State-Directed Development: Political Power & Industrialization in India (PDF)

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P1: KDF 0521836700c07.xml CY409B/Kohli 0 521 83670 0 June 8, 2004 17:0 7 India’s Fragmented-Multiclass State and Protected Industrialization Sovereign India’s experiment with state-led economic growth has produced mixed results. Between 1950 and 1980 the Indian economy grew at a sluggish per annum rate of 3 to 3.5 percent, but accelerated to nearly 6 percent per annum thereafter (see Table 7.1). Nonetheless, this performance of the sovereign state was a considerable improvement over the nearly stagnant colonial economy, especially the pre-1930 period. At the same time, this growth compares unfavorably, especially with that of South Korea but also Brazil, suggesting the need to scrutinize the role of the state in the Indian economy. As for industrial growth, it fluctuated from over 7 percent in the first fifteen years, to below 4 percent during 1965–80 and then back again to nearly 6 percent per annum between 1980 and 2000. There was Copyright © 2004. Cambridge University Press. All rights reserved. also considerable structural transformation over the five decades: Whereas agriculture contributed more than half and industry less than 10 percent of the national product at independence in 1947, toward the end of the century a diversified industrial sector contributed nearly one-quarter and the service sector nearly one-half of the whole. This chapter focuses on the political determinants of economic perfor- mance in India, especially rates and patterns of industrialization, raising questions about the design and the capacity of India’s highly interventionist state. Given the mixed outcome, the puzzles for analysis are both why the Indian economy has done as well as it has and why it has not done better. In keeping with the central themes of the study, the main concern is with the state’s role, specifically, how the dynamics of a fragmented-multiclass state influenced economic choices and performance. The scholarly scope of this chapter is broad and sweeping in quality, necessarily leading to neglect of nuances and of controversies relevant for a country specialist. I note at the outset that India’s political economy can be interpreted from at least two distinct standpoints, only one of which is emphasized below. A more neoliberal interpretation would suggest that India’s lackluster performance results from the sluggish economic growth Kohli, A. (2004). State-directed development : Political power and industrialization in the global periphery. Cambridge University Press. 257 Created from kcl on 2024-10-17 10:40:05.  P1: KDF 0521836700c07.xml CY409B/Kohli 0 521 83670 0 June 8, 2004 17:0 258 Slow but Steady: India table 7.1 Some Basic Growth Data, 1950–2000 (all figures in percentage per annum) 1950–64 1965–79 1980–2000 GDP growth 3.7 2.9 5.8 Industrial growth 7.4 3.8 6.2 Agricultural growth 3.1 2.3a 3.0 Gross investment/GDP 13 18 23 a Figures are for 1967–80. Inclusion of the two drought years 1964–65 and 1965–66 would make this average figure even lower. Source: Government of India, Economic Survey (various issues). Because of numerous statistical complications, these figures should be viewed as broadly indicative rather than as exact or definitive. that followed from the closed and statist model of development adopted by India’s misguided nationalist and socialist leaders. According to this line of thinking, the last two liberalizing decades have led to some improvement – higher rates of economic growth and a lower rate of poverty in India.1 While there are valuable insights in such a perspective, it is not wholly consistent with the facts and it reflects a world-view that this study does not share. I argue instead that the Achilles heel of Indian political economy is not so much its statist model of development as the mismatch between that statist model and the limited capacity of the state to guide social and economic change. There have been statist models in other parts of the world that achieved important gains, but they were generally directed by more effica- Copyright © 2004. Cambridge University Press. All rights reserved. cious states. The cohesive-capitalist cases of South Korea and Brazil both represent models of the right; the cohesive-lower-class model of communist China is a case on the left. Trying to reconcile political preferences of both left and right in the context of a fragmented state, the Indians failed both at radical redistribution and at ruthless capitalism-led economic growth. The socialist commitment of Indian leaders, for example, was rather shallow. While socialist rhetoric was used to try to build political capital, policies in favor of the poor were seldom pursued vigorously. Such socialist commit- ments as were pursued, albeit ineffectively, also alienated private investors. The associated difficulties in state-business relations also hurt economic growth. The change in India over the last two decades is not so much that it became more liberal as that Indian politics shifted toward the right, allow- ing for more harmonious state-business relations and a positive impact on growth. But at the same time the politicized political exclusion of the poor made governance more difficult and fed neofascist tendencies, including the mobilization of nationalism against minorities. 