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India Review
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The State, Economic Growth, and Development in India

Rahul Mukherji
a a

South Asian Studies Programme, National University of Singapore, Available online: 19 Feb 2009

To cite this article: Rahul Mukherji (2009): The State, Economic Growth, and Development in India, India Review, 8:1, 81-106 To link to this article: http://dx.doi.org/10.1080/14736480802665238

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India Review, vol. 8, no. 1, JanuaryMarch, 2009, pp. 81106 Copyright Taylor & Francis Group, LLC ISSN 1473-6489 print; 1557-3036 online DOI:10.1080/14736480802665238

The State, Economic Growth, and Development in India

1557-3036 1473-6489 FIND India Review, Review Vol. 8, No. 1, January 2009: pp. 118

RAHUL MUKHERJI
The State, India Review Economic Growth, and Development in India

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Introduction: The State and Economic Development in India The Indian state has been more penetrated by social actors than many East and Southeast Asian states. Unlike China, India could neither abolish private enterprise nor could it embrace globalization with the same speed and ferocity. Both complete state-driven nationalization and state-driven globalization would demand a state, which would have much greater command over interest groups like industrialists, farmers and trade unions. Policies favoring economic growth and development in India needed to evolve gradually after building a social consensus on those policies. This is a model of development driven by a relationship between the state and society, where the power of the state, even in its commanding moments, was moderated by the power of social actors. Developmental ideas were debated within the state. Substantial economic policy change would require building upon a historical path of gradual changes in ideas and policies, punctuated by economic crises. This paper demonstrates how this dynamic is critical for explaining the politics of the green revolution and consequent self-sufficiency in food grains, as well as for understanding the Indias globalization beyond 1991. It is a story of getting to higher rates of economic growth in a gradual and circuitous way after building a policy consensus among diverse stakeholders. Economic crises aided the arrival of a new consensus. Indias growth rates began looking more like Chinas after 2003. Figure 1 gives us a visual feel of the trajectory of Indias growth. Between 1956 and 1974, Indias GDP grew between 3 and 4 percent per annum, when it was a closed and highly regulated economy.
Rahul Mukherji is Associate Professor in the South Asian Studies Programme, National University of Singapore.

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FIGURE 1 INDIAS GDP GROWTH

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Source: World Development Indicators (Washington, DC: World Bank, 2008).

The same increased to over 5 percent between 1975 and 1990 when Indias domestic private sector was given greater room for maneuver. This was not a period when Indias engagement with the global economy saw a significant rise (Figure 2). The paradigm shift in private sector and trade orientation beyond 1991 has been associated with higher rates of growth, over 6 percent between 1991 and 2004, and over 8.5 percent between 2003 and 2007. It is the latter figure that has drawn the attention of the world when India became one of the fastest growing economies in the world after China.
FIGURE 2 MEASURING INDIAS GLOBALIZATIONMERCHANDISE TRADE/GDP (%)

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Indias democratic complexity and the chaotic nature of development policy are well known. The literature on the development state driven by the East Asian experience had been largely preoccupied with the importance of autonomy or the East Asian states ability to maintain its independence from powerful social actors.1 India, on the other hand, was caricatured as a country whose industrialization and growth were obstructed by politics and patronage. Indias sustained growth beyond 1991 poses a puzzle for this literature. This paper will discuss the twists and turns in Indias economic development policy since the time of independence in 1947, which gradually resulted in the high growth trajectory. It will deliberate on the reasons why sectors like telecommunications and stock markets became efficient, while others like the power sector lagged behind. What are the socioeconomic and political reasons for low levels of literacy in India, the decline of Indian agriculture, the persistence of poverty, and the rise of inequality in India?

The Political Economy of Growth Indias business houses were regulated to a greater or lesser extent by the state depending on the amount of influence they could wield within the state. The period from 1947 to 1968 were years of moderate regulation by the state. In comparison, the years between 1969 and 1974 were characterized by stringent regulation of private and foreign companies. The inability of the state to meet the demands of an increasingly mobilized people in the context of low levels of growth and productivity led to a gradual process of liberalization of the economy favoring the private sector between 1975 and 1990. The substantial bias in favor of government ownership and economic self-reliance that remained needed the balance of payments crisis of 1991 for spurring further economic liberalization. In 1991, a technocracy convinced about the importance of globalization and private initiative exploited Indias dependence on the IMF to direct policy attention towards the competitiveness of the Indian economy. Indias private sector was freed from significant state control during this period. The subsequent Indian private sector boom has been associated with high levels of economic growth in India.

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The Period of Slow Growth: 194774

The Indian business class wielded substantial influence at the time of independence, having played an important role in the struggle for freedom. In pre-colonial India, nationalist business had often taken positions that lent support to the Congress even if this meant giving up profits in the short run. Mohandas Gandhi, the man who mobilized the Indian nation to resist British colonialism in his address delivered at the Fourth Annual Meeting of the Federation of Indian Chambers of Commerce and Industry in 1931, commended the role of nationalist business in the Indian freedom movement. The wealthy were encouraged to treat themselves as trustees of the wealth that ultimately belonged to society as whole.2 Mohandas Gandhi was assassinated in the house of G. D. Birla, one of Indias pioneering industrialists, in January 1948. Sardar Vallabhbhai Patel, the powerful Deputy Prime Minister in Nehrus cabinet, was very close to G. D. Birla.3 The Sardar4 was the fundraiser and the organizer within the Congress Party, credited with bringing over 500 princely states under one sovereign. Such was his political prowess in the early years after independence that his candidate Purushottamdas Tandon was able to defeat Nehrus candidate for the Presidency of the Congress Party. Tandons campaign was funded and supported by Birla. The Sardar often used to stay at the Birla House in New Delhi and used Birlas goodwill on matters ranging from industrial policy to negotiating with multilateral financial organizations.5 The state and the business class in India reached a compromise in the early years after independence. The Indian business class desired limited state regulation and protection from international trade. While there was agreement on trade protection between the state and business class, there were differences of opinion about the extent of state regulation over the economy. The power of Indian business and its close links with the state produced a regulatory regime between 1947 and 1955, which was far more considerate towards the interests of Indian business than the socialists within the Congress Party had desired. The socialists had desired greater government control over private assets. When they found that the Report of the Economic Programme Committee of the Congress Party (January 1948) would be substantially watered down to favor private business, they left the Congress Party to form the Socialist Party in March 1948. The Industrial

