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Économie politique de l’Asie (1)

Comparing State-level policy responses to economic reforms in India

A subnational political economy perspective
La confrontation des réponses politiques des États indiens aux réformes économiques. Une perspective d’économie politique infranationale
La confrontación de las respuestas políticas de los Estados Indios a las reformas económicas. Una perspectiva de economía política infranacional
Loraine Kennedy, Kim Robin et Diego Zamuner


Les réformes économiques adoptées en Inde dans les années 1990 ont réécrit les règles de la gouvernance économique dans cette démocratie fédérale, entraînant des conséquences significatives sur les relations entre État central et États fédérés. Tout d’abord, le démantèlement de la gestion centralisée de l’économie nationale a créé une plus grande latitude pour les gouvernements des États dans l’élaboration des politiques de développement économique. Deuxièmement, les réformes elles-mêmes exigent la coopération des États et donc les politiques menées par les gouvernements régionaux contribuent plus qu’avant à la trajectoire de développement global de l’Inde. En s’appuyant sur des études de terrain, cet article se propose de discuter des cadres politiques mis en place dans quatre États (Andhra Pradesh, Haryana, Kerala et Orissa) en comparant les politiques de promotion territoriale et les réformes plus structurelles. Pour chaque cas, nous expliquons les actions et le discours politique en utilisant une approche d’économie politique qualitative. L’article vise ainsi à combler une lacune dans la littérature existante, qui tend à se limiter à la comparaison de la performance économique des États. Un des objectifs de cette étude est de comprendre comment les élites politiques des États, qui disposent désormais de plus d’espace politique (mais pas nécessairement d’espace fiscal), élaborent leurs stratégies de développement économique par rapport à l’État central, d’une part, et aux forces sociales présentes dans leurs circonscriptions politiques, d’autre part. Les différents compromis sociaux exprimés par ces politiques apportent la preuve des économies politiques distinctes prévalant au niveau infranational en Inde.

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This study was conducted at the Centre de Sciences Humaines (CNRS-MAEE) in New Delhi and financial support is gratefully acknowledged. The authors thank the anonymous reviewers and the editorial board of Revue de la Régulation for constructive remarks on an earlier draft.


  • 1 To avoid confusion, we capitalize State to designate the constituent members of the Indian Union. T (...)
  • 2 Defining “regional parties” or “state parties”, as they are classified by India’s Electoral Commiss (...)

1Economic reforms adopted in the 1990s deeply modified India’s macro-economic environment, as well as the trade and investment regimes. By rewriting the rules of economic governance in India’s federal democracy, reforms have had far-reaching consequences on the relations between the Union (or central state) and the States1. First, the dismantling of controls exercised by the central state have created greater scope for State governments to elaborate their own policies, for instance with regard to economic development initiatives. Second, the reforms themselves require cooperation from State governments to succeed, especially the so-called “second generation reforms”, and hence State-level politics and governance take on greater importance for India’s overall development trajectory. For these reasons, there is now considerably more interest for State-level studies than in the recent past. Another reason is that regional inequalities have deepened in India since the 1990s; inter-State comparisons of economic growth show increasing divergence in economic performance. This has become a major issue for India’s political establishment, all the more since national governing coalitions are increasingly formed with the help of regional political parties.2

  • 3 A modified version of this study appeared in French in Piveteau A., Rougier E., Nicet-Chenaf D. (di (...)

2On the basis of fieldwork-based research, this article proposes to discuss policy frameworks in four States: Andhra Pradesh, Haryana, Kerala and Orissa.3 We compare and contrast promotional policies, aimed at attracting investments to their respective territories, as well as their approaches to more structural reforms. For each case we seek to explain political actions and discourse using a qualitative political economy approach. In this way, the article aims to address gaps in the existing literature, which tends to focus on inter-State comparisons of economic performance and outcomes. There has been relatively little academic attention to the comparative study of State-level policy response to the national economic reform agenda. Notable exceptions are Sinha (2004, 2005), who compares three States (Gujarat, West Bengal, Tamil Nadu) in the pre- and post-reform periods, Bajpai and Sachs (1999) and Kennedy (2004). This paper will add to that corpus and contribute to shaping further research in the field.

3This kind of qualitative political economic study is necessary for two reasons: (1) to understand how States have responded to economic reforms and to explain this response. Indeed, the sparse literature on this topic suggests there is considerable variation across States, if not in policy rhetoric and design, then in implementation, as a result of subnational politics and institutional capacity; (2) to understand how State-level political elites, who now have more ‘policy space’ (even if not necessarily more fiscal space), elaborate their economic development strategies in relation to the central state, on one hand, and to social forces in their political jurisdictions, on the other. We examine the social compromises that are expressed by these State-level policies, which provide evidence of the distinct political economies prevailing at the subnational level.

4Part 1 of the article provides contextual background on India’s reform process and describes the changes brought about, with special attention to the implications for economic governance in the federal system (1. 1.). It briefly reviews the major debates regarding the onset of economic growth and the patterns of economic performance of the States (1. 2.). Much of this scholarship focuses on comparing growth rates across States to test whether or not they are converging. A brief review of the literature on the determinants of growth (1. 3.) sets the scene for the discussion of State-level policies in Part 2 of the paper. An overview of the few studies dealing directly with subnational response to economic reforms is then presented, followed by a discussion of State-level “promotional policies”, analysed as a response to inter-State competition brought about as a result of reforms (2. 1.). The following sections compare and contrast these policies that aim to attract investments in four States (2. 2. – 2. 6.). Part 3 deals with State-level approaches to structural or second-generation reforms, such as public finance reform, which are politically sensitive (3. 1.). For each of the four States studied, policies are viewed as an emanation of distinct regional political systems and discussed in terms of compromises between social groups (3. 2. – 3. 5.).

  • 4 The research in Kerala and Orissa was carried out in the framework of an international Masters in d (...)

5Case study narratives are used to present our fieldwork-based research in Parts 2 and 3. The analyses combine material from published and unpublished secondary sources with primary data collected through fieldwork consisting primarily of interviews with key informants e.g., elected officials, government servants, representatives of industry and trade unions, as well as village-level surveys (Orissa). In the case of Andhra Pradesh and Haryana, extended stays in India between 2005-2009 allowed for several rounds of research. For Kerala, research was conducted from August 2008 until February 2009 and for Orissa, from August to December 2009.4 The four States were not chosen to be representative of any particular type of State; nonetheless the aim was to choose cases with differing regional economies e.g., in terms of distribution of income across sectors. The States are located in three different regions of the country: Kerala and Andhra Pradesh in the South, Orissa in the East and Haryana in the North (see location map). Their distinct economic and social situations have given rise to unique subnational political economies, which serve to illustrate the great diversity comprised within India’s political economy.

1. Economic reforms, shifting policy prerogatives in India’s federal democracy and outcomes

1. 1. Liberalization and its impacts on policy-making in India

6In the early 1990s, facing a severe balance of payments crisis, India adopted a structural adjustment programme putting the country on a path of gradual economic reform. In July 1991 a series of decisions were taken to implement major changes in monetary, trade and industrial policies. The rupee was devalued, steps were taken to make India’s currency convertible on the current account and the exchange rate more reflective of market conditions. With regard to trade, customs duties, among the highest in the world, were drastically reduced and procedures for importing and exporting were simplified, including for foreign capital investment. With regard to the investment climate in the country, industrial investment and production, which had been tightly controlled, were delicensed and broadly deregulated (Sachs, Varshney, Bajpai 1999; Basu, 2004).

7In addition to modifying the macro-economic climate and the trade and investment regimes, economic reforms brought about deep changes in India’s federal democracy. They translated into both greater policy-making space for State governments and greater responsibility for their own finances (Ahluwalia, 2000; Bagchi, 2003).

  • 5 With the exception of interest rates. However, it should be pointed out that interest rates in info (...)

8Prior to 1991, as part of a planned approach to development, private firms were required to obtain approval for new industrial units (and expansion of existing units) from central government ministries in New Delhi, including for the proposed geographical location of the investment. This centralized management of the economy was designed to ensure that scarce capital was directed to priority sectors and not overly concentrated in a few regions. Indeed, economic integration and balanced regional development were major political goals and one of the justifications for centralized economic planning. Independent India had inherited a highly fragmented territory, and still today factor prices vary widely5, as do the cost of goods and services (Virmani, Mittal, 2006; Melchior, 2010). In this institutional arrangement, State governments could not directly influence national industrial policy, although they could use their skills and resources to try and bargain for a better deal through administrative channels, or pressure national policymakers through informal channels, such as political parties. With their limited financial resources, they could elaborate policies to reflect their priorities.

