POLITICS OF ECONOMIC GROWTH

IN INDIA, 1980-2005

Submitted By
Abhishek Kumbhalkar (PGP37279)
Mrunal Patil (PGP37306
Nivedha Asokan (PGP37305
Part I: The 1980s
India’s economy hardly grew in the first half of 20th century and post-independence it showed a
sluggish growth rate of 3-4%. However, it was mesmerizing to see India’s economy growing at the
rate of 6% in the last quarter of the century. The paper has tried to find the reason behind the
growth of India post-independence. It has analysed two interpretations of this growth rate. Firstly,
pro-market interpretation focuses on economic liberalisation in India which started in 1991.
According to pro-market interpretation, the earlier sluggish growth rate was a result of highly
interventionist state and of a misguided import substitution trading regime. In 1991, India adopted a
pro-market, liberalising its domestic regulatory structure, lowering tariffs, implementing suitable
exchange rate policies, and allowing foreign investors to play a major role in the economy. However,
this interpretation is insufficient to explain three observed anomalies: First, India’s rapid economic
growth was seen a decade prior to liberalization of 1991. Second, industrial production in India did
not show any growth post liberalising reforms. Third, some states showed positive response to this
change, while some showed negative response. Since pro-market interpretation was unable to
explain the changes, it is more likely that the pro-market interpretation is mistaken. Alternative way
to explain the growth is the pro-business interpretation. The pro-business interpretation says that
the rapid industrialization is the result of highly interventionist states who prioritised economic
growth as a state goal, ruthlessly supported capitalists, repressed labour, and mobilised economic
nationalism.

It can be argued that the economic growth in India post 1980 is because of the rightward drift in
Indian politics due to which ‘the embrace of state and business continues to grow warmer, leaving
many others out in the cold’. The paper has elaborated on this argument by focussing on the pro-
business changes since 1980 that are responsible for the economic growth. The argument is
explained in paper by three analytical steps. First, the paper has compared the redistributive pre-
1980 political and policy orientation in India against the more pro-growth and pro-business
orientation that followed in the 1980s. The paper has suggested some possible causal mechanisms
that might link political and economic changes by considering the association between this political
shift on the one hand, and the improved growth performance on the other hand. Second, the more
liberal policies adopted in the early 1990s resulted in a new policy regime; this regime is best
characterised as part pro-business, especially pro-indigenous business, and part pro-market. After
analysing these policy changes, it can be doubted if the pro-market policies are really helping propel
India’s economic growth. Also, it can be said that the pro-indigenous business policies adopted since
1980 are probably the main driver behind India’s industrial growth. Finally, Indian states with more
pro-growth and pro-business governments have tended to experience higher rates of economic
growth.

When a democratic state is narrowly committed to growth and business groups, not only is the
quality of that democracy likely to suffer, but it is also likely to create distributional and political
problems. The three most evident in India are: growing regional and class inequalities; the utilisation
of ethnic nationalism; and a rapid turnover in ruling governments.

Pro-Market versus Pro-Business State Intervention

The main lines of the debate are as follows: high growth resulted from the state’s embrace of a pro-
market strategy, namely, a move towards limited state intervention and an open economy; or the
growth was a product of an interventionist state, especially of a close collaboration between the
state and business groups aimed at growth promotion.
Whereas a pro-market strategy supports new entrants and consumers, a pro-business strategy
mainly supports established producers. A pro-market strategy rests on the idea that free play of
markets will lead to efficient allocation of resources, as well as promote competitiveness, hence
boosting production and growth.

A pro-market strategy would expect a competitive, open, and efficient economy which can result in
several additional positive outcomes: for the same amount of investment, a more efficient economy
would lead to higher rates of economic growth; pursuing comparative advantage would lead to
labour-intensive industrialisation and thus rapid employment growth; competition would facilitate
new entrants; and the terms of trade would shift towards the countryside, benefiting the rural poor.
The main concerns about pursuing such strategy were mostly short-term when the shift away from a
statist to a closed economy was expected to cause instability and recession.