1 One recent collection that broadly reflects this standpoint is Isher Judge Ahluwalia and I. M. D. Little, eds., India’s Economic Reforms and Development: Essays for Manmohan Singh (New Delhi: Oxford University Press, 1998). Kohli, A. (2004). State-directed development : Political power and industrialization in the global periphery. Cambridge University Press. Created from kcl on 2024-10-17 10:40:05. P1: KDF 0521836700c07.xml CY409B/Kohli 0 521 83670 0 June 8, 2004 17:0 Protected Industrialization 259 I have divided the discussion of modern India’s political economy into three chronological phases: the Nehru era (approximately 1950–64), the era of Indira Gandhi (approximately 1965 to the early 1980s), and the last two decades of the twentieth century, during which numerous govern- ments have come and gone. This division reflects the judgment that political changes have influenced rates and patterns of industrialization. Thus, I sug- gest that the state’s considerable legitimacy and relatively clear economic priorities in the Nehru period facilitated some economic gains. By contrast, Indira Gandhi’s populism hurt investment and growth. And finally, the po- litical drift toward the right in the third phase has been accompanied by a growing role of the private sector in the economy and improved economic performance. I. The Nehru Era If the 1940s in India are best thought of as the decade in which India marked the transition from colonialism to sovereign democratic republic, the Nehru era that followed is usefully viewed as the crucible of modern India: It is during this era that a stable democracy took root and a statist model of economic development emerged hegemonic. Indians by now take their democracy for granted, as if it were the most obvious way of organizing state power in a poor, multiethnic, continent-sized country. Viewed comparatively, however, as well as against the most popu- lar theories that treat democracy as a function of economic advancement, India’s democracy is a puzzle.2 At a minimum the survival of democracy Copyright © 2004. Cambridge University Press. All rights reserved. in India suggests that, under specific conditions, a country’s political struc- tures enjoy some autonomy from the underlying society and economy. The roots of Indian democracy and of its fragmented-multiclass state thus need to be understood in terms of institutional continuities, including the British political inheritance and, in particular, a relatively centralized and coherent state,3 with its well-developed civil bureaucracy, its limited but real experi- ence of elections and of constitutional, parliamentary government, and its traditions of independent media and freedom of such associations as labor unions. Since inheritance is seldom destiny, India, like many other postcolonial countries, could readily have squandered these valuable political resources. Yet it did not. Besides colonial inheritance, therefore, one must underline the constructive political role of India’s nationalist movement/party, the 2 For a fuller discussion of this puzzle, see Atul Kohli, ed., The Success of India’s Democracy (Cambridge: Cambridge University Press, 2001), esp. the introduction. 3 Those who do not see a ready connection between centralized authority and democracy may consider Samuel Huntington’s important argument that “order” nearly always precedes “democracy.” See Huntington, Political Order in Changing Societies (New Haven, Conn.: Yale University Press, 1968). Kohli, A. (2004). State-directed development : Political power and industrialization in the global periphery. Cambridge University Press. Created from kcl on 2024-10-17 10:40:05.  P1: KDF 0521836700c07.xml CY409B/Kohli 0 521 83670 0 June 8, 2004 17:0 260 Slow but Steady: India Indian National Congress, and of India’s leaders in the evolution of the democratic state. In its quest for freedom from British rule, the Congress not only brought together a variety of Indian elites but also established numerous links between elites and the masses, which defined the framework within which India’s democracy advanced. India’s leaders adopted mass suf- frage, committed themselves to a parliamentary democracy, permitted the emergence of a variety of political voices and organizations, and conducted the internal affairs of their hegemonic party in a democratic and inclusive manner.4 This combination of a protodemocratic colonial inheritance and a demo- cratically inclined mass nationalist movement provided the institutional preconditions for the emergence of democracy in India. But the politi- cal preconditions also helped to lay the foundation for the emergence of a fragmented-multiclass state. The Indian case thus raises the important question: Does democracy in a developing country necessarily lead to frag- mented state power with a multiclass social base? The Indian case indeed sug- gests a strong association between democracy and a fragmented-multiclass state. But as no single case tells us all that much about a general relation- ship, one must be wary of confusing association with causation. For every India, for example, there is also a Malaysia, with less fragmented state author- ity. And even if democratization in a developing country tends to encourage fragmented-multiclass states, the reverse is certainly not the case: State power in many authoritarian situations can also be fragmented and rest on a plural class base. Most important for the immediate discussion, certain specific po- litical developments during the Nehru period helped to consolidate India’s Copyright © 2004. Cambridge University Press. All rights reserved. democracy while also reinforcing the state’s fragmented-multiclass nature. The colonial bureaucracy that India’s leaders inherited was a fine profes- sional force, especially the elite ICS officers, but it was mainly a law and order bureaucracy, not well suited to implement the leaders’ ambitious develop- mental goals. A major overhaul of the bureaucracy, though contemplated, was never really pursued, mainly because the well-trained elite civil servants were indispensable for governing the new state.5 The size of the civil service, including the officer ranks, also grew substantially during the Nehru years. Though renamed the Indian Administrative Service (IAS), the new service reflected the structure of the ICS and still relied for staffing on a highly com- petitive exam that mainly tested general rather than specialist knowledge. The small fraction of candidates who passed the exam were then trained 4 For a good study of how and why the Indian National Congress – even though a single, hegemonic party – facilitated Indian democracy, see Rajni Kothari, Politics in India (Boston: Little, Brown, 1970). 