India's Open-Economy Policy

Globalism, Rivalry, Continuity

Jalal Alamgir

• Publisher: Routledge
• Year: 2008
• ISBN:
  9781135970567
• Edition: 1
• Topic: Medicine
• Subtopic: Toxicology

This book is the first major exploration of Indian political economy using a constructivist approach. Arguing that India's open-economy policy was made, justified, and continued on the basis of the idea of openness more than its tangible effect, the book explains what sustained the idea of openness, what philosophy, interpretations of history, and international context gave it support, justification, and persuasive force.

Drawing on a wide range of contemporary and historical sources, and going as far back as the 19th century, the author reconstructs how Indian policymakers have interpreted economic priorities, perceived success and failure, and evaluated the destiny of their nation. By the 1990s, their imperatives increasingly highlighted a sense of rivalry, especially with China, and globalism, a desire to play a strong role in world affairs. The book shows how a sense of nationalist urgency was created through globalism and rivalry, allowing policymakers to privilege international needs over domestic political demands, replace economic independence with interdependence as a priority, and ensure that the broad basis of India's openness could not be challenged effectively even though certain policies faced severe opposition.

This book will be of interest to those working on International Political Economy, Globalization, Economic History, Public Policy, and South Asian politics.

1 Explaining the continuity of openness

Given the democratic nature of our political system, it’s a miracle we have got this far.

Manmohan Singh, Indian Finance Minister (Congress Party), 30 September 1993

Reversing economic liberalization is ruled out.

Deve Gowda, Indian Prime Minister (United Front), 16 December 1996

We in India are committed to globalization.

Yashwant Sinha, Indian Finance Minister (BJP), 1 February 1999

The world’s largest democracy, India, is instructive for those interested in counter-intuitive politics. In the last decade and a half, Indian leaders, regardless of party, endured considerable political turmoil to implement a set of policies to move India from a relatively closed economy focused on domestic planning to one that espouses free markets and international trade. To be sure, elements of freedom were present in India’s economy before, and conversely, trace elements of centralized planning remain today. But the organization of the economy – how income is earned and spent, how capital is raised, how business is run, how labor is employed and work done, how goods and services are traded across borders, how profits are shared, re-invested, and taxed, and how the state treats private enterprise – became by the mid-2000s fundamentally different from how it was in 1990. The change is visible not only statistically; everyday economic and social life was also noticeably different for many Indians, as observed by residents and travelers alike. Today, the difference has been internalized and accepted as normal: an increasingly larger part of society has settled down into the newer ways of conducting life, and of defining success in life. All told, it is not an exaggeration to claim that what the Indian political economy has gone through is one of the great transformations of the last century.

Paradoxically, this change could not have been possible without continuity. It was by continuing with open-economy policies, thereby building momentum incrementally and relentlessly, that policymakers could shift the direction of the economy. The move was risky. India’s political and economic circumstances were fragile in the early 1990s. Two years into the process the Finance Minister still reckoned that it would take a “miracle” to sustain economic openness in a country as diverse and politicized as India. In the seventeen years since reforms began, policymakers have endured a wave of protests, strikes, lockouts, violence, even mass suicide – from social groups, organized labor, trade associations, farmers, nationalist parties, environmentalists, and intellectuals. The period saw seven changes in government, but only one notable policy retraction from economic openness.¹ Even that happened prior to the passing of the policy; once enacted, no major pro-openness policy has been curtailed or withdrawn since 1991. Successive Indian governments, regardless of party, have “ruled out” any reversal in India’s new economic orientation.

What is remarkable about India’s story is not why policies were changed, but why they have been sustained. One would expect that during lengthy periods of turbulence elected politicians would be doubly sensitive to the demands of their constituencies. It may make sense for them to bear short spurts of unrest. But in India political upheaval against open-economy policies continued for a decade and a half. Even the most recent general elections, in 2004, were won and lost mainly on the question of globalization.² Though contested on many issues, the election results underscored the ongoing problem of managing the unequal benefits of economic openness. The pro-openness policy trajectory of BJP, the party that was in power, had raised the visibility of the trading and financial elite as the primary policy beneficiaries, which alienated many Indian voters who perceived themselves still steps and years removed from the trickling down of wealth. Yet India’s open-economy policy continues, and indeed for the past seventeen years, politicians in power have been trying to build bridges across political interests in support of increasing, not limiting, the scope of openness in Indian economy. What explains this continuity?

