explaining economic liberalization in india: state and society perspectives

18
Explaining Economic Liberalization in India: State and Society Perspectives JØRGEN DIGE PEDERSEN * University of Aarhus, Aarhus, Denmark Summary. — The economic reforms of 1991 carried out by the Indian government were remarkable given the prevailing attitude among researchers that such reforms would be impossible to implement. This article discusses the possible explanations for the initiation and consolidation of the reform process. Contrary to the prevailing explanations that focus on the state elite or pressures from the international economy, this paper argues that the impetus came from a new breed of Indian entrepreneurs. Ó 2000 Elsevier Science Ltd. All rights reserved. Key words — Asia, India, economic reforms No social order ever perishes before all the productive forces for which there is room in it have developed; and new, higher relations of production never appear before the material conditions of their existence have matured in the womb of the old society itself. There- fore mankind always sets itself only such tasks as it can solve; since, looking at the matter more closely, it will always be found that the task itself arises only when the material conditions for its solution already exist or are at least in the process of formation Karl Marx [1859] (1973, p. 504) 1. INTRODUCTION The economic liberalization policy initiated by the Indian government in 1991 came as a surprise to many observers. Academic observ- ers of the earlier attempts to liberalize the Indian economy had unanimously stressed the impediments to such policies and had predicted that even if initiated, liberalization policies would never be implemented. 1 Contrary to these expectations successive Indian govern- ments led by dierent political parties and coalitions — the Congress Party (1991–96), the United Front (1996–98) and the Bharatiya Janata Party (1998) — have persisted with the new policy, now into its eighth year. While the policies have evoked a lot of debate and criti- cism within India, this debate has focused almost exclusively on the likely economic and social consequences of the new policies. 2 I will instead focus on alternative explanations of the initiation and subsequent consolidation of the policies of structural adjustment in India. The competing explanations will be related to the international theoretical discussion on struc- tural adjustment experiences, in particular the relationship between the nature of politics and state on the one hand and liberalizing adjust- ment policies in the developing world on the other. Interestingly, IndiaÕs experience with economic reforms does not fit easily into prevalent theorizing over economic reform processes. The following section discusses some of the major paradoxes of the Indian reform process. These paradoxes emerge from the encounter between current academic thinking on IndiaÕs political economy on the one hand and the Indian reality of an ongoing reform process on the other. 2. THE PUZZLES AND PARADOXES OF LIBERAL REFORM IN INDIA In the recent international debate on pros- pects and prerequisites for economic develop- ment India has generally been seen as either an exception to the rule or as a model case for a wrongly conceived development strategy. IndiaÕs inward-oriented and largely state-di- rected strategy came in for strong criticism by World Development Vol. 28, No. 2, pp. 265–282, 2000 Ó 2000 Elsevier Science Ltd. All rights reserved Printed in Great Britain 0305-750X/00/$ - see front matter PII: S0305-750X(99)00132-1 www.elsevier.com/locate/worlddev * The author thanks Eswaran Sridharan and an anon- ymous referee for their comments on an earlier version of the article. Final revision accepted: 22 June 1999. 265

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Page 1: Explaining Economic Liberalization in India: State and Society Perspectives

Explaining Economic Liberalization in India: State

and Society Perspectives

JéRGEN DIGE PEDERSEN *

University of Aarhus, Aarhus, Denmark

Summary. Ð The economic reforms of 1991 carried out by the Indian government were remarkablegiven the prevailing attitude among researchers that such reforms would be impossible toimplement. This article discusses the possible explanations for the initiation and consolidation ofthe reform process. Contrary to the prevailing explanations that focus on the state elite or pressuresfrom the international economy, this paper argues that the impetus came from a new breed ofIndian entrepreneurs. Ó 2000 Elsevier Science Ltd. All rights reserved.

Key words Ð Asia, India, economic reforms

No social order ever perishes before all the productiveforces for which there is room in it have developed;and new, higher relations of production never appearbefore the material conditions of their existence havematured in the womb of the old society itself. There-fore mankind always sets itself only such tasks as itcan solve; since, looking at the matter more closely,it will always be found that the task itself arises onlywhen the material conditions for its solution alreadyexist or are at least in the process of formation

Karl Marx [1859] (1973, p. 504)

1. INTRODUCTION

The economic liberalization policy initiatedby the Indian government in 1991 came as asurprise to many observers. Academic observ-ers of the earlier attempts to liberalize theIndian economy had unanimously stressed theimpediments to such policies and had predictedthat even if initiated, liberalization policieswould never be implemented. 1 Contrary tothese expectations successive Indian govern-ments led by di�erent political parties andcoalitions Ð the Congress Party (1991±96), theUnited Front (1996±98) and the BharatiyaJanata Party (1998) Ð have persisted with thenew policy, now into its eighth year. While thepolicies have evoked a lot of debate and criti-cism within India, this debate has focusedalmost exclusively on the likely economic andsocial consequences of the new policies. 2 I willinstead focus on alternative explanations of the

initiation and subsequent consolidation of thepolicies of structural adjustment in India. Thecompeting explanations will be related to theinternational theoretical discussion on struc-tural adjustment experiences, in particular therelationship between the nature of politics andstate on the one hand and liberalizing adjust-ment policies in the developing world on theother. Interestingly, IndiaÕs experience witheconomic reforms does not ®t easily intoprevalent theorizing over economic reformprocesses. The following section discusses someof the major paradoxes of the Indian reformprocess. These paradoxes emerge from theencounter between current academic thinkingon IndiaÕs political economy on the one handand the Indian reality of an ongoing reformprocess on the other.

2. THE PUZZLES AND PARADOXES OFLIBERAL REFORM IN INDIA

In the recent international debate on pros-pects and prerequisites for economic develop-ment India has generally been seen as either anexception to the rule or as a model case for awrongly conceived development strategy.IndiaÕs inward-oriented and largely state-di-rected strategy came in for strong criticism by

World Development Vol. 28, No. 2, pp. 265±282, 2000Ó 2000 Elsevier Science Ltd. All rights reserved

Printed in Great Britain0305-750X/00/$ - see front matter

PII: S0305-750X(99)00132-1www.elsevier.com/locate/worlddev

* The author thanks Eswaran Sridharan and an anon-

ymous referee for their comments on an earlier version

of the article. Final revision accepted: 22 June 1999.

265

Page 2: Explaining Economic Liberalization in India: State and Society Perspectives

those proponents of outward-oriented, laissez-faire capitalism who were so prominent duringthe 1980s. 3 India did, however, earn a repu-tation for avoiding a debt crisis in a periodwhen the external ®nancial balances of so manydeveloping countries fell into a precarious state.On both counts India remained in a specialcategory (Joshi & Little, 1994). This specialstatus was also evident in the discussion thatfollowed the attempted liberalization policy bythe Rajiv Gandhi government from 1985onward.

