Politics of Economic Growth in India, 1980-2005: Part II: The 1990s and Beyond

Author(s): Atul Kohli

Source: Economic and Political Weekly , Apr. 8-14, 2006, Vol. 41, No. 14 (Apr. 8-14,
2006), pp. 1361-1370
Published by: Economic and Political Weekly

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 Politics of Economic Growth
in India, 1980-2005
Part II: The 1990s and Beyond
India's economic growth has not accelerated dramatically. What aggregate
change is noticeable predates the liberalising reforms by a whole decade and
industrial growth in the post-reform period did not pick up. Moreover, the
problems posed by India's current pro-business model of development include
disquieting implications for the quality of India's democracy. Why should the common
people in a democracy accept a narrow ruling alliance at the helm? Is ethnic and
nationalistic mobilisation a substitute for pro-poor politics? And, is India
increasingly stuck with a two track democracy, in which common people are only
needed at the time of electioins, and then it is best that they all go home, forget politics,
and let the "rational" elite quietly run a pro-business show?
ATUL KOHLI

H aving analysed the political economy of the growth

also readily available elsewhere [Jenkins 1999, pp 16-28; Kumar
experience in the 1980s, the second empirical puzzle for 2000; Frankel 2005]. The important issues deserving our attention
the paper emerges by juxtaposing economic performance instead are two: why were the reforms undertaken and how have
- especially performance of the manufacturing sector in specific they evolved; and why has the impact of reforms on aggregate
and of industry in general - during the 1980s against that ineconomic
the growth, especially on industrial growth, been negli-
1990s and beyond. A number of scholars have in recent years gible. Before tackling these issues, a few interpretive comments
demonstrated that, though growth in manufacturing in the 1990s on the nature and the scope of the reforms are in order.
was somewhat lower than in the 1980s, the shift in growth trend The economic reforms undertaken since 1991 have influenced
since 1991-92 was not statistically significant [see e g, Nagarajboth India's industrial policy and external economic relations.
2003, and Table 3 in Part I of this paper]. The stunning fact The is variety of industrial policy reforms - further delicensing,
removal of MRTP constraints, tax concessions, opening of yet
then this: in spite of all the noise about reforms - for and against
- the growth rate of India's manufacturing industry was newer not areas hitherto reserved for the public sector, and taming
influenced all that greatly by the reforms (Figure 2 in Part labour-
I). are best viewed as continuation of reforms well underway
The real break in growth occurred around 1980. Since then during the 1980s. These reforms also ought to be judged mainly
nothing dramatic has changed in terms of the aggregate outcomes. as pro-indigenous business, enabling well established businesses
to grow and allowing some new ones to emerge and flourish.
The growth data is further supported by employment data:
employment in manufacturing remained constant around 12In perlight of the discussion above, none of these reforms should
cent of the workforce during the 1980s and the 1990s [Nagaraj be all that surprising. Where there was a significant element of
2003, p 3708]. The reforms have thus neither helped nor hurt discontinuity, and thus of surprise, was in the area of India's
growth and employment by much.1 Why? external economic relations, including, the trade, foreign invest-
Once again, observing the more proximate economic determi- ment and financial relations. As is also well known, starting in
1991, import quotas were removed (fully only in 2001), tariffs
nants of these trends helps set up the puzzle for a deeper political
economy analysis. It is clear from Table 2 (Part I) that the overall
came down slowly but surely, currency was devalued, the foreign
rates of capital formation in the Indian economy did not alter investment regime was liberalised, and various restrictions on
significantly between the 1980s and the 1990s. What did alter, external financial transactions were eased. Some of these reforms
however, was the composition of this investment (Figure 3 in
helped Indian business; others put enormous competitive pressure
Part I); public investments declined in the 1990s and the balanceon them. In adopting these external economic reforms, the Indian
was filled by a variety of private investors. As already noted, state was responding to a sharply changed world and, in the
there might have been a slight decline in the growth rateprocess, of attempting to establish a new social contract with Indian
productivity of the economy, but not by much (Figure 4 in Part business:
I). we will continue to put our full weight behind you,
So, the second empirical puzzle concerns the impact of reforms but you, in turn, must become more competitive.
on investment - overall stability but changing composition - and The scope of India's external economic reforms must be kept
in perspective. By India's own past standards, the changes were
on the rate of growth of productivity of labour and capital, where
very few gains are evident. quite dramatic. In a comparative and global perspective, however,
That India in 1991 adopted a fairly significant set of economicIndia's opening to the world remains relatively modest. In a useful
policy reforms is well known. A list of reforms undertakenessay, is Baldev Raj Nayar (2001) has documented this "modesty".