5 For a good study of continuity in the nature and the structure of the pre- and postindepen- dence higher civil service in India, see David C. Potter, India’s Political Administrators: From ICS to IAS (Delhi: Oxford University Press, 1996). I draw on this study in the next paragraph, especially chaps. 3 and 4. Kohli, A. (2004). State-directed development : Political power and industrialization in the global periphery. Cambridge University Press. Created from kcl on 2024-10-17 10:40:05. P1: KDF 0521836700c07.xml CY409B/Kohli 0 521 83670 0 June 8, 2004 17:0 Protected Industrialization 261 in more or less the same way as ICS officers had been – first in an insti- tute and then on the job, apprenticing under more senior officers. To keep up the old esprit de corps, many of the ICS traditions were maintained, including the idea that elite civil servants constituted the steel frame that anchored India’s political stability. Internal promotions were made on the basis of merit and seniority, and an independent supervisory body helped to maintain the level of professionalism, essentially until the late 1960s, when the IAS became more politicized. The IAS also adopted the core structure of the old ICS, namely, district officers that were responsible for revenue and law and order; new development functions were merely add-ons. Upon independence, India’s leaders faced a cruel choice: advancing the state either as an effective agent of political order or as a successful facilitator of economic development. They opted for the former, which would become a longer-term trend – prioritizing political needs over economic ones and thus initiating what would eventually become a substantial gap between the state’s capacities and its developmental ambitions. A similar mismatch came to characterize the Congress Party as it sought to be simultaneously a popular ruling party and an agent of socialist development.6 The majority of Indians lived in the countryside, and most of them operated within a variety of patron-client relationships. One ready way to build political support in such a social setting was to cultivate the support of the patrons – generally the highest, landowning elite castes – who, in turn, could sway the political behavior of their dependent clients, generally poor peasants. And this is precisely what the party did, building long chains of patronage that extended from the center to the periphery. This ensured a popular base – at least for a Copyright © 2004. Cambridge University Press. All rights reserved. decade or two – but eventually also led to the capture of the party by society’s powerful. In this way more egalitarian ambitions, such as land redistribution and the capacity to tax the agrarian sector, were undermined. Another significant political development concerned the evolution of Indian federalism.7 Soon after India won its sovereignty, each of its nu- merous ethnic groups began demanding a greater share of power. These struggles came to a head in the late 1950s, when a reluctant Nehru agreed to a linguistic reorganization of Indian federalism. Although this decision accommodated ethnic demands and created a more stable political unit, it also fragmented state power. To the extent that developmental ambitions of 6 For a fuller discussion of some such issues, see Francine Frankel, India’s Political Economy, 1947–1977: The Gradual Revolution (Princeton, N.J.: Princeton University Press, 1978), esp. chaps. 5 and 6. A much more detailed treatment of how the early Congress party “succeeded” is Myron Weiner, Party Building in a New Nation (Chicago: University of Chicago Press, 1967), esp. chap. 22. 7 A ready and useful overview is Bipan Chandra, Mridula Mukherjee, and Aditya Mukherjee, India after Independence, 1947–2000 (New Delhi: Penguin, 2000), chaps. 8–10. For Nehru’s views on this and a host of other related issues, the indispensable source remains S. Gopal, Jawaharlal Nehru: A Biography, vols. 2 and 3 (Delhi: Oxford University Press, 1984). Kohli, A. (2004). State-directed development : Political power and industrialization in the global periphery. Cambridge University Press. Created from kcl on 2024-10-17 10:40:05.  P1: KDF 0521836700c07.xml CY409B/Kohli 0 521 83670 0 June 8, 2004 17:0 262 Slow but Steady: India India’s leaders found institutional expressions – such as the Planning Com- mission – these were nearly all at the center. By contrast, lower-level govern- ments were mainly “machines” with significant powers and resources. While India’s central state continued to be quite powerful in relation to its federal units, a federal reorganization of functions also diluted the state’s overall capacity to pursue a coherent developmental agenda. The ruling ideology of the Congress Party provides a final example of the mismatch between capacity and ambitions. Congress committed itself to “nationalism” and “socialism” – Nehru’s creed, which won substantial popularity and legitimacy for him and the party. At the same time, how- ever, these ideological commitments made it difficult to pursue vigorous economic growth, a goal that Congress and the state elites also espoused. In spite of the socialist rhetoric, India was mainly a private-enterprise economy. Vigorous economic growth would be feasible only if there were a vigorous private sector. But the Indian version of multiclass statism found itself at odds with its espoused goals: Nationalism discouraged foreign enterprise in India, and the socialist inclination created difficult relations with Indian entrepreneurs. Taken together, these political developments during the Nehru era sug- gest two conclusions. First, there was significant continuity between the colonial state and the sovereign Indian state, even as there were many ob- vious discontinuities – that the new state was sovereign, democratic, and interventionist. The areas of continuity include, most strikingly, the design of the new civil service but also the organization of the legal system and of the