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Policy Resolution of April 1948 reserved public ownership exclusively in just three sectors of the Indian economy. Second, there were disputes over whether the Planning Commission would be a recommending or an implementing agency. The Ministries were able to maintain their implementation powers and the Planning Commission relegated to a largely advisory body. The private sector in India was relieved to maintain its distance from Soviet style planning. Last but not least, the Industrial Development and Control Bill initiated in 1949 was opposed and reformulated into the Industrial Development and Regulation Act (1951) to give considerable voice to Indian industry. This was the birth of industrial controls and licensing that would only be abolished in 1991.6 Sardar Patels death in 1950 was a turning point. Nehrus desire for greater state control over the economy could be realized. The state would gain greater control over private activity, even though Nehru saw a legitimate role for the private sector. It took Nehru a couple of years till 1955 to gain absolute command over the Congress Party. The Industrial Policy Resolution of 1956 was less generous towards private capital than the one in 1948. The Second Five-Year Plan (195661) increased the proportion of government investment in relation to private investment and pointed it towards heavy capital intensive industrialization. The Nehru years witnessed a rise in the power of the Planning Commission, which won it the epithet super cabinet.7 Nehru was not entirely averse to the private sector. Banks could not be nationalized. Foreign investment continued to enjoy a reasonably favorable environment. G. D. Birla remained an important source of election funds and helped mobilize Indian industry to the service of the Congress Party during the election years of 1952 and 1957. Birlas business performed reasonably well during this period. The Birlas were not given permission to build a steel plant, nor were the Tatas allowed entry into the automobile industry. The Birlas had been given permission to produce cars and the Tatas were permitted to produce steel.8 Industrys prosperity depended on direction from the state. Lal Bahadur Shastri became Prime Minister in 1964 after the death of Jawaharlal Nehru. Quite unexpectedly, Shastri began systematically overturning the Nehruvian legacy. The importance of the Planning

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Commission was diminished and the Prime Ministers Office was made more powerful. The National Development Council involving state-level leaders was also made more powerful. G. D. Birla and the Federation of Indian Chambers of Commerce and Industry developed a close working relationship with the new Prime Minister. Industrial sectors such as steel and cement were decontrolled. And the decision to devalue the Rupee was taken during his premiership. Had the decision to devalue the Rupee been consistently pursued, it would have increased the export orientation of the Indian economy. Medha Kudaisya has argued that had Shastri not died prematurely in January 1966, the Indian economy might well have taken a private sector and trade oriented route in the mid-1960s. This was the trajectory followed by many East and Southeast Asian countries.9 The rest of this section will demonstrate that the promotion of trade may not have been easy for Shastri because of the views of the majority of Indian business, intellectuals, and political elite at that time. Mrs. Indira Gandhis unexpected rise to the Premiership after Lal Bahadur Shastris sudden demise in January 1966 was owed partly to struggles within the Congress Party that could not easily be resolved. Indira Gandhi was known to be unassertive and shy in those days. She did not appear to pose a threat to senior Congress leaders like Kamraj and Morarji Desai. Mrs. Gandhi would have to consolidate her power within the party if she were to consolidate her position over the longer term.10 An economic crisis was looming large over the nations horizon. The droughts of 1964/65 and 1965/66 and the war with Pakistan in 1965 created a financial situation where India became dependent on shipments of US PL 480 wheat. Food price inflation is a major setback for any Indian political party. The government needed substantial external finance to fund the Fourth Five-Year Plan (196974). Between the Third (196166) and the Fourth Five-Year Plans, Indias strained resources drove the country to two years of plan holiday (1967 and 1968). The food situation and the related financial situation forced India to ask the US for subsidized wheat supplies and financial assistance. President Lyndon Johnsons policy of slow shipment of wheat and the quid pro quo demanded by donors was a far cry from the liberal financial assistance that India had received during the Kennedy years.

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India liberalized its trade regime and devalued the Indian Rupee, bowing to external pressure.11 The financial crisis of 1966 and the aborted liberalization of the economy demonstrate the consequences of external pressure in the absence of an internal consensus about promoting Indias trade and competitiveness. Indian business was overtly supportive of the reforms but was largely opposed to the devaluation. Domestically driven import substituting industry needed cheap imports for the manufacture of goods for the Indian market. Industry was averse to the rise in import prices consequent upon the devaluation. The sentiment within the intellectual community and the views within the Indian Parliament were overwhelmingly opposed to the devaluation of the Indian Rupee. Such was the political opposition to the Rupee devaluation in the Indian Parliament that Mrs. Gandhi did not even inform President of the Congress Kamraj before Finance Minister Sachin Choudhury announced this measure in June 1966.12 The policy of trade promotion and private sector participation was reversed by 1969. The government nationalized private sector assets in areas such as insurance, banks, coal, wheat, and significant parts of the steel industry. Large industrialists in the private sector were controlled stringently in relation to the quantities and types of goods they could produce through the Monopolies and Restrictive Trade Practices Act (MRTP; 1969). Even G. D. Birla could not strike a relationship with Mrs. Gandhi, and J. R. D. Tata was quite disillusioned at this time.13 The small scale industrial sector flourished at this time, with fewer regulatory bottlenecks, easy credit and certain key areas of business reserved for it. The Foreign Exchange Regulatory Act (1974) reduced the power of multinational corporations by reducing the foreign equity participation of foreign companies from 51 percent to 40 percent. This meant that multinationals would have fewer powers in company boards. This ultimately led to the departure of companies like Shell, Coca Cola, IBM, and Caltex.14 What were the reasons for this offensive against big Indian and foreign corporations? Industrial policy between 1969 and 1974 make the Nehru, Shastri and early Indira Gandhi years look like a period of liberal economic policy. The state was ascendant and private capital was in retreat to the greatest extent during this period. Mrs. Gandhi understood that she could consolidate her position as Prime Minister by

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undermining a group called the Syndicate within the Congress Party, which was more sympathetic towards the large Indian corporations. When the Congress Party decided to install N. S. Reddy as the candidate for Indias presidency, she proposed the name of trade union leader V. V. Giri instead. Indira Gandhi had feared that her Congress opponents would use Reddy to undermine her position. Giri contested and won the election against the Congress Partys official candidate with the support of the Communist Party of India. The majority of the Congress votes had gone to Reddy and not to Giri. Thereafter Mrs. Gandhis allies within the Congress Forum for Socialist Action and the Communist Party of India reigned supreme till about 1974. Indira Gandhi was faced with a political situation that went beyond her control after 1974. The growth rate did not pick up and there was social unrest against both the personalization of politics and economic hardships. Mrs. Gandhi took the Congress Party in her hands and systematically undermined inner party democracy something that was a heritage of the struggle for independence, which had been nurtured by her father Jawaharlal Nehru. A controversial appointment of a Chief Justice, the Allahabad High Courts ruling on electoral malpractices in her constituency, low rates of economic growth and a freeze in wages at a time when inflation could not be controlled, all mobilized the nation against her and the Congress Party. The last straw was the proclamation of National Emergency or authoritarian rule in June 1975. These events galvanized all the non-communist opposition political forces into political solidarity the Congress Party lost its first elections to the Janata Party in 1977. The veteran Congress socialist leader Jayaprakash Narayan, who had been a close associate of Nehru, provided charismatic leadership to the political movement against Indira Gandhis regime.15

