972 1. Promoters: Punjab State Industrial Development Corpora- tion Ltd. (PSIDC), a wholly owned undertaking of the Punjab Government. Had successfully implemented six medium-size projects. Have formed a new company - Punjab Tractors Ltd. (PTL) for undertaking the Swaraj tractor pro- ject in June 1970. 2. Top Management of the PTL: Managing Director - Mr. Chandra Mohan - aged 39 - a qualified mechanical engineer with 17 years experience in production engineering, management of large works, and research, design and development of a wide variety of engineering products. Was assistant director of CHERI till May 1970, where under Mr. Suri's direction he along with a team of four engine- ers of CHERI developed the Swaraj tractor. All five of them are now with 1TL on deputation from CMERI. 3. Project: (a) Product: Swaraj tractor - based on know- how developed at CERI and intensively tested under widely different field conditions over a period of 6 years. Has passed the test of the Tractor Testing and Training Station (TTTS). (b) Capacity: 5,000 tractors per annum on two shift basis - Production to start in April 1974 ! Full capacity output by April 1978. Construction time - 105 weeks - from March 1972 to March 1974. (c) Raw Materials and Components: Steel 1heets, plates and bars, alloy steel bars and semi- processed items such as forgings and castings for manufacture of about 70 types of components. The remaining 780 types of components to be pro= cured from ancillary industries. (d) Land: 23.2 acres of land acquired in Mohali Focal Point Industrial Estate near Chandigarh. (e) Power: Supply of 1650 kw assured by the Punjab State Electricity Board. (f) Water: Supply assured from the Central Water Supply Scheme of the Industrial Estate. -2- APPENDIX A (g) Foreign Collaboration: None. (h) Technical Know-how: Provided by the National Research Development Corporation of India (NRDC) based on the indigenous know-how and technology developed by the Central Mechanical Engineering Research Institute (CMERI). (i) Technical Consultants: M/s. M.M. Suri & Associates (P) Ltd. - company started by Mr. M.M. Suri, well-known for his inven- tion of the 'Suri Transmission' in diesel locomotives. Was director of CMERI till 1968 end and was the moving spirit behind the technological research that developed the Svaraj tractor design. 4. Project Cost: Rupees Million 1. Land 1.162 ii. Buildings 2.252 iii. Plant & Machinery 18.617 - of which foreign exchange cost of 3.191.. iv. Technical Know-how 2.073 v. Miscellaneous Assets 0.781 vi. Pre-operative Expenses 5.050 vii. Prellminary Expenses 0.480 viii. Contingencies-Provision 2.300 ix. Margin for Working Capital 4.287 Total 37.002 5. Means of Financing: Term Equity Loan Total 1. Promoter 4.500 4.500 2. Industrial Development Bank 4.500 7.082 11.582 3. Other Einancial In- stitutions 5.000 15.918 20.918 Total 14.000 23.000 37.000 -.3- APPENDIX A 6. Market: Present production of tractors is less than the demand and about 40 -percent of demand is met by Imports - particularly of tractors in HP range of 25 & below. None"of the present manufacturers produces tractors of less than 26 HP. 7. Financial Viability: 1974-75 1975-76 1976-77. 1977-78 1. Output (Number) 1,600 3,500 4,500 5,000 2. Net Operating Profit (Rupees Million)-3.656 -0.320 1.761 2.702 3. Operating Profit to Sales Ratio (Percent) - - 2.2 3.1 8. Economic Viability: 1. Internal Rate of Return 13% 2. Exchange Rate of the Project or Domestic Resource Cost of one U.S. dollar saved. Rs. 9.50 Source: Industrial Development Bank of India. Based on IDBI Memorandum to its Board. APPENDIX B Statement - I Swaraj Tractor: Performance Indicators Expected Actual 1. Capital Cost (Rupees Million)+ 37.002 35.916 2. Gestation Lag 105 weeks 105 weeks (March 1972 to (March 1972 to March 1974) March 1974) 3. Output/Sales of 1974-75 1,600 991 Tractors 1975-76 3,500 2,242 (Number) 1976-77 ,200 3,800 1977-78 4>5001 5,000 4. Operating Profit 1974-75 -3.656 -8.824 (Rupees Million) 1975-76 -0.320 +0.635 1976-77 1.761 +2.300* 1977-78 2.702 +3.500* Source: Industrial Development Bank of Indla. *Estimated + For cost-composition, see Table II. .. 1. . ..... . APPENDIX B Statement - II SwaraJ Tractor: Project Cost Expected Actual (March 1972) (April 1974) (Rs. Million) 1. Land 1.162 0.985 2. Buildings 2.252 3.435 3. Plant and Machinery (a) Imported 3.191 3.135 (b) Indigenous 15.426 13.457 4. Technical Know-how 2.073 1.640 5. Miscellaneous Assets 0.781 2.337 6. Preliminary Expenses 0.480 0.583 7. ~re-operative Expenses 5.050 5.187 8. Provision for Contingencies 2.300 9. Margin for Working Capital . 4.287 5.157 Total 37.002 35.916 Source: Industrial Development Bank of India. .: .,�. ;У �� ; ,.�-.- .. ,. . 