This book offers an answer by highlighting the fundamental role played by ideas and beliefs. Policy continuity is essentially a consistent progression of decisions and actions taken by policymakers. To investigate continuity, we need to discount the significance of an individual policy or event, and try to identify patterns instead. A triggering event or an individual policy can be arbitrary: other events could have substituted for it. The event that triggered India’s open-economy policy was a devaluation of its currency in 1991, undertaken to address a severe shortage of foreign exchange needed for external payments. In another case the trigger could well have been an energy crisis, a treaty deadline, lobbying by exporters, or a palace coup. In other words, I am less interested in asking why a certain decision was made, but more in understanding the basis on which a series of policies was sustained. It is in understanding this basis that the role of ideas becomes significant. How can certain ideas be powerful enough to over-ride a torrent of political disincentives? What makes them useful enough to be marketed to the broad populace, such that policies eventually come to be established and accepted, thus lowering the risk of changes and uncertainties?

The central role of ideas becomes clearer if one considers, conceptually, how economic openness or any such value orientation can become established, starting from being set up as a tentative policy championed by a small group of policymakers, to being accepted eventually as a standard by society at large. The process, with all its attendant arguments, persuasions, narratives, manipulations, selling and marketing, takes place predominantly in the realm of ideas. To the extent that one considers statistics “real,” economic openness can be measured statistically, using the ratio of a country’s trade to gross domestic product (GDP), for instance. But until those ratios can be calculated, shown to be different a few years later, and confirmed to be sustainable still a few more years later, openness remains ideational. In other words, until beneficial shifts are evident in life, which can take many years, open-economy policy has to be made, justified, and continued on the basis of the idea of openness rather than its tangible effect. Indian policymakers needed to persist with their unpopular policy, and at the same time, win a series of ideational battles over free trade, foreign investment, withdrawal of subsidies, welfare programs, and indeed, the very definition of nation. The victory of pro-openness policymakers was far from assured, but is evident in the fact that even Indian states governed by communist parties, such as the states of West Bengal and Kerala, began to pursue their own open-economy policies by the second half of the 1990s. My aim is to discuss what sustained the idea of openness in India and what ensured that it had the persuasive political force needed to withstand its discontents.

An exploration of ideas will necessarily involve navigating “perception” and “construction.” The terms can add enormous complexity, and also baggage, covering a wide range of approaches from social psychology and cognitive science to post-positivism and postmodernism; for the purpose of this study the only differentiation I draw is that perception is passive while construction is proactive. One can perceive reality in a descriptive fashion (“this has happened”), but one constructs reality in the active effort of trying to make sense of it (“this has happened because…”; “this will happen if…”). Notions of collective identity, theory, historiography, policy statements, textbooks, political speeches, publications, debate, academic and professional training, government sponsorship of arts or cultural rituals – the production and practice of all of these can cumulate into systematic social construction that privileges certain ways of interpreting complex political and economic realities, and eventually informs and governs policy behavior.³

In much of this book, we will attempt to put ourselves in the mindset of the perceptive and constructive policymaker, recognizing the role of both introspection and extroversion inherent in sustaining macro policies aimed at accomplishing political and economic change. In more straightforward terms, we will look at how pro-openness policymakers perceived India and its ambitions internally as well as externally in relation to a broader society of states. The assumption is that societal change involves introspective national and nationalist imaginings, and nationalist perceptions become sharper and urgent only in relation to the international, the outside, or the foreign. Policymakers had to place their initiatives to open up India’s economy into a vision more encompassing than merely “free trade” or “capitalism”; they had to perceive for themselves and construct for others a larger milieu that could provide justification for controversial policies, such that India’s economy could be integrated with the world outside without losing national imaginings of what “India” means. For example, India’s primary economic objective, for most of its history, has been poverty alleviation. The primary goal noted in key policy documents nowadays is quite different, as Chapter 4 of this book will point out. Does that mean that a core national value has been compromised? Can fundamental changes such as these be reconciled in the context of broader ideas? The continuity of open-economy policy involved the rationalization, marketing, and acceptance of ideological changes that were politically very sensitive; orchestrating it required perceiving and constructing “reality” in a way that could convey consistency with cherished national aspirations despite change.