The Moderate Growth Phase: 197590

Indias accelerated economic growth, at a rate greater than 5 percent in the period from 1975 to 1990, needs to be understood in the context of steady private sector orientation beginning in the mid 1970s, which accelerated in the 1980s. Thoughts about private sector and trade orientation arose in the mid-1970s. In 1975 a special Cabinet Committee was formed for export promotion.16 A number of influential reports

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within the Government of India began arguing against the system of physical and financial controls, and the need for export promotion.17 The Department of Electronics set up within the Prime Ministers Office foresaw the potential for Indias exports in software even in the mid-1970s.18 In the early 1980s, Mrs. Gandhi was attentive to Chinas trade oriented growth and the inability of the Soviet system to meet even its food requirements.19 The difference between India and China was that it was politically tougher for Mrs. Gandhi (198084) and her successor and son Rajiv (198489) to undo the economic legacy built from the late 1960s than it was for Deng to undo the legacy of Mao. Private sector oriented liberalization entailed gradual dismantling of controls over private enterprise. The corporate private sector was highly protectionist. Trade orientation and substantial tariff liberalization could not be achieved and Indias trade to GDP ratio remained constant between 1980 and 1990 (Figure 2). There was substantial opposition to economic deregulation. The Congress Party was largely opposed to private sector orientation. Indian industry had become so accustomed to licensed production within the protected home market that the auto industry even opposed the automatic expansion of its manufacturing capacity when they came to know that they would need to compete with a joint venture between the Government of India and Suzuki Corporation.20 The Maruti Suzuki car would quickly overtake the sales of Indias known brands the Ambassador and the Fiat cars, which had not upgraded their technology for decades.21 Indian industrialists had typically become past masters at briefcase politics which entailed bribing the government in order to secure production, import, and export licenses.22 The achievements of the 1980s were quite substantial in relation to the legacy of the 1970s. First, some industrial deregulation favoring the Indian private sector was achieved. The restrictions for large businesses via the MRTP route were eased. It was now easier to expand capacity or to manufacture a product similar to a licensed product without permission from the government.23 Second, Rajiv Gandhi was able to move the telecommunications sector in the direction of private sector orientation. He was able to corporatize24 parts of the Department of Telecommunications (DOT) into the government-owned corporate entity Mahanagar Telephone Nigam Limited (MTNL),

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despite vehement opposition from the managers and workers of the DOT. The Centre for the Development of Telematics (CDOT) funded by the government began producing telephone switches superior to the ones being produced by a joint venture between the government-owned Indian Telephone Industry and the French company Alcatel. CDOT switches had to contend with politics within the government in order to succeed, despite opposition from the Indian Telephone Industries. This technology was licensed for private production and continues to serve Indias rural areas. These efforts produced impressive levels of industrial growth in the mid to late 1980s that were surpassed only after 2003.25 Third, Rajiv Gandhi made a considerable effort to draw the more professional and modern Association of Indian Engineering Industry (AIEI) closer to the government. As a consequence, the influential industrialists of the Federation of Indian Chambers of Commerce and Industry (FICCI) who had become used to obtaining licenses by supplying the ruling party with funds a practice that was perfected in the 1970s, were relegated to the background. Rajiv Gandhi consulted AIEI on important matters, provided it with access to government policy, and persuaded a small association to transform itself into an organization that would represent the interests of Indian industry.26 Fourth, the period of domestic deregulation witnessed the emergence of the software sector as an export oriented sector. This was aided by synergies between the Department of Electronics (DOE) and Indias natural comparative advantage, which lay in its cheap Englishspeaking technically competent workforce. The DOE, which was housed by technocrats with backgrounds similar to the new qualified middle class entrepreneurs, slowly began to push the government towards providing entrepreneurs with greater choice with respect to imports, and provided for easy finance for imports needed for exports. It also gave the push to government investment in software technology parks, which provided Indian firms with cheap connectivity, office space and infrastructure and was a major boost for Indias software exports.27 Last but not least, the most important legacy of the Rajiv Gandhi government was the background research on economic liberalization that was carried out within the Prime Ministers Office, the Ministry of Commerce and Industry and the Ministry of Finance by people like Montek Ahluwalia, Shankar Acharya, Rakesh Mohan, and Vijay

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Kelkar. This effort was spurred in part by Indias own policy failures and in part by the rising growth rates in China and Southeast Asia. To give one example, Rajiv Gandhis successor V. P. Singh requested his Special Secretary, Montek Singh Ahluwalia, to write a memo about what India needed to do in order to grow like Malaysia. Singh and Ahluwalia were just back from a trip to Malaysia and Prime Minister Singh was deeply moved by the progress made by Malaysia. Ahluwalias memo of 1990, which was leaked to the press, was the blueprint of reforms that India carried out after 1991, when faced with its severest balance of payments crisis.28
The High Growth Trajectory: 1991Present

It is important to note that the trade, investment and infrastructure reforms of 1991, even though they constituted a break from the past, were largely path dependent. Without the experience of the 1970s and the 1980s, the technocratic conviction required to break the political deadlock in favor of the status quo bias in a moment of financial crisis would not have arisen. India could have done in 1991 what it did in 1966, which was retreat to reforms in a moment of crisis only to pursue state control and autarky in the long run. The reason why 1991 was different from 1966 was that this time technocratic conviction within the executive branch made a virtue of dependence on the IMF at the time of the balance of payments crisis, and pursued reforms that were tough within the context of Indias political economy. Finance Minister Manmohan Singh was a distinguished economist whose doctoral dissertation submitted to Oxford University was published by Clarendon Press in the early 1960s. At a time when most distinguished development economists were talking about the virtues of import substitution, it was Singh who has pointed out through a detailed empirical analysis that trade would be an important factor for the development of a less developed country like India. Manmohan Singh had the support of an excellent technocratic team whose research and policy experience during the 1980s generated a sophisticated blueprint for reforms. Singh stated in no uncertain terms in his Budget speech in 1991 that the underlying problem was the unsustainability of government spending in the presence of low levels of productivity. The budget deficit had contributed to the balance of payments deficit and led to investor pessimism. Equally significant was the fact that Prime Minister Rao was willing to stick his political