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(a) 1968 Estimate: 25,000 45,000 20,000 90,000 (b) 1972 Revised Estimate: - - - 40,000 3. Leading Tractor Manufacturers: Est:Lmate-- 1968 10,000 40,000 15,000 65,000 Revised Estimate: 1972 - - - 36,000 4. Indian Society of Agricu Engineers: EstImate: 1968 52,000 5. Actual Demand 971-72 (a) Production 1,301 22,168 23,469 (b) Imports 10,000 4,000 14,000 . . ...................... Total 11,301 26,168 37,469 Souree: Indastrial Development Bank of India APPENDIX C ACA Project Promoters Confrontation Q. Farmers preferred a 30 HP engine, while the project had provided for a 20 HP engine. A. 20 HP engine is cheaper and more suited to the conditions of small to medium holdings. Further, the Swaraj-20, in actual field trials, hadper- formed better than the other indigenous 30 HP tractors and even better than most of the imported tractors in 20-25 HP range in regard to draw-bar pull and ratio of the dray-bar HP to the power available at the PTO - which are of primary concern to the cultivators. Q. Farmers did not like air-cooled engines and hence one of the domestic manufacturers is to change over to water-cooled ones. A. We conducted a field survey in Punjab on this issue. The farmers do indeed prefer the air-cooled system. Thermodynamically, the air-cooled system is superior and the CMERI had completely redesigned the cooling system of the air-cooled engine for the Swaraj; in actual field tests at the TTTS, it was found that this engine was over-cooled to some extent. Q. In view of the low capital investment per tractor of the PTL - lower by about Rs. 2,000 than that of the other producers - the PTL can reduce production costs further by manufacturing its own engine. A. Since there is underutilisation of capacity in the diesel engine industry, it does not seem advisable to add to capacity in this branch. Further, this would require additional investment and cause delay in project implementation. If our experiment succeeds, we propose to manu- facture the engine at a later stage and tbe Kirloskers have already given an undertaking to the Central Government to transfer the complete know-how for the manufacture of the Ra-2 engine to the PTL if the latter decided to * manufacture it. Q. It is not normal for a tractor manufacturer to produce its own requtre- ments of jigs, fixtures and tools (JFTs). A. Unlike other domestic producers with foreign collaborations, the JFTs required by PTL are not readily available. To develop a reliable source of quality JFTs in India far in advance of the commencement of trial pro- duction is difficult. Further, the cost of such JFTs woufd be nearly three times what would cost the PTL to manufacture them. The tool room is in fact a nucleus for R and D work; no other domestic producer has such R and D facilities. Q. The Swaraj manufacturing program envisages procurement of more than 80 percent of components and materials from domestic sources; there is no import content. This would require a sound machinery for materials plan- ning and procurement, together with quality control of bought out com- ponents from ancillaries. This purchase from outside sources may lead to higher than expected costs and adversely affect delivery schedules as has happened in the case of the other mahufacturers. The PTL should have more than one source of supply of components. A. This is a valid point. We are trying to develop alternative sources of supply and even provide technical'assistance to new entrepreneurs seek- ing to start such ancillaries. Besides, we would have adequate machinery to ensure strict standards of quality control at each procurement, manu- facturing and assembly stage. Q. By 1973-74, the domestic production of tractors is likely to be about 40,000 tractors, while the demand may'be of the order of 50,000. Thus there would be adequate demand for Swaraj. Further, Swaraj with its automatic hydraulic depth-cum-draft control (only Massey-Ferguson has similar hydraulics) and its superior product characteristics should be preferred by the farmers to other models. However, the industrial licen- ces already issued by the government would raise the number of producers from six to fifteen and production capacity from 40,000 to 123,000 if the new licenced units do start manufacturing..2 The demand, however, is unlikely to be higher than 50,000 even by 1978-79, while licence.s were * issued in 1971 on the basis of a demand estimate of 90,000 tractors in 1973-74..Ll/ With such relatively small-sized producers (only six of them may eventually have a capacity of more than 10,000 units) and prolifera- tion of models based on foreign collaboration, the market would become highly competitive and unfortunately it would not be possible for any producer to lower its production costs with the unit size as fixed by the licencing authorities. Swaraj then would have to evolve a sound dis- tribution and service machinery in order to compete effectively with the other producers. But even then, its returns are not likely to be adequate - what with its small size - 5,000 units - and government price control. A. We do not envisage any problem in marketing. We are to have an effici- lent dealer network with staff trained by the PTL to provide after-sales service and spare parts. In addition, we will have our own regional centres. Further, the field tests carried out on Swaraj in 1970 have created a good impression on the Punjab farmers. Because of its better product features and its superiority in field performance with more tilling potential at less fuel consumption in the 