Arguments in the debate over the origins ofthe 1985 liberalization policy fall into twocategories according to their identi®cation ofthe dynamics behind the reform e�orts. Onegroup, partly Marxist inspired, saw the policyas a result of pressures from domestic bigbusiness wishing to expand by encroaching onareas previously reserved for public enterprisesand the small-scale sector. Given the localbusinessmenÕs fear of foreign competition theliberalization policy was only expected toinclude domestic deregulation, not a reductionof the restrictions on foreign investments andimports (Patnaik, 1985). Prophetically, someobservers warned against an impending debtcrisis resulting from the new measures, andthere were even allegations that the Indianeconomy had been ``hijacked'' by a select groupof Indian capitalists and politicians (Bagchi,1985, p. 26).

A second explanation focused on the narrowcircle of advisors surrounding the PrimeMinister and saw the impetus for liberalizationin the market-oriented ideology of this basicallyautonomous group of insiders. The faltering ofthe liberalization initiatives was seen as a resultof ``society hitting back'' (Kohli, 1989, p. 316).Powerful groups both within the Indian stateand within the wider society, were thought tooppose liberalization. These powerful groupsincluded the business sector, the bureaucrats,the rural sector and the traditionally highlyvocal and in¯uential leftist-nationalist intelli-gentsia (Denoon, 1998).

Given the plausibility these explanationsderived from the short-lived liberalizationpolicies of the mid-1980s, the far-reachingreform of July 1991 by the newly-electedminority government (led by prime ministerNarasimha Rao) must have come as a surprise.Indeed, the governmentÕs success in consoli-dating the reform policies and implementing asubstantial part of the new policy measures wasnever anticipated by the observers of the initial

policy steps. 4 This unexpected outcome raisesa number of intriguing questions about IndiaÕspolitical economy: Does Indian businesssupport a liberal policy regime in theory, but inpractice oppose it? Do the intelligentsia, therural sector, the bureaucracy, the trade unionsand other powerful (or at least vocal) groupsoppose the policy changes? If such oppositionexists, why were the policies were initiated, whyhave they continued for more than eight years,and why have they been implemented on a scalethat greatly exceeds the skeptics' expectations?

Three logical explanations can be o�ered tothese questions. An obvious one is that theopponents of the liberalization policies wereweakened considerably during the last years ofthe 1980s. Another explanation is that theaccounts of the 1985 liberalization may haveoverlooked some powerful forces, that newforces have since entered the political scene, orthat the interests of relevant parties havechanged in a more liberal direction. The thirdexplanation is that skeptics' pessimism andtheir failure to predict the subsequent strongliberalization thrust is due to inadequate anal-ysis of the key elements of economic reformand their respective in¯uences over the policyprocess. The three explanations are di�erentbut not mutually exclusive. There is an elementof truth in all three and a theoretically informedcombination of them yields a satisfactoryexplanation of the initiation and consolidationof the new economic policies.

3. THEORETICAL PERSPECTIVES ONPOLICY REFORM IN DEVELOPING

COUNTRIES

The debate on policy reforms in developingcountries has been inspired in turn by twotheoretical debates within the social sciencesand development studies in particular: (a) thedebate on the relationship between state andsocial structures and actors, and its signi®cancefor explaining important social change, and (b)the debate on the nature of developing societiesand their insertion into the world economy. 5

In recent years, this debate has been concernedwith policies of economic stabilization andstructural reforms promoted by the WorldBank and the International Monetary fund(IMF). The omnipresence of these institutionslends support to the interpretation that thereforms were the result of pressure from inter-ested parties abroad. Indeed, external agents

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have at times been seen as the sole forceworking for liberal reforms. 6

The discussion on the role of the state infostering social change has been stronglyin¯uenced by the so-called statist perspective.The statist perspective rests on two supposi-tions:

(1) public o�cialsÕ forming their own policy prefer-ences, the extent to which they do so being explainedby the stateÕs internal variations, and the preferencesbeing distinctive vis-�a-vis societyÕs; (2) the state actingon its preferences despite their divergence from thoseof the most ÔpowerfulÕ private actors. 7

The state is treated as an autonomous vari-able in contrast to the Marxist approach whichaccords explanatory primacy to social forces,with the state as a dependent variable. 8 Thearguments for ``bringing the state back in''(Evans, Rueschemeyer & Skocpol, 1985) werere¯ected in the ensuing debate on the role of thestate in successful economic development andon structural reforms in developing societies.This argument identi®es the autonomous(ÔstrongÕ) state as the necessary condition forsuccessful economic policy, including successfuleconomic reforms. The statist position is thefoundation of the argument that successfulreforms require a strong and dedicated politicalleadership supported by a core group of tech-nocrats (``a change team''). 9 The consolidationof reforms is then seen as requiring a powerfulconstituency for reform, and this constituencywill in turn serve to diminish state autonomy(Haggard & Kaufman, 1995, pp. 9±10). Aconsensus has emerged on the characteristics ofthe ``developmental state.'' The state has to beinsulated from regressive social forces, or statedpositively, the autonomy of the state has to be``embedded'' in ``progressive,'' development-oriented social forces (Evans, 1989, 1992a,1995, 1997). 10 This notion of ``embeddedautonomy'' legitimizes a renewed focus ondissolving the concept of a state±societydichotomy. 11

The second theoretical in¯uence on thedebate on economic reforms comes from thewell-known dependency debate. One of the keydiscussions in the debate on economic adjust-ment has been on the use of ``conditionality'' inpromoting policies for structural adjustment.While the importance of IMF/World Bankconditionality is not in dispute, its actualimpact on policy is unknown. 12 Much of thecriticism of the Indian economic liberalization

program is based on an interpretation, partlysupported by the Indian government itself, thatthe reforms were enforced from abroad, eitherby the international ®nancial institutions orcircumstances in the world economy. 13

The principal parameters in the debate oneconomic reforms in developing societies aresummarized in Figure 1. 14

The above discussion points to three mainavenues for investigation into the causes for theunexpected and permanent change in economicpolicy by the Indian government in 1991. Onestrategy would be to take the ``statist'' argu-ment at face value and search for dynamics andchanges within the Indian state that couldprovide an explanation for the emergence of thenew strategy. A second approach is to analyzethe changes in the structure of the Indiansociety at large, in particular among thosesegments that are mostly concerned with theeconomic reforms. Finally, one could search forindications of stronger and more determinedinternational pressure and/or in¯uence on thepolitical decision-making system in India.

The following sections consider the threealternative research strategies to discover howthe changes happened, why they happened, andwhy they were sustained. This procedure facil-itates both the possible links between the vari-ous explanatory factors, the importance of theindividual factors and the theoretical implica-tions of the Indian case for the general debateon the role of the state in developing societiesand on state-initiated economic reforms. Theexplanations o�ered will of course be of apartial nature. An adequate explanation wouldrequire more detailed investigations into theprocess of liberalization, including those

Figure 1. Main determinants of economic reformsÐa®gurative sketch.

