Political Economy of Federalism in India: Economic and Regional Disparities

 The post-colonial state in India established a parliamentary-federal structure   ofgovernment and launched an ambitious strategy of economic development under the direction of an interventionist nationalist state.  The Congress Party’s dominance, centralist tilt in the constitutional distribution of powers, Jawaharlal Nehru’s supremacy in the party and government following the death of Ballabhbhai Patel in December 1950, initiation of the process of centralized planning by the Planning Commission chaired by Prime Minister Nehru himself accentuated the trend of centralization in the Indian political system.  This centralizing drive, continued more or less uninterrupted until Nehru’s death in harness in May 1964.  During this phase the process of planning through the Planning Commission and National Development Council expanded the public sector of the industrial economy and raised it to the “commanding heights” of the economy.  The Planning Commission in particular and the dominant public sector turned out to be the major economic factors of political centralization in India.

            Francine Frankel (2005: ch. 4) draws attention to a basic contradiction in Nehru’s model of “Indian socialistic pattern” between rapid industrialization and gradual agrarian reform.  For the heavy investment in industries, on the one hand, and the approach of prompting the agricultural sector to grow on cooperative lines with optimum use of the existing resources created an inevitable imbalance and contradiction that vitiated the hope of the planners that agricultural development would supplement the surplus for industrial development as well as generate demand for industrial products and expand the domestic market.  In my view this contradiction worked itself out in a way by the end of the Nehru era that incrementally chipped at the centralized parliamentary federal system put in place by the Constituent Assembly of India.

           This contradiction, Frankel postulates, was the major economic factor that led directly to the crisis of national economic planning, on the one hand, and the crisis of political stability, on the other, by the late 1960s.  From then on, the Congress split of 1969, the illusive massive electoral mandate for the Indira Congress in 1971-72, the Gujarat and Bihar Movements beginning in the early 1970s and culminating by the mid-1970s, and the lapse into the emergency authoritarianism of 1975-77 followed in quick succession over the ‘long’ 1970s when political populism practically undermined economic planning, or at least subordinated economic development to political strategem for electoral survival of the Congress governments.  Extreme political centralization of emergency authoritarianism set the chain reaction of the insurgency in Punjab in the 1980s and anti-Foreigners’ Movement in Assam in the late 1970s-mid-1980s, the insurgency and cross-border terrorism in Jammu and Kashmir, and the continuation of insurgencies in several northeastern states.  The process of federalization followed in the trail of these events triggered by regional ethnic peace accords signed by the Rajiv Gandhi government in Assam, Punjab, Tripura, etc., on the one hand, and by the diversification of the state party systems by the election to power of non-Congress state governments in various states like Andhra Pradesh, Karnataka, Assam, Punjab, Haryana, etc., on the other.  Both these developments fructified through the 1980s.  Finally, the 1989 Lok Sabha election unseated the Rajiv Gandhi Congress government and ushered in the multiparty system with coalition governments at the federal level itself.  The OBC reservations recommended by the Mandal Commission belatedly implemented by the Janata Dalled National Front government headed by V.P. Singh in 1990, the liberalization-privatization-globalization (LPG) package accelerated by the Rao Congress government in 1991, and the demolition of the Babri masjid by the Ram-Mandir-in-Ayodhya Movement led by the Hindu Right Sangh Parivar in 1992 triggered a chain of events that resulted in an unprecedented political fragmentation that confounded the processes of democratization and federalization in India.

            Yet amid the changing political Kalidoscope the one constant political-economic factor that stands out is the linear direction of the new strategy of neoliberal capitalist development initiated in the 1980s and accelerated in 1991 and after.  The paradigm shift of 1991 in the strategy of economic development must be put in the larger context of the parametric shift in the political system from a highly centralized, executive-dominated parliamentary regime of the 1970s under Prime Minister Indira Gandhi culminating in the Emergency authoritarianism of 1975-77 fortified by anti-democratic 38th, 39th, and 42nd constitutional amendments, and suspension and arrest of 1980s and federalization with a rush since the 1989 parliamentary election to restore parliamentary and extra-parliamentary opposition and press censorship, etc.  This political centralization must be juxtaposed with the extent of economic centralization attained by the 1980s when the central government also controlled the “commanding heights” of the economy reflected in the fact that about 45 percent of output in the organized sector was accounted for the public sector and nationalized and long-term financial lending institutions, country’s eight largest firms were in the public sector as also 24 of the top 30 in terms of total capital employed.  The public sector dominated the economy in the ratio of 3:1 in paid up share capital and 4:1 in value of sales (Frankel, 2005: 380).  It took the electoral defeat of the Emergency regime in 1977 and the creeping political federalization of the democracy and usher in a vigorous federal phase in Indian politics.