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neck out in favor of economic reforms. He trusted his Finance Minister and understood that the end of the Cold War required a fundamental restructuring of Indias internal and external economic policies. Why did Indian industry agree to tariff reductions, devaluation and easier entry of foreign direct investment when they had opposed these in the past? Import substituting industry needed foreign exchange for imports of intermediate goods, and this finance could only be made available by the IMF, at a time when commercial banks and non-resident Indians had withdrawn their money from India. India had merely two weeks of foreign exchange and no alternative sources of funding when it went to the IMF in 1991. Indian industrys acquiescence to economic reforms were articulated and promoted effectively the Confederation of Indian Industry. Rajiv Gandhi had earlier played a critical role in galvanizing the AIEI into the Confederation of Indian Industry (CII). The technocrats, who were largely in agreement with the IMF on the three abovementioned issues, made a virtue of necessity and pushed for far-reaching reforms in trade, industrial, and foreign investment policies in the first three reform years (199193), when India was accepting conditional funds from the IMF. The technocrats also begged to differ with the IMF. The fiscal deficit was allowed to grow after the first year, as government spending could not be drastically reduced in a poor country. Trade union laws could not be reformed. And market restructuring in areas such as telecommunications, stock markets, and airlines were home-grown efforts unaided by World Bank funds.29 Dr. Manmohan Singh declared at the Gabriel Silver lecture at Columbia University in 1995 that Indias tryst with globalization had become irreversible no matter which government came to power after the elections of 1996. This prophecy has come true.30 What are the drivers of Indias growth? Industrial de-licensing after 1991 allowed Indian private companies to produce whatever they liked in almost all areas, without the need for a license. To give one example, the Tatas, who were not allowed to make Indian cars during the regime of controls, took the initiative and produced one of Indias most popular cars the Indica. Spurred by their success they have bought brands like Rover and Jaguar to consolidate their international business. The Tatas have introduced the worlds cheapest car the Nano.

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Second, the devaluation of the Indian Rupee automatically made Indias software and other exports more competitive. To give just one example, India replaced Japan as Sri Lankas biggest trader in 1996 after a period of 60 years. Geography, exchange rates, and improved products made Indian goods such as watches, motor bicycles, cars, and trucks more competitive than their counterparts from Japan. Titan watches replaced their Japanese counterparts and the cheaper Indian Kawasaki Bajaj and Hero Honda bikes replaced the more expensive Kawasaki and Honda bikes from Japan.31 Third, Indias increasing competitiveness arose also as result of the competition from foreign markets. Even though Indias tariffs are high by Association of Southeast Asian Nations standards, the weighted average nominal tariff came down from 81.4 percent in 1991/92 to 32.9 percent in 1995/96 to 18 percent in 2004/05. India abolished its quotas for consumer goods in 2001. Third, tariff liberalization, which was especially successful in the intermediate goods sector, reduced the prices of Indian finished products.32 Preferential trade agreements with Singapore, Sri Lanka, and Thailand also pushed the government and Indian companies to increase their competitiveness.33 Fourth, the legacy of the Foreign Exchange Regulatory Act (1974) could only be overturned after 1991. Non-debt creating investments of multinational corporations were viewed favorably after 1991. While the quantum of foreign investment increased quite rapidly in relation to the past, this was still insignificant when compared with China. A fundamental difference between the Indian and Chinese political economies is that while China could promote foreign investments in the absence of a domestic private sector, in Indias case, foreign investment had to fight domestic corporations to win regulatory advantages. This was not easy. Of the US$48 billion that India received between 1992 and 2002, US$24 billion came via the portfolio route and US$24 billion via the direct route.34 This entire amount could have gone to China in a single year. And foreign investment through the portfolio route that arrived in India via the stock markets went towards strengthening Indian companies. A business lobby that supports foreign investment in India is the domestic industrialist who needs foreign capital to compete with the more cash rich Indian companies. It was the less well endowed companies like Bharti Televentures in Indias GSM cellular sector that supported the government over increasing the foreign equity limit from 51 percent to 74 percent

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in 2006, in order to compete with richer companies like Tata and Reliance.35 Last but not least, the entrepreneurial instincts of Indian business, which could take advantage of deregulation, were critical for Indias growth. A significant difference between India and China is that while the Chinese economy is still largely propelled by government-owned companies, the Indian economy is driven to a much greater extent by its domestic private sector. A quick look at the list of top companies in Indian and Chinese stock markets reveals this pattern quite unambiguously. Indian private sector business houses have offered successful business models that are being discussed in the leading business schools of the world.36 Sectors such as software services and business process outsourcing have won India acclaim as the back-office of the world. People in the US think of themselves as being Bangalored when their jobs get outsourced to India. Indias manufacturing sector has also begun to shape up after 2003. Pharmaceuticals, gems and jewelry, and automotive parts have emerged as leading sectors. Even though Indian manufacturing lags behind China due to logistical and regulatory bottlenecks, Indian companies are consolidating and multinationalizing their business operations, overcoming domestic bottlenecks and capturing the international market. The Tatas, for example have purchased the Tetley brand for $432 million, which has made it the second largest producer of packaged tea after Unilevers Lipton. Tata consolidated the operations of Tata Steel to win the title of the Best Steel Company in the World, which was accorded by World Steel Dynamics. Thereafter Tata went on to acquire the Anglo Dutch Corus Steel for $11 billion in 2007, in the fourth largest deal in the history of the industry. The Corus acquisition was preceded by smaller acquisitions in Singapore and Thailand in 2004 and 2005, respectively. There have been substantial foreign acquisitions in sectors such as automotive parts, IT, the consumer goods sector and in the pharmaceutical sector since 2004.37
Infrastructure Reforms

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India did a spectacular job of reforming its telecommunications sector, airlines, stock markets, and banks. It has so far failed in reforming the power sector and has had middling success in reforming its ports, airports, and highways. Indian Railways is becoming commercially oriented faced with competition from airlines and improved roads.

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What is interesting is that with the exception of the power sector all the success stories were home grown and evolved in the context of messy democratic politics. The success stories were driven by promoting competition for the government-owned incumbents rather than by privatizing them. Crises were crucial for making the incumbents accept competition. Indias telecommunications revolution driven by GSM cellular technology is truly spectacular. India is adding more than 8 million phones every month and its telecommunications services are among the most efficient in the world. India crossed the 300 million lines mark in March 2008 and its tele-density has grown rapidly to over 26 lines per 100 people.38 This remarkable success was achieved due to the promotion of competition by getting private players to compete with the government-owned incumbents, rather than by privatizing government assets. Indias telecommunications boom, however, was far more successful in urban than in rural areas. The process was quite messy as the Department of Telecommunications, housed within the Ministry of Communications, was averse to private sector competition. It was the Prime Ministers Office and the Ministry of Finance that made the DOT bend a little. The promotion of competition, which was aided by the setting up of the Telecom Regulatory Authority of India in 1997 and its further consolidation (2000), was spurred by financial crises. Every time the rent-seeking behavior of the DOT brought the private sector to its knees, the Prime Ministers Office moved quickly to improve the regulatory framework favoring the private sector. During such times the Prime Minister took over the Communications portfolio.39 Indias stock markets were reformed via a similar dynamic. The government realized the need for a well regulated stock market in the aftermath of the balance of payments crisis of 1991. The stock market was viewed as an institution for attracting savings that could be diverted towards industrialization. There was an urgent need to curb the opaque and rent-seeking propensities of Indian brokers that demanded computerization and reform of the settlement system. The brokers of the Bombay Stock Exchange (BSE) successfully resisted both till the Ministry of Finance deployed its powers to set up a new National Stock Exchange (NSE). The brokers had underestimated the potential of the NSE. The success of the NSE led to reforms in the BSE. However, reforms in the settlement system had to wait till