armed forces. The latter was especially consequential for helping to ensure Copyright © 2004. Cambridge University Press. All rights reserved. civilian control of the relatively apolitical military, a complex story beyond the scope of this study.8 A more subtle area of continuity was the pattern of the state’s alliances with the property-owning elites. The colonial state had rested its power with landowning traditional elites and generally had a good working relationship with Indian business groups. While Nehru clearly had a broader social base, the power alliances of India’s new rulers with prop- ertied groups also demonstrated remarkable continuities. While it is true that the megatraditional elites such as the Maharajas and the Zamindars were eliminated, the Congress rulers still based their rural power on land- owning elites, albeit smaller landowners, a “lower” gentry of sorts. Second, Nehru and his colleagues placed a high priority on consolidating Indian democracy. They thus incorporated society’s powerful and conceded some power to demanding regional elites, but they also encouraged the hopes of the masses by promising egalitarian development to the poor. Al- though these strategies helped to institutionalize India’s fragile democracy, 8 This is a surprisingly understudied area of scholarship on Indian politics. Perhaps “dogs that do not bark” attract less attention than the ones that do, but probably not justifiably. One study that does address this issue explicitly is Stephen P. Cohen, The Indian Army: Its Contribution to the Development of a Nation (Berkeley: University of California Press, 1971). Kohli, A. (2004). State-directed development : Political power and industrialization in the global periphery. Cambridge University Press. Created from kcl on 2024-10-17 10:40:05. P1: KDF 0521836700c07.xml CY409B/Kohli 0 521 83670 0 June 8, 2004 17:0 Protected Industrialization 263 at the same time, the resulting political developments also institutionalized the fragmented and multiclass political tendencies of the Indian state and undermined its capacity to pursue developmental goals vigorously. Was this outcome inevitable? This is a difficult question to answer unambiguously. Certainly, the power to undertake some basic changes existed, as there was nothing inevitable in the degree of state fragmentation and in the lack of focus in the state’s developmental priorities. At the same time, however, the nationalist move- ment was already straining and losing its way as it sought to create unity in diversity prior to independence. Nehru’s specific decisions aimed at main- taining a stable and legitimate democracy in a heterogeneous society fur- ther weakened this potential in the postindependence period. Maintaining a “law and order” bureaucracy hurt the state’s capacity to undertake eco- nomic tasks directly; a commitment to nationalism and socialism made it difficult to mobilize private capital; and the Congress Party’s dependence on regional and rural elites fragmented state power, making it difficult to penetrate the rural society directly. The economic model adopted during the Nehru era was, of course, the well-known model of state-led, import-substituting industrialization (ISI). Once adopted, it endured, even in the face of significant efforts in recent years toward a different model. At the end of the twentieth century, India still exhibited some of the core characteristics of its statist model of devel- opment – thus underlining the political nature of India’s early economic choices.9 Nehru’s political preferences, expressed through the Congress Party, be- Copyright © 2004. Cambridge University Press. All rights reserved. came India’s dominant ideas and stressed the following: maintaining na- tional sovereignty, the superiority of the state in steering progressive cap- italist development, and the need for India’s poor to share in the fruits of development. The nationalist commitments of India’s leaders translated into a suspicion of an open economy and a preference for heavy industry. In spite of low domestic savings, foreign investors were by and large dis- couraged, mainly because they might have threatened hard-won national sovereignty. A variety of interests, including Indian business groups, bene- fited from these ideological choices over time and helped to sustain them. A suspicion of an open trading regime is more difficult to understand in terms of underlying nationalism. Protectionism was justified mainly in terms of prevailing economic ideas of “export pessimism” and “infant industry.”10 9 Good studies of this topic include A. H. Hanson, The Process of Planning (London: Oxford University Press, 1966); Jagdish N. Bhagwati and Padma Desai, India: Planning for Indus- trialization (London: Oxford University Press, 1970); and Baldev Raj Nayar, India’s Mixed Economy (Bombay: Popular Prakashan, 1989). 10 A good discussion of the belief systems that supported India’s economic choices can be found in Sukhamoy Chakravarty, Development Planning: The Indian Experience (Delhi: Oxford University Press, 1988), chaps. 1 and 2. Kohli, A. (2004). State-directed development : Political power and industrialization in the global periphery. Cambridge University Press. Created from kcl on 2024-10-17 10:40:05.  