           The LPG package of reforms of the early 1990s included a combination of short-term stabilization measures and medium-run-to-long-run structural adjustment measures aimed at “‘freeing the economy’, certainly from significant state intervention, if not from some minimal management by the state” (Terence J. Byres, 1997: 5).  To address the immediate financial crisis the stabilization measures encompassed devaluation of rupees by 20 percent on 1 and 3 July 1991, restraint on public expenditures like subsidies on fertilizers, food, and petroleum, reduction on fiscal deficit, and lifting of curbs on free flow of capital.  Structural adjustment measures included freer trade and industrial policies, narrowing of the scope of public sector, disinvestment of public sector equity in profit-making enterprises, dumping the loss-making enterprises, making them freer in price-fixing, greater freedom for financial sector and capital market, reforms in taxation, excise, and customs duties, promotion of inflow of direct private foreign investment and access to international technology.  These measures would phase out vestiges of development planning, roll back the interventionist state in the economic sphere, drastically reduce rent-seeking, integrate the Indian economy into the world economy, and make the Indian industry more competitive and efficient (Byres, 1997: 5-6).

            India’s overall post-reform growth rate has been expectedly impressive.  In the words of Kaushik Basu (2004: 20-21): “from 1994 to 1997 Indian national income grew at over 7 percent per annum, and during the entire last decade the growth rate has been around 6.5 percent.”  This is more than double the rate of growth in the pre-reform decades.  The gradualist approach in deregulation has also stood India in good stead which is demonstrated in the fact that the fiscal crisis originating in the USA in 2008 and engulfing the rest of the world by 2009 causing the worst economic recession since the great economic depression of the 1930s has not afflicted India as adversely as the West itself.

            A critical survey of research with an eye for federally relevant concerns may be divided into three major categories: (a) impact of economic reforms on regional economic disparities, and on the emergence of a dualistic economy; (b) their impact on the Indian state, especially the federal structure of the state; and (c) the imperative of the regional state-level reforms after the initial thrust of the national-level reforms.  We will briefly deal with each of these themes in turn.

            In her recently updated second edition of the systematically comprehensive longitudinal study of India’s political economy from 1947 to the mid-2000s, Francine Frankel (2005: Ch. 14) underlines the trend of India moving towards a dualistic economy as a result of its “macroeconomic reforms without redistributive change” since the early 1990s.  The new economic strategy is accentuating class as well as regional economic disparities.  The contradiction between rapid industrialization and gradual agrarian reforms inherent in the Nehruvian strategy of development (Ch. 4) could not be restored to a balance either by the Green Revolution launched in 1969 due to its limited scope and run or by the Janata Party Government (1977-79) with a peasant as well as small small trader bias due to its short spell in power as well as caste and class contradictions (ch. 13).  Sustained growth rates of approximately 6 percent from the mid-1980s did contribute to the emergence of a consumer class and the development of some sort of a national market, including rural areas.  It also produced an information technology revolution related to the expansion of the service sector developing much faster than industrial and agricultural sectors.  Yet both these developments were confined to certain classes and communities and regions.  This feature led directly to growth without redistribution and inclusion and precipitated the slide towards the two economies: “a smaller, yet sizeable affluent economy growing up in larger cities and spreading to self-contained islands of export-oriented, high technology parks”, on the one hand, and “the larger predominately agricultural economy, of landless, marginal and small farmers, many belonging to historically disadvantaged lower castes, minority religions, tribal groups and women”, on the other (p. 625).  Frankel also demonstrates the definite trend of increase in inter-state disparities, with Maharashtra and Gujarat showing the potential of replicating East Asian levels of annual growth, in the 1990s; Rajasthan, Madhya Pradesh, Tamil Nadu, and West Bengal growing above the national average; Bihar, Uttar Pradesh, Orissa, and even richer states of Haryana and Punjab experiencing a decline in annual growth rates; and Rajasthan, Andhra Pradesh, and Karnataka remaining more or less at the same level as in the 1980s (pp. 604-5).