20-30 HP range, we are unlikely to face a marketing problem. Q. The sale of tractors depends crucially on the availability of credit facilities to the farmers. Under the proposed World Bank scheme, the banks would be able to finance tractor-purchase by farmers as they would get re- imbursement from the World Bank line of credit. We do not know whether Swaraj is included in this scheme. A. The World Bank team did not visit us, nor has it tried to inquire into the evolution of the Swaraj tractor. With the prejudice against indigenous research and technology at the Central Government level and also in the World Bank, it is unlikely that the Swaraj would be included in the World Bank scheme. However, we would try to persuade the Indian banks with the assistance of the IDBI to provide the required credit facilities. But this would certainly be a problem to be faced. Q. The construction-implementation schedule appears to be rather tight without much flexibility; it may not be possible for the PTL to complete the project by March end, 1974 - that is within 105 weeks after the sanc- tion of financial assistance (March, 1972) - as the PTL proposes to put up its own tool room to manufacture all the toolings required. A. In fact this project has matured over a period of years - since 1965, when the design work on the new tractor was undertaken - and we have formu- lated it with great care. Further, we are using the "Precedence Network" technique for the first time in India, which is an improvement over the conventional PERT/CPM and we are to review its network on a computer. We propose to adopt Open-web Portal Frame Steel Structures for construction - this concept is being introduced in India for the first time - and this will result in speedy erection and substantial economy in structural costs by as much as 30 percent. We are confident that if financial arrangements are completed by March 1972, we would be able to commence production from April 1974. APPENDIX D Comments by Chandra Mohan (Managing Director of the PTL) CERTAIN-BASIC ISSUES Role of Punjab Government/PSIDC It is not very correct to say that Punjab Government went into the Swaraj project with any enthusiasm. The enthusiasm was basically confined to a few individuals. It was these individuals who after detailed discussions with me (at Durgapur) and Mr. M.M. Suri got convinced that the project had a large basic strength. These individuals virtually overstretched themselves into committing the PSIDC into the project. The moment the project came up for specific consideration in the government, serious reservations were expressed both at the political and secretarial levels. These reservations were perhaps also natural; after all the technology had been discarded by the Govt. of India itself and the commitments of the Central Govt. to Indian technology were supposedly far larger than those of the State Govt., risk taking capabilities of the Centre were also larger. In this background the major task for me and the Swaraj supporters was to convince the government step by step to radically alter its thinking. Inviting G.S. Atwal & Co. to join PTL was a part of the strategy to convince the government of the soundness of the project. This did have the desired effect and the Punjab Govt. did at least take the decision that if PTL could raise the resources from the Financial Institutions (Rs.30 million plus) Punjab Govt. would not mind risk- ing its Rs.3 million equity. The situation got seriously complicated when IDBI took the decision that G.S. Atwal & Co. had to be dropped and PSIDC equity raised to Rs.4.5 million. It took nearly one year of hard pursuit to make the Punjab Govt. take this decision. If I may'add, Swaraj/PTL did not come up because of any Institutional support, whether in the Centre or in the State. It survived purely because of certain individuals, who developed strong convictions for the project and the dedicated manner in which the team had inched its way through every hurdle from the beginnings in 1965. Fortunately for the project, these individuals did occupy key positions in the relevant decision making process at every crucial time. Fortunately again these individuals could be approached and convinced by Mr. M.M. Suri and myself. If I were to look back over the 12 years of the project history the number of such individuals would barely exceed a dozen. But this dozen made all the difference. Now that the project has established itself in every facet, there is all out support both from the State and Central Govts. You would appreciate the reasons for which the Financial Institutions were kept in the dark of all these local problems. You would agree with me that had the Financial Institutions known, financial clearances would have become almost impossible. Despite all our meticulour pur- suit and the speed at which all information was furnished, Institutional clearances did take a good part of 18 months (if one were to consider the Pre-feasibility Report also). Even from the submission of the formal DPR in-March '71, the last Institutional clearance came only in June '72. DETAILS Is Tractor a simple technology? Comparing