Economic Development in South Asia - Example

Student’s Name] [Instructor’s Name] [Course Title] [Date] ECONOMIC DEVELOPMENT IN SOUTH ASIA ABSTRACT This paper discusses the impact that economic liberalization has had on federal relations in India. The paper argues that economic liberalization has transformed federal relations in India from intergovernmental cooperation between the central government and the states towards inter-jurisdictional competition among the states. I believe that this change has resulted in an inconclusive legacy regarding economic polarization among the states. The paper concludes that inter-jurisdictional competition has complicated the Indian state's ability to address fundamental developmental challenges. The gradual political realignment in India during the 1980s increased demands for a more decentralized federal system. As I have argued in a previous paper, these demands formed the blueprint for federal relations in the 1990s. In this paper, I will argue that a new phenomenon--economic liberalization--in India's political landscape is having a more lasting repercussion on federal relations in India. INTRODUCTION One of the most important outcomes of the economic liberalization policies undertaken by India in the 1990s is the concentration of foreign direct investment (FDI) into a few states. This concentration has prompted Indian states to compete with each other for further foreign investment inflows. Indeed, economic liberalization has prompted a change in federal relations from intergovernmental co-operation between the central government and the states towards inter-jurisdictional competition among the states (Singh, 45). I define inter-jurisdictional competition as the raviolis and contentious relationship for resources among similar tiers of government (constituent units) or among localities within a region. Based on this premise, I will discuss whether or not inter-jurisdictional competition has increased the polarization between states and/or affected the ability of the Indian state to address fundamental developmental challenges (Aleaz, 103-4,9). The timing and pace of economic liberalization in India The transformation from a one-party dominant system through the 1970s to a multiparty system of governance at the state level by the mid-1980s has been one of the most important phenomena in India's party system. One author has labeled the transformation from one-party dominance to a multiparty system of governance as a paradigm shift in Indian politics (Aleaz, 103-4,9). This gradual political party realignment in India's state and national legislatures increased demands for a more decentralized federal system. The debates that took place in the context of the appointment and the release of the Sarkaria Commission showed a way by which some state governments wished to have this decentralization take place. However, the political party realignment in the mid-1980s has been accompanied by an unrelated development--India's gradual economic liberalization in the 1990s. Some authors claim that Prime Minister Indira Gandhi began to enact some modest industrial policy reforms in 1975 and 1980. Others claim that these were followed by additional industrial reforms and some trade liberalization policies in the late 1980s under her son, Prime Minister Rajiv Gandhi (Singh, 45). Nevertheless, these nominal economic reforms cannot be considered more than mild preliminary steps at economic liberalization. Indira and Rajiv Gandhi's policies were aimed principally at domestic industrial reform. They also featured moderate trade reforms though a slow shift from import-substitution to an export-oriented strategy of growth, including the gradual rationalization of the tariff structure and the import licensing policy. These modest efforts to redress India's growing current account deficit increased the country's exports but also aggravated its trade deficit (Ali, 63-7). A more substantive set of economic liberalization policies were enacted following a mounting economic crisis which reached its peak: during April-July 1991. By July of 1991, India's foreign currency assets touched a record low of US $560 million, the fiscal deficit peaked at 8.4% of the gross domestic product, and the inflation rate increased to 16.7%. In response to this unprecedented economic crisis, the Congress Party government which came to power in June 1991 introduced a new economic strategy, eventually labeled as the New Economic Policy (NEP). NEP used a combination of measures aimed at short-term economic stabilization, as well as long-term structural reform, masterminded by Finance Minister Manmohan Singh. In light of the crisis, Singh presented the outline of NEP at an emergency meeting in the Lok Sabha (Ali, 63-7). In his presentation, Singh warned that the process of macro-economic adjustment would take at least three years to implement. NEP included short-term stabilization measures to reduce the current account deficit in the balance of payments (BOP), and to control inflation. Long-term measures of structural reform included the elimination of import restrictions on intermediate and capital goods. Other current account liberalization measures included the gradual reduction on the average tariff protection on most goods from 300% in 1991 to 50% by 1995 (Ali, 63-7). These initial reforms were supplemented by a series of incremental financial sector reforms, including adjustments in the exchange rate and a partial convertibility of the rupee on the trade account. In addition, partial capital account reforms were introduced in the secondary capital market to facilitate portfolio investment in India's stock markets. India's conceptually sequenced economic liberalization policy has succeeded in increasing FDI inflows into India. Similarly, economic liberalization has increased total portfolio equity investment (PEI). PEI includes foreign institutional investment, Euro-issues/GDRs, portfolio investment by non-resident Indians (NRIs) and offshore funds. The increases of FDI and PEI have been dramatic, although PEI inflows have been more volatile. The dramatic increases in FDIs and