            B.B. Bhattacharya and S. Sakthivel (2007: 475) also conclude: “While advanced, industrial states have tended to leapfrog in the reform years, other states have lagged behind.... We also note that the tertiary sector, rather than industry, has become the engine of growth in the last two decades....  Unfortunately, backward states with higher population growth are not able to attract investment – both public and private – due to a variety of reasons, like poor income and infrastructure and probably also poor governance.”  Amaresh Bagchi and John Kurian (2005: 336) concur: “Evidence clearly suggests that a proximate cause of the widening regional disparities during the nineties was the grossly uneven flow of investment to various states after liberalization.”  Percentage share of investment proposals between August 1991 and March 2000, netted by Group I states (Andhra Pradesh, Gujarat, Haryana, Karnataka, Kerala, Maharashtra, Punjab, and Tamil Nadu was 66.7 percent, while Group II states (Assam, Bihar, Madhya Pradesh, Orissa, Rajasthan, Uttar Pradesh, and West Bengal) were preferred by investors for their project location only to the meagre extent of 27.4 percent of investment proposals.  Group I states are also the hot spots for foreign direct investment (FDI).  Only five states – Andhra Pradesh, Gujarat, Karnataka, Maharashtra, and Tamil Nadu – account for about 75 percent of the total FDI in India since liberalization (pp. 336-339).

            Political and social scientists in India, not only on the left, generally believe that neoliberal economic reforms at the behest of the IMF-World Bank in 1991 have reduced the economic and political sovereignty of the Indian state that had been following an autonomous national development since the heydays of Nehru.  In a well-researched and cogently argued piece, Baldev Raj Nayar (2007) has, however, argued that this conclusion is empirically questionable and invalid.  For, in the first place, the state-directed strategy of heavy industrialization was clearly planned beyond India’s economic means, which created a foreign exchange crisis right in the first half of the 1960s.  It was eased by foreign aid.  “Paradoxically, a strategy intended to make the country economically independent and decolonized ended up making it dependent on foreign aid for its execution” (p. 357).  Two other factors created economic vulnerabilities and made India dependent on foreign aid.  These were the failure of the public sector industries and agricultural sector to yield the surpluses necessary for continued industrialization.  The resultant fiscal and food deficits, to say nothing of wars with China and Pakistan in 1962 and 1965 and droughts in 1965-6 and 1966-7, compounded India’s economic crisis and made the country critically dependent on foreign aid and food supplies from the West, mainly the USA, that tried to arm-twist in fiscal and foreign policies by its “short tether” policy.  Even in 1991, Nayar argues, the real cause of economic reforms in India was India’s own worst financial crisis in the first place.  If the IMF and World Bank pressed for their preferred policy prescription, “they were pressing against an already open door” (p. 377).  In the post-reform period India’s exports became more diversified, foreign direct investment has considerably expanded, and what is more relevant and important, Indian economy, by choice, still remains relatively insulated from world economy.  Nayar’s conclusion is that “the period of globalization has been marked by the augmentation of national autonomy, rather than an erosion of it, because of the opening up of the Indian economy improved India’s capabilities” (p. 381).  Nayar concedes, however, the assumed effect of globalization may lie ahead when the Indian economy opens up further beyond a point.  But then, he adds, the adaptive capabilities of India’s relatively mature economy need not be underestimated nor be the fact forgotten that in the case of economies of India and China the size itself is a factor of autonomy and manouvrability.

Although Nayar’s (2007) study of globalization and national autonomy in India glosses over the federal dimension of the Indian state and economy, this aspect has received greater attention in some sections of the recent literature in political science.  Lawrence Saez (2002) observes that economic liberalization has significantly impacted the Indian federal system such that the change is from cooperative federalism to enhanced prospects of jurisdictional conflicts.  This rather alarmist prognosis that has not in fact materialized was probably an artifact of his research design that focused on the Inter-State Council (ISC) belatedly set up under article 263 of the Constitution in 1991, and inexplicably omitted the National Development Council (NDC) an informal but more functional forum of intergovernmental relations established by a cabinet resolution of the Nehru government in 1952! The finding of a comprehensive study of intergovernmental relations in India by M.P. Singh and Rekha Saxena (2010) is that the ISC met for the first time in 1996 and had met (until February 2010) only 10 times largely as a mere debating forum.  Much more consequential has been the NDC which had until then met around 50 times since 1952 for formulation and approval of the five-year plans by the two orders of governments.  The secretariat of the ISC is largely an idle body, whereas the secretariat of the Planning Commission serves as the secretariat of the NDC as well.  Besides, there are around half a dozen national councils of intergovernmental composition and scope in various policy areas that harmonize and coordinate union-state policies.  In addition, the real nutty-gritty of intergovernmental policies and relations are coordinated by frequent informal Chief Ministers’/ministers’/secretaries’ conferences between the two orders of governments.  Singh and Saxena conclude that “the system has evolved into a fairly formal as well as informal rule-based affair and has not been seriously decried for deficiencies in terms of rule of law and justice.”  This is despite the fact that ideologically divergent sets of parties have been in power occasionally since the late 1960s and routinely since the 1990s at the union and state levels at a given period of time.