The key idea here is that success or failure of growth is determined by the quality of state
intervention and not by its degree. More specifically, identifying relationship of the state to the
private sector is the key to understanding the relative effectiveness of state intervention in the
economy. This relationship varies along a continuous stretching from convergence in goals to mutual
hostility between the state and the private sector. The most conducive environment for rapid
industrial expansion in the developing world has been one in which the state's commitment to high
growth aligned with private entrepreneurs' profit maximization needs.

There was a lot of variances in the exact policy initiatives that developmental states took. Only a few
policies, such as labour discipline, required repression. Most policies chosen by developing
countries, on the other hand, indicated a single-minded political commitment to growth, as well as a
political recognition that maximising production ensures the profitability of efficient producers but
not unproductive ones. As a result, successful developmental nations have been pro-business far
more than they have been strictly and ideologically pro-market.

Thus, India from 1950 to 1980 was an example of a statist, import-substitution model of
development, with a socialist flourish. From 1980 onwards, however, the Indian state has shifted
Indian political economy towards east Asian models of development. This emulation remains
incomplete as India cannot readily replicate other state. As a result, an attempt is being made to
transform "socialist India" into "India incorporated” remains partial. India's economic successes can
be described in terms of the country's partial shift toward a pro-business development stance.

Politics of Economic Growth in the 1980s

According to historical statistics, economic growth rose after 1980, due to increases in both
investment and productivity. Expanding public and private business investments fuelled investment
growth in the 1980s, while a variety of growing private investments fuelled investment growth in the
1990s as public investments fell. In terms of productivity, particularly total factor productivity in
manufacturing, the research suggests that there was a rise in the 1980s, followed by a reduction in
the growth rate in the 1990s, although it was still improving.

Adoption of a new development model was what eventually prompted the upward shift in the
Indian economy's growth rate about 1980. Around 1980, Indira Gandhi moved India's political
economy toward a state-business partnership for economic growth. Indira Gandhi's post-emergency
policies disregarded redistributive considerations in favour of economic growth. Indira Gandhi made
it clear shortly after taking power in January 1980 that increasing production was now her top
objective. Nonetheless, the changes were significant, involving a move from left-leaning to right-
leaning governmental intervention. Economic actors in India recognised the developments and
expressed their support by increasing their investments and assisting India's rapid economic growth.

The policy shift was caused by underlying developments that were both slow-moving and
increasingly evident. Slow moving type included evidence that India's economic growth had been
poor during the 1970s and increasing production which was high on the policy agenda. The critical
fact that capitalism's importance in the Indian economy had continuously expanded was part of the
backdrop in which higher rates of growth were to be accomplished. The reliance on the private
sector for growth has increased because of the public sector's poor performance.

Among the short-term changes, Indira Gandhi must have realised by 1980 that garibi hatao politics
was losing steam: anti-poverty policies such as land reforms had proven difficult to implement;
ineffective socialism had hampered economic growth; and, by contrast, putting the state's weight
behind private producers had aided agricultural production, leading to the green revolution in the
1960s.

The three components of Indira Gandhi's new development model, which she implemented from
1980 onwards and which has largely been followed by subsequent governments, were: prioritising
economic growth as a state goal; supporting big business to achieve this goal; and taming labour as a
necessary component of this strategy.

The first step that Indira Gandhi took was to undergo pro-business policy reforms. The state
undercut the new investments in the public sector. The private sector was encouraged to take up
new investments in heavy industries. The Monopolies and Restrictive Trade Practices Act (MRTP
Act), which effectively stifled big business expansion, was thus watered down, abolishing licencing
constraints and allowing big business to thrive in vital areas including chemicals, medicines,
ceramics, and cement. The government also encouraged private sector participation in areas such as
power generation.

Second step deals more with the financing of these reforms. To promote investment, the
government granted some tax relief to big businesses. More importantly, the government changed
the legislative framework and offered incentives to encourage the private sector to fund new
investments directly from public funds.