9In 1991, the dismantling of controls exercised by the central state on industrial investments meant private firms could locate where they chose, and this created incentives for States to improve their investment climate. Very quickly, some State governments began to elaborate and put forward their own industrial development initiatives. These include land-use changes (zoning), tax exemptions and infrastructure improvement, all of which contribute to influencing the investment climate (see Part 2 below).

10By reducing the direct involvement of the state in the economy and reducing many sources of income, both legal (e.g., customs duties) and illicit (e.g., rents linked to the system of permits called license-permit raj), the reforms have had a significant impact on financial relations between the Union and the States. State governments can no longer depend on New Delhi in the same way as before, for example for capital investments and budgetary support, and are under pressure to become more involved in raising resources and practicing fiscal responsibility (Sachs, Varshney, Bajpai, 1999; Bagchi, 2003).

11Taken together, these transformations have resulted in a certain re-ordering of economic governance – a redefinition of the respective roles of the Central State and State governments. Liberalization of controls on the location of investment has resulted in a more direct competition between subnational territories with regional governments vying to overtake each other. Despite some mimicry in policies aimed at improving the business environment and increasing the attractiveness, a closer analysis reveals significant differences in the attitudes of political elites as well as regional diversity of instruments deployed. Many of these characteristics are historically embedded, so were present well before the 1990s, but the reforms have served to make them more visible (Sinha, 2005).

12Beyond opening up policy space for States, it soon became evident that moving ahead with the economic reform agenda would require increasing cooperation from State governments. Already from the beginning the central government delegated to States part of the responsibility for implementing reforms (Jenkins 1999). This was especially the case with the so-called “second generation reforms”, which involve public finance reform and restructuring public agencies (e.g., State electricity boards), dismantling public subsidies and building up market-enabling institutions (see Part 3 below).

13Lastly, it is important for contextual reasons to mention the evolution of India’s polity characterised by the intensification of political competition at all levels. This has resulted in the decline of the dominant Congress party and the rise of a multiparty system. State-level politics have become more autonomous from the logic of national politics (Yadav, Palshikar 2008) and regional-based political parties have become crucial partners in national government coalitions. In addition to new leveraging power this gives subnational political elites more policy space.

14For all of these reasons State-level politics and governance have taken on greater importance for India’s overall development trajectory. The next section explores some of the scholarship on these topics.

1. 2. Economic growth and regional inequalities

15As a prelude to our discussion, it is useful to recall key elements of India’s recent growth story and to flag two important ongoing debates. From 1950 to 1980, India grew at roughly 3.5% per year, which was very slow in relation to its population growth (roughly 2.2% per year). In the 1980s onwards, India’s growth rates registered a gradual acceleration (5.5% per year) climbing in the 1990s to peaks of 7-8%. In the 2000s, even higher rates were achieved and maintained for several years at around 8% or more, before decelerating after 2009 (6.8%), a slowdown attributed in part to the global financial crisis (Government of India, 2013).

  • 6 This links up to broader debates on lessons from “emerging” economies, see Piveteau and Rougier (20 (...)
  • 7 For instance, the Indian Parliament voted to open India’s domestic market to large-scale retailers (...)

16The first vigorously debated issue revolves around explaining the onset of higher growth in the 1990s and 2000s. Although some economists see a direct causal link between economic reforms and growth performance (Ahluwalia, 2004), others emphasize the importance of public institutions and policy decisions taken prior to reforms.6 Indeed, an entire body of work has been devoted to the study of the sequencing of growth in India, with some prominent voices, like Dani Rodrik and Arvind Subramanian (2004) arguing that the turning point took place in the 1980s, i.e. before the implementation of a structural adjustment program in 1991. Discreet reforms undertaken by Indira Gandhi in the early 1980s followed by Rajiv Gandhi’s bolder agenda from the mid-1980s aimed to deregulate the domestic economy and ease investment procedures (Kohli, 1989). These “pro-business” reforms were primarily designed to improve the environment for existing businesses and increase their profits; they were not market reforms per se (Rodrik and Subramanian, 2004). In contrast, the reforms of the 1990s were intended to improve the functioning of markets and extend the reach of markets in the provision of goods and services. They have effectively dismantled the apparatus of centralized management of the economy by removing most controls on business and investment and although external liberalization has been very gradual (and controversial), most sectors of the Indian economy are now open to international competition.7

17The second debate relates to regional variations in economic growth and to the question of the widening of inter-State inequalities in per capita income. In particular there has been considerable interest among economists in examining whether growth rates in India’s States are converging, as neoclassical theory predicts, i.e., the poorer States are growing faster than the richer ones, or the inverse. A review of the literature highlights some of the key findings and sets the scene for our State-level analysis in section 2.

18Focusing on the decade following the reforms, some authors found no evidence of either an increase or decrease in inter-State inequalities (Singh and Srinivasan, 2002; Dholakia, 2003). Ghosh and Chandrasekhar (2003) underscore that States’ ranking in terms of per capita State Domestic Product (SPD) did not change: Punjab, Haryana and Maharashtra remained the richest States while Bihar and Orissa remained the poorest.

19As Ahluwalia pointed out, the implementation of economic reforms has led to substantial growth in India with both rich and poor States experiencing an increase in SDP growth; however, the degree of dispersion in growth rates increased very significantly in the 1990s (Ahluwalia, 2000, p. 1638). Whereas SDP varied by a factor of 2 in the 1980s (Kerala at 3.6%/year and Rajasthan at 6.6%/year), that variation was much larger in the 1990s, more than 3. 5., and the inter-State differences were even more marked when measured in terms of per capita SDP (Ahluwalia, 2000, p. 1638). More recent data show that the annual growth rate in net SDP per capita was higher during the post-reform period (1991-2004) than during the pre-reform period (1970-1990) for 10 States out of the 15 major States; 5 States experienced a reduction in their rate of growth between the two periods (cf. table 1).

Table 1. Average Annual Growth Rates of the Net Sate Domestic Product Per Capita for 15 Indian States

Pre-reform Period (1970-1990)

Post-reform Period (1991-2004)

Andhra Pradesh















Himachal Pradesh









Madhya Pradesh












Tamil Nadu



Uttar Pradesh



West Bengal



Full sample*



Source: Chikte 2011, using data from the Economic and Political Weekly Research Foundation.

Notes : Numbers are percentages.
*Total of 15 States

20Most authors agree that the reforms of the 1990s have aggravated regional inequalities. The Gini coefficient, used to measure disparities in inter-States SDP per capita in the 14 most populated States, started increasing from 1980s and has risen more rapidly since the 1990s. Indeed, from 0.152 in 1980-1981, this coefficient increased to 0.175 in 1989 and then to 0.233 in 1998-1999 (Ahluwalia, 2000). Banerjee and Piketty (2005) also give evidence of rising inequalities: the shares of the 0.01 per cent, 0.1 per cent and 1.0 per cent in total income rose after 1980s and more sharply after 1992-1993.

  • 8 Dholakia (1994) had used another method to identify shifts in growth.

21Numerous studies have used a standard growth convergence equation to test the neoclassical absolute or conditional convergence hypothesis. Cashin and Sahay (1996) were the first to empirically test for this hypothesis and found strong evidence of absolute convergence in the pre-reform period (1961-1991) for 20 States, following on the conclusion of Dholakia (1994)8. In contrast, no study to our knowledge has demonstrated convergence among States in the post-reform period (1991-present). Rao et al. (1999) focused on the 14 major States and reported an increase in divergence sharper in the initial years of liberalization (1990-1994). Dasgupta et al. (2000) found a tendency for the Indian States to have diverged during the period 1960-1995 in terms of per capita SDP. In a study focusing on 19 Indian States over the period 1971-1996, Aiyar (2001) found that States are converging to different steady states, determined partly by literacy rates and private investments. Sachs, Bajpai and Ramiah (2002) also gave evidence of inter-State divergence during both pre and post reform periods; dividing their sample into rich and poor States, they found that divergence was most notable within the poorer group of States. Using the most recent data, Kumar and Subramanian (2011) show that divergence in the growth performance across States has continued during the 2000s.

22Recently scholars have also used other statistical and econometric methods to test for convergence. For example, Nayyar (2008) used the Generalized Method of Moments estimation to show the absence of absolute convergence for the period 1973-2003, and several recent studies found evidence for polarization and convergence clubs (Kar, Jha, Kateja, 2010; Bandyopadhyay, 2011; Ghosh et al., 2013).

  • 9 The Gini coefficient for Tamil Nadu is 0.398 in 1999-2000 and 0.345 in Maharastra.
  • 10 For other studies focusing on intra-states inequalities, see Kurian (2000) and Purohit (2008).

23Besides this vast literature on inter-State disparities, there has been some interest in examining intra-State inequalities in the context of economic reforms and the ensuing geographic reallocation of resources and investments. It has been found that some of the “richer” States, which are usually assumed to have benefited the most from reforms, demonstrate high levels of inequalities. For instance, in 2000 inequalities in per capita SDP were found to be the highest in two of the richest States (Tamil Nadu and Mahrashstra)9 (Ghosh and Chandrasekhar, 2003).10 On the other hand, Swain et al. (2009) showed that regional disparity in Orissa, one of India’s poorest States, declined during the post-reform period due to special area and development programs devised for backward areas.