PEIs have aided in the recovery of private investment in India. For instance, gross domestic investment (as a percentage of the gross national product) has increased from 23.1% in 1991 to over 29% in 1997. Moreover, according to International Finance Corporation statistics, market capitalization in India has increased from US $38 billion in 1990 to US $128 billion seven years later (Singh, 45). In contrast to other countries that have adopted 'shock therapy' economic liberalization packages, India's economic reforms, although crisis-driven, have been comparatively gradual. The gradualness of the economic reforms was a matter of necessity given that the Congress Party that initiated NEP was a minority government. Prime Minister Narasimha Rao had to reach support for Singh's economic reform package within and outside the Congress Party. In contrast, although Rajiv Gandhi had enjoyed a clear mandate after the 1985 general elections, he failed to capitalize on this electoral victory to lobby for internal party support for his moderate trade liberalization policies (Singh, 45). In an analysis of Gandhi's modest economic reforms, Atul Kohli showed that his own Congress Party's internal opposition stalled further economic liberalization efforts during his rule. In contrast, other observers such as Prem Shankar Jha have noted that since the enactment of NEP, 'the opposition to the reform programme within Congress seems to have virtually disappeared'. One of the advantages of India's gradual economic liberalization policies is that a consensus has been built around some key policy proposals. Instead of harming the credibility of the reforms, gradualism appears to have cemented a broad, multi-partisan political consensus in favor of measured economic liberalization. The United Front and the Bharatia Janata Party (BJP)-led minority governing coalitions have coincided in their interest for increased FDI in a graduated manner, with an emphasis on investment into infrastructure development and removal of unemployment (Bhaduri, 11-6) The Finance Minister during the BJP coalition government, Yaswant Sinha, announced that 'the reforms will continue under all circumstances. The [BJP] government has clearly given out the appropriate signals in this regard'.India's unique brand of co-operative federalism The dual transformation of the political party realignment in the mid-1980s and the economic liberalization policies in the early 1990s has altered the structure of' India's federal system. Several authors have attempted to find a theoretical middle ground between the centralizing, hierarchical features of the Indian Constitution and the demands for decentralization that eventually arose from its socio-cultural diversity (Bhaduri, 11-6). Granville Austin was instrumental in addressing this continuous tension by labeling India's federal system as an example of 'cooperative federalism'. Austin argued that 'cooperative federalism produces a strong central, or general government, yet it does not necessarily result in weak provincial governments that are largely administrative agencies for central policies' (Singh, 45). The British political scientist W.H. Morris-Jones argued that 'whereas the emphasis on the Constitution is on demarcation, that of practical relations is on co-operative bargaining'.However, a result of India's socioeconomic diversity, Morris-Jones stressed the bargaining aspects of federalism rather than its co-operative elements as suggested by Austin. Co-operative federalism, for Morris-Jones, has implications of a semblance of friendly commonality of interests, whereas bargaining implies the conflict (Bhaduri, 11-6) ECONOMIC LIBERALIZATION AND FINANCIAL RELATIONS BETWEEN THE CENTER AND THE STATES Functionally, the relationship between the central government and the states has been occasionally coercive, particularly though, the application of President's Rule. In turn, acrimony has been a defining characteristic of some other facets of federal relations in India. One area of disagreement has been the issue of financial relations. Disparities in the distribution of resource transfers from the central government to the states have often become central in the debate about fiscal federal relations, namely because the Constitution of India has circumscribed the tax-raising abilities of the central and state governments. Indian states receive about 60% of their total revenue from tax receipts (Singh, 45). The primary component of the states' total tax receipts is received from the state sales tax, and nearly a quarter of all states' total revenues' come from the sales tax. One of the principal sources of contestation between the central government and the states is that there is wide variation between the tax-raising ability of different states. Approximately one third of the states' total revenue constitutes the states' share of taxes collected by the central government. Direct grants and loans from the central government supplement these revenues. In the past, in order to alleviate the state's perceived dependence on assistance from the central government, some state governments demanded more powers to impose taxes of their own. Moreover, some state governments argued that their inability to raise an adequate level of resources prompted unwanted interference from the central government in their affairs. India's gradual move to a market economy has not significantly altered the central government's financial relationship with the states (Brenann, 21-4). The Finance Commission, the national government agency that reviews tax devolution and determines resource transfers, arranges the allocation of non-plan transfers to the states. The Finance Commission approves nearly three-quarters of central government transfers to the states. Despite recent efforts by the central government to reduce its fiscal deficit, the states' and union territories' percentage share of income tax revenue and Union excise duties has remained constant aspects of cooperation resulting from conflictual interests (Singh, 45). ECONOMIC LIBERALIZATION AND A TAXONOMY OF FEDERALISM In light of the recent changes in