Third, both the national government and the business sector believed that labour activism needed
to be restrained if private enterprise was to grow quickly. Indira Gandhi had a difficult time with this
because she was widely viewed as a left-wing leader. Nonetheless, she prioritised the "national
situation" over labour’s interests and issued a warning to the union. Indira Gandhi increasingly
characterised strikes, 'gheraos,' "go-slow" and "work-to-rule" campaigns as "anti-social acts of
irresponsibility by a few."

The economic strain on budgets was severe, with revenues from direct taxes dropping on the one
hand (due to tax breaks for big business) and expanding expenses, such as modernising defence and
maintaining infrastructure investment on the other. In keeping with its new priorities, which include
increasing production mostly through the private sector, the government attempted to reduce some
of its traditional spending.

Finally, some changes in India's economic links with the rest of the globe should be noted. The
second petroleum price spike in 1981 greatly increased India's import bills as an oil importer.
Imports of machinery and other technology would be required as part of a commitment to increase
industrial growth. In 1981, India secured a loan deal with the International Monetary Fund (IMF) for
approximately $5 billion over a few years, anticipating a foreign exchange crisis. India's pro-business
policies had already been moving in a "encouraging" direction, but not quite the "structural
adjustment" package that had been demanded. India's response at the time was to liberalise its
economy. Both, the international investors, and foreign commodities are affected in some way. The
liberalisation of 1981 was not only far from routine, but it was also fraught with dangers. It turned
out to be a short-lived phenomenon. The cost of imports increased dramatically, even though a
corresponding increase in exports. Several Indian businessmen had responded angrily to the threat
of lower-cost imports demanded protection. The Indian government complied; imports were
allowed to continue. In the 1983-84 budget, restrictions were enforced once more. India cancelled
its IMF arrangement around the same time, if not sooner taking full advantage of the loan. This was
also a pattern that would repeat itself during the Rajiv Gandhi years.

There are three major political economy observations to be made about the Rajiv period. First,
regardless of what actual changes were accomplished during this time, Rajiv Gandhi and his advisors
decided to emphasise a rupture with the past from the start. Whereas Indira Gandhi's growing
embrace of big business was straining her commitment to socialism, Rajiv Gandhi rejected the idea
of socialism entirely and declared his government's dedication to a new "liberal" beginning. Second,
the government's dedication was first and foremost to economic growth, and only secondly to some
abstract ideals of "openness" or "laissez faire," as seen by policy reforms made during this period.
Despite mounting fiscal deficits, the government has continued to make public investments,
especially in infrastructure. Thus, government spending aided growth by boosting demand as well as
reducing supply restrictions. Much of the new private investment went into these areas, boosting
the productivity of the previously heavy-industry-based economy. Finally, the government became
actively involved in fostering the growth of certain industries, such as computers and electronics, by
providing supply-side support while still maintaining competitive pressure.

Finally, it is important to note that the policy pattern was more pro-business, especially pro-big
Indian business. Various internal policy reforms benefited large corporations rather than small or
medium private businesses, such as eliminating many licencing procedures, removing further
restrictions on how big businesses can be, and opening areas previously protected for the public
sector to the private sector. Furthermore, if disagreements developed over external opening, the
government met the requests of Indian business organisations, particularly on issues of foreign
investment but also on trade.

One important argument here is that the pro-business policy shift achieved by the two Gandhis was
the catalyst for this change in economic success. Indira Gandhi emphasised the democratic socialist
aspect of Nehru's statist development paradigm prior to this time, in the 1970s. Indira Gandhi's
efforts at redistribution, however, failed due to the Indian state's organisational and class
characteristics, and the democratic socialist tilt morphed into anti-capitalist populism, harmed
economic progress. Indira Gandhi basically abandoned the redistributive drive of her speech and
policies after regaining power in 1980, prioritising economic growth as the state's principal goal, and
quietly but steadily reordering economic policy to achieve this goal.