Economic and Political Weekly April 8, 2006 1361

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On the trade front, for example, tariffs did come down signifi- has some control - than greenfield foreign investment, not to
cantly, but the decline began in 1987. during the Rajiv Gandhi mention acquisitions and mergers.
years, and towards the end of the millennium, still averaged some And, finally, it must have been clear to Indian decision-makers
30 per cent, among the highest in the world. India's share of that WTO was going to happen (it actually came into being in
foreign trade at some 25 per cent of the GDP was also among 1994), and that India would be a signatory to WTO agreement.
the lowest in the world in the early 21st century (Table 3). The Given WTO's requirements, it must also have been clear that
story on foreign investment is not all that different. While the import quotas would have to go and that tariffs would have to
inflows in the 1990s were huge compared to the past - averaging come down within some time bound period. Mitu Sengupta
nearly $ 4 billion, including both direct and portfolio investments during her researches thus found a number of decision-makers,
- on a per capita basis India remained one of the least exposed including Manmohan Singh and Amar Nath Varma, arguing that
countries to foreign investment in the world. And finally, it is these external considerations were important considerations in
well known that capital movements in India remain relatively why India had to liberalise in the early 1990s.2
restricted. While India's "world" thus indeed change over the 1980s, some
Now, let us first briefly visit the issue of politics of reforms. very important changes within India also must be taken into
Why did the same set of reforms that proved difficult to pursue account. Most important, the reluctance of Indian business group
during the 1980s become more likely in the early 1990s? A towards external opening softened, though within limits. During
superficial answer would point to the economic "crisis" of 1991. the 1980s, segments of Indian capital became more efficient and
As already indicated above, however, the "crisis" mainly pro- business lobbying underwent some significant changes. We have
vided an opportunity for policy reform: the real causes were already discussed above the steady gains in productivity of Indian
deeper. A number of political analysts have drawn our attention industry throughout the 1980s. One can then suggest that some
to these deeper causes [Jenkins 1999; Pederson 2000; Nayar Indian business groups were probably more ready to deal with
2001: Harriss and Corbridge 2000]. Building on their work, it foreign competition in the 1990s than in the 1980s. The clearest
makes sense to separate the underlying structural variables from evidence for this claim is available in the changing patterns of
the political process, and then to think of the underlying structural how Indian capital organised itself politically and in the demands
changes as both external to India and within India, especially it then made on the state during this period.
in India's business community. The reforms became more Stanley Kochanek (1996A; 1996B) has ably documented some
acceptable during the 1990s then because the world in which of these changes in business organisation and lobbying. Very
India operated changed and because Indian capital split politi- briefly, during the 1980s, India's two main national chambers
cally. with a significant faction at least willing to experiment with of commerce - the Federation of Indian Chambers of Commerce
a more open economy. Let us elaborate: and Industry (FICCI) and the Associated Chambers of Commerce
Foremost among the significant external changes was the and Industry (Assocham) - reorganised. They increasingly be-
decline and the disintegration of the Soviet Union. This change came mirror images of each other (with differing regional base),
was profoundly consequential for India. What I have in mind but they also slowly lost ground to the newly constituted Con-
here is not only the diffuse and the oft cited issue of the decline federation of Indian Industry (CII) in terms of political influence.
of a model of development. The resulting pressures were insteadThe CII increasingly came to represent India's more "modernm"
more concrete and more serious. First. the Soviet Union was an industries - especially engineering firms, often located in the
important trading partner (India-Soviet Union trade was close south of India - who were more interested in exports. The CII
was also run professionally and developed such close ties with
to $ 6 billion towards the end of the 1980s) which provided India,
in exchange for a variety of goods, oil, armaments and defence Indian bureaucracy that it came to be dubbed as the "junior
materials. Much of this exchange did not involve use of hard partner" of the government; so much so that the 1993-94 budget
currencies. With a sharp decline in exports to Russia, the issue
came to be called the "Tarun Das" budget, referring to Tarun
of maintaining and upgrading defence forces became intimately Das, the director of CII [Kochanek 1996A, p 167]. Over the next
related to the availability of hard foreign exchange. Improvingdecade, these patterns became nearly institutionalised; for ex-
export earnings and maximising other sources of foreign ample, ex- Montek Singh Ahluwalia in 2004 was openly discussing
change thus became issues of national security. While never the need for "public-private partnership" in industry and inviting
publicised as such, these issues must have created a new sense the private sector "to be part of the decision-making" (Indian
Express, December 29, 2004). While not quite "India Incorpo-
of urgency for "liberalisation". Closely related to this, the dis-
integration of the Soviet Union also meant the loss of a militaryrated", there is more than a shade of a move towards "Korea
and political ally, creating pressures to shore up relations withor Taiwan Incorporated" in these changes.
the US. As most developing country leaders understand, im- Though somewhat of an oversimplification, Indian capital
basically split during the 1980s in its political and policy pref-
proved political relations with the US, in turn, often involve closer
economic relations, especially the opening of an economy erences. to On the one side were the more "modem", export-oriented
American goods and capital. businesses, represented by the CII. They favoured a more open,
A second important global change that developed over the competitive economy. And on the other side were the older
1980s was the growing availability of investible resources -business
in houses that matured during the import substitution
foreign exchange, to boot - in the form of portfolio investments.regime. They were represented by both FICCI and Assocham;
While a Faustian bargain - mainly because of their volatile nature
they were also considerably more wary of external opening. As
- they might have appeared attractive to foreign exchange starvedwill become clear below, the actual political process surrounding
Indian decision-makers. Even to Indian businessmen, portfolio economic liberalisation was more complex than this character-
investment must have appeared less threatening - it is in some isation might suggest. Nevertheless, with some significant busi-
ways more akin to selling your shares in public, over which ness one names and organisations willing to support the opening of