            Rob Jenkins (1999) has turned his analytical focus on how federalism has facilitated the political sustainability of economic reforms despite electoral unpopularity of these policies.  Both orders of governments displace the opposition to the reforms to the other level.  “Reluctant reformers at the state level are able to claim that actions taken by the central government leave them no option but to liberalize.  And when state governments liberalize under duress, reformers in the central government (or their party colleagues in state capitals) are then able to declare that consensus has been created (Jenkins, 1998: 206).

            Lloyd and Susanne Rudolph (2008) contend that the 1990s witnessed the passage of India from a “command economy” to a “federal market economy” caused by the economic liberalization in 1991 and the transformation of a centralized one-party dominant system to a regionalized multiparty coalition government system.  The federal market economy is characterized by (a) the transformation of the interventionist state of the formerly centrally planned economy into the regulatory state in the new phase of indicative planning, and (b) the emergence of the regional states as the principal arena for competition among them for private investment generating “race to the bottom” (offering various fiscal concessions including tax-holidays) and to the “race to the top” of the economic pyramid (providing productive labour force, good physical and social infrastructure, and good governance).  Chief Ministers have become entrepreneurs and marquee players in the emergent federal market economy.  With the declining ability of the union government to routinely bail out financially strapped and profligate states, the latter seeking development loans are being constrained to observe conditionalities of the World Bank and Asian Development Bank in addition to those of the centre and the market credit raters.

            In M.P. Singh’s (2003: 222) assessment economic reforms in India are marked more by the replacement of the direct bureaucratic regulation of the economy by autonomous regulation of the economy by autonomous regulatory authorities and partial privatization than by globalization of trade and investment.  To the extent that decontrol and privatization reduce the intervention of the federal state in the affairs of industry, business, and state governments, the forces of federalization (in contrast to parliamentary executive centralization) have been reinforced.  Another notable development in the era of economic reforms has been the creation of regulatory authorities with semi-judicial powers or otherwise at union and state levels under legislative enactments in some sectors of the economy, e.g. electricity, telecommunication, companies affairs etc. Such authorities have mushroomed in a variety of sectors but not all of them have semi-judicial powers and are therefore less autonomous from the concerned ministries.  The autonomous agencies have replaced direct bureaucratic control by government departments in functionally intermeshed union and state jurisdictions. Comprehensive studies of the new regulatory regime are not yet available.  A few studies of the Telecom Regulatory Authority of India (TRAI) suggest that their performance has been mixed (Ashok v. Desai, 2006; M.P. Singh, 2009).

            Aseema Sinha’s (2007) study of the changing political economy of federalism in India finds that the political institutions and processes involved are marked both by changes and continuities.  Continuities are seen in the comparative fact that “India’s trajectory of economic reform, unlike the dual transitions of Eastern Europe where communist institutions were dismantled, has been taking place within the existing structure of the [constitution]”.  However, in the post-reform period, “the nature of competition has changed from vertical competition (where states competed with each other but for centrally determined resources) to horizontal competition (where states compete with each other more directly and for resources from a wider variety of actors” (p. 479) (emphasis in the original).  For example, after 1991, especially after 1994, transnational interaction and transborder regional interaction of subnational states of India have tended to develop, both bilaterally and multilaterally.  With the centre’s policy in directing the location of industries dispensed with after 1991, “the states now bypass the centre and go directly to business houses and foreign investors” (p. 513).