Part II: The 1990s and Beyond

After examining the political economy of the 1980s growth experience, the paper's second empirical
challenge derives from comparing 1980s economic success to 1990s and beyond. Several academics
have recently proven that, while industrial growth in the 1990s was lower than in the 1980s, the
change in trend since 1991-92 was not statistically significant. The startling fact is that, despite all
the clamour about reforms - both for and against them – the growth rate of India's manufacturing
industry was not much influenced by them. Around 1980, there was a significant slowdown in
growth.

Since 1991, India's industrial policy and external economic ties have been shaped by economic
reforms. The many industrial policy reforms — additional delicensing, removal of MRTP limits, tax
rebates, opening of formerly designated sectors for the public sector, and labour taming – are best
understood as continuations of reforms that began in the 1980s. These measures should mostly be
viewed as pro-indigenous business, helping existing enterprises to expand while also allowing some
new ones to arise and thrive. Given the preceding arguments, none of these measures should come
as a surprise. The domain of India's external economic connections, including commerce, foreign
investment, and financial relations, was where there was a considerable element of discontinuity,
and hence of surprise. As is also well known, import quotas were eliminated beginning in 1991
(though not completely until 2001), tariffs were gradually reduced, the currency was devalued, the
foreign investment system was liberalised, and numerous limitations on external financial activities
were lifted. Some of these reforms benefited Indian businesses, while others put them under
tremendous competitive pressure. The Indian government was responding to a rapidly changing
world by enacting these external economic changes, and in the process, attempting to construct a
new social compact with Indian business: we will continue to put our entire weight behind you, but
you must improve your competitiveness.

Why did the same set of reforms that proved difficult to pursue during the 1980s become more
likely in the early 1990s?

The reforms became increasingly acceptable in the 1990s as the environment in which India
functioned changed and as Indian capital split politically, with a large faction eager to at least
experiment with a more open economy. The decline and breakup of the Soviet Union were huge
external changes. This shift had far-reaching implications for India. The Soviet Union was a major
economic partner (India-Soviet Union commerce was close to $6 billion by the end of the 1980s),
providing India with oil, weaponry, and defence materials in exchange for a range of items. Much of
this trade took place without the use of real currency. With exports to Russia plummeting, the issue
of sustaining and upgrading defence forces became closely linked to the availability of hard currency.
Improving export revenues and maximising other foreign exchange sources thus became national
security concerns. These difficulties must have created a new sense of urgency for liberalisation,
even if they were never publicised as such.

There are also some significant changes occurring within India that must be considered. Most
importantly, the Indian corporate community's aversion to external expansion decreased, though
only little. Various areas of Indian capital became more efficient during the 1980s, and business
lobbying witnessed substantial changes. We've already discussed how Indian industry increased its
production steadily throughout the 1980s. As a result, it's reasonable to conclude that some Indian
business groupings were more prepared to deal with global competition in the 1990s than they were
in the 1980s. The most compelling evidence for this assertion may be found in the shifting patterns
of Indian capital's political organisation and the demands it placed on the state during this time.

Although this is an oversimplification, Indian capital diverged in its political and policy preferences
during the 1980s. On one hand, the CII represented the more "modern," export-oriented industries.
They advocated for a more competitive, open economy. On the other hand, there were the older
corporations that had grown up during the import substitution era. They were represented by FICCI
and Assocham, and they were far more sceptical about outward opening. The real political process
around economic liberalisation was more complex than this characterisation might suggest, as will
be shown further below. Nonetheless, India's pro-liberalisation policymakers must have felt buoyed
by the presence of several notable business names and organisations eager to back the openness of
the market.