1362 Economic and Political Weekly April 8, 2006

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the economy, India's pro-liberalisation policy-makers must have cut the budget deficit. Since it was difficult to increase revenues
felt emboldened. Changing global conditions and splits within - especially in light of tax concessions to the corporate sector
the ranks of Indian capital thus provided the new structural - the burden of these efforts fell on reducing expenditures. After
conditions within which India's technocratic elite pushed through some early success, say, the first three years, these soon ran into
some significant policy changes in the early 1990s. numerous problems. For example, cutbacks in subsidies were
Beyond the structural changes, the political process of eco- resisted by such politically consequential groups as farmers and
nomic liberalisation was also revealing of the underlying power exporters, further cuts in social expenditures were likely to cost
dynamics. As I analyse this, the basic picture that emerges is popular electoral support, and decline in public investments was
one of the political and economic elite attempting to accommo- being widely associated with the continuing industrial recession.
date each other, but within the context of considerable fragmen- Even big capital started arguing for greater public investments
tation of political power: this political dynamics, I will suggest. in such areas as infrastructure. Concerned about economic growth
was economically consequential. To highlight only some of the then, the Indian government by 1994 chose not to accept further
main events, as the balance of payments situation deteriorated IMF loans, started arguing that further cuts in budget deficits
throughout 1990. the issue of India approaching the IMF for a were neither possible nor desirable, and the decline in current
"structural adjustment" type of a loan was again at the forefront; expenditures came to a halt; the reduction in budget deficits that
India accepted such a loan in 1990 with a caretaker government was actually achieved unfortunately came at the expense of social
in charge. In early 1991 then, just a couple of months before spending and public investment [Kumar 2000: 807-8].
the "big bang" announcement of new liberal economic policies. The attempt to integrate the Indian economy with the global
the CII floated a "theme paper" in April 1991, arguing for radical economy was, of course, the third major component of the reform
shifts in India's economic policies towards a more open and initiative. As already noted, during the 1990s most import quotas
competitive economy [Kochanek 1996B: 538]. When the Con- were removed, tariff levels came down, and laws governing the
gress government, with Manmohan Singh as the finance minister, inflow of foreign capital were liberalised. However, the political
actually announced the policy shift. the main forces supporting process of India's global opening turned out to be quite conten-
such a shift included the narrow political leadership, the tech- tious and, in the end, a variety of pressures, especially business
nocratic policy elite, a segment of Indian capital, and external lobbying, limited the speed and scope of such an opening. For
actors, expressing their preferences mainly in the form of policy example, as also discussed above, India's major chamber of
conditionalities set by the IMF. commerce, the CII. supported the opening of India's economy
In spite of India being a fairly mobilised democracy, it was in the early 1990s. By contrast, the other two chambers, FICCI
then the case that major economic policy changes arrived in India and Assocham, argued throughout the 1980s for internal deregu-
with a narrow support base. If further evidence was needed to lation but for "going slow" on the external front. Within two-
support this claim, notice, for example, that critical reforms in three years of the "big bang" opening, as the balance of payment
industrial policy in 1991 were made as executive decisions. crisis eased, a variety of Indian business houses came together
Anticipating nationalist opposition to global opening, the govern- - in a group the Indian press dubbed as the "Bombay Club" -
ment used legal technicalities - they included the policy changes to oppose India's external opening [Kochanek 1996A: 168-70].
in a "statement" rather than in a "resolution" - to avoid any They argued that rapid liberalisation will destroy India's indig-
discussion and a vote in the parliament. Similarly, the efforts enous industry, especially capital goods industry; according to
to reduce fiscal deficits over the next few years encountered them, tariffs should be brought down very slowly, and the inflow
opposition. Once gain, as yet another example, the government of foreign investment should be limited. Citing Korea as their
reduced some fertiliser subsidies and increased petroleum prices model, they asked for more government help and for a more
(in September 1992) only after Parliament went into recess. Other selective integration with the global economy. Along with FICCI
such examples could be readily multiplied. The simple point, and Assocham members, the prominent spokesmen of the Bombay
however, is that liberalising reforms were pushed forward by a Club included senior officials of the CII, underlining the point
narrow coalition, and that an element of "stealth" clearly charac- that, as far as external opening is concerned, Indian capital is
terised the politics of economic liberalisation [see Jenkins 1999]. not as factionalised as the organisational politics of competing
aimed at circumventing nationalist and popular opposition. chambers might suggest.
The "big bang" rhetoric of a dramatic policy shift aside. India's The nationalist element in Indian business's protests found a
economic policies during the 1990s altered only incrementally. strong echo in the swadeshi politics of India's main opposition
responding to objective changes, the evolving views of key policy party at the time, the BJP. A variety of more diffuse issues -
makers, and to a variety of political pressures. Early reforms such as intellectual property rights and rapid opening of trade
included internal deregulation of industry, attempts to tame the in commodities and services - also fed the nationalist wrath of
deficit, and slow but steady external opening. The industrial India's political class. The BJP mobilised these sentiments ef-
policy reform included further delicensing of the private sector, fectively in the mid-1990s, putting the ruling Congress govern-
removal of MRTP restrictions, tax concessions to business, and ment on the defensive. The early momentum of reforms thus got
some further efforts to tame India's well entrenched and activist
bogged down in the nearly normal complexities of India's
labour. India's private sector rightly interpreted these policydemocratic politics. The results included a steady but relatively
changes as creating "operational freedom it has never enjoyedslow-paced integration of Indian economy with the global
before" (Eco0nomic Times, November 9, 1991 ). The stock marketeconomy, a trend that has pretty well continued into the
boom that followed was probably not unrelated to what was present period.
interpreted as a sharply pro-business policy shift. Of the major policy reforms initiated in 1991 then, internal
In line with the IMF's "structural adjustment" prescriptions,deregulation has proceeded the furthest, global opening has been
a second important element of early reforms included efforts toreal but slow and modest, and the attempts to trim current public