a car with a tractor at equal levels of sophistication, if I may say so, the tractor is more complicated. In addition to the engine and transmission, a tractor has hydraulics for implement control which is not there in a car. The number of parts are also not far different. The only major complication in a car is brought about by the sheet-metal body which is more complicated because of passenger comfort rather than basic utility. The abuse to which a tractor is subject to when compared to a car, also makes design still more difficult. I would therefore say that technology of a tractor is not as simple as the report makes it out to be. Economies of Scale This aspect also came up for discussions in a recent meeting convened by UNIDO in Vienna for evolving an approach to the transfer of tech- nology for agricultural machinery to the developing countries. First and foremost, cost of production is related to design and the methods by which any particular design can be manufactured. Economies of scale can only be related tbethe scale of production for any par- ticular design and not when different designs are under consideration. Specific examples which I may mention are: 1. Sheet-metal (fenders, bonnet etc.) of tractors all over the world and more particularly from the developed countries, is so designed that it requires minimum tooling investments of Rs.5.0 million and plant investments of Rs.10 million. Designs have been developed basically to save labour. On the other hand Swaraj sheet metal requires a tooling investment of not more than Rs.10,000 and it is being made in 3 small-scale units with investments of around Rs. 100,000 each. 2. The casting wall thickness for tractors in the developed countries have been so reduced over the years to save material costs that they can only be produced in foundries with investments larger than Rs.100 million. On the other hand Swaraj castings developed specifically for technology levels readily available in India are being made in foundries with capital investments as low as Rs.500,000. I am citing these examples just to illustrate the point. Our pro- duction costs with these designs are decidedly lower even at low production volumes. I also agree that our own costs would come down, if production levels were raised. It will not be correct to compare the interse economies of the scale of production of different designs, again amply proven in India. A very crucial contribution of indigenous :technology is the in-depth flexibility which it provides to the design group to adopt/innovate to bring down the costs keeping local conditions in view. This flexi- bility is further increased by their in-depth knowledge of the pro- duction processes. We have in our own case changed designs of compon- ents to cut down capital investments any number of times. Complimentarity of the production group has also shown immense flexibility in selection of machines and stretching them to the limits of their capabilities to conserve capital, a scarce commodity in a developing country. We are perhaps the only unit in the world wherein special purpose machines, which are normally tooled up for the production of one or two components, have been stretched out to handle 4 to 5 components. Our utilisation of these very expensive SPMs from the very first day has been near 100%, while all the others will not achieve 100% utilisation till they achieve the production levels of 15,000 plus. On the other hand, our SPMs had 100% utilisation at production leVels of 4000 and as we proceed further to higher production levels, we will keep on adding SPMs. Capital invest- ments for us will always be made as market demands higher production levels. Customer Preference and Education It would perhaps surprise you that customer preference for brand names etc. perhaps only exists in the mind of the educated elite. Swaraj, with no established brand name whatsoever, found customer acceptance from the very first day in a market with 10 other well known international names. It did require intensive marketing, but resistance was no way near what the elite had always broadcast. Farmer preference was solely dictated by performance, reliability, servicing and spare parts. We also did have some technical problems at Swaraj introduction. With the in-depth know- ledge of our R&D , these technical problems were soon overcome. This constant improvement coupled with aggressive marketing had made Swaraj a positive customer preference today. I do not really k4ow whether govern- ment can help in customer education. To my mind assignment of the role of customer education to government is hardly feasible in a democracy. Modest Investments PTL investments were kept modest from two considerations: 1. It was even difficult to raise the modest investment of Rs.37 million. This itself required intense effort of 3 years, and there were many moments when things looked totally dead. 2. In the detailed analysis of various tractor projects set up in India, it had clearly emerged that reaching productional levels of 5000 is '1 iv at least a 2 to 3 years exercise; so why incur interest charges on the investments for higher