P1: KDF 0521836700c07.xml CY409B/Kohli 0 521 83670 0 June 8, 2004 17:0 264 Slow but Steady: India In the Indian case, however, there was also something deeply experiential and political about these choices. We have seen that openness during the colonial era had been interpreted by nationalists, not only as killing nascent industries, but also as inhibiting the emergence of indigenous industrial cap- italism. Indian businessmen and industrialists, who stood to benefit from a relatively closed economy in which competition would be limited, expressed these preferences openly. Protectionism, as well as an emphasis on heavy in- dustry, was thus seen as serving the interests of nation building. How else, according to India’s leaders, could such an enormous country, with its an- cient civilization, reemerge as a powerhouse that was not easily subject to manipulation by external powers? Widespread was the belief in the state’s ability to guide social and eco- nomic change efficaciously at the middle of the twentieth century. We have seen this in the Korean and Brazilian cases. This view had a left-leaning tilt in India, reinforced by an admiration of the Soviet Union’s developmental “successes” and by an affinity for the British Labor Party’s type of socialism. These ideological proclivities were also consistent with the concrete inter- ests of the Indian political elite, which could channel some of the fruits of development to themselves and their offspring. The statist model trans- lated into both a direct economic role for the state – as, for example, in the widespread creation of public enterprises – and into a more indirect role in guiding the activities of private capital via the “license permit raj [or regime].”11 What is surprising in retrospect is not so much India’s affinity for statism but how little open discussion took place concerning the type of state that could successfully undertake such ambitious economic tasks. Copyright © 2004. Cambridge University Press. All rights reserved. While market imperfections were discussed ad nauseam, there was no paral- lel discussion of state imperfections from the standpoint of developmental capacity. One wonders whether the discussion was avoided because it would have focused attention on the shortcomings of the rulers.12 Finally, a vague commitment to the poor and the downtrodden perme- ated much of the nationalist political discourse. Gandhi and Nehru in their own ways shared this commitment. It found expression in socialist rhetoric and in policy areas such as land redistribution and the laws governing employment of urban labor. Unlike the commitment to nationalism and statism, however, the commitment to the poor was relatively shallow. India’s upper-caste rulers may have meant well, but they were no revolutionaries. Barrington Moore’s apt description of Nehru as “the gentle betrayer of 11 For a highly critical but excellent description of how this policy “regime” operated, see Bhagwati and Desai, India, esp. chap. 13. 12 To be fair, Nehru did on occasion blame developmental failures on the bureaucracy, though this also conveniently exonerated him and his Congress colleagues for the state’s shortcom- ings. See, for example, Potter, India’s Political Administrators, 2. A number of government reports also analyzed administrative weaknesses of the Indian state, though without much impact. See Bhagwati and Desai, India, chap. 8. Kohli, A. (2004). State-directed development : Political power and industrialization in the global periphery. Cambridge University Press. Created from kcl on 2024-10-17 10:40:05. P1: KDF 0521836700c07.xml CY409B/Kohli 0 521 83670 0 June 8, 2004 17:0 Protected Industrialization 265 masses”13 probably applies as well to a fairly broad spectrum of India’s po- litical class, though not all of them were always as “gentle.” How else would one explain the limited political energy devoted to land reform or, for that matter, to promoting widespread access to primary education?14 What was the impact of Nehru’s economic approach, which was statist in intent and emphasized public investment in heavy industry? The modest economic success of the period brings us back to the twin questions: Why, in spite of India’s fragmented-multiclass state, was a statist model able to achieve some success and why was the performance not better? We begin by situating India’s initial conditions in a comparative perspec- tive. India’s socioeconomic conditions at midcentury were probably some- where between the much more favorable starting point of Korea, or even Brazil, and the considerably worse conditions of, say, Nigeria. On the pos- itive side, India had undergone some industrialization; a small but signif- icant group of indigenous entrepreneurs was in place; banking and other financial institutions existed; and technically trained manpower, though not abundant, was not as scarce as it was in many African and Middle Eastern countries. The agrarian economy, by contrast, had not grown much over the previous several decades; internal demand was limited; savings were low; ex- perience with managing complex modern production was relatively scarce; and the health and educational conditions of the working population were abysmal. Given these conditions, how well designed was the developmental approach of sovereign India’s leaders? First, the agricultural sector: Nehru’s approach to this sector was mainly “institutional” in the sense that he and India’s economic planners hoped Copyright © 2004. Cambridge University Press. All rights reserved. that by tinkering with agrarian relations (via land reforms, for example) and by educating the peasantry (via extension programs, for example), India’s agricultural production would improve.15 After some significant initial pub- lic investments, especially in irrigation, the agricultural sector was therefore more or less ignored at the expense of industry. The results reflected this neglect. Agricultural growth was barely able to stay ahead of population growth. More serious was that much of this growth was extensive and not intensive; that is, it was the result of bringing more land under cultivation, not of improving productivity. The modest increases in agricultural production thus reflected increasing labor input – growing population – and the use of additional land facilitated in part by new public investments in irrigation. Beyond this, the repeal of a variety of colonial-era taxes on agriculture may have created some incentives 13 Barrington Moore, Jr., Social Origins of Dictatorship and Democracy: Lord and Peasant in the Making of the Modern World (Boston: Beacon Press, 1966). 14 See, for example, Myron Weiner, The Child and the State in India (Princeton, N.J.: Princeton University Press, 1991), chap. 4. 