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the stock market scam of 2001, as this reform was resisted even by the regulator. The health of Indian companies and its stock markets make India a compelling destination for foreign institutional investors.40 Indias power sector was a dismal failure, despite the governments best efforts. Farmers considered electricity provision a right rather than something that needed to be paid for. And, there was rampant theft of electricity even in the non-farm sector. To give one example, field work in Andhra Pradesh in December 2007 revealed that poor and middle-income farmers were in favor of subsidized quality electricity rather than the poor quality free electricity being provided by the Congress government of Dr Rajasekhar Reddy. They opined that free power came at night and the distribution companies did not invest in transformer replacement for burnt transformers or for insulating the wires. The result was that farmers and animals were being electrocuted at night. Why then would the Chief Minister make such a political deal out of free electricity? This could be because rich farmers could hire laborers at night and afford the maintenance costs that the state-owned distribution companies did not provide for farmers who did not pay for electricity. The poor and middle-income farmers also opined that the governments claim of having reduced theft could be spurious because agricultural consumption had not been metered. Andhra Pradesh was reputed to have the best governed power sector in India at the time when the interviews were conducted in 2007.41

Challenges for Development Indias robust growth needed to involve more people. Its agriculture sector has been in decline since the mid-1990s. Its trade union laws increase the propensity of Indian industry to remain capital intensive, resulting in unemployment and increased employment in the unorganized sector. Manufacturing industry still faces major regulatory bottlenecks. Last but not least, human development in areas such as primary education and health leave a lot to be desired. The result is that even though there has been a decline in the number of people below the poverty line, a strategy of inclusive growth would have achieved poverty alleviation more rapidly. India is faced with its second agrarian crisis. The first one in the mid-1960s was due largely to the emphasis of the Second and the Third Five-Year plans on heavy capital intensive industrialization and

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the neglect of public investment in agriculture. India corrected this bias after the late 1960s by giving agriculture its due importance and increasing investment in agricultural technology, inputs, and prices. The middle-income and rich peasants in Western India produced the green revolution and made India self-sufficient in food grains.42 Indias agriculture sector, which houses more than 60 percent of the people, has grown at a rate of 1.65 percent between 1996/97 and 2004/05. This is cause for concern as it may produce Indias second agrarian crisis. Subsidies to the rich and middle-income farmers like free power, price supports, free water, and free fertilizer have not been reduced but public investment that uplifts all, has come down. To give one example, the US$15 billion loan waiver for farmers announced in the populist Union budget of 2008/09 will not affect the majority of the marginal farmers. Eighty percent of the marginal farmers do not have access to formal loans. Drought proofing 60 million hectares of arable land with the same amount of money would have produced more inclusive results.43 Democracies have a propensity to get captured by powerful interest groups, which work to the detriment of larger developmental concerns. The Industrial Disputes Act protects less than 10 percent of Indias workforce in a manner that makes it very difficult to retrench unionized workers. Any industrial unit employing more than 100 workers needs to seek the permission of the government before firing a worker. Such permission can be tough to obtain. The result is that most of the unionized workers are in the public sector, and private companies try hard to keep workers out of the unions. Industry adjusts to regressive labor laws by subcontracting its commercial operations to smaller units that escape labor laws and by increasing the capital intensity of production. Even though some state governments have been favoring employers in recent times aided by favorable verdicts by the courts, a stable contract between a worker and an employee that protects the worker in return for his service has yet to evolve. Inclusive growth demands labor intensive production, aided by rational labor laws.44 India needed to promote a developmental, transparent, and investment friendly democracy. Industrial regulations in India make it more difficult to make a success of manufacturing investment in India relative to China, despite the progress made after 1991. Indian firms can invest in any sector but need state and central government permission

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on a variety of issues ranging from land, labor, environment, electricity, water, taxation, and many more. These regulations often become a source of rent-seeking and patronage rather than a speedy and judicious clearance of an investment proposal based on its merits. India is not an easy place to begin business in manufacturing, unless one finds a willing state government taking an initiative to make a success of the investment. Second, Indian industry is negatively served by poor ports, roads, and airports and is crippled by power cuts. The process of clearing manufacturing investment needs to be made more transparent and less cumbersome.45 Indias industrialization is beginning to demand more and more land. Industrial land acquisition needed to be based on the consent of the local people. Acquisition needed to be preceded by compensation and welfare measures that rendered the acquisition of land for industrial purposes a developmental endeavor. Fertile double cropped land needed to be largely left for cultivation. The current laws give the government substantial powers to acquire land. Forced land acquisition by the government has led to violent unrest in some parts of India. Land acquisition has been successful in areas where developers have worked with state governments and the local people for gaining consent by attempting to uplift their human condition. States like Tamil Nadu, Andhra Pradesh, Gujarat and Maharashtra have tried to streamline some of these procedures at the sub-national level. Investment friendly states are able to craft developmental bureaucracies that work more effectively for the local people and investors.46 The success of Indian entrepreneurship lay in the fact that it was able to overcome these bottlenecks and grow. The software sector was especially lucky because it needed roads, ports, airports, and power to a much lesser extent than Indian manufacturing. It was aided by Indias success in creating efficient telecommunications, stock markets, and the financial infrastructure. Interstate inequalities have increased in the post 1991 period. As the central governments role in funding the state governments became less, the states needed to attract private investment for furthering their development. Chief ministers like Chandra Babu Naidu of Andhra Pradesh became reform icons who tried to improve governance in their states in order to attract investment. They also successfully pleaded for funds from development banks like the World Bank and the Asian Development Bank. Well governed states therefore attracted

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FIGURE 3 TREND IN INTER-STATE INEQUALITY GINI COEFFICIENT

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Source: Montek S. Ahluwalia, State-Level Performance under Economic Reforms in India, in Anne O. Krueger, ed., Economic Policy Reforms and the Indian Economy (New Delhi: Oxford University Press, 2002), pp. 91121.

more funds while the laggards stayed behind. Figure 3 shows how interstate inequality has grown since 1991. Heightened inequalities will make some Indian states look like Singapore while others resemble sub-Saharan Africa.47 India could not banish illiteracy, unlike many other Asian countries. Myron Weiner was right to point out that the social elite governing the Indian state tolerated child labor, which served factories and households at the cost of depriving millions of children of a decent living. Literacy improved in areas where the state and social actors worked together. The success in Kerala, Goa, and Mizoram owed it substantially to the work of Christian missionaries.48 The recent success in Rajasthan benefited from the remarkable efforts of non-governmental organizations like Sewa Mandir and the Social Work Research Centre. In Andhra Pradesh, the MV Foundation has done commendable work in mobilizing villagers and improving the condition of state-run schools.49 Indias literacy rate at 61 percent according to the 2001 census is an improvement on the past but is still much lower than Chinas 91 percent.50 Indias public health record presents a dismal picture during the reform period. The infant mortality rate declined by 30 percent in the 1980s but the same declined by only 12.5 percent in the 1990s. Indias (80/1000) infant mortality rate was lower than Bangladeshs (91/1000) in the 1990. In 1999, Indias infant mortality rate (71/1000) had