1. 3. Determinants of growth in Indian States

24Alongside the rising interest in inter and intra-State convergence or divergence, scholars have also examined factors explaining growth. For many authors, private investments were the major driving force for growth during the 1990s and have thus indirectly favoured divergence across States (Rao et al., 1999; Ahluwalia, 2000; Aiyar, 2001; Singh and Srinivasan, 2002). As Chakravorty (2000) demonstrates, more advanced States have benefited from an increase in investment flows during the post-reform era leaving less industrialized regions behind. However, Rao et al. (1999) also show that private investments tended to go to States with higher public spending, suggesting a positive correlation between per capita public expenditure and per capita SDP. Many of these studies underscore the inequitable spread of infrastructure (Rao et al., 1999) as an underlying cause of inter-State disparities because infrastructure is indeed often found to be a major determinant of growth (Shand and Bhide, 2000; Ghosh, 2008; Bandyopadhyay, 2011).

25Apart from physical infrastructure, some authors have given evidence on the role of human capital and “social infrastructure” in explaining economic performance. Not surprisingly, literacy and education are found to be explanatory variables for inter-State inequalities (Ahluwalia, 2000; Aiyar, 2001; Ghosh, 2008); meanwhile, literacy rates have converged across States during the 1990s (Chikte, 2011). Some studies have focused on the role of social and political infrastructure in economic performance. For instance, Shand and Bhide (2000) looked at the size of public administration and found it to be negatively linked to SDP growth during the 1990s (as opposed to the 1970s and the 1980s). They concluded that “in the states with larger public administration, growth rates were not higher, i.e., large public administrations did not facilitate higher growth rates”. We can also quote geography (Sachs et al., 2002) and even “neighboring state effects” (Bandyopadhyay, 2011) as possible explanatory variables of Indian inter-State disparities.

  • 11 This can be partly explained by data gaps, for instance, with regard to public investments (Sachs e (...)

26As this discussion suggests, the differential performance across States has raised many questions, including to what extent these variations are the result of State-level policies. A number of authors consider that subnational policies, especially as they affect the business climate, are important for outcomes, but few studies actually provide proof of this correlation.11 For instance, Sachs et al. (2002) ask: “to what extent are the differences a manifestation of global economic forces acting upon India, especially during a period of economic liberalization, and to what extent do they reflect differences in economic policies at the (S)tate and union level?” although their study focuses more narrowly on marginal productivity of investments by sub-sector. And the deputy chairman of the Planning Commission has stated that State level policies deserve much closer attention than they receive because they influence economic outcomes more than before (Ahluwalia, 2000, p. 1637).

2. State-level response to reforms

2. 1. Reviewing the literature

27As mentioned above, economic liberalization resulted in an indirect expansion of the prerogatives of State governments in certain policy areas. Before the reforms of the 1990s, the Indian States had limited influence on the location of private industrial investments since these were channelled the licensing apparatus of the central government. Consequently public investments were the main determinant of growth at the State-level, and resources for these investments were primarily transferred from the central government (World Bank, 1997, p. 19). Soon after the dismantling of licence-permit raj, States found themselves in direct competition with each other for private investments. Because macroeconomic policy is the prerogative of the central government, States do not have the classic levers that would allow them to put in place an autonomous economic policy (exchange rate, money supply, main taxes, etc.). Nonetheless, they can influence the relative attractiveness of their territory through promotional policies and through investments in infrastructure.

  • 12 This is perhaps linked to the fact that States were not required to publicly take a stand with rega (...)
  • 13 This argument is further developed in Kennedy (2004).
  • 14 Likewise, we observe that a rich State like Maharashtra was not necessarily as enthusiastic in its (...)

28How have States responded to this new environment and how can these responses be explained? Surprisingly perhaps, there has not been a systematic comparison of State-level response to economic reforms.12 One exception is Bajpai and Sachs (1999) who compared a broad range of State-level policy reform: investment incentives, power sector reform, industrial policy reform, measures for infrastructure development, and reform of the tax system. On this basis, they placed the country’s 15 major States into three categories: reform-oriented (Andhra Pradesh, Gujarat, Karnataka, Maharashtra, Tamil Nadu), intermediate reformers (Haryana, Orissa, West Bengal) and lagging reformers (Assam, Bihar, Kerala, Madhya Pradesh, Punjab, Rajasthan, Uttar Pradesh). Although extremely useful as a first attempt at taking stock of State-level response to reforms, this study demonstrates a widely found bias, namely the assumption that States respond to liberalisation on the basis of their relative economic standing. In other words, ‘rich’ States are more likely to adopt reforms since it is presumed that they stand to gain from the shift towards markets and global economic integration whereas ‘poor’ States are not inclined to embrace reforms since they perceive themselves as likely to lose from a greater reliance on markets.13 Bajpai and Sachs’ classification tends to make this assumption even when there is evidence to the contrary. Orissa, a “poor” State, measured in per capita income, is a case in point. It has been actively pursuing reforms, but its growth has been relatively slow, and hence it was not categorised as ‘reform-oriented’.14 Incidentally the four cases we examine in this article are classified under three different categories.

  • 15 In her view, “liberalisation in India amounted not to deregulation but to the reordering of state-m (...)

29Aseema Sinha takes a longer-term perspective in her comparative study of three States (Gujarat West Bengal and Tamil Nadu) underscoring continuity rather than change. In her view, “liberalisation in India amounted not to deregulation but to the reordering of state-market relations mediated by subnational re-regulation strategies and processes” (Sinha, 2004, p. 68). She maintains that “in the face of a regulation vacuum created by central state withdrawal” States have adapted the new, more liberal policy regime to their regional conditions and initiated new rules and policies (Sinha, 2005, p. 153-154).15 To explain variations in the levels and composition of industrial investments, Sinha emphasizes the importance of political and institutional factors that affect risk and also the credibility of policies. She argues that institutional capacity in the post-reform era is largely determined by capacities and skills acquired in the previous period. This is consistent with Ahluwalia (2000) who considers the problem for very poor States is less the level of investment than their ability to absorb capital and to use resources efficiently. Apart from infrastructure conditions, key factors are the structure of State bureaucracy, the nature of industry and the specific configuration of the political environment.

30Another comparative study carried out at about the same time undertook to explain why Andhra Pradesh and Tamil Nadu, whose promotional policies are not so different on the ground, adopted very different styles for communicating about economic reforms (Kennedy, 2004). Whereas Andhra Pradesh openly embraced the economic reform agenda, Tamil Nadu pursued “by stealth” (Jenkins, 1999), quietly implementing more market-oriented practices. The explanation focused on the degree of fragmentation in the regional party system of each State and the nature of political competition, both a reflection of social mobilisation. In both Tamil Nadu and Andhra Pradesh, two large parties contest power and traditionally alternate in forming the government; they ‘accommodate’ other smaller groupings, often based on caste or sub-regional identities. However in the case of Tamil Nadu, the party system has become highly fragmented, requiring constant re-negotiation. In this context, neither of the established parties was willing to risk alienating highly mobilised groups, notably among middle and lower castes that tend to oppose liberalization, and thereby destabilise their electoral coalitions (Kennedy, 2004). This analysis emphasized the importance of the regional political system for explaining the packaging of economic reforms, a dimension that we included in our case studies.

2. 2. Shaping the investment climate – contrasting experiences from four States

31States dispose of a variety of instruments for shaping their business climate, a term that refers to all the factors considered by investors before taking a decision to invest. These factors include cost and availability of the means of production (average wage, natural resources, human capital levels, etc.), the legal framework (procedures for entry and exit, labor laws, degree of law enforcement, etc.), land availability and quality of infrastructure, and finally the incentives to business. Factors falling under the direct jurisdiction of regional States include most networked infrastructure (roads, electricity, water, sanitation) and social infrastructure such as schools and medical facilities. They can offer incentives packages comprising subsidies in cash or kind (e.g., land; uninterrupted supply of electricity, water, telecommunications; exemption, reduction or deferral of taxes; assistance with procedures), propose ad hoc investment conditions related to sectorial or spatial considerations (e.g., in high tech sectors and in particular priority zones) or financial packages including equity finance.

32In the first decade after liberalization, most States deployed strategies to make themselves more attractive, which often involved blatantly imitating industrial policies and trying to out-compete each other. This race to the bottom prompted the central government to intervene in 1999 to end the most obvious form of competition, namely sales tax exemptions, the main fiscal lever available to the regional governments. However, States continue to mobilize other, often less transparent instruments, which can be negotiated with investors on a case-by-case basis, particularly with regard to the land. The Constitution assigns to States the responsibility for land management (registration of transactions, redistribution, etc.), which is crucial factor of production, especially for investors seeking to establish large-scale manufacturing platforms to take advantage of growing markets in India or as a means of accessing East and Southeast Asian markets.