Beyond the structural changes, the political process of economic liberalisation was also revealing of
the underlying power dynamics. The narrow political leadership, the technocratic policy elite, a
segment of Indian capital, and external actors, expressing their preferences primarily in the form of
policy conditionalities set by the IMF, were among the main forces supporting such a shift when the
Congress government, with Manmohan Singh as finance minister, actually announced the policy
shift. A second key component of early reforms was measures to reduce the budget deficit, which
were in line with the IMF's "structural adjustment" prescriptions. Because increasing revenues was
challenging – especially in light of corporate tax breaks – the focus of these efforts shifted to cutting
spending. After a brief period of success, say the first three years, these businesses quickly ran into a
slew of issues. Cuts in subsidies, for example, were resisted by politically powerful groups such as
farmers and exporters, additional cuts in social spending were expected to cost popular electoral
support, and a drop in public investment was generally linked to the ongoing industrial slowdown.
Even big business began to advocate for increased public spending in sectors like infrastructure.
Concerned about economic growth at the time, the Indian government refused to accept further
IMF loans in 1994, arguing that further cuts in budget deficits were neither possible nor desirable,
and the decline in current expenditures came to a halt; unfortunately, the reduction in budget
deficits that was achieved came at the expense of social spending and public investment.

The third key component of the reform programme was, of course, the desire to integrate the Indian
economy with the global economy. As previously stated, most import limits were eliminated
throughout the 1990s, tariff levels were reduced, and laws controlling the entrance of foreign capital
were liberalised. However, India's global opening proved to be a contentious political process, and in
the end, a number of factors, particularly industry lobbying, constrained the speed and extent of such
an opening. As previously mentioned, India's biggest chamber of business, the CII, backed India's
economic liberalisation in the early 1990s. Throughout the 1980s, the FICCI and Assocham fought for
internal deregulation while "going slow" on the exterior front. As the balance of payment issue
improved, two-and-a-half years after the "great bang" opened. They claimed that quick liberalisation
would damage India's indigenous sector, particularly the capital goods industry; instead, tariffs should
be gradually reduced, and foreign investment should be restricted. They urged for more government
assistance and a more selective integration with the global economy, citing Korea as an example. If
India's recent economic development is truly the product of pro-market policies, there should be few
costs and many benefits: decentralised markets promote democracy and competition ensures a level
playing field. The fact that the investment boom began primarily in the "registered sector," particularly
in the first half of the 1990s, suggests two things:

1) Reform policies initially benefited big business more than small business
2) Big business felt relatively at ease with the economy's slow pace of external opening.

Despite much pro- and anti-reform rhetoric about India becoming more neoliberal, the political
process and policy reform process reveal a considerably more complex pattern of government
engagement in the economy. But significant liberalisation has occurred and the Indian state remains
activist, prepared to promote and collaborate with Indian industry, while still being constrained by a
range of democratic political constraints. For emerging nations, the argument is growing over which
model to adopt and there are primarily three models:
 ● Anglo-American
● Scandinavian
● Japanese

The benefits of returning to the previous import substitution development paradigm are questionable.
It's also unlikely that such a return is a viable choice in today's "globalised" world. Some lone experts
are chipping away at this hegemony, suggesting that the developing world's growth triumphs are like
those of East Asia. In contrast to the neoliberal paradigm, which assumes that all good things can
coexist, the East Asian model emphasises trade-offs. Faster industrial growth and increased
penetration of international markets for industrial products were predicted because of the changes,
but the results have been disappointing. India remains as one of the world's fastest growing
economies, with an annual growth rate of about 6% and exports have been gradually increasing. Since
1991, the amount of concentration in private industry has also risen, which is significant. Given these
limits, the economic growth rose dramatically in the post-reform period. Also, that certain states were
more successful in attracting new private investment than others.

Politics of economic growth in states:

During the 1990s, the poorer states of India had a substantially different pattern of post-reform
industrial growth than the richer states. Because of insufficient infrastructure or more broadly, an
unfavourable investment climate, impoverished governments had a harder time attracting new
private investment. The data collected by the Centre for Monitoring the Indian Economy on "private
projects under execution" backs up this assumption. Nonetheless, it is true that industrial growth did
not improve in the 1980s, and public investment fell as the percentage of public debt rose. The key
drivers of India's long-term economic growth may be traced back to state government actions. In
India's better-off states, post-reform industrial growth either increased (Gujarat and Tamil Nadu) or
stayed approximately the same as in the 1980s (Maharashtra, Karnataka and Punjab). The decline of
development in the secondary sector as a whole and in registered manufacturing in particular, was
extremely substantial throughout the 1990s. When compared to India's poorest states, whose
economic development has slowed across the board since the reforms, a key conclusion emerges:

“Private investors in India continue to prefer India's richer states over the poorer ones”.

