State, Business, and Economic Growth in India

By: Jignesh Komal

Palak Shashank

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Identifying variations in how states are organized and in the institutionalized 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 continuum stretching from considerable convergence in goals to mutual hostility between the state and the private sector.

State intervention

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It is interventionist state, especially of a close collaboration between the state and business groups aimed at promoting growth

A pro business strategy mainly supports established producers

Pro Business

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Abandonment of left-leaning, anti capitalist rhetoric and policies.

Prioritizing economic growth, and a slow but steady embrace of Indian capital as the main ruling ally.

pro-indigenous business policies adopted

Practices in 1980

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New industrial policy statement that put“maximizing production” as its top priority

The emphasis has shifted from distributive justice to growth”

Established powerful committees—staffing them with well-known probusiness bureaucrats—to study how this major transformation was to be implemented

Stiff steps taken by Indira Gandhi in 1980’s

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Government withdrew important constraints on big business to expand and then encouraged them to enter areas hitherto reserved for the public sector

The Monopoly and Trade Restrictions Act (the MRTP act) effectively limited the growth of big business. It was diluted, thereby removing licensing restrictions and allowing big business to expand in such core industries as chemicals,drugs, ceramics, and cement.

The government granted some tax relief to big business to encourage investment

Special legislation was passed to discourage strikes and labor, and businesses were increasingly supposed to cooperate.

…Contd

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Dropped the pretense of socialism altogether and openly committed his government to a new “liberal” beginning

Government’s commitment was primarily to economic growth, and only secondarily to some abstract notions of “openness”.

The policy pattern was more pro-business, especially big Indian business, rather than anything else.

3 aspects of Rajiv Gandhi Period

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Changing GDP pattern

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Prioritization of economic growth as a state goal

Supporting big business to achieve this goal Taming labor as a necessary aspect of this

strategy.

Reasons for shifting pattern

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High growth resulted from the state’s strategy namely, a move toward limited state intervention and an open economy

Liberalized its internal regulatory framework Reduced tariffs Adopted appropriate exchange rate policies Allowed foreign investors to play a

significant role in the economy. The animal urges of Indian entrepreneurs

were “uncaged”

Pro Market

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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

…contd

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Import quotas were removed (only fully in 2001

Tariffs fell gradually, Currency was devalued, Foreign investment regime was liberalized Various restrictions on external financial

transactions were eased

1991 and more reforms

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Economic growth in India started accelerating a full decade before liberalization of 1991

Industrial production in India—a key object of reforms—did not accelerate after the liberalizing reforms

Unsolved questions of embraced 1991 pro-market strategy

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Decline of the Soviet Union The need to establish closer ties with the

United States The availability of new foreign resources for

investment in the form of portfolio investment

The anticipation that India will soon join the WTO.

Indian business groups were more ready to deal with foreign competition in the 1990s than in the 1980s

Why Reforms in 1991

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Modernization and restructuring of CII and FICCI

“Modern” industries—especially engineering firms, often located in the south of India—that were more interested in exports

…Contd

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The labor intensity of Indian industry decreased steadily during the 1990’s

The unregistered sector of Indian industry—which one presumes to be more export-oriented and less capital intensive—did not attract much new investment in the post-reform period

No clear evidence that exports of labor intensive goods grew sharply

The level of concentration in private industry has increased since 1991

Liberalization was ineffective as it is the state’s continuingpro-business orientation

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Market capitalization of the top 10 private companies increased from 2.2% of the GDP in 1990 to 12.9% in 2004, and sales of the top 10 companies during the same period grew from 2.3 to 9.3% of the GDP.

Data

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Growing regional and class inequalities Political ramifications The utilization of ethnic nationalism—

instead of the less volatile Interest oriented appeals—as a tool of

political mobilization Rapid turnover in ruling governments.

Democracy when leaned towards Capitalism

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Economic growth in India was more a function of the pro-business tilt of the Indian state and less a result of the post-1991 economic liberalization

The real debate about national choices is increasingly about “varieties of capitalism.” With advanced industrial economies providing three alternatives—the neoliberal model of Anglo-America, the social democratic model of Scandinavia, and the statist model of Japan and South Korea

Socio Democratic model is Best for India Stuck with a two track democracy

Conclusion

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Thank you