            After the initial thrust of economic reforms at the national level in the early 1990s, the imperative of state-level reforms forced itself on the national and subnational governments in the Indian federal system by the end of the decade.  The reorientation in economic policy making at both levels were, of course, interlinked, given the centralized nature of the Indian Constitution as well as the practice of the federal system until the end of the 1980s.  Yet the federal-regional demarcation did matter both in theory and practice.  Reforms were triggered by a severe balance-of-payment financial crisis in international trade in the late-1980s and mid-1991 at the federal level.  A serious fiscal crisis at the state level by the end of the 1990s made a similar policy-shift unavoidable (Stephen Howes et al., 2003: 3-14).  Search for solution prompted some pioneering reformist Chief Ministers like Chandrababu Naidu (Telugu Desham Party/Andhra Pradesh) and Digvijay Singh (Indian National Congress/Madhya Pradesh) to take first steps in fiscal and governance reforms.  But pretty soon other states were constrained to fall in line under the duress of the harsh reality of the fiscal crunch.  State governments had generally gone much ahead of the union government in following populist economic policies over the previous decades.  They now found themselves compelled to begin yielding to the compulsions of having to replace “competitive populism” by “competitive developmentalism” (Stephen Howes et al., 2003: “Introduction”).

            We conclude this section of the political economy of federalism in India by an examination of how different states differed in implementing the agenda of economic policy reform prescribed by New Delhi and why.  We draw on extremely illuminating paired comparisons of Andhra Pradesh and Tamil Nadu by Loraine Kennedy (2004) and of West Bengal and Gujarat by Aseema Sinha (2004).  At the time neoliberal policy shift was made by the Congress minority government of P.V. Narasimha Rao in New Delhi, Andhra Pradesh was ruled by the Telugu Desam Party (TDP) led by N. Chandrababu Naidu, Tamil Nadu by All India Anna Dravida Kazhagam (AIDMK), West Bengal by Communist Party of India (Marxist) (CPI-M)-led Left Front, and Gujarat by the Bharatiya Janata Party (BJP).  Why a policy prescription made by a Congress government at the centre was so easily followed at the state level by a different set of parties from the left, right and regional sectors may be understood by recalling the highly centralized federal structure envisaged by the Constitution of India and the fiscal crisis afflicting the union government in the early 1990s and the state governments by the late 1990s.  The principal causes of the precarious finances of the state governments were partly of their own making and partly due to the fallout of the policies followed by the union government from which the state could not be immune as also the declining capability of New Delhi to routinely bail out financially strapped state governments.

            The policy of economic liberalization was adopted by all the four state governments here under review.  Yet it was done openly and with great fanfare by the TDP in Andhra Pradesh and BJP in Gujarat, whereas the AIADMK in Tamil Nadu and the Left Front in West Bengal did so by stealth.  The explanation offered for this variable pattern between Andhra Pradesh and Tamil Nadu is that the multi-party system whereas it is more widely dispersed in Gujarat.  This narrows the support for liberalization in the former in contrast to the latter.  Moreover, the party-government and party-trade union differences over the liberalization policy that West Bengal had to contend with, which weakened the thrust towards liberalization, was conspicuous by its absence in Gujarat.

       All in all, despite the anti-liberalization or anti-globalization ethos of the ideological legacies of CPI-M’s social democracy, BJP’s swadeshi, and AIADMK’s dravidian movement, as ruling parties in West Bengal, Gujarat, and Tamil Nadu their governments were able to promote economic reforms under political-economic compulsions.  The presence of a class of regional bourgeoisie in Gujarat, Andhra Pradesh, and Tamil Nadu made the task easier and speedy, whereas its absence in West Bengal retarded the process.  Overall, investors’ response in Western and Southern India was predictably much stronger than in eastern India.

            Assema Sinha (2005) in an extended study of three Indian states of Gujarat, West Bengal, and Tamil Nadu in a cross-national comparative perspective inclusive of China, Brazil, and former Soviet Union concludes: “Interestingly, by leading and supporting a negotiated transition away from a dirigiste regime during the recent era of liberalization, the regional political elites have secured prominent positions in the post-dirigiste state and political system” (p. 278).fragmentation and more intense political mobilization of Other Backward Classes (OBCs) and Dalits (both critical of economic liberalization) in the former state made the ruling AIADMK inclined to avoid being seen enthusiastically promoting business liberalism.  In Andhra Pradesh the prevalence of a two-party (TDP and Congress) competition and relatively moderate subaltern political mobilization did not constrain a highly publicized promotion of business liberalism. The contrasting policy promotion in West Bengal and Gujarat is likewise explained by Sinha in terms of the variations in spatial political economy of industrialization and intra-party and party-trade union conflicts over industrial policy in the two states.  

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