India’s reforms falter without a developmental state—coordinated institutions can turn incremental changes into industrial transformation.
As the US President Donald Trump imposed 50 percent tariffs on India, New Delhi’s economic commentariat has swung back into action. Even a semblance of a fiscal crisis or a shock prompts these commentators to itemise a lengthy set of reforms that the union government should implement with alacrity. A crisis is too good an opportunity to miss, they argue, and not implementing these reforms is ‘the only thing holding the country back from unlocking its real economic might’. Within this discourse, reform advocates in India tend to fall into two camps: the ‘big bang’ proponents and the gradualists.
The first category—the ‘big bang’ proponents—support the 1991 reform packages. According to them, these reforms single-handedly changed the country’s fortune. Nonetheless, from labour and capital markets to the byzantine regulatory state, too many restrictions continue to remain in place. An extensive alleviation of these constraints can result in a series of efficiency gains, especially for the Indian manufacturing sector. The core argument here is that India’s political economy is constrained, and a major crisis provides the opportunity to implement a package of reforms that would otherwise be politically unfeasible.
The second category includes the gradualists or incrementalists. As the name suggests, the scholars within this camp argue that India’s growth story following the 1991 big bang reforms has been a function of incremental reforms. The gradual transformation defined here is the core logic of India’s development model, which helps avoid any major political backlash or instability. The only quibble is that Indian governments haven’t necessarily practised a planned, gradual reform approach.
What India lacks are coordinating institutions and mechanisms that will allow firms to actually reap the benefits of the reforms that have been implemented. In other words, India lacks a developmental state, especially of the variety that underpinned the industrial transformation of East and Southeast Asia countries.
“Gradualism implies a clear definition of the goal and a deliberate choice of extending the time taken to reach it, to ease the pain of transition,” wrote the former Deputy Chairman of the Planning Commission, Montek Singh Ahluwalia, while assessing the performance of the Indian economy a decade after the 1991 reforms. “This is not what happened in all areas. The goals were often indicated only as a broad direction, with the precise endpoint and the pace of transition left unstated to minimise opposition—and possibly also to allow room to retreat.”
However, it merits attention that the binary between ‘big bang’ reforms and gradualism fails to capture a crucial facet of the purpose of reforms in a polity such as India. Crucial jurisdictions are divided between the union and state governments, coupled with a fragmented ministerial and decision-making system at both levels. So, when reforms are undertaken, their impact is often underwhelming. What India lacks are coordinating institutions and mechanisms that can facilitate firms to actually reap the benefits of the reforms that have been implemented. In other words, India lacks a developmental state, the kind that has demonstrably underpinned the industrial transformation of East and Southeast Asian countries.
A developmental state comprises the following characteristics:
Whether during India’s License-Permit Raj years or the decades following the 1991 reforms, India has not had a developmental state that has been capable or willing to perform these aforementioned functions. Even today, India lacks three vital coordinating mechanisms that are preconditions to sustainable industrialisation. First, coordination between various government ministries, departments and agencies at the central and state levels. Second, given part-divergent and part-overlapping jurisdictions, a working coordination between the central and state governments. Finally, between the government and industry.
Interestingly, two of India’s leading industrial states – Gujarat and Tamil Nadu – succeeded by resolving some of these coordination challenges at some point during their industrial development trajectory.
Gujarat functioned as an active sub-national developmental state during India’s proto-socialist and permit-raj years, offering considerable/notable industrial successes in an otherwise restrictive period. At a time when the government in New Delhi championed public enterprise-led industrialisation and effectively blocked most private firms’ investment applications, the Gujarat government devised a strategy to work around this constraint. Political economist Aseema Sinha highlights in her book, The Regional Roots of Developmental Politics in India, how, from the 1960s to the end of the license-permit system, successive Gujarat governments deployed a three-pronged strategy to circumvent the constraints imposed by the union government.
Consequently, Gujarat’s investment pattern became markedly different from states such as West Bengal and Tamil Nadu, reveals Sinha. In 1978, the public, joint, and private sectors in West Bengal accounted for 74, 8, and 17 percent investments, respectively. In comparison, Gujarat featured 38, 30, and 31 percent public, joint, and private investments, respectively. Considering the available information about Gujarat’s joint ventures, the state’s investment share with some private sector involvement was over 60 percent. By the time the permit system was scrapped, Gujarat had already experienced industrialisation quite significantly.
If Gujarat showcased a masterclass in vertical coordination, several decades later, Tamil Nadu has mastered the art of horizontal coordination. Tamil Nadu now features a sub-national developmental state of its own, and consequently, its industrial firms and clusters are rapidly integrating into global value chains.
But building such coordinating institutions at the central and state levels, then giving them reasonable institutional autonomy, and ensuring their bureaucracies are adequately embedded within industries can amplify the impact of reforms already undertaken.
Economists Mausam Kumar and his co-authors show that the key supra-institution coordinating the state’s industrial policy is the Department of Industries, Investment Promotion, and Commerce (DIIPC). According to Kumar et al, “DIIPC functions as the central coordinating agency for industrial policy design and investment facilitation related to large-scale, capital-intensive, and strategic industrial sectors in Tamil Nadu.”. DIIPC works under the political leadership of the state’s Ministry of Industries and, on the administrative side, is headed by a secretary, who is an Indian Administrative Service (IAS) officer.
There are sub-agencies and departments responsible for implementing the various aspects of the state’s industrial policy. For instance, the State Industries Promotion Corporation of Tamil Nadu (SIPCOT) is responsible for managing the industrial parks and Sector Specific Economic Zones (SSEZs). The Tamil Nadu Industrial Development Corporation (TIDCO) is in charge of managing the industrial corridors. Investment facilitation, management of the single window portal, and permit clearance assistance is done by Guidance Tamil Nadu. Meanwhile, Tamil Nadu Industrial Investment Corporation is responsible for coordinating working capital requirements for approved projects.
The key feature here includes the specific boards of all these various agencies, chaired by DIIPC’s Secretary to the Ministry of Industries. Thus, DIIPC manages the inter-agency coordination and provides the cohesive institutional structure required to facilitate a successful industrial policy.
The experience of both Gujarat and Tamil Nadu speaks to the invaluable role of facilitating vertical and horizontal integration. Given the complexities of India’s domestic political economy, the scope for undertaking reforms remains inherently limited.. However, building such coordinating institutions at the central and state levels, giving them reasonable institutional autonomy, and ensuring their bureaucracies are adequately embedded within industries can amplify the impact of reforms already undertaken.
Srijan Shukla is an Associate Fellow with the Centre for Economy and Growth Programme and the Forums team.
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Srijan Shukla is an Associate Fellow working with the geoeconomics and the forums team. His research focuses on domestic and international political economy. In the ...
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