EXPLAINING ECONOMIC LIBERALIZATION IN INDIA 267

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domestic political circumstances that, mostwould agree, were also instrumental inproviding a window of opportunity for pushingforward the reform package.

4. A CHANGE IN SOCIETY: THE ``QUIETREVOLUTION'' WITHIN INDIAN

INDUSTRY

Many observers place the blame for thefailure of previous reform e�orts on the Indianbusiness community, in particular those indus-trial sectors that grew up under the protec-tionist and inward-oriented regimes. In anysociety-centered explanation the nature andstrength of the industrial class must ®gureprominently.

Before 1991 changes within the industrialsector in India were modest. Indian industry,though slowly improving its share of nationalproduction, in 1991 still accounted for onlyone-®fth of total economic activity within thecountry. 15 The sectoral structure of Indianindustry had similarly changed only gradu-ally. 16 In terms of social control, the industrialsector was dominated by the same relativelyfew family-based industrial conglomerates thathad historically been dominant. This overallimpression of constancy, however, obscuresimportant recent changes, some of which arenot easily captured by statistical measurement.One change has been the gradual emergence ofa technologically more advanced segmentamong industrial companies, small-, medium-and large-scale. Modern medium- and small-scale industries have grown relative to tradi-tional small-scale industries and they nowcontribute more to output and export thanpreviously (Desai & Taneja, 1993). They havealso grown more rapidly than expected by theIndian planners (Planning Commission, 1992,p. 149). 17 The growth of medium- and small-scale modern companies was re¯ected in the

rapid growth of nongovernment companies (seeTable 1). This growth has in combination witha reduction in the growth-rate of government-owned companies resulted in an interestingchange within the corporate sector (see Figure2). The share of corporate paid-up capitalowned by private companies stopped itsdeclining trend vis-�a-vis government companiesduring the 1980s and began to climb slowlyafter 1987. In retrospect, this was a prelude tothe rapid growth under the new economicpolicy that in 1996 made private capital surpasspublic sector capital for the ®rst time since1972. In short, there are indications that in thelate 1980s, were a turning point in the devel-opment of private business in India.

The emergence of a more ``modern'' segmentof Indian business not only came aboutthrough the establishment of new companiesbut also, and equally important, throughchanges within the established circle of large-scale private industry. Even among publicsector enterprises a segment of modern enter-prises has emerged. In the private sector this isindicated by the gradual movement toward asystem of professional managers in contrast tothe traditional family-based system. Manyyounger members of the industrial elite have, inaddition, gone abroad for management educa-tion. With their gradual and often con¯ict-rid-den takeover of parts of the large-scalecorporate sector during the 1980s Indianindustry has, in a certain sense, ``come ofage.'' 18 These changes within the industrialsector amount to a ``quiet revolution.'' It hasbeen accompanied by a change in the pattern ofpolitical organization of the Indian industrythat is symbolized by the rise to prominence ofa new industrial apex organization, theConfederation of Indian Industry (CII) 19.

Indian industry has been organized aroundtwo apex industrial bodies, The AssociatedChambers of Commerce and Industry (Assoc-ham) and The Federation of Indian Chambers

Table 1. Growth of government and non-government companies, 1961±96 (Average annual growth rates, percentage)a

Period Government companies Non-government companies

Paid-up capital Number Paid-up capital Number

1961±71 14.2 8.3 6.7 1.41971±81 18.7 10.5 7.3 7.51981±91 15.8 3.3 14.3 13.51991±96 7.1 0.8 32.9 12.8

a Source: Government of India (various issues), Annual Report on the Working and Administration of the CompaniesAct, 1956, New Delhi (various issues). CII (various years) Handbook of Statistics.

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of Industry and Commerce (FICCI), bothhaving their origin long before Indepen-dence. 20 While FICCI mainly acted as therepresentative of Indian-controlled largeindustries, Assocham represented British andother foreign-controlled industrial enterprises.With the strengthening of the Indian-controlledsection of industry after Independence and thegradual decline of the antagonisms betweenIndian and foreign business interests, FICCIbecame the most in¯uential representative ofprivate industry. The organization was,however, still dominated by traditional Indianindustrial interests, mainly from the Easternpart of the country and from the in¯uentialcommunity of Marwaris, especially the indus-trial house of Birla.

In the mid-1980s tensions arose becausenew small-and medium-scale industriesbecame members of FICCI and becauseenterprises based in the western India grew inimportance while the established industrialinterests continued to dominate the organiza-tion. The tensions came out into the openwhen a group of Bombay-based membersbroke out of the organization. 21 The failureof FICCI to accommodate the up-comingindustrialists, including many from SouthIndia, as well as some of the organizationÕsexisting members, made these companies look

for alternatives. One of their options obvi-ously was to join AssochamÐand theBombay break-aways eventually did thatÐbutincreasingly many seemed to favor the existingassociation for the important engineeringindustry. The Association of Indian Engi-neering Industry (AIEI) possessed many ofthe features that were in demand among thenew type of Indian industrialists. The AIEIhad emerged in 1974 as a fusion between twoorganizations representing foreign and Indianengineering companies, respectively. 22 Thisfeature made it unique in the Indian context.It was also unusual because of its represen-tation of both public-and private-sectorcompanies and both small-and large-scaleindustries. Furthermore, it was known for itsstrong professional ethos and its internalorganization seemed relatively free from thefavoritism of sectional interests that becameso controversial within FICCI.

The shift toward a new organizationalpattern within Indian industry can be traced tothe recent evolution of the AIEI itself. In 1986the AIEI changed its name to Confederation ofEngineering Industry and in 1992 the organi-zation was renamed, Confederation of IndianIndustry (CII), re¯ecting its new, self-pro-claimed role as ``the apex organization for theindustry in India'' (CII, 1992, p. vi).

Figure 2. Private share of total paid-up capital of companies at work, 1957±96. (Source: as for Table 1.)

EXPLAINING ECONOMIC LIBERALIZATION IN INDIA 269

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The changing pattern of organization notonly represents the rise of new elements inIndian business. It can also be interpreted as achange in the convictions and interests ofprivate industry, di�erent from the traditionaloutlook of Indian industry. It is thus a statedobjective of the CII to work toward a globali-zation of Indian industry and it claims to havea philosophy in favor of deregulation, de-con-trol and de-licensing in all areas. It alsopurports a strong professionalism in its work.In addition, the CII claims to have a ``proac-tive,'' ``partnership approach'' to its workingwith the Indian government (Kochanek, 1995±96, 1996). 23 In 1995, the CII consisted ofaround 3000 member companiesÐmore thandouble the number in the late 1970s 24Ðand itsmembership pro®le re¯ects its solid foundationin a broad cross-section of Indian industrialenterprises.