Economic and Political Weekly April 8. 2006 1363

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expenditures have not made much headway. Two other reform but still remained at a level generally higher than in the earlier
areas - privatisation of public enterprises and labour reforms - periods. Capital formation in the household sector by contrast
were also discussed at the early stages, and have been periodically has grown rapidly since the mid-1990s.
rediscussed. Anticipating serious political opposition, however, One must attribute the continued buoyancy of private sector
various governments have mostly left these policy reform areas investments to the variety of pro-business industrial policy changes
alone. A pattern thus emerges. Internal deregulation and the introduced in the post-1991 period. The fact that the investment
modest global opening were changes that were either demanded boom originated mainly in the "registered sector," especially in
by Indian business groups, especially big business, or something the first-half of the 1990s [see Nagaraj 2003: 3711], further
a significant faction of Indian business could live with. The suggests two observations: reform policies initially helped big
unwillingness or the inability to privatise public enterprises and/ business more than small business; and that big business felt
or to tame India's organised labour in turn underline the "soft" relatively comfortable with the slow pace of external opening
or fragmented nature of state power in democratic India. The of the economy, at least until later in the 1990s, when continued
politics of continuing budget deficits is in part a result of similar imports and foreign investor produced goods brought forward
democratic pressures, but it also highlights the commitment of protests and discouraged further investments. The relatively high
Indian policy-makers to economic growth, and the related will- rates of private investment are also one of the main forces
ingness to use public expenditures to facilitate this outcome. In propelling steady growth of industry (though not at a very high
spite of the much pro- and anti-reform rhetoric about India going rate) in the post-reform period. The pro-growth and the pro-
neo-liberal, therefore, both the political process and the process business drift of the Indian state - that began in the 1980s and
of policy reform reflect a much more complex pattern of state continued into the 1990s and beyond - are thus mainly responsible
intervention in the economy: while some liberalisation is real, for the respectable performance of the Indian economy.
Indian state remains activist. willing to support and to work Several related observations further support the point that the
closely with Indian business, but at the same time state actors main dynamics underlying sustained growth is not so much
remain hemmed in by a variety of democratic political pressures. liberalisation as it is the state's continuing pro-business orien-
Now, leaving aside the issue of politics and policies of reform. tation. First, contrary to what one might expect from further
the second major vexing issue concerns their limited economic liberalisation. the labour intensity of Indian industry decreased
impact. In the words of Montek Ahluwalia, the reforms "were steadily during the 1990s [Chaudhuri 2002: 160]. Second, the
expected to generate faster industrial growth and greater pen- unregistered sector of Indian industry - which one presumes to
etration of world markets in industrial products, but performance be more export-oriented and less capital intensive - did not attract
in this respect has been disappointing" [Ahluwalia 2002: 75]. much new investment in the post-reform period [Nagaraj 2003:
With reform advocates themselves expressing disappointment, 371 1]. Relatedly, there is no clear evidence that exports of labour-
the real debate in the literature is about explaining the disap- intensive goods grew sharply. Fourth, and this is quite important,
pointing performance. The "disappointment" of course has to be the level of concentration in private industry has increased since
kept in perspective: at some six per cent annual growth, India 1991: for example, market capitalisation of the top 10 private
is still among the world's fastest growers: exports have grown companies increased from 2.2 per cent of the GDP in 1990 to
steadily; and the balance of payment situation has improved 12.9 per cent in 2004 and sales of the top 10 companies during
considerably since the reforms. And yet, it is the case that the same period grew from 2.3 to 9.3 per cent of the GDP.4 And
industrial growth in the 1990s and beyond did not improve over finally, the share of employment generated by the manufacturing
the 1980s (Figure 2 in Part I), growth in total factor productivity sector has remained largely unaltered over the last decade
in the post-reform period was somewhat lower than in the 1980s and a half.
(Figure 4 in Part I), the modest export growth continued to be Leaving aside the issue of private industry, public investments
surpassed by growing imports, and public investment declined in India as a proportion of total economic activity declined
while the share of public debt in the GDP continued to grow.
Table 3: Some Post-Reform Economic Indicators
Contending explanations, as one might expect, tend to suggest
either that reforms have not gone far enough [e g, Ahluwalia Year GDP Industrial Capital Formation Electricity International
2002], or that they have already gone too far, too quick [Patnaik Growth Growth (Per Cent GDP) Generated Trade
(Per Cent) (Per Cent) Private Public Growth Per Cent GDP
1999; Chaudhuri 2002].3
Sector Sector (Per Cent) Exports Imports
Focusing mainly on the political economy of growth, what is
1990-1991 5.6 7.0 13.9 9.0 9.6 6.2 9.4
surprising is that, at least at the aggregate level, India's reforms
1991-1992 1.3 -1.0 12.9 9.2 4.0 7.3 8.3
seemed to have neither helped nor hurt economic growth by much. 1992-1993 5.1 4.3 14.2 8.2 4.8 7.8 10.2
How does one best understand this outcome? As before, one needs 1993-1994 5.9 5.6 13.4 8.0 5.0 8.1 9.6
to focus both on issues of rates of investment and of productivity, 1994-1995 7.3 10.3 13.2 8.8 6.1 8.1 10.9
1995-1996 7.3 12.3 16.7 7.7 5.8 8.9 12.0
neither of which improved much in the post-reform period.
1996-1997 7.8 7.7 15.9 6.9 3.5 8.6 12.3
Some of the post-reform economic indicators are presented in 1997-1998 4.8 3.8 15.3 6.4 3.4 8.5 12.2
Table 3. Along with the data presented above, they underline 1998-1999 6.5 3.8 15.1 6.5 4.6 8.3 11.5

the point relatively well known to observers of India, namely, 1999-2000 6.1 4.9 15.6 6.2 5.0 8.4 12.4
2000-2001 4.0 7.0 15.9 6.0 4.6 9.9 12.7
that private investments, including corporate investments, have 2001-2002 4.4 3.7 16.2 5.9 4.0 9.4 11.8
for the most part remained buoyant in the post-reform period 2002-2003 5.8 6.3 16.6 5.6 5.0 10.6 12.7
but public investments have declined (see Table 2 and Figure 3 2003-2004 8.5 6.6 16.8 6.0 6.5 10.8 13.3

in Part I and Table 3 here). Private corporate investment shot Average 5.7 5.9 15.1 7.2 5.1 8.6 11.4
up rapidly after the reforms but peaked in the mid-1990s. Since Source: Author's estimates based on, Econo
then the rate of growth of corporate investments has declined India, various issues, http://indiabudget.n