33The following section covers the four States and presents the main steps they have taken to shape their investment climate. This corresponds to a first phase of reforms.

2. 3. Orissa: mobilising mineral assets to attract private investors

  • 16 The steel company POSCO of South Korea plans to invest USD 12 billion by 2016, representing 70% of (...)
  • 17 The abolition in 1994 of the national Freight Equalization Policy has benefited the State, by allow (...)

34The Orissa government’s main objective has been to promote its remarkable endowment in mineral resources by attracting investors (Indian and foreign) willing to bring in technology and know-how for extraction and processing (Government of Orissa, 2007).16 Elaborated in the early 2000s, the key elements of the strategy are simplification of administrative procedures, tax incentives and improvement of certain infrastructures. This was followed in 2007 by a new industrial policy to strengthen economic development policies and further facilitate investment in minerals especially.17

  • 18 The Chief Minister is the head of the government at the State-level, the equivalent of the Prime Mi (...)

35The establishment of “Team Orissa” symbolizes the government’s commitment to attract entrepreneurs. Under the direct supervision of the Chief Minister18, this special agency provides practical legal or economic advice to investors. According to the World Bank (2008) these efforts have led to a reduction in the time needed to start a business.

36Besides efforts in communication and administrative responsiveness, investment promotion usually also involves direct financial incentives. The Orissa government sells land at reduced prices for industrial projects and offers investors reduced rates for electricity and various tax subsidies.

37Meanwhile, the government has chosen to encourage investment in infrastructure in the form of public-private partnerships. In 2008 there were 27 infrastructure projects of this type, for a total of 2,855 billion USD (World Bank, 2008). Moreover, the government has created specialized infrastructure in the form of technology centres offering businesses quality infrastructure. For example, in the capital Bhubaneswar several large office buildings providing high-tech infrastructure have been built. In 2005, the Indian government adopted a law authorizing and regulating the creation of special economic zones. In Orissa, more than ten such zones dedicated to the metallurgy industry and information technology have already been approved.

  • 19 Interview with Saurabh Garg, IAS, Commissioner, Industries Department, Bhubaneswar conducted August (...)

38These policies contrast sharply with the State’s industrial policy in the 1980s and 1990s during which the State itself, via public sector enterprises for instance, was the main investor. Today the State acts almost exclusively through incentives, an approach that does not necessarily yield sufficient inflows of capital to induce the degree of development desired by the government.19

  • 20 This indicator is based on the investigation of the World Bank on the investment climate in India. (...)

39However, despite the government’s efforts to attract capital, the investment climate in Orissa is comparatively not so good. According to an indicator developed by in a recent World Bank sponsored study, Orissa ranks in the bottom third of Indian States (Iarossi, 2009).20 Although it is rated higher than average for certain variables based on the subjective perceptions of economic actors, corruption is perceived as a problem – a point corroborated by people interviewed in the course of our research (academics, activists and villagers).

40Despite the State’s rapid growth in recent years, almost half of the population continues to live below the poverty line. Significant geographical and social disparities exist, for instance the incidence of poverty in the Southern region is nearly three times the poverty rate in the coastal region (de Haan and Dubey, 2005). In addition, the State suffers from stark social inequalities. A special feature of Orissa is the relatively high proportion of so-called tribal groups (Scheduled Tribes, ST) as well as dalits, groups belonging to the lowest caste strata among Hindus (Scheduled Castes, SC), representing 22% and 16% respectively in the total population. These two groups are overrepresented among the poor; STs represent 41% of the poor and SCs 23%. Moreover, these social inequalities have tended to widen since the incidence of poverty is declining faster in other groups (de Haan and Dubey, 2005). The poorest tend to be concentrated in the most remote geographical areas, with poor connectivity, so that the social dimension of inequality is superimposed on the spatial dimension.

41To summarise, Orissa’s industrial policy underwent a significant shift in the 2000s from a tradition of public sector-led development to greater reliance on the private sector. Considerable efforts were made to improve the business climate for private investors, with special attention to the State’s comparative advantage in mineral resources.

2. 4. Kerala: reluctance to reform a unique model of social development

  • 21 Kerala’s growth turned around in 1990s (4% on average) and grew even faster in the 2000s (7.5) (Kum (...)

42Kerala qualifies in many ways as an exceptional State. Its human development index is by far the highest in the country, its literacy rate, for example, is 22 percentage points higher than the national average (94% vs. 72%). This outstanding performance is largely due to the high level of political consciousness and mobilization of the population, the roots of which go back to the late 19th century. However, this State’s unique model of social democracy, which incorporates aspects of a “welfare state”, is facing a crisis; several decades of sluggish economic growth have been inadequate for funding the model and large deficits have accumulated. Remittances from Kerala’s large migrant community (mainly in West Asia) provide support to a large number of households and have helped to keep the economy afloat.21 As central government transfers decreased in relative terms in the 1990s, and as other States improved their economic performance, Kerala’s political leadership has come under increasing pressure to try and stimulate growth.

  • 22 Interviews conducted by D. Zamuner with two senior government officials, who requested anonymity, K (...)

43A detailed analysis of economic development policies over a period of 25 years indicates that the actual commitment of successive governments to the goals expressed in official policy announcements has varied significantly (Zamuner, 2009). In 1987, for instance, the government announced that industrial development was its top priority; a few years later, the approach was defensive, and the policy approach was defined in negative terms, viz., as a necessary response to fierce competition from other States.22 Moreover, investigations in Kerala in 2009 revealed a gap between the attitudes of senior politicians and public servants in charge of implementing economic development policies. The Kerala State Industrial Development Corporation (hereafter KSIDC) is a case in point: this agency’s mission is to support private and mixed capital investment projects for infrastructure development. Without the effective support of their political bosses, KSIDC officials could not succeed in their initiatives. At the same time, the private sector seems generally uninformed about the support programs offered by the KSIDC. A study examining the actual conversion rate of investment projects (Industrial Entrepreneurs Memorandum) into concrete projects corroborates Kerala’s difficulty in completing negotiations with potential investors since its success rate was only 16% versus 60% for Maharashtra (Blaudin de Thé, 2008).

44As this discussion suggests, there is more variation in political commitment of successive governments rather than in policy content per se. Such variations between administrations can be explained largely by the regional political system characterized by the almost systematic alternation between two main political coalitions: the Left Democratic Front, led by the main Communist party (CPI-M), and the United Democratic Front, led by the regional branch of the Congress party, which generally supports more liberal economic policies. It can be recalled in this context that it was the Congress Party, in power in New Delhi, which first introduced economic reforms in 1991. The Left Front coalition is traditionally characterized by a militant (and democratic) communist ideology, but in reality its position varies with the faction that dominates at a given point in time. The reformist faction, who supports private sector development, has not always been able to impose its line.

45To summarise, the economic reform agenda promoted by New Delhi has not critically influenced policies pursued in Kerala, although successive governments can implement incremental changes. A very high level of political competition has kept the pressure on governments to maintain existing high levels of social services.

2. 5. Haryana: policy consensus for promoting industrialisation

46In contrast to Kerala, the State of Haryana demonstrates more policy stability both in the general policy line it follows and in the practical commitment towards its goals. Although Haryana experiences an alternation between the Congress party and regional-based political parties, there is nevertheless a broad consensus among the major political actors in favour of a “modernization” approach to economic development with regard to industry and services as well as urbanization, an observation confirmed by all the respondents in our study.

  • 23 Haryana and Punjab were a single State until 1966 when claims for a Sikh majority State led to a sp (...)
  • 24 Data of the Labour Commissioner, Government of Haryana, in December 2008.

47It should be noted at the outset that the State’s regional economy is among the strongest of India in terms of per capita income (see Appendix), and it enjoys sustained development in all the main sectors of its economy. The Green Revolution in the 1960s increased very significantly the yields in this region, known as the breadbasket (and rice basket) of the country, along with Punjab.23 Since the 1980s, its industrial development has been quite spectacular, especially near Delhi. A peculiarity of its manufacturing sector is that over 75% of production takes place in the formal sector, indicating the presence of large-scale units, in striking contrast with the national economy characterized by the predominance of the informal sector. As an indicator of its vitality: 980 new factories were established between 2002 and 2007, and in the same period, industrial employment increased by 140,000 in the formal sector alone.24 Similarly, the service sector (finance, real estate, computer services companies) is growing very fast, especially in Gurgaon, a satellite city of Delhi.

