The political economy of industrial policy reforms in India

In July 1991, a minority government in India successfully launched a series of dramatic changes in economic policy. By decreasing the government's discretionary powers over trade, industry and foreign investment, the policy changes sought to replace intervention and protection with competition, transparency and efficiency. Contrary to what the established political economy literature would expect, the lack of legislative majority, of strong pro-market leadership and the presence of a strong opposition did not spell doom for the new policy package. The balance of payments crisis that preceded the policy changes does not adequately explain the reforms either. This dissertation seeks to explain the initiation of policy reform by the Rao government in 1991 and concludes that we need to focus on the private corporate sector, the crisis and the political party system to explain the change.; First, it argues that after 1980, as the share of the private corporate sector in India expanded in a largely state-dominated, heavily regulated, inward-oriented economy, private industrial firms gradually started to advocate liberal industrial policies. Their attitudes towards foreign direct investment, however, varied greatly. Their advocacy of liberal policies gained momentum after 1989 as India's balance of payments deteriorated. In 1991, when India came close to defaulting on loans, the government was forced to make some change in policy quickly, but change in more than one direction was conceivable.; Finally, it demonstrates that India's party system responded gradually to the liberal shift in society's policy preferences in the 1980s. The minority Congress Party government that came to power in June 1991 chose to try the greater liberalization that business was now advocating. In this, they had support from a pro-market opposition party. The success in adopting the new policies may be attributed to the bargaining and consensus-building done by Prime Minister Rao.; The dissertation contributes to the literature on political economy of economic policy reform by demonstrating how a minority government may successfully initiate policy reform through consensus-building. It also highlights the importance of support from opposition parties and business groups in the policy reform process.