Whether structural conditions or “hard economic reality” become relevant to policy depends significantly on perception and construction, especially of self and other. It is now commonplace to perceive India and China as competitors. A growth industry has boomed in international business and international relations literature seeking to compare India and China, producing every year a torrent of catchy titles that together could describe a veritable zoo, complete with dragons, giants, tigers, elephants, lions, and mongooses.⁴ Most of these works feed off an automatic assumption of rivalry. But how did these two countries become rivals? And what does rivalry mean from the perspective of a policymaker? Business literature frequently compares the foreign direct investment (FDI) coming into India and China. But does FDI into China crowd out FDI into India, as presumed whenever analysts urge for policy reform? It generally does not, since most investors spread assets across both India and China to diversify risk and to access both markets – which is partly why FDI into both countries has been rising simultaneously. Moreover, just because China has a greater inflow of FDI does not necessarily mean India needs to attain that level. The appropriate level of FDI would be determined by a variety of factors, including domestic savings-investment gap and absorbability. But because rivalry is imagined and constructed, any difference between the two countries, whether relevant or not, becomes a matter of gain/loss: a greater level of FDI into China is conveyed and interpreted automatically as a relative loss for India, and accompanied with urgent policy prescriptions and allusions. Later chapters will show that China was imagined to be India’s rival long before they competed materially in any significant way. It was the imagining, the perception, not the “material” competition, that became policy-relevant.

Ideational motivations centered on these two dimensions – one about national ambition (“what do we want to achieve as a nation”) and the other about national placement (“where are we placed relative to other nations”) – had begun to intertwine powerfully in Indian policy-thinking long before a crisis hit the economy in 1991. As a result of the specific ways that these motives combined, the mindset of Indian policymakers was already attuned sharply to the external world; their imaginings of India had already become globalized. We will, in the course of this book, explore how this happened, how it encouraged policy continuity, and how it induced an increasingly greater part of policymakers as well as the public, over time, to associate India’s open-economy policy with aspirations of the nation-state rather than with the platform of a specific party. We must also consider seriously the influence of social construction and ideas on economic policymaking because the guidance offered by existing approaches to openness, outlined briefly below, does not fully account for continuity. Much scholarship on national economic policy since the end of the Cold War has cast disproportionate attention on “material” change. Continuity has either remained obscure or taken for granted.

Approaches to continuity

Conventional discussions on Indian economy attributed the shift toward openness to a balance of payments crisis in 1991, in the wake of the Persian Gulf War. This view is consistent with mainstream economic studies that have identified a similar pattern of crisis-led policy change elsewhere in the developing world.⁵ Leftist perspectives also acknowledge the role of the crisis, and indicate, in addition, the influence of Indian businesses, restating the classic argument that the move toward a market economy has been orchestrated and sustained collectively by the interests of capital, that is, “the bourgeoisie.”⁶ But questions remain. The bourgeoisie was not a unified whole in support of open-economy policies; it was in fact deeply divided over policy continuity.⁷ Moreover, if economic crisis prompted a policy response, we should expect that constant political crises and turbulence would also prompt appropriate policy responses. It is not rational for weak coalition governments to continue openness at substantial political cost – costs that became evident in Indian voter behavior nationally and regionally. Earlier efforts at liberalization were piecemeal and extinguished prematurely mostly because of domestic political difficulties.⁸ One possible explanation of how the post-1991 economic reforms were politically sustained in India is offered in Rob Jenkins’s study. Jenkins argues that given the resistance and hurdles, reformist policymakers often resorted to underhanded techniques of manipulation, while using India’s layers of democracy and politics, from local to state to federal, as protection in order to carry on with their reform program. It was essentially reform by “obfuscation and stealth” (Jenkins uses these terms not pejoratively, but descriptively). This approach illuminates the political mechanism involved, but it does not satisfactorily answer why reformist policymakers would be so determined to continue open-economy policy in the first place, when the easier option, from the perspective of both political costs and political incentives, is to desist and fall back toward the pre-reform status quo.⁹