48An analysis of the industrial policies carried out in the last twenty years indicates a change in the mid-1990s. Until then, the strategy had relied on generous tax benefits to attract new investments, but after 1997 the focus shifted to infrastructure development through partnerships with the private sector. In general, successive governments have been very accommodating to investors, simplifying procedures through a single window mechanism, more “flexible” plant inspections allowing companies to certify compliance with labour laws on the basis of an “honour system”. Since the mid-1990s, the government has instructed a specialized public agency (HSIIDC) to buy and develop a stock of property, a “land bank”, to facilitate industrial projects that require large plots near transport hubs (Kennedy, 2009). Again, these concern primarily metropolitan Delhi and emerging industrial corridors along the National Highway 8.

49Haryana has the non-trivial advantage of surrounding metropolitan Delhi on three sides. Indeed, a significant proportion of its territory is located in the National Capital Region. This agglomeration of 24 million people is experiencing remarkable growth in recent years and has surpassed metropolitan Mumbai’s population. Policymakers in Haryana are fully aware of this advantage and have been multiplying their interventions in this area, notably public investments in both conventional (roads) and specialized (production platforms) infrastructure. To facilitate interaction with industry locally and with potential investors, the regional government decentralized certain services and opened branches of some departments in Gurgaon. It fixed floor prices for land acquired by the government, in order to ensure a better deal for landowners than what is provided for in the colonial-era law on land acquisition.

50To sum up, Haryana pursued a strategy of infrastructure-led development from the mid-1990s, building up its existing industrial base. The degree of political will mobilised to support each industrial policy has remained fairly stable across successive governments.

2. 6. Andhra Pradesh: claiming policy space as part of a popular regionalist agenda

  • 25 This regional party was formed in the early 1980s in opposition to the Congress. It claims to prote (...)
  • 26 Hyderabad, the capital of the southern State, ranked second in Doing Business in India, reflecting (...)

51The State government of Andhra Pradesh began to demonstrate strong will to improve the investment climate in 1995 when Chandrababu Naidu became Chief Minister of the government led by the regional Telugu Desam Party (TDP).25 These efforts were especially focused on the metropolitan region of Hyderabad.26 Actions were undertaken to beautify the city, improve road traffic, digitalize many government services (including utilities), and reform municipal finance. A strategic plan for this State of 70 million people, Andhra Pradesh: Vision 2020 (GoAP, 1999), was designed in collaboration with the international consulting firm McKinsey. It promised to put the State on a strong growth path that would allow it to achieve spectacular social objectives within two decades. Relying on private capital and international “best practices”, the strategy involved realizing specialized infrastructure and direct investment towards the most dynamic sectors of the global economy (information technology, pharmaceuticals, logistics, biotechnology).

52During the decade that Chandrababu Naidu was leading the government (1995-2004), Andhra Pradesh was a rare example of an Indian State that openly embraced a liberalization agenda. This was done by linking market reforms to the TDP’s broader political project of wresting greater political autonomy from New Delhi. Thus, globalization was presented by political leaders as an opportunity for the State to extricate itself from under New Delhi’s yoke. The government deployed intense media campaigns to garner public support and attract the attention of investors, including FDI. This strategy of hyperbole, referred to as “trumpeting” in the literature on economic policy reform (Rodrik 1998), was intended to compensate for objective weaknesses of the regional economy (regional GDP has been relatively dependent on agriculture and the State’s social indicators tend to be below national averages). It was their way of signalling their commitment to investors, in an attempt to improve a rather mediocre image (Kennedy, 2004). In some sectors, the strategy appears to have been successful, especially in information technology (IT), where the State has built up virtually from scratch a fairly solid industrial base.

53This was done through extensive investments in infrastructure specially designed for the information technology industry, most notably HITEC City in metropolitan Hyderabad, an extensive area offering both fully equipped office space and serviced plots for companies choosing to build their own facilities. A special IT policy, first implemented in 1999 and revised in 2002, offered numerous incentives such as 24-hour electricity connection, exemption from inspections under most labour laws in exchange for self-certification, exemption from zoning regulations and a rebate on the cost of land (Kennedy, 2007).

54The TDP government’s pro-reform discourse also drew the attention of international agencies of development cooperation, such as Britain’s DFID and the World Bank, eager to find a “model” among India’s States, who could be held up as a poster child. In fact, Andhra Pradesh became the first sub-national State in the world to directly negotiate a loan from the World Bank (Kirk, 2005).

55To recapitulate, Andhra Pradesh adopted a discourse favourable to economic reforms from the mid-1990s and aggressively marketed the State as ‘pro-business’. Promoting high-tech sectors in particular, the political leadership sought to reverse the image of an industrially backward State.

3. State-level structural reforms and social compromises

3. 1. Implementing second-generation reforms

56Whereas the first phase of macroeconomic reforms initiated in India was implemented relatively rapidly, the second phase has proven more difficult and uneven. This is in part because it depends on the will and the capacity of State governments. In India the term “second-generation reforms” generally refers to the reforms that were not included in the first phase, but it is also a way of designating the reforms considered politically sensitive and likely to face opposition (Jenkins, Khilnani, 2004). Examples include public finance reforms, restructuring of public utilities (electricity, water), privatization of public enterprises, reform of labor laws and the establishment of institutions to regulate a market economy. It sometimes includes the reform of governance institutions with the aim of making decision-making processes more transparent and government more accountable.

  • 27 In 2006, the current account deficit of the central government was reduced to 2% of GDP and its fis (...)

57Whereas the first generation of reforms could be carried out relatively smoothly, the current process is more complicated in part because it depends more heavily on the cooperation of State governments. The politics of each State follows the rules and logics of it distinct political economy. Nonetheless, there are limitations on the manoeuvring space of State governments, in particular with regard to fiscal powers. In fact, fiscal relations are one of the most sensitive areas in federal relations in India. The national Finance Commission helps States by filling the gaps between spending and revenue generation, but such “grants-in-aid” as they are called, have not created incentives for States to maintain fiscal discipline. In the early 2000s, the Indian government decided to address the issue. After three years of discussion, the Parliament adopted the Fiscal Responsibility and Budget Management Law, which came into force in 2004. It required the government to eliminate its current account deficit and reduce its overall budget deficit within 3% of GDP before 2008.27 This Act is binding, however, only on the central government whereas the States’ combined budget deficits contribute to nearly half of the total deficit. The fact remains that these reforms had an effect on the public finances of the States – indeed, the first phase of fiscal consolidation resulted in a decline in transfers to the States, expressed as a percentage of GDP, from 4,9% in 1990 to 3.8% in 1999, before rising again to 4.3% in 2003 (Chakraborty et al., 2009).

58Again, the effects were uneven; States with low per capita income and heavy debt like Orissa were hardest hit. Similarly, the severity of the public finance crisis –with regard to fiscal deficit, debt service, debt stock– varies widely among States. The deficit /State GDP ratio is particularly high in seven States: Orissa, West Bengal, Punjab, Rajasthan, Gujarat, Kerala and Uttar Pradesh. With the exception of Gujarat, these States are paying high interest on their debt as a proportion of their income. In our study, Andhra Pradesh is considered to have an average deficit while Haryana is characterized by a relatively low deficit. The situation in Kerala is considered particularly serious because current expenditure is funded with deficit financing. Recent studies have shown that the level of debt service has a direct impact on State spending, and therefore indebted States face a significant reduction in their “fiscal space” (Chakraborty et al., 2009). Orissa is an example of a State under strong pressure to reform its public finances.

3. 2. Orissa: structural reform under duress

  • 28 Interview conducted by L. Kennedy and K. Robin with Dr. Ramvir Singh, Special Secretary, Planning a (...)
  • 29 Nearly 80,000 jobs were eliminated between 1998 and 2005 (World Bank, 2008).

59In Orissa, the budget deficit in the late 1990s was critical, around 30% of net output (Meher 2002). In 2003, the ratio of interest payments to current income was 32%, higher than the Indian average of 29% and well above the 15% limit recommended by the 12th Finance Commission. The situation was so critical that the government was in difficulty to pay its own employees. According to State government officials, the decision to perform a far-reaching reform of public finances was taken by a small group of senior bureaucrats from the Department of Finance and Planning, not as a result of particular pressure brought to bear by the national Finance Commission or the central government.28 This decision led in 1999 to the signing of a Memorandum of Understanding between the Orissa Government and the central government for reducing expenditures and increasing revenues (Meher, 2002). In 2005, responding to the impetus given by New Delhi, the Government of Orissa adopted its own Fiscal Responsibility and Budget Management Act. In addition to restructuring its debt, the reform package aimed to increase State revenues via for example the introduction of VAT (in 2005) and a hike in the amount of royalties charged by the State on the mining and metallurgy industry. Drastic measures were taken to reduce public expenditure, a freeze was put both on salaries and new recruitment of civil servants and steps were taken to privatize public enterprises.29

  • 30 Two structural adjustment loans of USD 125 million and USD 225 million were granted between 2004 an (...)