Table 2 shows that in 1992, CII memberscomprised a fairly large section of small-andmedium-sized companies (small� less than 100employees, medium� 101±1000 employees),while still having a substantial representation oflarge companies. Because of the continueddominance of the engineering industry thecompanies represented by the CII are veryoften those with a stronger than averageorientation toward the use of modern technol-ogies, indicated by the almost universal pres-ence of technological collaboration agreementswith foreign companies. 25

The argument so far has been that since themid-1980s there has been a ``quiet revolution''within Indian industry. This revolution hasbrought to the forefront a new type of indus-trial establishment, often smaller, moreprofessionally managed and more orientedtoward modern technologies than traditional

Indian companies. 26 Furthermore, this trendhas resulted in organizational changes thathave broken the dominance of traditionalinterests among the organized representativesof Indian industry.

The second part of the argument is that thisemergence of new organized industrial interestscoincides with and may indeed have beendecisive in the introduction and persistence ofeconomic reform in the 1990s. To substantiatethis argument one would have to trace in moredetail than is possible here the direct and indi-rect in¯uences from the CII and other sectionsof industry on the policy-making process.While the information necessary to substantiatethe argument is not easily available it is worthnoting that for the last 7±8 years the CIIrepresented by its dynamic secretary generalhas been a very prominent participant in thepublic debate on the economic reforms and isrumored to be very close to the Ministry ofFinance. 27 In the wake of the reforms the CIIhas strongly supported the liberalizationmeasures, and when a need for corrections tothe policy was expressed the government hasgenerally been receptive to the organiza-tionÕs advice. 28

The emergence of a new type of industrialisthas, of course, not meant the complete disap-pearance of the old type, and the rise toprominence of the CII has not meant a totaldisplacement of the traditional organizationsclaiming to represent Indian industry. It may,on the contrary, have prompted a certainreinvigoration of FICCI (Kochanek, 1995±96,1996). An example of the continued relevanceof FICCI as a spokesman for industrial inter-ests came with the complaints by a group ofIndian industrialistsÐ``the Bombay Club''Ðover what was seen as a systematic favoring offoreign companies in the rules governing theacquisition of preferential shares in Indiancompanies. Their arguments for a ``level play-ing ®eld'' were taken up by FICCI in Decem-ber 1993 and in April 1994 some of therequested policy changes were announced. 29

Some of the Bombay Club members were alsoin¯uential within the CII and in March 1996they led the CII secretary-general to issue astatement strongly critical of the ways in whichmultinational companies were allowed tobehave vis-�a-vis their Indian partners. 30 TheCII chairman immediately had to backtrack onthe statement and the incident demonstratedthat while some industrialists still have theability to raise protectionist issues their overall

Table 2. Membership of the Confederation of IndianIndustry (CII) in 1992 according to size of employmenta ;b

Employmentcategory

Number Percentage

0±50 (small) 452 30.251±100 (small) 218 14.6

101±500 (medium) 462 30.9501±1000 (medium) 135 9.0

1001±(large) 230 15.4

a The table is based on information on 1497 membercompanies providing details on employment. Due torounding percentage total does not sum up to 100.b Source: Confederation of Indian Industry, 1992 (Owncalculations).

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in¯uence through the organizations hasdeclined. 31

The general point is, then, that the landscapeof Indian industry has undergone a majorchange from the mid-1980s onward, a changethat resulted in the strengthening of a new setof interests and a new pattern of representationgiving Indian industrialists a broader menu ofoptions when seeking to in¯uence public poli-cy-making. The ``quiet revolution'' withinIndian industry has transformed the con®gu-ration of interests that on the one hand seek toin¯uence government policies and on the otherprovide the medium through which the newpolicies will take e�ect. The change to a neweconomic policy in 1991 may be interpreted as apolitical re¯ection of these changes within theIndian society.

5. A ``FOREIGN HAND'' OR ``PUSHINGTHROUGH OPEN DOORS''?

The second type of explanation of the neweconomic policy interprets the di�erencebetween the situation in the mid-1980s and inthe early 1990s as comprising two changes. Onechange is the increase in the vulnerability of theIndian economy to external events. The otherchange is the related increase in the pressure foreconomic policy reforms coming from theinternational ®nancial institutions. In theorythree mechanisms through which a particularcountry can be in¯uenced by internationalstructures and international actors can beidenti®ed (Stallings, 1992): (a) the operationsand impact of international markets in goodsand ®nance; (b) ideological ``linkage'' mecha-nisms, i.e., external impact on ideas and inter-ests of important domestic actors emanatingfrom their exposure to the outside world; (c) adirect exercise of power, or leverage, by inter-national actors in their dealings with nationalgovernments.

In the case of India it is possible to discernelements of all three types of internationalin¯uences in the period between the abortedattempt to liberalize the economy in the mid-1980s and the de®nitive liberalization policyintroduced in 1991.

With regard to the impact of internationalmarket forces a serious aggravation of IndiaÕsexternal economic position took place duringthe 1980s. The balance of trade worsened;external debt continued to rise and the servicingof that debt became an increasing burden, (see

Figures 3±5). This overall deterioration inIndiaÕs external economic relations providedthe background for the acute crisis thatemerged in 1990±91. As a result of the Gulfcrisis, IndiaÕs payments for imported oil rosedramatically, and valuable earnings fromexports to Gulf countries as well as repatria-tions from Indians working in the area werelost. 32 This situation prompted a partialwithdrawal of funds invested in India by Non-Resident Indians (NRIÕs) and a drying up ofexternal commercial lending to India. Theinevitable result was a dramatic reduction inthe foreign exchange reserves that despite asharp reduction in imports made a default onexternal payment a serious possibility by early1991. 33 The seriousness of the crisis and themood of Indian o�cials at the time can beillustrated by the statement of a former ®nancesecretary who called the 1990±91 period``among the cruelest in IndiaÕs Post-Indepen-dence economic history'' (Jalan, 1991, p. 1) andthe crisis and the subsequent economic reformmeasures ``one of the most momentous periodsin IndiaÕs economy since independence'' (Jalan,1992, p. vii). The economic crisis certainlymade a response from the Indian governmentan absolute necessity and it is an importantexplanation of the timing of the new policymeasures. To some extent it also explains thenature of the immediate policy changes. It ismuch harder, however, to explain the continu-ation of reforms in the period when theimmediate external balance-of-payment prob-lems were resolved. In particular, the govern-mentÕs present commitment to continue thereform policy in a situation of booming foreignreserves is somewhat di�cult to attribute tomarket-transmitted external compulsions.

The second mechanism, the ideological link-age, refers to the tendency of certain groups toidentify with the interests and outlook ofinternational actors. This mechanism cancertainly be identi®ed in India, but it is di�cultto argue that a signi®cant change in the inten-sity of this type of in¯uence happened in theperiod after the mid-1980s and before thereforms. The ideological linkage will often bestrong among externally-oriented businessgroups, among a consumer-oriented middleclass and among top-level technocrats withextensive links abroad (Stallings, 1992, p. 52).The links of the Indian top bureaucracy withinternational actors will be discussed in the nextsection, but the importance of the two otherexternally-in¯uenced domestic groups has been

EXPLAINING ECONOMIC LIBERALIZATION IN INDIA 271

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Figure 4. India's debt service as percentage of exports, 1980±96. (Source: World Bank (various years) World DebtTables/Global Development Finance, Washington: The World Bank.)