productional levels? Higher productional levels and investments could always follow in expansions. Air-cooled engine We did eventually decide to switch to a water-cooled engine, despite proven technological advantages of air-cooled engines. A casual remark of a very senior Punjab government official made us take this decision: "As it is you are trying to makket an unknown tractor based on Indian know-how; why open a second front by introducing an air-cooled engine with which our farmers hate had bitter experience on some tractors earlier. One front at a time is better strategy." Deeper thinking did convince me of its irrefutable logic. Tool Room The biggest strengths which have enabled PTL to weather the dark periods have been: 1. R&D 2. Tool design and Industrial Engineering 3. Tool-making facilities. It was these three strengths which made us switch over to the 35 HP fast. We are soon coming out with a small Economy Tractor for the small farmers of the country. R4D on this tractor was started in January 1976 and we should be introducing it commercially before March 1978. 27 months for design, proto-type manufacture, proto-type proving, tooling up and com- mercial manufacture would stand out as shining performance anywhere in the world. To achieve this time-schedule we resorted to considerable over-lapping of all activities, obviously at a certain risk, but this again was a managerial decision. We would have easily met our time- schedule of 24 months but for an unfortunate labour strike earlier this year. WORLD BANK World Bank became relevant only in 1974, '75 & '76 when a large number of tractors were made available to our farmers at concessional credit under specific World Bank schemes. Despite the best of effort at in- clusion in these schemes, we failed in getting the Swaraj included. This did hurt us hard, as 12,000 trac!tors became eligible for this concessional credit in Punjab and Haryana alone. 95% of tractor sales in India are against credit from Commercial Land Mortgage Banks. We have been eligible for this finance on the same terms as other tractors. It has taken quite some time to get included in the approved lists of various banks, but then we have got it finally with intensive follow up, though slowly. Swaraj today is on the approved list of all the financing agencies in India. v An ironic fact worth mentioning is that Swaraj secured World Bank approval in Afghanistan at its very first international entry early this year an approval denied in our own country. Swaraj Production Our actual production in 1976-77 (July-June) was 3200. But for the strike it would have been 3800. This year again because of the strike and its aftermath we may not cross 4500. Our 1977 Report is enclosed for any detailed information. Excise-Duty Relief Excise Support was a two year battle. It was not at all easy to con- vince the government to take this decision without precedent. Here again the support of a few individuals alone finally swung the course. Credit Financing of Tractor Sales and ARDC ARDC refinances all Commercial Banks/Land Mortgage Banks for tractor sales. When we lost the fight for inclusion in the World Bank Schemes, we were given an assurance by the Finance Ministry that ARDC would come up for special schemes for financing Swaraj tractors, to give us at least an equal chance to fight. Here again we failed, ARDC's stock answerTbeing how could they single out a specific tractor without in- viting public criticism; they could only develop general schemes for tractorisation and it was for us to capture whatever market share we could. Since the fight was becoming prolonged, we ultimately gave up this line, even though some commercial banks were keenly interested in promoting Swaraj. Gold Shield I really do not know if the award of Gold Shield to PTL was a reflec- tion of any changing attitudes or emphasis of the government on self reliance. This was purely a decision of the Award Committee, PTL's contribution to import substitution being far too outstanding to be over-looked. PTL's contribution to the total production based on Indian know-how last year was 33%. How could such contribution be overlooked? Its significance to changigg attitudes towards Indian technology in general, however, is totally different. Technological Competence in various Institutions Knowing what various institutions are in depth, I really do not know if technological capability is the strong point of aiy. The biggest failing in any developing country is perhaps technological capabili- ties or for that matter capability to even appreciate a technology and its relative merits. Decisions are by and large based on con- vincing salesmanship etc. This inference would perhaps be further strengthened by the fact that even in 1977, the Government of India is seriously considering setting up another tractor plant with British Leyland collaboration. This vi Rs.180 million project would involve lumpsum payment-'for technical know-how of Rs.7.5 million, royalties, etc. Such a decision would indeed be ironic, but then every reason is being found to clear this project. Can we really say that the PTL example has made