60From the initial launching to the implementation of structural reforms in Orissa, the World Bank was closely involved.30 The recovery plan contributed to a return to more balanced public finances, but it also put the State on an ideologically marked development path, which is practically irreversible. With severe cutbacks in public spending, public action has come to rely on indirect interventions, for instance through incentives directed towards industrial investors to exploit the natural resources of the State. These reforms have had consequences for services levels and hence living standards.

  • 31 One consequence is that are not always adapted to the specificities of Orissa. This is the case of (...)

61The current strategy pursued by the government does not appear to take into account the social and spatial disparities that exist in the State. A focus on the industrial sector and to some extent the service sector effectively ignores three quarters of the population, which depend on agriculture and related activities. Although the State government demonstrates a certain willingness to create jobs for people living in rural areas through support to cottage and small industries, the core strategy targets industrial growth. The rationale is that it will foster economic development and improve living conditions and create jobs through a trickle down effect. It is noteworthy that actions aimed at reducing poverty and social inequalities are primarily the result of national policies designed and financed by the central government.31

62If the development strategy has paradoxically ignored the majority of the population it is, according to many observers and analysts (Mohanty, 1990; Harriss, 2000; de Haan, 2004), due to the lack of political mobilization on the part of middle and working classes. A small political elite, composed of high castes (Brahmins and Karnas) representing less than 8% of the population, dominate political life. The Khandayats, the largest caste numerically speaking and one which could be considered middle class, hence capable of enjoying significant political clout, do not form a homogeneous group. In addition, because the redistribution of land between the Khandayats and the affluent castes are relatively egalitarian, there have not been the classic caste-based conflicts around land. Likewise, although Scheduled Tribes account for 22% of the total population, the category covers a wide range of groups, which does not facilitate their mobilization around common interests (Kumar, 2004).

  • 32 For example, the district of Kalahandi concentrate three-quarters of India’s bauxite reserves. This (...)

63High turnout in elections, including among the poorest groups, indicates a strong interest in politics, but other indicators, such as the fact informants did not know the name of the Chief Minister although it is highly publicized, underscore the gap between these socially marginalized groups and political elites (de Haan, 2004; Robin, 2010). This absence of mobilization among marginalized groups has made it easier for the government to conduct its policy of attracting industrial investors to tap mineral deposits, including on tribal land, which often involves the displacement of villages.32 Although rehabilitation and resettlement policies exist, they do not always allow families to regain livelihoods and living standards similar to what they had prior to displacement (Meher 2008, quoted by Mishra, 2010, p. 50).

64By the early 1990s, scattered protest movements started to emerge (Meher, 2009). In 2006 during a protest against the establishment of Tata Steel on 200-acres granted by the Government of Orissa, security forces shot and killed 12 protesters. This event has fueled protest movements and today a dozen of the largest industrial projects are stalled. The project sponsored by POSCO, the South Korean steel company, the largest foreign investment in the country if it is built, was suspended because of its environmental impacts and also because of the flagrant violations that occurred during the approval process at the time of signing the MOU. If mobilization succeeds in taking root, the government could be obliged to reconsider its policies, which are now heavily skewed in favor of industrial interests.

3. 3. Andhra Pradesh: an example of chosen reforms?

  • 33 The first Andhra Pradesh Economic Reform Loan (APERL 1) was granted in March 2002 (USD 250 million) (...)

65On the surface, the Andhra Pradesh experience resembles that of Orissa, although it started its reforms a few years earlier. Andhra Pradesh adopted a similar structural adjustment programme in 2002, borrowing money on an even larger scale from international donors.33 Like in Orissa, the British cooperation agency provided support for structural reforms through financial and technical assistance. But a major difference is the context and conditions under which reforms were undertaken in each State. In Orissa, as we have seen, drastic decisions were taken in a context of fiscal crisis. Although Orissa was not forced to sign loan contracts with the World Bank –and follow the conditionalities dictated therein–its choices were certainly very limited. The context of reforms in Andhra Pradesh seems quite different. Certainly, Chandrababu Naidu did not inherit a good financial situation when he took over as Chief Minister in 1995; the populist style of his predecessor, NT Rama Rao, had created huge budget deficits, mainly because of food subsidies. So there was pressure on public finances and the TDP government took a pragmatic, some would say cunning, decision to publicly embrace structural reforms and appropriate them as its own. Marking a contrast with the ‘stealthy’ way in which of the central government implemented economic reforms (Jenkins, 1999), and also with the duress experienced by Orissa, Andhra Pradesh openly boasted about its reform program and presented it as part of an overarching plan for social and economic development (Kennedy, 2004). As such, the reform program was presented as a means by which Telugu society could achieve its broad objectives and fulfill its potential.

  • 34 This plan of action was spelled out in a document called “Andhra Pradesh: Vision 2020” (GoAP, 1999)

66In the late 1990s, even before taking out a loan from the World Bank, Naidu’s government began its new program of economic and governance reforms. It put an end to some of the costly policies put in place by its predecessor, for example by reducing the subsidy for rice and discontinuing free supply of electricity to farmers. One of the main points on the reform agenda was restructuring the government, its size and its mode of interface with the public. The freeze on hiring in the public sector, decided a few years prior, was maintained, many services were delegated to private companies or, in the health sector, to NGOs, a greater share of the cost of utilities (energy, water, waste collection) was transferred to consumers. Other politically difficult decisions, which met with opposition, were taken such as the closure of loss-making cooperative societies and the privatization of some public enterprises. In exchange for these sacrifices the government promised economic growth and good governance, meaning greater transparency and accountability.34

67The story of these reforms, which were more “hype” than reality (Mooij, 2007) is interesting not so much for its results, which were not up to expectations or promises, far from it, but for what it teaches us about the policy space for regional political leaders. Evidence suggests that political elites in Andhra Pradesh managed to maintain greater control of the reform process, compared to Orissa, both in deciding to launch it and during implementation. This greater maneuvering space is perhaps due in part to a less severe financial situation, but political factors also weighed, aided by Naidu’s considerable political skill. In 1998, the latter, who already enjoyed a certain notoriety on the national level, seized a rare opportunity that gave his government important influence over the central government: he pledged support to the Bharatiya Janata Party, so that it could form a coalition government. With 29 MPs, the TDP was the largest partner in the coalition, and although Naidu claimed no ministerial berths, preferring to give support from the outside and retain his autonomy, he enjoyed privileged access to the inner circles of power.

  • 35 In 2008 the giant software company Satyam Computer Services, quoted on the New York stock exchange, (...)

68At the State-level, the political line followed by the TDP can be analyzed as a strategy aimed to benefit the region’s most powerful economic actors, many of who are natives of the State. Indeed, Andhra Pradesh has its own “regional capitalists” (Baru, 2000), which is not the case for all States, and it can boast of a considerable number of large corporate groups in financial services and media (Eenadu), pharmaceuticals (including Dr Reddy’s Lab), computer services and software engineering, etc. Industrialists, as well as political leaders from both major political parties (TDP and Congress), are largely from the dominant landowning castes (Reddy, Kamma, Raju). These groups have undergone social mobility starting in the colonial period, benefiting from public investments in irrigation and later the Green Revolution; they have since migrated to the cities and have diversified their activities. In this way, the main economic and political actors share a common subculture, supported by a set of informal rules, which facilitates communication and consensus building. Indeed the very close links between industrial and political power have often been criticized, perhaps most dramatically on the occasion of the Satyam/Maytas scandal, the tremors of which were felt all the way to Wall Street.35 Evidently, the liberal economic policies followed under the TDP regime appealed to one small part of the electoral base of the TDP, the one designated as “urban entrepreneurial class” (Srinivasulu, 2003), eager for a more business friendly environment. For other groups, unlikely to gain from such policies, the TDP put in place parallel popular policies that targeted specific categories of the electorate (women, artisans, etc.).

69As mentioned above, the regional political system is dominated by two large parties that bring together various social groups, including traditionally disadvantaged groups, who are “accommodated” in exchange for symbolic and material favors. Despite a regular alternation between the two parties, however, governance is characterized by high stability, which probably made it less dangerous for the TDP to adopt a new political line as long as it could claim to promote the interests of the State against the “despotism” of New Delhi.

3. 4. Haryana: a pragmatic approach to growth representing dominant interests

70Like Andhra Pradesh, Haryana too has experienced more manoeuvring space than Orissa in the choice and pace of its reforms, related no doubt to its healthier financial situation. Since the early 1990s, successive governments have initiated some moderate reforms, but have not undertaken a major program like Orissa or Andhra Pradesh. Contributing more to continuity than change, these measures aimed mainly to improve the business environment in the State.