Figure 3. India's balance of trade, 1974±75 to 1996±97. (Source: Government of India, Economic Survey, various years.)

WORLD DEVELOPMENT272

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apparent in India in recent years. Most largeIndian business enterprises, including publicsector enterprises, have numerous ties withtransnational corporations through technolog-ical collaboration agreements and the numberof agreements has risen signi®cantly since theearly 1980s (Kumar, 1990; Mani, 1992). Incomparison, the magnitude and strategic posi-tion of a�liates of transnational corporationshave probably been of less importance when itcomes to the creation of an ideological link-age. 34 A separate and growing channel ofin¯uence is from Indians living abroad, buthaving business activities in India. These non-resident Indians have been o�ered attractive®nancial terms by the Indian government inorder to bring investments to India. Theirnumber and the magnitude of their investmentshas grown rapidly in recent years and as aresultÐit can be arguedÐthey have had animpact on the ideological orientation of thelocal business community (Roy, 1994; Ghosh,1998).

The emergence and expansion of a consumer-oriented middle class in India has been a muchdebated phenomenon in India in recent years.Numbering from anywhere between 60 and 350

million people this primarily, but not exclu-sively, urban phenomenon has becomeincreasingly visible. 35 In terms of consumptionpatterns it can be argued that this class repre-sents an increasing presence of ``foreignvalues.'' The intriguing fact is, however, thatthe same middle class has been supportive ofthe Hindu nationalist political movement, inparticular its political face, the BharatiyaJanata Party (BJP), which in recent times hasturned from being an advocate of economicliberalization into a strong opponent of theCongress and United Front governmentÕseconomic policies, then, after March 1998 whenin government, basically continuing thereforms. 36 The process of ideological linkage,then, seems to have more complex results thanjust the creation of a constituency for economicreforms that opens up the economy to inter-national markets.

The third mechanism for external in¯uence isthrough the direct exercise of power, or lever-age, in negotiations between foreign actors andthe Indian government. The most relevantinternational actors are the InternationalMonetary Fund (IMF) and the World Bank,both of whom entered into negotiations with

Figure 5. Total debt stocks, 1970±96. (Source: World Bank (various years) World Debt Tables/Global DevelopmentFinance. Washington: The World Bank.)

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the Indian government because of the acuteneed for ®nancial resources that arose duringthe 1990±92 economic crisis. It is tempting tosee these negotiations as the immediate andmost important factor behind the liberalizationpolicies because their outcome was IndiaÕsformal commitment to a plan for structuraladjustment strikingly similar to the liberaliza-tion program initiated in July 1991. 37 Thisinterpretation of events, though attractivelysimple, nevertheless must to be met with somecaution. Both historical evidence and eventsfollowing the introduction of the reforms seemto indicate that while undoubtedly important inin¯uencing the timing of the reforms, externalpressure from the international ®nancial insti-tutions was far less important than claimed bymany critics in India. In previous negotiationswith the international ®nancial institutions, inparticular in the mid-1960s and again in 1981,the Indian government only accepted andimplemented policies for which there werealready important domestic constituencies. Thebargaining and the resulting policy changeswere much more like a process of ``leaningagainst open doors'' than a case of a one-sidedimposition of policies (Pedersen, 1993). Studiesof negotiations on structural adjustmentprograms in other parts of the Third Worldhave indicated that a successful adoption ofpolicies only happened in those cases where thelocal government was already prepared toinitiate economic reforms of the kind proposedby the international institutions (Mosley,Harrigan & Toye, 1991; Kahler, 1992; Harvey,1993).

Events following the initial reforms in Indiado not correspond to the image of a weakIndian government giving in to pressures frompowerful international institutions. While themain ingredients in the Indian liberalizationpolicies conform to standard IMF/World Bankprescriptions, in many important policy areasthe recipe has not been fully adhered to. Theprivatization of state enterprises, a reductionin the work force employed in public enter-prises and in public bureaucracies plus the lackof resolve by the Indian government to pressfor a reduction in the public de®cit are exam-ples of deviance from the IMF recipe. At onestage the Indian government was even reportedto have resisted calls by the IMF for anupward adjustment of the Indian rupeefollowing the surprisingly rapid build-up offoreign currency reserves (Financial Times, 26May, 1994). 38

6. BUREAUCRACY ANDDE-REGULATION: A SELF-DISARMING

``DOMINANT CLASS''?

The third possible explanation of the initia-tion and continuation of economic reforms inIndia takes the statist approach at face value.Policy reforms must here be seen as originatingfrom within the state itself, and motivated bythe self-serving interests and aspirations ofin¯uential groups within the state apparatus.

There are two di�erent versions of the storyof the bureaucracy-driven nature of economicreforms in IndiaÐone broad, the other narrow.The broad version and the one with the mostdi�culties in explaining the policy changes,interprets the bureaucracy as constituting a so-called dominant class. The narrow versionfocuses on the small bureaucratic elite manningthe absolute top of the administrative hierar-chy, in particular, the increasingly in¯uentialMinistry of Finance and the o�ces close to thePrime Minister (Cabinet Secretariat, PrimeMinisterÕs O�ce).

The interpretation of the Indian bureaucracyas constituting a dominant autonomous classhas in recent years been prominent as a forcefulexplanation of the inward-oriented, state-di-rected and stagnant pattern of development inIndia (Bardhan, 1984). Adhered to by bothneoliberal market apologists and state-criticalneomarxists the theory of a dominant stateclass, nevertheless, largely fails to account forthe rather limited economic bene®ts accruing topublic employees and top bureaucrats and forthe precise nature of the expansion of the state(Pedersen, 1992). 39 The bureaucracy-as-domi-nant-class theory does not fully explain whythis class would introduce economic reformprograms which ultimately aim at reducing thepower and scope of the state, i.e., the bureau-cracyÕs own power base! 40 On the other hand,the theory does point to the importance oftaking serious the interests of public employeeswhen analyzing economic reform processes,and it can to some extent explain why thereform elements aimed at a reduction ofemployment opportunities within the state havebeen among the least successful. 41 It has alsobeen argued that at least some sections of theIndian bureaucracy in recent years have begunto favor of a more supportive rather than astrictly regulatory role for the state in its policytoward private business activities. This changehas mostly happened in those bureaucraciesthat closely interact with new and modern

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industries such as the computer industry andrelated activities (Evans, 1992b, 1995). Whetherthis type of newly-found business-friendly spirithas permeated the whole government bureau-cracy or has been con®ned to small (butpossibly important) pockets within the state isrelevant to the validity of the ``autonomy of thestate''-argument. Most observers would see thisnew spirit as only present in a few parts of thegovernment machinery and will consequentlysee the origins of the new economic policies inline with the narrow version of the statistargument.