any differ- ence to national thinking and decision making? Small Scale Industry It would perhaps be of interest to note that with intensive effort over the last 3 years, we have been able to develop more than 100 small scale ancilliary suppliers around us, 70 w*thin a radius of 10 Kms. Their average supplies to us last year were Rs.100,000 and their average employment is 12. There is hardly any of these units wherein investment exceeds Rs.200,000, in most it is below Rs.50,000. In the national perspective of developing small industry and new entrepreneurial talent in modern technology, this is perhaps no small contribution of PTL. Selection of Technology Group The actual position was in fact the reverse. It was the team and the consultants which sold the project to the PSIDC and later on forced them through determination and strategy to go ahead with the project. Role of the Planning Commission Here again, if I look back, it was not the Planning Commission which assigned the task to CMERI. It was virtually Mr. Suri who forced the Indian approach on the Planning Commission. With his salesmanship the Planning Commission had no option but to nod yes. Industrial Licensing Policies It has been generally seen in India that licences should be given for capacities way beyond demand projections. This stems from the fact that no detailed assessment is really made of the technological/ managerial capabilities of the prospecting parties. Drop-outs are large. This has been amply illustrated in tractors where the follow- ing firms given licences in 1971-72 dropped out: 1. United Auto Tractors (Romanian collaboration) 2. Steyr Tractors (Austrian collaboration) .3. Byford Tractors (Japanese coliaboration) 4. Perfect Tractors (West German collaboration) The interest of-the promoters primarily lay in selling imported tractors/CKD packs to capitalise on the market boom of 1970-71. ILS Criteria - Financial Viability ILS is not bothered about financial viability. This is purely left to the promoters and their financiers. Your experience at the IDBI would perhaps corroborate. vii ILS Logic - Crucial Function Neglect of such crucial functions is perhaps inevitable in a seller's market anywhere in the world. With the changing situation of the Indian market in the last 3 years when it has turned completely buyer's all manufacturers are devoting attention to these functions. Indian Society of Industrial Engineers The correct name is Indian Society of Agricultural Engineers. Tractor manufacturers had developed separate demand projections. Manufacturers have no regular association as such. Demand Projections Having been involved with tractors for a fair length of time, I feel that it is almost impossible to develop any realistic long-term demand projections in a country like India where economic policies change most frequently. Food prices, bank credit, extension of irrigation, etc., etc. are a large number of variables for tractor demand. Even when the government commissioned NCAER 4 years ago to develop realistic demand estimates, projections went astray. In any case, projections were qualified by a whole host of 'ifs'. Are such projections of any use? Swaraj and the ILS At the point of time when Swaraj designs was initiated at CMERI I had analysed that considering the immense popularity of the Massey Ferguson, Swaraj must be fully competitive with MF, if not better. Now that we have been in the tractor market for some time add know the tractor market better, we are coming out (as mentioned earlier) with the smaller Economy Tractor. Presently farmer response to the Economy appears overwhelming. Here again, the final proof of the pudding will only lie in its eating. We are approaching the production programme with cautious optimism. According to a global survey conducted by UNIDO 3 years ago the demand for such a tractor in the developing countries would be of the order of 100,000 by 1980. Will it really materialise will only be evident once the tractor is launched commercially. As far as I am aware our ap-- proach is original and the Swaraj Economy will be the cheapest tractor in the international free market for equivalent performance. After some field experience at home, we hope to make an international launch by the beginning of 1979. ILS and the Swaraj History The ILS was completely aware of the Swaraj history because of the fight for more than 5 years with the government. It was purely a question of a total lack of faith in Indian Engineering capabilities. This was even evidenced by the fact that conversion of our Letter of Intent into a Licence took more than two years and any number of doubts had to be cleared. The decision finally swung around in favour of Swaraj again because of one or two individuals. viii Pricing and Customer Preference I don't think low prices have been taken by the farmers as indicative of inferior performance. The tremendous market which these super cheap Russian tractors enjoyed from 1960 to 1973 and the Eicher in the last 3 years are a striking proof of this inference. SwaraJ Success - a coercive fact As mentioned earlier actual experience does not substantiate this hope. I*