It's probable that simple international openness won't deliver much, especially in a huge economy like
India, where foreign commerce and investment play a little role. While the first economic benefits and
drawbacks were significant, so was the divergent behaviour of state governments. With reform
champions voicing dissatisfaction, the fundamental discussion is about how to justify the reform
institutions' poor performance. India's rapid growth is accompanied with increasing inequalities and
the economy's capital intensity. One of the key engines fuelling consistent, albeit not particularly fast,
expansion of industry in the post-reform period is relatively high rates of private investment. Regional
nations that have successfully formed a pro-growth alliance appear to be seeing the fastest economic
development. The question arises if India was becoming a two-track democracy, in which ordinary
people were only required during elections and then it is best if they all go home, ignore politics, and
allow the "sensible" elite to run a pro-business show quietly. During the 1990s, the labour intensity of
Indian industry continuously fell, whereas capital formation in the household sector grew substantially
from the mid-1990s. This led to India's underdeveloped states, which have weak infrastructure and an
unfavourable business climate, appear to be attracting private money. The Indian state's pro-growth
trend, which began in the 1980s and extended into the 1990s and beyond, is largely responsible for
the country's economy's solid post-reform record. However, because of the reforms, public sector
investments in India have decreased, as has been the situation in most Indian states.

The government lacks an investment council, indicating a lack of interest in encouraging and
preserving private investment. In the 1990s, secondary sector data shows significant development in
Tamil Nadu and Madhya Pradesh, as well as a drop in Haryana. In both the 1980s and the post-reform
period, Punjab's industrial growth stayed in the six percent area. Punjab's economy slowed because
of a drop in agricultural growth rates, not because of policy reforms. There are eight states in India
whose growth rates have risen or fallen by a percentage point or more. India's impoverished states
have not fared well after policy changes in 1991. The necessity to "serve" a populist polity, among
other fiscal pressures, resulted in a dramatic drop in public investment.

Since then, the rate of increase in corporate investments has slowed, although it has remained
consistently greater than in previous times. Since 1994-95, the most significant declines in
governmental and private sector investment have occurred in Bihar, Madhya Pradesh and Uttar
Pradesh. In terms of per capita income, West Bengal and Kerala are closer to the national average, but
the investment climate is not as favourable. The incentives and pressures placed on the private sector
to increase exports have remained inadequate. India isn't South Korea or Taiwan, and its fastest-
growing states aren't open economies with liberal labour laws. The noticeable aggregate shift
predates the liberalising changes by a decade. Bihar is paying a high price for the lack of
governmental activism for development. Over the previous decade and a half, the manufacturing
sector's percentage of employment has stayed unchanged. Punjab is an outlier, where the drop in
total growth appears to be driven primarily by a drop in agricultural growth. The fall in growth in a few
states was statistically more substantial than the uptick in growth. India's current acceleration of
economic growth is more a product of the Indian government's pro-business stance than of post-1991
economic liberalisation. The question of why certain states' post-reform economic development
increased is more complicated. Indeed, the changes themselves appear to have had a fairly minor
influence on the overall economy including on growth, investment and inequality. Improvements in
industrial efficiency were prioritised by the government, with export success coming in second. While
succeeding administrations have made progress, they have not been able to keep current spending
under control. Bihar has attracted the fewest projects out of all of India's main states in recent years.
Neoliberals often wish to highlight all successful situations – such as modern India – as evidence of
the benefits of their prescriptions while avoiding failures. None of this, however, means or should
indicate that any new development plan is immune to criticism.