Within this narrower interpretation of thestatist perspective it can be argued that theeconomic reforms originated exclusively from aclosed circle of advisors to the Indian govern-ment and that the momentum of the reformscame from the tenacity of this group. AtulKohli noted in his discussion of the reformproposals of the mid-1980s that a small groupof bureaucrats and advisors in collusion with anew breed of politicians led by Rajiv Gandhiwere the key promoters of economic reform(Kohli, 1989, p. 312) and others have seen thereforms as basically ``Finance-Ministry-driven''(Raghavulu, 1992) or even driven exclusively bytwo persons: Finance Minister ManmohanSingh and Prime Minister Narasimha Rao(Joshi & Little, 1996, pp. 257±258). The politi-cal leadership changed during 1985±91 andeven more so during the 1990s, and it is verydi�cult to ®nd in this period the ``hard anddedicated leadership'' that constitutes a keyelement in the political preconditions foreconomic reforms in the international debate.While the leading politicians have di�ered,basically the same group of key advisors/bu-reaucrats has advocated reforms and thusconstitutes a ``change team.'' Most of these keyreformers also have had previous experiencefrom working abroad for international agenciessuch as the World Bank or the IMF and in thatsense they may represent an example of theideological linkage mentioned above. 42 Whilethere can be no doubt that these key expertadvisors have played a signi®cant role informulating the reform proposals it is lesscertain that their activities can fully explain theinitiation and continuation of the reforms.First, a group of reform-minded bureaucrats/advisors has been in place at the very least sincethe early 1980s. It is also well documented thatkey elements of the reform proposals wereprepared by the bureaucrats quite some timebefore the summer of 1991 (Swami, 1994,

pp. 185±188). Since the late 1970s, a host ofgovernment-appointed commissions has advo-cated changes in the mechanisms for statecontrol over economic activities and many ofthese proposals found their way into the reformprograms. There is, in addition, much evidencethat critics of economic reforms within the toppositions of the bureaucracy, including topeconomic advisors, have been gradually easedout. 43 In sum, arguments can be made for theimportance of the Indian bureaucracy (andstate employees at large) in resisting certainelements of the reforms. There are also strongarguments for the crucial role played by ele-ments of the state elite in promoting thereforms but it seems extremely di�cult toexplain their promotional role in terms of thegroup serving their own narrow interests as thestatist argument would have it. 44

7. EXPLAINING THE ECONOMICLIBERALIZATION POLICY

From the arguments developed above onemay conclude that an explanation of IndiaÕseconomic liberalization policy would dependmore on the analystÕs theoretical starting pointthan on indisputable empirical evidence. It ispossible to argue that an explanation of theintroduction of the reform package lies inimportant changes in the Indian society, inincreased pressure from abroad or for thatmatter in autonomous changes in attitudeswithin the powerful Indian bureaucracy/stateelite. The three di�erent viewpoints are not,however, equally convincing. Rather, they canbest be seen as supplementary in the sense thatthey tend to explain di�erent aspects of theliberalization policy and, more important, thatthey are mutually interrelated. This does notmean, however, that they are of equal impor-tance and that the di�erent theoretical stand-points outlined in the introduction are equallyvalid. On the contrary, they can be rankedaccording to their explanatory power and thatthis ranking must elevate the long-criticizedsociety-centered viewpoint most often associ-ated with a Marxist perspective to its properplace, vide the introductory quotation.

Before outlining a synthesized explanationbased on the three approaches some method-ological distinctions must be explicated. The®rst problem concerns the de®nition of what itis that we seek to explain. In the new economicpolicy one can di�erentiate between the sepa-

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rate elements of the policy changes that requireexplanation. One can thus distinguish, ®rst,between the content of the reform measuresand the timing of the reforms. Furthermore,setting the agenda for reform must be distin-guished from the actual decisions and thesubsequent implementation and consolidationof policies followed by the societal conse-quences of the reform measures. Second, onemay in each of these aspects distinguishbetween necessary and su�cient causes for theobserved changes.

Returning to the case of IndiaÕs liberaleconomic reform in 1991 and the threecompeting explanations of this phenomenon, itis clear that these explanations have strength indi�erent areas. Furthermore, they present asexplanatory factors some that are clearlymutually interrelated. I will discuss theseinterrelationships in a systematic manner andconcentrate on explaining the timing of thereforms, the content of the policies, and ®nally,the question of why reforms were carried out,i.e., consolidated and implemented in aconsiderably more consistent manner than hasever been seen in India.

The case for the ``statist'' perspective isstrongest in the case of agenda-setting andinitiation of the policies. This is also preciselywhere the focus of the theory lies, cf. thequotation from Nordlinger above (Section 3).The agenda for reform had been set at leastsince the early 1980s and a powerful in¯uenceon the agenda-setting process had been theinvestigations of a number of governmentcommittees of the working of various aspects ofthe existing regulatory system. Clearly a sectionof the political and, in particular, the bureau-cratic elite had rather precise ideas about theneed for economic reforms and the nature ofsuch reforms, and they were looking foropportunities to promote their ideas. Thatthese ideas had their origin in a rational andindependent calculation of the state eliteÕs owninterests seems rather unlikely, though. Asmentioned earlier, many had been exposed toideas currently in fashion in internationalinstitutions, and it seems likely that observationof and interaction with the Indian society wasimportant in forming these ideas. One of thearchitects of the reform proposals (AbidHussain) observed in an interview in 1988 that:``A new breed of entrepreneurs has emergedand it is time to support them'' (India Today,June 30, 1988, p. 55). This points to the ratherobvious fact that the Indian state and its top

o�cials are a component of the wider Indiansociety and that the viewpoints of the policyelite are a�ected by their interrelations withsociety.

The timing of the reforms, then, must be seenas a question of explaining when the opportu-nity arose that gave the state elite the decisiveupper hand in the ever-present struggles overeconomic policy within the Indian state. Thecombination of an external economic crisis andthe accompanying pressure from international®nancial institutions with the political oppor-tunities a newly elected government possessesprovides the most likely answer. The consoli-dation of reforms when these opportunities andcompulsions were absent must, however, beexplained by factors of a more structuralnature. The changes within Indian industry thatI termed ``a quiet revolution,'' in my opinion,provide the key answer to this question. The``quiet revolution'' constitutes the decisive andnecessary change that together with theeconomic crisis set the situation in the 1990sapart from the situation in the mid-1980s. Byhaving an impact upon the attitudes of publico�cials, especially those with responsibility forthe overall development strategy, and byproviding continuous support when the imme-diate reform needs disappeared and, mostimportant, by being those economic agents thatmake an at least partially successful outcome ofthe reform policy likely, the rise of the newindustrialists has constituted the key socialchange that was necessary for the reforms to becarried through. The rise of new industrialiststo some extent is a result of previous policyliberalizations initiated by the state elite in theearly 1980s and to some extent also a result ofincreased technological interaction with foreigncompanies, both exempli®ed by the liberaliza-tion of the policy for imports of electronics,computers and software in the mid-1980s(Joseph, 1997). These earlier policy changesserve to illustrate the mutual interactionbetween the explanatory factors from theabove-mentioned competing perspectives. Myargument for putting emphasis upon the ``quietrevolution'' within Indian industry hinges to alarge extent on the fact that the new industri-alists, whatever the reason for their emergence,have been able to organize autonomously andgain considerable direct and indirect in¯uenceupon government policies. 45 Recent events inIndia seem to have thus con®rmed the primacyof societal forces in explaining policy reforms inthe sense that social developments have struc-