1364 Economic and Political Weekly April 8, 2006

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noticeably during the 1990s (Table 2 and Figure 3 in Part I and with the declining R&D investment in the private sector, and
Table 3 here). The underlying dynamics are not hard to under- with the continuing cuts in the role of the public sector, the trend
stand. Given the fragmented nature of state power in India, public is nearly in the opposite direction. Fourth, the efforts to improve
India's human capital have been minimal. And lastly, both the
authorities find it hard to raise taxes and revenues. A variety of
tax concessions to the rich and middle classes have also cut into
incentives and pressures on the private sector to boost exports
have remained insufficient. These series of inactions - some as
the revenue pie, as has the decline of import duties. The service
and agricultural sectors remain largely untaxed. The pressure aonresult of political incapacities and others due to the lack of
imagination - may cumulatively help us understand why pro-
the expenditure side is merciless, especially paying interest on
the growing public debt. and defence expenditures. Faced with ductivity growth of India's industrial economy has not improved
in the post-reform period.
severe fiscal pressures in 1991, along with a loan and associated
conditions of the IMF. the Indian government sought to trim the
deficit. While the successive governments have made some Politics of Economic Growth in the States
headway, they have been unable to control current expenditures.
The budget deficit has thus been reduced mainly by cutting publicFinally, there is a third puzzle, namely, of considerable var
investments, including in infrastructure. Among the various tion in growth performance across Indian states in the post-refo
consequences. notice the sluggish growth of such vital inputsperiod.
to The basic growth data for Indian states during the 19
industrial growth as the supply of electricity (see Table 1); the
and in the post-reform period (1990-2004) is provided in Tabl
rate of growth of electricity generating capacity in the 1980s was
The main thing to note is that the rates of economic growth acr
nearly double that of the 1990s [see Nagaraj 2003: 3713]. Can Indian states started diverging more in the 1990s than in the 198
anyone doubt that such state shrinkage is hurting India's eco- for example, the coefficient of variation in the 1980s was 0.
and in the 1990s, 0.29 [see Bhattacharya and Sakthivel 20
nomic growth? It is no wonder that various analysts, of a variety
of persuasions, seem to agree that public investments in India Table 1]. Those who have used alternate measurements, such
now need to be stepped up (Ahluwalia 2002; Mohan 2002;
gini coefficients, have found a similar pattern of divergence
Nagaraj 2003; and Chaudhuri 2002). the 1990s [Shetty 2003, Table 6: 5197], and even those sy
The continued buoyancy of private investment and the decline
pathetic to reforms seem to agree [Ahluwalia 2000]. The anal
of public investment in India constitute key elements of India's
tical issue raised by this trend then is, how to make sense of
economic growth "story" in the 1990s. An additional issue that
diverging growth performance. One strand of market logic wou
expect capital to move to capital-scarce areas where it mig
deserves further attention is that the rate of growth of productivity
of the industrial economy in the 1990s did not improve over command
the higher returns, leading to some convergence follow
1980s [Kumar 2000: 806-07]. While the international opening liberalisation. While a dozen years may be too short a time per
of the economy has led to a fair amount of restructuring andto judge, the issue does arise: why are Indian states diverg
consolidation of Indian industry [Basant 2000], as well asinstead?
to
Of the 16 major states listed in Table 2, notice that, when
increase in technology imports, somehow none of this is adding
up to any sharp improvement in efficiency. Why? The answer compared to the 1980s, economic growth rate in the post-reform
period altered significantly in only half the states (i e, increased
of reform advocates seems to be that tariffs are still too high and
that the labour regime remains rigid. While this may be the case,or decreased by one percentage point or more). Economic growth
increased notably in Gujarat, Kerala and West Bengal; by con-
it is also possible that one should not expect too much from mere
international opening, especially in a large economy, with a following reforms, economic growth declined by more than
trast,
relatively small role for international trade and investment.
Table 4: Economic Growth in Major Indian States, 1980-2004
Moreover, the claim that trade opening will enhance economic
States 1980-1990 1990-2004 1980-2004
efficiency may also have the causal sequence backwards, at least
for late-late-industrialisers. If east Asian countries like South Andhra Pradesh 4.81 5.33 5.1
Korea are to be a model, note that state supported improvements Assam 3.91 3.00 3.4
Bihar 5.20 4.2 4.6
in industrial efficiency came first, and export success only second
[Amsden 1989; Kohli 2004]. Gujarat 5.71 8.11 7.1
Haryana 6.68 6.63 6.65
While the Indian state indeed recommitted itself to private
Himachal Pradesh 6.10 6.44 6.3
sector led growth around 1980, India is no South Korea or Taiwan.
Karnataka 6.10 6.38 6.3
Kerala 4.50 5.69 5.2
The fact is that the Indian state has neither done enough to help
Madhya Pradesh 5.18 4.74 4.9
improve the efficiency of the private industrial economy, nor has Maharashtra 5.98 5.92 5.95
it done much at all to improve the life-chances of its poor. First,Orissa 5.85 3.94 4.7
Punjab 5.14 4.14 4.6
India's dismal infrastructure continues to add to the cost of private
Rajasthan 7.17 5.68 6.3
industry. Second, while there is much talk of improving the labour
Tamil Nadu 6.35 5.70 5.97
situation, not only is the action limited, but even the underlyingUttar Pradesh 5.88 3.76 4.64
model of change is mispecified. Once again, if east Asia is to
West Bengal 5.20 7.12 6.32
be the model, labour regimes in such rapid growers as South All-India 5.60 5.90 5.8

Korea combined job security, training on the job, continuing skillSource: Rajya Sabha Unst
improvements, and strict discipline, involving repression; the Lok Sabha Unstarred Q
"model" is thus neither fully desirable nor likely to be replicated Central Statistical Organ
Bihar, Madhya Pradesh a
in India. Third, the state has done not nearly enough to help across years because, fo
improve the technological efficiency of the Indian economy. regions that have com
Imports of foreign technology have helped somewhat. However. Chhattisgarh and Uttar

Economic and Political Weekly April 8, 2006 1365

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a point in Bihar, Orissa, UP, Punjab and Rajasthan. Those Figure 1A: Economic Growth in Rich and Poor States
working with more specific state-level data on manufacturing Post-reform Growth Rate (1990-2004)
in the registered sector have established that the decline in growth Accelerated Decelerated