India's political and economic regime types, the problems in attempting to define the application of the concept of cooperative federalism have become more perplexing. These changing circumstances force a reevaluation of federal relations in India. My analysis of the impact of economic liberalization policies on India's federal system begins with a schematic matrix of federalism (Singh, 45). This composite model combines differing approaches to the study of federalism. In this matrix, federalism has been modeled along a basic distinction between the participating levels of government and the nature of their relationship. Thus, intergovernmental institutions (or institutions of vertical integration) represent the different tiers of government (central government and the constituent units) (Singh, 45). Inter-jurisdictional institutions (or institutions of horizontal integration) represent the similar tiers of government (constituent units) or governmental institutions among localities within a region. The character and pattern of this relationship can be co-operative or competitive. Jane Clark Perry, Morton Grodzins and Daniel Elazar and others have defined co-operative federalism as the sharing of governmental functions and authority. Albert Breton and John Kincaid have defined competitive federalism as the rivalry and contention for resources or avoidance of a particular cost. The matrix of federalism is merely a heuristic device to illustrate a broad transformation in the pattern of federal relations in India (Brenann, 21-4). The dual transformation (political party realignment and economic liberalization) has altered the traditional structure of federal relations in India. Although the diminished significance of the central government for a state's development of economic and economic plans could encourage greater opportunities for grassroots development and increased inter-jurisdictional co-operation, the impact of massive foreign investment inflows will instead push the debate about federalism in a different direction. This incrementally altered trajectory is from intergovernmental co-operation towards inter-jurisdictional competition (Brenann, 21-4). Since the enactment of economic liberalization policies, states have shared the burden of financing education with central government revenues. According to the latest figures available to the Ministry of Education, during fiscal year 1995-1996 states contributed 66% of India's total expenditure on education, while the central government assisted with 34%.62 Nevertheless, educational expenditures continue to account for the largest share of budgetary expenditures by the states. On the other hand, since the enactment of economic liberalization policies, the influx of FDI has diminished some states' eagerness to collaborate with the central government on developmental policies, notably in energy. Instead, high recipients of FDI are increasingly relying on extra-governmental sources of finance for developmental energy projects (Singh, 45). There is wide variation in the state budgetary contribution on education by some states. However, FDI laggards Jammu and Kashmir, Himachal Pradesh, Assam, Madhya Pradesh and Bihar spent as much or as little as of their the state's budgetary expenditures on education as FDI magnets This paper argued that the political party realignment in India in the mid-1980s, combined with the impact of foreign investment inflows in the 1990s, has shifted the debate about federalism from intergovernmental cooperation to inter-jurisdictional competition (Mohan, 20). CONCLUSION This transformation has several implications for federal relations in India. First, the influx of foreign direct investment has been concentrated into selected states. However, the financial disparities between states need not spark new forms of domestic unrest. Second, the attempt to alter the institutional design of intergovernmental institutions, such as those recommended by the Sarkaria Commission, will be largely outmoded (Singh, 45). Finally, the transformation from intergovernmental cooperative federalism to inter-jurisdictional competitive federalism has not equipped India with the ability to properly face new developmental challenges. Given the instability of various minority-governing coalitions at the center, the continuation of India's gradual economic liberalization program is likely to remain undisturbed (Peterson, 33-40). However, the volatility of India's party system at the center may prevent it from addressing some of the unfavorable outcomes derived from unmediated inter-jurisdictional competition. WORKS CITED Aleaz, Bonita Struggles of Indian Federalism (Calcutta: Punthi-Pustak, 1997); A.K.M. Abdus Sabur, Challenges of Governance: Fundamentals Under Threat (Dhaka: Bangladesh Institute of International and Strategic Studies, 2001). Ali Engineer, Asghar Lifting the Veil: Communal Violence and Communal Harmony in Contemporary South Asia (Hyderabad: Sangam, 2001) Bhaduri, Amit and Deepak Nayyar, The Intelligent Person's Guide to Liberalisation (New Delhi: Penguin Books India, 2000), Brennan, Geoffrey and James Buchanan, The Power to Tax: Analytical Foundations of a Fiscal Constitution (Cambridge: Cambridge University Press, 1999), Mohan, Chandra 'Reforms on slow track', Business India, Vol 7, No 385 (December 1999), p 50-51; Sunil Jain and Hardev Sanotra, 'Economic reforms: questioning the pace', India Today, Vol 18, No 21, 1999, Peterson, Barry Rabe and Kenneth Wong, When Federalism Works (Washington, D.C.: The Brookings Institution, 2002) Saez, Lawrence 'A comparison of India and China's foreign investment strategy toward energy infrastructure', Journal of Developing Areas, Vol 32, No 2, 1998 Singh, Mahendra 'Political parties and political economy of federalism: a paradigm shift in Indian politics', Indian Journal of Social Science, Vol 7, 2004 Venkatesan, Problems in the Implementation of Economic Reforms at the State Level (New Delhi: National Council of Applied Economic Research, 2004). Wildasin, David 'Nash equilibria in models of fiscal competition', Journal of Public Economics, Vol 35, No 2, 2003 Read More