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tured the possibilities for reform and havemade alternative policies less likely, no matterwhich political forces hold political power. Theneed therefore is to put the state elite in itsproper social context. The political andbureaucratic elite, however important andpowerful it may seem, ultimately depends uponthe matrix of social forces prevalent in everysociety for the carrying through of a majorreform. The autonomy of the state elite may behigher in the initial stages of the reformprocess. But even at this stage one wouldnormally expect a process of continuous inter-action between the state elite and those socialforces that are organized with the aim ofin¯uencing public policy. 46

The content of the reform policies and thedi�erential pace in which they have beenimplemented must be explained with referenceto the struggle between a diverse set of interestgroups on the one hand and on the other a solidalliance between the new policy elite and thenew industrialists. The immediate stabilizationmeasures in 1991 consisted of a set of fairlyconventional stabilization measures such astightening of monetary policies, a devaluationof the rupee and reductions of the ®scal de®cit.These measures clearly re¯ected the commonthinking within both the IMF and the Indianpolicy elite with regard to an appropriate crisisstrategy. 47 The structural reforms thatfollowed the immediate crisis measures consis-ted of liberalizing changes in policies governingindustrial development, trade, foreign invest-ment, the public sector and the ®nancial sector.

As mentioned before many of the policychanges were based upon earlier proposalsfrom a host of government-appointedcommittees and there are ®rm indications thatthey were combined to create a coherent policypackage well before the economic crisis of 1991.Thus, a policy paper prepared by the govern-ment leaked to the press in July 1990 outlinedin detail the reforms considered necessarywithin a ®ve-year period. 48 The economiccrisis shortened this transitional period, butotherwise it is remarkable how closely theactual reforms have followed the suggestionsmade in 1990. While the slow progress in areassuch as privatization of public enterprises,liberalizing labor laws and opening the ®nan-cial sector to foreign investments can beexplained with reference to resistance of rele-vant interest groups the continued reformmomentum must be ascribed to the gradualstrengthening of the new reformist coalition.

Figure 6 sketches the interaction between theexplanatory factors pointed to by the theoreti-cal paradigms discussed here, with the focusand di�erentiated weight attributed to eachfactor on the di�erent elements in the neweconomic policy.

8. CONCLUSION

The arguments and empirical ®ndings in thisarticle are obviously of a preliminary natureand they can best be viewed as hypothesessubject to further inquiry. If my interpretation

Figure 6. A tentative explanation of the economic reforms.

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of the Indian liberalization process is true itmay have important consequences for expla-nation of the economic reforms in developingsocieties. For the state±society oriented debatethe most important lesson from the Indianexperiment with economic reform is not toover emphasize the distinction between stateand society. The state is ``embedded'' in andre¯ects the con®guration of articulated inter-ests in its own society, and while substantialreform measures may be initiated autono-mously by state o�cials, they will only takee�ect when supported by strong and organizedsocial interests. A renewed focus on socialforces as they organize and interact with state

elites is therefore called for. For the debate ondependency and the external imposition ofeconomic reforms the lessons from India so farconform with the experiences gained fromother countries that while policies may beinitiated at the behest of foreign agencies, theactual implementation and the long-terme�ects of policies depend much more on thenature of the society in question and, inparticular, on the nature and strengths of thevarious social forces within it. To paraphraseMarx, new modes of economic regulation onlyarise and are sustained when the socialconditions for their existence have matured insociety.

NOTES

1. See, for example, Harris, 1987, and Manor, 1987,

and the excellent review of the literature in Sridharan

(1993).

2. See, for examples, articles and arguments reprinted

in Third World Network 1992, in EPW Research

Foundation (1994) and in the annual Alternative

Economic Survey published by Public Interest Group/

Delhi Science Forum.

3. See survey in Toye (1987, pp. 117±127).

4. Pessimistic views have been expressed in Bardhan

(1992), Manor (1995) and in Denoon (1998).

5. For a useful survey of the debate on economic

reform see Haggard and Kaufman (1992a,b, 1995).

6. Recent examples are George and Sabelli (1994) and

Chossudovsky (1997).

7. See Eric Nordlinger's answer to Gabriel Almond's

statement in American Political Science Review, Vol. 82,

No. 3, September 1988, pp. 875±885. The quotation is

from p. 881. See also Nordlinger (1987) and for a

critique of the perspective that posits state against

society, Migdal (1987) and Migdal, Kohli and Shue

(1994).

8. It should be noted, however, that to some extent the

juxtaposition between the society-centered Marxist

viewpoint and state-oriented ``statist'' viewpoint is

misplaced because two perspectives tend to focus on

di�erent aspects of the policy process. Marxists tend to

focus on the ultimate results of state actions, while the

statist perspective, as indicated by the quotation in the

main text, focuses on the policy formulation process. It

is clearly possible to argue that state o�cials formulate

policies largely (or completely) according to their own

preferences but, at the same time, that the end result of

the implementation process and the ``confrontation with

social realities'' will be di�erent from that envisaged by

these o�cials and, very likely, in harmony with the

interests of powerful private actors.

9. From Nelson (1984) and Waterbury (1989) over

Haggard and Kaufmann (1992a,b) to the World Bank

(1997, Ch. 9) this has been seen as a key lesson of

economic reform management.

10. This view is now even endorsed by the World Bank

(see World Bank, 1997).

11. For a similar viewpoint, see the introduction in

Migdal, Kohli and Shue (1994).

12. See the discussion in Mosley, Harrigan and Toye

(1991) and for a broader view that argues that interna-

tional in¯uences have been crucial, Stallings (1992). The

opposite argument is advanced in Kahler (1992).

13. For examples of critiques of the pressures from the

Bretton Woods institutions see Third World Network

1992 and for example of the o�cial emphasis on the

compulsions emanating from the international economy,

see Government of India (1992).

14. A similar set of alternative explanations is sketched

in Shastri (1997).

15. Measured in constant prices manufacturing consti-

tuted only 20.2% of gross domestic product in 1991±92.

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Central Statistical Organisation (1997 Statement 10, p.

29). If mining and electricity are included the share rises

to 24.7%.

16. For a statistical overview over Indian industrial

sector, see Sandesara (1992). The following comments

are to a large extent based on this book.