15 For a good discussion, see Gunnar Myrdal, Asian Drama (New York: Pantheon, 1968). Kohli, A. (2004). State-directed development : Political power and industrialization in the global periphery. Cambridge University Press. Created from kcl on 2024-10-17 10:40:05.  P1: KDF 0521836700c07.xml CY409B/Kohli 0 521 83670 0 June 8, 2004 17:0 266 Slow but Steady: India for agrarian producers that contributed somewhat to higher rates of produc- tion. Conversely, the state’s downward penetration was minimal and, hence, so was its capacity to alter agrarian relations.16 The relative neglect of public investments in better irrigation and higher use of such other agricultural inputs as fertilizers further undermined the prospects of rapid increases in food production. By the mid-1960s, then, India’s agricultural sector was on the verge of crisis. Heavy industry, by contrast, was emphasized by Nehru, who used the tremendous legitimacy he enjoyed to pursue his priorities and translate goals into outcomes. In truth, constructing heavy industry was more readily influenced from the political apex than, say, agriculture or land redistribu- tion. The imposition of substantial tariffs and quotas provided a protected environment in which industry could take root. The bulk of this growth, facilitated by rapidly growing public savings and investment, was in the pub- lic sector: further development of electricity, railways, and communication, and in such areas as machineries and steel. The main source of growing public revenues was indirect taxation, es- pecially of consumer goods. There were, consistent with India’s socialist leanings, progressive income tax laws in place, but the government’s capac- ity to collect them was limited – a problem that, over time, would become quite consequential. Indirect taxation sufficed in this early period because the government’s nondevelopmental expenditures were minimal: Nehru’s government spent little on health and primary education, underlining the superficial quality of India’s socialism. Moreover, his considerable legitimacy minimized the need to throw money at one group or another to buy political Copyright © 2004. Cambridge University Press. All rights reserved. support. The levels of political mobilization in India were also relatively low at this early stage, with much of the lower-class population deeply enmeshed in traditional patron-client relationships. Hence, public expenditures could stay focused on Nehru’s priorities, especially the development of heavy in- dustry, which generated substantial production growth.17 Critics of this strategy have documented that this growth was quite expen- sive, in the sense of being relatively inefficient.18 Some of the underlying causes are inherent to the nature of public sectors – for example, investment in industries that are not immediately profitable or below-market social pricing of output. But others were specific to India: the role of generalist bureaucrats, ill equipped to manage public sector industries, and/or the 16 I have analyzed this issue of the state’s limited downward reach in detail elsewhere. See Atul Kohli, The State and Poverty in India: The Politics of Reform (Cambridge: Cambridge University Press, 1987). 17 For a good review, see K. N. Raj, Indian Economic Growth: Performance and Prospects (Delhi: Allied Publishers, 1966). 18 See Bhagwati and Desai, India. See also Jagdish N. Bhagwati and T. N. Srinivasan, India (New York: National Bureau of Economic Research, distributed by Columbia University Press, 1975). Kohli, A. (2004). State-directed development : Political power and industrialization in the global periphery. Cambridge University Press. Created from kcl on 2024-10-17 10:40:05. P1: KDF 0521836700c07.xml CY409B/Kohli 0 521 83670 0 June 8, 2004 17:0 Protected Industrialization 267 growing political interference by lower-level political elites who treated pub- lic sector industries as one more resource in their patronage networks. The highly protected environment within which these industries operated also contributed to the accumulating inefficiencies. The Indian state’s attempts to guide the private sector have also been roundly criticized.19 These criticisms, however, need to be kept in perspec- tive. Because the role of private capital in industry at this early stage was not all that significant, the prominent role assigned to the public sector is better understood as providing a substitute for a laggard private sector. After all, India’s private sector had hardly flourished in the preindependence pe- riod under nearly free-market conditions. That said, however, the socialistic Nehruvian state – unlike the South Korean state – sought more to tame than to encourage private sector development. State intervention had a decid- edly regulatory cast: Instead of asking business what it could do and how the state could help, the state itemized what private business could not do and then raised numerous barriers to what it could do. Implementation, too, was haphazard and inefficient: For example, priority industries were not always the ones that enjoyed maximum protection, and overbearing bureaucrats in charge of licensing often deterred private investors. The growing maze of bureaucratic obstacles to private sector development led over time to corruption and to inefficient allocation of private sector resources. The examples of the steel and textile industries help to fill out this broad account of the Nehruvian state’s role in promoting public and private sector industries, respectively. We have seen in Chapter 6 that the indigenous steel industry was initiated in the first half of the twentieth century by the Tatas.20 Copyright © 2004. Cambridge University Press. All rights reserved. To advance their nation-building goals, Nehru and his political colleagues prioritized the development of steel in the 1950s.21 But, as in South Korea and Brazil, state elites found the private sector not forthcoming. It is true that in India some private steel industries, such as that of the Tatas, continued to flourish, but given the size, complexity, and risk involved, other private sector start-ups were not on the horizon.22 Steel, therefore, emerged as the leading candidate for public sector development. 