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overtaken Bangladeshs (61/1000).51 The latest Human Development Report shows that infant mortality of the poorest 20 percent in India is higher than countries like Bangladesh and Pakistan but the same for the richest 20 percent of the population is much lower than these countries.52 Deaton and Dreze point out that the number of Indians living at less than a dollar a day has come down, even though there is a substantial debate about the extent of decline in the poverty rate. According to one widely quoted estimate, between 1993/94 and 1999/2000 the number of Indians living at less than a dollar a day came down from 36 percent to 26 percent.53 This means that India has about 270 million absolutely poor people when the figure for China is about 110 million. Indias growth has produced more development for the rich and the middle class than the poorest sections of society. Inequality levels in India measured by the Gini coefficient are lower than China, the US, Singapore, and Latin America but higher than Pakistan, Bangladesh, and Europe.54 Indias growth has increased economic inequality, a fact that will be difficult to sustain within a democratic polity. It remains to be seen whether India will go the way of Europe or the United States in this respect.

In Sum The trajectory of economic policies favoring Indias growth was path dependent. From 1947 to 1975 the policy consensus favored an important role of the state within a relatively closed economy. Private enterprise survived during this period but Indias trade declined. Changes in the policy consensus favoring economic deregulation began to appear in the mid-1970s, which prepared the ground for the tectonic policy shifts beyond 1991. Path dependence ensured that new policy ideas building upon the lessons of the past took quite some time to get embedded within politics and result in policy outcomes. This is a story of how powerful social actors who derive benefits from a certain set of policies oppose a change in the social equilibrium. Economic change is perhaps more difficult but more stable in India than in China because it depends to a greater extent on the gradual evolution of a social and political consensus favoring the change.55 The Indian state needed financial crises and technocratic conviction to move policies in a substantially new direction. This was true of the green revolution, and changes in trade, infrastructure, and

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industrial policies. Technocratic conviction was important. India pursued agriculture reforms after 1966, when faced with a balance of payments crisis at the time of a severe drought. India did not pursue reforms in industry and trade at that time because the political and technocratic conviction was in favor of import substitution. Acquiescence to US advice in agriculture but not in industrial and trade policies reflected the internal policy consensus in 1966. In 1991, on the other hand, economic research and the gradual implementation of growth oriented policy change during the 1980s, coupled with the rise of China and Southeast Asia and the decline of the Soviet system, convinced the policy elite that they too could become a part of the Asian growth story by implementing substantial reforms in trade, industry, and infrastructure. Financial crises were critical for the major policy shifts in India. They aided the convinced technocracy and the executive to overcome political opposition to policy change. It became clear to the policy elite that the promotion of Indian agriculture and the private sector was critical in the context of hard budget constraints in 1966 and in 1991, respectively. The financial crises of 1966 and 1991 are critical for explaining Indias green revolution in the early 1970s and its tryst with globalization in the 1990s. Private sector promotion after 1991 succeeded by allowing private corporations to compete with Indias public sector companies rather than by privatizing the government-owned firms. Indian entrepreneurship was quick to seize the private sector advantage. The government sector has adjusted to private sector competition in areas like telecommunications and airlines, which had earlier been reserved for the public sector. The major challenge for Indias development is inclusive growth. Growth has unambiguously reduced poverty and improved the human condition in India. But the gains of the middle and richer classes have been greater than those that went to the poorer sections of society. This is evident from the fact that reforms in areas such as telecommunications, banks, stock markets, airlines, trade and industrial policy have not been matched by agricultural and human development. Indias industrialization continues to be capital and knowledge intensive at a time when over 250 million people survive on less than a dollar a day. If India grows in this way it will take a longer time to eradicate poverty, illiteracy, and malnutrition. Moreover, slow progress

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in human development in areas such as education and health will make it tougher for India to grow in the long run. Indias high growth trajectory, which is essential for development, has become reasonably stable. The debate is not about whether India will grow at 6 percent or at 4 percent per annum. The debate is whether India will grow at 10 percent or 8 percent or 6 percent. This is a substantial achievement. It has been achieved in the context of democratic politics where changes in policy orientation have been slow because it is difficult to produce new winners in the economy by not causing injury to some social groups or classes. Rich farmers, unions, industrialists and a substantial section of government officials all favored the status quo that supported a protected economy and the public sector. This coalition is gradually beginning to favor growth and competition as the middle class learns that the competition game is a rewarding one.56 The challenge for Indias growth and development is to get a larger proportion of the Indian people into its middle class, which is well served by markets and competition. This enterprise demands an active role of the Indian state and will demand support from its society.
NOTES I Would like to thank Sunila Kale, Sumit Ganguly, and Bibek Debroy for comments. The errors, as usual, rest with the author. 1. For seminal work on state autonomy and state-led export oriented growth see, Robert Wade, Governing the Market (Princeton, NJ: Princeton University Press, 1990); Alice Amsden, The State and Taiwans Economic Development, in Peter Evans, Dietrich Rueschmeyer, and Theda Skocpol, eds., Bringing the State Back In (New York: Cambridge University Press, 1985); Stephan Haggard, Pathways from the Periphery (Ithaca, NY: Cornell University Press, 1990); and Peter Evans, Embedded Autonomy (Princeton, NJ: Princeton University Press, 1995). 2. See H. Venkatsubbiah, Enterprise and Economic Change: 50 Years of FICCI (New Delhi: Vikas Publishing House, 1977), pp. 16972. 3. G. D. Birla was among the two leading industrialists in India at the time of independence, and one who had played an important role in connecting Indian business with the Indian national movement. G. D. Birlas relationship with different prime ministers is a convenient way of evaluating the relationship between the state and business class in India. 4. Sardar means leader in Hindi and Vallabhbhai Patel was affectionately called Sardar Patel. 5. On the relationship between Sardar Patel and G. D. Birla see Medha M. Kudaisya, The Life and Times of G. D. Birla (New Delhi: Oxford University Press, 2003), chapter 11. 6. On the stateprivate sector compromise that lasted till 1955 see Kudaisya, The Life and Times of G. D. Birla, pp. 30413; Vivek Chibber, Locked in Place (Princeton, NJ: Princeton University Press, 2003), chapter 6. 7. On the rise of Nehru, the Planning Commission, and the state-driven regulatory framework of the time see Francine R. Frankel, Indias Political Economy (New Delhi: Oxford University Press, 2005), chapter 4; I. G. Patel, Glimpses of Indian Economic

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8. 9. 10.

