Uncertain Success: The Political Economy of Indian Economic Reform.

• Author: Dutt, Amitava Krishna

Introduction

Over the last decade and a half, and especially since 1991, India has been implementing economic reforms to liberalize and globalize the economy by reducing state ownership and control and by opening up to greater trade, foreign capital flows and technology imports. This implies a dramatic change in course for an economy that has firmly followed the model of dirigiste, import-substituting industrialization since independence and the inception of planning in the early 1950s.

The Indian government and neo-liberal economists take for granted that these reforms will free the economy from its state-imposed shackles and move it significantly beyond its earlier sluggish "Hindu" rate of growth.(2) Indeed, proponents of reform argue that India's somewhat improved economic performance in recent years is the result of the reforms implemented in the 1980s and early 1990s. According to this view, the main source of uncertainty lies in whether the Indian state can remain effective and can sustain the pace of reform in the face of political constraints, especially given the fact that the Congress party, the main proponent of reform, was voted out of power in May 1996 and replaced by a minority coalition government.

The purpose of this article is to assess the likely effects of the reform measures from a political economy perspective. The term political economy is used in the sense of economic analysis that goes beyond the standard neoclassical approach, on which most of the analysis of economic reform is based, to incorporate political factors and explore the interaction between economic and political forces. The standard neoclassical approach suggests that the recent reforms can be expected to increase Indian economic growth. However, this article will find more room for doubt by introducing economic considerations that are typically ignored in the standard approach, such as the role of aggregate demand, structural constraints and income distribution. Moreover, a close examination of the interaction of political and economic forces tells a different and less optimistic story.

After examining the effectiveness of the Indian state in the economic sphere, this analysis will address the pre-reform period, outlining pre-reform policies, assessing their economic implications and discussing the economic and political considerations that led the government to change its economic strategy. This article will then look at the reform and post-reform periods, describe the reform policies and assess their impact. The article will conclude with a discussion of the future of reform, focusing on reform from a political economy perspective and assessing the likelihood of long-term success.

India's Political Economy

Because the Indian state suffers from a lack of autonomy in relation to society; it faces certain constraints in making policy changes. These constraints can be traced to the strengths and weaknesses of the dominant classes in India, the interests of these classes and the relationship of each class to the others and to the state.(3)

To allow for an analysis of the autonomy of the Indian state, this article will assume that the state is a distinct actor in Indian society with its own interests. The question of what constitutes the state's interests is obviously complex, and would have to encompass a broad spectrum: private incomes of individuals within the state; votes and money to conduct elections in order to remain in power; class interests of those comprising the state; and developmental concerns and the ideology of bureaucrats and politicians.

A useful point of departure in this analysis is to start by examining the extent to which the state is able to implement its development goals.(4) Peter Evans, a political sociologist who has written extensively on questions of autonomy and state effectiveness, has argued that the state's ability depends on "embedded autonomy," where autonomy refers to the capacity to operate without being constrained by society, and embeddedness allows it to respond to changes in economic reality in a sophisticated manner. According to Evans, a state that has this type of autonomy will have a bureaucracy based on highly selective meritocratic recruitment, which stresses long-term career paths in a system that provides insulation as well as commitment. Informal networks within the bureaucracy will give it internal coherence, and institutional networks will link public officials and social actors.

On these counts, India's situation is not very encouraging, but it is not hopeless. The Indian Administrative Service (IAS) is an expert and well-organized bureaucracy; the Congress party that has been in power for most of the post-independence period has the potential to give coherence to state policymaking; and there are close links between the government and business. However, the IAS has experienced organizational decay and the all-inclusive Congress party, which never had a clear or unified agenda, has also weakened organizationally and was recently defeated in the national elections. Moreover, links between business and the government have been used mainly by private industrialists to further their own ends in a highly regulated system. This is quite different from a shared vision and a social contract between the state and private industry, with the latter providing information to the state and the state providing the appropriate carrots and sticks. There are also difficulties connected with the organization of the bureaucracy, which is split up into different ministries that are frequently uncoordinated and sometimes paralyzed by turf battles.

The question of autonomy cannot be taken up independently from the nature of groups in society and their relation to the state and each other. India's dominant classes can be identified as the industrial capitalists, rich and middle-income farmers, and white-collar and managerial workers. Each of these classes has strengths arising from their monopoly over industrial capital, agricultural land and human capital, respectively. However, each has weaknesses as well, due to internal divisions and their need for state support so that none has hegemonic power.(5) This implies that they (and their constituents) have to form uneasy alliances with each other and with the nondominant classes--industrial workers, small farmers and landless workers. Economic distinctions between these classes are blurred by non-economic distinctions based on caste, religion and language. Political parties representing such groups have sprung up and are increasing in popularity. Societal divisions along non-economic lines have intensified in recent times, as can be seen in the political disturbances that resulted from the release of the Mandal Commission Report on job reservation for lower castes and the demolition of the Ayodhya Mosque by Hindu nationalist parties and organizations.

Though the dominant classes share the common goal of staying in power, they also suffer from deep divisions. The most important are those between wealthy farmers and the urban rich and between industrial capitalists and the managerial classes. While on the surface farmers and urban classes face off over terms of trade and resource allocation, at a deeper level they represent the political divide between traditional, rural, Bharat (the Hindi name for India) and modern, urban "India." The industrial capitalists and the managerial classes differ over the regulatory powers of the state; for caste reasons, the latter have adopted a prostate ideology, while the capitalists, for obvious reasons, oppose regulation.(6)

The relationship between the state and the dominant classes is characterized by a certain give and take. The state helps the industrial capitalists by providing finance (the bulk of industrial loans are state-financed). The state also provides infrastructure; shelters domestic industry from foreign competition; selectively enforces industrial and labor regulations; and takes over private firms with large losses. For their part, industrial capitalists help the state by financing political parties so they can run effective elections, by financing individual politicians and bureaucrats through direct bribes and generally by expanding industrial production.

The state helps rich and middle-income farmers by supporting food prices (particularly since the mid-1960s); offering subsidies for inputs, including fertilizers and power; providing institutional credits, which, despite attempts to the contrary, have gone more to rich farmers; and through tax breaks. There is no agricultural income tax and virtually no property tax on agricultural land. The farmers, in turn, help the state by establishing vote banks, given their command over rural votes, and through direct bribes and campaign contributions.

Finally, the state helps the non-dominant classes by keeping inflation within reasonable bounds, by supplying cheap food in urban and rural areas, and through redistribution programs to assist the poor. Unfortunately, these programs have usually been short on substance and long on populist slogans. The underclasses help the party in power by providing votes during elections and lending the ruling party political legitimacy; this is especially true of industrial workers in the state and private sector who can withdraw their support by going on strike. They also have the potential to provide support for the implementation of government policies, such as land reform and new labor laws, at village and firm levels.

Given the conflicting and complementary interests of the different dominant classes, given that none of them have political hegemony and so often have to woo elements of non-dominant classes, and given the role of caste, ethnic, regional and linguistic forces, the Indian political arena is a messy game of shifting alliances, mutual concessions among the dominant classes and attempts to...