19 See Bhagwati and Desai, India, esp. pt. 6. 20 I am indebted to my research assistant, Rina Agarwala, for collecting this information on the steel industry. 21 A useful recent account of the state’s role in India’s steel industry is Vibha Pinglé, Rethinking the Developmental State: India’s Industry in Comparative Perspective (Delhi: Oxford University Press, 1999), chap. 3. Earlier accounts include W. A. Johnson, The Steel Industry of India (Cambridge: Harvard University Press, 1966); Padma Desai, The Bokaro Steel Plant: A Study of Soviet Economic Assistance (Amsterdam: North-Holland, 1972); and Gilbert Etienne, Asian Crucible: The Steel Industry in China and India (New Delhi: Sage, 1992). 22 Vibha Pinglé thus notes that T. T. Krishnamachari, a successful industrialist, Nehru’s con- fidant, and subsequently minister of steel, approached Indian industrialists but in vain. It was only then that he and Nehru were persuaded that the state would have to undertake development of steel in the public sector. See Pinglé, Rethinking the Developmental State, 54. Kohli, A. (2004). State-directed development : Political power and industrialization in the global periphery. Cambridge University Press. Created from kcl on 2024-10-17 10:40:05.  P1: KDF 0521836700c07.xml CY409B/Kohli 0 521 83670 0 June 8, 2004 17:0 268 Slow but Steady: India But in India, unlike in South Korea and Brazil, the steel industry grew up relatively inefficient, not very competitive internationally. A blanket con- demnation of public sector ownership clearly will not do, as steel in all three cases was developed in the public sector. Rather, the culprit was the differing nature of states and patterns of state intervention. Moreover the problems in India developed only over time. Under Nehru, substantial public invest- ments were devoted to steel, and foreign collaboration was sought to help to establish and manage the steel plants. Competent senior bureaucrats at the Planning Commission were responsible for steel policy, and there were good management practices at the plant level. The overall protected environment generated by the import-substitution policy regime ensured a ready market in an economy in which industrialization had begun in earnest. The result was that steel production in India between 1950 and 1964 grew rapidly at a rate of nearly 11 percent per annum. The real problems of the steel industry date to the Indira Gandhi period, when it was starved of new investments and thus of new technology and modernization. It was then that the fragmented-multiclass nature of India’s developmental state came to the fore to cause problems for the steel indus- try. First, locational issues that were politicized by India’s federal structure were exacerbated during Indira Gandhi’s period. Second, policy making was in the hands of generalists, the IAS bureaucrats, whose relations with plant- level management were at best remote and at worst condescending and demoralizing for the technocrats. Third, pricing and distributional policies were politicized, with especially damaging consequences. Steel prices were kept below market price and became a public subsidy to a variety of in- Copyright © 2004. Cambridge University Press. All rights reserved. dustries, including private sector industries. Although justified in terms of the needs of rapid industrialization, the policy could be sustained only as long as ample public resources to support such subsidies were available. A critical constraint was the state’s limited capacity to undertake direct taxa- tion, especially in the countryside, where formal political penetration was minimal. Controlled prices were also a constraint on steel industry profits, reducing its capacity for self-sustaining investments. As long as steel was a priority sector during the Nehru period, with continuous infusion of new re- sources, these problems remained manageable, and fairly impressive growth continued. By contrast, large-scale textile production performed rather poorly in Nehru’s India, even though at the time of independence, the textile indus- try, concentrated in private hands in western India, was not insubstantial. It is possible that with probusiness state intervention and subsidies for ex- ports, India’s textile production could have become internationally compet- itive. This was not to be so, however, and the state’s legitimacy-driven policy choices were the root cause.23 We have seen that Nehru was not especially 23 See, for example, S. R. B. Leadbeater, The Politics of Textiles: The Indian Cotton Mill Industry and the Legacy Kohli, A. (2004). of Swadeshi State-directed (1900–1985) development (Newand : Political power Delhi: Sage Publications, industrialization 1993); and in the global periphery. Sanjib Misra, Cambridge University Press. Created from kcl on 2024-10-17 10:40:05. P1: KDF 0521836700c07.xml CY409B/Kohli 0 521 83670 0 June 8, 2004 17:0 Protected Industrialization 269 supportive of private enterprise. And within this framework, textiles faced special obstacles. Recall that the issue of the destruction of small-scale household-based textile production at the hands of modern textiles played a central role in India’s nationalist imagination. Gandhi successfully exploited khadi, or hand-spun cotton, as a tool of political mobilization, as witnessed in the symbolism of the Congress elite donning khadi uniforms and caps. With this political inheritance it would have been very difficult to unleash modern tex- tile manufacturing against small-scale production. Mahatama Gandhi’s pop- ulist commitment to “love of the small people” cast a long political shadow on India’s textile policy. (While championing khadi, however, Gandhi was simultaneously collecting large dues for the Congress from his close friend, textile manufacturer G. D. Birla.) Add to this Nehru’s socialist proclivities, which inclined