11.

12. 13.

14. 15. 16.

17.

18. 19. 20.

Policy (New Delhi: Oxford University Press, 2003), chapter 2; A. H. Hanson, The Process of Planning (London: Oxford University Press, 1966), chapter 4. On Nehrus acceptance of the role of the private sector see, Kudaisya, Life and Times of G. D. Birla, pp. 31617 and chapter 14; Dwijendra Tripathi and Jyoti Jumani, The Concise Oxford History of Indian Business (New Delhi: Oxford University Press, 2007), chapter 12. On the Shastri years, see Medha M. Kudaisya, Reforms by Stealth, South Asia Vol. 25, No. 2 (2002), pp. 20529; and Patel, Glimpses of Indian Economic Policy, chapter 4. On accounts of Indira Gandhis image of being a quiet and shy person in 1966 who could not share the news about devaluation with the Congress top brass see Frankel, Indias Political Economy, pp. 28892; David B. H. Denoon, Devaluation Under Pressure (Cambridge, MA: MIT Press, 1986), pp. 479; K. Sundaram, Political Response to the 1966 Devaluation-2, Economic and Political Weekly, September 19, 1972, p. 1883. On the financial crisis, the lack of alternative food supplies and Indias dependence on the US, see Vijay Joshi and I. M. D. Little, India (New Delhi: Oxford University Press, 1994), pp. 734; Frankel, Indias Political Economy, p. 286; Robert L. Paarlberg, Food Trade and Foreign Policy (Ithaca, NY: Cornell University Press, 1985), pp. 1589; and, James W. Bjorkman, Public Law 480 and the Policies of Self Help and Short Tether, in Lloyd I. Rudolph and Susanne H. Rudolph, eds., The Regional Imperative (Atlantic Highlands, NJ: Humanities Press, 1980), pp. 2323. On the political and ideological opposition to devaluation see Rahul Mukherji, Indias Aborted Liberalization 1966, Pacific Affairs Vol. 73, No. 3 (Fall 2000), pp. 38292. On the impact of economic regulation during this period on the Tata group of industries see, Tripathi and Jumani, The Concise Oxford History of Indian Business, pp. 1845. G. D. Birla could establish a relationship with Nehru but not with Indira Gandhi. See Kudaisya, The Life and Times of G. D. Birla, chapter 16. On the exit of multinational corporations see Tripathi and Jumani, The Concise Oxford History of Indian Business, pp. 199200. For a detailed account of economic regulation under Indira Gandhi from the late 1970s and its political fallout see Frankel, Indias Political Economy, chapter 1013. On the New Economic Programme 1975/76 and other liberalization measures see, Baldev R. Nayar, When Did the Hindu Rate of Growth End?, Economic and Political Weekly, May 13, 2006, p. 1886; Baldev R. Nayar, Indias Globalization (Washington: EastWest Centre Policy Studies Number 22, 2006), pp. 1013; Siddhartha Mukerji, State and Industrial Transformation in India, Unpublished M.Phil. Dissertation (New Delhi: Jawaharlal Nehru University, 2007), pp. 4953, Atul Kohli, Politics of Economic Growth in India, Economic and Political Weekly, April 1, 2006, pp. 12548. The influential government reports included Vadilal Dagli (Chair), Report of the Committee on Controls and Subsidies (New Delhi: Ministry of Finance, 1979); Abid Hussain (Chair), Report of the Committee on Trade Policy (New Delhi: Ministry of Commerce, 1984); Sukhamoy Chakravarty (Chair), Report of the Committee to Review the Working of the Monetary System (New Delhi, Reserve Bank of India, 1985); M. Narasimhan (Chair), Report of the Committee to Examine Principles of a Possible Shift Physical to Financial Controls (New Delhi: Ministry of Finance, 1985). On the general policy consensus emanating from these reports see P. N. Dhar, The Indian Economy, in Robert E. B. Lucas and Gustave F. Papanek, eds., The Indian Economy (New Delhi: Oxford University Press, 1988), pp. 1314. On the evolution of the Department of Electronics see Vibha Pngle, Rethinking the Developmental State (New Delhi: Oxford University Press, 2000), pp. 12738. Indira Gandhi, Selected Speeches and Writings Volume 4, 1980/81 (New Delhi: Publications Division of the Ministry of Information and Broadcasting, 1985), p. 236. The Monopolies and Restrictive Trade Practices Act of 1969 had imposed various restrictions on large Indian companies, one of which was the need for permission to expand capacity. Businesses generally opposed these restrictions and argued for greater flexibility. However, when faced with the prospect of competition from a multinational like Suzuki Motors, the Indian industry wished to hide behind production quotas.

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21. On political opposition to Rajiv Gandhis reforms see Atul Kohli, Democracy and Discontent (New York: Cambridge University Press, 1991), pp. 31538. 22. See Stanley Kochanek, Liberalization and Business Lobbying in India, in Rahul Mukherji, ed., Indias Economic Transition (New Delhi: Oxford University Press, 2007), pp. 41719. 23. Nayar, When Did the Hindu Rate of Growth End?, pp. 188788; Rajiv Kumar and Abhijit S. Gupta, Towards a Competitive manufacturing Sector, Working Paper Number 203 (New Delhi: Indian Council for Research on International Economic Relations, 2008), p. 4. 24. Corporatization was a process by which the government created companies owned by it, which were to be run like a private company, free from political interference. 25. On progress made in the telecommunications sector during the Rajiv Gandhi era see Rahul Mukherji, Managing Competition, in Rahul Mukherji, ed., Indias Economic Transition (New Delhi: Oxford University Press, 2007), pp. 3024. 26. On the transformation of the Association of Indian Engineering Industry into the Confederation of Indian industry see Aseema Sinha, Understanding the Rise and Transformation of Business Collective Action in India, Business and Politics Vol. 7, No. 2 (2005), pp. 127; Kochanek, Liberalization and Business Lobbying in India, in Mukherji, ed., Indias Economic Transition, pp. 4247; Jorgen D. Pederson, Explaining Economic Liberalization in India, World Development Vol. 28, No. 2 (2000), pp. 26871. 27. On the rise of Indias software sector during this period see, Vibha Pingle, Rethinking the Development State: Indias Industry in Comparative Perspective (New Delhi: Oxford University Press, 1999), pp. 13244; Devesh Kapur, The Causes and Consequences of Indias IT Boom, India Review Vol. 1, No. 2 (2002), pp. 93102; AnnaLee Saxenian, Bangalore: The Silicon Valley of Asia, in Mukherji, ed., Indias Economic Transition, pp. 3624. 28. This view is based on interviews with Montek Ahluwalia, Shankar Acharya, Rakesh Mohan and Vijay Kelkar in DecemberJanuary 200506 in New Delhi and Mumbai. This research is documented in government documents such as the Union Budgets, and reports of the Bureau of Industrial Costs and Prices. See also Vanita Shastri, The Political Economy of Policy Reform in India, Unpublished PhD Dissertation (Ithaca, NY: Cornell University, 1995), pp. 22326. 29. For details about this story of 1991 see Rahul Mukherji, Economic Transition in a Plural Polity, in Mukherji, ed., Indias Economic Transition, pp. 11735; and, Joshi and Little, India., chapter 7. 30. See Baldev Raj Nayar, The Limits of Economic Nationalism in India: Economic Reforms under the BJP-led Government, in Mukherji, ed., Indias Economic Transition, pp. 20227. 31. On the impact of liberalization on Indias trade with Sri Lanka see Saman Kelegama, The Indo-Sri Lanka Trade and Bilateral Free Trade Agreement, Asia Pacific Development Journal Vol. 6, No. 2 (1999), pp. 95103. 32. On tariff liberalization see, Suresh D. Tendulkar and T. A. Bhavani, Understanding Reforms (New Delhi: Oxford University Press, 2007), pp. 11625. 33. On Indias preferential trade agreements see Vinod Aggarwal and Rahul Mukherji, Indias Shifting Trade Policy: South Asia and Beyond, in Vinod K. Aggarwal and Min Gyo Koo, eds., Asias New Institutional Architecture (Heidelberg: Springer-Verlag, 2008), pp. 23553. 34. Suresh D. Tendulkar and T. A. Bhavani, Understanding Reforms (New Delhi: Oxford University Press, 2007), pp. 10616. 35. Rahul Mukherji, Promoting Foreign Investment in Indias Telecommunications Sector, Journal of Development Studies Vol. 44, No. 10 (2008), pp. 142545. 36. Two examples would include the Nano car and Airtels telecommunications services. See Pete Engardio, CHINDIA: How China and India are Revolutionizing Global Business (New York: McGraw Hill, 2007), chapter 4. 37. The internationalization of the Tatas see, Andrea Goldstein, The Internationalization of Indian Companies, CASI Working Paper Number 08-02 (Philadelphia: University of Pennsylvania, January 2008), pp. 812, 1825.