in select states was more statistically robust than the growth pick- State Per High Gujarat, West Bengal Punjab
up [Nagaraj 2002, Table 3]. Somewhat broader data on growth Capita
rates in the secondary sector as a whole, however, are broadly Income Low Kerala Rajasthan, Bihar,
Orissa, UP
consistent with the overall growth trends in Table 4, at least in
terms of the eight states in which growth rates increased or Notes: 1 Growth acceleration and deceleration in all the five figures (1A, 1 B,
decreased by a percentage point or more.5 Given the problems 1 C, 1D and 1 E) is judged by a movement of at least one percentage
point over the 1980s.
of data quality and availability at the state level, I will focus my 2 High and low state per capita incomes (or rich and poor) are simply
comments below on the divergence in the overall economic defined as above and below the national income average in 1991.
growth rates across states: moreover, given that only a small
number of states are being analysed, where statistical findings Figure 1 B: Economic Growth in States with Varying Investment
Climate
are not likely to be robust, the discussion should be treated as
rough and ready. Post-reform Growth Rate (1990-2004)
Accelerated Decelerated
Within these constraints, how does one best explain that
economic growth picked up significantly in the post-reform Investment Favourable Gujarat Punjab
Climate
period in Gujarat. Kerala, and West Bengal and declined as
Not favourable West Bengal, Rajasthan, Bihar,
significantly in Bihar. UP, Orissa, Punjab and Rajasthan? Kerala Orissa. UP
Figures 1 (A, B. C, D and E) provide some preliminary insights.
Notes: 1 The data of investment clim
First, let us set aside some plausible explanations. One might
2004, p 21. The factors they inclu
be tempted to hold that liberalisation enabled less well-off states spent on administration, capital expe
to attract capital due to higher marginal productivity of capital industrial disputes, per cent of sick
and thus to grow more rapidly: this is not true (see Figure 1A). formation, and industrial workers
clearly some problems of endogeniety here. The resulting
One might also be tempted to hold that growth patterns exhibit categorisation should thus be treated only as rough and ready. A
continuity, that states that grew rapidly in the 1980s also contin- more systematic analysis of investment climate in a subset of these
ued to grow rapidly in the post-reform period: again, this is not states is broadly consistent with this categorisation. See, World
Bank, Improving the Investment Climate in India, Washington DC,
true (see Figure ID). And finally, though the data on this is not
2001, Table 3.1, p 47.
presented here, there is little association between rates of literacy
and the rate of growth across Indian states [Ahluwalia 2000: 1664]. because of poor infrastructure (Figure IE) or more broadly, an
What then is the most likely explanation for growth acceleration unfavourable investment climate (Figure 1B). Moreover, India's
in some states and deceleration in others? Let us assume as before two other major and very poor states - Assam and Madhya
that growth rates reflect both shifts in levels of investment and Pradesh - also fit this pattern, though economic growth in them
in productivity. Unfortunately. unlike the national level, invest- declined by less than one percentage point (Table 4). So, one
ment and productivity data for individual states are not readily pattern seems fairly clear: following policy reforms in 1991,
available. On the issue of investment patterns. what we do know India's poor states have not done very well. Growth deceleration
instead is that, following reforms, public investments declinedin them probably reflects a decline in public investments and a
across India and that this was also the case for most Indian states concomitant failure of private investment to fill the gap. Instead
[Ahluwalia 2000, Table 8: 1642]. One may propose then that of seeking a higher rate of return in capital-scarce areas - a trend
this decline hurt growth prospects of those states most who are that may still unfold over the longer term - private capital in
unable to readily attract new private investment. By contrast, the India for now seems to be shirking India's poor states with poor
states that have done better are probably those that have attracted infrastructure and unfavourable investment climate. That public
new private investment, both domestic and foreign. While direct action will be needed to reverse this trend ought to be clear.
data to support this claim are not available, the numbers ofThe issue of why post-reform economic growth accelerated
"private projects under implementation" collected by the Centre in yet other states is more muddled. As already noted, the three
for Monitoring the Indian Economy is broadly supportive, es- states where growth accelerated by more than one percentage
pecially at the two extremes. One central component of the largerpoint are Gujarat, West Bengal and Kerala; economic growth
puzzle of varying growth rates across states is then this: why in the secondary sector in these three states also followed this
are some states better able to attract new private investment trend [see Bhattacharya and Sakhtivel 2004, Table 6]. The
than others? underlying determinants, however, are not obvious. While Gujarat
Data in Figure 1A again provides some clues. The states inis clearly one of India's richest states, both West Bengal and
which growth decelerated by more than a point - presumably Kerala are closer to the national average in terms of per capita
because they failed to attract new private investment - are mostlyincome; investment climate in both Kerala and West Bengal is
India's poor states (Figure 1A): Bihar, UP, Orissa and Rajasthan. also considered to be not all that favourable (Figure IB). The
The only exception - Punjab - is really not an exception becausepattern of post-reform industrial growth in India's other rich
growth deceleration in that state was more a function of declinestates during the 1990s also ought to be noted: it picked up
in the agricultural growth rate and quite probably unrelated tosignificantly in Tamil Nadu, somewhat in Maharashtra, stayed
the issue of policy reforms: industrial growth in Punjab in bothabout the same in Karnataka and Punjab, and declined signifi-
the 1980s and in the post-reform period remained in the six percantly in Haryana [Bhattacharya and Sakthivel 2004, Table 6].
cent range. Whether a direct function of their poverty or not,What conclusions, if any, might one draw about the underlying
the poor states then may fail to attract new private investment determinants?

1366 Economic and Political Weekly April 8. 2006

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 Except for Haryana, one pattern that does seem to stand out Figure 1C: Economic Growth and Labour Unrest in the States
is that post-reform industrial growth in India's better-off states Post-reform Growth Rate (1990-2004)
either accelerated (Gujarat and Tamil Nadu) or stayed about the Accelerated Decelerated

same as in the 1980s (Maharashtra, Karnataka and Punjab). These Decreased West Bengal, UP, Orissa, Rajasthan
states are generally blessed with good infrastructure and more Labour Kerala
Unrest
desirable investment climates (see India Today, August 16, 2004,
Unchanged Gujarat Bihar, Punjab
pp 20-21). When juxtaposed against India's poorest states - or Increased
where economic growth declined across the board in the post-
reform period - an important conclusion emerges: private inves- Note: The figures on labour unrest are "mandays lost" and were taken from
various issues of the Statistical Abstracts of India. The decrease or
tors in India continue to favour India's better-off states over the
increase in labour unrest is estimated by the changing picture in the
poorer states. In common sense terms this is not all that surprising. 1990s when compared to the 1980s.
What it does underline, however, is that the pattern of economic
Figure 1D: Economic Growth in the 1980s and in the
reforms in India is not following the free market logic of capital Post-reform Period
moving to capital scarce areas. The logic evident instead is more
Post-reform Growth Rate (1990-2004)
akin to a Mathew effect, namely, to him who hath shall be given. Accelerated Decelerated
If "initial conditions" of Indian states are clearly important for
attracting investment and for growing, two important qualifica- Growth High Gujarat Orissa, Rajasthan, UP
Rate in
tions ought to be added. First, varying initial conditions arethe 1980s Low West Bengal, Kerala Punjab, Bihar
themselves a product of past patterns of development, especially
Note: Growth rates in the 1980s are categorised as high or low simply
the role of varying state governments and of state politics. Thus,
above or below the national average.
such important factors as quality of roads, availability of elec-
tricity, levels of education, labour discipline, and law and order Figure 1 E: Economic Growth in States with Varying Infrastructur
conditions - all factors that private investors take into account
Post-reform Growth Rate (1990-2004)
when deciding in which state to invest - are traceable back to Accelerated Decelerated
the past developmental activities of state governments. And
Quality Good Gujarat, Kerala Punjab
second, variation in initial conditions does not explain everything;of
the quality of state governments also matters. For example, why Infrastructure Poor West Bengal Rajasthan, Bihar,
has Gujarat experienced more rapid industrial growth in the post- UP, Orissa