71Since the start of market reforms at the national level, the ruling parties in Haryana have mostly coincided with those in power in central government, a factor that explains why the economic development policies followed in the State have often been in line with those advocated by New Delhi (Kennedy, 2009). Such affinities have brought considerable advantages to the State. For example: just before the regional elections of 2009, the Prime Minister’s Office accelerated approvals for several large infrastructure projects, including a power plant to serve an industrial area near Delhi.

72Haryana’s political economy still reflects the importance of agriculture. Along with Punjab, it underwent a modernization process through the consolidation of parcels, public investment in irrigation, and capital-intensive cultivation. This has resulted in high productivity and a functioning market for agricultural land, which is rare in India where land is a source of security par excellence and is imbued with strong symbolic value. In addition, farmers in Haryana are organized in unions and have been a powerful lobby in the State for decades.

73So although Haryana’s economy has industrialised and restructured over the past twenty years, its economic elites still identify largely with farming, and maintain a stake in agriculture. Nonetheless many landowners have diversified their activities in favour of industry, trade and real estate. In a context of strong market pressure on land, especially around the cities of Chandigarh, the State capital, and Delhi, many owners have sold their land. Some have bought plots elsewhere, including in neighboring Rajasthan, and continue to rely on agriculture, but others are moving towards new activities, including property development, one of the fastest growing sectors of the Indian economy. Thus, while protecting the interests of the powerful farm lobby, governments can develop policies favorable to industrial development without turning their backs on their political support base (Kennedy, 2009). Traditional elites act increasingly as a “growth coalition” in the State, lending their support for a growth strategy favorable to other types of investors.

74Political elites in Haryana, whichever the party, mainly come from landowning castes, especially the Jats. Present throughout the State, Jats carry important electoral weight in about 40% of the constituencies of the State Assembly (35 of 90 seats). Their economic weight is even heavier because they possess about half the arable land (Jodhka, 1999). At the other end of the social scale, Dalits account for about 20% of the population, but unlike Jats, they are not organized and do not represent a political force. Traditionally disadvantaged because at the bottom of the Hindu social hierarchy, Dalits suffer from deficits of all types of capital (land, financial, social). Employed as farm workers or laborers, they have been strongly affected by changes in the regional economy. Lastly, it should be noted that despite its economic prosperity (per capita income is among the highest in the country), Haryana is considered socially “backward”. In addition to sectarian violence, crimes against women, involving insufficient dowry for instance, are not uncommon. Particularly damning is the sex ratio, the worst in the country: in the age group 0-6 years, only 819 girls per 1,000 boys, a result of widespread selective abortion.

75Until now, the political model of Haryana has been based on the domination of some social groups, those who hold property rights on land, but society is changing rapidly and it is not certain that it can continue. Surveys indicate that the electorate wants to end the political domination of the Jat community, a position shared by 27% of Jats respondents, because it is perceived as governing in a biased fashion in favour of the dominant caste (Joshi and Rai, 2009).

3. 5. Kerala: shifting attitudes toward private sector development

76As indicated above, Kerala is known for its independent policy stance and its exceptional social indicators, far superior to any other State in India. Unlike Orissa, the critical state of Kerala’s finances since the 1980s has not translated into a hard constraint to implement structural reforms. The main reason is the political mobilization of the population and the traditional autonomy of the State, relatively speaking, vis-à-vis the central government.

77Kerala has been much studied for its unique human development model, based on income redistribution through social policies, as well as for the crisis that this model has undergone starting in the 1980s. Although particularly effective in increasing social development indicators in the region, the lack of private investment and economic growth over several decades resulted in high unemployment and high public deficits. Yet Kerala was able to maintain this model because of widespread influence in the State of socialist ideologies, promoted by the communist parties. Since coming to power in 1957, Kerala has been heavily influenced by Communist parties. Trade unions are powerful and combative, forcing governments from both the Left and Center-Left to accept them as partners. This is one of the reasons why in Kerala, more than any other State in India, government policies have benefited low income groups. Because of this particular political configuration, local politics has long been characterized by mistrust of the private sector. But all this began to change during the 1980s when the negative consequences of the model began to be felt provoking large-scale emigration and greater economic dependency on remittances. Heller (1995) explains the change in the attitude of government towards the private sector through what he calls the transition from a logic of “class struggle” towards one of “class compromise” at the highest levels of CPI-M, the party at the head of the Left Democratic Front. The change did not simply occur among political leaders but was the result of the evolution of society towards a mentality characterized as “middle class” as a result of its socio-economic development. Thus, the change of political attitude was a reflection of the wider changes in society. Other factors contributed to this evolution: the waning influence of Naxalites (far left revolutionary movement), and the economic takeoff of certain regions in India as a result of pro-business reforms introduced by Rajiv Gandhi, putting pressure on the State to promote growth.

78We have seen since the late 1980s that the degree of political commitment Kerala government on improving the business climate varied according to ruling party, and to the ruling faction within it. At the same time, many people interviewed in the course of this study stated that there were no longer fundamental differences between the CPI-M and the Congress with regard to their positions on economic restructuring. Both parties tend to adopt a leftist rhetoric, based on redistributive policies, to attract the electorate, and the two major governing coalitions (Left Democratic Front and United Democratic Front) include parties from across the political spectrum. Policy positions depend increasingly on electoral opportunism and rather less on ideology.

79Among recent governments, the United Democratic Front (2001-2006) was the most focused on implementing liberal market reforms, e.g., opening the higher education sector to private investment. It also adopted major administrative reforms and austerity measures, which included an attempt to reduce the number of government employees and their benefits. But the government had to backtrack on the latter after strong opposition, –almost 500,000 civil servants went on strike for a month– including within the ranks of the political party leading the coalition. Thus, despite a subtle shift in favour of economic reforms, successive governments in Kerala continue to assert an autonomous policy stance driven by pressure from the political base. Currently, the State continues to run large deficits, and yet its overall performance is better thanks in part to the growth of certain sectors such as construction, which is the result of a strong inflow of remittances from emigrants and also an improvement of the business climate.

80Currently, Kerala’s economy is mainly based on small and medium enterprises and the sectoral distribution of firms indicates the primacy of the service sector, which is much more developed than in the rest of the country (see Appendix). The Government is trying to adopt a new development model more adapted to the specific features of the State, such as tourism, and based on environmental friendly sectors as well as traditional industries.

81Lastly, the private sector in Kerala does occupy a strong enough position to shape the policy framework to its interests, which also contributes to the fluctuation of economic policies with each political alternation. In contrast to Haryana, there is not a vocal “growth coalition”. As long as the private sector has not attained a critical mass, it cannot effectively influence the industrial policy.

4. Concluding remarks

82The economic reform agenda adopted by the Indian government in the1990s contributed to reshaping federal governance, in particular with regard to the scope for State governments to implement economic development policies and their degree of responsibility for managing public finances. Subnational political elites reacted differently to this new situation, which was perceived sometimes as a constraint and sometimes as an opportunity. Like most States in India, the four States examined here progressively took measures to improve their business environment in a bid to attract private investments for infrastructure development and industrialisation. However, we saw that commitment toward private sector-led development was not always followed from one government to the next (Kerala) and that deep-seated practices like corruption were not effectively abolished (Orissa). It was observed that State governments tried to put forward their ‘comparative advantage’, mineral resources in the case of Orissa and proximity to Delhi in the case of Haryana, which concentrated investments in the dynamic National Capital Region. In the case of Andhra Pradesh, the only State that openly embraced economic reforms, the State government made significant efforts in specialised infrastructure, mainly for high tech industries, to tap into the strong growth of these sectors in the global economy.

83In the context of India’s federal system, State governments can, in theory, decide whether to implement structural reforms and their sequencing, but the analysis showed that Orissa had in fact a limited degree of choice because of its budgetary deficits and debt. On one hand, it had to bend to the requirements of the central government concerning its deficits and on the other, to the conditionalities of international donors providing funding for implementing the reforms. In contrast, Andhra Pradesh’s political leadership embraced the reform agenda in the mid-1990s as a strategy for pursuing its regionalist political agenda, and contracted loans from the World Bank in a bid to restructure the regional economy and engage with the global economy. What transpires is a “variable geometry” at work in India’s federal governance, not one imposed from above but defined as a function of regional political dynamics. Although it appears that economically developed (‘rich’) States or those with a stable financial position enjoy more manoeuvring space, political factors are still the determining factor for explaining the policy stance adopted. The policy preferences of regional governments, including with respect to market reforms and openness to FDI emerge as an outcome of a political process based in part on the capability of local groups to promote their interests. We have seen that despite democratic institutions that would in principle favour the rural majority, the influence of dominant castes persists in Andhra Pradesh, Orissa and Haryana. It is only in Kerala that policies have given expression to the interests of the majority of population and have resulted in an extraordinary level of social development.