him to argue in favor of producing cheap cloth for mass con- sumption, and the political factors molding policy choices start to become comprehensible. Nehru and his colleagues restricted production of textile mills, taxed them highly, and even priced a part of their output below market prices so as to provide cheap cloth for poor consumers. Contrast this pattern of in- tervention with the one encountered in Korea and Brazil, where state inter- vention was often supportive of producers, though the political framework necessary for that support was also much narrower and more repressive. This contrast also underlines a central argument of this study, namely, that variations in patterns of state intervention are what matters most when trying to understand varying roles that states play in late-late-development. Thus, Copyright © 2004. Cambridge University Press. All rights reserved. Nehru’s textile policies undermined private and large-scale textile manufac- turing in India but encouraged small-scale textile manufacturing, first with hand looms and then with power looms. Support, that is, went for anything that was less than a modern textile mill, with commensurate consequences: Output of large mills nearly stagnated, while that of smaller producers grew sharply. The latter were suitable for the low-end market consumption but not for competitive exports. The story of industrialization in Nehru’s India is thus mixed, character- ized by notable achievements but also stupendous follies. As demonstrated with examples of steel and textiles, both these successes and limitations are explicable in terms of the underlying patterns of state intervention. Thus, India’s 7 percent industrial growth rate per annum in this period was respectable. But Brazil in the same period – one of the fastest growers in the world and also a democracy with a strict import-substitution policy “India’s Textile Policy and the Informal Sector,” in Stuart Nagel, ed., India’s Development and Public Policy, Policy Studies Organization (Aldershot: Ashgate, 2000). For analysis of related economic issues, see Howard Pack, Productivity, Technology and Industrial Development: A Case Study in Textiles (New York: Oxford University Press, 1987); and Keijiro Otsuka et al., Comparative Kohli, A. (2004). Technology State-directed Choice development in Development : Political (Basingstoke, power and industrialization Hampshire: in the Macmillan, 1988). global periphery. Cambridge University Press. Created from kcl on 2024-10-17 10:40:05.  P1: KDF 0521836700c07.xml CY409B/Kohli 0 521 83670 0 June 8, 2004 17:0 270 Slow but Steady: India regime – industrialized at a rate of nearly 10 percent per annum. This some- what superior performance also reflected underlying political and policy differences. The rate of investment in Brazil and India in this phase was more or less comparable. The real difference thus was in capital-output ra- tios, or in the relative efficiency with which capital was invested in the two countries. The roots of this difference, in turn, can be traced back to the fact that Brazilian democracy was considerably less nationalist and mass-based than that of India. Brazilian leaders thus worried less than India’s leaders about legitimacy issues of nationalism or redistribution. The clearest mani- festations of this greater political room for maneuver in Brazil were the closer cooperation between the state and business and the heavy dependence on foreign investment to facilitate import-substitution industrialization. While this strategy was not without its own problems, the advanced technology and management that foreign investors brought to Brazil was an important reason for Brazil’s more rapid industrial growth in this early phase. II. The Indira Gandhi Era If democracy and a nationalist-statist model of economic development took root in India during the Nehru era, the political economy of the Indira Gandhi era that followed is best viewed as one in which India’s democracy became more populist and deinstitutionalized, economic rhetoric moved further to the left, and the gap between the state’s developmental capacities and economic goals widened even further, to the detriment of industrial development. Nehru’s death in 1964 marked the slow but steady departure Copyright © 2004. Cambridge University Press. All rights reserved. of the first generation of nationalist leaders from the political scene. As nationalist legitimacy declined, numerous movements and parties opposing Congress’s hegemony emerged. The party’s old ruling formula – a mantle of inclusive nationalism and long chains of patronage fed by statism – was increasingly incapable of generating electoral majorities. Either Congress had to come up with a new winning formula or it would give way to other parties. It was Indira Gandhi who stepped in and provided the winning strategy that revived Congress’s sagging fortunes. But her populism and top- down deinstitutionalization of the polity further accentuated its fragmented and multiclass character, with significant developmental consequences. Under Nehru, India had undergone steady industrialization and experi- enced modest economic growth, but the poor had not benefited very much. Indeed, the spread of commerce and democracy had eroded patron-client ties, making the poor ripe for new forms of political mobilization. A savvy In- dira Gandhi understood these changes and capitalized on them,24 turning 24 Good biographical studies of Indira Gandhi include Mary Carras, Indira Gandhi: In the Crucible of Leadership: A Political Biography (Boston: Beacon, 1979); and Pupul Jayakar, Indira Gandhi: An Intimate Biography (New York: Pantheon, 1992). Kohli, A. (2004). State-directed development : Political power and industrialization in the global periphery. Cambridge University Press. Created from kcl on 2024-10-17 10:40:05. P1: KDF 0521836700c07.xml CY409B/Kohli 0 521 83670 0 June 8, 2004 17:0 Protected Industrialization 271 “poverty alleviation” into her central political slogan. This shift to the left in