Another perspective underscores the influence of international financial institutions (IFIs), such as the World Bank and the International Monetary Fund (IMF). Since the Third World Debt Crisis in the early 1980s, much lending from IFIs to troubled economies has been conditional on policy adjustment toward openness, especially in countries with payment problems.¹⁰ Opening up the economy, however, is not the only way that countries have responded to crises. They have turned inward at times, and many borrowers adopted a “heterodox” mix of policies, including incomes policies, subsidies, price controls, or capital controls that were not part of conditionalities.¹¹ The impact of IFIs has been limited because of “powerful sources of conflict between the policy strictures of the external actors and the political interests of many developing country governments.”¹² An in-depth analysis by Mosley, Harrigan, and Toye on the influence of World Bank policies found that only two countries (Turkey and Thailand) among the nine cases studied met more than 65 percent of the loan conditions. Even small (read: weak) countries such as Kenya, Guyana, and Ecuador implemented only about a third of the stipulations.¹³ During the ravages of the Asian Financial Crisis in the late 1990s, Malaysia contravened IMF’s prescription and imposed capital controls. Poland set the scope and pace of economic transition from communism to capitalism mostly on its own terms, rejecting the shock therapy advised by the IMF and the US Treasury.¹⁴ India is a large and resourceful country, with a strong prior record of independence from pressures by international organizations. Moreover, as this study will show, most of India’s policy struggles with IFIs have been about fiscal deficit, and domestic, not external, liberalization. Indian policymakers seem to have implemented pro-openness policies pre-emptively and out of their own volition.¹⁵ What explains their commitment to openness?

“Social learning” may have provided the basis, as contended by some analysts. The idea is that policymakers in developing countries “may have finally ‘seen the light’ and accepted the superiority of the liberal economic ideas.”¹⁶ National policymakers, many of whom had stints as staff members of IFIs or regional and international development banks, learned about successful techniques of economic transformation through previous experience with failed models, or from observing other countries, or from continual policy dialogue with IFIs. Devesh Kapur’s research shows the extent and some of the effects of the overseas exposure of India’s policy elite – through international migration, education, and return – since India’s colonial days.¹⁷ Social learning eventually becomes institutionalized, providing ideational continuity despite political change. However, this line of research has usually put the source of the ideas in the West; the implication is that Indian policy would change as the West changes. As Achin Vanaik wrote, explaining the source of the 1991 reforms, “the apex of the state bureaucracy in India … [was] increasingly drawn into the mental orbit of their counterparts in the West.”¹⁸ But social learning can also threaten continuity, especially if elements of the initial policy package are controversial, as they were in India, and fail to deliver the anticipated results. In addition, as Haggard and Kaufman note, “it is difficult to pin down precisely processes of learning and socialization that determine the way such ideas are adopted by particular sets of national leaders or incorporated into specific policy contexts.”¹⁹ Why were post-1991 reforms different from previous episodes with regard to policy continuity? This book contributes evidence of social learning, but also identifies nation-centric interpretations that give such learning significance toward policy continuity instead of policy reversal.

Bureaucratic competence or insulation of technocrats from political demands provides support for risky policies, according to another influential strand of scholarship. But major studies of India’s bureaucracy, especially those up to the 1990s, report downbeat results, contending that inefficiency, corruption, patronage, and a lack of professio...

Table of contents

• Cover Page
• Title Page
• Copyright Page
• List of figures
• List of tables
• Preface
• List of abbreviations
• 1 Explaining the continuity of openness
• 2 The politics of causes and consequences
• 3 Roots of globalism and rivalry
• 4 Evolution of economic globalism and economic rivalry
• 5 Perception, policy, and persistence
• Appendix
• Notes
• Bibliography