reform period than other similar better-off states? And why do Note: The data for the quality of infrastructure is from India Today, August
economic prospects of some such poorer states as Bihar seem 2004, p 20. The factors they included were standardised measures o
availability of electricity, paved roads, bank branches, post offices an
a lot worse than of some other poorer states, say, Madhya telephones. The top 10 "big states" have been categorised as havin
Pradesh? I will return to some such issues momentarily. For now, "good" infrastructure and the bottom 10 as having "poor" infrastructur
why have such middle income states as West Bengal and Kerala
experienced rapid growth in the post-reform period? This is 2002, Table 3]. While the reasons behind the deceleration are
especially puzzling in light of the fact that these are India'smany [see World Bank 2005], the decline in both public and
"radical" states that are presumably not too attractive to privateprivate investments is noticeable. A variety of fiscal pressures,
investors. More detailed state-level research is clearly needed.6 including the need to "service" a populist polity, led to significant
One tantalising clue to the economic performance of these radical decline in public investment, from an annual average of some
states is provided in Figure 1C. Labour militancy declined in both15-20 per cent of total public spending in the 1980s to some 5-
these states during the 1990s: for example. labour disputes in10 per cent in the post-reform period [World Bank 2003, Ch 3].
West Bengal declined from some 9.6 million in 1981 to 3.8 While data on private investment in Bihar is not available, the
million in 1995, and in Kerala from 2.2 million in 1981 to 1.7 data on new state level private projects collected by the CMIE
million in 1995. Is it possible that, desiring growth, communist indicates that Bihar in recent years was attracting the fewest
parties in power have demobilised their organised supporters?projects among all of India's major states. A variety of Bihar's
If so, significant improvement in industrial production mightinitial conditions, including the investment climate, are clearly
reflect improved productivity via enhanced capacity utilisation, part of this "story." However, it is also the case that repeated
as well as by attracting some new investment. governments in Bihar have simply not been developmental.
Leaving aside the issue of cross-state variations, let us now Consumed by the need to broaden and maintain their electoral
briefly contrast the specific states of Bihar and Gujarat to get power, the priorities of Bihar's political leadership are anything
a sense of how differences in initial conditions are combiningbut growth promotion. In the words of the World Bank, yes, the
with governmental initiatives to create the Mathew effect. Bihar World Bank:
is well known for its poor infrastructure, poor quality workforce, Bihar has not been proactive in courting private investment or
and poor governance [see Kohli 1991: World Bank 2005]. In articulating a development strategy and "vision." Thus, the gov-
spite of these obstacles, Bihar's economy during the 1980s grew ernment does not have an investment council, conveying a lack
at a respectable rate of some five per cent per annum. Following of concern about fostering and protecting private investment
the reforms, however, the average growth rate fell by a whole [World Bank 2005: p 32].
point (Table 4). A pronounced deceleration in agricultural growth This absence of state activism for development is costing
rate was part of this decline. However, the deceleration of growth Bihar dearly.
in the secondary sector as a whole was also quite significant By contrast, "liberalisation" has proved to be a boon to a state
[Bhattacharya and Sakthivel 2004, Table 6], and that in registeredlike Gujarat. The average annual rate of economic growth in the
manufacturing during the 1990s was quite dramatic [Nagaraj post-reform period in Gujarat accelerated by more than two