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38. These figures are for April 2008 taken from the website of the Telecom Regulatory Authority of India, http://www.trai.gov.in/Default.asp. 39. On the telecommunications revolution in India see, Rahul Mukherji, Promoting Competition in Indias Telecom Sector, in Vikram Chand, ed., Reinventing Public Service Delivery in India (Washington, DC and New Delhi: World Bank and Sage, 2006), pp. 5890. 40. On stock market reform see John Echeverri-Gent, Politics of Market MicroStructure, in Rahul Mukherji, ed., Indias Economic Transition (New Delhi: Oxford University Press, 2007), pp. 32858. 41. On Indias power sector reforms see, Rahul Tongia, The Political Economy of Indian Power Sector Reforms, in David G. Victor and Thomas C. Heller, eds., The Political Economy of Power Sector Reform (Cambridge: Cambridge University Press, 2007), pp. 10974; Navroz Dubash and Sudhir C. Rajan, Power Politics, Economic and Political Weekly, September 1 2001, pp. 336790; Mukherji, Managing Competition, pp. 31323. Andhra Pradesh has consistently been ranked among the top three states for power sector governance by the credit rating agency Credit Rating Information Services of India Limited because of its efficient state-owned generating companies, and success in reducing transmission and distribution losses. See B. Saranga Pani, N. Sreekumar and M. Thimma Reddy, Power Sector Reforms in Andhra Pradesh, Governance and Policy Working Paper 11 (Hyderabad: Centre for Economic and Social Studies, 2007), p. 11; Tongia, The Political Economy of Indian Power Sector Reform, pp. 1478. 42. On the genesis of Indias green revolution see, Ashutosh Varshney, Democracy, Development and the Countryside (New York: Cambridge University Press, 1998), chapter 3; Frankel, Indias Political Economy, pp. 26892. 43. On the plight of Indian agriculture see, Ramesh Chand, S. S. Raju and L. M. Pandey, Growth Crisis in Indian Agriculture, Economic and Political Weekly, June 30, 2007, pp. 252833. On the loan guarantee scheme see Vijay Mahajan, Farmers Loan Wiaver Endangers Financial Inclusion, in India in Transition (Philadelphia: Centre for the Advanced Study of India University of Pennsylvania, March 24, 2008). 44. On Indias trade unions see, Supriya Roy Chowdhury, Public Sector Restructuring and Democracy, in Mukherji, ed., Indias Economic Transition, pp. 388408; and Tendulkar and Bhavani, Understanding Reforms, pp. 13848. 45. On problems facing the manufacturing sector in India see, Forbes, Doing Business in India. 46. On land acquisition see Rahul Mukherji, Special Economic Zones in India, Institute of South Asian Studies Working Paper 30 (Singapore: Institute of South Asian Studies, January 8, 2008), pp. 410. 47. On inter-state inequality see, Lloyd I. Rudolph and Susanne H. Rudolph, Iconization and Chandra Babu, in Mukherji, ed., Indias Economic Transition, pp. 23150; and Montek S. Ahluwalia, State-Level Performance under Economic Reforms in India, in Anne O. Krueger, ed., Economic Policy Reforms and the Indian Economy (New Delhi: Oxford University Press, 2002), pp. 91121. 48. Myron Weiner, The Child and the State in India (Princeton, NJ: Princeton University Press, 1991). 49. On successful social action supplementing the efforts of the state see, Prema Clarke and Jyotsna Jha, Rajasthans Experience in Improving Service Delivery in Education, in Chand, ed., Reinventing Service Delivery in India, pp. 22559. My knowledge about the MV Foundation is based on fieldwork with MA methodology students of the Centre for Political Studies, Jawaharlal Nehru University in March 2005. We collected systematic quantitative and qualitative data from eight villages in the Ranga Regddy and Nalgonda districts of Andhra Pradesh. 50. United Nations Development Programme, Human Development Report 20078: Fighting Climate Change (New York: UNDP, 2007), pp. 23031. 51. Angus Deaton and Jean Dreze, Poverty and Inequality in India, in Baldev R. Nayar, ed., Globalization and Politics in India (New Delhi: Oxford University Press, 2007), pp. 40849. 52. Human Development Report 20078, p. 255.

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53. Angus Deaton and Jean Dreze, Poverty and Inequality in India, in Nayar, ed., Globalization and Politics in India, pp. 45054. 54. This comparative picture emerges from the UNDPs inequality map available on the web. See http://en.wikipedia.org. 55. There are similarities and differences between this story of Indias political economy and the one presented by Pranab Bardhan in Indias Political Economy (New York: Basil Blackwell, 1984). While both acknowledge the power of social groups and the bias towards the status quo, my story spells out the logic for change in favor of growth and development. 56. This could be the way India will overcome the status quo bias in favor of low levels of growth and development so aptly described in Bardhan, Indias Political Economy.