17. The tendency for medium and small factories to

grow more rapid in the 1980s than larger units of various

kinds is also seen in data on the growth of value added

(see Swamy, 1994, p. 208).

18. This move toward more modern management and

production methods by a new generation of businessmen

is hard to document in valid empirical terms. I have

relied on evidence relating to the major enterprises as

found in Indian magazines such as India Today, Business

India etc. See, for example, articles on the new entre-

preneurs in India Today, July 15, 1994. The generational

changes in the large industrial houses has resulted in

many controversies that have been extensively covered in

the Indian press.

19. The sense of a social revolution in the Indian

society has been expressed by others in recent times with

expressions like ``bourgeois revolution'' (Stern, 1993) or

``A million mutinies'' (Naipaul, 1990).

20. See Sabade and Namjoshi (1977) and Kochanek

(1974) for details on the organizational pattern of Indian

industry.

21. For a detailed diagnosis of the con¯ict see Jalali

(1987) and reports in India Today, May 31 and June 15,

1985. The story is also narrated in Kochanek (1995±96).

22. The early story of the associations of engineering

industry is told in Sabade and Namjoshi (1977). The

authors also stress the uniqueness of the organization.

23. These objectives and claims are taken from the

CII's own declaration of objectives and principles as

they can be found in CII (1992, p. vii). Many formu-

lations are obviously meant to mark a break with the

older pattern of organization that was so intimately

connected with the working of FICCI. The element of

professionalism is con®rmed by the authors personal

experience having visited the CII and its precursors

several times.

24. In 1977 the then AIEI had 1175 members and by

1992 membership had grown to more than 2600 (see

AIEI, 1977 and CII, 1992).

25. One gets a clear impression of this from a perusal

of the CII membership list. A large part of the total

number of collaboration agreements between Indian and

foreign companies have occurred precisely within the

engineering industry.

26. In the words of one long-time observer of Indian

business, the old industrial elite could be characterized

as a ``rent-seeking, highly dependent, inward-looking,

mercantilist-oriented business elite'' (Kochanek, 1987,

p. 1300). My contention is that this general impression,

while always somewhat exaggerated, did change during

the 1980s and is today certainly not correct.

27. Anyone familiar with the Indian press will have

noted this. An example of the lobbying of the CII (and

of the other industry associations as well) before the

1992±93 budget is given in Business India, February 15±

28, 1993, pp. 50±58 (``Budget 1992±93: Last Chance to

Consolidate''), in particular p. 53. See also Kochanek

(1995±96).

28. One example of this is the reforms of the import

duty structure, another the changes in the foreign

exchange regulation rules. On the last see Kochanek

(1996, p. 167).

29. See Financial Times (London), December 4-5, 1993

and April 26, 1994 and the account in Kochanek (1996,

pp. 168±169).

30. The statement and the controversy it raised is

narrated in Business India, April 8±21, 1996.

31. Some of the Bombay Club members probably

supported the Bharatiya Janata Party in the hope of

reversing the liberalization policies, so far with limited

success.

32. An estimate of the magnitude of India's losses on

account of the Gulf crisis is made in Government of

India (1991, Table 9.3, p. 156).

33. The crisis is described in clear language in Govern-

ment of India (1992), Economic Survey 1991±92, Part I.

34. Foreign investments were modest and stagnant in

India in the 1980s in comparison with other developing

countries and the share of various sectors of the Indian

economy that are directly controlled by transnational

corporations declined.

35. The number varies according to the precise de®ni-

tion of what constitutes this ``middle class.'' What unites

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this middle class is their buying power which constitutes

a substantial market for industrial consumer goods,

including foreign produced (and by Indian standards

very expensive) goods. For a discussion of the emergence

of this class, see Kohli (1989), p. 318 and reports in

various news magazines, for example, Far Eastern

Economic Review, January 14, 1993 (``The middle-class

bulge''), Fortune, August 10, 1992 (``India: Open for

business''). Most estimates on the size of the middle class

come from surveys done by the National Council of

Applied Economic Research.

36. For the rise of the BJP in urban areas, in particular

in New Delhi, see India Today, December 15, 1993.

37. It has thus been pointed out that the government's

economic reforms came very close to the policy measures

suggested in a con®dential World Bank report from 1990

(Swami, 1994, p. 231) and others have pointed to the

occasional use of US style and spelling in one of the

policy documents produced by the Indian government!

(PIRG, 1992, p. 44).

38. Interestingly, the stance of the Indian government

was reported to have been supported by the World

Bank.

39. According to Chew (1992) it is particularly the

higher grades within the civil service that has experi-

enced a decline in the real value of their earnings. It must

be noted, however, that higher-ranking o�cers have

ample opportunities for earning extra incomes through

consultancy jobs for international organizations or

private companies, including the media.

40. See also the comments in Sridharan (1993) on the

failure of the ``New Political Economy'' to explain

liberalizing initiatives.

41. The carving in to substantial wage demands from

public employees by the weak United Front government

in 1997 is indicative of the political strength of this group.

42. This is documented in detail in Shastri (1997).

43. ``There is no place for those with con¯icting

paradigms'' one o�cial is quoted as saying (India

Today, April 15, 1992, p. 32). The replacement of

o�cers probably started in 1985 when Rajiv Gandhi

came to power. In 1985 Montek Ahluwalia replaced

Arjun Sengupta as economic advisor and in 1991

(after the reforms were initiated) Ashok Desai replaced

Deepak Nayyar as economic advisor. Both Sengupta

and Nayyar were regarded as being too ``leftist''.

(India Today, January 31, 1995; December 15, 1991).

Deepak Nayyar has after his departure started his own

crusade against the manner in which the economic

reforms are being carried out. See Bhaduri and Nayyar

(1996).

44. It is interesting to note, however, that a former

``insider'' mentions one personal motivationÐthat of

gaining access to ``the international reward system,'' i.e.,

jobs with international organizationsÐamong key

policy advisors as being of importance for the reform

momentum. See Bhaduri and Nayyar (1996, pp. 61±64).

45. In a casual remark to the author one former

advisor to the government claimed that the rise to

prominence by the CII was ``engineered'' by key

bureaucrats.

46. For a more detailed study of the reform process I

would agree with Sridharan that it is important to

identify and consider the impact of the political-institu-

tional incentive structure (Sridharan, 1993). On the

other hand, the consolidation of the reforms through a

period of dramatic political shifts in political power

between virtually all groupings in the Indian Parliament

is an indication of the reform's deep roots in the social

power structure.

47. The IMF was generally satis®ed with the economic

reform measures. See for examples IMF Survey, Novem-

ber 18, 1991 and September 21, 1992.

48. The so-called Ahluwalia Paper supposedly

authored by Montek Singh Ahluwalia was published in

The Financial Express (July 11, 1990). It contained

proposals for abolishing industrial licensing, opening up

for foreign investment, reducing the degree of protec-

tion, reforming the public sector and envisioned at a

later stage ®nancial sector reforms and reforms in labor

legislation.

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