Economic and Political Weekly April 8, 2006 1367

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per cent over the 1980s (Table 4), with the growth in the sec- countries increasingly is, which model is best to emulate. My
ondary sector jumping by nearly three percentage points, up into personal preferences are social democratic, but for now that is
the double digits. The underlying dynamics are again not hard not too relevant. The neo-liberal model has in the recent years
to understand. The initial advantages were significant: good been hegemonic, or near hegemonic. With numerous countries
infrastructure; productive labour force: and a prolonged record adopting - or apparently adopting - neo-liberal policies, a press-
of pro-business government. If Bihar was at the lowest end of ing scholarly issue is: how successful have these policies been?
attracting new private investment, Gujarat was at the other extreme. The discussion about India is part and parcel of this broader
As part of an explanation, Aseema Sinha (2004) has very nicely global debate. Champions of neo-liberalism generally want to
documented, how in the 1990s Gujarat became even more of an embrace all successful cases - such as recent India - as examples
activist, pro-business state: of the virtues of their prescriptions, while distancing themselves
from failures, often arguing that their prescriptions were not really
The government (of Gujarat) continued to invest in projects and
sectors where it expected private investment to need further en- implemented, or urging us to imagine how much worse things
couragement. To accelerate development of the electronics indus- might be had their prescriptions not been implemented. Against
try for instance, the state government announced a special incen- these arguments - which are often put forward and supported
tive package, which included investment subsidy and sales, tax by enormously powerful institutions around the world - some
benefit, and five additional electronics industrial estates were lone scholars chip away at this hegemony, arguing instead that
planned. In 1995-2000 many new state agencies were created, such growth successes in the developing world resemble more the
as the Gujarat Infrastructure Development Board and the Gujaratstatist model of Japan or South Korea, where activist states have
Power Corporation. These signified an enhancement of the state allied closely with business groups to push national economies
rather than its withdrawal (p 88).
on an upward trajectory. Since a narrow alliance of political and
This activist industrial policy is a lot more east Asia thaneconomic elite is not easy to institutionalise, east Asian models
neoliberalism at work. have also often had unsavoury politics. Against the neo-liberal
To sum up, the reforms of 1991 have opened up new oppor- model that holds that all good things can go together, the east
tunities for some Indian states and left others at a disadvantage.
Asian model puts into sharp relief the tradeoffs that modem
While initial economic advantages and disadvantages weredevelopment efforts might involve.
important, so has been the contrasting behaviour of state levelIf India's recent economic growth was really a result of pro-
governments. Here too, of course, institutional inheritance matters.
market policies, then, in principle, there ought to be very few
Nevertheless, the interstate dynamics of differential growth rates
costs, only widespread benefits: after all, decentralised markets
seem to be propelled by similar forces as were evident at support
the democracy; competition creates a level-playing field;
national level: regional states that have effectively created a pro-
efficient use of factors of production ought to create labour-
business alliance for growth seem to be experiencing the most intensive industrialisation and thus rapid employment growth;
rapid economic growth. terms of trade ought to shift towards the countryside, benefiting
the rural poor: and since capital moves to capital-scarce areas
Conclusion in search of high returns, regional inequalities ought to diminish
over time, mitigating inequalities. Unfortunately, many of the
In this essay I have argued that the recent accelerationtrends noted ofabove do not fit these expectations. India's growth
acceleration is instead being accompanied by growing inequali-
economic growth in India was more a function of the pro-business
tilt of the Indian state and less a result of the post-1991 economic
ties, growing capital intensity of the economy, growing concen-
liberalisation. In order to support this argument, I have offered
tration of ownership of private industry, and nearly stagnant
three types of evidence: first, growth acceleration aroundgrowth 1980in employment in manufacturing industries. This evi-
coincided with the striking but the less noticed shift indence is more consistent with the view that the development
the state's
economic role initiated by Indira Gandhi; second, themodel aggregate
pursued in India since about 1980 is a pro-business model
economic performance since liberalisation, especially that industrial
rests on a fairly narrow ruling alliance of the political and
growth, has not improved over the 1980s; and finally,the theeconomic
inter-elite.
state variation in economic growth in the 1990s also Rapid seemseconomic
to growth is essential for poor India. It is also
follow the same pattern, with pro-business state governments
the case that India's development strategy from the Nehru period
succeeding handsomely in attracting private investment was and
much thus
in need of change. However, none of this implies, or
growing rapidly. ought not to imply, that any new growth strategy that produces
With the argument now in place, what remains isthese mainly to
outcomes is beyond critical scrutiny. India's success at
tease out some concluding implications. Readers may wonder
growth acceleration is to be admired. However, the current
what the stakes are in distinguishing pro-business and pro-market
growth experiment has to be kept in proper perspective. India's
policies? The answer is in part scholarly, that is, getting economiccausal
growth has not accelerated dramatically. What aggre-
connections right, and in part normative, that is, are the gateongoing
change is noticeable predates the liberalising reforms by a
changes fair and just? We are now living in a world in which
whole decade and industrial growth in the post-reform period
democracy and capitalism have emerged as the most diddesirable
not pick up. Moreover, the problems posed by India's current
modes for organising national political economies. The real model of development include disquieting impli-
pro-business
debate about national choices is thus increasingly about "varieties
cations for the quality of India's democracy. I raise them at the
of capitalism". With advanced industrial economiesend providing
only as questions. Why should the common people in a
mainly three alternatives - the neo-liberal modeldemocracy of Anglo- accept a narrow ruling alliance at the helm? Is ethnic
America, the social democratic model of Scandinavia, and the and nationalistic mobilisation a substitute for pro-poor politics?
statist model of Japan and South Korea- the debate for developing And, is India increasingly stuck with a two-track democracy, in

1368 Economic and Political Weekly April 8, 2006

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SPECIAL ISSUE

WATER CONFLICTS IN INDIA

February 18, 2006
'Million Revolts' in the Making -Biksham Gujja, K J Joy, Suhas Paranjape,
Vinod Goud, Shruti Visput
Contending Water Uses: Biodiversity vs Irrigation: Case of Keoladeo National Park -Malavika Chauhan
Contending Water Uses: Social Undercurrents in a Water-Scarce Village -Anjal Prakash, R K Sama
Contending Water Uses: Bridge over the Brahmaputra -Chandan Mahanta, Anjana Mahanta
Equity, Access and Allocation: Conflict in the Bhavani -A Rajagopal, N Jayakumar
Equity, Access and Allocation: Discrimination in an Irrigation Project -S N Lele, R K Patil
Water Quality: Pollution through Aqua Culture: Kolleru Wildlife Sanctuary -J Rama Rao, Jasveen
Water Quality: Unclogging the Khari River:
Stakeholders Come Together to Halt Pollution -Srinivas Mudrakartha, Jatin Sheth, J Srinath
Water Quality: Bridging the Ganga Action Plan: Monitoring Failure at Kanpur -Praveen Singh
Sand Mining: Groundwater Depletion in Papagani Catchment -M Chandrasekhara Rao
Micro-Level Disputes: Gravity Dam in Trouble: Forest Officials
Who Missed the Wood for the Trees -Nandita Singh, Chandan Sinha
Micro-Level Disputes: Traditional Water Harvesting Structure:
Community behind 'Community' -Prakash Kashwan
Micro-Level Disputes: Failure of Community Institutions:
Shapin River Basin in Jharkhand -Pankaj Lal, Kamaldeo Singh, Kapildeo Prasad
Dams and Displacement: Alternative Restructuring of the Sardar Sarovar:
Breaking the Deadlock -Suhas Paranjape, K J Joy
Dams and Displacement: When Multiple Conflicts Overlap:
Haribad Project in Madhya Pradesh -Rehmat, Shripad Dharmadhikary
Dams and Displacement: Major Loss, Minor Gain: Polavaram Project in AP -R V Rama Mohan
Transboundary Disputes: Two Neighbours and a Treaty: Baglihar Project in Hot Waters -Rajesh Sinha
Transboundary Disputes: Politics and Litigation Play Havoc: Sutlej Yamuna Link Canal -Indira Khurana
Privatisation: In Chhattisgarh, a River Becomes Private Property -Binayak Das, Ganesh Pangare
For copies write to: Circulation Manager,
Economic and Political Weekly,
Hitkari House, 6th Floor, 284, Shahid Bhagatsingh Road, Mumbai 400 001.

1370 Economic and Political Weekly April 8, 2006

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