84In post-reform India, State governments have greater policy space and more scope for influencing social and economic outcomes. In this context, State-level policies are starting to receive greater attention than in the past. This aim of this article is to contribute to this research programme and to advance the argument that State economic policies, and their response to economic reforms more generally, are a reflection of the existing dynamics and structures that characterize India’s many subnational political economies.

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Andhra Pradesh





Surface (i)

275 045

44 212

38 863

155 707

3 287 240

Surface (% )






Population (i)






Population (2011)

84 665 533

25 353 081

33 387 677

41 947 358

1 210 193 422

Population (% of total)






Ave annual growth rate of pop 1991-2001






Ave annual growth rate of pop 2001-2011






pop density /km² (2011)






Development (ii)






Human Development Index (HDI) (2007-8)






Ranking HDI (out of 23)






Under Five Mortality Rate, (2005–6) (‰)






Literacy rate (2007-8) (%)






Incidence of poverty (% living below) (2008)






Economy (iii)






Per capita income 2007-08 (At Constant 1999-00 Prices)






Average Annual Growth Rates of the Net Sate Domestic Product Per Capita (1970-1990)






Average Annual Growth Rates of the Net Sate Domestic Product Per Capita (1991-2004)






Contrib GDP 1993-2000 (%)
























Contrib GDP 2000-05 (%)































 Indian National Congress (INC) (national party /centre-left)


(national party /centre-left)

United Democratic Front, led by INC (centre-left)

Biju Janata Dal

(regional party / centrist)

United Progressive Alliance, led by INC (centre-left)

Principal parties/coalitions in the opposition

Telugu Desam Party (regional party / centrist)

Indian National Lok Dal (regional party / conservative)

Left Democratic Front, led by Communist Party of India-Marxist (national party / left)


(centre-left), Bharatiya Janata Party (right)

National Democratic Alliance, led by Bharatiya Janata Party (right)

*Sample of 15 States

Sources: (i) Census of India 1991, 2001, 2011 ; (ii) India Human Development Report 2011, Oxford University Press ; (iii) Institut français de Pondichéry, Eric Denis 2011; Chikte 2011 and Economic and Political Weekly database. Note: In May 2013 one euro is the equivalent of 73 rupees.

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1 To avoid confusion, we capitalize State to designate the constituent members of the Indian Union. There are currently 28 States.

2 Defining “regional parties” or “state parties”, as they are classified by India’s Electoral Commission, is problematic because of the tremendous variety; a working definition of regional parties: they operate in subnational territories, as opposed to national parties, and usually can only aspire to govern at the State-level.

3 A modified version of this study appeared in French in Piveteau A., Rougier E., Nicet-Chenaf D. (dir.), Émergences capitalistes aux Suds, Karthala, Paris, 2013.

4 The research in Kerala and Orissa was carried out in the framework of an international Masters in development economics at Sciences Po Paris.

5 With the exception of interest rates. However, it should be pointed out that interest rates in informal credit markets, which play a crucial role in India’s economy, differ widely. See Guerin et al. (2013).

6 This links up to broader debates on lessons from “emerging” economies, see Piveteau and Rougier (2010).

7 For instance, the Indian Parliament voted to open India’s domestic market to large-scale retailers like Walmart in late 2012, several years later than planned, because of widespread opposition.

8 Dholakia (1994) had used another method to identify shifts in growth.

9 The Gini coefficient for Tamil Nadu is 0.398 in 1999-2000 and 0.345 in Maharastra.

10 For other studies focusing on intra-states inequalities, see Kurian (2000) and Purohit (2008).

11 This can be partly explained by data gaps, for instance, with regard to public investments (Sachs et al., 2002, p. 12).

12 This is perhaps linked to the fact that States were not required to publicly take a stand with regard to the reform agenda – indeed, State governments were not formally consulted about the agenda and their approval was not required. The national Parliament voted to implement reforms.

13 This argument is further developed in Kennedy (2004).

14 Likewise, we observe that a rich State like Maharashtra was not necessarily as enthusiastic in its reform efforts as Bajpai and Sachs’ classification system suggests.

15 In her view, “liberalisation in India amounted not to deregulation but to the reordering of state-market relations mediated by subnational re-regulation strategies and processes”, Sinha, 2004, p. 68).

16 The steel company POSCO of South Korea plans to invest USD 12 billion by 2016, representing 70% of State GDP. The project has met with strong local resistance. At present, the State government has acquired about 2,000 acres for the project and requires an additional 700 acres for the project to start. But it still faces violent protests from villagers.

17 The abolition in 1994 of the national Freight Equalization Policy has benefited the State, by allowing it to benefit from its comparative advantage in mineral resources. Under the Freight Equalization Policy a factory could be set up anywhere in India and the transportation of minerals would be subsidised by the central government, a policy meant to facilitate industrialization throughout the country.

18 The Chief Minister is the head of the government at the State-level, the equivalent of the Prime Minister at the national level.

19 Interview with Saurabh Garg, IAS, Commissioner, Industries Department, Bhubaneswar conducted August 20, 2009 by L. Kennedy and K. Robin.

20 This indicator is based on the investigation of the World Bank on the investment climate in India. The survey was conducted by face-to-face interviews of 4,000 entrepreneurs in 16 States. G. Iarossi distinguishes an objective dimension (costs) and a subjective (perceptions).

21 Kerala’s growth turned around in 1990s (4% on average) and grew even faster in the 2000s (7.5) (Kumar, Subramanian, 2011).

22 Interviews conducted by D. Zamuner with two senior government officials, who requested anonymity, Kerala, Trivandrum, October 2008. Political commitment can be measured for instance by the relative size of staff dedicated to the implementation of industrial policy, and in the amounts spent by various governments for “economic services”.

23 Haryana and Punjab were a single State until 1966 when claims for a Sikh majority State led to a split. They now share a capital, Chandigarh.

24 Data of the Labour Commissioner, Government of Haryana, in December 2008.

25 This regional party was formed in the early 1980s in opposition to the Congress. It claims to protect the interests of the Telugu-speaking people and defend their pride.

26 Hyderabad, the capital of the southern State, ranked second in Doing Business in India, reflecting no doubt the very significant efforts made over the past fifteen years by successive regional governments.

27 In 2006, the current account deficit of the central government was reduced to 2% of GDP and its fiscal deficit to 3.7% of GDP (Herd and Leibfritz, 2008).

28 Interview conducted by L. Kennedy and K. Robin with Dr. Ramvir Singh, Special Secretary, Planning and Coordination, Government of Orissa, Bhubaneswar August 19, 2009.

29 Nearly 80,000 jobs were eliminated between 1998 and 2005 (World Bank, 2008).

30 Two structural adjustment loans of USD 125 million and USD 225 million were granted between 2004 and 2008.

31 One consequence is that are not always adapted to the specificities of Orissa. This is the case of the Pradhan Mantri Gram Sadak Yojana scheme, fully funded by the Government of India, which finances the construction of roads connecting villages of 500 inhabitants or more. However, more than half of tribal villages have a population of less than 500 inhabitants, and hence are not eligible.

32 For example, the district of Kalahandi concentrate three-quarters of India’s bauxite reserves. This region is mainly inhabited by tribal people whose livelihoods depend on forest resources. Mining projects directly threaten the lifestyles and livelihoods of these people. Since independence, nearly 2 million families in Orissa have been displaced to make way for such projects (Fernandes, 2006).

33 The first Andhra Pradesh Economic Reform Loan (APERL 1) was granted in March 2002 (USD 250 million), a second loan was approved in February 2004 (USD 220 million); finally APERL 3 was finalized in January 2007 (USD 225 million).

34 This plan of action was spelled out in a document called “Andhra Pradesh: Vision 2020” (GoAP, 1999).

35 In 2008 the giant software company Satyam Computer Services, quoted on the New York stock exchange, was prevented by stockholders from acquiring two companies (Maytas Properties and Maytas Infra) owned by the sons of Satyam founder Ramalinga Raju. In that context, it was revealed that Satyam had, with the complicity of international audit firms, committed massive fraud. See “In India, Crisis Pairs With Fraud”, New York Times, 9 Jan. 2009. The State government was indirectly implicated because of its dealings with Maytas Properties and Maytas Infra. See Ramachandraiah (2008).

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Loraine Kennedy, Kim Robin et Diego Zamuner, « Comparing State-level policy responses to economic reforms in India », Revue de la régulation [En ligne], 13 | 1er semestre / Spring 2013, mis en ligne le 24 juin 2013, consulté le 24 janvier 2022. URL : ; DOI : 10.4000/regulation.10247

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Loraine Kennedy

CNRS Research Director at the Centre d’Études de l’Inde et de l’Asie du Sud (CNRS-EHESS),

Kim Robin

Consultant specialized in health and social policy evaluation at Eneis Conseil,

Diego Zamuner

Project Officer at CAF / Development Bank of Latin America,

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