Social capital can help close a wide MSME gap
In his inaugural address to the first Industrial Conference in Pune in 1890, Mahadev Govind Ranade noted that “the industry of the country is parched up for want of Capital" because after land revenue, a considerable portion of gross savings was used to hoard bullion. The lack of institutional arrangements for industrial finance meant that capital was locked up in unproductive assets and not available to India’s entrepreneurs. A century later, the German economic historian Dietmar Rothermund came to a similar conclusion.
Lacking financial institutions, Indian surpluses in the second half of the 19th century went into gold and land. Meiji Japan, in contrast, was able to “gather small savings and to channel them into the mainstream of the national economy," enabling the country’s industrialization. We can blame the British Raj for not creating financial institutions that were necessary for Indian industrialization.
But it does not answer why Indians didn’t (or couldn’t) take the initiative to do so. Part of the reason why 19th century India failed to develop financial institutions, and why Indians bought up gold and land, was inadequate social capital arising from hyper-diversity. Capital stayed within caste-community groups, which zealously guarded their business interests and saw themselves in competition with each other.
When there was more capital than they could invest within their own community, they put it into gold and land. Physically owning assets meant that you didn’t have to depend on governments for contract enforcement. The colonial regime, in any case, had little interest in creating trust and social capital in India.
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