Uncertain Success: The Political Economy of Indian Economic Reform

By Dutt, Amitava Krishna | Journal of International Affairs, Summer 1997 | Go to article overview

Uncertain Success: The Political Economy of Indian Economic Reform


Dutt, Amitava Krishna, Journal of International Affairs


Introduction

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

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

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

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

India's Political Economy

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

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

A useful point of departure in this analysis is to start by examining the extent to which the state is able to implement its development goals.(4) Peter Evans, a political sociologist who has written extensively on questions of autonomy and state effectiveness, has argued that the state's ability depends on "embedded autonomy," where autonomy refers to the capacity to operate without being constrained by society, and embeddedness allows it to respond to changes in economic reality in a sophisticated manner. …

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